Sypris Solutions, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended July 2, 2023; comparison periods ended July 3, 2022. Unaudited. Sypris provides manufactured truck and pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $35.6 | $29.0 | $67.9 | $55.2 |
| Gross profit / margin | $4.7 / 13.1% | $3.8 / 13.0% | $8.8 / 13.0% | $8.3 / 15.0% |
| Operating income / margin | $1.0 / 2.7% | $0.04 / 0.1% | $1.4 / 2.0% | $1.2 / 2.1% |
| Net income (loss) | $0.2 | $(0.6) | $0.04 | $(0.4) |
| Net income (loss) per diluted share | $0.01 | $(0.03) | $0.00 | $(0.02) |
Second-quarter revenue grew 22.6% year over year; first-half revenue grew 23.0%. Electronics revenue rose 40.2% in Q2 and 41.0% in the first half, supported by communications-market sales and better component availability. Technologies revenue rose 11.7% and 12.7%, respectively, including higher energy-product sales. Electronics gross profit improved, while Technologies gross profit declined; management attributed part of the Technologies pressure to unfavorable Mexican peso exchange rates. First-half consolidated gross margin fell to 13.0% from 15.0%, as cost of sales increased faster than revenue. Q2 net income improved from a loss, while first-half results were only marginally positive.
Cash, liquidity and obligations
- Cash was $20.6 at July 2, 2023, down from $21.6 at December 31, 2022; $6.2 was held outside the U.S. and could incur withholding taxes if repatriated.
- First-half operating cash flow was positive $3.7, versus negative $2.0 in 2022. Inventory growth used $21.3 of cash, substantially offset by a $22.3 increase in accrued and other liabilities, primarily customer advances, and a $4.7 increase in accounts payable.
- Capital expenditures were $1.5; financing activities used $3.2, including $2.5 of principal payments on the related-party note. Cash decreased $1.1 over the period.
- Total current assets were $105.9 and current liabilities $81.8. Inventory was $64.0, up from $42.1 at year-end. Contract liabilities totaled $62.1, up from $40.4, and largely reflect customer billings and advance payments.
- Debt and finance obligations were approximately $9.1: $4.0 on the secured related-party note, $3.3 in finance leases and $1.8 in equipment financing. The note is controlled by entities associated with the CEO and a director, secured by substantially all company assets, and bears interest at 8.8% as of quarter-end. $2.0 is due April 2024 and the balance April 2026.
- Management projected available cash would support operations for the next 12 months, but warned that revenue shortfalls, unexpected costs, shipment delays or inflation could require additional funding or spending and supplier-payment actions.
Outlook, risks and contingencies
- No formal consolidated revenue or earnings guidance was provided. Management expected Sypris Electronics’ backlog to support a stable revenue rate for the remainder of 2023. It anticipated strong North American Class 8 production demand in Q3, with a Q4 decrease compared with 2022.
- Management expected supply-chain challenges and inflationary pressure on materials, logistics, utilities and labor to continue through 2023. Electronic component shortages may persist, and alternative sourcing depends in part on customer qualification.
- Sypris Electronics had $92.8 of remaining performance obligations on non-cancellable contracts longer than one year; the company expected to recognize approximately 35% in 2023, 64% in 2024 and the balance in 2025.
- Purchase commitments totaled $56.8, including $36.5 due in 2023 and $19.7 in 2024. These firm, non-cancelable commitments are significant relative to cash and should be considered alongside forecast working-capital needs.
- Foreign-exchange exposure increased: significant Mexican operating expenses are peso-denominated, and the company does not hedge those expenses. Management cited exchange-rate movements as a source of operating-cost risk.
- A Mexican subsidiary is appealing a tax assessment of approximately $1.15 (including interest, inflation adjustments and penalties); no amount was accrued because management did not consider a loss probable. The DOL 401(k) litigation had a proposed settlement awaiting court approval; the company had a $0.575 reserve and estimated possible additional loss of $0–$0.058. A separate product-liability case has no estimable loss range; the insurer accepted defense costs.
- Management reported no material change in risk factors other than increased foreign-currency risk. It also cited geopolitical and government-budget uncertainty affecting defense spending, and continuing supply, inflation, customer-concentration and profitability risks.
Key facts for investors to verify
- Whether revenue growth, particularly in Electronics, converts to sustainable operating profitability and improved first-half gross margins.
- Inventory realization, customer advances and contract-liability balances, including the cash impact of the $56.8 purchase commitments.
- Liquidity against the $2.0 related-party note maturity in April 2024, lease and equipment-financing payments, and any need for additional funding.
- Developments in the Mexican tax appeal, DOL settlement approval and product-liability litigation.
- Mexican peso movements, ongoing supply availability and inflation, and federal defense-budget actions relevant to customer programs.