Sypris Solutions, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are to the three months ended April 2, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Sypris supplies truck and pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics.
Financial performance
| Metric | Q1 2024 | Prior-year quarter |
|---|---|---|
| Revenue | $35.6 million | $32.3 million |
| Gross profit / margin | $2.9 million / 8.1% | $4.2 million / 12.9% |
| Operating income (loss) | $(1.4) million | $0.4 million |
| Net income (loss) | $(2.2) million | $(0.2) million |
| Basic and diluted loss per share | $(0.10) | $(0.01) |
| Net cash used in operating activities | $(1.7) million | $(1.2) million |
Revenue increased 10.1%, but gross profit fell 30.7%. Sypris Technologies revenue declined 5.9% to $18.4 million; Sypris Electronics revenue rose 34.5% to $17.2 million. Technologies’ gross margin fell to 11.2% from 13.5%; Electronics’ fell to 4.8% from 11.9%. The company attributed the deterioration to lower volumes, unfavorable product/program mix, higher material prices, foreign-exchange effects in Mexico, and scrap costs on two ramping Electronics programs.
Liquidity, debt and balance sheet
- Cash was $8.1 million at March 31, 2024, up from $7.9 million at year-end. Current assets were $102.9 million and current liabilities were $88.5 million.
- Inventory declined to $70.9 million from $77.3 million at year-end; accounts receivable increased to $13.1 million from $8.9 million. Operating cash use reflected, among other items, the receivables increase, partly offset by inventory reduction.
- Debt and financing included a $9.0 million secured related-party note, $3.1 million of finance leases, $1.8 million of equipment financing and a $0.5 million working-capital line. The related-party note bears interest at a rate reset annually, subject to an 8% floor; the rate was 9.56% at quarter-end. Finance lease and equipment financing rates were 8.8% and 6.8%, respectively.
- Q1 financing cash flow included $2.5 million borrowed from Gill Family Capital Management (GFCM), an entity controlled by the CEO and a director. The note is secured by a first-priority lien on substantially all company assets and is guaranteed by subsidiaries.
- Equity was $20.8 million, down from $22.5 million at year-end. The company reported an accumulated deficit of $119.2 million.
Outlook, risks and unusual items
- Management said its forecast indicates sufficient liquidity for at least the next 12 months, relying on cash, operating cash generation and working-capital reductions. It warned that revenue shortfalls, unexpected costs or shipment delays could require further cost reductions, supplier payment extensions, additional financing or other strategic actions; financing may not be available.
- Management expects North American Class 8 truck production to decline 10% in 2024, with a significant decrease beginning in Q2. It anticipates further customer demand in the oil and gas market in 2024, while noting geopolitical and macroeconomic uncertainty.
- Electronics backlog is expected to support a stable revenue rate for the rest of 2024. The company reported $90.9 million of remaining performance obligations on non-cancellable contracts longer than one year, all in Electronics; it expects to recognize about 80% in 2024 and the balance in 2025. This is not a company-wide revenue or earnings forecast.
- Inflation, supply-chain constraints, electronic-component shortages and higher logistics, utilities and labor costs may continue to pressure operations. Defense funding priorities and budget processes also remain uncertain.
- Firm, non-cancelable purchase commitments totaled $41.3 million, including $28.4 million scheduled for 2024. The company reported a $1.15 million Mexican tax assessment under appeal and accrued no loss, as management did not consider a loss probable.
- A lawsuit alleging injuries related to a Sypris Technologies product was settled on April 18, 2024, after quarter-end. The company said insurance would fund the settlement and cover defense costs. A separate 401(k) plan settlement included a $575,000 restoration payment made in 2023; the company requested a good-faith waiver of a related 10% penalty in March 2024.
Key facts for investors to verify
- Whether Electronics production ramps, scrap levels and program mix improve enough to recover margins, and whether reported backlog converts to shipments and cash on schedule.
- Whether working-capital needs and supplier payment negotiations remain manageable, and whether management’s 12-month liquidity forecast is achieved without further related-party or other financing.
- The terms, interest cost, repayment schedule and governance oversight of the $9.0 million GFCM related-party note, including its collateral and guarantees.
- Progress on the Mexican tax appeal, the requested ERISA penalty waiver, and any material developments in litigation, insurance coverage or purchase commitments.
- Management reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.