Sypris Solutions, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 29, 2013. Unaudited results; dollar amounts below are in millions unless stated otherwise. Sypris provides outsourced manufacturing and technical services and specialty products through its Industrial and Electronics Groups.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $76.3 | $78.8 | $236.9 | $274.1 |
| Gross profit / margin | $7.3 / 9.5% | $9.4 / 11.9% | $23.7 / 10.0% | $35.1 / 12.8% |
| Operating income (loss) | $(1.0) | $0.6 | $(8.5) | $9.6 |
| Continuing operations, net | $(2.0) | $0.6 | $(9.9) | $11.1 |
| Net income (loss) | $(2.0) | $(5.7) | $(9.9) | $4.0 |
| Basic EPS | $(0.10) | $(0.30) | $(0.52) | $0.19 |
- Q3 revenue fell 3.2% year over year. Industrial Group revenue rose 2.3% to $66.7 million, while Electronics Group revenue declined 29.1% to $9.6 million. Electronics posted a $0.2 million gross loss.
- For the first nine months, revenue declined 13.6%; Industrial revenue fell 7.9% and Electronics revenue fell 43.5%. Electronics recorded a $0.7 million gross loss.
- Nine-month operating results included a $6.9 million noncash goodwill impairment that fully wrote off Electronics Group goodwill. The impairment followed weaker forecasts tied to a customer’s insourcing decision and lower defense-market demand.
- Interest expense was $0.1 million in Q3 and $0.4 million for nine months. Nine-month other income of $1.4 million included gains from idle-asset sales, partly offset by foreign-currency losses. The 2012 comparisons included gains on marketable securities and losses from discontinued operations related to a settled indemnification dispute.
Cash, debt, and liquidity
- At September 29, 2013, cash was $9.6 million, versus $18.7 million at December 31, 2012. Current assets were $98.2 million and current liabilities $69.0 million. Long-term debt was $13.0 million; total liabilities were $95.8 million.
- Cash used in operations was $0.9 million for the first nine months, compared with $1.1 million provided in 2012. Investing activities used $0.8 million; financing activities used $7.4 million, including a $6.0 million reduction in revolving debt and $0.8 million of dividends.
- The PNC credit facility matures in May 2016. The company reported $23.6 million of excess availability and $9.6 million of unrestricted cash, or $33.2 million in total cash and available borrowing capacity. About $7.5 million of cash was held by Mexican subsidiaries. The filing says management expected to meet facility covenants and fund operations for at least 12 months, subject to business and economic conditions.
Changes, outlook, and risks
- Management attributed the nine-month Industrial revenue decline mainly to lower heavy-duty truck volumes. Q3 Industrial volumes improved; management expected Industrial volumes to remain flat for the rest of 2013 and rebound in Q2 2014.
- Electronics faced completed programs, customer insourcing, sequestration-related defense spending effects, and delayed government approvals. The company was developing new offerings, including identity-management, cryptographic-key-distribution, and cyber-analytics solutions, but said commercialization was slower and costly and significant revenue was not expected within 12 months. Further revenue declines and additional cost reductions remained possible.
- Dana and Meritor represented approximately 55% and 15%, respectively, of 2012 revenue. Their supply contracts were due to expire over the next 14–20 months. Sypris was negotiating with Dana, which disputed the binding effect of a recently signed amended agreement and had asserted rights to explore alternative suppliers. Sypris disputed Dana’s ability to do so. Management warned that unsuccessful negotiations or lower volumes or prices could materially harm results.
- Other risks include customer concentration, defense-budget uncertainty, inventory and working-capital demands, foreign currency exposure, and credit-facility covenant compliance. Purchase commitments were approximately $6.6 million; outstanding letters of credit were $0.8 million. Management said routine litigation was not expected to materially adversely affect the company. Disclosure controls were assessed as effective, with no material quarterly change in internal controls reported.
Important facts for investors to verify
- Progress and legal status of the Dana dispute, and renewal terms and timing for Dana and Meritor contracts.
- Electronics Group revenue, margins, new-program awards, and the possibility of further impairments or restructuring.
- Industrial demand assumptions, including the expected Q2 2014 rebound, and the effect of customer volumes and pricing.
- Credit-facility borrowing availability, covenant headroom, cash generation, and the location and availability of overseas cash.
- Working-capital movements, including receivables, inventory, and payables, and the sustainability of liquidity if operating results weaken.