Business context and reporting period
Sypris Solutions, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2019; comparisons are with the three months ended April 1, 2018. The company manufactures truck and energy-pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $19.564 | $19.942 |
| Gross profit | $1.591 | $2.031 |
| Gross margin | 8.1% | 10.2% |
| Operating loss | $(1.961) | $(1.626) |
| Net loss | $(2.305) | $(1.795) |
| Loss per share, basic and diluted | $(0.11) | $(0.09) |
| Cash used in operating activities | $(4.472) | $(0.646) |
Cash and cash equivalents were $5.689 million at March 31, 2019, down from $10.704 million at year-end 2018. Current assets were $41.877 million and current liabilities $27.999 million, for working capital of approximately $13.878 million. Total assets were $65.676 million, total liabilities $51.518 million, and stockholders’ equity $14.158 million.
Debt included a $6.5 million related-party note payable and finance lease obligations of approximately $3.521 million, including the current portion. Operating lease liabilities were $8.347 million following adoption of the new lease standard. Interest expense, net, was $0.217 million. No dividends were declared.
Material changes versus prior comparable period
- Revenue decreased 1.9% overall. Technologies revenue rose 11.3% to $16.141 million, while Electronics revenue fell 37.0% to $3.423 million.
- Technologies gross profit increased to $2.304 million from $2.107 million. Electronics gross loss widened to $0.713 million from $0.076 million, as lower volume, component shortages, program mix and unabsorbed overhead weighed on results.
- Consolidated gross profit fell 21.7%; gross margin declined by 2.1 percentage points. SG&A increased to $3.454 million from $3.148 million, while severance, relocation and other costs declined to $0.098 million from $0.509 million.
- Net cash used in operations increased to $4.472 million, reflecting principally a $2.664 million inventory increase and a $1.801 million decline in accounts payable. Cash declined by $5.015 million during the quarter.
- Effective January 1, 2019, the company adopted ASC 842, recording operating lease right-of-use assets and liabilities. Adoption increased accumulated deficit by $1.442 million through recognition of a deferred sale-leaseback gain; management reported no material impact on the income or cash flow statements.
Outlook, risks and unusual items
Management said cash and cash equivalents were projected to support operations for the next 12 months. It warned that revenue shortfalls, unexpected costs, shipment delays or failure to generate proceeds from asset sales could require additional funding, spending cuts, extended supplier terms, asset liquidations or program reductions. No specific revenue or earnings guidance was provided.
Management cited new commercial-vehicle and energy opportunities and a three-year supply agreement with Sistemas, with some product lines extending up to six years from production commencement. It also noted that electronic-component shortages and long lead times hurt Electronics results; some shortages were expected to ease within 6–9 months, but others could persist beyond 2019, with no assurance the company could resolve them.
The company expected approximately $0.388 million of additional pre-tax Broadway Plant exit costs, mostly cash expenditures. It had $9.831 million of purchase commitments, primarily for inventory and manufacturing equipment. A customer-program inventory exposure included $0.746 million of gross inventory, a $0.246 million reserve, and a possible additional loss of up to $0.500 million if the successor-customer program failed.
The Department of Labor’s 401(k) plan lawsuit remained unresolved; the company said its proposed settlement amount was immaterial, but the parties had not reached agreement. Management did not expect normal-course litigation and contract matters to materially adversely affect results or financial position. It also identified insurance-liability estimates, customer and supplier concentration, component availability, working capital, and the ability to return to profitability as risks. No material changes to the prior annual report’s risk factors were reported.
Most important facts for investors to verify
- Whether Electronics component shortages and lower program volumes improve, and whether new programs reach expected run rates and margins.
- Whether operating cash burn moderates and management’s 12-month liquidity expectation remains supportable given the decline in cash.
- Progress on asset sales and the remaining Broadway Plant exit costs.
- Terms and repayment capacity for the $6.5 million related-party note, including its security and staggered maturities in 2021, 2023 and 2025.
- Recoverability of the customer-specific inventory and developments in the DOL 401(k) litigation.