Sypris Solutions, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended July 3, 2011; compared with the periods ended July 4, 2010. Financial amounts below are in millions unless otherwise noted. Sypris provides outsourced manufacturing and technical services and specialty products through its Industrial and Electronics groups.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $85.1 | $63.1 | $160.9 | $126.0 |
| Gross profit | $8.1 | $4.6 | $16.3 | $10.4 |
| Gross margin | 9.5% | 7.3% | 10.1% | 8.2% |
| Operating income (loss) | $0.2 | $(3.5) | $4.1 | $(4.7) |
| Net income (loss) | $(1.6) | $(4.3) | $0.5 | $(6.7) |
| Net income (loss) per share | $(0.08) | $(0.23) | $0.03 | $(0.36) |
| Operating cash flow | Not presented by quarter | $1.5 | $(0.1) |
Q2 revenue grew 34.8% year over year; first-half revenue grew 27.7%. First-half operating income included a $3.0 million customer settlement gain for prior-year volumes. First-half net income also reflected a $0.45 million after-tax discontinued-operations charge related to an indemnification claim from the buyer of Sypris Test & Measurement.
Business trends and changes
- Industrial Group: Revenue increased 47.9% in Q2 and 41.6% in the first half. Higher commercial truck, light truck and trailer-axle volumes, a new commercial-vehicle customer, steel-price pass-throughs and productivity improvements supported growth. Q2 gross profit rose to $7.1 million from $2.3 million; margin improved to 10.3% from 4.9%.
- Electronics Group: Revenue decreased 2.2% in Q2 and 8.2% in the first half. Program completions, product mix and delays in fiscal 2011 defense appropriations weighed on results. Q2 gross profit fell to $1.0 million from $2.3 million; margin declined to 6.4% from 13.9%, amid engineering investment, lower higher-margin EMS revenue and greater inventory provisions.
- Consolidated Q2 gross margin improved, but the company remained loss-making for the quarter. SG&A rose modestly in dollars but declined as a share of revenue. Research and development expense increased to support Electronics product and technology development.
Cash, debt and liquidity
- At July 3, cash and cash equivalents were $14.2 million, down from $16.6 million at year-end 2010. Current assets were $111.7 million and current liabilities $79.1 million.
- Long-term debt was $22.0 million, with no current portion reported. In May 2011, Sypris replaced its former revolving agreement and senior notes with a secured credit facility providing up to $50 million, maturing in May 2016, with an option to increase availability to $60 million subject to conditions.
- Management reported $22.3 million of excess facility availability and $14.1 million of unrestricted cash, or $36.4 million of combined cash and borrowing capacity. Approximately $9.8 million of cash was held by Mexican subsidiaries.
- First-half operating cash flow was $1.5 million; investing cash use was $2.3 million, including $2.9 million of capital expenditures; financing cash use was $1.6 million. Receivables and inventory increased, partly offset by higher accounts payable.
Outlook, risks and unusual items
- Management stated it expected sufficient resources to meet cash requirements for at least the next 12 months. Longer-term funding depends on profitability, working-capital management and growth; additional financing may be needed if major customers face difficulty or working-capital and capital needs exceed expectations. Availability and acceptable terms of any additional financing are not assured.
- On August 1, 2011, Sypris agreed to sell idle machinery and equipment for an anticipated gain of approximately $3.5 million, with completion expected by September 9, 2011.
- The company estimated the buyer indemnification claim concerning its divested Test & Measurement business would not exceed $0.946 million; $0.45 million was charged in the first half and $0.196 million had been paid by July 3, 2011. The remaining amount was reserved.
- Restructuring activity generated a $0.123 million gain for the first half; approximately $0.634 million of additional program costs remained expected. The restructuring program has been intended to reduce fixed costs and improve operating performance.
- Risks highlighted include dependence on major automotive and aerospace/defense customers, government funding delays, product or contract issues, inventory valuation, foreign-exchange exposure, equipment disruptions, pension and benefit costs, and potential claims or impairments. Management said routine litigation was not expected to materially affect results; no legal proceedings were listed. No material change to previously disclosed risk factors was reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No specific financial guidance was provided.
Key facts for investors to verify
- Whether Industrial Group volume growth and productivity gains persist, and whether Electronics Group revenue and margins recover.
- How much of reported first-half profitability depended on the one-time $3.0 million customer settlement.
- Working-capital trends—especially receivables and inventory—and their effect on cash conversion.
- Borrowing-base availability, facility covenant compliance and the extent to which cash held in Mexico is accessible for group needs.
- Outcome and final cost of the indemnification claim, remaining restructuring costs, and completion and proceeds of the announced equipment sale.