Sypris Solutions, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018; comparative periods ended October 1, 2017. Amounts below are in millions of dollars unless otherwise noted. Sypris supplies truck and oil-and-gas components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $21.1 | $21.4 | $64.0 | $60.8 |
| Gross profit | $1.2 | $0.7 | $6.2 | $1.8 |
| Gross margin | 5.7% | 3.5% | 9.6% | 3.0% |
| Operating loss | $(2.0) | $(2.8) | $(4.2) | $(10.6) |
| Net loss | $(2.3) | $(3.1) | $(3.3) | $(9.6) |
| Loss per share, basic and diluted | $(0.11) | $(0.15) | $(0.16) | $(0.47) |
Q3 operating margin was approximately -9.5%, versus -12.9% a year earlier; nine-month operating margin was approximately -6.5%, versus -17.4%. No dividends were declared.
- Segments: Q3 Technologies revenue rose 9.6% to $14.9 million, with gross profit of $1.3 million versus a $0.6 million loss. Electronics revenue fell 20.1% to $6.2 million and recorded a $0.1 million gross loss, compared with $1.3 million gross profit. For nine months, Technologies revenue increased 10.7% to $44.7 million; Electronics revenue decreased 5.4% to $19.3 million.
- Cash flow: Operating cash use was $1.1 million for the first nine months, versus $8.5 million in 2017. Investing activities provided $2.3 million, including $2.3 million of insurance proceeds and $1.4 million from asset sales; capital expenditures were $1.3 million. Financing activities used $0.8 million, primarily for lease payments. Cash increased $0.5 million to $8.6 million.
- Liquidity and debt: Current assets were $47.0 million and current liabilities $30.1 million at September 30. Total liabilities were $48.2 million; equity was $14.5 million. Debt obligations included a $6.5 million secured related-party note and approximately $3.5 million in capital lease obligations, before unamortized debt costs. The related-party note bears 8% interest through March 2019, then a rate of at least 8%, and matures in installments from 2021 to 2025.
Changes, outlook and management commentary
- Nine-month revenue increased 5.3%, while gross profit improved by $4.4 million and net loss narrowed by $6.3 million. Technologies’ improvement reflected higher volumes and cost savings following the Broadway Plant production transfer and closure. Q3 consolidated revenue was down 1.3% year over year.
- The nine-month results included a $2.3 million insurance recovery gain for freeze damage at the Broadway Plant; 2017 comparative results included a $2.7 million gain on asset sales. These items affect comparison of reported results.
- Sypris adopted ASC 606 on January 1, 2018. Management said the standard increased nine-month revenue by $1.0 million and reduced nine-month operating and net loss by $0.1 million; Q3 operating and net loss increased by $0.1 million. Prior-year results were not restated.
- Management projected cash would be sufficient to fund operations for the next 12 months, but warned that revenue shortfalls, unexpected costs, or shipment delays could require additional funding, spending cuts, extended supplier terms, asset sales, or suspension of programs. The filing provides no formal earnings or revenue guidance.
- Management expected new Technologies programs to support revenue growth in 2018 and 2019. After quarter-end, Sypris entered a three-year axle-shaft supply agreement with Sisamex and agreements for other products lasting up to six years from production start.
- Electronics faced component shortages and long lead times, program delays, and unfavorable mix as new programs ramped up. Management expected shortages to continue into 2019, while noting mitigation efforts with customers and suppliers. It cited increased U.S. defense funding as supportive of market opportunities.
- Broadway Plant exit costs were $1.1 million in the first nine months; approximately $0.6 million of additional pre-tax costs remained, mostly expected to be cash expenditures. Management was evaluating options for the property and remaining assets.
Risks, contingencies and unusual items
- Sypris held $0.97 million of inventory tied to an Electronics customer whose business was transferred to a successor. The successor agreement provides for purchases, but the filing cautions that recovery of the inventory investment is not assured.
- Outstanding purchase commitments were approximately $15.4 million, primarily for inventory and manufacturing equipment.
- A Department of Labor lawsuit challenges the company’s interpretation of its 401(k) plans. Sypris considers the allegations without merit and plans to defend the matter; an adverse outcome could require additional plan contributions.
- Management reported no material adverse expectation from ordinary-course litigation and no accrued environmental liabilities. Insurance liabilities and the availability and cost of electronic components, raw materials, and liquidity remain relevant risks.
- Adoption of lease accounting standard ASC 842 was planned for January 1, 2019; management expected a material balance-sheet impact from recognizing right-of-use assets and lease liabilities.
Important facts for investors to verify
- Whether operating cash flow improves without relying on customer prepayments, increased payables, insurance recoveries, or asset-sale proceeds.
- Whether the reported improvement in profitability persists after separating insurance and asset-sale effects, and whether Technologies’ margins are sustainable.
- Whether Electronics resolves component shortages and program delays and converts new awards into revenue and positive margins.
- Execution, production timing, and economics of the post-quarter Sisamex agreement and other awarded programs.
- Cash requirements for Broadway Plant exit activities, asset disposition proceeds, related-party debt service, and future lease liabilities.
- Outcome of the DOL 401(k) litigation and recoverability of the customer-specific inventory.