Sypris Solutions, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 29, 2019; comparison periods ended September 30, 2018. Amounts below are in millions of U.S. dollars unless otherwise stated. The filing was signed November 12, 2019.
Business context
Sypris supplies truck and energy-pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics. Many products are made under multi-year customer contracts.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $22.3 | $21.1 | $66.3 | $64.0 |
| Gross profit | $2.3 | $1.2 | $7.2 | $6.2 |
| Gross margin | 10.5% | 5.7% | 10.8% | 9.6% |
| Operating loss | $(1.0) | $(2.0) | $(3.4) | $(4.2) |
| Net loss | $(1.6) | $(2.3) | $(3.1) | $(3.3) |
| Loss per share, basic and diluted | $(0.07) | $(0.11) | $(0.15) | $(0.16) |
- Q3 revenue rose 5.5% year over year; nine-month revenue rose 3.5%. Technologies revenue increased 5.4% for the quarter and 8.9% year to date. Electronics revenue increased 5.7% in Q3 but declined 9.0% for the nine months.
- Technologies generated gross profit of $2.5 million in Q3 and $7.8 million year to date. Electronics recorded gross losses of $0.2 million and $0.6 million, respectively.
- Cash and cash equivalents were $7.1 million at September 29, down from $10.7 million at December 31, 2018. Current assets were $42.2 million and current liabilities $28.1 million.
- Operating cash use was $3.1 million for the nine months, versus $1.1 million in 2018. Investing activities provided $0.1 million and financing activities used $0.6 million. Cash declined by $3.7 million over the period.
- Debt included a $6.5 million related-party note principal and $3.2 million of finance lease obligations, net of unamortized costs. Operating lease liabilities were $8.0 million following adoption of the new lease standard.
- Stockholders’ equity was $13.4 million, compared with $14.8 million at year-end 2018. No dividends were declared.
Material changes and unusual items
- Q3 gross profit improved primarily with stronger Technologies performance, including price increases and lower supply and maintenance expense. Electronics remained gross-loss-making, affected by weak volume, adverse program mix, ramp-up costs, a $0.3 million physical inventory adjustment, and inventory reserves.
- For the nine months, Technologies’ gross profit increased $2.4 million, while Electronics’ gross profit fell $1.4 million versus 2018. Electronics results were affected by component shortages and shipments accelerated into Q4 2018 ahead of the ERP transition.
- Year-to-date other income included a $1.5 million customer-dispute settlement and a $0.5 million net gain on idle-asset sales, offset in part by $0.7 million of pension expense. The 2018 comparison included a $2.3 million insurance recovery gain, so other income was lower in 2019.
- Severance, relocation and other costs were $0.4 million for the first nine months, compared with $1.1 million in 2018, largely related to the closed Broadway facility. The company expects approximately $0.25 million of additional exit-related costs.
- Sypris adopted ASC 842 lease accounting on January 1, 2019, recognizing operating lease right-of-use assets and liabilities; comparative periods were not recast.
Outlook, risks and contingencies
- Management projected that cash would be sufficient to support operations for the next 12 months. It warned that revenue shortfalls, lower-than-expected asset-sale proceeds, unexpected expenses or shipment delays could require additional funding, spending reductions, extended supplier terms, asset sales, or program curtailments. No specific revenue or earnings guidance was provided.
- Management cited growth opportunities and a more diversified customer base for Technologies, while anticipating a near-term cyclical decrease in commercial-vehicle production. Electronics had new awards and programs continuing into 2020, but component shortages and long lead times could persist through 2020; management could not assure successful resolution.
- Disclosure controls were deemed ineffective at quarter-end due to two material weaknesses tied to the January 2019 Electronics ERP implementation: inadequate ERP access/conversion oversight and deficient accounting-close and financial-reporting controls. The company was implementing remediation, but the weaknesses were not yet considered remediated.
- The company had restated its Q1 2019 financial statements after ERP-related invoice processing errors understated accounts payable and cost of sales. The filing identifies continued reporting disruption and control remediation as risks.
- A $6.5 million secured note is payable to an entity controlled by the CEO/chairman and a director, with principal maturities in 2021, 2023 and 2025; it is secured by substantially all company assets. Purchase commitments were approximately $9.3 million, primarily for inventory.
- The Department of Labor lawsuit concerning interpretation of the company’s 401(k) plans could require additional participant contributions if the allegations were upheld; the company said it considered the claims without merit and was defending the matter. Management did not expect ordinary-course litigation to materially harm the company.
- Management said up to approximately $3.5 million of valuation allowance on foreign deferred tax assets might be released within 12 months if profitability provides sufficient positive evidence; timing and amount remained uncertain.
Important facts for investors to verify
- Whether ERP remediation controls operate effectively and whether any further restatements or reporting delays occur.
- Whether Electronics component availability, production volumes and margins improve, and how much inventory and working capital are required.
- Whether operating cash burn moderates and liquidity remains adequate against the company’s 12-month projection and $9.3 million of purchase commitments.
- Progress on Technologies diversification, commercial-vehicle demand and expected sales of idle or underutilized assets.
- Terms, related-party governance and repayment capacity for the secured $6.5 million note, along with the status of the DOL 401(k) litigation.