Sypris Solutions, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This filing reports full-year results; fourth-quarter figures are identified separately below. Sypris provides outsourced manufacturing, engineering and technical services, and specialty products through its Industrial and Electronics groups.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net revenue | $335.6 million | $266.7 million |
| Gross profit / margin | $35.2 million / 10.5% | $24.9 million / 9.3% |
| Operating income (loss) | $6.2 million | ($7.4 million) |
| Income (loss) from continuing operations | $8.4 million | ($9.7 million) |
| Net income (loss) | $7.9 million | ($10.2 million) |
| Net income (loss) per diluted share | $0.40 | ($0.55) |
| Cash from operating activities | $17.0 million | $1.9 million |
| Capital expenditures | $6.8 million | $2.2 million |
- Industrial Group revenue rose 43.0% to $273.3 million, with gross profit of $27.3 million and a 10.0% gross margin, compared with $9.0 million and 4.7% in 2010.
- Electronics Group revenue fell 17.5% to $62.3 million. Gross profit declined to $7.9 million from $15.9 million, and gross margin fell to 12.7% from 21.1%.
- For Q4 2011, revenue was $83.6 million, gross profit $8.7 million, operating income $0.5 million and net income $1.3 million. Q4 2010 net loss was $1.6 million.
- At year-end, cash was $18.2 million; total debt was $10.0 million, down from $23.3 million. Total assets were $175.7 million, liabilities $115.3 million and stockholders’ equity $60.5 million. The filing reports no cash dividends in 2011 or 2010.
Liquidity, debt and cash flow
- A new asset-based credit facility entered in May 2011 provides up to $50 million and matures in May 2016, with a conditional option to increase availability to $60 million. Year-end borrowing availability was $24.8 million; cash plus available borrowing capacity totaled $43.0 million.
- Operating cash flow improved substantially, though working capital included cash investment in Industrial Group receivables and inventory. Increased accounts payable provided $11.7 million of cash in 2011.
- Management said its 2012 forecast indicated sufficient liquidity to fund operations and meet facility covenants for at least the next 12 months, while noting results could vary with business, regulatory and economic conditions.
Material changes, outlook and risks
- Industrial Group growth reflected higher commercial-truck and trailer volumes, a new commercial-vehicle customer, and higher steel prices passed through under certain contracts. Productivity improvements also supported its gross-profit increase.
- Electronics Group revenue and margins weakened following completion of certain programs, product-mix changes and delayed congressional approval of the FY 2011 Defense Appropriations Bill. Management expected Electronics revenue to remain relatively flat in 2012. It anticipated modest Industrial market growth through 2012 and 2013.
- Reported earnings included a $3.0 million customer settlement gain, $3.6 million gain on idle-asset dispositions and $2.6 million foreign-currency translation gain. The filing also reports a $2.3 million gain on an asset sale completed in 2012. Restructuring expense was $0.2 million in 2011; the program was described as substantially complete, with no material 2012 costs expected.
- Revenue concentration is significant: DHC represented approximately 54% of 2011 revenue, Meritor 13%, and the five largest customers 77%. DHC’s supply agreement was scheduled to expire January 1, 2015 unless renewed; many contracts have no minimum purchase commitments.
- Key exposures include cyclical commercial-vehicle demand, steel and other input costs, customer concentration, possible defense-budget reductions, contract profitability and renewal, supplier disruption, debt-covenant compliance, and environmental and pension obligations. The pension plans were underfunded by $11.7 million at year-end, versus $7.7 million in 2010; expected 2012 contributions were $1.5–$1.7 million.
- Environmental matters include contamination assessments at several sites and a 2011 suit against Whirlpool concerning groundwater beneath the Marion, Ohio property. The company reported no material pending legal proceedings otherwise. A potential indemnification claim related to the discontinued Sypris Test & Measurement business had a recorded remaining reserve of $750,000 at year-end.
- Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2011; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether Industrial Group volumes, margins and customer demand remain strong, and whether DHC renews its supply agreement before its scheduled 2015 expiration.
- Whether Electronics Group programs, margins and revenue stabilize amid federal defense-budget uncertainty.
- How much of 2011 profitability and cash generation depended on customer settlements, asset sales, foreign-exchange gains and working-capital movements.
- Ongoing borrowing availability and compliance with credit-facility covenants, alongside capital spending and working-capital needs.
- Developments in the underfunded pension plans, environmental assessments and litigation, and the discontinued-operations indemnification claim.