Sypris Solutions, Inc. — Q1 2018 Form 10-Q
Business and period: The quarter ended April 1, 2018. Sypris supplies truck and oil-and-gas pipeline components through Sypris Technologies and aerospace and defense electronics through Sypris Electronics. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $19.942 | $18.185; up 9.7% |
| Gross profit (loss) | $2.031; 10.2% margin | $(0.547); (3.0)% margin |
| Operating loss | $(1.626) | $(4.977) |
| Net loss | $(1.795); $(0.09) per share | $(3.308); $(0.16) per share |
| Operating cash flow | $(0.646) | $(0.840) |
| Cash and equivalents | $7.030 at quarter-end | $8.144 at December 31, 2017 |
| Current assets / current liabilities | $40.623 / $23.216 | $40.003 / $21.624 at December 31, 2017 |
| Debt and lease obligations | $6.5 related-party note; $3.802 capital leases, including current portion | Related-party note principal unchanged; lease obligations declined |
Sypris Technologies revenue rose 13.7% to $14.507 million and gross profit improved to $2.107 million from a $0.644 million loss. Sypris Electronics revenue was nearly flat at $5.435 million; gross profit declined to a $0.076 million loss from $0.097 million of profit.
Cash used in investing activities was $0.043 million, as $0.363 million in asset-sale proceeds were largely offset by $0.406 million of capital expenditures. Financing used $0.425 million, primarily for capital lease payments. The company reported $9.543 million of purchase commitments, mainly for inventory and manufacturing equipment.
Changes, outlook and notable items
- Revenue growth and the return to positive gross profit were driven chiefly by increased Technologies volume, including oil-and-gas sales, and productivity gains after production moved from the Broadway Plant. The plant transition generated $0.509 million of costs in the quarter; approximately $0.582 million of additional costs remained expected.
- Electronics faced component shortages and long lead times, unfavorable program mix, and start-up costs for new programs. Management expected shortages to continue to affect the first half of 2018.
- Adoption of ASC 606 added an estimated $0.507 million to reported quarterly revenue and reduced operating and net loss by $0.106 million, or $0.01 per share. Without the adoption, revenue would have been approximately $19.435 million and net loss $1.901 million. Prior-year figures were not restated.
- Other income was $0.084 million, compared with $1.848 million in Q1 2017, when asset-sale gains were $2.416 million. Q1 2018 included a $0.281 million gain on idle-asset sales.
- Management said forecast cash and cash equivalents should fund operations for the next 12 months. It cautioned that revenue shortfalls, lower-than-expected asset-sale proceeds, unexpected costs or shipment delays could require new funding, spending cuts, extended supplier terms, asset sales, or suspension of planned programs.
- Management expected revenue growth in 2018 and 2019 from recently awarded Technologies and Electronics programs. Some awards remained subject to final contract negotiations; no quantified company-wide revenue or earnings guidance was provided.
- The $6.5 million secured note is payable to an entity controlled by the CEO and a director, bears 8% interest through March 31, 2019, and is secured by substantially all company assets. Principal maturities are scheduled for 2021, 2023 and 2025.
- Contingencies include a Department of Labor lawsuit concerning interpretation of the company’s 401(k) plans, which Sypris disputes, and $1.036 million of customer-specific inventory dependent on a supply agreement with a designated successor. The company said the outcome of the DOL matter could require additional plan contributions; no reasonably possible loss range was estimated for the inventory exposure.
Important facts for investors to verify
- Whether reported growth and margin improvement persist after separating ASC 606’s effect, asset-sale gains, and Broadway transition costs.
- Whether new program awards convert to finalized contracts and deliver expected revenue, and whether electronic-component constraints ease.
- Whether cash-flow forecasts and expected asset sales support management’s 12-month liquidity assessment, given continuing operating cash use and purchase commitments.
- Whether the successor customer honors its inventory-purchase agreement and whether the DOL litigation or other contingencies create material costs.
- Whether the related-party secured note terms, upcoming interest costs, and capital lease obligations remain manageable.