Sypris Solutions, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended July 1, 2018; filed August 14, 2018. Unless stated otherwise, amounts below are in millions of dollars. The company supplies truck and pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $22.971 | $21.249 | $42.913 | $39.434 |
| Gross profit | $2.934 | $1.623 | $4.965 | $1.076 |
| Gross margin | 12.8% | 7.6% | 11.6% | 2.7% |
| Operating loss | $(0.542) | $(2.847) | $(2.168) | $(7.824) |
| Net income (loss) | $0.814 | $(3.147) | $(0.981) | $(6.455) |
| Diluted earnings (loss) per share | $0.04 | $(0.15) | $(0.05) | $(0.32) |
Q2 revenue increased 8.1% year over year; six-month revenue rose 8.8%. Q2 operating margin improved to negative 2.4% from negative 13.4%. The Q2 net profit included a $2.275 million insurance recovery gain; it should not be viewed as solely reflecting recurring operating performance.
Segments and changes versus prior year
- Sypris Technologies: Q2 revenue was $15.327 million, up 9.0%; gross profit rose to $1.930 million from $0.323 million. Six-month revenue increased 11.2% to $29.834 million, and gross profit was $4.037 million versus a $0.321 million loss. Management attributed improvement partly to higher volumes and cost savings after the Broadway Plant production transfer and closure.
- Sypris Electronics: Q2 revenue increased 6.3% to $7.644 million, but gross profit declined to $1.004 million from $1.300 million. Six-month revenue rose 3.7% to $13.079 million while gross profit fell to $0.928 million from $1.397 million. The company cited unfavorable program mix, new-program start-up costs, and electronic component shortages and long lead times.
- Company-wide gross margin improved substantially, while operating losses narrowed. Lower SG&A and reduced Broadway-related exit costs contributed to the improvement. Six-month results also benefited from the $2.275 million insurance gain; the prior-year period included $2.537 million in gains from idle-asset sales.
Cash flow, liquidity and debt
- Cash was $7.191 million at July 1, 2018, down from $8.144 million at year-end 2017. Current assets were $44.563 million and current liabilities $25.688 million, implying working capital of approximately $18.875 million.
- Six-month operating cash flow was negative $2.717 million, versus negative $5.958 million a year earlier. Investing provided $2.427 million, including $2.275 million of insurance proceeds and $1.358 million from asset sales. Financing used $0.663 million, primarily for lease payments. Cash declined $0.953 million during the period.
- Debt included a $6.5 million secured related-party note (carrying value $6.442 million) and capital lease obligations of $3.671 million. The note is owed to an entity controlled by the CEO/chairman and a director; it bears 8% interest through March 2019, with later rate terms tied to the five-year Treasury rate and maturities in 2021, 2023 and 2025. It is secured by substantially all company assets.
- Management stated that forecast cash and cash equivalents should fund operations for the next 12 months, but warned that revenue shortfalls, delayed shipments, unexpected costs, or lower asset-sale proceeds could require additional funding or further spending reductions. Approximately $0.8 million of cash was held outside the U.S.
Outlook, risks and unusual items
- Management expects revenue growth in 2018 and 2019 from new awards in automotive, energy-related and other markets for Technologies, and from new electronics programs. Some awards remained subject to final contract negotiations; no formal numerical earnings or revenue guidance was provided.
- Management said electronic component shortages could constrain Electronics but expected them to ease in the second half of 2018. Some defense program components are sole-sourced, requiring customer or end-user coordination to address supply constraints.
- The Broadway Plant exit was substantially completed by year-end 2017. The company recorded $0.814 million of related costs in the first half of 2018 and expected approximately $0.601 million of additional costs. It was evaluating disposition options for the property; a freeze-damage insurance settlement produced the Q2 gain, and management said facility fair value exceeded its carrying value.
- ASC 606 adoption increased reported revenue by $0.519 million and net income by $0.080 million in Q2, and revenue by $1.026 million and reduced the six-month net loss by $0.186 million. Prior-year periods were not restated. Reported results are therefore not fully comparable on the same revenue-recognition basis.
- Other matters include $17.170 million of outstanding purchase commitments; a Department of Labor lawsuit over interpretation of the company’s 401(k) plans, which could require additional participant contributions if the allegations prevail; and $1.026 million of inventory associated with a customer whose business was transferred to a successor under a new supply agreement. Management could not estimate a reasonably possible loss for the customer matter. Management did not expect ordinary-course litigation to have a material adverse effect.
Important facts for investors to verify
- How much of the earnings improvement is sustainable after excluding the insurance recovery and considering prior-year asset-sale gains.
- Whether Technologies’ new awards and customer diversification offset prior commercial-vehicle customer losses, and whether announced awards reach final contracts.
- Whether Electronics’ component shortages ease as anticipated and whether new programs achieve the expected revenue and margins.
- Cash needs and working-capital trends, including the timing and proceeds of Broadway Plant or other asset sales; management’s 12-month liquidity forecast is conditional.
- Related-party note terms, interest obligations and security; the outcome of the DOL case; and recovery of customer-specific inventory under the successor agreement.
- The effects of ASC 606 on comparisons with prior periods and the expected balance-sheet impact of the upcoming lease-accounting standard.