Sypris Solutions, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended July 3, 2016; comparisons are to the periods ended July 5, 2015. Amounts below are in U.S. dollars unless otherwise noted.
Business context
Sypris provides outsourced manufacturing, engineering and technical services, and specialty products through Sypris Technologies and Sypris Electronics. Technologies serves commercial vehicle and energy-related markets; Electronics serves aerospace, defense and other markets. Results were affected by the loss of Dana-related business following the nonrenewal of a supply agreement and weaker commercial vehicle and oil-and-gas demand.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $23.5m | $40.8m | $50.4m | $77.8m |
| Gross profit (loss) | $0.7m | $(0.03)m | $1.4m | $(3.2)m |
| Operating loss | $(4.6)m | $(7.8)m | $(11.0)m | $(20.7)m |
| Net loss | $(5.2)m | $(8.4)m | $(10.3)m | $(21.4)m |
| Loss per diluted share | $(0.26) | $(0.43) | $(0.52) | $(1.09) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(7.0)m | $(11.0)m |
Revenue declined 42.3% in the quarter and 35.1% year to date. Gross margin improved to 3.1% from approximately break-even in Q2 2015, and to 2.9% from negative 4.1% for the six-month period. Operating losses narrowed, reflecting lower SG&A and improved segment gross profit, but the company remained loss-making. Six-month interest expense increased to $1.8m from $1.5m, principally due to higher rates and the new financing arrangements. Six-month other income included a $2.4m gain on the Toluca sale-leaseback.
- Technologies: Revenue fell 53.9% in Q2 and 45.7% year to date. Management attributed the declines to lost trailer-axle revenue associated with the Morganton asset sale and weaker commercial vehicle and oil-and-gas demand. Segment gross loss was $0.3m for Q2 and $0.9m year to date.
- Electronics: Revenue was essentially flat in Q2 and rose 0.9% year to date. Gross profit improved to $1.0m in Q2 and $2.4m year to date, supported by higher-margin mix and lower overhead.
Financial position and liquidity
At July 3, 2016, cash and cash equivalents were $1.8m; an additional $6.0m was restricted as collateral for the term loan. Current assets were $44.3m and current liabilities $32.2m. Total liabilities were $60.4m and stockholders’ equity $9.4m. Debt and capital lease obligations totaled approximately $24.1m, including $4.9m drawn on the revolving facility, $9.1m on the term loan, $6.5m of related-party notes and $3.3m of capital lease obligations. The related-party note bears 8% interest and is due January 30, 2019.
For the first six months, operating activities used $7.0m of cash. Investing activities provided $5.0m, including $11.1m of net Toluca sale proceeds, partly offset by the $6.0m restricted-cash deposit. Financing activities provided $2.5m, primarily from $1.0m of related-party borrowing and a $2.7m increase in revolver borrowings. Cash ended the period at $1.8m.
Material changes, outlook and risks
- On March 9, 2016, Sypris sold its Toluca property for approximately $12.2m and leased back the portion needed for operations. Annual base rent is approximately $0.9m, subject to CPI adjustments and caps. The arrangement generated a reported $2.4m gain; additional gain was deferred over the lease term.
- After quarter-end, on August 16, Sypris sold specified Sypris Electronics assets and product lines for $42.0m cash, with $1.5m held in escrow for up to 12 months. Approximately $15.5m of proceeds repaid the term loan and reduced the revolving facility; the $6.0m collateral deposit was released. The retained Electronics business continues to provide manufacturing and design services. These post-quarter transactions are not reflected in the July 3 balance sheet.
- Management expected truck production to remain near first-half 2016 levels for the rest of 2016 and to increase slightly in 2017. It described oil-and-gas demand as weak but potentially stabilizing. Management pursued cost reductions, higher-margin customer opportunities and production reallocation between U.S. and Mexican facilities; additional cuts could follow if markets weakened. No specific earnings or revenue guidance was provided.
- Before the post-quarter debt repayment, the credit agreements required at least $3.0m of excess revolver availability; if availability fell below that level, a trailing-twelve-month fixed-charge coverage ratio of at least 1:1 applied. The company cited liquidity and covenant compliance as continuing management priorities.
- A Tampa lease dispute could result in repair costs ranging from no liability to $4.0m; Sypris accrued $0.5m and said it would contest the claims. Management did not expect other disclosed litigation to materially harm financial position or results. Purchase commitments were approximately $9.8m, primarily for inventory and equipment.
- Key risks include continued weak markets, customer concentration and order volatility, failure to replace lost Dana revenue, access to liquidity and covenant compliance, execution of new business and cost-reduction plans, and litigation or operational risks. The filing reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Post-quarter closing details and final use of the $42.0m Electronics-sale proceeds, including the remaining revolver balance, escrow and any transaction adjustments.
- Current borrowing availability, covenant status and liquidity after the term-loan repayment and release of restricted cash.
- Whether Technologies can recover gross margins as commercial vehicle and energy demand remains soft, and whether anticipated higher-margin programs materialize.
- Ultimate outcome and potential cost of the Tampa lease dispute, including whether the recorded $0.5m accrual is sufficient.
- Ongoing costs and obligations of the Toluca leaseback, and the effect of divesting the specified Electronics product lines on future revenue and profitability.