Sypris Solutions, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 2, 2023; comparison period ended April 3, 2022. Unaudited consolidated results. Sypris provides truck and pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $32.3 | $26.2 |
| Gross profit / margin | $4.2 / 12.9% | $4.5 / 17.2% |
| Operating income / margin | $0.4 / 1.3% | $1.1 / 4.2% |
| Net income (loss) | $(0.2) | $0.2 |
| Diluted EPS | $(0.01) | $0.01 |
| Cash used in operating activities | $1.2 | $3.3 |
| Capital expenditures | $0.7 | $0.9 |
Revenue rose 23.4%. Technologies revenue increased 13.7% to $19.5 million; Electronics revenue increased 42.0% to $12.8 million. Gross profit declined 7.7% as cost of sales grew faster than revenue. Technologies gross margin fell to 13.5% from 18.3%; Electronics gross margin fell to 11.9% from 15.3%. Net loss included $0.3 million of income tax expense despite pretax income of $0.1 million.
Liquidity, cash flow and obligations
Cash was $19.5 million at April 2, down $2.2 million from year-end 2022; $5.6 million was held outside the U.S. Current assets were $91.1 million and current liabilities were $63.4 million. Inventory increased $10.4 million to $52.5 million, while accounts receivable increased $2.7 million. Management expects available cash and operating cash flows to fund operations and commitments for at least the next 12 months and beyond, subject to the risks described in the filing.
Reported current and long-term debt and finance lease obligations totaled approximately $11.9 million, including a $6.5 million secured related-party note, $3.6 million in finance leases and $1.8 million in equipment financing. The related-party note bears interest at the greater of 8.0% or 500 basis points above a specified Treasury benchmark; the rate was 8.8% at April 2. The company paid $2.5 million on the note on April 3, 2023. Purchase commitments totaled $65.4 million, primarily for inventory and manufacturing equipment, with $44.7 million scheduled for 2023.
Material changes and management outlook
- Revenue growth was driven by higher commercial vehicle, automotive and energy product sales at Technologies, and stronger communications-market sales and improved component availability at Electronics.
- Technologies gross profit was reduced by approximately $0.4 million from foreign-exchange effects in its Mexican subsidiary, as well as unfavorable energy-product mix and higher material costs. Electronics benefited from higher volume and overhead absorption, partly offset by program mix.
- Operating cash use improved year over year, but inventory investment remained substantial, primarily to support Electronics program growth. Customer prepayments helped fund some inventory purchases.
- Management expects supply-chain constraints and inflationary cost increases to continue through 2023. Electronics component shortages may persist; management expects Electronics backlog to support a stable revenue rate for the rest of 2023.
- Management expects commercial-vehicle demand to remain strong in the first half of 2023 and decrease in the second half versus 2022. It expects oil-and-gas customer demand to increase in 2023 versus 2022, while noting market and geopolitical uncertainty. No consolidated financial guidance with specific revenue or earnings targets is provided.
- Electronics had $105.9 million of remaining performance obligations on qualifying contracts at April 2; the company expects approximately 44% to be recognized in 2023 and the balance in 2024.
Risks, contingencies and unusual items
- A Mexican tax authority assessment related to the 2016 tax year was approximately $1.15 million. The subsidiary appealed; no amount was accrued because the company did not consider a loss probable.
- The Department of Labor 401(k) litigation has a $0.575 million reserve; the company estimates possible loss of $0 to $0.058 million above the reserve. A separate product-liability case has an undeterminable potential loss; the insurer accepted defense costs.
- The company does not hedge its Mexican-peso-denominated expenses and disclosed increased foreign-exchange risk. The filing attributes a material portion of Mexican operating expenses to the peso.
- The company maintains a valuation allowance against all U.S. deferred tax assets. Supply-chain availability, inflation, customer demand, government funding and the U.S. debt-ceiling process are among the cited uncertainties.
Important facts for investors to verify
- Whether gross margins recover as input-cost inflation, product mix and Mexican-peso movements evolve.
- How inventory levels, customer prepayments and the $65.4 million of purchase commitments affect working capital and future cash flow.
- The cash and debt position after the April 3 payment of $2.5 million on the related-party note, and the note’s related-party terms and upcoming maturities.
- Progress and outcomes for the Mexican tax appeal, DOL litigation and product-liability case.
- Whether projected program awards, remaining performance obligations and demand assumptions convert into revenue on schedule.