Edgar Filing: SUN HYDRAULICS CORP

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Form 11-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 11-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED December 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 000-21835

A.	Full title of the plan and the address of the plan, if different from that of the issuer named below:

SUN HYDRAULICS CORPORATION 401(K) AND ESOP

RETIREMENT PLAN

1500 WEST UNIVERSITY PARKWAY

SARASOTA, FLORIDA 34243

B.	Name of issuer of the securities held pursuant to the plan and the address of its principal executive office:

SUN HYDRAULICS CORPORATION

1500 WEST UNIVERSITY PARKWAY

SARASOTA, FLORIDA 34243

SUN HYDRAULICS CORPORATION 401(K) AND ESOP RETIREMENT PLAN

FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE

AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

DECEMBER 31, 2011 AND 2010

CONTENTS


	Page

Report of Independent Registered Public Accounting Firm		1

Financial Statements
Statements of Net Assets Available for Benefits		2
Statements of Changes in Net Assets Available for Benefits		3
Notes to the Financial Statements		4

Supplemental Schedule
Schedule of Assets (Held at End of Year)		13

Exhibits		14

Signature		15

Consent of Independent Registered Public Accounting Firm		15

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Participants and Administrator of the

Sun Hydraulics Corporation 401(k) and

ESOP Retirement Plan:

We have audited the accompanying statements of net assets available for benefits of Sun Hydraulics Corporation 401(k) and ESOP Retirement Plan as of December 31, 2011 and 2010, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the 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. The Plan is not required to have, nor have we been engaged to perform an audit of its internal control over financial reporting. Our audits 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 Plan’s 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 audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of Sun Hydraulics Corporation 401(k) and ESOP Retirement Plan as of December 31, 2011 and 2010, and the changes in net assets available for benefits for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of assets (held at end of year) is presented for purposes of additional analysis and is not a required part of the basic financial statements, but is supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/ Mayer Hoffman McCann P.C.

June 15, 2012

Clearwater, Florida

SUN HYDRAULICS CORPORATION 401(K) AND ESOP RETIREMENT PLAN

STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS


	December 31,
	2011			2010
Assets
Investments at fair value
Cash timing difference	$	—		$	(413	)
Common/collective trust fund		8,386,216			7,815,385
Money market fund		332			234
Mutual funds		28,815,593			27,361,274
Self directed brokerage accounts		1,343,595			1,443,599
Sponsor company common stock, non-participant directed		11,241,035			12,460,127

Total investments at fair value		49,786,771			49,080,206


Receivables
Employer contribution-cash		51			90
Employer contribution-sponsor company common stock		3,753,480			2,192,882
Participants’ contribution		51			90
Notes receivable from participants		2,569,301			2,120,688

Total receivables		6,322,883			4,313,750


Net assets available for benefits at fair value		56,109,654			53,393,956

Adjustment from fair value to contract value for fully benefit responsive investment contract		(57,468	)		(196,566	)


Net assets available for benefits	$	56,052,186		$	53,197,390

The accompanying Notes to the Financial Statements are an integral part of these financial statements.

SUN HYDRAULICS CORPORATION 401(K) AND ESOP RETIREMENT PLAN

STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS


	Year Ended December 31,
	2011			2010

Additions to net assets attributed to:

Investment income
Net appreciation (depreciation) in fair value of investments	$	(1,154,117	)	$	7,315,391
Participant loan interest		128,822			129,051

Total investment income (loss)		(1,025,295	)		7,444,442


Contributions
Participant		1,864,311			1,523,058
Employer-cash		1,235,484			1,009,217
Employer-sponsor company common stock, at fair value		3,753,480			2,192,882
Rollovers		128,199			290,594

Total contributions		6,981,474			5,015,751


Total additions		5,956,179			12,460,193


Deductions from net assets:
Benefits paid to participants		3,074,651			2,837,700
Administrative expenses		26,732			26,573

Total deductions		3,101,383			2,864,273


Net increase		2,854,796			9,595,920


Net assets available for benefits
Beginning of the year		53,197,390			43,601,470

End of the year	$	56,052,186		$	53,197,390

The accompanying Notes to the Financial Statements are an integral part of these financial statements.

SUN HYDRAULICS CORPORATION 401(K) AND ESOP RETIREMENT PLAN

NOTES TO THE FINANCIAL STATEMENTS

DECEMBER 31, 2011 AND 2010

1.	Description of Plan

The following description of the Sun Hydraulics Corporation 401(k) and ESOP Retirement Plan (f/k/a Sun Hydraulics Corporation Retirement Plan) (the “Plan”) provides only general information. Participants should refer to the Plan agreement, as amended, for a more complete description of the Plan’s provisions.

General

The Plan became effective January 1, 1979. The Plan is a defined contribution 401(k) plan covering employees of its sponsor, Sun Hydraulics Corporation (“Corporation”), who have completed three months employment and reached the age of 18. Employees may enroll in the Plan effective on the first day of each calendar quarter following their third month of employment. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).

During 2004, the Corporation adopted the Employee Stock Ownership Plan (“ESOP”). Under the ESOP, the Corporation may contribute on a discretionary basis company common stock to all employees eligible to participate in the Plan. The ESOP is a non-participant directed investment as the Corporation makes all contributions to the fund.

The sponsor company common stock fund is a share-based stock fund. At December 31, 2011, the fund held 479,771 shares of Sun Hydraulics Corporation common stock with a price of $23.43 per share as of such date. At December 31, 2010, the fund held 494,450 shares of Sun Hydraulics Corporation common stock with a price of $25.20 per share as of such date.

The Plan is administered by the Employee Benefits Committee (the “Committee”) except in connection with the acquisition, retention or disposition of Corporation stock held by the Plan, with respect to which the Board of Directors retains authority. The Committee is composed of five employees of the Corporation appointed by the Corporation’s Board of Directors. Charles Schwab Trust Company (the “Trustee”) is the current trustee for the Plan. Schwab Retirement Plan Services, Inc. provides the recordkeeping, accounting, and the telephone and internet exchange features of the Plan.

Contributions

Salary deferral contributions are made by participating employees through payroll deductions in amounts authorized by the employees. The Plan allows participants to make pre-tax contributions from 1% to 100% of their salary not to exceed statutory limits. Pre-tax contributions, of up to 6% of the employee’s salary (depending on length of service), are matched by the Corporation. Matching contributions are based on the years of service as listed in the following schedule:


Years of Service	% Match
Less than three years		3	%
After three years		4	%
After five years		5	%
After seven or more years		6	%

Additional contributions may be made by the Corporation on a discretionary basis. During 2011 and 2010, the Corporation contributed $3,753,480 and $2,192,882, respectively, to the ESOP in the form of company stock. The contributions in 2011 and 2010 are shown as a contribution receivable for that plan year.

Participant Accounts

Each participant’s account is credited with the participant’s contribution, any employer contribution and an allocation of Plan earnings or losses. Allocations are based on the participant’s account balance.

Vesting

Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participants are vested in employer matching contributions and discretionary employer ESOP contributions based upon years of service defined in the Plan, as follows:


Years of Service	Vesting %
Less than 1		0	%
1		20	%
2		40	%
3		60	%
4		80	%
5 or more		100	%

Payment of Benefits

If a participant ceases to be employed by the Corporation for any reason other than death or total and permanent disability, prior to satisfying the age and service requirements for early or normal retirement, the terminated participant may elect to receive lump-sum or periodic payments of the participant’s vested account balance. Withdrawals may be subject to tax withholdings and penalties.

Benefits may be paid upon death, disability, termination or retirement to the participants or their beneficiaries, in lump-sum amounts or periodic payments. Under certain circumstances, hardship withdrawals are allowed from the Plan.

Investment Options

The participants, upon enrollment in the Plan, elect to invest their contributions, in multiples of five (5) % increments, in the investment options provided by the Plan. Initial investments in sponsor company common stock is not a participant directed investment option.

Notes Receivable From Participants

A participant may receive a loan based on the loan program set forth by the Plan. The minimum loan is $1,000 and the maximum is $50,000, not to exceed 50% of the participant’s vested account balance. Loans are repaid through payroll deductions over a maximum of five (5) years. A participant can have only one loan outstanding. Current loans bear interest at rates between 5.25% and 10.25%.

Plan Expenses

The Plan pays the account administrative service fee from income earned by the Plan. The Corporation pays the legal and accounting fees, and other expenses on behalf of the Plan.

Forfeitures

At December 31, 2011 and 2010, forfeited nonvested accounts totaled $3,889 and $3,201, respectively. Account balances will revert back to the Plan and will be used to pay reasonable administrative expenses of the Plan; any excess will be used to reduce the employer’s matching contributions.

2.	Summary of Accounting Policies

Basis of Accounting

The accompanying financial statements are presented on the accrual basis of accounting.

Use of Estimates

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 changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

Investments

The Plan’s investments are held by the Trustee. The Plan’s investments are stated at fair value. If available, quoted market prices are used to value investments. For investments without quoted market prices, the net asset value is calculated and verified on a daily basis by the respective trusts and reported to the Trustee. Notes receivable from participants are valued at cost which approximates fair value. Investment income and gains and losses are allocated among participants on the basis of individual participant account balances. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividend income is recognized when earned.

Payment of Benefits

Benefits are recorded when paid.

Net Appreciation (Depreciation) in Fair Value of Investments

The Plan presents, in the statements of changes in net assets available for benefits, the net appreciation (depreciation) in fair value of its investments consisting of interest, dividends, the realized gains (losses) and the unrealized appreciation (depreciation) on those investments.

3.	Investments

Investment balances that represent five percent or more of the net assets available for benefits are as follows:


	2011		2010
Sponsor Company Common Stock	$	11,241,035	$	12,460,127
Schwab Stable Value Select Fund		8,386,216		7,815,385
JPMorgan Core Bond Fund		5,526,764		5,195,977
Schwab S&P 500 Index Select		4,554,994		4,367,113
Rainier Large Cap Equity		2,811,178		2,896,175
Artio International Equity A		*		3,377,520

*	Artio International Equity A did not represent five percent or more of the net assets available for benefits during the current year.

During the years ended December 31, 2011 and 2010, the Plan’s investments (including gains and losses on investments bought and sold, as well as held during the year) appreciated (depreciated) in value as follows:


	2011			2010

Mutual funds	$	(772,250	)	$	3,246,328
Common/collective trust fund		324,282			174,239
Sponsor company common stock		(687,280	)		3,840,751
Self directed brokerage account		(18,869	)		54,073

Net change in fair value	$	(1,154,117	)	$	7,315,391

A portion of the Schwab Stable Value Fund, a common collective trust (“CCT”), is invested in guaranteed investment contracts (“GICs”) which provide for benefit-responsive withdrawals by plan participants at contract value. The GICs are valued at fair value in Investments with an adjustment to reflect them at contract value on the Statement of Net Assets. The average yield for the CCT was 1.53% and 2.26% for the years ended December 31, 2011 and 2010, respectively. The average yield earned by the CCT, with an adjustment to reflect the actual interest rate credited to participants, was 4.59% and 2.73% for the years ended December 31, 2011 and 2010, respectively. On November 8, 2011, Charles Schwab Bank announced its plans to terminate the Schwab Stable Value Fund effective as of the close of business on April 30, 2012. The elevated adjusted yield in 2011 was due to an accelerated distribution of gains through the crediting rate beginning December 1, 2011 in preparation for the termination of the fund.

4.	Fair Value Measurements

The Company uses the three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

Level 1. Observable inputs such as quoted prices in active markets;

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

Common/collective trust fund

The common/collective trust fund’s market value is based on the asset value per unit as determined by the collective trust as of the valuation date and are classified as Level 2.

Common stocks

Sun Hydraulics Corporation common stock and common stocks held in self-directed brokerage accounts are stated at fair value as quoted by the market close price on a recognized securities exchange on the last business day of the Plan year and are classified as Level 1.

Money market funds

The money market funds are valued at quoted prices in an active market, which represents the net asset values of shares held by the Plan at year-end and are classified as Level 1.

Mutual funds

Mutual funds and mutual funds held in self-directed brokerage accounts are valued at quoted prices in an active market, which represents the net asset values of shares held by the Plan at year-end and are classified as Level 1.

As of December 31, 2011, the Plan’s investments measured at fair value on a recurring basis were as follows:


			Fair Value Measurements at 12/31/11 Using
	Assets Measured at Fair Value at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	12/31/2011		(Level 1)		(Level 2)		(Level 3)

Common/collective trust fund	$	8,386,216		—		8,386,216		—
Sponsor company common stock		11,241,035		11,241,035		—		—
Money market fund		332		332		—		—
Mutual funds
Target/Life Cycle/Allocation		4,716,228		4,716,228		—		—
Fixed Income		6,301,800		6,301,800		—		—
Large Company Equity		9,917,911		9,917,911		—		—
Mid Company Equity		2,662,434		2,662,434		—		—
Small Company Equity		2,100,461		2,100,461		—		—
International/Global Equity		3,116,759		3,116,759		—		—
Self directed brokerage accounts		1,343,595		1,343,595		—		—

	$	49,786,771		41,400,555		8,386,216		—

As of December 31, 2010, the Plan’s investments measured at fair value on a recurring basis were as follows:


			Fair Value Measurements at 12/31/10 Using
	Assets Measured at Fair Value at		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	12/31/2010		(Level 1)		(Level 2)		(Level 3)

Common/collective trust fund	$	7,815,385		—		7,815,385		—
Sponsor company common stock		12,460,127		12,460,127		—		—
Money market fund		234		234		—		—
Mutual funds
Target/Life Cycle/Allocation		4,123,064		4,123,064		—		—
Fixed Income		5,195,977		5,195,977		—		—
Large Company Equity		10,037,402		10,037,402		—		—
Mid Company Equity		2,444,002		2,444,002		—		—
Small Company Equity		2,135,173		2,135,173		—		—
International/Global Equity		3,425,656		3,425,656		—		—
Self directed brokerage accounts		1,443,599		1,443,599		—		—

	$	49,080,619		41,265,234		7,815,385		—

5.	Non-participant Directed Investments

Information about the net assets and the significant components of the changes in net assets relating to the non-participant directed investments is as follows:


	2011		2010
Net assets:
Sponsor company common stock	$	11,241,035	$	12,460,127


	Year Ended
	December 31,
	2011			2010
Changes in net assets:
Contributions	$	2,192,882		$	—
Net appreciation (depreciation)		(687,280	)		3,840,751
Benefits paid to participants		(905,981	)		(604,061	)
Administrative expenses		(6,917	)		(6,449	)
Loans taken		(606,973	)		(281,692	)
Forfeitures		(81,748	)		(44,800	)
Transfers to participant directed investments		(1,123,075	)		(112,547	)

	$	(1,219,092	)	$	2,791,202

6.	Tax Status of the Plan

The Internal Revenue Service has determined and informed the Corporation by letter dated May 20, 2011, that the Plan and related trusts were designed in accordance with applicable sections of the Internal Revenue Code. Although the Plan has been amended since receiving the letter, the Corporation believes that the Plan is designed and is currently being operated in compliance with the applicable requirements of the Internal Revenue Code.

7.	Plan Termination

Although it has not expressed any intent to do so, the Corporation has the right under the Plan to amend or discontinue the Plan at any time and to terminate the Plan, subject to the terms of ERISA. In the event of Plan termination, the participants will become 100% vested in their accounts and net assets of the Plan will be distributed to the participants and beneficiaries of the Plan.

8.	Related Party Transactions

Certain Plan investments are shares of mutual funds and a common/collective trust managed by the Trustee and shares of the Corporation’s common stock; and, therefore, these transactions qualify as party-in-interest.

9.	Risks and Uncertainties

The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits.

10.

Reconciliation of Financial Statements to Schedule H of Form 5500

The following is a reconciliation of net assets available for benefits per the financial statements at December 31, 2011 and 2010 to Schedule H of Form 5500:


	2011		2010

Net assets available for benefits per the financial statements	$	56,052,186	$	53,197,390

Adjustment from fair value to contract value for fully benefit responsive investment contract		57,468		196,566


Net assets available for benefits per Schedule H of Form 5500, line 1(l)	$	56,109,654	$	53,393,956

The following is a reconciliation of net increase in net assets available for benefits for the years ended December 31, 2011 and 2010 per the financial statements to net income on Schedule H of Form 5500:


	2011			2010

Net increase in net assets available for benefits per the financial statements	$	2,854,796		$	9,595,920

Adjustment from fair value to contract value for fully benefit responsive investment contract		(139,098	)		147,162


Net income per Schedule H of Form 5500, line 2(k)	$	2,715,698		$	9,743,082

SUPPLEMENTAL SCHEDULE

SUN HYDRAULICS CORPORATION 401(K) AND ESOP RETIREMENT PLAN

SCHEDULE OF ASSETS (HELD AT END OF YEAR)

December 31, 2011

Information furnished pursuant to item 4i, Schedule H of Form 5500

Employer identification number: 59 2754337

(a)

(b)

(c)

(d)

(e)

Identity of issuer, borrower, lessor, or similar party

Description of investment including maturity date, rate of
interest, collateral, par or maturity value

Cost

Market Value

Schwab Stable Value Select Fund

Common/Collective Trust

8,386,216

Schwab Government Money Fund

Money Market Fund

332

American Beacon Large Cap Value

Mutual Fund

1,575,834

Artio International Equity A

Mutual Fund

2,212,409

Blackrock Lifepath 2020

Mutual Fund

1,814,908

Blackrock Lifepath 2030

Mutual Fund

1,813,488

Blackrock Lifepath 2040

Mutual Fund

604,878

Blackrock Lifepath 2050

Mutual Fund

53,157

Blackrock Lifepath Ret I

Mutual Fund

429,796

JPMorgan Core Bond Fund

Mutual Fund

5,526,764

Loomis Sayles Small Cap Value

Mutual Fund

2,100,461

Manning & Napier World Oppty A

Mutual Fund

513,718

Morgan Stanley Mid Cap Grth P

Mutual Fund

478,641

Oppenheimer Developing Mkts Y

Mutual Fund

390,632

Perkins Mid Cap Value Inv

Mutual Fund

2,183,793

Rainier Large Cap Equity

Mutual Fund

2,811,178

Schwab S&P 500 Index Select

Mutual Fund

4,554,994

Thornburg Value R5

Mutual Fund

975,906

Vanguard Inflation Protection Sec

Mutual Fund

775,036

Personal Choice Retirement Account

Self Directed Brokerage Account

1,343,595

Sponsor Company Common Stock

Common Stock

5,266,245

11,241,035

Notes receivable from participants

Various maturity dates with interest ranging from 5.25%-10.25%

2,569,301

Total investments

5,266,245

52,356,072

*	Represents a party-in-interest to the Plan.

**	Represents both a party-in-interest to the Plan and a non-participant directed fund.

#	Investments are participant-directed and, therefore, cost information is not required.

See accompanying independent registered public accounting firm’s report.

Exhibits:


Exhibit Number		Exhibit Description

23.1		Consent of Independent Registered Public Accounting Firm – Mayer, Hoffman, McCann, P. C.

SIGNATURE

The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan Administrator has duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.

Sun Hydraulics Corporation 401(K) and ESOP Retirement Plan

June 15, 2012

/s/ Tricia L. Fulton

Tricia L. Fulton

Chief Financial Officer (Principal Financial and Accounting Officer)