Sypris Solutions, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter ended July 4, 2021; comparisons are with the quarter ended July 5, 2020. Six-month figures compare the periods ended on those dates. Amounts are in millions of dollars unless otherwise noted. Sypris supplies truck and pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $25.969 | $17.153 | $45.951 | $39.578 |
| Gross profit / margin | $4.309 / 16.6% | $2.121 / 12.4% | $6.125 / 13.3% | $5.846 / 14.8% |
| Operating income (loss) | $0.893 | $(0.860) | $(0.173) | $(0.583) |
| Net income (loss) | $3.823 | $(0.348) | $2.193 | $(0.653) |
| Diluted earnings (loss) per share | $0.17 | $(0.02) | $0.10 | $(0.03) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $8.606 | $(1.041) |
Quarterly net income included a $3.599 million gain from forgiveness of the Paycheck Protection Program (PPP) loan and accrued interest. Excluding that item, pretax income would have been $0.537 million for the quarter and a pretax loss of $0.972 million for the first half, before considering any related tax effects.
Q2 revenue at Technologies rose 130.2% to $17.139 million; Electronics revenue declined 9.0% to $8.830 million. For the first half, Technologies revenue increased 43.3% to $30.329 million while Electronics fell 15.2% to $15.622 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $18.194 million at July 4, 2021, up from $11.606 million at year-end; $5.3 million was held outside the U.S. and could incur withholding taxes if repatriated.
- Current assets were $57.136 million and current liabilities were $35.124 million. Total assets were $78.666 million; total liabilities were $61.968 million.
- Debt and finance lease obligations, net of unamortized costs, totaled approximately $9.761 million: $6.5 million in secured related-party notes, $2.274 million in finance leases and $1.006 million in equipment financing. Operating lease liabilities were an additional $6.433 million.
- The related-party notes are owed to an entity controlled by the CEO and a director. Interest resets annually at the greater of 8% or 500 basis points above the specified Treasury rate; $2.5 million principal is due April 2022. The notes are secured by a first-priority lien on substantially all company assets.
- Management said projected cash should fund operations for the next 12 months, but warned that adverse revenue, pandemic, shipment or cost developments could require further spending cuts, supplier-term extensions, asset sales or additional funding.
Cash flow and material period changes
- First-half operating cash flow was $8.606 million, versus cash used of $1.041 million a year earlier. Customer prepayments and increases in accounts payable and accrued liabilities were significant cash sources; receivables and inventory increases used $3.270 million and $7.063 million, respectively.
- Investing activities used $1.203 million, principally capital expenditures. Financing activities used $0.658 million. Cash increased by $6.588 million over the six months.
- Revenue recovery at Technologies, especially commercial vehicles, drove the year-over-year increase. Management cited higher volumes, partly offset by unfavorable mix, operating supplies, maintenance costs and first-quarter labor productivity challenges.
- Electronics revenue and gross profit declined, primarily due to completion of a prior-year program and delayed communications orders. Management said a follow-on program was booked, with shipments expected to resume in Q4 2021; delayed orders were expected to convert to revenue over the balance of the year.
- Consolidated gross margin improved in Q2 but declined for the first half. SG&A fell as a percentage of revenue, to 13.2% for Q2 and 13.7% for the first half.
Outlook, risks and unusual items
- Management described commercial vehicle demand as favorable and cited an industry outlook calling for 2021 production to rise 46% year over year. It expected oil and gas spending to improve in the second half versus 2020, while acknowledging reduced near-term pipeline investment.
- Electronics backlog was expected to support a stable revenue rate for the rest of 2021. The company reported $40.473 million of remaining performance obligations on longer-term contracts, with approximately 52% expected to be recognized in 2021 and the balance in 2022.
- Electronic component shortages could challenge production in the second half of 2021 and 2022. Other risks include COVID-19 and economic uncertainty, supplier availability and lead times, customer forecast volatility, contract awards and renewals, government budget and debt-ceiling uncertainty, and dependence on key customers and suppliers.
- The company had approximately $21.445 million of purchase commitments, primarily for inventory and manufacturing equipment. It also had $19.474 million of contract liabilities, up from $7.339 million at year-end, largely reflecting customer billings and advances.
- The PPP loan was fully forgiven on June 28, 2021. The company continued to defend a Department of Labor lawsuit concerning its 401(k) plans and a product-liability lawsuit involving an industrial closure; management considered the claims without merit, and potential damages in the latter matter were undeterminable. Management did not expect normal-course litigation to materially harm results, but outcomes remain uncertain.
- COVID-19 continued to create uncertainty. The company maintained a valuation allowance against all U.S. deferred tax assets. Subsequent to quarter-end, it granted 197,500 restricted shares and options for 34,000 shares, generally vesting after three years.
- Disclosure controls were reported effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported profitability and cash generation is recurring, given the $3.599 million PPP-forgiveness gain and working-capital effects?
- Whether the expected Q4 Electronics program shipments and delayed communications orders convert to revenue as projected, and whether component shortages constrain delivery.
- Whether Technologies’ higher volumes sustain margins amid unfavorable mix, labor, maintenance and input-cost pressures, and whether oil and gas demand recovers.
- Liquidity and repayment capacity for the $2.5 million related-party note due in April 2022, including its interest terms and collateral; also monitor the $21.445 million purchase commitments.
- Developments in the DOL and product-liability litigation, the impact of customer prepayments and contract liabilities, and the dilutive effect of subsequent equity awards.