Weak Mining, Energy Sector Demand Dents Sun Hydraulics Corporation Earnings

By Markets Fool.com

Image source: Sun Hydraulics.

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Sun Hydraulics (NASDAQ: SNHY) reported second-quarter results on Aug. 3. A challenging global economic environment continues to take a toll on the high-performance-valve and manifold maker's revenue and profits.

Sun Hydraulics results: The raw numbers

Metric

Q2 2016

Q2 2015

Growth (YOY)

Net sales

$50.8 million

$54.0 million

(6%)

Net income

$7.0 million

$9.2 million

(24%)

Earnings per share

$0.26

$0.35

(26%)

Data source: Sun Hydraulics Q2 2016 earnings press release.

What happened with Sun Hydraulics this quarter?

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Sun Hydraulics saw revenue declines in all of its geographic segments, including the Americas (10%), Europe (3%), and Asia-Pacific (1%). Low oil prices and a lack of investment in the mining sector dented demand in Sun's Americas business, while Brexit has made forecasting demand more difficult for its European operations. Sun's Asia-Pacific division continues to struggle with weak demand in the Korean construction industry, but the company noted that sales growth was strong in areas such as China and Australia.

Even as sales fell, selling, engineering, and administrative expenses increased 16% for the quarter, due in part to costs related to Sun's recent CEO transition.

All told, operating income dropped 26% to $10.4 million; net income decreased 24% to $7 million; and earnings per share declined 26% to $0.26.

Despite the downturn, Sun Hydraulics continues to invest in its business processes, technology, and people.

"Demand in our various end markets remains sluggish, but we are encouraged by increased sales in selected markets throughout Asia Pacific which are directly attributable to our increased marketing efforts in the region," said CEO Wolfgang Dangel in a press release.

He added: "We believe that continued investment is a necessary component to drive long-term results.To this end, we are accelerating lean manufacturing efforts, expanding our electronic and digital capabilities, acquiring talent to complement our current competencies, and acting on opportunities where we can grow in both new and existing geographic regions."

Looking ahead

For the third quarter, Sun Hydraulics expects revenue to decease 4% year over year, to approximately $46 million. Earnings per share are projected to fall to a range of $0.19 to $0.21, down from $0.32 in Q2 2015, mostly due to decreased volume.

Dangel addressed the company's strategy in the current economic climate, saying, "The economic environment remains clouded, with geopolitical instability impacting visibility so it is more important than ever that we maintain our long-term mindset." He added, "By continuing to invest in future growth, we will remain positioned to respond to customer demand with our superior product and service performance."

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Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends Sun Hydraulics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.