Sypris Solutions, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended October 1, 2017; comparisons are with periods ended October 2, 2016. Amounts below are in millions of dollars unless otherwise noted. Sypris operates in Technologies (truck, oil and gas pipeline components) and Electronics (electronics manufacturing and systems integration).
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $21.4 | $21.4 | $60.8 | $71.8 |
| Gross profit (loss) | $0.7 | $(0.6) | $1.6 | $0.9 |
| Operating loss | $(2.9) | $(6.0) | $(10.9) | $(17.1) |
| Net income (loss) | $(3.1) | $21.0 | $(9.6) | $10.7 |
| Diluted EPS | $(0.15) | $1.02 | $(0.47) | $0.52 |
Gross margin was 3.1% in Q3 2017 versus negative 2.6% a year earlier; nine-month gross margin was 2.6% versus 1.3%. Operating margin for the nine months improved to negative 17.9% from negative 23.8%, but remained deeply negative. The 2016 net income comparisons included substantial gains from asset transactions, notably the $31.2 million CSS business sale gain; those gains are not indicative of recurring operating performance.
- Cash flow: Operating activities used $8.5 million in the first nine months of 2017, versus $12.9 million used in 2016. Investing activities provided $2.8 million, including idle-asset sale proceeds; financing activities used $0.3 million. Cash declined $6.0 million to $9.2 million.
- Balance sheet at October 1, 2017: Current assets were $45.2 million and current liabilities $26.5 million; total assets were $63.6 million, total liabilities $45.5 million, and stockholders’ equity $18.1 million. Inventory rose to $22.1 million from $14.6 million at year-end 2016.
- Debt and liquidity: The company had $6.5 million of related-party notes payable and capital lease obligations of $3.0 million. It had no revolving credit facility. Cash included $0.5 million held outside the U.S. Management projected cash would fund operations for the next 12 months, subject to forecast and asset-sale assumptions.
Material changes versus the prior comparable period
- Q3 revenue was essentially flat: lower Technologies sales were offset by Electronics growth. Nine-month revenue fell 15.3%, with declines in both segments.
- Technologies revenue declined $7.0 million for the nine months, primarily from nonrenewed supply agreements; management cited offsets from oil and gas and commercial-vehicle demand. Technologies continued to post gross losses.
- Electronics revenue for the nine months fell $4.0 million, partly because the 2016 comparison included the CSS product lines sold in August 2016. Revenue from the retained electronics manufacturing business increased $7.1 million, reflecting new-program ramp-up. Electronics reported positive gross profit and operating income in 2017 periods shown.
- SG&A declined $7.0 million year over year for the nine months, reflecting cost reductions, the CSS sale and lower prior-year consulting and other costs. Interest expense also fell after repayment of the term loan and revolving facility in 2016.
- Cash and cash equivalents fell from $15.3 million at December 31, 2016 to $9.2 million. Accounts payable, accrued liabilities and inventory increased over that period.
Outlook, management commentary, risks and unusual items
- Management expects cost reductions following the Broadway Plant transition to support improved Technologies gross margin beginning in Q4 2017 and into 2018. The plant was expected to complete transitional operations by year-end 2017; remaining costs to be recognized were estimated at $2.5 million, expected to be cash expenditures.
- Management cited new Technologies program awards expected to contribute to growth in 2018 and 2019, some subject to final contract negotiations. Electronics awards were expected to support growth in 2017, with programs continuing into 2018 and 2019. A higher-margin Electronics program was expected to decline slightly in Q4 2017.
- Liquidity is sensitive to revenue shortfalls, delays in shipments, unexpected costs and proceeds from planned asset sales. The company warned such changes could require additional funding, spending cuts, extended supplier payment terms, asset sales or program curtailments.
- On November 10, 2017, the related-party GFCM note was amended: $2.5 million, $2.0 million and the balance mature in 2021, 2023 and 2025, respectively. The amendment permits limited interest deferrals and gives GFCM a first-priority security interest in substantially all company assets, including assets in Mexico. The lender is controlled by the CEO and a director, who are significant beneficial stockholders.
- Q3 and nine-month 2017 results included Broadway transition charges of $0.4 million and $2.2 million, respectively, and nine-month gains of $2.7 million on idle-asset sales, partly offset by $0.8 million of foreign-currency translation losses.
- A customer’s distributor-related lawsuit led the customer to indicate it would transfer business to a designated successor. Sypris held $984,000 of related inventory and was negotiating a replacement supply agreement; the filing states that a reasonably possible loss range could not be estimated if the successor program fails.
- Other items to monitor include $3.1 million of purchase commitments, the Department of Labor’s proposed findings concerning the company’s 401(k) plans (which the company disputes), and ordinary-course litigation and contingencies. Management did not expect existing litigation matters to materially adversely affect financial position or results.
- Adoption of the new revenue standard was scheduled for January 1, 2018. The company was evaluating whether contracts require revenue recognition over time rather than at shipment; any timing impact had not been determined.
Important facts for investors to verify
- Whether new program awards convert to final contracts and deliver the forecast revenue and margin growth.
- Whether Technologies can restore positive gross margins after the Broadway transition and whether remaining transition costs stay within estimates.
- Whether operating cash use moderates, and whether planned asset sales and management’s 12-month liquidity forecast are realized.
- The terms, security priority and related-party implications of the amended GFCM note, including the company’s lack of a revolving credit facility.
- Whether the successor-customer agreement is completed and the $984,000 of customer-specific inventory is recovered through sales.