Sypris Solutions, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparisons are with FY2011. Sypris provides outsourced manufacturing and technical services and specialty products through its Industrial Group (truck components, energy and chemical products) and Electronics Group (aerospace and defense electronics).
Financial results and position
Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
| Metric | FY2012 / year-end 2012 | FY2011 / year-end 2011 |
|---|---|---|
| Revenue | $341.6 | $335.6 |
| Gross profit and margin | $43.7; 12.8% | $35.2; 10.5% |
| Operating income and margin | $9.0; 2.7% | $6.2; 1.8% |
| Income from continuing operations | $10.3 | $8.4 |
| Net income | $3.0 | $7.9 |
| Net cash from (used in) operating activities | $(4.9) | $17.4 |
| Cash and cash equivalents | $18.7 | $18.2 |
| Long-term debt | $19.0 | $10.0 |
| Credit facility availability | $13.2 | Not stated here |
- Industrial Group revenue increased 4.7% to $286.0 million; Electronics Group revenue fell 10.9% to $55.6 million. Gross margins improved in both groups, but Electronics remained loss-making at the operating level.
- FY2012 net income included a $7.2 million after-tax loss from discontinued operations, primarily reflecting a $6.5 million settlement of an indemnification dispute related to the 2009 sale of Sypris Test & Measurement, plus legal expenses. Continuing-operations earnings increased despite lower total net income.
- Operating cash flow was negative despite positive earnings, primarily reflecting a $15.2 million use of cash from lower accounts payable and a $6.1 million use from lower accrued liabilities. Capital expenditures were $7.1 million.
- At year-end, cash plus available borrowing capacity totaled $31.9 million; approximately $11.7 million of cash was held by Mexican subsidiaries. The current ratio was approximately 1.65, versus 1.34 a year earlier.
Material changes versus FY2011
- Revenue rose 1.8%, with Industrial growth partly offset by declining Electronics revenue. Steel-price pass-throughs contributed about $7.2 million to Industrial revenue growth.
- Gross profit increased $8.5 million. Industrial gains reflected specialty-closure volume, pricing and productivity; Electronics benefited from a higher-margin sales mix, including foreign-government product sales.
- Operating income increased to $9.0 million. Lower interest expense ($0.4 million versus $1.7 million) reflected lower average borrowing rates and debt outstanding.
- Cash flow from operations swung from $17.4 million provided to $4.9 million used. Borrowings under the credit facility increased by $9.0 million, and year-end debt rose to $19.0 million.
- FY2011 included a $3.0 million customer settlement gain and larger foreign-currency and asset-disposal gains; FY2012 included a $2.6 million gain on idle-asset disposals and a $1.9 million gain on sale of Dana shares.
Outlook, risks and unusual items
- Management expected Industrial market softness from the second half of 2012 to persist through the first half of 2013, while describing longer-term commercial vehicle and trailer-market prospects as improving. It expected Electronics revenue to be relatively flat in 2013, but cautioned that new products and programs were not expected to generate significant 2013 revenue.
- Electronics faces uncertain U.S. defense appropriations and potential sequestration-related reductions, delays or cancellations. Management cited the risk of further Electronics revenue declines and possible future impairment charges if projected cash flows or fair value weaken.
- Customer concentration is substantial: Dana represented approximately 55% of 2012 revenue and Meritor 15%; the five largest customers accounted for 79%. The Dana supply agreement was scheduled to expire January 1, 2015 unless renewed.
- The $50 million credit facility matures in May 2016 and is secured by substantially all domestic assets. Covenants restrict, among other matters, dividends and certain transactions; a fixed-charge coverage test applies if availability falls below specified thresholds. Management expected to meet covenants and fund operations for at least the next 12 months based on its forecast.
- Other risks include fixed-price and multi-year contract profitability, cyclical vehicle demand, steel and supplier costs, labor relations, environmental contamination at certain current and former sites, and pension underfunding. The Marion, Ohio contamination matter includes litigation against Whirlpool; the filing says there were no material pending legal proceedings otherwise.
- The goodwill impairment test found Electronics fair value approximately 21% above carrying value, based on forecasts that included improved margins. No 2012 impairment charge was recorded.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts to verify
- Whether the Dana agreement is renewed or replaced before its scheduled January 2015 expiration, given Dana’s 55% share of revenue.
- Whether Electronics revenue stabilizes and new programs produce meaningful sales, and how defense-budget actions affect awards and funding.
- Why operating cash flow turned negative and whether working-capital outflows, borrowing needs and credit-facility availability remain manageable.
- The sustainability of reported earnings: discontinued-operation settlement costs, asset-sale and securities gains, and the tax effects of contemplated foreign-cash repatriation.
- The filing gives two different amounts for the 2012 pre-contract-cost write-off: approximately $1.1 million in MD&A and $1.709 million in the financial-statement note. Verify the correct amount and its presentation.
- Environmental remediation exposure, pension funding needs, and the effect of cash held in Mexico on the availability of liquidity to the U.S. parent.