Sypris Solutions, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 3, 2021; comparisons are to the periods ended October 4, 2020. Sypris supplies truck and pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $25.7 million | $22.2 million | $71.6 million | $61.7 million |
| Gross profit / margin | $4.0 million / 15.5% | $3.5 million / 16.0% | $10.1 million / 14.1% | $9.4 million / 15.2% |
| Operating income / margin | $1.0 million / 3.8% | $0.8 million / 3.8% | $0.8 million / 1.1% | $0.3 million / 0.4% |
| Net income | $0.3 million | $3.5 million | $2.5 million | $2.8 million |
Q3 revenue rose 15.9%, largely from the recovery in commercial vehicle demand at Sypris Technologies; Electronics revenue declined. Nine-month revenue grew 16.0%, but gross margin fell as cost of sales rose faster than revenue. Nine-month net income was lower despite improved operating income, reflecting the prior-year $3.3 million deferred tax benefit and the 2021 tax expense.
- Segment trends: Nine-month Technologies revenue increased 41.5% to $47.0 million, while Electronics revenue decreased 13.6% to $24.6 million. Electronics’ decline reflected a completed prior-year program and delayed orders; component availability also constrained production.
- Cash flow: Operating cash flow was $2.2 million for the first nine months, versus $0.1 million in 2020. Capital expenditures were $1.8 million; cash declined $0.5 million to $11.1 million.
- Liquidity and obligations: Current assets were $55.8 million and current liabilities $33.4 million. Reported debt and finance-lease obligations totaled approximately $9.7 million, including $6.5 million of related-party notes; operating lease liabilities were a further $6.2 million. The $2.5 million current related-party note is due April 1, 2022. Cash included $5.0 million held outside the U.S., which could incur withholding taxes if repatriated.
- Working capital: Inventory increased to $27.4 million from $16.2 million at year-end, principally to support expected Electronics program activity. Customer contract liabilities rose to $18.9 million from $7.3 million, reflecting customer prepayments.
Outlook, risks and unusual items
- Management said cash and cash equivalents were projected to support operations for the next 12 months, but revenue shortfalls, shipment delays, unexpected costs or COVID-19 impacts could require additional funding or further cost reductions.
- Management cited favorable commercial vehicle conditions and referenced an industry forecast for 2022 production up 18% from 2021; this is a market outlook, not company revenue guidance. Oil and gas demand was expected to improve in Q4 2021 versus 2020.
- Electronics backlog was expected to support a stable revenue rate through the rest of 2021 and into 2022, though component shortages could continue. The company reported $39.4 million of remaining performance obligations, all in long-term Electronics contracts, expected to be recognized 31% in 2021, 54% in 2022 and the balance in 2023.
- The SBA approved forgiveness of the $3.6 million PPP loan and accrued interest in June 2021. The resulting $3.6 million gain increased nine-month pretax income; it is nonrecurring and not operating cash flow.
- Risks include COVID-19 and potential vaccine/testing requirements, labor and supply-chain constraints, customer and market concentration, government budget and procurement delays, and volatility in commercial vehicle and energy markets. The filing notes an enacted continuing resolution funding federal activities through December 3, 2021.
- Contingencies include a Department of Labor lawsuit concerning 401(k) plan interpretation and product-liability litigation over a pressure closure. Management disputes the allegations; potential damages in the product case were described as undeterminable. The company also had approximately $19.0 million in purchase commitments, primarily for inventory and manufacturing equipment.
Most important facts for investors to verify
- Whether Technologies’ volume recovery can offset margin pressure from mix, labor productivity, supplies and maintenance costs.
- Whether Electronics can convert its backlog and customer-funded inventory into shipments despite electronic-component shortages.
- The timing and repayment or refinancing plan for the $2.5 million related-party note due in April 2022, and the terms and governance implications of related-party financing.
- Whether operating cash generation can sustain working-capital needs, capital spending and purchase commitments while maintaining adequate liquidity.
- Developments in the litigation, COVID-19-related requirements, and federal budget or procurement timing that could affect costs or demand.