Business context and reporting period
Sypris Solutions, Inc. filed this unaudited Form 10-Q for the three months ended April 5, 2015; the comparable 2014 quarter ended March 30, 2014. The company provides outsourced manufacturing, engineering and technical services, and specialty products through Sypris Technologies and Sypris Electronics. All dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net revenue | $37.0 | $84.2 |
| Gross profit (loss) | $(3.2) | $10.6 |
| Operating income (loss) | $(12.9) | $2.4 |
| Net income (loss) | $(13.0) | $1.7 |
| Diluted earnings (loss) per share | $(0.66) | $0.08 |
| Operating cash flow | $(5.3) | $2.5 |
| Capital expenditures | $0.3 | $0.6 |
Gross margin was (8.5)% versus 12.5%; operating margin was (34.8)% versus 2.8%; and net margin was (35.2)% versus 1.9%.
At April 5, 2015, cash was $3.4, down from $7.0 at year-end 2014. Total assets were $108.7 and stockholders’ equity was $33.3. Debt was $19.9, comprising $15.9 outstanding under the revolving facility and a $4.0 related-party note. The company reported $4.2 of remaining revolver availability after its letter of credit. Current assets were $70.1 and current liabilities were $63.5.
Material changes versus the prior comparable period
- Revenue fell 56.1%, primarily because Dana, which represented approximately 59% of 2014 revenue, stopped ordering from Sypris effective December 31, 2014. The loss of Dana business accounted for $50.1 of the year-over-year revenue decline.
- Sypris Technologies revenue declined 63.0% to $28.1 and its gross loss was $4.1, versus gross profit of $11.2 a year earlier. Management attributed the deterioration to lower sales volume and productivity challenges following the Dana loss.
- Sypris Electronics revenue rose 6.4% to $8.9, and gross profit improved to $0.9 from a gross loss of $0.6, supported by a new manufacturing-services program and a more favorable sales mix.
- SG&A increased to $9.1 from $8.0, primarily due to higher legal costs. Interest expense rose to $0.3 from $0.1; the weighted-average borrowing rate increased to 4.7% from 2.4%.
- Operating cash use was $5.3, compared with cash generation of $2.5. Collections of receivables provided $17.3, partly offset by lower accounts payable, which used $7.0.
Outlook, risks and unusual items
- Management expected Sypris Technologies’ production levels to decline significantly in 2015. It was pursuing replacement business and cost reductions, while noting there was no assurance recovery plans would succeed.
- Sypris Electronics faced uncertainty in defense and aerospace spending, legacy-program declines, and delays or reductions tied to government budgets and appropriations. Management expected segment uncertainty to continue for at least 12 months and anticipated higher R&D expense in 2015.
- Management forecast sufficient liquidity to operate through 2015 and expected compliance with amended credit-facility covenants, but warned that revenue shortfalls or higher costs could require asset sales, additional capital or further cost reductions.
- The amended credit facility waives certain existing or potential defaults, caps total borrowings at $25.0, restricts dividends, imposes revised financial and minimum-availability covenants, and matures January 15, 2016. Its interest margin was to rise from an initial rate of approximately 6% to an estimated 10% by January 2016. The company was required by September 30, 2015 to secure subordinated debt, divest real property, or combine the two.
- The company received a $4.0 subordinated note from Gill Family Capital Management, an entity controlled by the CEO and a director, bearing 8% interest and maturing April 12, 2016. It was also pursuing additional subordinated debt and potential property sales.
- Sypris is contesting Dana’s repudiation of a purported five-year contract extension. An Ohio court ruled against Sypris on the enforceability/arbitrability issue, and Sypris appealed. Separately, an arbitration ruling received April 29, 2015—after quarter-end—awarded Sypris $505,000 on prior-agreement claims. The filing does not report a final resolution of the contract-extension dispute.
- Other notable items: the company recorded $0.3 of severance related to Dana-related workforce reductions; paid $0.4 of dividends, while declaring no dividend for the quarter; and recorded a negligible net tax benefit. No impairment was recorded on the tested asset group.
Important facts for investors to verify
- Progress and timing of replacement business for Dana revenue, including customer awards, expected volumes, margins and production ramp-ups.
- Status and potential outcome of the Dana contract-extension appeal and any related damages proceedings; distinguish the $505,000 arbitration award from the unresolved extension dispute.
- Compliance with credit-facility covenants and minimum availability requirements, and completion of the required capital raise or property divestiture by September 30, 2015.
- Cash needs, borrowing availability and the effect of rising borrowing costs through the January 2016 facility maturity.
- Whether Sypris Electronics can replace declining legacy programs amid U.S. defense-budget and program-funding uncertainty.