Sypris Solutions, Inc. — Q3 2022 Form 10-Q
Quarterly period ended October 2, 2022. Sypris provides truck and energy pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $25.2 | $25.7 | $80.4 | $71.6 |
| Gross profit / margin | $2.0 / 7.8% | $4.0 / 15.5% | $10.3 / 12.8% | $10.1 / 14.1% |
| Operating income (loss) | $(1.6) | $1.0 | $(0.4) | $0.8 |
| Net income (loss) | $(2.2) | $0.3 | $(2.6) | $2.5 |
| Diluted earnings (loss) per share | $(0.10) | $0.01 | $(0.12) | $0.11 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $8.3 | $2.2 |
Q3 revenue declined 1.9% year over year, while nine-month revenue rose 12.2%. Nine-month 2021 earnings included a $3.6 million gain from forgiveness of the PPP loan; no such gain was recorded in 2022. Q3 operating margin was approximately -6.4%, compared with 3.8% a year earlier.
Segments and drivers
- Sypris Technologies: Q3 revenue increased 1.8% to $17.0 million, but gross profit fell to $1.1 million from $2.1 million. Nine-month revenue grew 10.8% to $52.1 million. Steel-price pass-throughs contributed about $0.9 million to Q3 and $3.4 million to nine-month revenue; lower commercial-vehicle shipments and higher manufacturing, energy and labor-related costs pressured results.
- Sypris Electronics: Q3 revenue decreased 8.7% to $8.2 million, chiefly due to delayed or unavailable components. Nine-month revenue grew 15.0% to $28.3 million as two follow-on programs ramped. Gross profit declined in both periods, reflecting lower margins on new programs and additional engineering costs.
Cash, liquidity and obligations
- Cash was $16.5 million at October 2, 2022, up from $11.6 million at year-end; $2.7 million was held outside the U.S. Operating cash flow of $8.3 million less capital expenditures of $2.8 million and financing cash use of $1.0 million resulted in a $4.9 million net cash increase, including a $0.4 million favorable exchange-rate effect.
- Current assets were $68.0 million and current liabilities $41.7 million. Inventory rose to $35.2 million from $30.1 million at year-end. Management projected cash would fund operations for the next 12 months, while warning that adverse operating or economic changes could require additional funding or spending reductions.
- Related-party secured notes totaled $6.5 million principal, owed to an entity controlled by the CEO and a director. $2.5 million is due April 2023, $2.0 million April 2024 and the balance April 2026; interest resets annually at the greater of 8% or 5 percentage points above a specified Treasury average. The notes are secured by a first-priority lien on substantially all company assets.
- Finance lease obligations were $3.7 million and equipment financing obligations $1.2 million. Operating lease liabilities were $5.2 million. Purchase commitments totaled approximately $58.3 million, primarily inventory and manufacturing equipment, through 2024.
- Remaining performance obligations for longer-term, non-cancellable contracts were $85.4 million, all in Sypris Electronics; the company expected to recognize approximately 13% in 2022, 55% in 2023 and the balance in 2024.
Outlook, risks and contingencies
- No formal consolidated revenue or earnings guidance is stated. Management expected supply-chain constraints and inflationary increases in materials, freight, utilities and labor to continue through 2022 and into 2023. The filing said Electronics backlog was expected to support a stable revenue rate for the balance of 2022.
- Management anticipated higher Tube Turns energy-market demand in Q4 2022 versus Q4 2021, citing improved commodity prices and LNG activity, while noting geopolitical and market uncertainty. Commercial-vehicle production remained affected by supply constraints.
- Electronics programs are exposed to component shortages and potential procurement delays under continuing government budget resolutions. Management noted the FY2023 federal budget remained uncertain, although key programs continued to be funded.
- The company recorded a $0.525 million reserve in Q3 for the Department of Labor 401(k) plan litigation; it estimated possible additional loss of $0–$0.108 million beyond the reserve. A separate product-liability lawsuit involving a pipeline closure remains unresolved, and the company said it could not estimate a loss range.
- Other stated risks include failure to return to profitability, customer and supplier concentration, inflation, execution of new programs, working-capital needs, and geopolitical, foreign-exchange and government-spending uncertainty. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Key facts for investors to verify
- Whether supply availability, inflation and production ramp costs improve enough to restore gross margins.
- Whether Electronics program growth converts to profitable sales and the disclosed backlog is realized on schedule.
- Liquidity and working-capital trends, including rising inventory, customer advances and the $58.3 million of purchase commitments.
- Repayment or refinancing plans for the $2.5 million related-party note maturity in April 2023 and the terms of the secured related-party financing.
- Developments in the Department of Labor and product-liability cases, and any change to recorded reserves or estimated exposure.