Sypris Solutions, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended October 4, 2020, compared with periods ended September 29, 2019. Amounts are in U.S. dollars unless noted.
Business context
Sypris supplies manufactured components for commercial vehicles and energy infrastructure, and electronics for aerospace and defense, through Sypris Technologies and Sypris Electronics. The company reported that COVID-19 and the commercial-vehicle downturn weighed on Technologies, while Electronics grew on increased program shipments and improved component availability.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $22.2m | $22.3m | $61.7m | $66.3m |
| Gross profit / margin | $3.4m / 15.4% | $2.3m / 10.5% | $9.0m / 14.6% | $7.2m / 10.8% |
| Operating income (loss) | $0.8m | $(1.0)m | $0.3m | $(3.4)m |
| Net income (loss) | $3.5m | $(1.6)m | $2.8m | $(3.1)m |
| Diluted EPS | $0.17 | $(0.07) | $0.14 | $(0.15) |
- Q3 revenue was nearly flat year over year as Electronics revenue rose 52.6% to $10.1m, offsetting a 22.9% decline in Technologies to $12.1m. Nine-month revenue fell 6.8%; Technologies declined 31.7% while Electronics grew 62.0%.
- Gross margin improved, reflecting better Electronics performance and cost/productivity improvements. Technologies’ lower volumes continued to pressure its gross profit.
- Net income included a $3.3m deferred tax benefit from reversing a valuation allowance on certain Mexican deferred tax assets. The company continues to maintain a valuation allowance on U.S. deferred tax assets.
- For the first nine months, operating cash flow was $0.1m, versus cash use of $3.0m in 2019. Investing activities provided $0.8m; financing activities provided $2.9m, including PPP proceeds.
Liquidity, debt and balance sheet
- At October 4, cash was $8.3m, current assets $40.6m, current liabilities $26.8m, total assets $61.4m and stockholders’ equity $15.2m.
- Debt included a $3.6m PPP loan, $6.5m principal owed under secured related-party notes, and finance lease obligations of approximately $2.4m. The related-party notes are secured by a first-priority lien on substantially all company assets; $2.5m was due April 2021.
- The company had $10.2m in outstanding purchase commitments, primarily for inventory. It reported $2.5m of cash held outside the U.S., which could incur withholding taxes if repatriated.
- Management projected available cash would be sufficient for operations over the next 12 months, but warned that adverse changes could require additional funding, further spending cuts, extended supplier terms or asset sales.
Outlook, risks and unusual items
- No consolidated numerical revenue or earnings guidance was provided. Management expected COVID-19 to continue negatively affecting results, cash flows and financial position.
- Technologies faced reduced commercial-vehicle demand, weaker oil and gas infrastructure activity and uncertainty from depressed oil prices. Management said third-quarter volumes improved, but anticipated continued pressure until the pandemic diminishes.
- Electronics’ backlog was expected to support a stable revenue rate through the remainder of 2020; management said program price increases could support margin expansion. The company reported $35.8m of remaining performance obligations on longer-term contracts, expecting to recognize approximately 19% in Q4 2020, 55% in 2021 and the balance in 2022.
- The $3.6m PPP loan bears 1% interest. The company intended to seek forgiveness, but stated that forgiveness was subject to approval and was not assured.
- Unusual items included the $3.3m tax benefit and $0.8m of nine-month net gains on asset sales, including the Broadway Plant real estate sale. The comparable 2019 period included a $1.5m customer settlement gain.
- Contingencies include a Department of Labor lawsuit concerning 401(k) plan interpretation and product-liability litigation related to an industrial closure. Management disputes the allegations; potential damages in the product case were not determinable. The filing also disclosed ordinary-course litigation and insurance-related estimation risks.
Important facts for investors to verify
- Whether the Mexican deferred tax asset benefit is realizable under updated forecasts, and the continuing valuation allowance on U.S. deferred tax assets.
- PPP loan forgiveness outcome, repayment terms and related-party note interest deferrals and April 2021 maturity.
- Whether Technologies’ volumes recover and Electronics’ backlog converts to revenue and margins as expected, amid COVID-19 and supply-chain risks.
- Cash generation and liquidity relative to purchase commitments, lease obligations and the company’s stated 12-month liquidity outlook.
- Developments in the DOL and product-liability cases, and any resulting financial exposure.