Sypris Solutions, Inc. — Q1 2013 Form 10-Q
Business and period: Sypris provides outsourced manufacturing, engineering and technical services, and specialty products through its Industrial and Electronics groups. This unaudited filing covers the three months ended March 31, 2013; comparisons are with the three months ended April 1, 2012. Dollar amounts below are in millions unless noted.
Financial results and position
| Metric | Q1 2013 | Comparable period |
|---|---|---|
| Revenue | $78.4 | $96.5 |
| Gross profit / margin | $8.1 / 10.3% | $12.5 / 13.0% |
| Operating income (loss) | $(6.9) | $4.5 |
| Net income (loss) | $(6.5) | $5.3 |
| Diluted EPS | $(0.34) | $0.27 |
| Operating cash flow | $0.6 | $(0.5) |
- Revenue declined 18.7%. Industrial Group revenue was $71.1 million, down 13.8%; Electronics Group revenue was $7.3 million, down 47.9%.
- Industrial gross profit was $8.1 million (11.4% margin), versus $9.9 million (12.0%). Electronics recorded a $0.03 million gross loss, versus $2.6 million gross profit.
- Cash and cash equivalents were $18.5 million at March 31, 2013, versus $18.7 million at year-end 2012. Working capital was $37.5 million, based on current assets of $112.6 million and current liabilities of $75.1 million.
- Reported long-term debt was $17.5 million, down from $19.0 million at year-end. The company reported $21.5 million of excess credit-facility availability, giving $40.0 million in cash and available borrowing capacity. About $5.2 million of cash was held by Mexican subsidiaries.
- Operating cash flow included $14.3 million used for higher receivables and $2.8 million used for inventory, partly offset by a $17.5 million cash contribution from accounts payable. Investing activities provided $1.2 million, including $2.1 million of idle-asset sale proceeds; financing activities used $2.0 million, including $1.5 million of debt reduction.
Changes and unusual items
- Revenue and gross profit fell across both segments. Industrial volume declines included commercial truck components and trailers; steel-price pass-throughs partly offset the revenue decrease. Electronics was affected by completed programs, lower-margin sales mix and reduced demand.
- A $6.9 million non-cash goodwill impairment fully wrote off Electronics Group goodwill. The company cited a customer’s decision to insource space programs, increased effects from U.S. defense sequestration, weaker short-term forecasts and a post-quarter decline in the company’s market value.
- Other income, net was $1.2 million, including $1.7 million in gains on idle-asset sales, partly offset by $0.6 million of foreign-currency losses. The prior period included $2.6 million of asset-sale gains.
- Research and development expense increased to $0.9 million from $0.4 million. The company said it expects full-year 2013 R&D costs to be below 2012 levels.
Outlook, risks and contingencies
- The company expects continued uncertainty and potential further revenue declines in aerospace and defense for at least the next 12 months. New Electronics products and programs are not expected to generate significant 2013 revenue.
- Management forecasts sufficient liquidity to fund operations and meet credit-facility covenants for at least the next 12 months, while cautioning that actual results may differ. If availability falls below specified thresholds, a minimum fixed-charge coverage ratio applies.
- Key risks include defense budget cuts and delays, customer insourcing, dependence on major customers and suppliers, lower volumes, working-capital demands, inventory risks, foreign-exchange exposure and the ability to develop replacement Electronics programs. Further revenue declines could require additional cost reductions or downsizing.
- Outstanding purchase commitments were approximately $6.9 million; letters of credit were approximately $1.0 million. Management said normal-course litigation and contract matters were not expected to have a material adverse effect and reported no material legal proceedings. The Dana-related dispute had been settled and mutually released.
- The company recorded $0.6 million of income tax expense despite the quarterly loss, primarily for foreign and state taxes. It maintains a valuation allowance against domestic net deferred tax assets and expects to repatriate available non-U.S. cash in 2013 and 2014.
Important facts to verify
- Electronics Group demand, customer insourcing plans, defense funding and the timing of replacement program awards.
- Assumptions underlying the $6.9 million goodwill impairment and whether further impairment indicators emerge.
- Receivables, inventory and payable movements, and the sustainability of positive operating cash flow.
- Credit-facility borrowing-base availability, covenant headroom and management’s 12-month liquidity forecast.
- Potential tax effects of planned foreign-cash repatriation and the valuation allowance on deferred tax assets.