Sypris Solutions, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 28, 2014; financial statements are unaudited. Amounts below are in millions of dollars unless stated otherwise.
Business context and results
Sypris provides outsourced manufacturing and technical services and specialty products through its Industrial and Electronics groups. Q3 revenue rose 18.3% year over year, primarily on higher Industrial Group volumes. The company remained unprofitable for the quarter, while nine-month results improved to a small profit.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $90.2 | $76.3 | $267.6 | $236.9 |
| Gross profit / margin | $8.2 / 9.1% | $7.3 / 9.5% | $29.6 / 11.1% | $23.7 / 10.0% |
| Operating income (loss) / margin | $(0.2) / (0.2)% | $(1.0) / (1.3)% | $3.9 / 1.5% | $(8.5) / (3.6)% |
| Net income (loss) | $(1.2) | $(2.0) | $0.9 | $(9.9) |
| Diluted EPS | $(0.06) | $(0.10) | $0.04 | $(0.52) |
Financial position and cash flow
- At September 28, cash was $19.3, total debt was $25.0, and stockholders’ equity was $55.8. Current assets were $122.9 versus current liabilities of $82.7.
- Credit-facility borrowing availability was $10.1 after letters of credit; cash plus available capacity totaled $29.4. The $25.0 drawn amount was under a facility maturing in May 2016. Sypris reported covenant compliance.
- Nine-month operating cash flow was $6.0, compared with a $0.9 use in 2013. Investing used $4.5, including $4.5 of capital expenditures; financing used $1.0. Cash increased $0.6 over the period.
- Receivables increased $23.0, largely with higher revenue and changed payment terms at a major customer; accounts payable increased $23.0. The company paid $1.2 in dividends.
Changes, outlook, and material risks
- Industrial Group: Nine-month revenue increased 14.1%, driven mainly by higher commercial-vehicle-related volumes; gross profit improved to $31.8 from $24.4. Dana and Meritor represented approximately 59% and 16% of nine-month revenue, respectively.
- Dana: The supply agreement expires December 31, 2014. Dana disputes the binding effect of a 2013 amended agreement, intends to end the relationship at year-end, and plans to transition more than 2,000 part numbers. Arbitration was scheduled for January 2015 and an Ohio court trial for March 2015. Sypris warned that an unfavorable outcome or reduced business could materially harm financial condition and performance.
- Meritor: Agreements expire December 31, 2014 and May 2, 2015. Failure to renew on acceptable terms, or renewal at lower volumes or prices, could also have a material adverse effect.
- Management was developing contingency plans, including renewals, new business, alternative asset uses and other measures, and expected to begin implementation before year-end. It believed available liquidity could fund operations for at least 12 months, but said mitigation and liquidity plans were not assured.
- Electronics Group: Q3 revenue fell 20.6% and the group recorded a $1.1 gross loss; nine-month revenue grew 3.4%, but it recorded a $2.2 gross loss. Management cited legacy program declines, customer insourcing, defense-budget uncertainty and weak replacement-program pipeline; further revenue declines were possible over the next 12 months. Cost actions and new-product efforts may not offset the pressure.
- Nine-month SG&A increased $3.0, principally due to legal costs related to customer negotiations. Research and development declined to $0.3 from $2.8; management noted some discretionary investment had been reduced, potentially affecting development of new offerings.
- Nine-month net income included $6.5 of revenue recognized from the Dana claim, which was expected to be fully amortized by December 31, 2014. Other income included $0.7 of flood-relief grant gains and foreign-currency gains; the 2013 comparison included a $6.9 goodwill impairment and gains from asset dispositions.
- Income tax expense was $3.4 for the nine months despite pretax income of $4.3. Management attributed the provision primarily to foreign operations and maintained a valuation allowance against the domestic net deferred tax asset.
- Other exposures included $7.2 of purchase commitments, $0.8 of letters of credit, and a credit-facility subjective acceleration clause that management did not expect the lender to exercise. The filing reported no material changes to previously disclosed risk factors.
Key facts investors should verify
- Developments and actual outcomes in the Dana arbitration and litigation, and the effect of any supply transition on revenue, assets, and liquidity.
- Renewal terms and volumes for the Dana and Meritor contracts, including whether customer concentration can be reduced.
- Progress in executing contingency plans and whether cash, borrowing availability, and covenant headroom remain adequate.
- Whether Electronics Group revenue and margins stabilize, and whether new programs can replace declining legacy business.
- The sustainability of operating cash generation given receivable growth, customer payment terms, and the scheduled end of Dana-claim revenue recognition.