Sypris Solutions, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 3, 2022. Amounts below are in millions of dollars unless noted. Sypris supplies truck and pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $29.0 | $26.0 | $55.2 | $46.0 |
| Gross profit | $3.8 | $4.3 | $8.3 | $6.1 |
| Gross margin | 13.0% | 16.6% | 15.0% | 13.3% |
| Operating income (loss) | $0.04 | $0.9 | $1.2 | ($0.2) |
| Net income (loss) | ($0.6) | $3.8 | ($0.4) | $2.2 |
| Diluted EPS | ($0.03) | $0.17 | ($0.02) | $0.10 |
- Q2 revenue rose 11.8% year over year, but gross profit fell 12.3% and operating income declined to near break-even. Q2 gross margin contracted 3.6 percentage points.
- First-half revenue increased 20.1%; gross profit rose 35.3%, and operating results improved from a loss to income. First-half net loss contrasts with prior-year net income, which included a $3.6 million PPP loan and accrued-interest forgiveness gain.
- Q2 segment revenue was $18.0 million for Technologies (+4.7%) and $11.1 million for Electronics (+25.6%). First-half segment revenue was $35.1 million (+15.8%) and $20.1 million (+28.7%), respectively.
- Q2 segment gross profit declined for both businesses: Technologies to $2.1 million from $2.5 million, and Electronics to $1.6 million from $1.8 million. First-half gross profit increased in both segments.
Cash, liquidity and obligations
- Cash was $7.5 million at July 3, 2022, down from $11.6 million at December 31, 2021; $3.6 million was held outside the U.S. Total current assets were $53.1 million and current liabilities $38.9 million.
- First-half operating cash flow was negative $2.0 million, versus positive $8.6 million in the prior-year period. Investing cash outflow was $1.8 million, mainly capital expenditures; financing cash outflow was $0.7 million. Cash decreased by $4.1 million.
- Reported debt included a $6.5 million secured related-party note, $4.0 million of finance lease obligations and $1.0 million of equipment financing obligations. The related-party note is controlled by the CEO and a director; it is secured by a first-priority lien on substantially all company assets, bears interest at the greater of 8% or 5 percentage points above a Treasury benchmark, and has $2.5 million due April 2023.
- Management said existing cash was projected to fund operations for the next 12 months, while warning that forecast shortfalls or unexpected costs could require additional funding, spending reductions, extended supplier terms, asset sales or curtailment of programs.
- Firm purchase commitments totaled approximately $61.9 million, primarily for inventory and equipment. The filing also reported $78.3 million of remaining performance obligations on longer-term Electronics contracts, expected to be recognized 21% in 2022, 54% in 2023 and the balance in 2024.
Changes, outlook and risks
- Technologies’ revenue benefited from steel-price pass-throughs ($1.3 million in Q2; $2.4 million in the first half), higher shipments in automotive, SUV and energy markets, and anticipated commercial-vehicle demand. Commercial-vehicle shipments were constrained by customer supply-chain issues and inventory adjustments.
- Electronics growth reflected production ramp-ups on two follow-on programs and fewer material-availability disruptions than in the prior-year period. Management said backlog was expected to support a stable revenue rate through the rest of 2022.
- Management described strong expected Class 8 demand for the remainder of 2022, while noting a slowing economy and uncertainty in oil-and-gas demand. It expected oil-and-gas customer demand to improve versus 2021 as commodity prices and activity improved. No company-wide numerical revenue or earnings guidance was provided.
- Ongoing risks include supply constraints and long component lead times, inflation in materials, logistics, utilities and labor, and uncertainty associated with COVID-19, the Russia-Ukraine conflict, defense budgets and customer demand. Management expected supply-chain and inflationary pressures to continue through 2022.
- Contingencies include a Department of Labor lawsuit concerning interpretation of the company’s 401(k) plan and a product-liability suit involving a pipeline closure. The company said it could not estimate a loss or range for either matter. Management did not expect other ordinary-course litigation to materially adversely affect results. No environmental accrual was recorded.
- The company maintains a valuation allowance against all U.S. deferred tax assets. Income-tax expense was $0.3 million in Q2 and $0.8 million in the first half, primarily reflecting foreign taxes.
Investor verification priorities
- Track whether revenue growth converts to improved margins, particularly as new Electronics programs ramp and inflationary costs persist.
- Monitor operating cash flow, cash balances, working-capital needs and the ability to meet the $2.5 million related-party note maturity in April 2023.
- Assess the scale and timing of firm purchase commitments against customer demand, supply availability and the reported contract backlog.
- Review developments in the DOL and product-liability litigation, for which potential losses were not estimable, and any resulting accruals or disclosures.
- Check subsequent filings for updates to management’s 12-month liquidity assessment and its expectations for supply-chain, inflation, commercial-vehicle, oil-and-gas and defense-market conditions.