Sypris Solutions, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with FY2018. Sypris is a diversified manufacturer operating through Sypris Technologies (truck and pipeline components) and Sypris Electronics (aerospace and defense electronics). Technologies generated 70.2% of 2019 revenue and Electronics 29.8%.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $87.9 million | $88.0 million |
| Gross profit / margin | $9.9 million / 11.2% | $7.6 million / 8.6% |
| Operating loss | $4.3 million | $4.3 million |
| Net loss | $3.9 million; $0.19 per share | $3.5 million; $0.17 per share |
| Cash from operating activities | Used $5.8 million | Provided $1.9 million |
| Cash and cash equivalents at year-end | $5.1 million | $10.7 million |
- Technologies revenue increased 3.1% to $61.7 million; gross profit rose to $9.8 million, with gross margin improving to 15.9% from 12.6%. Segment operating income was $4.3 million, versus $3.2 million.
- Electronics revenue declined 6.9% to $26.2 million. Gross profit was $0.1 million; segment operating loss widened to $3.0 million from $2.6 million.
- Consolidated gross margin improved, but higher SG&A—up $3.2 million to $13.7 million—left the operating loss essentially unchanged. The prior-year SG&A included a $1.9 million benefit from resolving a disputed legal fee.
- Operating cash use reflected, among other items, increased inventory ($2.8 million use), lower accounts payable ($4.1 million use) and lower receivables ($2.4 million source). Capital expenditures were $0.9 million; asset-sale proceeds were $1.9 million.
- Year-end current assets were $39.8 million and current liabilities $23.4 million. Inventory was $20.8 million, up from $18.6 million.
- Debt included a $6.5 million secured related-party note and $3.0 million of finance lease obligations. The related-party note bears 8% or a formula-based rate, is secured by substantially all Company assets, and has principal maturities in 2021, 2023 and 2025. Operating lease liabilities were $7.7 million after adoption of the lease accounting standard.
Material changes and notable items
- Revenue was nearly flat overall: Technologies growth, principally energy-related sales and program pricing, was offset by lower Electronics revenue and weaker commercial-vehicle volumes.
- Technologies’ gross-profit improvement reflected program price increases and better supply, utilities and maintenance performance; new-program pre-production and ramp-up costs partly offset gains.
- Electronics revenue was affected by component shortages and long lead times, lower volumes on certain programs, and shipments accelerated into late 2018 ahead of the January 2019 ERP implementation.
- Other income in 2019 included a $1.5 million customer-dispute settlement and a $0.7 million net gain on idle-asset sales, partly offset by $1.0 million of pension expense. 2018 included a $2.3 million insurance recovery gain related to Broadway Plant damage.
- The Broadway Plant remained closed; $2.2 million of related property was classified as held for sale at year-end. Management expected approximately $63,000 of additional exit costs.
- Cash fell by $5.6 million during 2019. Management stated that available cash and expected operating cash flows should fund operations and commitments for at least 12 months, but noted that revenue shortfalls, unexpected costs or shipment delays could require additional funding or spending reductions.
Outlook, risks and contingencies
- Management expected Technologies revenue to decrease slightly in 2020 as commercial-vehicle demand softened, partly offset by new program launches. The filing cited analyst expectations for lower North American truck shipments.
- Management expected Electronics component shortages to remain a challenge during 2020, despite efforts to qualify alternative suppliers. New Electronics awards were expected to contribute revenue into 2020. The filing cited enacted FY2020 federal appropriations and anticipated defense-market opportunities, but funding and awards remain uncertain.
- The filing noted that the emerging coronavirus outbreak could disrupt demand, supply chains, travel and operations; its potential impact was uncertain when the report was filed.
- Key risks include recent and anticipated operating losses, customer concentration (the five largest customers accounted for 61% of revenue), cyclical truck and energy markets, dependence on government-funded programs, component shortages, fixed-price contract margins, and limited access to capital before sustained profitability.
- A Department of Labor lawsuit concerning interpretation of the Company’s 401(k) plan remained unresolved. The Company said it considered the allegations without merit and was defending the matter; an adverse outcome could require additional plan contributions. Management did not expect ordinary-course litigation and claims to materially affect results, but outcomes remain uncertain.
- Management reported that material weaknesses tied to the Electronics ERP implementation and financial close controls were remediated by December 31, 2019. The Company had restated its first-quarter 2019 interim financial statements following invoice cut-off errors. Management concluded internal control over financial reporting was effective at year-end; the auditor did not attest to that assessment.
- The independent auditor issued an unqualified opinion on the financial statements. No dividends were declared in 2019 or 2018, and the Company did not anticipate paying dividends in 2020.
Important facts for investors to verify
- Whether operating cash use and declining cash can be arrested, and whether management’s 12-month liquidity assessment remains supportable.
- Progress toward replacing lost or declining programs, converting announced awards into profitable revenue, and reducing customer concentration.
- Actual impact of truck-market weakness and Electronics component availability on shipments, margins and working capital.
- Repayment capacity and terms of the secured related-party note, including its collateral and upcoming 2021 maturity.
- Resolution of the Department of Labor matter and continued effectiveness of ERP, financial-close and reporting controls.
- Realization of expected proceeds from assets held for sale and any further Broadway Plant or restructuring costs.