Sypris Solutions, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 28, 2019. The company operates in two segments: Sypris Technologies (truck and energy components) and Sypris Electronics (aerospace and defense electronics). Figures below are in millions of dollars unless otherwise stated.
Financial results
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $87.97 | $82.29 |
| Gross profit / margin | $7.57 / 8.6% | $3.33 / 4.0% |
| Operating loss / margin | $(4.30) / (4.9%) | $(12.15) / (14.8%) |
| Net loss | $(3.51) | $(10.82) |
| Cash provided by (used in) operations | $1.89 | $(9.46) |
| Capital expenditures | $2.05 | $1.64 |
- Technologies revenue rose 9.0% to $59.82 million; Electronics revenue rose 2.7% to $28.15 million. Segment shares were approximately 68% and 32%, respectively.
- Technologies gross profit improved to $7.52 million from $0.74 million, helped by higher volumes, production-transfer cost savings after the Broadway Plant closure, and a fourth-quarter price increase. Electronics gross profit fell to $0.05 million from $2.59 million, pressured by program start-up inefficiencies, component shortages, inventory adjustments and weaker mix.
- At year-end, cash was $10.70 million, total current assets $45.40 million and current liabilities $28.99 million. Total liabilities were $46.73 million; stockholders’ equity was $14.83 million.
- Debt included a $6.5 million secured related-party note and $3.40 million of capital lease obligations. The note is owed to an entity controlled by significant shareholders, bears 8% interest through March 2019 and is secured by substantially all company assets; maturities fall in 2021, 2023 and 2025. Operating lease commitments were $11.27 million, before adoption of the new lease standard.
Changes and notable items
- Revenue increased 6.9% year over year, while net loss narrowed by $7.32 million. The company nevertheless remained loss-making.
- Operating cash flow improved by $11.35 million, but included a $7.49 million increase in accrued and other liabilities, primarily from customer prepayments. Inventory used $2.86 million of cash.
- 2018 other income included a $2.28 million insurance recovery gain for freeze damage at the idle Broadway Plant; investing cash flow also included $1.38 million of asset-sale proceeds. 2017 other income included a $2.67 million gain on asset sales.
- SG&A fell $2.60 million, including a $1.89 million reduction from resolving a disputed legal fee for less than originally charged. Broadway Plant exit-related costs were $1.39 million in 2018, with approximately $0.40 million of additional costs expected.
- At the start of 2018, adoption of ASC 606 increased reported revenue by an estimated $0.60 million and increased operating and net loss by $0.11 million versus legacy accounting; prior-year figures were not restated.
Outlook, risks and contingencies
- Management expected 2019 revenue growth in Technologies, citing commercial vehicle and oil-and-gas activity, new program launches and a three-year axle-shaft agreement with Sistemas. It also cited Electronics awards and a nearly $700 billion FY2019 U.S. defense authorization as potential market support. These are expectations, not guaranteed results.
- The company disclosed that it anticipated further operating losses in the near term. It stated that existing cash and projected operating cash flows should fund operations and planned investment for at least 12 months, but warned that revenue shortfalls, shipment delays, unexpected costs or lower asset-sale proceeds could require additional funding or further spending cuts.
- Customer concentration remains significant: the five largest customers generated 61% of 2018 revenue; Sistemas, Northrop Grumman and Detroit Diesel accounted for approximately 19%, 14% and 14%. Two customers represented 40% of year-end receivables.
- Electronic-component shortages and long lead times could raise costs, increase inventory and delay deliveries. Other key risks include cyclical truck and energy markets, government funding changes, contract profitability, labor negotiations, supplier disruption, and execution of the Broadway Plant exit and production transfers.
- A Department of Labor lawsuit challenges the company’s interpretation of its 401(k) plan. The company considered the allegations without merit and submitted a counteroffer in February 2019; potential additional plan contributions were described as immaterial under that offer. Separately, $759,000 of customer-specific inventory was exposed to uncertainty around a successor customer; a $246,000 reserve was recorded, with up to $513,000 of additional reasonably possible loss disclosed.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements. The auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether revenue growth and new awards translate into sustained positive segment margins and consolidated profitability.
- Whether operating cash generation persists after the effect of customer prepayments and other working-capital timing items.
- Liquidity needs, related-party note terms and security, lease obligations, and the expected balance-sheet impact of ASC 842 adoption in 2019.
- Progress in selling or otherwise resolving the Broadway Plant property and remaining assets, including any further exit costs or impairment.
- Customer concentration, receivable collection, electronic-component availability, and the outcome of the DOL matter and customer-specific inventory exposure.