Business context and reporting period
Sypris Solutions, Inc. filed this unaudited Form 10-Q for the quarter and six months ended July 5, 2015. The company provides outsourced manufacturing and technical services and specialty products through Sypris Technologies and Sypris Electronics. All dollar figures below are in millions unless noted.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $40.8 | $93.1 | $77.8 | $177.4 |
| Gross profit (loss) | $(0.03) | $10.8 | $(3.2) | $21.4 |
| Operating income (loss) | $(7.8) | $1.7 | $(20.7) | $4.1 |
| Net income (loss) | $(8.4) | $0.4 | $(21.4) | $2.0 |
| Diluted earnings (loss) per share | $(0.43) | $0.02 | $(1.09) | $0.10 |
- Gross margin was approximately negative 0.1% in Q2 and negative 4.1% for the first half, versus 11.6% and 12.1%, respectively, in 2014.
- Q2 revenue fell 56.2%; first-half revenue fell 56.2%. Sypris Technologies revenue declined 61.8% in Q2 and 62.3% in the first half. Sypris Electronics revenue was down 7.0% in Q2 and 0.7% in the first half.
- At July 5, cash was $1.6; current assets were $56.1 and current liabilities $55.5. Total debt was $25.3, consisting of $16.7 drawn on the revolving facility, a $3.0 Meritor note and a $5.5 related-party note. Stockholders’ equity was $24.8.
- First-half operating cash flow was negative $11.0, versus positive $4.7 in 2014. Investing cash use was $0.9; financing provided $6.4. Cash declined from $7.0 at year-end to $1.6.
- Q2 and first-half interest expense was $1.2 and $1.5, compared with $0.2 and $0.3 in 2014. The company declared no dividend in 2015; the 2014 comparable periods included dividends.
Material changes versus prior periods
The principal driver was the loss of Dana business: Dana accounted for about 59% of 2014 revenue, and shipments had been minimal since December 31, 2014. The company attributed $52.3 of Q2 and $102.4 of first-half revenue declines to Dana, partly offset by improved volumes from other commercial-vehicle customers. Lower volumes and operating inefficiencies sharply reduced Sypris Technologies’ gross profit. Electronics’ first-half gross profit improved to $0.3 from a $1.1 loss, but the segment remained challenged.
SG&A declined $1.8 in Q2 and $0.7 in the first half, mainly from lower Dana-related legal costs; however, SG&A rose to 18.0% of Q2 revenue and 21.1% of first-half revenue as sales contracted. First-half severance was $0.6. Other income included a $0.5 Dana arbitration award; the award does not resolve the separate dispute over the alleged extended supply contract.
Outlook, risks and unusual items
- Liquidity and going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing negative operating cash flow and the requirement to repay the PNC credit facility and Meritor note by September 30, 2015. Failure to comply could allow lenders to demand immediate repayment. Management believed refinancing and asset-sale initiatives would succeed, but gave no assurance.
- Subsequent Morganton sale: On July 9, the company sold certain Morganton, North Carolina assets to Meritor. Total consideration was approximately $15.7, including cash at closing and subsequent payment; proceeds were applied to reduce PNC debt. Sypris retained certain axle-shaft production assets for transfer to Louisville. The transaction was subsequent to quarter-end.
- Debt and liquidity actions: The July credit-facility amendment required repayment by September 30 and included lender fees of $0.5 at signing and a further $0.5 success fee. At August 10, after applying sale proceeds, debt was reported at $11.9, with $6.2 of additional facility availability. The $5.5 related-party note bears 8% interest and matures April 12, 2016; the Meritor note bears 10% and was due September 30, 2015.
- Revenue recovery: The company reduced staffing, work schedules and employment costs, and was negotiating potential new programs. Management noted that new-program cycles can take six months or more and forecast substantially reduced 2015 revenue and cash flows. No specific revenue or earnings guidance was provided.
- Key operating risks: Dana contract litigation is ongoing; Sypris appealed an Ohio ruling against its position on enforceability of the alleged extension. Electronics faces defense-budget and program-funding uncertainty, declining legacy demand and competition. The filing also cites refinancing, covenant, customer concentration, execution and asset-sale risks.
- Other commitments: Purchase commitments were approximately $6.2 at July 5, primarily for inventory and manufacturing equipment; letters of credit totaled $0.9. The company reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether Sypris met or obtained extensions or waivers for the September 30, 2015 repayment and covenant requirements, and the resulting debt balances and borrowing availability.
- Final Morganton sale proceeds, adjustments and use of proceeds, including the Meritor note increases and any additional facility or asset dispositions.
- Progress and outcome of the Dana appeals and arbitration, and any recoveries or additional liabilities.
- Whether new customer programs replaced lost Dana revenue, and whether operating cash flow and margins improved.
- Whether management’s going-concern plans were successful; the filing explicitly states that there is substantial doubt and that outcomes are uncertain.