Sypris Solutions, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020. Sypris supplies truck and pipeline components through Sypris Technologies and aerospace and defense electronics through Sypris Electronics.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $97.4 million | $82.3 million |
| Gross profit / margin | $14.5 million / 14.9% | $12.1 million / 14.6% |
| Operating income / margin | $1.9 million / 2.0% | $0.1 million / 0.1% |
| Net income | $2.9 million | $1.7 million |
| Operating cash flow | $4.2 million | $3.6 million |
| Capital expenditures | $2.8 million | $1.5 million |
- Technologies revenue rose 36.2% to $61.7 million, mainly as commercial vehicle demand recovered. Electronics revenue declined 3.6% to $35.7 million, primarily after a program ended; delayed electronic components also affected production.
- Gross margin improved slightly overall. Technologies’ gross margin eased to 13.1% from 13.6% amid inflation, product mix, maintenance, and labor productivity pressures. Electronics’ margin rose to 17.9% from 15.9%, reflecting mix and pricing improvements.
- FY2021 net income included a $3.6 million gain from forgiveness of the Paycheck Protection Program loan and accrued interest. FY2020 results included a $3.7 million deferred tax benefit related to Mexican deferred tax assets, so year-over-year net income comparisons reflect significant nonrecurring items.
- Cash and equivalents were $11.6 million at year-end, essentially unchanged from 2020; $5.5 million was held outside the U.S. The company reported $56.1 million of current assets and $34.0 million of current liabilities.
- Operating cash flow was positive, but inventory increased $14.0 million and was a major cash use. Customer advances for specific Electronics program inventory helped fund much of the increase.
- Year-end borrowings included a $6.5 million secured related-party note, $4.5 million of finance lease obligations, and $1.2 million of equipment financing; the PPP loan was forgiven. The related-party note bears interest at the greater of 8% or 500 basis points above a specified Treasury average and is secured by substantially all company assets.
Changes, outlook, and key risks
- Revenue increased 18.3% from FY2020 as Technologies rebounded; Electronics revenue remained below the prior year. Operating income improved to $1.9 million from $0.1 million.
- Management expects Technologies revenue to increase in 2022, citing anticipated stronger commercial vehicle demand and a possible recovery in energy-related demand. Management expects Electronics’ backlog to support a stable 2022 revenue rate, while warning that component availability may continue to constrain output.
- Electronics had $44.6 million of remaining performance obligations on non-cancellable contracts longer than one year; approximately 66% was expected to be recognized as revenue in 2022 and the balance in 2023. Awards and backlog do not assure future revenue or profitability.
- Inflation, higher labor and transportation costs, electronic-component shortages and extended lead times, COVID-19 effects, and customer scheduling volatility could pressure margins, delivery, and working capital. The five largest customers accounted for 68% of FY2021 revenue; Sistemas, Detroit Diesel, and Northrop Grumman represented 21%, 18%, and 16%, respectively.
- Federal budget uncertainty may delay procurement, although management stated key programs remained funded under continuing resolutions. The company is a subcontractor, not a prime contractor, on government programs.
- Contingencies include a Department of Labor lawsuit concerning interpretation of the company’s 401(k) plan, where an adverse outcome could require additional participant contributions and penalties, and a product-liability lawsuit concerning a pipeline closure. Management said ordinary-course legal matters were not expected to materially affect results; potential damages in the product case were undeterminable.
- The company reported no cash dividends in 2021 or 2020 and said it did not anticipate dividends in 2022. Its auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting. The auditor did not attest to internal control.
Important facts for investors to verify
- Whether 2022 revenue and margin expectations are realized, particularly given supplier constraints and inflation.
- How much of Electronics’ stated backlog converts to shipments, revenue, and cash, and whether component shortages cause further delays or cost increases.
- Cash conversion and inventory trends: inventory rose to $30.1 million from $16.2 million, while customer contract liabilities rose to $19.9 million from $7.3 million.
- Debt service and refinancing exposure, including the secured related-party note’s interest rate, maturities, collateral, and related-party nature.
- Customer concentration, the status and potential financial impact of the DOL and product-liability cases, and the sustainability of reported earnings excluding PPP forgiveness and tax-related items.