UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 25, 2004 | Commission file number 0-21835 |
SUN HYDRAULICS CORPORATION
Florida | 59-2754337 | |||
(State or Other Jurisdiction of | (I.R.S. Employer | |||
Incorporation or Organization) | Identification No.) | |||
1500 West University Parkway | ||||
Sarasota, Florida | 34243 | |||
(Address of Principal Executive Offices) | (Zip Code) |
941/362-1200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 per share
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Rider A
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the shares of voting common stock held by non-affiliates of the Registrant, computed by reference to the closing sales price of such shares on the Nasdaq National Market, as of the last business day of the Registrants most recently completed second fiscal quarter was $70,548,788.
As of March 11, 2005, there were 7,156,822 shares of common stock outstanding.
PART I
ITEM 1. BUSINESS
Certain statements contained in this Item 1. Business that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. See Item 7. Forward-Looking Information.
Overview
The Company is a leading designer and manufacturer of high-performance screw-in hydraulic cartridge valves and manifolds, which control force, speed, and motion as integral components in fluid power systems. The innovative floating construction of the Companys screw-in cartridge valves and the design of the cavities in which they are installed provide demonstrable performance and reliability advantages compared to other available screw-in cartridge valves. The Company designs and manufactures one of the most comprehensive lines of screw-in hydraulic cartridge valves and manifolds in the world. The Company has generated a profit every year since 1972 and has paid a dividend every quarter since its initial public offering of securities in 1997. The Company believes that its success is primarily a result of its innovative product design, consistent high quality, superior product performance and the breadth of the markets it serves.
The Company sells its products primarily through a global network of independent fluid power distributors to a diverse universe of end users, for use in various mobile applications, such as construction, agricultural and utility equipment (historically, approximately 66% of net sales), and a broad array of industrial applications, such as machine tools and material handling equipment (historically, approximately 34% of net sales). While many of the Companys end users are subject to cyclical demand for their products, the Company mitigates this exposure through the wide variety of applications and industries it serves. In 2004, sales to the Companys largest distributor represented less than 7% of net sales, and approximately 50% of the Companys net consolidated sales were outside the United States.
The Company was organized as a Florida corporation in 1986 to take over the operations of the business of the Companys predecessor, Suninco, Inc. (f/k/a Sun Hydraulics Corporation). Suninco, Inc. was founded in 1970 by Robert E. Koski for the specific purpose of developing and promoting screw-in cartridge valve technology. The Companys executive offices are located at 1500 West University Parkway, Sarasota, Florida 34243, and its telephone number is (941) 362-1200. The Companys website is www.sunhydraulics.com.
Industry Background
Fluid power is one of three basic technologies, along with electrical and mechanical, utilized to achieve power transmission and motion control. Due to its mechanical advantage, fluid power is widely employed to move and position materials, control machines, vehicles and equipment, and improve industrial efficiency and productivity. Fluid power can perform work on very light loads with a high degree of accuracy or develop enormous forces to move and position materials and equipment that weigh many tons.
Screw-in hydraulic cartridge valves first appeared in the late 1950s as an alternative to conventional forms of hydraulic valves. Conventional hydraulic valves are generally larger in size, typically manufactured from cumbersome iron castings, relatively limited in their ability to interface with machinery and equipment, and are usually simple devices designed to control a single task. Screw-in cartridge valves represent a miniaturization of hydraulic valves, providing the same functional characteristics as conventional valves, but in a smaller package size. In addition to being lighter-weight and more compact, screw-in cartridge valves frequently offer significant advantages in interface flexibility and cost over conventional hydraulic valves.
Screw-in cartridge valves have significant marketplace acceptance because hydraulic system design engineers are easily able to develop multiple-function control systems. A number of screw-in cartridge valves can be grouped together in a manifold, creating a hydraulic control system that is functionally analogous to an electronic integrated circuit. End users can utilize screw-in cartridge valves and custom
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manifolds to design an optimal solution for control of their fluid power systems that significantly reduces assembly time and expense.
Strategy
The Company will continue to design, manufacture, market and support, on a worldwide basis,
differentiated high-performance and high-quality cartridge valves and integrated valve packages.
The Company believes this focus supports its business objectives of sustaining revenue growth that
will yield an above-average return on capital while achieving a high level of customer
satisfaction. Key elements of the Companys strategy include the following:
Deliver Value Through High-Quality, High-Performance Products. The Companys products are designed with operating and performance characteristics that exceed those of many functionally similar products. Overall, the Companys products provide high value because they generally operate at higher flow rates and pressures than competitive offerings of the same size. The Company tests 100% of its screw-in cartridge valves to ensure the highest level of performance on a consistent basis.
Achieve a High Level of Customer Satisfaction. The Company is a build-to-order operation that schedules orders to the customers request date. To ensure all employees are dedicated to meeting customer requests, the Company measures and posts monthly the percentage of shipments that satisfy the customers requests. In addition to meeting the above requirement, the Company tests 100% of the screw-in cartridge valves before shipment. The Company tests extensively all product returns due to questions regarding functionality and issues a written report of findings upon request. The Company believes that its long-term success is dependent upon its reputation in the marketplace, which in turn is a result of its ability to service its customers.
Offer a Wide Variety of Standard Products. The Company currently offers one of the most comprehensive lines of screw-in cartridge valves and manifolds in the world. The Company is committed to producing functionally superior, standard products that contain a high degree of common content to minimize work in process and maximize manufacturing efficiency. Products are designed for use by a broad base of industries to minimize the risk of dependence on any single market segment or customer. The Company expands its business through the development of new products that are complementary to its existing products.
Expand the Product Line. The Company is continuously engaged in new product development programs to offer new and better cartridge valve solutions to its customers. New cartridge products generally fit into existing cavities, often allowing them to be installed in existing standard manifolds. The Company recently has aggressively begun designing and introducing to the marketplace electro-hydraulic cartridge valves, including solenoid and proportional valves. The Company believes these products provide the opportunity to obtain sales for which it previously could not compete, and further believes that the electro-hydraulic cartridge valves will help increase sales of the Companys other cartridge valve and manifold products.
Capitalize on Custom Manifold Opportunities. Because fluid power system design engineers are increasingly incorporating screw-in cartridge valves into custom control systems, the Company concentrates its efforts in custom manifolds in two ways. The Company designs and manufactures manifolds which incorporate the Companys screw-in cartridge valves for sale to original equipment manufacturers (OEMs). To support this effort, the Company is able to design and manufacture manifolds at its operations in Sarasota, Florida and Kansas City, Kansas, USA, Coventry, England, Erkelenz, Germany, Seoul, Korea and at its operation in Shanghai, China. The Company also encourages competitive manifold manufacturers to utilize the Companys screw-in cartridge valves in their manifold designs. The Company sells tooling for machining its cavities, allowing independent manifold manufacturers to easily incorporate the Companys screw-in cartridge valves into their designs.
Expand Global Presence. The Company intends to continue to strengthen its global presence in the areas of distribution and international operations. In 2003, the Company added operations in Kansas City, Kansas, USA and Bordeaux, France to its existing operating units in the United States, England, Germany, Korea and China. The Company has strong distributor representation in most developed and developing markets, including North and South America, Western Europe, Asia, Australia, and South Africa. In 2004, the Company generated approximately 50% of its net sales outside the United States. The Company is continuing to expand its distribution arrangements in Eastern Europe and expand its
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market presence in China. The Company believes that further expansion of its international facilities will enhance its competitive position in certain foreign markets. In addition, custom manifolds provide an opportunity for operating units and distributors to offer significant value-added content through the local production of manifolds that incorporate the Companys screw-in cartridge valves. This strategy helps minimize potential tariffs and duties that could inflate the price of the Companys products in foreign markets.
Maintain a Horizontal Organization with Entrepreneurial Spirit. The Company believes that maintaining its horizontal management structure is critical to retaining key personnel and an important factor in attracting top talent from within the hydraulic valve and manifold industry. The Company strives to maintain its horizontal management structure that encourages communication, creativity, entrepreneurial spirit, and individual responsibility among employees. Employee initiatives have led to continuous process improvements, resulting in considerable operating efficiencies and quality control, as well as the maintenance of a safe and comfortable working environment. The Company believes that a lack of job titles and direct formal reporting responsibilities eliminates perceived barriers to advancement and reduces the potential for adversarial relationships to arise within the organization. A workplace without walls in the Companys offices as well as on the shop floor encourages informal employee consultation and provides the opportunity for all personnel to interface across functional areas.
Leverage Manufacturing Capability and Know-how as Competitive Advantages. The Company believes that one of its competitive advantages is its ability to consistently manufacture products to demanding specifications. The Companys strong process capability is critical in achieving the high performance characteristics of its screw-in cartridge valves. The Company has the ability to manufacture most of the components of its products with the exception of springs, elastomer seals, and electrical coils, although most high-volume machining is performed by independent, outside vendors (see Manufacturing). The Company has in-house heat treatment capability to provide consistent and reliable control of this critical operation.
Sell Through Distributors. Due to the variety of potential customers and the Companys desire to avoid unnecessary bureaucracy, the sales function has been performed primarily by independent distributors. The Company has 64 distributors, 41 of which are located outside the United States, and a majority of which have strong technical backgrounds or capabilities, which enable them to develop practical, efficient, and cost-effective fluid power systems for their customers. Many of these distributors sell products manufactured by other companies that allow them to provide a complete hydraulic system to the customer. The Company provides a high level of technical support to its distributors through open access to the Companys engineering staff, technical documentation, and technical training programs.
Develop Closer Relations with Key Customers. The Company maintains close relationships with many OEMs and end users of its products to help it understand and predict future needs for fluid power control devices and to test and refine new product offerings. The Company also recognizes it will sometimes have to develop a direct relationship in the areas of sales and support with some large OEMs that are existing or potential customers. The Company will be selective in developing these relationships and believes the closer ties will help increase sales without compromising profits or developing excessive bureaucracy.
Brand Label and License Manufacturing where desirable. When it is deemed to be of strategic benefit, the Company sometimes enters into marketing, brand labeling and/or non-exclusive manufacturing licensing agreements with other manufacturers of fluid power components. Historically, approximately 5% of the Companys sales have been to other fluid power manufacturers that incorporate the Companys products into complete system solutions.
Products
Screw-in Cartridge Valves
The Company designs and manufactures high-performance, screw-in hydraulic cartridge valves in up to
five size ranges, suitable for flows from one to 400 gallons per minute and continuous operating
pressures up to 5,000 pounds per square inch. The floating construction pioneered by the Company
provides demonstrable performance and reliability advantages compared to most competitors product
offerings due to its self-alignment characteristic that accommodates potential manufacturing
deviations common in the thread-making operations of screw-in cartridge valves and manifolds. This
floating
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construction significantly differentiates the Company from most of its competitors, which design and manufacture rigid screw-in cartridge valves that fit an industry common cavity. The floating construction of the Companys screw-in cartridge valves eliminates the tendency of working parts inside the cartridge valves to bind when screwed into the manifold, which leads to unnecessary stress and, often, premature failure. Some competitors manufacture products that fit the Companys cavity. Strategically, the Company believes the markets for its products will expand more rapidly if other sources are available for products that fit the Companys cavity.
Manifolds
A manifold is a solid block of metal, usually aluminum or ductile iron, which is machined to create
threaded cavities and channels into which screw-in cartridge valves can be installed and through
which the hydraulic fluid flows. The manifolds manufactured by the Company are described below:
Standard Manifolds. The variety of standard, catalogued manifolds offered by the Company is unmatched by any screw-in cartridge valve or manifold competitor. These products allow customers easily to integrate the Companys screw-in cartridge valves into their systems in many different ways. Once designed, standard manifolds require minimal, if any, maintenance engineering over the life of the product and can be readily manufactured at all of the Companys operations.
Custom Manifolds. Custom manifolds are designed for a customer-specific application and typically combine many different screw-in cartridge valves in a single package or multiple packages. The Companys internally-developed, proprietary expert system software allows the Company to manufacture manifolds efficiently in low volumes. The innovative design of the Companys screw-in cartridge valves allows manifolds to be physically smaller for certain applications than functionally similar manifolds containing competitors screw-in cartridges that fit industry common cavities. The Company believes many of the custom manifolds that incorporate cartridge valves which fit industry common cavities require testing after assembly. The Company does not routinely test manifolds that contain its screw-in cartridge valves because of the inherent reliability of the cartridge valves, and this provides the Company with a significant competitive advantage. Custom manifolds provide many benefits to end users and equipment manufacturers, including reduced assembly time, order simplification, reduced leakage points, neater packaging, potentially fewer hose and fitting connections, and more control functions in a single location.
Engineering
The Companys engineers play an important role in all aspects of the Companys business, including
design, manufacturing, sales and marketing and technical support. When designing products,
engineers work within a disciplined set of design parameters that often results in repeated
incorporation of existing screw-in cartridge valve parts in new functional products.
During product development, engineers work closely with manufacturing personnel to define the processes required to manufacture the product reliably and consistently. The close link between engineering and manufacturing helps smooth the transition from design to market. Design changes to facilitate manufacturing processes are sometimes considered but typically not if product performance levels would be compromised. The Company practices a continuous improvement process, which it believes is largely attributable to its horizontal management structure that empowers employees and encourages their creative contribution. At various times the Company may incorporate design changes in a product to improve its performance or life expectancy. All of the Companys engineers provide application support to customers and distributors.
Manufacturing
The Company is a process intensive manufacturing operation that extensively utilizes computer
numerically controlled (CNC) machinery to manufacture its products. Where commercial machinery is
not available for specific manufacturing or assembly operations, the Company often designs and
builds its own machinery to perform these tasks. The Company makes extensive use of automated
handling and assembly technology (including robotics) where possible to perform repetitive tasks,
thus promoting manufacturing efficiencies and workplace safety. The Company has its own electric
heat treatment furnaces to provide consistent and reliable control of this important operation.
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At its two Sarasota, Florida, manufacturing plants, the Company has extensive testing facilities that allow its design engineers to test fully all cartridge valve products at their maximum rated pressure and flow rates. A metallurgist and complete metallurgical laboratory support the Companys design engineers and in-house heat treatment. The resident engineers at the Companys other facilities also utilize test equipment.
The Company employs a build-to-order philosophy and relies on its distributors to purchase and maintain sufficient inventory to meet their customers demands. With this build-to-order philosophy, most raw materials, including aluminum and steel, are delivered on a just-in-time basis. These and other raw materials are commercially available from multiple sources.
The Company controls most critical finishing processes in-house but does rely on a small network of outside manufacturers to machine cartridge parts to varying degrees of completeness. Many high-volume machining operations are performed exclusively at outside suppliers. The Company is very selective in establishing its supplier base and attempts to develop and maintain long-term relationships with suppliers. The Company continually reviews all of its suppliers to improve the quality of incoming parts and to assess opportunities for better control of both price and quality. The Companys quality systems at the U.S. and U.K. facilities are in compliance with ISO 9001:2000 for design and manufacture of steel cartridge valves, aluminum and ferrous manifolds for hydraulic systems. Those in Korea are certified to ISO 9001:2000 and 14001:1996 for the design, development, production, and after sales service of hydraulic valves.
Sales and Marketing
The Companys products are sold globally, primarily through independent fluid power distributors.
Distributors are supported with product education programs conducted by the Company at its
facilities. Technical support is provided by each of the Companys operations (Florida, Kansas,
England, Germany, France, Korea, and China). Included in the Companys sales and marketing staff
are hydraulic engineers who have significant experience in the fluid power industry. Discount
pricing structures encourage distributors to buy in moderate to high volumes to ensure there is a
local inventory of products in the marketplace.
The Company currently has 64 distributors, 41 of which are located outside the United States and a majority of which have strong technical backgrounds or capabilities, which enable them to develop practical, efficient, and cost-effective fluid power systems for their customers. In 2004, sales to the Companys largest distributor represented less than 7% of net sales and net sales outside of the United States represented approximately 50% of total net sales.
In addition to distributors, the Company sells directly to other companies within the hydraulic industry under a pricing program that does not undermine the primary distributors efforts. Companies that participate in this program utilize the Companys products in a value-added application, integrating the Companys screw-in cartridge valves into other fluid power products or systems of their manufacture. Management believes this strategy strengthens the Company by encouraging other manufacturers to buy products from the Company that they might otherwise develop themselves.
The Company has in the past, to a limited degree, sold product directly to OEMs. Although the Company does not have any employee whose primary responsibility is direct sales, it may consider this in the future. The Company recognizes that to gain access to certain large OEM accounts it may have to deal directly in the areas of sales and support.
While the Company principally sells its products through distributors, it provides end users with technical information via its website and catalogues that offers design engineers all of the information necessary to specify and obtain the Companys products. The Company believes that providing complete technical information to the marketplace helps to stimulate demand for the Companys products. The Companys website continues to evolve and has helped to drastically reduce the time between engineering release of products and their appearance in the marketplace. The Company is continuing to invest in this technology as one of the best ways to keep its broad product offering available to customers around the world.
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Customers
While many of the Companys customers requirements are growing, management does not believe that
the loss of any one customer would have a material adverse effect on the Companys business.
End-user customers are classified by whether their primary applications for the Companys products
are mobile or industrial.
Mobile applications involve equipment that generally is not fixed in place and is often operated in an uncontrolled environment, such as construction, agricultural, mining, and fire and rescue and other utility equipment. Mobile customers were the original users of screw-in cartridge valves due to the premium that these industries place on considerations of space, weight, and cost. Mobile customers historically account for approximately 66% of the Companys net sales.
Industrial applications involve equipment that generally is fixed in place in a controlled environment. Examples include automation machinery, presses, plastics machinery such as injection molding equipment, and machine tools. The requirements of the industrial marketplace are more demanding than most mobile applications since industrial equipment typically operates at significantly higher cycles. The Companys products are designed to withstand these operating imperatives, and industrial applications historically account for approximately 34% of the Companys net sales. Many conventional valve designs are still used in industrial applications and represent substitution opportunities for the Companys products.
The Company does not warrant its products for use in any of the following applications, (i) any product that comes under the Federal Highway Safety Act, such as steering or braking systems for passenger-carrying vehicles or on-highway trucks, (ii) aircraft or space vehicles, (iii) ordnance equipment, (iv) life support equipment, and (v) any product that, when sold, would be subject to the rules and regulations of the United States Nuclear Regulatory Commission. These application limitations have alleviated the need for the Company to maintain the internal bureaucracy necessary to conduct business in these market segments.
Competition
The hydraulic valve industry is highly fragmented and intensely competitive. The Company has a
large number of competitors, some of which are full-line producers and others that are niche
suppliers similar to the Company. Most competitors market globally. Full-line producers have the
ability to provide total hydraulic systems to customers, including components functionally similar
to those manufactured by the Company. There has been increasing consolidation activity within the
industry in recent years, with large, full-line producers filling out their product lines by
acquiring or entering into relationships with other hydraulics companies, and management expects
there will be further consolidation in the future. The Company believes that it competes based upon
quality, reliability, price, value, speed of delivery and technological characteristics.
Most of the Companys screw-in cartridge valve competitors produce screw-in cartridge valves that fit an industry common cavity that sometimes allows their products to be interchangeable. The industry common cavity is not currently supported by any national or global standards organizations, although there is an ongoing effort to standardize a modified version of this cavity in the United States. The International Standards Organization (ISO) has developed a standard screw-in cartridge cavity that is different from the industry common cavity, but the Company is not aware of any major competitor that currently produces a full line of standard products conforming to the ISO standard. The Company does not manufacture a product that fits either the industry common or the ISO standard cavity. Some competitors manufacture selected screw-in cartridge valves that fit the Companys cavity. The Company believes the majority of these products are load control valves. Management believes that increased use of the Companys cavity will be beneficial in the long term because, although competition will increase, markets and applications for the Companys products also will increase.
Employees
As of December 25, 2004, the Company had 545 full-time employees in the United States, 78 in
England, 27 in Germany, one in France and 28 in Korea. The Company continues to focus its efforts
on designing and manufacturing standard products, allowing it to maintain over 90% of its employees
in manufacturing, distribution, and engineering functions. No employees are represented by a union
in any of the Companys operating units, and management believes that relations with its employees
are good.
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Employees are paid either hourly or with an annual salary at rates that are competitive with other companies in the industry and in its geographic areas. Management believes that the combination of competitive salary, above average health and retirement plans, and a safe and pleasant working environment discourages employee turnover and encourages efficient, high-quality production. Nevertheless, due to the nature of the Companys manufacturing business, it is often difficult to attract skilled personnel.
Patents and Trademarks
The Company believes that the growth of its business is dependent upon the quality and functional
performance of its products and its relationship with the marketplace, rather than the extent of
its patents and trademarks. The Companys principal trademark is registered internationally in the
following countries: Argentina, Australia, Brazil, Canada, Chile, China, France, Germany, India,
Italy, Japan, Korea, Mexico, Peru, Spain, Sweden, Switzerland, the United Kingdom and the United
States. While the Company believes that its patents have significant value, the loss of any single
patent would not have a material adverse effect on the Company.
Business Risk Factors
In addition to the other information in this Form 10-K Report, the following should be considered in evaluating the Companys business and its prospects:
Cyclicality. The capital goods industry in general, and the hydraulic valve and manifold industry in particular, are subject to economic cycles. The downturn in the industry from 2001 2003 had a material adverse effect on the Companys business and results of operation. The strength of the economic recovery in 2004 has and will continue to directly affect orders for the Companys products.
Technological Change. The fluid power industry and its component parts are subject to technological change, evolving industry standards, changing customer requirements and improvements in and expansion of product offerings. If technologies or standards used in the Companys products become obsolete, the Companys business, financial condition, and results of operations will be adversely affected. Although the Company believes that it has the technological capabilities to remain competitive, there can be no assurance that developments by others will not render the Companys products or technologies obsolete or noncompetitive. See Business Strategy.
Competition. The hydraulic valve industry is highly fragmented and intensely competitive, with the Company facing competition from a large number of competitors, some of which are full-line producers and others that are niche suppliers like the Company. Full-line producers have the ability to provide total hydraulic systems to customers, including components functionally similar to those manufactured by the Company. The Company believes that it competes based upon quality, reliability, price, value, speed of delivery and technological characteristics. Many of the Companys screw-in cartridge valve competitors are owned by corporations that are significantly larger than the Company and have greater financial resources than the Company. There can be no assurance that the Company will continue to be able to compete effectively with these companies.
The manifold business is also highly fragmented and intensely competitive. All of the major screw-in cartridge valve manufacturers either manufacture manifolds or have sources that they use on a regular basis. In addition, there are a number of independent manifold suppliers that produce manifolds incorporating various manufacturers screw-in cartridge valves, including those made by the Company. Finally, there are many small, independent machine shops that produce manifolds at very competitive prices. Competition in the manifold business is based upon quality, price, proximity to the customer, and speed of delivery. Many of the Companys competitors have very low overhead structures and there can be no assurance that the Company will continue to be able to compete effectively with these companies.
In addition, the Company competes in the sale of hydraulic valves and manifolds with certain of its customers. Generally, these customers purchase cartridge valves from the Company to meet a specific need in a system that cannot be filled by any valve made by such customer. To the extent that the Company introduces new valves in the future that increase the competition between the Company and such customer, such competition could adversely affect the Companys relationships with these customers.
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Potential Marketplace Adoption of Industry Standard. The Companys screw-in cartridge valves fit into a unique cavity for which, to date, few other manufacturers have designed products. Accordingly, the Companys screw-in cartridge valves are not interchangeable with those of other manufacturers. Most competitive manufacturers produce screw-in cartridge valves that fit into an industry common cavity. There is an ongoing effort in the United States to produce a new standard for screw-in hydraulic cartridge valve cavities based on the industry common cavity. Additionally, the International Standards Organization (ISO) has an existing industry standard for screw-in hydraulic cartridge valve cavities, which is different from the Companys cavity and the industry common cavity. In the Companys view, the industry common cavity as well as the suggested standardized form of this cavity and the ISO standard cavity fail to address critical functional requirements, which could result in performance and safety problems of significant magnitude for end users. To the Companys knowledge, no major competitor has converted its products to fit the ISO standard cavity. Any move by a substantial number of screw-in cartridge valve and manifold manufacturers toward the adoption of ISO standard or another standard, based on the existing industry common cavity, could have a material adverse effect on the Companys business, financial condition and results of operation. See Business Competition.
International Sales. In 2004, approximately 50% of the Companys net sales were outside of the United States. The Company is expanding the scope of its operations outside the United States, both through direct investment and distribution, and expects that international sales will continue to account for a substantial portion of net sales in future periods. International sales are subject to various risks, including unexpected changes in regulatory requirements and tariffs, longer payment cycles, difficulties in receivable collections, potentially adverse tax consequences, trade or currency restrictions, and, particularly in emerging economies, potential political and economic instability and regional conflicts. Furthermore, the Companys international operations generate sales in a number of foreign currencies, particularly British pounds, the Euro, and the Korean Won. Therefore, the Companys financial condition and results of operation are affected by fluctuations in exchange rates between the United States dollar and these currencies. Any or all of these factors could have a material adverse effect on the Companys business, financial condition, and results of operations.
Risks Relating to Growth Strategy. In pursuing its growth strategy, the Company intends to expand its presence in its existing markets and enter new markets. In addition, the Company may pursue acquisitions and joint ventures to complement its business. Many of the expenses arising from the Companys expansion efforts may have a negative effect on operating results until such time, if at all, these expenses are offset by increased revenues. There can be no assurance that the Company will be able to improve its market share or profitability, recover its expenditures, or successfully implement its growth strategy. See Business Strategy.
The Companys expansion strategy also may require substantial capital investment for the construction of new facilities and their effective operation. The Company may finance the acquisition of additional assets using cash from operations, bank or institutional borrowings, or through the issuance of debt or equity securities. There can be no assurance that the Company will be able to obtain financing from bank or institutional sources or through the equity or debt markets or that, if available, such financing will be on terms acceptable to the Company.
Dependence on Key Employees and Skilled Personnel. The Companys success depends, to a significant extent, upon a number of key individuals. The loss of the services of one or more of these individuals could have a material adverse effect on the business of the Company. The Companys future operating results depend to a significant degree upon the continued contribution of its key technical personnel and skilled labor force. Competition for management and engineering personnel is intense, and the Company competes for qualified personnel with numerous other employers, some of which have greater financial and other resources than the Company. The Company conducts a substantial part of its operations at its facilities in Sarasota, Florida. The Companys continued success depends on its ability to attract and retain a skilled labor force at this location. While the Company has been successful in attracting and retaining skilled employees in the past, there can be no assurance that the Company will continue to be successful in attracting and retaining the personnel it requires to develop, manufacture and market its products and expand its operations. See Business Employees.
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Risk of Product Liability. The application of many of the Companys products entails an inherent risk of product liability. There can be no assurance that the Company will not face any material product liability claims in the future or that the product liability insurance maintained by the Company at such time will be adequate to cover such claims.
Raw Materials. The primary raw materials used by the Company in the manufacture of its products are aluminum, ductile iron, and steel. There can be no assurance that prices for such materials will remain stable. Material costs have increased during the past fiscal year and are predicted to increase further. If the Company is unable to pass through any price increases to its customers, the operating results of the Company will be adversely affected.
Parts Suppliers. The Companys largest expense in the cost of sales is purchased cartridge valve parts. There can be no assurance that the Companys manufacturing costs and output would not be materially and adversely affected by operational or financial difficulties experienced by one or more of its suppliers.
Environmental Compliance. The Companys operations involve the handling and use of substances that are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the soil, air and water and establish standards for their storage and disposal. Management believes that the Companys current operations are in substantial compliance with applicable environmental laws and regulations, the violation of which could have a material adverse effect on the Company. There can be no assurance, however, that currently unknown matters, new laws and regulations, or stricter interpretations of existing laws or regulations will not materially affect the Companys business or operations in the future.
Payment of Dividends. Although the Company has paid a cash dividend each quarter since its Common Stock has been publicly traded, there can be no assurance that funds will be available for this purpose in the future. The declaration and payment of dividends is subject to the sole discretion of the Board of Directors of the Company and will depend upon the Companys profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by the Board of Directors, and may be restricted by the terms of the Companys credit agreements.
Certain Anti-takeover Provisions. The Companys Articles of Incorporation provides for a classified Board of Directors. In addition, the Articles of Incorporation gives the Board of Directors the authority, without further action by the shareholders, to issue and fix the rights and preferences of a new class, or classes, of preferred stock. These and other provisions of the Articles of Incorporation and the Companys Bylaws may deter or delay changes in control of the Company, including transactions in which shareholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of shareholders to approve transactions that they may deem to be in their best interests.
Control by Certain Shareholders and Management. Members of the Koski family, including two Directors, Robert E. Koski, the Companys founder and former Chairman, and Christine L. Koski, own or control approximately 36% of the outstanding shares of Common Stock. Accordingly, the members of the Koski family have the ability to influence significantly the election of the Companys Directors and the outcome of certain corporate actions requiring shareholder approval and to influence the business of the Company. Such influence could preclude any acquisition of the Company and could adversely affect the price of the Common Stock. Additionally, all Directors and Executive Officers of the Company as a group beneficially own or control approximately 39% of the outstanding shares of Common Stock. See Item 12. Security Ownership of Certain Beneficial Owners and Management.
ITEM 2. PROPERTIES
The Company owns major facilities in the United States, United Kingdom, Germany, and Korea, as set forth below.
The Company owns a 66,000 square foot facility in Sarasota, Florida, which houses manufacturing, design, marketing and other administrative functions. The Sarasota facility is well suited for the design, testing and manufacture of the Companys products.
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The Company also owns a 60,000 square foot manufacturing facility in Manatee County, Florida. The Manatee County facility, constructed in 1997, has a productive capacity similar to the Sarasota facility.
Both facilities in Florida are encumbered by a secured loan and a revolving line of credit, which are due July 23, 2008, and July 23, 2006, respectively. Monthly payments of principal and interest are due on the secured loan and interest only is due on the revolving line of credit, both with a variable interest rate of LIBOR + 1.9% or the banks prime rate, at the Companys discretion. At December 25, 2004, the Term Loan had an outstanding balance of $10.2 million and the Line of Credit was fully paid with no outstanding balance.
The close proximity of the United States facilities allows for quick change and the ability to shift resources, including machinery and people, to effectively meet changing business requirements. The Company believes the combined productive capacity of these facilities is approximately $100 million. The Company estimates its combined current capacity utilization to be approximately 75%.
The Company also owns vacant land in Manatee County, Florida, for future expansion requirements. There is no mortgage on this property and the Company believes the land to be well suited to add over 30,000 square feet of manufacturing capacity.
The Company leases a 10,000 square foot manufacturing facility in Lenexa, Kansas, which is used to manufacture manifolds for the North American market.
The Company owns a 37,000 square foot facility in Coventry, England, free of any encumbrances. This facility has a productive capacity of approximately $20 million and currently, is operating at 75% of its productive capacity.
The Companys 45,000 square foot distribution and manufacturing facility in Erkelenz, Germany has a mortgage loan, which is due September 30, 2008, and has a fixed interest rate of 6.05%. At December 25, 2004, the principal balance was $0.9 million. This facility is well suited to house equipment used for manufacturing and testing of the Companys products. Currently, a small portion of the manufacturing area is utilized and the remainder is leased on an annual basis to an outside company.
The Company owns a 10,000 square foot distribution and manufacturing facility in Inchon, Korea, free of any encumbrances.
The Company believes that its properties have been adequately maintained, are generally in good condition, and are suitable and adequate for its business as presently conducted. The extent of utilization of the Companys properties varies from time to time and among its facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in routine litigation incidental to the conduct of its business. The Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of the Company through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year ended December 25, 2004.
11
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY,
Market Information
The Common Stock of the Company has been trading publicly under the symbol SNHY on the Nasdaq
National Market since the Companys initial public offering on January 9, 1997. The following
table sets forth the high and low closing sale prices of the Companys Common Stock as reported in
the Nasdaq National Market and the dividends declared for the periods indicated:
Holders
There were 116 shareholders of record of Common Stock on March 11, 2005. The number of record
holders was determined from the records of the Companys transfer agent and does not include
beneficial owners of Common Stock whose shares are held in the names of securities brokers,
dealers, and registered clearing agencies. The Company believes that there are approximately 2,000
beneficial owners of Common Stock.
Dividends
Dividends were paid on the 15
th
day of each month following the date of
declaration. The Companys Board of Directors currently intends to continue to pay a quarterly
dividend of at least $0.075 per share during 2005. However, the declaration and payment of future
dividends is subject to the sole discretion of the Board of Directors, and any determination as to
the payment of future dividends will depend upon the Companys profitability, financial condition,
capital needs, future prospects and other factors deemed pertinent by the Board of Directors.
Unregistered Sales of Securities
On September 17, 2004, the Company contributed 32,000 shares of common stock to a newly formed
employee stock ownership plan (ESOP) with the Companys 401(k) plan for U.S. employees. The
issuance of the shares was exempt from registration under the Securities Act of 1933 as the
contribution of the shares to the ESOP for the benefit of the Registrants employees, without the
payment of consideration by the ESOP or employees, does not constitute a sale of the common stock
for purposes of the Act.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following summary should be read in conjunction with the consolidated financial statements
and related notes contained herein. See Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and Item 1. Business.
As of January 1, 1999, the Company changed from a calendar reporting year ending on December
31st to a fiscal year which will end on the Saturday closest to December 31st. Each quarter
consists of two 4-week periods and one 5-week period.
13
Quarterly Results of Operations
14
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OVERVIEW
Sun Hydraulics Corporation is a leading designer and manufacturer of high-performance screw-in
hydraulic cartridge valves and manifolds, which control force, speed and motion as integral
components in fluid power systems. The Company sells its products globally through wholly owned
subsidiaries and independent distributors. Sales outside the United States for the year ended
December 25, 2004, were 50% of total net sales.
Approximately 66% of product sales are used by the mobile market, which is characterized by
applications where the equipment is not fixed in place, the operating environment is often
unpredictable, and duty cycles are generally moderate to low. Some examples of mobile equipment
include off-road construction equipment, fire and rescue equipment and mining machinery.
The remaining 34% of sales are used by industrial markets, which are characterized by equipment
that is fixed in place, typically in a controlled environment, and which operates at higher
pressures and duty cycles. Automation machinery, metal cutting machine tools and plastics machinery are some
examples of industrial equipment. The Company sells to both markets with a single product line.
Industry Conditions
Demand for the Companys products is dependent on demand for the capital goods into which the
products are incorporated. The capital goods industries in general, and the fluid power industry
specifically, are subject to economic cycles. According to the National Fluid Power Association
(the fluid power industrys trade association in the United States), the United States index of
shipments of hydraulic products decreased -16%, -3% and -2% in 2001, 2002 and 2003, respectively.
This trend reversed in 2004 as the United States index of shipments of hydraulics products
increased 25%.
The Companys order trend has historically tracked closely to the United States Purchasing Managers
Index (PMI). The index was 57.3 at the end of December 2004 compared to 62.1 at the end of
December 2003. When the PMI is over 50, it indicates economic expansion.
15
Results for the 2004 fiscal year
Management believes the Companys most important achievement in 2004 was the ability to
maintain and improve on-time delivery, even with a 33% increase in sales. This capability will
continue to foster growth in all markets, both short term and long term.
The rebound in domestic markets was very strong in 2004, and remained strong in January and
February 2005. Along with a 39% increase in North American sales compared to 2003, the Companys
international business has remained strong, with European sales increasing 25% and Asian sales
increasing 28% in 2004.
While the 33% increase in sales had a positive effect on margins, higher productivity helped to
offset the effect of increased material costs and further improve margins. This enabled the
Company to hold the line on pricing. As a result, management believes the Company has gained
market share. Gross profit in 2004 increased 54% over 2003. Gross profit as a percentage of sales
increased to 30% from 26% in 2003.
Dividends
The Company declared quarterly dividends of $0.04, $0.05, $0.05, and $0.075 per share to
shareholders of record on the last day of the first, second, third, and fourth quarters of 2004,
respectively. These dividends were paid on the 15
th
day of each month following the date
of declaration. Total dividends of $0.215 were paid to shareholders in 2004.
Cash Flow
Net cash generated from operations for the year was $15.0 million, a $5.5 million increase compared
to $9.5 million in 2003. Capital expenditures for the year were $5.0 million, cash on hand
increased $4.5 million to $9.8 million, debt decreased $6.0 million to $12.3 million, and $1.5
million was paid to shareholders in dividends.
16
Results of Operations
The following table sets forth, for the periods indicated, certain items in the Companys
statements of operations as a percentage of net sales.
Segment Information (in thousands)
Outlook for 2005
The Company plans to continue to invest in marketing and productivity improvements at a level
comparable to 2004. Sales for the first quarter of 2005 are projected to be $27.5 million, which
would represent a 29% increase over the first quarter of 2004, with net income per share in the
range of $0.38 to $0.41.
Comparison of Years Ended December 25, 2004 and December 27, 2003
Net Sales
Net sales were $94.5 million, an increase of $23.7 million, or 33.5%, compared to $70.8 million in
2003. Sales increased 29% excluding the effect of exchange rates.
Net sales in the United States operation increased 37.5% with shipments to Asia up 29.3%, Canada up
27.3% and domestic shipments up 40.2%. Net sales in the United Kingdom operation increased 17.9%,
primarily due to increases in sales to European distributors, while domestic sales were flat.
German operation net sales increased 38.1%, with increases in all markets served. Net sales in the
Korean operation increased 27.2%, due to increased shipments stimulated by Korean customers meeting
demand from China coupled with growth in domestic Korean business.
17
Gross Profit
Gross profit increased 54.4% to $28.5 million in 2004, compared to $18.5 million in 2003. Gross
profit as a percentage of net sales increased to 30.2% in 2004, compared to 26.1% in 2003. The
increase in gross profit as a percentage of net sales was due to the increase in net sales and
productivity improvements, which more than offset increased material and employee benefit costs.
Selling, Engineering, and Administrative Expenses
Selling, engineering and administrative expenses in 2004 were $16.2 million, a $1.4 million, or
9.7%, increase, compared to $14.8 million in 2003. The increase was primarily due to higher
employee wages and benefit costs of $1.1 million including the establishment of an ESOP, and higher
advertising costs including catalogs and website updates of $0.2 million.
Interest Expense
Interest expense was $0.5 million and $0.6 million in 2004 and 2003, respectively. While
average outstanding debt increased $1.3 million, from $13.9 million in 2003 to $15.2 million in
2004, due to debt acquisitions related to the $2 per share special dividend paid on August 18, 2003, lower interest
rates were negotiated on the new debt allowing interest expense to decrease.
Foreign Currency Transaction (Gain) Loss
There was minimal impact to net income from foreign currency transactions in 2004 compared to a
foreign currency gain of $0.1 million in 2003, due primarily to gains in the Euro and Korean Won
against the U.S. dollar. While the Euro, the Korean Won and the British Pound made gains against
the U.S. dollar in 2004, the U.K. operations experienced losses related to sales conducted in U.S.
dollars.
Miscellaneous (Income) Expense
Miscellaneous income had a minimal impact on net income in 2004, compared to miscellaneous
income of $0.1 million in 2003. The $0.1 million decrease was due to losses on disposal of fixed
assets and increased charitable contributions, both in the U.S. operations.
Income Taxes
The provision for income taxes for the year ended December 25, 2004, was 33.3% of pretax
income compared to 33.6% for the year ended December 27, 2003. The decrease was due to a change in
the relative levels of income and different tax rates in effect among the countries in which the
Company sells its products.
Comparison of Years Ended December 27, 2003 and December 28, 2002
Net Sales
Net sales for 2003 were $70.8 million, an increase of $6.3 million, or 10.0%, compared to
$64.5 million in 2002. Sales increased 7% excluding the effect of exchange rates, as approximately
$2.0 million of the $6.3 million increase was due the strength of the British Pound, the Euro and
the Korean Won to the U.S. Dollar.
Net sales in the United States operation increased 3.7% as shipments to Asia increased 12.5%, to
Canada 5.4% and domestic shipments to 1.8%. Net sales in the United Kingdom operation increased
11.2%, mainly due to currency translation. German operation net sales increased 40.0% with a true
volume increase of 16%, with 24% related to currency translation. Korean operations increased
16.2%, with approximately 8.1% due to the effect of currency and 8.1% due to increased shipments
stimulated by Korean customers meeting demand from China.
18
Gross Profit
Gross profit increased 15.7% to $18.5 million in 2003, compared to $16.0 million in 2002.
Gross profit as a percentage of net sales increased to 26.1% in 2003, compared to 24.7% in 2002.
The increase in gross profit as a percentage of net sales was due to the increase in total net
sales and transaction based exchange gains in Germany and Korea. These increases were offset by
start-up costs for the U.S. Midwest operation and operational problems stemming from mid-year
business system difficulties in the United Kingdom. Management believes that operating margins will
increase significantly as demand grows because manufacturing overhead, marketing, engineering and
administrative costs will be relatively static. Management also believes that continuing increases
in demand will allow the Company to capitalize on recent productivity improvements and result in
lower per unit manufacturing cost.
Selling, Engineering, and Administrative Expenses
Selling, engineering and administrative expenses in 2003 were $14.8 million, a $2.3 million,
or 18.0%, increase, compared to $12.5 million in 2002. Increases in areas of discretionary
spending were as follows: $0.3 million for website development, $0.3 million for professional fees
and outside services, $0.4 million for a software system write-off in the United Kingdom, and $0.6
million for marketing related costs in the new Kansas and France operations. In addition, expenses increased $0.3 million in Germany,
related to warranty expense and professional fees. Currency translation in Germany and the U.K.
accounted for $0.4 million of the increase. The Company believes that selling, engineering and
administrative expenses will remain relatively static at 2003 levels in 2004.
Interest Expense
Interest expense was $0.6 million in 2003 and 2002. While average outstanding debt increased
$3.8 million, from $10.1 million in 2002 to $13.9 million in 2003, due to debt acquisitions related
to the $2 per share special dividend paid on August 18, 2003, lower interest rates were negotiated
on the new debt allowing interest expense to remain flat.
Foreign Currency Transaction (Gain) Loss
Foreign currency transaction gain in 2003 of $0.1 million compared to foreign currency loss of $0.1
million in 2002 was due primarily to gains in the Euro and Korean Won against the U. S. dollar.
Miscellaneous (Income) Expense
Miscellaneous income was $0.1 million in 2003, compared to miscellaneous expense of $0.2
million in 2002. The $0.3 million change was due to an increase in loss on sale of fixed assets in
the United States and the United Kingdom in 2002.
Income Taxes
The provision for income taxes for the year ended December 27, 2003, was 33.6% of pretax
income compared to 31.4% for the year ended December 28, 2002. The increase was due to a change in
the relative levels of income and different tax rates in effect among the countries in which the
Company sells its products.
Liquidity and Capital Resources
Historically, the Companys primary source of capital has been cash generated from operations,
although short-term fluctuations in working capital requirements have been met through borrowings
under revolving lines of credit as needed. The Companys principal uses of cash have been to pay
operating expenses, pay dividends to shareholders, make capital expenditures, and service debt.
Net cash flow from operations in 2004 was $15.0 million, compared to $9.5 million in 2003 and $7.7
million in 2002. The $5.5 million increase in the Companys net cash flow from operations in 2004
was due primarily to the increase in net income of $5.7 million, while working capital excluding
cash remained relatively static. Cash on hand increased $4.6 million from $5.2 million in 2003 to
$9.8 million in
19
2004. Days sales outstanding increased slightly from 32 to 33 in 2004 and
inventory turns improved from 7.8 to 9.6. The increase in the Companys net cash flow from
operations in 2003, compared to 2002, was due to the increase in net income of $0.3 million
combined with working capital changes, led by a $1.1 million increase in accrued expenses due
primarily to changes in expected liabilities related to the Companys self-funded health insurance
plan in the U.S.
Capital expenditures were $5.0 million in 2004, compared to $3.1 million in 2003 and $5.9
million in 2002. Capital expenditures in 2002 included $1.5 million for the expansion of the
building in the United Kingdom. Capital expenditures in 2005 are projected to be $5.0 million.
On July 23, 2003, the Company completed a recapitalization which refinanced existing debt in
the U.S. and further leveraged assets. This new financing consisted of a Term Loan of $11 million
and a secured revolving Line of Credit of $12 million. The Term Loan and the Line of Credit are
secured by all of the Companys U.S. assets and a pledge of 65% of the authorized and issued
capital stock of its first tier subsidiaries in the United Kingdom and Korea. The total carrying
value of assets held as collateral is $59.5 million. The Term Loan has monthly principal and
interest payments based upon a 20-year amortization schedule, with all remaining principal and
interest due July 23, 2008. The Line of Credit requires monthly payments of interest only, and is
payable in full on July 23, 2006. Both the Term Loan and the Line of Credit had a floating interest rate for the first year of 1.9% over LIBOR, or the
Prime Rate, at the Companys discretion. From and after July 2004, the rates will vary based upon
the Companys leverage ratio. At December 25, 2004, the Term Loan had an outstanding balance of
$10.2 million and the Line of Credit was fully paid with no outstanding balance.
The Term Loan and the Line of Credit contain debt covenants including 1) Fixed Charges Coverage
Ratio (as defined) of 2.0 to 1.0, determined quarterly on a rolling four quarters basis, 2) Debt
(as defined) to Tangible Net Worth (as defined) of not more than 1.5 to 1.0, determined quarterly,
3) Current Ratio of 1.5 to 1.0, determined quarterly, 4) Funded Debt (as defined) to EBITDA (as
defined) of less than 3.25 to 1.0, determined quarterly on a rolling four quarters basis, and 5)
the Companys primary domestic depository accounts shall be with SouthTrust Bank. As of December
25, 2004, the Company was in compliance with all debt covenants.
The Company declared quarterly dividends of $0.04, $0.05, $0.05, and $0.075 per share to
shareholders of record on the last day of the first, second, third, and fourth quarters,
respectively, and $0.04 per share each calendar quarter in 2003 and 2002. These dividends were
paid on the 15
th
day of each month following the date of declaration. In addition, the
Company paid a special dividend of $2.00 per share totaling $13.3 million on August 18, 2003. The
declaration and payment of future dividends is subject to the sole discretion of the Board of
Directors, and any determination as to the payment of future dividends will depend upon the
Companys profitability, financial condition, capital needs, future prospects and other factors
deemed pertinent by the Board of Directors.
The Company believes that cash generated from operations and its borrowing availability under
the revolving Line of Credit will be sufficient to satisfy the Companys operating expenses and
capital expenditures for the foreseeable future. In the event that economic conditions were to
severely worsen for a protracted period of time, the Company would have several options available
to ensure liquidity in addition to increased borrowing. Capital expenditures could be postponed
since they primarily pertain to long-term improvements in operations. Additional operating expense
reductions also could be made. Finally, the dividend to shareholders could be reduced or
suspended.
In June 2004, the Companys Board of Directors authorized the repurchase of approximately $0.4
million of outstanding Company stock on the open market. The stock purchased was used to offset
the issuance of shares under the Companys new ESOP. The Company purchased 32,000 shares, which
were all granted to the ESOP.
In November 2004, the Companys Board of Directors authorized the repurchase of up to $2.5 million
of Company stock, to be completed no later than January 15, 2006. The stock purchases will be made
in the open market or through privately negotiated transactions. Market purchases will be made
subject to restrictions relating to volume, price and timing in an effort to minimize the impact of
the purchases on the market for the Companys securities. The amount of the stock repurchases was
set based upon the anticipated number of shares that will be required to fund the Companys ESOP,
and employee stock
20
purchase plan, through fiscal year 2005. As of December 25, 2004, the Company
had repurchased 5,800 shares on the open market at an average cost of $14.28 per share. All 5,800
shares were retired prior to December 25, 2004.
OTHER MATERIAL COMMITMENTS. Our contractual obligations and debt obligations as of December 25,
2004, are summarized in the table below (in thousands):
Other long term liabilities consist of deferred income of $277 and deferred compensation of
$23. The deferred income is a result of the supply agreement with Mannesmann Rexroth, A.G., a
German full-line hydraulic component and systems manufacturer, entered into during 1999. This
agreement expires in 2010. Deferred compensation relates to Director compensation for the Board
meetings attended during 2004. Amounts will be paid upon an individual ceasing to be a Director of
the Company.
Critical Accounting Policies and Estimates
The Company currently only applies judgment and estimates which may have a material effect on the
eventual outcome of assets, liabilities, revenues and expenses for impairment of long-lived assets,
accounts receivable, inventory, goodwill and accruals. The following explains the basis and the
procedure for each account where judgment and estimates are applied.
Revenue Recognition
Impairment of Long-Lived Assets
The Company assesses the recoverability of goodwill and intangible assets not subject to
amortization under SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). See Goodwill
below.
Accounts Receivable
21
Inventory
Goodwill
Accruals
As of July 1, 2003, the Company accrues for health care benefit costs under a self-funded plan
utilizing estimates provided by a third party administrator and insurance company. The Company
purchases re-insurance for both specific and aggregate stop losses on claims that exceed $75,000 on
an individual basis and approximately $3.6 million on an aggregate basis.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin
No. 51 (ARB 51)
.
FIN 46 provides guidance in determining (1) whether
consolidation is required under the controlling financial interest model of ARB 51 or (2) whether
the variable interest model under FIN 46 should be used to account for existing and new entities.
In December 2003, the FASB released a revised version of FIN 46 (FIN 46R) clarifying certain
aspects of FIN 46 and providing certain entities with exemptions from its requirements. The
Company uses the equity method of accounting to account for investments in its joint venture in
China in which it does not have a majority ownership or exercise control. The Company adopted FIN
46 as of September 25, 2004, and does not believe that its investment in the China Joint Venture is
a Variable Interest Entity within the scope of FIN 46R,
nor
is it material to the financial
statements of the Company at December 25, 2004.
In November 2004, the FASB issued SFAS No. 151 (SFAS 151),
Inventory Costs, an amendment of ARB
No. 43, Chapter 4
. The amendments made by SFAS 151 clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. While SFAS 151 enhances Accounting Research
Bulletin No. 43,
Restatement and Revision of Accounting Research Bulletins,
and clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage), the statement also removes inconsistencies between ARB 43 and International
Accounting Standards No. 2 and amends ARB 43 to clarify that abnormal amounts of costs should be
recognized as period costs. Under some circumstances, according to ARB 43, the above listed costs
may be so abnormal as to require treatment as current period charges. SFAS 151 requires these items
be recognized as current-period charges regardless of whether they meet the criterion of so
abnormal and requires allocation of fixed production overheads to the costs of conversion.
This standard will be effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The impact of the adoption of SFAS 151 on the Companys reported operating results,
financial position and existing financial statement disclosure is not expected to be material.
22
In December, 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS 123(R)),
Share-Based Payment
,
which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS 123). SFAS
123(R) supersedes Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued
to Employees
(APB 25)
,
SFAS 123, and amends SFAS No. 95,
Statement of Cash Flows
. This Statement
requires entities to recognize the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards (with limited exceptions).
This Statement eliminates the alternative to use APB 25s intrinsic value method of accounting that
was provided in SFAS 123 as originally issued. Under APB 25, issuing stock options to employees
generally resulted in recognition of no compensation cost.
SFAS 123(R) also requires that the Company estimate the number of awards that are expected to vest
and to revise the estimate as the actual forfeitures differ from the estimate. This standard is
effective as of the beginning of the first interim or annual reporting period that begins after
June 15, 2005. The effect of these items and other changes in SFAS 123(R) as well as the
potential impact on the Companys reported operating results, financial position and existing
financial statement disclosure is currently being evaluated.
SFAS 123(R) requires that the benefits of tax deductions in excess of recognized compensation cost
be reported as a financing cash flow, rather than as an operating cash flow; thus, reducing net
operating cash flows and increasing net financing cash flows in the periods after the effective
date. The Company cannot estimate what these amounts will be in the future because they
depend on, among other things, when employees exercise stock options. The amount of operating cash
flow recognized in 2004 for such excess tax deductions for stock-based compensation was
approximately $290,000. There was no effect on operating cash flows for such excess tax deductions
during 2003 and 2002.
The Company currently follows the disclosure only provisions of SFAS No. 148,
Accounting for
Stock-Based Compensation Transition and Disclosure, an amendment of FASB Statement No.123,
Accounting for Stock-Based Compensation
, and has elected to follow APB 25 and related
interpretations in accounting for its employee stock options. The Company uses the Black-Scholes
formula to estimate the value of stock options granted to employees for disclosure purposes. SFAS
123(R) requires that we use the valuation technique that best fits the circumstances. The Company
is currently evaluating other techniques.
In December 2004, the FASB issued FASB Staff Position (FSP) 109-1 (FSP 109-1) and 109-2 (FSP
109-2). FSP 109-1 provides guidance on the application of SFAS No. 109,
Accounting for Income
Taxes
(SFAS 109), with regard to the tax deduction on qualified production activities provision
within H.R. 4520, The American Jobs Creation Act of 2004 (Act), that was enacted on October 22,
2004. FSP 109-2 provides guidance on a special one-time dividends received deduction on the
repatriation of certain foreign earnings to qualifying U.S. taxpayers. The Act contains numerous
provisions related to corporate and international taxation including repeal of the Extraterritorial
Income (ETI) regime, creation of a new Domestic Production Activities (DPA) deduction and a
temporary dividends received deduction related to repatriation of foreign earnings. The Act
contains various effective dates and transition periods. Under the guidance provided in FSP 109-1,
the new DPA deduction will be treated as a special deduction as described in SFAS 109. As such,
the special deduction has no effect on the Companys deferred tax assets and liabilities existing
at the enactment date. Rather, the impact of this deduction will be reported in the period in which
the deduction is claimed on the Companys income tax return. The repeal of ETI and its replacement
with a DPA deduction were not in effect in 2004 and, therefore, did not have an effect on the
income tax provision for the year ended December 25, 2004. The Company does not expect the net
effect of the phase-out of the ETI deduction and phase-in of the new DPA deduction to result in a
material impact on its effective income tax rate in 2005.
In FSP 109-2, the FASB acknowledged that, due to the proximity of the Acts enactment date to many
companies year-ends and the fact that numerous provisions within the Act are complex and pending
further regulatory guidance, many companies might not be in a position to assess the impacts of the
Act on their plans for repatriation or reinvestment of foreign earnings. Therefore, the FSP
provided companies with a practical exception to the permanent reinvestment standards of SFAS 109
and APB No. 23,
Accounting for Income Taxes Special Areas,
by providing additional time to
determine the amount of earnings, if any, that they intend to repatriate under the Acts
provisions. The Company is not yet in a position to decide whether, and to what extent, it might
repatriate foreign earnings to the U.S. Therefore,
23
under the guidance provided in FSP 109-2, no
deferred tax liability has been recorded in 2004 in connection with the repatriation provisions of
the Act. The Company is currently analyzing the future impact of the temporary dividends received
deduction provisions contained in the Act.
Off Balance Sheet Arrangements
The Company uses the equity method of accounting to account for investments in its joint venture in
China in which it does not have a majority ownership or exercise control. The Company does not
believe that its investment in the China Joint Venture is a Variable Interest Entity and within the
scope of FIN 46,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 5,
nor
is it material to the financial statements of the Company at December 25, 2004.
Seasonality
The Company generally has experienced increased sales during the second quarter of the year largely
as a result of the order patterns of our customers. As a result, the Companys second quarter net
sales, income from operations, and net income historically are the highest of any quarter during
the year.
Inflation
The impact of inflation on the Companys operating results has been moderate in recent years,
reflecting generally lower rates of inflation in the economy. While inflation has not had, and the
Company does not expect that it will have, a material impact upon operating results, there is no
assurance that the Companys business will not be affected by inflation in the
future.
FORWARD-LOOKING INFORMATION
Certain oral statements made by management from time to time and
certain statements contained herein that are not historical facts are forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934 and, because such
statements involve risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Forward-looking statements, including
those in Managements Discussion and Analysis of Financial Condition and Results of Operations are
statements regarding the intent, belief or current expectations, estimates or projections of the
Company, its Directors or its Officers about the Company and the industry in which it operates, and
assumptions made by management, and include among other items, (i) the Companys strategies
regarding growth, including its intention to develop new products; (ii) the Companys financing
plans; (iii) trends affecting the Companys financial condition or results of operations; (iv) the
Companys ability to continue to control costs and to meet its liquidity and other financing needs;
(v) the declaration and payment of dividends; and (vi) the Companys ability to respond to changes
in customer demand domestically and internationally, including as a result of standardization.
Although the Company believes that its expectations are based on reasonable assumptions, it can
give no assurance that the anticipated results will occur.
Important factors that could cause the
actual results to differ materially from those in the forward-looking statements include, among
other items, (i) the economic cyclicality of the capital goods industry in general and the
hydraulic valve and manifold industry in particular, which directly affect customer orders, lead
times and sales volume; (ii) conditions in the capital markets, including the interest rate
environment and the availability of capital; (iii) changes in the competitive marketplace that
could affect the Companys revenue and/or cost bases, such as increased competition, lack of
qualified engineering, marketing, management or other personnel, and increased labor and raw
materials costs; (iv) changes in technology or customer requirements, such as standardization of
the cavity into which screw-in cartridge valves must fit, which could render the Companys products
or technologies noncompetitive or obsolete; (v) new product introductions, product sales mix and
the geographic mix of sales nationally and internationally; and (vi) changes relating to the
Companys international sales, including changes in regulatory requirements or tariffs, trade or
currency restrictions, fluctuations in exchange rates, and tax and collection issues. Further
information relating to factors that could cause actual results to differ from those anticipated is
included but not limited to information under the headings Business, particularly under the
subheading, Business Risk Factors and Managements Discussion and Analysis of Financial
Conditions and Results of Operations in this Form 10-K for the
year ended December 25, 2004. The Company disclaims any intention or obligation to update or revise forward-looking statements,
whether as a result of new information, future events or otherwise.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on borrowed funds, which could
affect its results of operations and financial condition. The Company had approximately $10.3
million in variable-rate debt outstanding at December 25, 2004. The Company has managed this risk
by its ability to select the interest rate on its debt financing at Libor plus 1.9% or its lenders
prime rate, whichever is more advantageous. From and after July 2004, the interest rate on its debt
financing will remain variable based upon the Companys leverage ratio. At December 25, 2004, a 1%
change in interest rates up or down would affect the Companys income statement on an annual basis
by approximately $103,000 at the current, variable-rate outstanding debt level. At December 27,
2003, the Company had $16.0 million in variable-rate debt outstanding.
The companys exposure to foreign currency exchange fluctuations relates primarily to the direct
investment in its facilities in the United Kingdom, Germany, and Korea. The Company does not use
financial instruments to hedge foreign currency exchange rate changes.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
We have audited the consolidated balance sheet of Sun Hydraulics Corporation (a Florida
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
In our opinion, the financial statements referred to above present fairly, in all material
/s/ GRANT THORNTON LLP
Tampa, Florida
27
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
In our opinion, the accompanying consolidated balance sheet as of December 27, 2003 and the related
consolidated statements of operations, shareholders equity and comprehensive income, and of cash
flows for each of the two years in the period ended December 27, 2003 present fairly, in all
material respects, the financial position, results of operations and cash flows of Sun Hydraulics
Corporation and its subsidiaries at December 27, 2003 and for each of the two years in the period
ended December 27, 2003 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the Companys management;
our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Tampa, Florida
28
Sun Hydraulics Corporation
Consolidated Balance Sheets
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
29
Sun Hydraulics Corporation
Consolidated Statements of Operations
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
30
Sun Hydraulics Corporation
Consolidated Statement of Shareholders Equity and Comprehensive
Income
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
31
Sun Hydraulics Corporation
Consolidated Statements of Cash Flows
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
32
SUN HYDRAULICS CORPORATION
1. BUSINESS
Sun Hydraulics Corporation and its wholly-owned subsidiaries (the Company) design, manufacture
and sell screw-in cartridge valves and manifolds used in hydraulic systems. The Company has
facilities in the United States, the United Kingdom, Germany, Korea, and China. Sun Hydraulics
Corporation (Sun Hydraulics), with its main offices located in Sarasota, Florida, designs,
manufactures and sells through independent distributors in the United States and other
international markets. Sun Hydraulik Holdings Limited (Sun Holdings), a wholly-owned subsidiary
of Sun Hydraulics, was formed to provide a holding company for the European market operations; its
wholly-owned subsidiaries are Sun Hydraulics Limited (a British corporation, Sun Ltd.) and Sun
Hydraulik GmbH (a German corporation, Sun GmbH). Sun Ltd. operates a manufacturing and
distribution facility located in Coventry, England, and Sun GmbH, operates a manufacturing and
distribution facility located in Erkelenz, Germany. Sun Hydraulics Korea Corporation (Sun
Korea), a wholly-owned subsidiary of Sun Hydraulics, located in Inchon, South Korea, operates a
manufacturing and distribution facility. Sun Hydraulics Systems (Shanghai) Co., Ltd., (Sun
China), a 50/50 joint venture between Sun Hydraulics and Links Lin, the owner of Sun Hydraulics
Corporations Taiwanese distributor, is located in Shanghai, China, and operates a manufacturing
and distribution facility.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies followed in the preparation of the Companys
consolidated financial statements is set forth below:
Principles of Consolidation
Critical Accounting Policies and Estimates
Revenue Recognition
Impairment of Long-Lived Assets
The Company assesses the recoverability of goodwill and intangible assets not subject to
amortization under SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). See Goodwill
below.
33
Accounts Receivable
The Company sells to most of its customers on a recurring basis, primarily through distributors
with which the Company maintains long-term relationships. As a result, bad debt experience has not
been material. The allowance for doubtful accounts is determined on a specific identification
basis by a review of those accounts that are significantly in arrears. There can be no assurance
that a distributor or a large direct sale customer with overdue accounts receivable balances will
not develop financial difficulties and default on payment. See balance sheet for allowance
amounts.
Inventory
The Company offers a wide variety of standard products and as a matter of policy does not
discontinue products. On an ongoing basis, component parts found to be obsolete through design or
process changes are disposed of and charged to material cost. The Company reviews on-hand balances
of products and component parts against specific criteria. Products and component parts without
usage or that have excess quantities on hand are evaluated. An inventory reserve is then
established for the full inventory carrying value of those products and component parts deemed to
be obsolete or slow moving. See Note 5 for inventory reserve amounts.
Goodwill
The Company acquired its Korean operations in September 1998 using the purchase method. As a
result, goodwill is reflected on the consolidated balance sheet. A valuation based on the cash
flow method was performed at December 25, 2004 and
December 27, 2003. It was determined that the
value of the goodwill was not impaired. There is no assurance that the value of the acquired
company will not decrease in the future due to changing business conditions. See Note 7 for
goodwill amounts.
Accruals
The Company makes estimates related to certain employee benefits and miscellaneous accruals.
Estimates for employee benefit accruals are based on information received from plan administrators
in conjunction with managements assessments of estimated liabilities related to workers
compensation, the 401(k) plan discretionary match, and health care benefits. Estimates for
miscellaneous accruals are based on managements assessment of estimated liabilities for costs
incurred.
As of July 1, 2003, the Company accrues for health care benefit costs under a self-funded plan
utilizing estimates provided by a third party administrator and insurance company. The Company
purchases re-insurance for both specific and aggregate stop losses on claims that exceed $75,000 on
an individual basis and approximately $3.6
million on an aggregate basis.
Reclassification
Certain amounts shown in the 2003 and 2002 consolidated financial statements have been reclassified
to conform to the 2004 presentation.
Management Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
52 Week Fiscal Year
The Companys fiscal year ends on the Saturday nearest to the end of the month of December. Each
quarter consists of two 4-week periods and one 5-week period.
34
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market, cost being determined on a first-in,
first-out basis. Obsolete and slow moving inventory is evaluated and reserves are established
based on specific criteria determined by management.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Expenditures for repairs and improvements that
significantly add to the productive capacity or extend the useful life of an asset are capitalized.
Repairs and maintenance are expensed as incurred. Depreciation is computed using the straight
line method over the following useful lives:
Gains or losses on the retirement, sale, or disposition of plant, property, and equipment are
reflected in the Statement of Operations in the period in which the assets are taken out of
service.
Valuation Assessment of Long-Lived Assets
Management periodically evaluates long-lived assets for potential impairment and will provide for
impairment whenever events or changes in circumstances indicate the carrying amount of the assets
may not be fully recoverable. Assets are reviewed for utilization on a monthly basis by management
in conjunction with employees who work directly with the assets.
Goodwill
Goodwill, which represents the excess of the purchase price of acquisition over the fair value of
the net assets acquired and other acquisition costs, is carried at cost, net of accumulated
amortization. Effective January 1, 2002, the Company adopted SFAS 142. Under SFAS 142, goodwill
is no longer subject to amortization. Instead, SFAS 142 requires goodwill to be reviewed for
impairment on an annual basis, or more frequently if events or circumstances indicate possible
impairment.
Other Assets
Other assets consists of an equity investment in the Companys joint venture in China. The equity
investment was recorded at cost and has been adjusted for investment income or loss and dividend
distributions for each quarterly period since its origin.
Revenue Recognition
Sales are recognized when products are shipped and title to the products is passed to the customer.
Sales incentives are granted to customers based upon the volume of purchases. These sales
incentives are recorded at the time of sales as a reduction of gross sales.
Shipping and Handling Costs
Shipping and handling costs billed to distributors and customers are recorded in revenue. Shipping
costs incurred by the Company are recorded in cost of goods sold.
Foreign Currency Translation and Transactions
The Company follows the translation policy provided by SFAS No. 52,
Foreign Currency Translation
.
The Pound Sterling is the functional currency of Sun Ltd. The Euro is the functional currency of
Sun GmbH. The South Korean Won is the functional currency of Sun Korea. The U.S. Dollar is the
functional currency for Sun Hydraulics and the reporting currency for the consolidated group. The
assets and liabilities of Sun Ltd., Sun GmbH, and Sun Korea are translated at the exchange rate in
effect at the balance sheet date, and income and expense items are
35
translated at the average annual rate of exchange for the period. The resulting unrealized translation gains and losses are
included in the component of shareholders equity designated as accumulated other comprehensive
income. Realized gains and losses from foreign currency transactions are included in
miscellaneous (income) expense.
Income Taxes
The Company follows the income tax policy provided by SFAS No. 109,
Accounting for Income Taxes
(SFAS 109). This Statement provides for a liability approach under which deferred income taxes
are provided for based upon enacted tax laws and rates applicable to the periods in which the taxes
become payable. These differences result from items reported differently for financial reporting
and income tax purposes, primarily depreciation, accrued expenses and reserves.
Stock-Based Compensation
The Company has adopted the disclosure only provisions of SFAS No. 148,
Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment of FASB Statement No. 123
(SFAS 148), and
has elected to follow Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock
Issued to Employees
(APB 25) and related interpretations in accounting for its employee stock
options. Under APB 25, because the exercise price of employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is recorded. If the
company had elected to recognize compensation expense for stock options based on the fair value at
grant date, consistent with the method prescribed by SFAS No. 123,
Accounting for Stock-Based
Compensation
, net income and earnings per share would have been reduced to the pro forma amounts
below. The pro forma amounts were determined using the Black-Scholes valuation model with weighted
average assumptions as set forth below.
These pro forma amounts may not be representative of future disclosures since the estimated fair
value of stock options is amortized to expense over the vesting period and additional options may
be granted in future years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model.
36
3. FAIR VALUE OF INVESTMENTS
The fair value of a financial instrument is the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a forced sale or liquidation. The
following methods and assumptions were used to estimate the fair value of each class of financial
instruments.
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, other
current assets, accounts payable, accrued expenses and other liabilities approximate fair value.
The carrying amount of long-term debt approximates fair value, as the interest rates on the debt
approximate rates currently available to the Company for debt with similar terms and remaining
maturities.
4. RESTRICTED CASH
On December 25, 2004 and December 27, 2003, the Company had restricted cash of $462 and $425,
respectively. The restricted cash balance consisted of reserves for customs and excise taxes in
the U.K. operation. The restricted amount was calculated as an estimate of two months of customs
and excise taxes for items coming into the Companys U.K. operations and was held with Lloyds TSB
in the U.K.
5. INVENTORIES
6. PROPERTY, PLANT, and EQUIPMENT
Depreciation expense for the years ended December 25, 2004, December 27, 2003, and December 28,
2002 totaled $5,465, $5,152, and $5,100, respectively.
7. GOODWILL
On December 25, 2004 and December 27, 2003, the Company had $715 of goodwill, net of amortization
of $157, related to its acquisition of Sun Korea.
Valuation models reflecting the expected future cash flow projections were used to value Sun Korea
at December 25, 2004 and December 27, 2003. The analysis indicated that there was no impairment of
the carrying value of the goodwill.
37
8. OTHER ASSETS
9. ACCRUED EXPENSES AND OTHER LIABILITIES
38
10. LONG-TERM DEBT
The remaining principal payments are due as follows: 2005 $1,058; 2006 $1,475; 2007 $759;
2008 $8,736; 2009 and thereafter $226.
On July 23, 2003, the Company completed a recapitalization which refinanced existing debt in the
U.S. and further leveraged assets. This new financing consisted of a Term Loan of $11 million and
a secured revolving Line of Credit of $12 million. The Term Loan and the Line of Credit are
secured by all of the Companys U.S. assets, all Sun Ltd. and Sun Holdings assets excluding real
property and a restricted cash account for $462, and a stock pledge of all authorized and issued
capital stock of Sun GmbH and Sun Korea. The total carrying value of assets held as collateral is
$59.5 million. The Term Loan has monthly principal and interest payments based upon a 20-year
amortization schedule, with all remaining principal and interest due July 23, 2008. The Line of
Credit requires monthly payments of interest only, and is payable in full on July 23, 2006. Both
the Term Loan and the Line of Credit had a floating interest rate for the first year of 1.9% over
LIBOR, or the Prime Rate, at the Companys discretion. From and after July 2004, the rates will
vary based upon the Companys leverage ratio. At December 25, 2004, the Term Loan had an
outstanding balance of $10.2 million and the Line of Credit was fully paid with no outstanding
balance.
The Term Loan and the Line of Credit debt covenants including 1) Fixed Charges Coverage Ratio (as
defined) of 2.0 to 1.0, determined quarterly on a rolling four quarters basis, 2) Debt (as defined)
to Tangible Net Worth (as defined) of not more than 1.5 to 1.0, determined quarterly, 3) Current
Ratio of 1.5 to 1.0, determined quarterly, 4) Funded Debt (as defined) to EBITDA (as defined) of
less than 3.25 to 1.0, determined quarterly on a rolling four quarters basis, and 5) the Companys
primary domestic depository accounts shall be with SouthTrust Bank. As of December 25, 2004 and
December 27, 2003, the Company was in compliance with all debt covenants.
11. REDEEMABLE COMMON STOCK
On June 22, 2002, the Company entered into a standby Stock Repurchase Agreement with the Koski
Family Limited Partnership, which owns approximately 34% of the outstanding shares of the Companys
common stock. Robert E. Koski and Christine Koski are Directors of the Company. Under the
Agreement, the Company agreed to purchase up to $2,250,000 worth of Company common stock from the
Koski Partnership on a one time basis, until June 22, 2004, at a per share price of the lower of
$7.00 per share, or 15% less than the average closing price per share of the common stock for the
15 full trading days immediately preceding the closing date. Upon entering into
39
the Agreement, $2,250 was transferred from Capital in Excess of Par into Redeemable Common Stock on the balance
sheet.
Effective third quarter 2003, the Company adopted SFAS No. 150,
Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity
. The standard requires the Company
to classify certain financial instruments as a liability or an asset at fair value. Management has
determined that the estimated fair value of the put option is not material and has transferred
$2,250 from Redeemable Common Stock to Capital in Excess of Par on the balance sheet.
The Agreement expired in June 2004 and the Company did not purchase any shares from the Koski
Partnership during its term.
12. DIVIDENDS TO SHAREHOLDERS
The Company declared dividends of $1,482, $14,404, and $1,029 to shareholders in 2004, 2003,
and 2002, respectively.
The Company declared quarterly dividends of $0.04, $0.05, $0.05, and $0.075 per share to
shareholders of record on the last day of the first, second, third, and fourth quarters of 2004,
respectively, and $0.04 per share each calendar quarter in 2003 and 2002. These dividends were
paid on the 15
th
day of each month following the date of declaration. In addition, the
Company paid a special dividend of $2.00 per share totaling $13.3 million on August 18, 2003.
40
Deferred income tax assets and liabilities are provided to reflect the future tax consequences of differences
between the tax basis of assets and liabilities and their reported amounts in the financial statements.
For financial reporting purposes, income before income taxes includes the following components:
The components of the income tax provision (benefit) are as follows:
The reconciliation between the effective income tax rate and the U.S. federal statutory rate is as follows:
41
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts
assets and liabilities for financial reporting purposes and the amounts used for income taxes. The temporary
differences that give rise to significant portions of the deferred tax assets and liabilites as of December 25, 2004
and December 27, 2003 are presented below:
A valuation allowance to reduce the deferred tax assets reported is required if, based on the weight of the
evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. For the
fiscal years ended 2004 and 2003, management has determined that a valuation allowance is not required.
The foreign tax credit carryforward will expire in year 2008.
14. STOCK OPTION PLANS
During 1996, the Company adopted the 1996 Stock Option Plan (the Stock Option Plan), which
provides for the grant of incentive stock options and nonqualified stock options for the purchase
of up to an aggregate of 1,000,000 shares of the Companys common stock by officers, employees and
Directors of the Company. Under the terms of the plan, incentive stock options may be granted to
employees at an exercise price per share of not less than the fair value per common share on the
date of the grant (not less than 110% of the fair value in the case of holders of more than 10% of
the Companys voting stock). Nonqualified stock options may be granted at the discretion of the
Companys Board of Directors. The maximum term of an option may not exceed 10 years, and options
become exercisable at such times and in such installments as determined by the Board of Directors.
42
A summary of the Companys stock option plan for the years ended December 25, 2004, December 27,
2003, and December 28, 2002 is summarized as follows:
All options listed above vest over 5 years with a maximum term of 10 years.
A summary of outstanding and exercisable options at December 25, 2004 is summarized as follows:
The weighted average
estimated fair value of stock options granted during 2004, 2003 and
2002 was $4.80, $1.46, and $1.69 per share, respectively.
During 2001, the Company adopted the 2001 Restricted Stock Plan, which provides for the grant of
restricted stock of up to an aggregate of 275,000 shares of the Companys common stock to officers,
employees, consultants and directors of the Company. Under the terms of the plan, the minimum
period before any shares become non-forfeitable may not be less than six months. The market value
of the restricted stock at the date of grant was recorded as unearned compensation, a component of
shareholders equity, and is being charged to expense over the respective vesting periods.
Restricted stock expense for the years ended December 25, 2004, December 27, 2003, and December 28,
2002 totaled $250, $181, and $180, respectively.
43
On September 6, 2003, the Board of Directors granted restricted stock to employees who held
outstanding options as of that date. The purpose of the grant was to compensate option holders for
the decrease in value of the Companys stock attributable to the payment of the special dividend,
which the Board determined to be approximately $1.00. To provide a continuing incentive to these
employees, the restricted stock will be earned over a one to three year period. The restricted
stock is expensed over the vesting period at a price of $7.41, the stock price on September 5,
2003.
On October 15, 2004, the Board of Directors granted 23,756 shares of restricted stock to employees.
The restricted stock will be earned over a three year period. The restricted stock is expensed
over the vesting period at a price of $12.35, the stock price on October 15, 2004. The grant
increased restricted shares outstanding from 129,900 at December 27, 2003 to 153,656 at December
25, 2004. At December 25, 2004 and December 27, 2003, 67,374 and 33,983 of these shares,
respectively, were vested.
During 2001, the Company adopted the Employee Stock Purchase Plan (ESPP), which became effective
August 1, 2001. Most employees are eligible to participate. Employees who choose to participate
are granted an opportunity to purchase common stock at 85 percent of market value on the first or
last day of the quarterly purchase period, whichever is lower. The ESPP authorizes the issuance,
and the purchase by employees, of up to 325,000 shares of common stock through payroll deductions.
No employee is allowed to buy more than $25,000 of common stock in any year, based on the market
value of the common stock at the beginning of the purchase period. Employees purchased
approximately 13,342 shares at an average price of $8.62 and 14,984 shares at an average price of
$6.15, under the ESPP during 2004 and 2003, respectively. At December 25, 2004 and December 27,
2003, 282,632 and 295,974 shares, respectively, remained available to be issued through the ESPP.
During 2004, the Board of
Directors adopted and the shareholders approved the Nonemployee
Director Equity and Deferred Compensation Plan (the
Plan). Directors who are not officers of the Company are
paid $4,000 for attendance at each meeting of the Board of Directors,
as well as each meeting of each Board Committee on which they serve
when the committee meeting is not held within one day of a meeting of
the Board of Directors. Directors receive $1,500 of the $4,000
Director fee in shares of Company stock under the Plan. Directors
also may elect under the plan to receive all or part of the remainder
of their fees in Company stock and to defer receipt of their fees
until a subsequent year. The Plan authorizes the issuance of up to
80,000 shares of common stock. Directors were granted
2,741 shares during 2004. At December 25, 2004,
77,259 shares remained available to be issued through the Plan.
15. STOCK REPURCHASE PLAN
On November 29, 2004, The Companys Board of Directors authorized the repurchase of up to $2.5
million of Company common stock to be completed no later than January 15, 2006. Stock will be
repurchased periodically in the open market or through privately negotiated transactions, in
accordance with the Stock Repurchase Plan. Market purchases will be made subject to
restrictions relating to volume, price and timing in an effort to minimize the impact of the
purchases on the market for the Companys securities. The repurchased shares are retired and added
to the Companys authorized, but unissued, shares.
The amount of the stock repurchases was set based upon the anticipated number of shares that will
be required to fund the Companys employee stock ownership plan and employee stock purchase plan
through fiscal year 2005. In 2004, the Company repurchased 5,800 shares totaling approximately
$82,800 under the Plan at an average price per share of $14.28.
44
16. EARNINGS PER SHARE
The following table represents the computation of basic and diluted earnings per common share as
required by SFAS No. 128 Earnings Per Share (in thousands, except per share data):
Diluted earnings per common share excludes antidilutive stock options of approximately 45,000,
275,000 and 270,000 during 2004, 2003 and 2002 respectively.
17. EMPLOYEE BENEFITS
The Company has a defined contribution retirement plan covering substantially all of its eligible
United States employees. Employer contributions under the retirement plan amounted to
approximately $2,346, $686, and $685 during 2004, 2003, and 2002, respectively.
The Company provides supplemental pension benefits to its employees of foreign operations in
addition to mandatory benefits included in local country payroll tax statutes. These supplemental
pension benefits amounted to approximately $437, $266, and $235 during 2004, 2003, and 2002,
respectively.
In June 2004, the Companys Board of Directors approved the establishment of an Employee Stock
Ownership Plan (ESOP) as the discretionary match portion of its 401(k) retirement plan. Prior to
2004, discretionary matches to the 401(k) plan were made in cash. The Company contributes to the
ESOP for all eligible United States employees. Under the ESOP, which is 100% company funded, the
Company allocates common stock to each participants account. The allocation is generally a
percentage of a participants compensation as determined by the Board of Directors on an annual
basis. The ESOP is accounted for under Statement of Position 93-6
Employers Accounting for
Employee Stock Ownership Plans
.
In September 2004, the Company made a one-time contribution of 32,000 shares of its common stock to
the ESOP. In January 2005, 73,290 shares were contributed to the ESOP based on 2004 compensation.
All shares receive regular quarterly dividends payable to the ESOP to cover plan expenses.
The Company incurred compensation expense under the ESOP of approximately $1,572 during 2004.
There was no discretionary match to the 401(k) in 2003 and 2002.
Shares contributed to the ESOP are restricted for one year. Participants may then sell their
shares to enable diversification within their individual 401(k) accounts. The Company does not
have any repurchase obligations under the ESOP.
45
18. SEGMENT REPORTING
The individual subsidiaries comprising the Company operate predominantly in a single industry as
manufacturers and distributors of hydraulic components. Management bases its financial decisions
by the geographical location of its operations. The subsidiaries are multinational with operations
in the United States, the United Kingdom, Germany, and Korea. In computing earnings from operations
for the foreign subsidiaries, no allocations of general corporate expenses, interest or income
taxes have been made.
Identifiable assets of the foreign subsidiaries are those assets related to the operation of those
companies. United States assets consist of all other operating assets of the Company. Segment
information is as follows:
Net foreign currency gains (losses) reflected in results of operations were $0, $143, and $(68),
for 2004, 2003, and 2002, respectively. Operating income (loss) is total sales and other operating
income less operating expenses. In computing segment operating profit, interest expense and net
miscellaneous income (expense) have not been deducted (added).
Included in U.S. sales to unaffiliated customers were export sales, principally to Canada and Asia,
of $10,162, $7,912, and $7,246, during 2004, 2003, and 2002, respectively.
19. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any legal proceedings other than routine litigation incidental to its
business. In the opinion of management, the amount of ultimate liability with respect to these
actions will not materially affect the results of operations, financial position or cash flows of
the Company.
46
OPERATING LEASES The Company leases a manufacturing facility in Lenexa, Kansas and production
support facilities in Sarasota, Florida under operating leases having initial terms expiring
between 2004 and 2008. The lease for the manufacturing facility in Kansas has a term of 5 years,
expiring on November 14, 2008, and represents approximately 10,000 square feet of space. The lease
for the production support facilities in Florida are on a month-to-month basis and represent
approximately 10,000 square fee. Total rental expense for the years ended December 31, 2004, 2003
and 2002 was approximately $172, $126 and $104, respectively.
Future minimum lease payments on operating leases are as follows:
INSURANCE On July 1, 2003, the Company changed its group health insurance plan that covers U.S.
employees and their families from a fully-insured policy to a self-funded plan. The Company
purchases re-insurance for both specific and aggregate stop losses on claims that exceed $75,000 on
an individual basis and approximately $3.6 million on an aggregate basis.
The Company records a liability for all unresolved claims at the anticipated cost to the Company at
the end of the period based on the estimates provided by a third party administrator and insurance
company, plus an estimate for amounts incurred but not recorded. The Company believes it has
adequate reserves for all self-insurance claims.
20. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51
(ARB 51)
.
FIN 46 provides guidance in determining (1) whether
consolidation is required under the controlling financial interest model of ARB 51 or (2) whether
the variable interest model under FIN 46 should be used to account for existing and new entities.
In December 2003, the FASB released a revised version of FIN 46 (FIN 46R) clarifying certain
aspects of FIN 46 and providing certain entities with exemptions from its requirements. The
Company uses the equity method of accounting to account for investments in its joint venture in
China in which it does not have a majority ownership or exercise control. The Company does not
believe that its investment in the China Joint Venture is a variable interest entity and within the
scope of FIN 46 and FIN 46R, and therefore does not have a material effect on the Companys
financial statements.
In November 2004, the FASB issued SFAS No. 151 (SFAS 151),
Inventory Costs, an amendment of ARB
No. 43, Chapter 4
. The amendments made by SFAS 151 clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. While SFAS 151 enhances Accounting Research
Bulletin No. 43,
Restatement and Revision of Accounting Research Bulletins,
and clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage), the statement also removes inconsistencies between ARB 43 and International
Accounting Standards No. 2 (IAS 2) and amends ARB 43 to clarify that abnormal amounts of costs
should be recognized as period costs. Under some circumstances, according to ARB 43, the above
listed costs may be so abnormal as to require treatment as current period charges. SFAS 151
requires these items be recognized as current-period charges regardless of whether they meet the
criterion of so abnormal and requires allocation of fixed production overheads to the costs of
conversion.
This standard will be effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The impact of the adoption of SFAS 151 on the Companys reported operating results,
financial position and existing financial statement disclosure is not expected to be material.
47
In December, 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS 123(R)),
Share-Based Payment
,
which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS 123). SFAS
123(R) supersedes Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued
to Employees
(APB 25), SFAS 123, and amends SFAS No. 95,
Statement of Cash Flows
. This Statement
requires entities to recognize the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards (with limited exceptions).
This Statement eliminates the alternative to use APB 25s intrinsic value
method of accounting that was provided in SFAS 123 as originally issued. Under APB 25, issuing
stock options to employees generally resulted in recognition of no compensation cost.
SFAS 123(R) also requires that the Company estimate the number of awards that are expected to vest
and to revise the estimate as the actual forfeitures differ from the estimate. This standard is
effective as of the beginning of the first interim or annual reporting period that begins after
June 15, 2005. The effect of these items and other changes in SFAS 123(R) as well as the
potential impact on the Companys reported operating results, financial position and existing
financial statement disclosure is currently being evaluated.
SFAS 123(R) requires that the benefits of tax deductions in excess of recognized compensation cost
be reported as a financing cash flow, rather than as an operating cash flow; thus, reducing net
operating cash flows and increasing net financing cash flows in the periods after the effective
date. The Company cannot estimate what these amounts will be in the future because they
depend on, among other things, when employees exercise stock options. The amount of operating cash
flow recognized in 2004 for such excess tax deductions for stock-based compensation was
approximately $290,000. There was no effect on operating cash flows for such excess tax deductions
during 2003 and 2002.
The Company currently follows the disclosure only provisions of SFAS No. 148,
Accounting for
Stock-Based Compensation Transition and Disclosure, an amendment of FASB Statement No. 123
,
Accounting for Stock-Based Compensation
, and has elected to follow APB 25 and related
interpretations in accounting for its employee stock options. The Company uses the Black-Scholes
formula to estimate the value of stock options granted to employees for disclosure purposes. SFAS
123(R) requires that we use the valuation technique that best fits the circumstances. The Company
is currently evaluating other techniques.
In December 2004, the FASB issued FASB Staff Position (FSP) 109-1 (FSP 109-1) and 109-2 (FSP
109-2). FSP 109-1 provides guidance on the application of SFAS No. 109,
Accounting for Income
Taxes
(SFAS 109), with regard to the tax deduction on qualified production activities provision
within H.R. 4520, The American Jobs Creation Act of 2004 (Act), that was enacted on October 22,
2004. FSP 109-2 provides guidance on a special one-time dividends received deduction on the
repatriation of certain foreign earnings to qualifying U.S. taxpayers. The Act contains numerous
provisions related to corporate and international taxation including repeal of the Extraterritorial
Income (ETI) regime, creation of a new Domestic Production Activities (DPA) deduction and a
temporary dividends received deduction related to repatriation of foreign earnings. The Act
contains various effective dates and transition periods. Under the guidance provided in FSP 109-1,
the new DPA deduction will be treated as a special deduction as described in SFAS 109. As such,
the special deduction has no effect on the Companys deferred tax assets and liabilities existing
at the enactment date. Rather, the impact of this deduction will be reported in the period in which
the deduction is claimed on the Companys income tax return. The repeal of ETI and its replacement
with a DPA deduction were not in effect in 2004 and, therefore, did not have an effect on the
income tax provision for the year ended December 25, 2004. The Company does not expect the net
effect of the phase-out of the ETI deduction and phase-in of the new DPA deduction to result in a
material impact on its effective income tax rate in 2005.
In FSP 109-2, the FASB acknowledged that, due to the proximity of the Acts enactment date to many
companies year-ends and the fact that numerous provisions within the Act are complex and pending
further regulatory guidance, many companies might not be in a position to assess the impacts of the
Act on their plans for repatriation or reinvestment of foreign earnings. Therefore, the FSP
provided companies with a practical exception to the permanent reinvestment standards of SFAS 109
and APB No. 23,
Accounting for Income Taxes Special Areas,
by providing additional time to
determine the amount of earnings, if any, that they intend to repatriate under the Acts
provisions. The Company is not yet in a position to decide whether, and to what extent, it might
repatriate foreign earnings to the U.S. Therefore, under the guidance provided in FSP 109-2, no
deferred tax liability has been recorded in 2004 in connection with the repatriation provisions of
the Act. The Company is currently analyzing the future impact of the temporary dividends received
deduction provisions contained in the Act.
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
Consistent with its philosophy that it is desirable to change auditors periodically, the Audit
Committee requested proposals from accounting firms to serve as the Companys independent auditors
for 2004. After a review of the written proposals and oral presentations by the firms, the Audit
Committee began negotiations with Grant Thornton LLP to audit the Companys consolidated financial
statements for the year ended December 25, 2004.
The Audit Committee dismissed PricewaterhouseCoopers LLP (PwC) on March 14, 2004, as the
Companys principal accountant, effective upon its completion of its audit of the fiscal year 2003
consolidated financial statements. PwCs audit reports on the Companys consolidated financial
statements for the fiscal years ended December 27, 2003, December 28, 2002, and December 29, 2001,
contain no adverse opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
During fiscal years 2003 and 2002 and the subsequent interim period through March 14, 2004
(date of dismissal), there were no disagreements with PwC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of PwC, would have caused PwC to make a reference to the subject
matter of the disagreements in connection with its reports on the Companys consolidated financial
statements for any such periods. PwC furnished the Company with a letter addressed to the
Securities and Exchange Commission stating its agreement with the above statements.
During fiscal years 2003 and 2002 and the subsequent interim period through March 14, 2004
(date of dismissal), there were no reportable events as defined in Regulation S-K Item
304(a)(1)(v).
On April 19, 2004, the Audit Committee engaged Grant Thornton LLP to audit the Companys
consolidated financial statements for the year ended December 25, 2004. The Company did not
consult Grant Thornton LLP during the two most recent prior fiscal years, or the interim period
between December 27, 2003 and April 19, 2004, regarding the application of accounting principles to
a specified transaction, either completed or proposed, or the type of audit opinion that might be
rendered on its financial statements or any matter that was subject to any disagreement or
reportable event under Item 304(a)(1) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 25, 2004, the Companys management, under the direction of its Chief Executive
Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the
design and operation of the disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Companys Chief Executive Officer and the Chief Financial
Officer concluded that the Companys disclosure controls and procedures were effective as of
December 25, 2004, in timely alerting them to material information required to be included in the
Companys periodic SEC filings.
There were no significant changes in the Companys internal controls over financial reporting
during the year ended December 25, 2004, that materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
49
RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Dividends
High
Low
declared
$
8.250
$
7.960
$
0.040
8.480
7.200
0.040
10.750
7.010
0.040
8.810
6.640
0.040
$
10.810
$
7.240
$
0.040
17.790
9.010
0.050
18.420
12.020
0.050
16.130
11.250
0.075
Table of Contents
Year Ended
Dec 25, 2004
Dec 27, 2003
Dec 28, 2002
Dec 29, 2001
Dec 30, 2000
(in thousands except per share data)
$
94,503
$
70,798
$
64,545
$
64,983
$
79,967
28,535
18,486
15,964
14,625
21,465
12,294
3,683
3,420
2,060
7,356
11,732
3,277
2,592
1,312
5,919
$
7,830
$
2,176
$
1,778
$
950
$
3,921
$
1.14
$
0.33
$
0.28
$
0.15
$
0.61
$
1.14
$
0.33
$
0.27
$
0.14
$
0.60
$
0.22
$
2.16
$
0.16
$
0.16
$
0.16
$
5,465
$
5,152
$
5,100
$
5,426
$
5,594
4,987
3,076
5,870
4,022
4,374
$
9,762
$
5,219
$
3,958
$
3,611
$
2,698
16,723
12,663
12,828
12,778
12,658
71,808
63,032
62,285
61,750
64,374
12,254
18,207
9,611
10,663
12,012
2,250
45,403
35,063
42,899
43,738
43,836
Table of Contents
(in thousands)
For the Quarter Ended
Dec 25,
Sep 25,
Jun 26,
Mar 27,
2004
2004
2004
2004
$
23,426
$
23,164
$
26,522
$
21,390
6,796
7,047
8,386
6,305
2,817
3,045
4,190
2,241
2,561
2,972
4,117
2,082
$
2,001
$
1,880
$
2,591
$
1,358
$
0.29
$
0.27
$
0.38
$
0.20
$
0.29
$
0.27
$
0.38
$
0.20
Dec 27,
Sep 27,
Jun 28,
Mar 29,
2003
2003
2003
2003
$
17,610
$
17,851
$
18,912
$
16,425
4,357
4,523
5,529
4,078
1,044
919
1,262
458
839
784
1,280
374
$
595
$
509
$
816
$
256
$
0.09
$
0.08
$
0.13
$
0.04
$
0.09
$
0.08
$
0.12
$
0.04
Dec 28,
Sep 28,
Jun 29,
Mar 30,
2002
2002
2002
2002
$
15,476
$
16,043
$
17,413
$
15,613
3,697
4,048
4,526
3,692
626
1,027
1,384
383
423
780
1,188
200
$
368
$
507
$
774
$
128
$
0.06
$
0.08
$
0.12
$
0.02
$
0.06
$
0.08
$
0.12
$
0.02
Table of Contents
(in millions except per share data)
Table of Contents
(Dollars in millions except net income per share)
December 25,
December 27,
2004
2003
Increase
$
94.5
$
70.8
33
%
$
7.8
$
2.2
255
%
$
1.14
$
0.33
245
%
$
1.14
$
0.33
245
%
$
23.4
$
17.6
33
%
$
2.0
$
0.6
233
%
$
0.29
$
0.09
222
%
$
0.29
$
0.09
222
%
Table of Contents
For the Year Ended
Dec 25, 2004
Dec 27, 2003
Dec 28, 2002
Dec 29, 2001
Dec 30, 2000
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
30.2
%
26.1
%
24.7
%
22.5
%
26.8
%
13.0
%
5.2
%
5.3
%
3.2
%
9.2
%
12.4
%
4.6
%
4.0
%
1.5
%
7.4
%
United
United
States
Korea
Kingdom
Germany
Elimination
Consolidated
$
59,847
$
8,723
$
13,375
$
12,558
$
$
94,503
15,702
1,812
66
(17,580
)
8,417
926
483
2,399
69
12,294
44,765
4,449
13,742
10,062
(1,210
)
71,808
3,792
137
1,061
475
5,465
4,264
42
540
141
4,987
$
43,503
$
6,857
$
11,346
$
9,092
$
$
70,798
12,109
1,421
41
(13,571
)
2,160
689
(497
)
1,192
139
3,683
40,691
3,111
8,087
12,409
(1,266
)
63,032
3,630
123
380
1,019
5,152
1,914
265
149
748
3,076
$
41,937
$
5,899
$
10,200
$
6,509
$
$
64,545
10,643
1,569
32
(12,244
)
2,029
431
618
416
(74
)
3,420
43,407
2,035
11,596
6,207
(955
)
62,290
3,905
104
783
308
5,100
2,219
136
3,429
86
5,870
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Payments due by Period
LESS THAN
1-3
3-5
MORE THAN
CONTRACTUAL OBLIGATIONS
TOTAL
1 YEAR
YEARS
YEARS
5 YEARS
$
12,254
1,058
2,234
8,870
92
400
107
202
91
300
50
123
100
27
$
12,954
$
1,215
$
2,559
$
9,061
$
119
The Company reports revenues, net of sales incentives, when title passes and risk of loss transfers
to the customer. The effect of material non-recurring events is provided for when they become
known.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for
Impairment or Disposal of Long-lived Assets
(SFAS 144), long-lived assets, such as property and
equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of the asset is measured by comparison of its carrying amount to future
net cash flows the asset is expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured as the amount by which the carrying amount of the asset
exceeds its fair market value.
The Company sells to most of its customers on a recurring basis, primarily through distributors
with which the Company maintains long-term relationships. As a result, bad debt experience has not
been material. The allowance for doubtful accounts is determined on a specific identification
basis by a review of those accounts that are significantly in arrears. There can be no assurance
that a distributor or a large direct sale customer with overdue accounts receivable balances will
not develop financial difficulties and default on payment. See balance sheet for allowance
amounts.
Table of Contents
The Company offers a wide variety of standard products and as a matter of policy does not
discontinue products. On an ongoing basis, component parts found to be obsolete through design or
process changes are disposed of and charged to material cost. The Company reviews on-hand balances
of products and component parts against specific criteria. Products and component parts without
usage or that have excess quantities on hand are evaluated. An inventory reserve is then
established for the full inventory carrying value of those products and component parts deemed to
be obsolete or slow moving. See Note 5 for inventory reserve amounts.
The Company acquired its Korean operations in September 1998 using the purchase method. As a
result, goodwill is reflected on the consolidated balance sheet. A valuation based on the cash
flow method was performed at December 25, 2004 and December 27, 2003.I t was determined that the
value of the goodwill was not impaired. There is no assurance that the value of the acquired
company will not decrease in the future due to changing business conditions. See Note 7 for
goodwill amounts.
The Company makes estimates related to certain employee benefits and miscellaneous accruals.
Estimates for employee benefit accruals are based on information received from plan administrators
in conjunction with managements assessments of estimated liabilities related to workers
compensation, the ESOP contribution, and health care benefits. Estimates for miscellaneous
accruals are based on managements assessment of estimated liabilities for costs incurred.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Shareholders of Sun Hydraulics Corporation:
corporation) as of December 25, 2004, and the related statement of operations, shareholders equity
and comprehensive income, and cash flows for the year then ended. These financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audit.
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
respects, the financial position of Sun Hydraulics Corporation as of December 25, 2004, and the
results of their operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
February 25, 2005
Table of Contents
of Sun Hydraulics Corporation:
March 25, 2004
Table of Contents
(in thousands, except for share information)
December 25, 2004
December 27, 2003
$
9,300
$
4,794
462
425
8,611
6,215
7,105
6,621
392
270
776
524
26,646
18,849
43,687
42,829
1,475
1,624
$
71,808
$
63,302
$
2,536
$
2,440
4,609
2,217
1,058
937
522
270
1,198
51
9,923
5,915
11,196
17,270
4,986
4,726
300
328
26,405
28,239
7
7
28,579
26,478
(608
)
(601
)
13,870
7,522
3,566
1,657
(11
)
45,403
35,063
$
71,808
$
63,302
Table of Contents
(in thousands, except per share data)
For the year ended
December 25, 2004
December 27, 2003
December 28, 2002
$
94,503
$
70,798
$
64,545
65,968
52,312
48,581
28,535
18,486
15,964
16,241
14,803
12,544
12,294
3,683
3,420
527
606
578
(143
)
68
35
(57
)
182
11,732
3,277
2,592
3,902
1,101
814
$
7,830
$
2,176
$
1,778
$
1.14
$
0.33
$
0.28
6,846
6,551
6,433
$
1.14
$
0.33
$
0.27
6,897
6,597
6,589
Table of Contents
(in thousands)
Unearned
Compensation
Accumulated
Capital in
related to
other
Preferred
Common
excess of
restricted
Retained
comprehensive
Treasury
Shares
Stock
stock
par value
stock
earnings
income
stock
Total
6,421
$
$
6
$
24,718
$
(216
)
$
19,001
$
229
$
43,738
9
129
46
175
5
23
23
11
70
70
(2,250
)
(2,250
)
(1,029
)
(1,029
)
1,778
1,778
394
394
2,172
6,446
$
$
6
$
22,690
$
(170
)
$
19,750
$
623
$
42,899
83
1
1,538
(431
)
1,108
223
6
(14,404
)
(14,404
)
2,250
2,250
2,176
2,176
1,034
1,034
3,210
6,758
$
$
7
$
26,478
$
(601
)
$
7,522
$
1,657
$
35,063
20
257
(7
)
250
189
1,711
1,711
(74
)
(74
)
(6
)
(83
)
(83
)
(524
)
(524
)
513
513
290
290
(1,482
)
(1,482
)
7,830
7,830
1,909
1,909
9,739
6,961
$
$
7
$
28,579
$
(608
)
$
13,870
$
3,566
$
(11
)
$
45,403
Table of Contents
(in thousands)
For the year ended
December 25, 2004
December 27, 2003
December 28, 2002
$
7,830
$
2,176
$
1,778
5,465
5,152
5,100
73
370
190
289
182
180
(17
)
(7
)
(1
)
110
(16
)
(101
)
138
364
244
(2,379
)
(518
)
(934
)
(594
)
241
493
668
(252
)
286
175
149
(630
)
(56
)
97
734
383
2,392
1,136
(413
)
252
12
1
1,437
41
10
(28
)
(50
)
(49
)
14,962
9,473
7,668
(4,987
)
(3,076
)
(5,870
)
61
33
148
(4,926
)
(3,043
)
(5,722
)
18,850
(5,953
)
(10,254
)
(1,052
)
1,672
899
17
39
71
(781
)
(71
)
613
59
(1,482
)
(14,404
)
(1,029
)
(5,931
)
(4,882
)
(1,993
)
438
(287
)
394
37
425
4,506
836
347
5,219
3,958
3,611
$
9,762
$
5,219
$
3,958
$
527
$
607
$
578
$
2,617
$
696
$
(108
)
Table of Contents
(in thousands except per share data)
The consolidated financial statements include the accounts and operations of Sun Hydraulics and its
direct and indirect subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. The Company uses the equity method of accounting to account for
investments in its joint venture in China in which it does not have a majority ownership or
exercise control.
The Company currently only applies judgment and estimates, which may have a material effect on the
eventual outcome of assets, liabilities, revenues and expenses, for impairment of long-lived
assets, accounts receivable, inventory, goodwill and accruals. The following explains the basis
and the procedure for each account where judgment and estimates are applied.
The Company reports revenues, net of sales incentives, when title passes and risk of loss transfers
to the customer. The effect of material non-recurring events is provided for when they become
known.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for
Impairment or Disposal of Long-lived Assets
(SFAS 144), long-lived assets, such as property and
equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of the asset is measured by comparison of its carrying amount to future
net cash flows the asset is expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured as the amount by which the carrying amount of the asset
exceeds its fair market value.
Table of Contents
Table of Contents
Years
3 - 5
4 - 12
4 - 10
5 - 15
40
Table of Contents
December 25,
December 27,
December 28,
2004
2003
2002
$
7,830
$
2,176
$
1,778
165
105
88
(256
)
(219
)
(165
)
$
7,739
$
2,062
$
1,701
$
1.14
$
0.33
$
0.28
$
1.13
$
0.31
$
0.26
$
1.14
$
0.33
$
0.27
$
1.12
$
0.31
$
0.26
4.22
%
4.15
%
3.81
%
6.5
6.5
6.5
40.00
%
18.00
%
18.00
%
1.89
%
2.22
%
1.96
%
Table of Contents
December 25, 2004
December 27, 2003
$
2,523
$
2,120
2,487
2,390
2,402
2,308
(307
)
(197
)
$
7,105
$
6,621
December 25, 2004
December 27, 2003
$
50,238
$
47,255
8,431
7,477
23,140
22,174
1,645
1,528
2,653
2,556
$
86,107
$
80,990
(47,513
)
(41,834
)
5,093
3,673
$
43,687
$
42,829
Table of Contents
December 25, 2004
December 27, 2003
$
715
$
715
347
277
214
235
194
194
178
5
25
$
1,475
$
1,624
December 25, 2004
December 27, 2003
$
2,189
$
943
1,304
923
1,116
351
$
4,609
$
2,217
Table of Contents
December 25, 2004
December 27, 2003
$
10,220
$
10,770
5,150
947
1,086
1,009
1,103
78
98
12,254
18,207
(1,058
)
(937
)
$
11,196
$
17,270
Table of Contents
Table of Contents
13.
INCOME TAXES
For the year ended
December 25,
December 27,
December 28,
2004
2003
2002
$
7,865
$
1,786
$
1,338
3,867
1,491
1,254
$
11,732
$
3,277
$
2,592
For the year ended
December 25,
December 27,
December 28,
2004
2003
2002
$
2,318
$
160
$
306
195
(16
)
27
1,251
593
237
3,764
737
570
112
499
115
24
44
10
2
(179
)
119
138
364
244
$
3,902
$
1,101
$
814
For the year ended
December 25,
December 27,
December 28,
2004
2003
2002
$
3,966
$
1,067
$
881
3,570
(309
)
(3,324
)
(136
)
(39
)
(85
)
(38
)
(45
)
(75
)
200
(156
)
52
219
28
41
$
3,902
$
1,101
$
814
Table of Contents
December 25,
December 27,
2004
2003
$
240
$
208
62
152
103
121
495
391
(5,089
)
(4,847
)
$
(4,594
)
$
(4,456
)
Table of Contents
Exercise
Weighted
Number
price
average
of shares
range
exercise price
(share amounts are in thousands)
676
$
3.00
16.75
$
7.68
15
$
8.27
$
8.27
(4
)
$
3.85
$
3.85
(17
)
$
6.75
10.00
$
9.81
670
$
3.00
16.75
$
7.67
49
$
7.09
$
7.09
(224
)
$
3.00
7.00
$
4.05
(6
)
$
6.75
10.00
$
9.12
489
$
3.00
16.75
$
8.54
24
$
12.35
$
12.35
(189
)
$
3.00
16.75
$
8.86
(9
)
$
6.75
10.00
$
9.15
315
$
6.00
16.75
$
9.76
Options Outstanding
Options Exercisable
Weighted-average
Weighted
Range of
Number of
Remaining
Exercise
Number of
average
exercise prices
shares
contractual life
price
shares
exercise price
8,765
5.00
6.00
8,765
6.00
20,600
6.00
6.75
14,400
6.75
15,800
6.83
7.00
6,560
7.00
43,000
8.75
7.09
8,120
7.09
48,500
5.67
8.00
39,300
8.00
15,000
7.42
8.27
6,000
8.27
73,763
2.00
9.50
73,763
9.50
21,000
3.92
10.00
21,000
10.00
23,756
9.83
12.35
12.35
45,000
3.33
16.75
45,000
16.75
Table of Contents
Table of Contents
December 25,
December 27,
December 28,
2004
2003
2002
$
7,830
$
2,176
$
1,778
6,846
6,551
6,433
$
1.14
$
0.33
$
0.28
51
46
156
6,897
6,597
6,589
$
1.14
$
0.33
$
0.27
Table of Contents
United
United
States
Korea
Kingdom
Germany
Elimination
Consolidated
$
59,847
$
8,723
$
13,375
$
12,558
$
$
94,503
15,702
1,812
66
(17,580
)
8,417
926
483
2,399
69
12,294
44,765
4,449
13,742
10,062
(1,210
)
71,808
3,792
137
1,061
475
5,465
4,264
42
540
141
4,987
$
43,503
$
6,857
$
11,346
$
9,092
$
$
70,798
12,109
1,421
41
(13,571
)
2,160
689
(497
)
1,192
139
3,683
40,691
3,111
8,087
12,409
(1,266
)
63,032
3,630
123
380
1,019
5,152
1,914
265
149
748
3,076
$
41,937
$
5,899
$
10,200
$
6,509
$
$
64,545
10,643
1,569
32
(12,244
)
2,029
431
618
416
(74
)
3,420
43,407
2,035
11,596
6,207
(955
)
62,290
3,905
104
783
308
5,100
2,219
136
3,429
86
5,870
Table of Contents
$
107
101
101
91
$
400
Table of Contents
Table of Contents
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Table of Contents
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors and Executive Officers
The Board of Directors (Board) of the Company currently consists of nine members. The Board
is divided into three classes of Directors serving staggered three-year terms. Directors hold
their positions until the annual meeting of shareholders in the year in which their terms expire,
and until their respective successors are elected and qualified or until their earlier resignation,
removal from office or death. Executive Officers serve at the pleasure of the Board of Directors.
The following table sets forth the names and ages of the Companys Directors and Executive
Officers and the positions they hold with the Company.
Mr. Nixon
joined the Company in January 1988, and served as its President and Chief Executive
Officer from November 1988 until May 2000, at which time he was named Chairman of the Board. From
September 1985 to January 1988, he served as Vice President of Cross & Trecker Corporation and was
President of Warner & Swasey Company, its wholly-owned subsidiary. From 1964 to 1985, he served in
various management capacities with Brown & Sharpe Manufacturing Corporation, most recently as Vice
President of its fluid power division and President of Double A Products Company, its wholly-owned
subsidiary. Mr. Nixon is a graduate of Cornell University and the Harvard Business School, and is
Past
50
Chairman of the Board of the National Fluid Power Association. Mr. Nixon has over 35 years
experience in the fluid power industry.
Mr. Carlson
joined the Company in March 1996 and served as Vice President from January 2000
until May 2000, when he was named President and Chief Executive Officer. From October 1977 to
March 1996, Mr. Carlson held various engineering, marketing and management positions for Vickers
Incorporated, a wholly-owned subsidiary of Trinova Corporation. He is a graduate of the Milwaukee
School of Engineering and the Advanced Management Program at the Harvard Business School. Mr.
Carlson has over 32 years experience in the fluid power industry.
Mr. Cooper
joined the Company in December 1990 as an engineer and has been Engineering Manager
since September 1991. From August 1987 to December 1990, he was Engineering Manager, Mobile
Valves, of Vickers, Incorporated, a wholly-owned subsidiary of Trinova Corporation, and from
September 1979 to August 1986, he served as Vice President of Engineering for Double A Products
Company. Mr. Cooper is an engineering graduate of Willesden College of Technology, London,
England. Mr. Cooper has over 34 years experience in the fluid power industry.
Mr. Dobbyn
joined the Company in October 1995 and was named Chief Financial Officer in July
1996. From June 1995 to October 1995, Mr. Dobbyn served as the Controller of Protek Electronics.
From July 1994 to June 1995, he served as the Fiscal Director of a non-profit child care agency.
From September 1984 to July 1994, Mr. Dobbyn was Senior Vice President-Finance and Administration
for Loral Data Systems, formerly Fairchild Weston Systems, a Schlumberger company. Mr. Dobbyn is a
Certified Public Accountant and a graduate of Boston College.
Mr. Robson
has served as a Director of Sun Hydraulics Limited, Coventry, England, since May
1993, and has been employed by the Company as the General Manager of its United Kingdom operations
since 1982. Mr. Robson is a Chartered Engineer and a graduate of Coventry University. Mr. Robson
has over 36 years experience in the fluid power industry.
Dr. Bertoneche
holds a chair as Professor in Business Administration at the University of
Bordeaux in France, and was on the Faculty of INSEAD, the European Institute of Business
Administration in Fontainebleau, France, for more than 20 years. He is a Visiting Professor at the
Harvard Business School and an Associate Fellow at the University of Oxford. He is a graduate of
University of Paris and earned his MBA and PhD from Northwestern University. Dr. Bertoneche has
served as a Director of the Company since August 2001.
Mr. Kahler
retired as the President, CEO and a Director of Cincinnati Incorporated as of
February 28, 2005. Mr. Kahler served in various management positions with Cincinnati Incorporated
since 1989. He is a graduate of Carnegie-Mellon University and the Harvard Business School. Mr.
Kahler has served as a Director of the Company since May 1998.
Ms. Koski
founded Koski Consulting Group, Inc. in June 2001 to work with start-up companies in
the area of business strategy and marketing. In May 2001, Ms. Koski completed an Executive MBA
degree from Southern Methodist University. From 1980 through 2000, Ms. Koski held various
positions in sales, product management, purchasing, sales management, and international marketing
management with Celanese A.G. or its former affiliates, including Celanese Ltd., Hoechst AG and
Hoechst Celanese Chemical Group Ltd. Ms. Koski has served as a Director of the Company since May
2000.
Mr. Koski
is a co-founder of the Company and served as its Chairman of the Board from the
Companys inception in 1970 until his retirement as an executive officer in May 2000. He was also
its President and Chief Executive Officer from 1970 until November 1988. He is a graduate of
Dartmouth College and past Chairman of the Board of the National Fluid Power Association. Mr.
Koski has over 40 years experience in the fluid power industry, and has served as Chairman of the
Fluid Power Systems and Technology Division of the American Society of Mechanical Engineers, and as
a member of the Board of Directors of the National Association of Manufacturers.
51
Dr. Megerlin
retired in March 2003 as a member of the Executive Board of Linde AG and Chairman
and Managing Director of the Linde Material Handling Division of Aschaffenburg, Germany. Prior to
such time, he also was Chairman of Lindes U.S. subsidiaries Linde Hydraulics Corp., Canfield,
Ohio, and Linde Lift Truck Corp., Sommerville, South Carolina. Within VDMA, Germanys association
for mechanical and plant engineering, Dr. Megerlin formerly was Chairman and now serves as a member
of the Executive Board of the German Fluid Power Association. He is a mechanical engineer and
received his Dipl-Ing (M.S.) degree from the Technical University of Karlsruhe, Germany, and his
Dr.-Ing. (Ph.D.) from TH Aachen, Germany. Dr. Megerlin has over 31 years of experience in the fluid
power industry. Dr. Megerlin has served as a Director of the Company since May 1998.
Mr. Sakamoto
has been the President of Kawasaki Precision Machinery, Ltd. since October 2002.
From April 2000 to September 2002, he served as the General Manager of the Precision Machinery
Division of Kawasaki Heavy Industries Ltd., and from July 1998 through March 2000, he was Deputy
General Manager of the Precision Machinery Division of Kawasaki Heavy Industries Ltd. Mr. Sakamoto
has served in various management positions with Kawasaki Heavy Industries Ltd. since entering its
engineering department in April 1968. He is a graduate of Kyoto Institute of Technology, and an
executive board member of The Japan Fluid Power System Society since April 2002. Mr. Sakamoto has
over 36 years of experience in the fluid power industry.
Dr. Wormley
is the Dean of the Engineering School at Pennsylvania State University, where he
has taught since 1992. He previously was a member of the engineering faculty at the Massachusetts
Institute of Technology. Dr. Wormley has served as a Director of the Company since December 1992.
He is an engineer and earned his Ph.D. from the Massachusetts Institute of Technology.
No family relationships exist between any of the Companys Directors and executive officers,
except that Ms. Koski is the daughter of Mr. Koski. There are no arrangements or understandings
between Directors and any other person concerning service as a Director.
The Board of Directors has Audit, Compensation, and Nominating Committees.
The Audit Committee, which consists of John Kahler, Ferdinand Megerlin, and Marc Bertoneche,
held seven meetings in 2004. The Board of Directors determined, under applicable SEC and NASDAQ
rules, that all of the members of the Audit Committee are independent and that Mr. Bertoneche meets
the qualifications as an Audit Committee Financial Expert and he has been so designated. The
functions of the Audit Committee are to select the independent public accountants who will prepare
and issue an audit report on the annual financial statements of the Company, to establish the scope
of and the fees for the prospective annual audit with the independent public accountants, to review
the results thereof with the independent public accountants, to review and approve non-audit
services of the independent public accountants, to review compliance with existing major accounting
and financial policies of the Company, to review the adequacy of the financial organization of the
Company, to review managements procedures and policies relative to the adequacy of the Companys
internal accounting controls, to review compliance with federal and state laws relating to
accounting practices and to review and approve transactions, if any, with affiliated parties.
The Compensation Committee, which consists of David Wormley, Ferdinand Megerlin, and John
Kahler, reviews, approves and recommends to the Board of Directors the terms and conditions of all
employee benefit plans or changes thereto, administers the Companys restricted stock and stock
option plans and carries out the responsibilities required by the rules of the Securities and
Exchange Commission. The Committee met four times during 2004.
The Nominating Committee, which consists of John Kahler, Hirokatsu Sakamoto, and David Wormley
held three meetings in 2004. The Nominating Committee is responsible for identifying individuals
qualified to become members of the Board of Directors, consistent with criteria approved by the
Board, and for selecting the director nominees to stand for election at each annual meeting of
shareholders.
52
The Board of Directors held four meetings during 2004. Each Director attended all of the
meetings of the Board and of each committee of which he or she was a member in 2004.
The Company has adopted a code of ethics, which applies to all directors, officers and
employees. The code of ethics is monitored by the Companys Audit Committee and is available on
its website, www.sunhydraulics.com. A copy of the code of ethics will be provided to any person
without charge, upon request, by writing to the Company at 1500 West University Parkway, Sarasota,
FL 34243, Attention: Investor Relations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Companys Directors,
officers and holders of more than 10% of the Companys Common Stock to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in ownership of Common
Stock and any other equity securities of the Company. To the Companys knowledge, based solely
upon a review of the forms, reports and certificates filed with the Company by such persons, all of
them complied with the Section 16(a) filing requirements in 2004, except the following:
53
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table is a summary of the compensation paid or accrued by the Company for the
last three fiscal years for services in all capacities to the Companys Chief Executive Officer and
each of its four most highly compensated executive officers who earned more than $100,000 from the
Company in 2004 under the rules of the Securities and Exchange Commission (the Named Executive
Officers).
Summary Compensation Table
54
Option/SAR Grants in Last Fiscal Year
Aggregated Option/SAR Exercises in Last Fiscal Year
Compensation Committee Interlocks and Insider Participation
The members of the Committee in 2004 were John Kahler, Ferdinand E. Megerlin, and David N.
Wormley. See Item 10. Directors and Executive Officers of the Company.
55
Director Compensation
Directors who are not officers of the Company are paid $4,000 for attendance at each meeting
of the Board of Directors, as well as each meeting of each Board Committee on which they serve when
the committee meeting is not held within one day of a meeting of the Board of Directors. In 2004,
the Board of Directors adopted and the shareholders approved the Nonemployee Director Equity and
Deferred Compensation Plan (the Plan) pursuant to which $1,500 of the $4,000 Director fee is paid
in shares of Company stock under the Plan. Directors also may elect under the Plan to receive all
or part of the remainder of their fees in Company stock and to defer receipt of their fees until a
subsequent year. Directors also are reimbursed for their expenses incurred in connection with their
attendance at such meetings.
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
The following table sets forth as of March 11, 2005, information as to the beneficial
ownership of the Companys Common Stock by (i) each person or entity known by the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each Director,
(iii) Each Named Executive Officer of the Company, and (iv) all Directors and executive officers of
the Company as a group.
57
58
Equity Compensation Plan Information
The following table summarizes the Companys equity compensation plan information as of December
25, 2004. Information is included for both equity compensation plans approved by the Companys
shareholders and equity compensation plans not approved by the shareholders.
Equity compensation plans approved by shareholders include the 1996 Stock Option Plan, the
2001 Restricted Stock Plan, the Employee Stock Purchase Plan, and the 2004 Nonemployee Director
Equity and Deferred Compensation Plan. All shares to be issued upon exercise in column (a) and the
weighted average exercise price in column (b) represent shares issued under the 1996 Stock Option
Plan. The number of securities available for future issuance in column (c) were: 258,061 shares
under the 1996 Stock Option Plan, 282,632 shares under the Employee Stock Purchase Plan, 121,344
shares under the 2001 Restricted Stock Plan, and 77,259 shares under the 2004 Nonemployee Director
Equity and Deferred Compensation Plan.
The only equity compensation plan not approved by shareholders was the 1999 Stock Award Plan.
Three thousand shares were authorized for grant under the 1999 Stock Award Plan, which was approved
by the Board of Directors on May 21, 1999. The general purpose of the Plan is to recognize and
acknowledge extraordinary contributions of employees through the grant of shares of common stock,
thereby providing them with a more direct stake in the future welfare of the Company and
encouraging them to continue to demonstrate leadership and commitment to the Company. Subject to
supervision by the Board and the provisions of the Plan, the Companys president has the authority
to determine the employees to whom awards shall be granted and the number of shares of common stock
to be the subject of each award. As of December 25, 2004, there were 300 shares remaining for
future grants, and there were no outstanding options, warrants, or rights associated with this
plan.
On November 29, 2004, The Companys Board of Directors authorized the repurchase of up to $2.5
million of Company common stock to be completed no later than January 15, 2006. Stock will be
repurchased periodically in the open market or through privately negotiated transactions, in
accordance with the Stock Repurchase Plan. Market purchases will be made subject to
restrictions relating to volume, price and timing in an effort to minimize the impact of the
purchases on the market for the Companys securities. The repurchased shares are retired and added
to the Companys authorized, but unissued, shares.
The amount of the stock repurchases was set based upon the anticipated number of shares that will
be required to fund the Companys employee stock ownership plan and employee stock purchase plan
through
59
fiscal year 2005. In 2004, the Company repurchased 5,800 shares totaling approximately
$82,800 under the Plan at an average price per share of $14.28.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 22, 2002, the Company entered into a standby Stock Repurchase Agreement with the Koski
Family Limited Partnership, which owns approximately 34% of the outstanding shares of the Companys
common stock. Robert E. Koski and Christine Koski are Directors of the Company. Under the
Agreement, the Company agreed to purchase up to $2,250,000 worth of Company common stock from the
Koski Partnership on a one time basis, until June 22, 2004, at a per share price of the lower of
$7.00 per share, or 15% less than the average closing price per share of the common stock for the
15 full trading days immediately preceding the closing date. The Agreement expired in June 2004 and
the Company did not purchase any shares from the Koski Partnership during its term.
ITEM 14. PRINCPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The Company incurred aggregate audit fees $197,286 to Grant Thornton LLP during fiscal year
2004, and of $153,550 to PricewaterhouseCoopers LLP during fiscal year 2003. These fees were for
professional services rendered for the audit of the Companys consolidated financial statements,
the reviews of the financial statements included in the Companys Forms 10-Q for fiscal years 2004
and 2003, respectively, and the statutory audit of Sun Hydraulik Holdings Limited, Sun Hydraulics
Corporations wholly-owned subsidiary for its European market operations, and Sun Hydraulics
Limited, a wholly-owned subsidiary of Sun Hydraulik Holdings Limited. The Audit Committee has not
adopted any pre-approval policies and approves all engagements with the Companys auditors prior to
the performance of services by them. As a matter of policy, the Audit Committee has determined
generally not to request any new non-audit services from its auditors.
Tax Fees
During fiscal year 2003, the Company incurred aggregate fees of $4,860 to PricewaterhouseCoopers
LLP for services in connection with a sales tax audit of the Company by the State of Florida.
60
Name
Age
Position
69
Chairman of the Board of Directors (term expiring in 2007)
54
President, Chief Executive Officer, Director (term expiring
in 2006)
63
Engineering Manager
61
Chief Financial Officer
60
General Manager, Sun Hydraulics Limited
58
Director (term expiring in 2007), and a member of the
Audit Committee and Audit Committee Financial Expert
65
Director (term expiring in 2006), and a member of the
Audit, Compensation and Nominating Committees
47
Director (term expiring in 2005)
75
Director (term expiring in 2006)
66
Director (term expiring in 2007)
and a member of the Audit and Compensation Committees
61
Director (term expiring in 2005)
and a member of the Nominating Committee
65
Director (term expiring in 2005) and a member of the
Compensation and Nominating Committees
Table of Contents
Table of Contents
Table of Contents
Richard J. Dobbyn filed one Form 5 statement reporting a gift of 65 shares.
John Kahler filed four Form 5 Statements reporting a total of 146 shares
acquired in 13 transactions in which cash dividends in a trust for which his spouse
is trustee were reinvested in Company stock.
Robert E. Koski filed one Form 4 statement reporting the sale of 100 shares by
the Koski Family Limited Partnership.
Peter Robson filed four Form 4 Statements reporting four simultaneous option
exercises and sale of shares.
Table of Contents
Long Term
Compensation Awards
Securities
Name and
Restricted
Underlying
Other Annual
Principal Position
Year
Salary
Stock
Options/SARs (#)
Compensation (1)
2004
$
200,000
$
$
35,472
(2
)
2003
200,250
105,815
16,560
(2
)
2002
191,667
16,322
(2
)
2004
$
210,000
$
59,996
$
32,326
2003
180,250
105,613
11,040
2002
173,250
32,600
9,491
2004
$
148,000
$
16,673
$
24,460
2003
143,250
69,989
9,082
2002
138,233
32,600
10,558
2004
$
150,000
$
23,329
$
24,086
2003
140,250
74,092
9,814
2002
135,333
29,200
8,212
2004
$
143,077
$
$
25,264
2003
131,818
48,165
25,064
2002
131,818
27,719
(1)
Except as otherwise noted, reflects primarily contributions made by the Company on
behalf of the employee to the Companys 401(k) plan and excess life insurance premiums.
(2)
Includes dues of $750.
Table of Contents
Individual Grants
Percent of
Total
Number of
Options
Securities
Granted to
Potential Realizable Value at Assumed
underlying
Employees
Exercise or
Annual Rates of Stock Price Appreciation
options
in Fiscal
Base Price
Expiration
for Option Term (1)
Name
granted (#)
Year
($/sh)
Date
5% ($)
10% ($)
0% ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
4,858
20.45
%
$
12.35
10/15/2014
$
97,728
$
155,615
$
59,996
1,350
5.68
%
$
12.35
10/15/2014
$
27,158
$
43,244
$
16,673
1,889
7.95
%
$
12.35
10/15/2014
$
38,001
$
60,510
$
23,329
(1)
The options were granted on October 15, 2004, at an exercise price of $12.35, the closing
price for the shares of Common Stock on the Nasdaq National Market on that date. The 5% and
10% assumed annual rates of stock price appreciation are provided in compliance with
Regulation S-K under the Securities Exchange Act of 1934. The Company does not necessarily
believe that these appreciation calculations are indicative of actual future stock option
values or that the price of Common Stock will appreciate at such rates.
and Fiscal Year End Option Values
Number of Securities
Underlying Unexercised
Value of Unexercised in-the-
Options/SARs at Fiscal
Money Options/SARs at Fiscal
Shares Acquired
Value
Year-End (#)
Year-End ($)
Name
on Exercise (#)
Realized ($)
Exercisable/Unexercisable
Exercisable/Unexercisable (1)
(a)
(b)
(c)
(d)
(e)
24,765
$
263,198
74,781/4,000
$
686,420/32,000
1,235
$
12,350
59,485/23,738
$
305,683/205,668
27,100
$
179,131
28,200/7,150
$
71,594/61,199
47,000
$
189,756
2,200/7,889
$
15,326/65,733
46,109
$
194,437
-/1,000
$
-/6,750
(1)
Based upon the December 25, 2004, closing stock price of $15.85 per share, as reported on
the Nasdaq National Market.
Table of Contents
Table of Contents
Amount and Nature of
Name and Address of Beneficial Owner
Beneficial Ownership
Percent of
(1)
(2)
Class
2,526,931
35.3
%
2,526,931
35.3
%
2,323,166
32.5
%
2,285,543
31.9
%
2,258,543
31.6
%
2,258,543
31.6
%
607,900
8.5
%
495,404
6.9
%
136,203
1.9
%
4,334
*
34,906
*
10,875
*
37,445
*
328
*
4,378
*
3,676
*
441
*
883
*
2,825,023
39.0
%
Table of Contents
* Less than 1%.
(1)
Unless otherwise indicated, the address of each of the persons listed who own more than 5% of
the Companys Common Stock is 1500 West University Parkway, Sarasota, Florida 34243.
(2)
This column sets forth shares of the Companys Common Stock which are deemed to be
beneficially owned by the persons named in the table under Rule 13d-3 of the Securities and
Exchange Commission. Except as otherwise indicated, the persons listed have sole voting and
investment power with respect to all shares of Common Stock owned by them, except to the
extent such power may be shared with a spouse.
(3)
Includes 2,258,543 shares owned by the Koski Family Limited Partnership, over which Christine
L. Koski, Robert C. Koski, Thomas L. Koski, Robert E. Koski and Beverly Koski share voting and
investment power as the general partners in the Partnership. Christine L. Koski, Robert C.
Koski and Thomas L. Koski are the adult children of Robert E. Koski and Beverly Koski.
(4)
Includes 141,215 shares owned by Beverly Koski and 100,173 shares owned by Robert E. Koski.
Beverly Koski is the spouse of Robert E. Koski.
(5)
Includes 27,000 shares owned by the Koski Family Foundation, Inc., over which Robert E.
Koski, Beverly Koski and Robert C. Koski share voting and investment power.
(6)
According to the Schedule 13G, filed February 3, 2005, by Royce & Associates, LLC (Royce),
Royce has sole voting and investment power with respect to the 607,900 shares.
(7)
According to the Schedule 13G, filed January 18, 2005, by Rutabaga Capital Management
(Rutabaga), Rutabaga has sole voting power with respect to the 234,300 shares, and shared voting
power with respect to 261,104 shares. It has sole investment power with respect to the entire
495,404 shares beneficially owned.
(8)
Includes 74,781 shares subject to currently exercisable options and 29,522 shares in the Joan
Nixon Trust.
(9)
Includes 4,334 shares of unvested restricted stock.
(10)
Includes 1,000 shares subject to currently exercisable options and 10,090 shares of unvested
restricted stock.
(11)
Includes 933 shares subject to currently exercisable options and 8,656 shares of unvested
restricted stock.
(12)
Includes 2,000 shares subject to currently exercisable options and 16,898 shares of unvested
restricted stock.
(13)
Includes 500 shares owned by Mr. Kahlers spouse and 2,345 shares owned in trust, of which
Mrs. Kahler is the trustee and beneficiary.
Table of Contents
Number of securities
remaining available for
Number of securities to
future issuance under
be issued upon
Weighted-average
equity compensation
exercise of outstanding
exercise price of
plans (excluding
options, warrants, and
outstanding options,
securities reflected in
Plan category
rights
warrants, and rights
column (a))
(a)
(b)
(c)
315,184
$
7.86
739,296
300
315,184
$
7.86
739,596
Table of Contents
Grant Thornton LLP
PricewaterhouseCoopers LLP
2004
2003
2004
2003
$
197,286
$
$
$
153,550
4,860
Table of Contents
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
61
62
+ Executive management contract or compensatory plan or arrangement.
63
The following financial statements are included in Part II, Item 8:
Report of Independent Registered Public Accounting Firm
27
Report of Independent Registered Certified Public Accounting Firm
28
Consolidated Balance Sheets as of December 25, 2004,
29
Consolidated Statements of Income for the years ended
30
Consolidated Statements of Shareholders' Equity for the years ended
31
Consolidated Statements of Cash Flows for the years ended
32
Notes to Consolidated Financial Statements
33
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements
and notes thereto in Item 8 above.
Exhibits:
Exhibit
Number
Exhibit Description
Amended and Restated Articles of Incorporation of the Company (previously
filed as Exhibit 3.1 in the Pre-Effective Amendment No. 4 to the Companys
Registration Statement on Form S-1 filed on December 19, 1996 (File No.
333-14183) and incorporated herein by reference).
Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2
in the Companys Quarterly report on Form 10-Q for the quarter ended
October 2, 1999 and incorporated herein by reference).
Certificate of Amendment to Amended and Restated Bylaws of the Company
(previously filed as Exhibit 3.2.1 in the Companys Quarterly report on
Form 10-Q for the quarter ended March 27, 2004 and incorporated herein by
reference).
Stock Repurchase Agreement, dated June 22, 2002, between Sun Hydraulics
Corporation and the Koski Family Limited Partnership (previously filed as
Exhibit 99.2 to the Companys Form 8-K dated July 2, 2002 and incorporated
herein by reference).
Form of Distributor Agreement (Domestic) (previously filed as Exhibit 10.1
in the Companys Registration Statement on Form S-1 filed on October 15,
1996 (File No. 333-14183) and incorporated herein by reference).
Form of Distributor Agreement (International) (previously filed as Exhibit
10.2 in the Companys Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183) and incorporated herein by reference).
Table of Contents
Exhibit
Number
Exhibit Description
1996 Sun Hydraulics Corporation Stock Option Plan (previously filed as
Exhibit 10.3 in the Pre-Effective Amendment No. 4 to the Companys
Registration Statement on Form S-1 filed on December 19, 1996 (File No.
333-14183) and incorporated herein by reference).
Amendment No. 1 to 1996 Stock Option Plan (previously filed as Exhibit 10.4
to the Companys Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 and incorporated herein by reference).
Mortgage, dated April 11, 1996, between Sun Hydraulik GmbH and Dresdner
Bank (previously filed as Exhibit 4.19 in the Companys Registration
Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
Form of Indemnification Agreement (previously filed as Exhibit 10.4 in the
Pre-Effective Amendment No. 4 to the Companys Registration Statement on
Form S-1 filed on December 19, 1996 (File No. 333-14183) and incorporated
herein by reference).
Sun Hydraulics Corporation Employee Stock Award Program (previously filed
as Exhibit 4 to the Companys registration statement on Form S-8 filed on
July 20, 1999, and incorporated herein by reference).
2001 Sun Hydraulics Corporation Restricted Stock Plan (previously filed as
Exhibit 4 to the Companys registration statement on Form S-8 filed on June
12, 2001 (file No. 333-62816), and incorporated herein by reference).
Sun Hydraulics Corporation Employee Stock Purchase Plan (previously filed
as Exhibit 4 to the Companys registration statement on Form S-8 filed on
July 27, 2001 (file No. 333-66008), and incorporated herein by reference).
Credit and Security Agreement dated July 23, 2003, between the Company, Sun
Hydraulik Holdings Limited and Sun Hydraulics Limited as Borrower, and
SouthTrust Bank as Lender (previously filed as Exhibit 10.10 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 28, 2003
and incorporated herein by reference).
Master Loan Documents Modification Agreement dated as of November 18, 2003,
between the Company, Sun Hydraulik Holdings Limited and Sun Hydraulics
Limited as Borrower, and SouthTrust Bank as Lender (previously filed as
Exhibit 10.11 to the Companys Annual Report on Form 10-K for the year
ended December 27, 2003 and incorporated herein by reference).
Forms of agreement for grants under the Sun Hydraulics Corporation 1996
Stock Option Plan (previously filed as Exhibit 10.12+ to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 25, 2004 and
incorporated herein by reference).
Sun Hydraulics Corporation 2004 Nonemployee Director Equity and Deferred
Compensation Plan (previously filed as Appendix A to the Registrants Proxy
Statement for the 2004 Annual Meeting of Shareholders, filed with the
Commission on May 3, 2004 and incorporated herein by reference).
Form of Performance Share Agreement (previously filed as Exhibit 99.1 to
the Companys Form 8-K filed on December 16, 2004 and incorporated herein
by reference).
The Sun Hydraulics Corporation 401(k) and ESOP Retirement Plan (previously
filed as Exhibit 99.1 to the Companys Form 8-K filed on January 14, 2005
and incorporated herein by reference).
Code of Ethics
Subsidiaries of the Registrant
PricewaterhouseCoopers, LLP Consent
of Independent Registered Certified Public Accounting Firm
Table of Contents
Exhibit
Number
Exhibit Description
Grant Thornton LLP Consent of
Independent Registered Public Accounting Firm
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
CEO Certification pursuant to 18 U.S.C. § 1350.
CFO Certification pursuant to 18 U.S.C. § 1350.
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Sarasota, State of Florida on March 21, 2005.
Pursuant to requirements of the Securities Exchange Act of 1934, this Report has been signed
by the following persons on behalf of the Registrant and in the capacities indicated as of March
21, 2005.
64
SUN HYDRAULICS CORPORATION
By:
/s/ Allen J. Carlson
Allen J. Carlson, President and
Chief Executive Officer
Signature
Title
President, Chief Executive Officer
and Director
Chief Financial Officer (Principal
Financial and Accounting Officer)
Director
Director
Director
Director
Director
Chairman of the Board of Directors
Hirokatsu Sakamoto
Director
David N. Wormley
Director
EXHIBIT 14
SUN HYDRAULICS CORPORATION CODE OF ETHICS
Dear Fellow Sun Employee:
When Bob Koski incorporated Sun Hydraulics in 1970, he prepared the attached philosophy to guide the new company. The world is changing rapidly, but the way we manage Sun and the values we live by have not changed. Our directors, officers and employees are expected to conduct their business in accordance with Bobs original philosophy, together with the following basic principles of ethical business, which will constitute Suns Code of Ethics:
Compliance with Laws: You are expected to comply with all applicable laws and regulations of the U.S. and the other countries in which we do business.
Conflicts of Interest: You should avoid any personal activity, investment or association which could appear to interfere with your good judgment concerning Suns best interests. If you are related in any way to a vendor or customer, someone other than you should be the one to decide whether Sun will do business with that person. The Audit Committee must approve in advance all transactions in which an officer or a director, or any member of any such persons family, may have a personal interest.
Fair Disclosure: Those involved in the preparation of reports and documents that the Company files with the Securities and Exchange Commission and other public communications made by the Company should seek to provide full, fair, accurate, timely, and understandable disclosure in such reports, documents and public communications.
Reporting Violations: If you discover a violation of this Code, you should report it promptly to a leader at your location. If you still are concerned after speaking with your local leader or feel uncomfortable speaking with them (for whatever reason), you may send a detailed note, with relevant documents, to Suns Chairman or CEO. You also may contact the Chairman of the Audit Committee, as follows:
Chairman
Audit Committee
Sun Hydraulics Corporation
1500 West University Parkway
Sarasota, FL 34243
No Retaliation/Confidentiality: Sun will not take any action against someone who reports or otherwise tries to stop suspected wrongdoing. The anonymity of a reporting person and the confidentiality of the information reported will be maintained if you request, subject to disclosure to the extent necessary to conduct an effective investigation and take corrective action.
Any employee who ignores or violates any of Suns ethical standards, or who penalizes a subordinate for trying to follow them, will be subject to disciplinary action, up to and including immediate dismissal.
Sincerely,
/s/ Allen J. Carlson
|
/s/ Clyde Nixon | |
Allen J. Carlson,
|
Clyde Nixon | |
President and CEO
|
Chairman |
Corporate Philosophy
To obey the golden rule in all relations both within and without the company no matter how difficult this may seem at the time.
To respect the dignity of every individual and to be courteous at all times.
To honestly and fairly make and meet our commitments with customers, distributors, employees and suppliers and to establish stable relationships with them.
To be a leader in our chosen fields of activity and in the development of our industry and community.
To be a growing company so that employees are continually provided an opportunity for additional responsibilities.
To constantly improve our products and services so that they are worth more to our customers and to constantly improve our operational methods so that we can afford higher than average wages.
To provide steady and continuous employment for persons hired with reasonable working hours and safe working conditions.
To encourage employee self-improvement and to promote from within whenever possible.
To keep employees and stockholders informed of company policies, procedures and plans.
Bob Koski
1970
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Additional Name Under
Organized under the
Which Subsidiary Does
Name of Subsidiary
laws of
Business
England and Wales
Sun Hydraulics
England and Wales
Sun Hydraulics
The Federal Republic
of Germany
Sun Hydraulics
Korea
Sun Hydraulics
France
Sun Hydraulics
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.
333-30801, 333-83269, 333-62816, 333-66008, and 333-119367) of Sun Hydraulics Corporation of our
report dated March 25, 2004, relating to the financial statements, which appears in this Form 10-K.
/s/PricewaterhouseCoopers LLP
Tampa, Florida
March 25, 2004
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated February 25, 2005, accompanying the consolidated
financial statements included in the Annual Report of Sun Hydraulics Corporation on
Form 10-K for the year ended December 25, 2004. We hereby consent to the
incorporation by reference of said report in the Registration Statements of Sun
Hydraulics Corporation on Form S-8 (File No. 333-30801, effective July 3, 1997, File
No. 333-83269, effective July 20, 1999, File No. 333-62816, effective June 12, 2001,
File No. 333-66008 effective July 27, 2001 and File No. 333-119367, effective
September 29, 2004).
/s/ GRANT THORNTON LLP
Tampa, Florida
February 25, 2005
Exhibit 31.1
CERTIFICATION
I, Allen J. Carlson, certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 25, 2004, of Sun
Hydraulics Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Date: March 21, 2005
Exhibit 31.2
CERTIFICATION
I, Richard J. Dobbyn, certify that:
1. I have reviewed this Annual Report on Form 10-K for the year ended December 25, 2004, of Sun
Hydraulics Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Date: March 21, 2005
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350
I, Allen Carlson, the Chief Executive Officer of Sun Hydraulics Corporation (the Company),
certify that (i) the Annual Report on Form 10-K for the Company for the year ended December 25,
2004 (the Report), fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents,
in all material respects, the financial condition and results of operations of the Company.
/s/ Allen Carlson
Chief Executive Officer
March 21, 2005
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350
I, Richard J. Dobbyn, the Chief Financial Officer of Sun Hydraulics Corporation (the
Company), certify that (i) the Annual Report on Form 10-K for the Company for the year ended
December 25, 2004 (the Report), fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Richard J. Dobbyn
Chief Financial Officer
March 21, 2005