Sypris Solutions, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 29, 2014; comparisons are to the periods ended June 30, 2013. Financial statements are unaudited. Amounts below are in millions except per-share data.
Business context
Sypris provides outsourced manufacturing and technical services and specialty products through its Industrial and Electronics groups. Its markets include commercial vehicle components, energy and chemical products, and aerospace and defense electronics.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $93.1 | $82.2 | $177.4 | $160.6 |
| Gross profit | $10.8 | $8.3 | $21.4 | $16.4 |
| Gross margin | 11.6% | 10.1% | 12.1% | 10.2% |
| Operating income (loss) | $1.7 | $(0.7) | $4.1 | $(7.6) |
| Net income (loss) | $0.4 | $(1.5) | $2.0 | $(8.0) |
| Diluted earnings (loss) per share | $0.02 | $(0.08) | $0.10 | $(0.41) |
Q2 revenue increased 13.3% year over year; first-half revenue increased 10.4%. Industrial Group revenue rose 12.5% in Q2 and 9.6% in the first half, aided by higher commercial-vehicle and other market volumes, favorable product mix, productivity, and pricing. Electronics Group revenue grew, but the segment remained gross-loss-making: Q2 gross loss was $0.6 million and first-half gross loss was $1.1 million.
Operating results improved substantially year over year. The 2013 first-half comparison included a $6.9 million noncash goodwill impairment charge. Q2 2014 SG&A increased $1.5 million, primarily due to legal expenses related to customer contract negotiations. First-half other income was $0.5 million, including $0.7 million in flood-relief grants; the comparable 2013 period included $1.7 million of gains on asset disposals. Income tax expense was $2.2 million for the first half, primarily reflecting foreign taxes and U.S. state taxes; domestic deferred tax assets remained subject to a valuation allowance.
Cash flow, debt, and liquidity
- First-half operating cash flow was $4.7 million, versus a $1.0 million use in 2013. Investing activities used $2.5 million, including $2.5 million of capital expenditures; financing activities used $2.5 million, including $1.0 million of debt reduction and $0.8 million of dividends.
- Cash was $18.4 million at June 29, 2014, down from $18.7 million at year-end 2013. Accounts receivable rose to $64.9 million from $38.5 million, with the company citing higher revenue and changed payment terms at a major customer; accounts payable also increased.
- Long-term debt was $23.0 million, compared with $24.0 million at year-end. Under its credit facility, the company had $15.8 million of available borrowing capacity after letters of credit. Cash plus available capacity totaled $34.2 million. The facility matures in May 2016; the company reported compliance with covenants.
- Outstanding purchase commitments were approximately $6.9 million. The company declared dividends of $0.02 per common share for Q2.
Outlook, risks, and unusual items
- Customer concentration and contract dispute: Dana and Meritor accounted for approximately 58% and 16% of first-half revenue, respectively. Dana’s supply agreement expires December 31, 2014; Dana disputes the enforceability of a 2013 amended agreement, has notified Sypris it intends to end the relationship at year-end, and plans to transition more than 2,000 part numbers. Sypris disputes Dana’s position. The parties have asserted claims and are pursuing mediation and arbitration; Dana also filed an Ohio court action concerning arbitrability. Management warned that an unfavorable resolution could materially harm financial performance and liquidity.
- Meritor agreements expire December 31, 2014 and May 2, 2015. Management said reduced products, volumes, or prices, or failure to reach acceptable terms, could also have a material adverse effect. The company was pursuing renewals, new business, alternative asset uses, and other contingency plans, and expected to establish and initiate mitigating plans before year-end.
- Industrial outlook: Management expected modest production growth through 2014 and 2015, subject to the Dana and Meritor contract outcomes.
- Electronics outlook: The segment faced legacy program declines, customer insourcing, competition, and uncertainty in U.S. defense funding. Management anticipated continued uncertainty and potential revenue declines for at least the next 12 months; new programs and cost reductions may not offset declines.
- First-half revenue included $4.3 million recognized from the Dana claim, under which revenue is deferred and recognized over applicable periods, and $2.3 million from substantive milestones on a customer contract. The company also recognized $0.7 million of flood-relief grant gains. These items affect interpretation of recurring performance.
- Management believed cash, operating cash flow, and credit-facility availability would meet liquidity needs for 2014 and the foreseeable future, but noted that contract outcomes and changing business conditions could alter forecasts. Approximately $8.4 million of cash was held by Mexican subsidiaries. The company expected to repatriate available non-U.S. cash in 2014 and 2015.
Important facts for investors to verify
- Developments in the Dana dispute, arbitration and Ohio court action, and whether Dana’s planned year-end transition proceeds.
- Renewal terms and resulting volumes and prices under the Meritor agreements, and the company’s execution of contingency plans.
- Electronics Group revenue, margins, program awards, and cash requirements amid forecast declines.
- Receivables collection and working-capital trends, borrowing availability, covenant headroom, and liquidity after any customer transitions.
- How much reported earnings and cash generation depend on deferred Dana-claim revenue, milestone revenue, and grant gains.