Sypris Solutions, Inc. — Q2 2013 Form 10-Q
Business and period: Sypris provides outsourced manufacturing, engineering and technical services, and specialty products through its Industrial and Electronics groups. This unaudited report covers the quarter and six months ended June 30, 2013; comparisons are to periods ended July 1, 2012. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $82.2 | $98.9 | $160.6 | $195.4 |
| Gross profit / margin | $8.3 / 10.1% | $13.2 / 13.4% | $16.4 / 10.2% | $25.7 / 13.2% |
| Operating income (loss) / margin | $(0.7) / (0.8)% | $4.5 / 4.5% | $(7.6) / (4.7)% | $9.0 / 4.6% |
| Net income (loss) | $(1.5) | $4.4 | $(8.0) | $9.7 |
| Diluted EPS | $(0.08) | $0.22 | $(0.41) | $0.48 |
| Operating cash flow | Not separately presented | Not separately presented | $(1.0) | $(4.8) |
Q2 revenue declined 16.9% year over year; first-half revenue fell 17.8%. Industrial revenue declined 10.2% in Q2 and 12.0% for the half. Electronics revenue fell 51.8% and 50.0%, respectively. The Electronics Group recorded gross losses in both 2013 periods, versus gross profit in 2012.
At June 30, cash was $18.4, current assets $113.5 and current liabilities $74.6. Long-term debt was $20.0, up from $19.0 at year-end 2012. Total liabilities were $110.6; stockholders’ equity was $55.1. Cash plus reported excess borrowing availability under the credit facility totaled $37.4, including $19.0 of availability. The filing reports $0.8 of letters of credit outstanding. Dividends declared were $0.02 per share for Q2.
Changes, drivers and unusual items
- A $6.9 non-cash goodwill impairment in Q1 fully wrote off Electronics Group goodwill. The company cited weaker short-term forecasts following a customer’s decision to insource programs and reduced defense-market demand amid sequestration.
- Management attributed Industrial revenue declines mainly to lower commercial truck, trailer and off-highway volumes. Productivity improvements partly offset lower volume, higher wages and utilities, and Mexican peso effects.
- Electronics revenue was affected by completed or lost programs and unfavorable sales mix. New product and program development was slower than anticipated and was not expected to generate significant 2013 revenue.
- First-half operating cash use improved from $4.8 in 2012 to $1.0 in 2013. Receivables and inventory absorbed cash, partly offset by higher accounts payable. Investing cash flow was $0.6, including $2.2 of asset-sale proceeds and $1.5 of capital expenditures.
- First-half other income included $1.7 of gains from idle-asset sales. First-half income tax expense was $1.6 despite a pre-tax loss, primarily reflecting foreign and state taxes and valuation allowances on domestic deferred tax assets. Prior-year results included discontinued-operation legal costs and a gain on marketable securities.
Outlook, liquidity and risks
Management expected sufficient liquidity to fund operations and compliance with credit-facility covenants for at least the next 12 months, based on its current forecast. This expectation is subject to changing business, regulatory and economic conditions. If availability falls below $6.0, or below $8.0 for five or more consecutive days, a minimum fixed-charge coverage ratio of 1.15:1.00 applies.
Management expected continued uncertainty and potential further Electronics revenue declines for at least the next 12 months. U.S. defense spending uncertainty, sequestration, program delays, customer insourcing, competition and the absence of near-term replacement programs are key risks. The company is developing identity-management, cryptographic key-distribution and cyber-analytics offerings, but gives no quantified revenue or earnings guidance. It cautions that further revenue declines could require additional cost reductions.
Outstanding purchase commitments were approximately $7.4, primarily for inventory and manufacturing equipment. Management did not expect routine litigation to materially affect the company; no material legal proceedings were reported. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Electronics revenue, margins and program awards stabilize, and whether new products produce meaningful sales.
- Whether Industrial volumes and productivity can sustain margins as customer demand changes.
- Actual borrowing-base availability, covenant headroom and cash-flow conversion, particularly given working-capital needs and purchase commitments.
- The assumptions underlying the Electronics goodwill impairment and any subsequent impairment indicators.
- The durability of asset-sale gains and the effect of foreign taxes, repatriation plans and valuation allowances on future earnings and cash.