Sypris Solutions, Inc. — Q3 2015 Form 10-Q
Business context and period. The unaudited quarter ended October 4, 2015; nine-month results cover the period from year-end through October 4. Sypris provides outsourced manufacturing and technical services and specialty products through Sypris Technologies and Sypris Electronics. All financial amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $38.4 | $90.2 | $116.2 | $267.6 |
| Gross profit (loss) | $2.5 | $8.2 | $(0.7) | $29.6 |
| Gross margin | 6.4% | 9.1% | (0.6)% | 11.1% |
| Operating income (loss) | $(4.1) | $(0.2) | $(24.8) | $3.9 |
| Net income (loss) | $(0.3) | $(1.2) | $(21.7) | $0.9 |
| Basic and diluted EPS | $(0.01) | $(0.06) | $(1.10) | $0.04 |
Q3 other income of $7.8 million, mainly the $7.7 million gain on the Morganton asset sale, lifted pretax income to $2.0 million; a $2.3 million tax expense nevertheless left a net loss. For the nine months, other income was $8.6 million, including the Morganton gain and a $0.5 million Dana arbitration award.
- Segment trends: Sypris Technologies revenue fell 66.3% in Q3 and 63.7% year to date, principally because Dana shipments were minimal and Morganton trailer-axle operations were sold. Electronics revenue rose 38.8% in Q3 and 11.2% year to date; higher volumes and mix improved segment gross profit, but it remained exposed to declining legacy programs and uncertain government spending.
- Cash flow: Operating activities used $11.7 million in the first nine months, versus providing $6.0 million a year earlier. Investing activities provided $14.5 million, including $15.7 million of Morganton-sale proceeds; financing activities used $8.1 million. Cash declined to $1.8 million from $7.0 million at December 31, 2014.
- Balance sheet and liquidity: At October 4, current assets were $43.6 million and current liabilities $28.7 million. Total debt was $15.5 million, including $2.9 million current debt, a $3.8 million Meritor note and a $5.5 million related-party note. Under the then-current revolving facility, $6.3 million was drawn and $2.2 million remained available. Total assets were $72.7 million and equity $23.8 million.
Material changes and unusual items
- Revenue declined 57.4% in Q3 and 56.6% for the first nine months year over year. Dana represented approximately 59% of 2014 revenue; its loss drove the sharp contraction in Technologies.
- The July 2015 Morganton sale to Meritor generated $15.7 million in proceeds, applied to PNC debt, and a recognized gain of $7.7 million. Sypris retained certain axle-shaft assets and transitioned production to Louisville.
- Interest expense increased substantially as amended borrowing terms and new notes raised the weighted-average interest rate to 8.0% for Q3 and 6.1% for the nine months, versus 2.6% and 2.5% in the comparable 2014 periods.
- The company recorded $2.4 million of deferred tax expense in Q3 after establishing a valuation allowance on certain non-U.S. deferred tax assets because of uncertainty about forecast Mexican taxable income.
- Operating cost actions included workforce reductions, reduced schedules and management pay, and cost-control measures. Severance expense was $1.0 million year to date.
Outlook, financing and risks
- Management said it was in advanced discussions with several customers about potential new programs, but stated launch cycles can take six months or longer and there is no assurance these efforts will replace lost Dana revenue. The company also explored cost reductions and possible asset or business-line sales.
- After quarter-end, on October 30, 2015, Sypris refinanced the prior facility and Meritor note with a $15 million revolving facility and a $12 million term loan, both maturing in October 2018. At that date, reported revolving availability was $7.5 million, with $1.3 million drawn, and unrestricted cash was $3.5 million. The new loans carry collateral, financial and other covenants; availability below $4 million triggers a minimum 1:1 fixed-charge coverage ratio.
- The new financing requires best efforts to complete a sale-leaseback of the Toluca, Mexico property, with a specified term-loan prepayment or other $5 million funding requirement if the transaction is not completed by April 30, 2016. A non-binding October 30 letter of intent contemplated a $13 million sale-leaseback closing by March 15, 2016; completion and terms were not assured.
- Management expected to meet new debt covenants and have sufficient liquidity to fund operations through 2015 based on its forecasts, but warned that lower revenue or higher costs could require further asset sales. The filing highlights negative operating cash flow, covenant and refinancing risk, potential accelerated repayment, Dana litigation, customer concentration, and uncertainty in Electronics demand. The financial statements assume continued operations as a going concern, but management cautioned that its plans might not succeed.
- Sypris disputes Dana’s repudiation of a 2013 five-year supply agreement extension. An Ohio court ruled against Sypris on the arbitrability issue, which Sypris appealed. In a separate arbitration concerning the prior agreement, Sypris received a $0.5 million award in April 2015.
Important facts for investors to verify
- Progress and economics of replacement customer programs, and the extent to which revenue can recover from the loss of Dana.
- Operating cash use, borrowing-base availability, covenant compliance and the cash needed to service the new debt.
- Whether the Toluca sale-leaseback is completed on acceptable terms and whether the required debt repayment or alternative funding is available.
- Developments in the Dana appeal and arbitration, and any resulting recoveries, costs or operational consequences.
- Whether the Electronics segment can replace declining legacy business and whether further restructuring, asset sales or impairments become necessary.