Sun Hydraulics (NASDAQ:SNHY) released third-quarter 2015 results after the market closed on Monday that fell short of its expectations as well as its year-ago results.

The hydraulic component manufacturer attributed its weak results to a continued slump in global demand and currency effects from the strength of the U.S. dollar. It expects these headwinds to last into 2016 and, thus, issued a tepid outlook for the fourth quarter. 

Shares opened down more than 7% on Tuesday but steadily climbed throughout the day as the market digested the news. They closed the day down just 2.7%. 

Sun Hydraulics: The quarterly numbers

 Metric

Q3 2015

Q3 2014

Growth (YOY)

Revenue

$48 million

$55 million

(13%)

Net income

$8.4 million

$9.9 million

(15%)

GAAP EPS

$0.32

$0.37

(14%)

Data source: Sun Hydraulics.

What happened with Sun Hydraulics this quarter?

  • Currency effects reduced revenue by $1.8 million and EPS by $0.07 from the year-ago period.
  • Demand was down across all geographic markets. Revenue dipped 14% in the Americas, 17% in Asia, and 8% in Europe. Asian demand was primarily affected by the weakening of the South Korean economy, while 5% of the drop in European revenue was due to currency effects, according to the company.

Sun Hydraulics is using the down cycle to focus on investments to drive future growth. Specifically, it's concentrating on these areas:

  • Operational execution -- cross-training in production areas, evaluating manufacturing processes for additional improvements, and seeking opportunities for further automation.
  • Product development -- continuing to release innovative products, specifically in the electro-hydraulic market. The introduction of the new Digital Logic Valves, for instance, reportedly has Sun's customers exploring where they can apply this product to solve problems that go beyond traditional cartridge valve applications.
  • Market penetration -- growing global marketing resources by adding field application engineers in all regions. 

What management had to say
"Third-quarter sales were weaker than expected," said Allen Carlson, president and CEO. "It is my sense that we are near the bottom of this difficult economic cycle. Given where we believe we are in the business cycle, Sun's focus is on investments to drive future growth." 

Carlson added: "Market share gains are made in the beginning of the business cycle and to be prepared requires planning and investment at the bottom of the cycle. When the economy does recover, and it will, Sun will be positioned to respond to customer demand with the superior product and service performance that has become our hallmark."

Looking forward
Sun Hydraulics had a tough quarter, though this appears to be due to continued weak market conditions rather than execution issues. The company expects softened demand and currency headwinds to continue, so it issued fourth-quarter revenue and EPS guidance below year-ago levels and below what analysts were forecasting. It expects fourth-quarter revenue to be approximately $44 million, down 20% from the year-ago period, and EPS to be in the range of $0.17 to $0.19, compared with $0.39 in the year-ago period. 

Positively, Carlson said, "While we expect today's softened demand to continue into 2016, we foresee business conditions strengthening during the year."

Beth McKenna 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.