Sypris Solutions, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended April 3, 2022; compared with the three months ended April 4, 2021. Unaudited. Unless noted otherwise, amounts are in millions of dollars.
Business context
Sypris supplies truck and oil-and-gas pipeline components through Sypris Technologies, and aerospace and defense electronics through Sypris Electronics. The company operates in the U.S. and Mexico and serves customers through, among other arrangements, multi-year contracts.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $26.2 | $20.0 |
| Gross profit / margin | $4.5 / 17.2% | $1.8 / 9.1% |
| Operating income (loss) | $1.1 | ($1.1) |
| Net income (loss) | $0.2 | ($1.6) |
| Net cash used in operations | $3.3 | $0.9 |
- Revenue rose 30.9%. Technologies revenue was $17.2 million, up 30.1%; Electronics revenue was $9.0 million, up 32.7%.
- Technologies gross margin improved to 18.3% from 8.9%; Electronics gross margin improved to 15.3% from 9.5%. Consolidated operating margin was approximately 4.3%, versus a 5.3% operating loss margin in the prior-year quarter.
- Net income was $0.2 million, or $0.01 per diluted share, versus a $1.6 million loss, or $0.08 per share. Income tax expense was $0.5 million compared with $0.1 million.
- Operating cash outflow increased to $3.3 million, primarily reflecting a $4.7 million use of cash from accounts receivable and $1.2 million from inventory, partly offset by a $1.4 million source from accounts payable. Capital expenditures were $0.9 million.
- Cash declined to $7.5 million from $11.6 million at year-end 2021. Current assets were $57.1 million and current liabilities $37.3 million at April 3, 2022.
- Total liabilities were $60.5 million. Financing obligations included a $6.5 million related-party note, $4.2 million of finance leases, and $1.1 million of equipment financing. The related-party note is secured by a first-priority lien on substantially all company assets.
Changes, outlook and risks
- Improved volumes, product mix and contribution margins drove the increase in gross profit. Prior-year results were affected by COVID-related labor absences at Technologies and a customer stop-work order at Electronics, which was lifted late in Q1 2021. SG&A rose 17.6% to $3.4 million, partly because previously reduced executive, corporate and board compensation was reinstated.
- Management expected cash and cash equivalents to fund operations for the next 12 months, but cautioned that forecast shortfalls, delayed shipments, unexpected costs or pandemic-related impacts could require additional funding or spending reductions. No formal consolidated earnings or revenue guidance was provided.
- Management cited a favorable 2022 commercial-vehicle outlook and expected energy-market demand to improve versus 2021, while noting uncertainty from Russia’s invasion of Ukraine. Electronics backlog was expected to support a stable revenue rate through the balance of 2022; component shortages could continue. The company reported $45.1 million of remaining performance obligations on longer-term Electronics contracts, with approximately 49% expected to be recognized in 2022 and the remainder in 2023.
- Supply constraints, longer material lead times, and inflation in raw materials, logistics, transportation and labor were expected to persist through 2022. The company reported $36.5 million of outstanding purchase commitments, primarily for inventory and manufacturing equipment.
- Contingencies include ongoing Department of Labor litigation concerning interpretation of the company’s 401(k) plan, which could require additional participant contributions and penalties if the allegations prevail, and product-liability litigation involving a pipeline closure. Management said it was vigorously defending both matters; potential exposure in the closure case was not determinable. Management did not expect ordinary-course litigation to materially affect the company’s financial position or results.
- The company maintained a valuation allowance against all U.S. deferred tax assets. Management noted that COVID-19-related estimates remain uncertain. It reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash flow and working-capital needs improve as sales rise, particularly receivables and inventory.
- Whether management’s 12-month liquidity assessment remains supportable given the cash decline, debt maturities and $36.5 million of purchase commitments.
- The terms, interest rate resets and repayment capacity for the $6.5 million secured related-party note, including the $2.5 million due April 2023 and the relationship between the lender and company leadership.
- Whether supply shortages and inflation continue to pressure margins or delay production, and whether segment backlog converts to revenue as expected.
- Developments in the DOL 401(k) litigation and product-liability case, including any estimate or accrual of potential losses.