Sypris Solutions, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2012; financial statements are unaudited. Amounts below are in millions unless stated otherwise. Sypris provides outsourced manufacturing, engineering and technical services and specialty products through its Industrial and Electronics groups.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $98.9 | $85.1 | $195.4 | $160.9 |
| Gross profit / margin | $13.2 / 13.4% | $8.1 / 9.5% | $25.7 / 13.2% | $16.3 / 10.1% |
| Operating income / margin | $4.5 / 4.5% | $0.2 / 0.3% | $9.0 / 4.6% | $4.1 / 2.6% |
| Continuing-operations income (loss) | $5.0 | $(1.6) | $10.5 | $1.0 |
| Net income (loss) | $4.4 | $(1.6) | $9.7 | $0.5 |
| Diluted EPS | $0.22 | $(0.08) | $0.48 | $0.03 |
- Revenue and segments: Q2 revenue rose 16.3%; first-half revenue rose 21.5%. Industrial Group revenue increased 20.3% in Q2 and 28.8% for the half, driven mainly by commercial truck volumes and steel-price pass-throughs. Electronics Group revenue was nearly flat in Q2 but declined 7.5% for the half, reflecting completed programs.
- Margins and costs: Gross margin improved in both periods. Electronics’ improvement reflected a more favorable mix, including higher-margin overseas product sales; Industrial benefited from volume growth and a weaker Mexican peso. SG&A increased in dollars but declined as a share of revenue.
- Cash flow and liquidity: First-half operating cash flow was a use of $4.8, versus generation of $1.9 a year earlier, primarily because receivables used $20.4 and inventory used $6.4. Investing cash flow was positive $2.1, including $4.5 of asset-sale proceeds; capital expenditures were $2.4. Cash was $18.5 at July 1. The company reported $27.4 of excess credit-facility availability, or $45.9 of cash plus availability.
- Debt and balance sheet: Long-term debt was $14.0 at July 1, up from $10.0 at year-end 2011. Current assets were $128.5 and current liabilities $88.2. Restricted cash of $3.0 was classified as current, reflecting expected settlement of a claim within 12 months.
- Other financial items: First-half interest expense fell to $0.2 from $1.5; management attributed the decrease to lower average borrowing rates and debt. The company declared dividends of $0.02 per share for Q2 and $0.04 per share for the half.
Material changes and unusual items
- First-half 2012 results included a $2.6 gain on disposition of idle assets and a $0.5 gain on sale of Dana shares. The comparable 2011 period included a $3.0 customer-settlement gain and a $0.1 restructuring gain; these items affect year-over-year comparisons.
- Discontinued-operations legal costs related to the 2009 sale of Sypris Test & Measurement were $0.6 in Q2 and $0.8 for the first half. Sypris estimates total liability on the purchaser’s indemnification claim will not exceed $0.946, while claims asserted reach approximately $6.0. It had paid $0.196 and reserved $0.750 at July 1; $3.0 of escrow cash was classified as current.
- The company sold 43,966 Dana shares during Q2 for net proceeds of $0.556 and a gain of $0.537; it retained 100,000 shares valued at $1.281 at July 1.
Outlook, risks and contingencies
- Management expected sufficient liquidity and compliance with credit-facility covenants for at least the next 12 months, based on its current forecast. This is not a quantified earnings or revenue guidance range.
- Management cited continuing uncertainty in aerospace and defense spending, completed Electronics programs, and a lack of replacement awards. New Electronics products and programs were progressing more slowly than anticipated and were not expected to contribute significant revenue in 2012; further revenue declines were possible for at least the next 12 months.
- The company identified risks including dependence on major customers and government funding, lower volumes, program delays, working-capital demands, raw-material costs, foreign-currency movements, potential asset impairments, and covenant or credit availability pressures. Credit-facility availability below specified thresholds triggers a fixed-charge coverage covenant.
- Outstanding purchase commitments were approximately $8.4, primarily for inventory and manufacturing equipment; letters of credit were $1.0. Management said ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Industrial Group volume growth and improved margins are sustainable, and how much revenue growth reflects steel-price pass-throughs.
- Electronics Group backlog, replacement-program awards, and the timing and commercial prospects of new products.
- Receivables collection and inventory conversion, given negative first-half operating cash flow despite higher earnings.
- Credit-facility borrowing-base availability, covenant headroom, and the rise in period-end debt.
- Developments in the purchaser indemnification arbitration, the adequacy of the $0.750 reserve, and expected use of the $3.0 escrow.
- The recurring earnings and cash-flow contribution apart from asset-disposal and marketable-security gains.