Business context and reporting period
Sypris Solutions, Inc. filed this unaudited Form 10-Q for the quarter ended July 2, 2017. It supplies manufactured components and assemblies for truck, oil and gas, aerospace and defense, and other markets through Sypris Technologies and Sypris Electronics. Comparisons below are with the quarter and six months ended July 3, 2016.
Financial performance
| Metric | Three months ended July 2, 2017 | Six months ended July 2, 2017 |
|---|---|---|
| Revenue | $21.25 million; down 9.6% | $39.43 million; down 21.8% |
| Gross profit / margin | $1.59 million / 7.5% | $0.90 million / 2.3% |
| Operating loss | $2.89 million | $8.02 million |
| Net loss | $3.15 million; $0.15 per share | $6.46 million; $0.32 per share |
| Operating cash flow | Not presented separately for the quarter | $(5.96) million |
At July 2, cash and cash equivalents were $10.74 million, restricted cash was $1.50 million, and current assets and current liabilities were $49.86 million and $28.69 million, respectively. Total liabilities were $47.81 million and stockholders’ equity was $21.11 million. Debt comprised a $6.50 million related-party note and capital lease obligations (about $3.07 million); the company had no revolving credit facility. The related-party note bears 8% interest and is due January 30, 2019.
Material changes versus the prior comparable periods
- Six-month revenue declined $11.01 million. Technologies revenue fell 17.7%, primarily reflecting the nonrenewal of Meritor business; Electronics revenue fell 29.3%, mainly because the CSS product lines were sold in August 2016. Revenue from Electronics’ retained manufacturing business nevertheless increased $4.1 million year over year for the six-month period.
- Quarterly gross profit improved to $1.59 million from $0.75 million, while six-month gross profit declined to $0.90 million from $1.48 million. Lower SG&A and interest expense helped reduce the six-month net loss to $6.46 million from $10.30 million.
- Cash used in operations improved to $5.96 million from $6.94 million, but working capital absorbed cash, notably a $9.45 million inventory increase. Cash and cash equivalents declined $4.53 million from year-end 2016.
Outlook, risks and unusual items
- Management expected cash and cash equivalents to fund operations for the next 12 months, but warned that revenue shortfalls, delayed shipments, unexpected costs or asset-sale proceeds below expectations could require additional funding or further spending reductions. The company had $9.60 million of purchase commitments.
- Management anticipated significantly lower commercial-vehicle revenue in 2017 after the Meritor agreement expired and as Eaton business declined. New Technologies awards were expected to support growth in 2018 and 2019, subject in some cases to final contract negotiations. Electronics awards were expected to contribute to growth in the second half of 2017 and into 2018–2019.
- The Broadway Plant transition is expected to continue into 2018. The company recorded $1.88 million of related costs in the first half of 2017 and expected a further $2.38 million of pre-tax costs, all expected to be cash expenditures.
- Other income included a $2.54 million gain on sales of idle assets, partly offset by $0.60 million of foreign-currency translation losses. The company settled litigation relating to its former Tampa facility for a net cash payment of $448,000. A Department of Labor audit raised alleged 401(k) plan violations; the company disputed the findings and offered a resolution involving de minimis additional plan contributions.
- Principal risks include continued operating losses and cash use, dependence on successful new-program launches and customer diversification, commercial-vehicle market weakness, execution of plant-transition and cost-reduction plans, foreign currency exposure, and limited financing alternatives. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new awards convert to finalized contracts, scheduled shipments and sufficient margins to offset lost Meritor and Eaton revenue.
- Cash burn, inventory and payable movements, and whether liquidity remains adequate without a revolving credit facility.
- Actual cash costs and timing of the Broadway Plant transition, asset disposals and related operational savings.
- Repayment or refinancing plans for the 8% related-party note due in January 2019, and any additional financing needs.
- Resolution and potential financial exposure from the Department of Labor’s 401(k) findings and other contingencies.