Sypris Solutions, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company provides truck and pipeline components through Sypris Technologies and aerospace and defense electronics manufacturing through Sypris Electronics.
Financial performance and condition
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $82.3 million | $91.8 million |
| Gross profit | $3.0 million; 3.6% margin | $0.7 million; 0.8% margin |
| Operating loss | $12.5 million; (15.2)% margin | $22.8 million |
| Net income (loss) | $(10.8) million; $(0.53) per share | $6.0 million; $0.30 per share |
| Cash from operating activities | $(9.5) million | $(19.3) million |
- Revenue declined 10.4%. Technologies revenue fell 13.3% to $54.9 million; Electronics revenue fell 3.8% to $27.4 million. Excluding CSS, sold in 2016, Electronics revenue increased $10.0 million as new programs ramped up.
- Technologies generated $0.4 million gross profit versus a $0.3 million loss; Electronics gross profit rose to $2.6 million from $1.0 million. Consolidated gross margin remained thin.
- SG&A decreased to $13.1 million from $22.0 million, while severance, relocation and other costs increased to $2.4 million from $1.2 million.
- 2017 other income included a $2.7 million gain on idle asset sales, partly offset by $0.8 million of foreign currency losses. FY2016 results benefited from a $31.2 million CSS-sale gain and a $2.4 million Toluca sale-leaseback gain; thus the year-over-year swing to a net loss is not solely an operating comparison.
- Cash and cash equivalents were $8.1 million at year-end, down from $15.3 million; $1.6 million was held outside the U.S. Operating cash use improved but remained substantial. Capital expenditures were $1.6 million.
- The company had no revolving credit facility at year-end. Debt included $6.5 million principal of secured related-party notes and $4.2 million present value of capital lease obligations. The related-party notes are secured by substantially all assets and mature in installments in 2021, 2023 and 2025.
- Current assets were $40.0 million and current liabilities $21.6 million. Stockholders’ equity was $16.9 million, down from $26.1 million. The company reported a $4.8 million underfunded U.S. pension obligation.
Material changes and management outlook
- Nonrenewal of Meritor and certain Eaton business reduced 2017 revenue by $18.5 million. Sypris completed the Broadway Plant production shutdown at year-end and moved selected assets and work to other facilities. The exit program incurred $3.0 million of its estimated $3.6 million total costs by year-end; $0.6 million remained to be recognized.
- Management expects lower employment, occupancy and depreciation costs from the Broadway transition to support improved gross profit and operating income beginning in 2018. The company expects revenue growth in 2018 and 2019 from new commercial vehicle, oil-and-gas and electronics programs; some awards remained subject to final contract negotiations.
- Management stated cash was projected to support operations for the next 12 months, but warned that revenue shortfalls, asset-sale proceeds below forecast, unexpected costs or shipment delays could require additional funding or further spending reductions. The filing also anticipates further operating losses in the near term and provides no assurance of a return to profitability.
- U.S. Tax Cuts and Jobs Act accounting produced a $0.2 million tax benefit, primarily from alternative minimum tax credits; deferred tax assets remained subject to valuation allowances. The company had $135.0 million in federal net operating loss carryforwards.
Risks, contingencies and unusual items
- Customer concentration is material: the five largest customers accounted for 52% of 2017 revenue; Detroit Diesel, Northrop Grumman and Sistemas each represented approximately 13%–14%. Approximately 30% of year-end receivables were due from Sistemas and Northrop Grumman combined.
- Key risks include continued losses and cash consumption, dependence on a small number of customers, cyclical truck and energy markets, government program funding, steel and component supply, execution of plant consolidation and new program launches, and access to capital. Management noted the company had no revolver.
- A U.S. Department of Labor lawsuit filed in December 2017 disputes the company’s interpretation of its 401(k) plan. Sypris considers the allegations without merit and intends to defend the case; potential additional plan contributions are uncertain.
- Sypris held $1.0 million of inventory for a customer whose business was affected by litigation between the customer and its distributor. A successor supply agreement provides for purchases above inventory on hand and above cost, but recovery is not assured.
- A Tampa lease dispute was settled in April 2017 for $448,000 and dismissed. Management did not expect other ordinary-course legal matters to have a material adverse effect; environmental liabilities may arise, but none were accrued at year-end.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; auditor attestation of internal controls was not required.
Important facts for investors to verify
- Whether forecast 2018–2019 program awards translate into signed contracts, shipments and profitable revenue.
- Actual cash burn and liquidity against management’s 12-month forecast, including proceeds from planned asset disposals and the absence of a revolving facility.
- Whether Broadway closure savings materialize without disrupting customer production, and whether remaining exit costs stay near estimates.
- Progress and potential financial exposure from the DOL 401(k) litigation and the customer inventory transfer arrangement.
- Terms, security and repayment capacity for the related-party notes, including the interest-rate reset beginning in 2019.
- Customer concentration, receivable collection, and the sustainability of segment gross-margin improvement.