Sypris Solutions, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Sypris provides truck and energy-sector components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are to the periods ended July 1, 2018. Dollars are in millions except per-share data.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $24.444 | $22.971 | $44.008 | $42.913 |
| Gross profit / margin | $3.989 / 16.3% | $2.934 / 12.8% | $4.849 / 11.0% | $4.965 / 11.6% |
| Operating income (loss) / margin | $0.282 / 1.2% | $(0.542) / (2.4%) | $(2.410) / (5.5%) | $(2.168) / (5.1%) |
| Net income (loss) | $1.503 | $0.814 | $(1.533) | $(0.981) |
| Diluted EPS | $0.07 | $0.04 | $(0.07) | $(0.05) |
- Q2 revenue increased 6.4%; Technologies revenue rose 10.1%, while Electronics revenue declined 1.0%. For the first half, Technologies grew 10.7% and Electronics declined 16.0%.
- Q2 gross profit improved by $1.055 million, led by Technologies; first-half gross profit declined by $0.116 million. Electronics recorded a first-half gross loss of $0.418 million.
- Q2 net income included substantial other income. For the first half, other income was $1.442 million, including a $1.5 million customer settlement gain, a $0.477 million gain on idle-asset sales, and $0.495 million of pension expense. The settlement proceeds were received in July 2019.
- First-half operating cash flow was negative $5.768 million, versus negative $2.717 million in 2018. Capital expenditures were $0.671 million; cash declined $6.242 million to $4.462 million.
- At June 30, cash was $4.462 million and working capital was approximately $15.489 million. Current assets were $42.732 million and current liabilities $27.243 million. Management projected cash would be sufficient for the next 12 months, subject to the risks described below.
- Debt included a $6.5 million secured related-party note and finance lease obligations of $3.364 million, including current and long-term amounts. Operating lease liabilities were $8.153 million following adoption of the new lease standard.
Material changes, outlook and risks
- Technologies benefited from higher energy-related and commercial-vehicle sales, program price increases, and improved supply and maintenance expense. Management cited active domestic pipeline projects and new awards in several markets as potential support for continued growth.
- Electronics’ first-half performance was hurt by electronic-component shortages and long lead times, shipments pulled forward into late 2018 ahead of the ERP launch, lower legacy-program volumes, and unfavorable program mix. Management was pursuing alternate components and suppliers; some shortages were expected to ease within three to six months, but could persist beyond 2019.
- Management cited defense program awards and the enacted FY 2019 federal appropriations and proposed FY 2020 national-security budget as potential market support; the filing provides no quantified company revenue or earnings guidance.
- The company identified two material weaknesses in financial reporting controls related to the January 2019 ERP implementation: deficient system access, conversion oversight and training controls, and inadequate accounting-close and reconciliation controls. Disclosure controls were deemed ineffective as of June 30. Remediation had begun but was not yet considered complete.
- Management warned that revenue shortfalls, lower-than-expected asset-sale proceeds, unexpected costs, or shipment delays could require additional funding, spending cuts, extended supplier terms, asset sales, or curtailment of programs. $1.2 million of cash was held outside the U.S. and could incur withholding taxes if repatriated.
- Other exposures include approximately $12.858 million of purchase commitments, primarily for inventory; $793,000 of inventory tied to a successor customer agreement, with a $418,000 reserve and up to $375,000 of additional reasonably possible loss; and a Department of Labor lawsuit over the company’s 401(k) plans. Management said it vigorously contests the DOL allegations. Management did not expect ordinary-course litigation and contract matters to materially harm the company.
- The company expected another $376,000 of Broadway Plant exit costs. A $1.442 million accumulated-deficit adjustment arose from adopting lease accounting, which put operating lease assets and liabilities on the balance sheet.
Important facts for investors to verify
- Whether ERP-related material weaknesses are remediated and whether any further financial-statement corrections are required.
- Whether Electronics component availability, customer shipments, and program margins recover as management expects.
- Whether operating cash use moderates and the 12-month liquidity forecast remains achievable, including the timing of asset sales and settlement proceeds.
- Whether the successor customer fulfills purchase commitments for the exposed inventory and whether the reserve is sufficient.
- Progress on the DOL litigation, Broadway Plant exit costs, and the company’s ability to meet its secured related-party note and lease obligations.