Sypris Solutions, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 4, 2021; comparative period ended April 5, 2020. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The statements are unaudited.
Business context and results
Sypris supplies truck and oil-and-gas pipeline components and aerospace and defense electronics through Sypris Technologies and Sypris Electronics. Consolidated revenue declined 10.9% to $19.982 million.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $19.982 million | $22.425 million |
| Gross profit / margin | $1.816 million / 9.1% | $3.725 million / 16.6% |
| Operating income (loss) | $(1.066) million | $0.277 million |
| Net loss | $(1.630) million | $(0.305) million |
| Loss per diluted share | $(0.08) | $(0.01) |
| Operating cash flow | $(0.910) million | $0.714 million |
| Capital expenditures | $0.790 million | $0.453 million |
Gross margin contracted as cost of sales rose to 90.9% of revenue from 83.4%. SG&A fell to $2.882 million from $3.448 million, but this reduction did not offset the decline in gross profit. Interest expense was $0.222 million; income tax expense was $0.121 million.
Segment performance and material changes
- Sypris Technologies: Revenue decreased 3.8% to $13.190 million. A $1.9 million reduction in energy-related sales was partly offset by $1.4 million of higher commercial-vehicle sales. Gross profit fell to $1.171 million from $2.493 million, with lower contribution from sales volume, unfavorable mix, and COVID-related labor absences cited as factors.
- Sypris Electronics: Revenue declined 22.0% to $6.792 million. A customer stop-work order related to a component redesign and delayed communications orders reduced sales. The stop-work order was lifted in the final week of the quarter. Gross profit decreased to $0.645 million from $1.232 million; margin fell to 9.5% from 14.1%.
Cash, debt, and liquidity
- Cash and equivalents were $9.369 million at April 4, 2021, down from $11.606 million at December 31, 2020. $3.6 million was held outside the U.S. and could incur withholding taxes if repatriated.
- Operating cash use was $0.910 million, compared with cash provided of $0.714 million a year earlier. Inventory growth used $2.431 million; higher accounts payable provided $3.346 million. Cash used in operating and investing activities combined was $1.700 million.
- Current assets were $40.586 million and current liabilities $27.511 million, a current ratio of approximately 1.47. Inventory increased to $18.675 million from $16.236 million.
- Reported debt and finance obligations totaled approximately $12.563 million, including a $6.5 million secured related-party note, a $3.558 million PPP loan, finance leases, and $0.301 million of equipment financing. The related-party note is secured by a first-priority lien on substantially all company assets and carries interest of at least 8.0%.
- Management stated that projected cash was expected to fund operations for the next 12 months, but warned that adverse changes could require additional funding or further spending reductions. Purchase commitments were approximately $24.636 million, primarily for inventory and manufacturing equipment.
Outlook, risks, and unusual items
- Management expected stronger 2021 commercial-vehicle demand, with industry production projected to increase 35% from 2020, and anticipated increased oil-and-gas spending in the second half of 2021. These are expectations, not guarantees.
- Electronics backlog was expected to support a stable revenue rate through the remainder of 2021. Delayed communications orders were expected in Q2 and to convert to revenue over the balance of the year. New program awards included work continuing into 2022.
- COVID-19 uncertainty, supplier constraints, electronic-component shortages, customer demand and payment delays, and labor availability could affect sales, margins, cash flows, and operations. Management said electronic-component shortages could become a challenge in 2021.
- The company had applied for forgiveness of the full PPP loan but had no assurance of forgiveness. Payments were scheduled to begin in July 2021 absent forgiveness or a deferral; the company anticipated payments could be deferred if the SBA had not responded by then.
- The $2.5 million related-party note principal was due April 1, 2022; additional principal was scheduled for 2024 and 2026. The lender is controlled by the CEO and a director, both significant beneficial stockholders.
- Contingencies include a Department of Labor lawsuit concerning interpretation of the company’s 401(k) plans and product-liability litigation involving a pipeline closure. Management considers the claims without merit and does not expect ordinary-course matters to materially harm results, but outcomes remain uncertain. No environmental amounts were accrued.
- The company maintained a valuation allowance against all U.S. deferred tax assets. Management cited ongoing cost reductions and lower executive and board compensation implemented during the pandemic.
Important facts for investors to verify
- Whether Sypris can restore gross margins and convert the stated segment demand, backlog, and delayed orders into profitable revenue.
- The SBA’s decision on PPP forgiveness, the timing and amount of any repayment, and the effect on liquidity.
- Cash conversion and working-capital trends, particularly inventory growth, customer collections, and the ability to meet $24.636 million of purchase commitments.
- Terms, interest cost, repayment capacity, and governance oversight for the secured related-party borrowing.
- Developments in the DOL and product-liability cases, and any resulting financial exposure.