Sypris Solutions, Inc.
The accompanying notes are an integral part of the consolidated financial statements.
Sypris Solutions, Inc.
The accompanying notes are an integral part of the consolidated financial statements.
Sypris Solutions, Inc.
The accompanying notes are an integral part of the consolidated financial statements.
Sypris Solutions, Inc.
The accompanying notes are an integral part of the consolidated financial statements.
Sypris Solutions, Inc.
The accompanying notes are an integral part of the consolidated financial statements.
Sypris Solutions, Inc.
All references to “Sypris,” the “Company,” “we” or “our” include Sypris Solutions, Inc. and its wholly-owned subsidiaries. Sypris is a diversified provider of truck components, oil and gas pipeline components and aerospace and defense electronics. The Company produces a wide range of manufactured products, often under multi-year, sole-source contracts. The Company offers such products through its two business segments, Sypris Technologies, Inc. (“Sypris Technologies”) and Sypris Electronics, LLC (“Sypris Electronics”) (See Note 10)10).
The accompanying unaudited consolidated financial statements include the accounts of Sypris Solutions, Inc. and its wholly-owned subsidiaries and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with the instructions to Form 10-Q10-Q and Article 10 of Regulation S-XS-X of the SEC. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. The December 31, 2021 2022 consolidated balance sheet data was derived from audited statements, but does not include all disclosures required by U.S. GAAP. The Company’s operations are domiciled in the United States (U.S.) and Mexico, and we serve a wide variety of domestic and international customers. All intercompany transactions and accounts have been eliminated.
These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the results of operations, financial position and cash flows for the periods presented, and the disclosures herein are adequate to make the information presented not misleading. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Changes in facts and circumstances could have a significant impact on the resulting estimated amounts included in our consolidated financial statements. Actual results could differ from these estimates. Actual results for the three and nine months ended OctoberApril 2, 2022 2023 are not necessarily indicative of the results that may be expected for the year ending December 31,2022. 2023. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2021 2022 as presented in the Company’s Annual Report on Form 10-K.10-K.
The Company determines if an arrangement is a lease at its inception. The Company has entered into operating leases for real estate. These leases have initial terms which range from 10 years to 11 years, and often include one or more options to renew. These renewal terms can extend the lease term by 5 years, and will be included in the lease term when it is reasonably certain that the Company will exercise the option. The Company’s existing leases do not contain significant restrictive provisions; however, certain leases contain provisions for payment of real estate taxes, insurance and maintenance costs by the Company. The lease agreements do not contain any residual value guarantees. Some of the real estate lease agreements include periods of rent holidays and payments that escalate over the lease term by specified amounts. All operating lease expenses are recognized on a straight-line basis over the lease term. For finance leases, interest expense is recognized on the lease liability and the right-of-use asset is amortized over the lease term.
These operating leases are included in “Operating lease right-of-use assets” on the Company’s consolidated balance sheets, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligations to make lease payments are included in “Operating lease liabilities, current portion” and “Operating lease liabilities, net of current portion” on the Company’s consolidated balance sheets. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As of OctoberApril 2, 2022, 2023, total right-of-use assets and operating lease liabilities were approximately $4,451,000$4,072,000 and $5,152,000,$4,594,000, respectively. As of December 31, 2021, 2022, total right-of-use assets and operating lease liabilities were approximately $5,140,000$4,251,000 and $5,941,000,$4,878,000, respectively.
We primarily use our incremental borrowing rate, which is updated quarterly, based on the information available at the commencement date, in determining the present value of lease payments. If readily available, we would use the implicit rate in a new lease to determine the present value of lease payments. The Company has certain contracts for real estate which may contain lease and non-lease components which it has elected to treat as a single lease component.
The Company has entered into various short-term operating leases, primarily for office equipment with an initial term of twelve months or less. Lease payments associated with short-term leases are expensed as incurred and are not recorded on the Company’s balance sheet. The related lease expense for short-term leases was not material for the three and nine months ended OctoberApril 2, 2022 2023 and OctoberApril 3, 2021.2022.
The following table presents supplemental cash flow information related to leases (in thousands):
The following table presents certain information related to lease terms and discount rates for leases as of OctoberApril 2, 2022 2023 and December 31, 2021:2022:
The Company recognizes revenue when it satisfies a performance obligation by transferring control of a promised product or rendering a service to a customer. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for the product or service (the “transaction price”). The Company’s transaction price in its contracts with customers is generally fixed; no payment discounts, rebates or refunds are included within its contracts. The Company also does not provide service-type warranties nor does it allow customer returns. In connection with the sale of various parts to customers, the Company is subject to typical assurance warranty obligations covering the compliance of the electronics parts produced to agreed-upon specifications. Customer returns, when they occur, relate to quality rework issues and are not connected to any repurchase obligation of the Company.
A performance obligation is a promise in a contract to transfer a distinct product or render a service to a customer and is the unit of account to which the transaction price is allocated under ASC 606. When a contract contains multiple performance obligations, we allocate the transaction price to the individual performance obligations using the price at which the promised goods or services would be sold to customers on a standalone basis. For most sales within our Sypris Technologies segment and a portion of sales within Sypris Electronics, control transfers to the customer at a point in time. Indicators that control has transferred to the customer include the Company having a present right to payment, the customer obtaining legal title and the customer having the significant risks and rewards of ownership. The Company’s principal terms of sale are FOB Shipping Point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment.
For contracts where Sypris Electronics serves as a contractor for aerospace and defense companies under federally funded programs, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contracts that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Because control is transferred over time, revenue and gross profit is recognized based on the extent of progress towards completion of the performance obligation. We use labor hours incurred as a measure of progress for these contracts because it best depicts the Company’s performance of the obligation to the customer, which occurs as we incur labor on our contracts. Under this measure of progress, the extent of progress towards completion is measured based on the ratio of labor hours incurred to date to the total estimated labor hours at completion of the performance obligation.
Differences in the timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and deferred revenue, customer deposits and billings in excess of revenue recognized (contract liabilities) on the consolidated balance sheets.
Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in selling, general and administrative expense in the consolidated statements of operations.
Our potentially dilutive securities include potential common shares related to our stock options and restricted stock. Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted earnings per share excludes the impact of common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period. For the three and nine months ended OctoberApril 2, 2022, 2023, diluted weighted average common shares do not include the impact of any outstanding stock options and unvested compensation-related shares because the effect of these items on diluted net loss would be anti-dilutive. There were 38,000 potential common252,839 shares excluded from diluted earnings per share for the three and nine months ended OctoberApril 3, 2021.2022.
A reconciliation of the weighted average shares outstanding used in the calculation of basic and diluted income (loss) income per common share is as follows (in thousands):
(8)(8)
| Property, Plant and Equipment |
Property, plant and equipment consists of the following (in thousands):
| | | October 2, | | December 31, | | | April 2, | | December 31, | |
| | | 2022 | | | 2021 | | | 2023 | | | 2022 | |
| | | (Unaudited) | | | | | | (Unaudited) | | |
Land and land improvements | | $ | 43 | | | $ | 43 | | | $ | 43 | | | $ | 43 | |
Buildings and building improvements | | 7,918 | | | 7,863 | | | 8,257 | | | 8,044 | |
Machinery, equipment, furniture and fixtures | | 62,879 | | | 61,050 | | | 69,036 | | | 66,037 | |
Construction in progress | | | 2,097 | | | | 858 | | | | 2,697 | | | | 2,048 | |
| | | 72,937 | | | 69,814 | | | 80,033 | | | 76,172 | |
Accumulated depreciation | | | (57,861 | ) | | | (55,674 | ) | | | (63,261 | ) | | | (60,640 | ) |
| | | $ | 15,076 | | | $ | 14,140 | | | $ | 16,772 | | | $ | 15,532 | |
Debt outstandingLong-term obligations consists of the following (in thousands):
| | | October 2, | | December 31, | | | April 2, | | December 31, | |
| | | 2022 | | | 2021 | | | 2023 | | | 2022 | |
| | | (Unaudited) | | | | | | (Unaudited) | | | |
Current: | | |
Finance lease obligation, current portion | | $ | 1,038 | | | $ | 983 | | | $ | 1,169 | | | $ | 1,102 | |
Equipment financing obligations, current portion | | 369 | | | 336 | | | 400 | | | 398 | |
Note payable – related party, current portion | | | 2,500 | | | | 0 | | | | 4,500 | | | | 2,500 | |
Current portion of long-term debt and finance lease obligations | | $ | 3,907 | | | $ | 1,319 | | | $ | 6,069 | | | $ | 4,000 | |
Long-Term: | | |
| Long Term: | | |
Finance lease obligation | | $ | 2,684 | | | $ | 3,469 | | | $ | 2,410 | | | $ | 2,536 | |
Equipment financing obligations | | 866 | | | 868 | | | 1,430 | | | 738 | |
Note payable – related party | | 4,000 | | | 6,500 | | | 2,000 | | | 4,000 | |
Less unamortized debt issuance and modification costs | | | (12 | ) | | | (16 | ) | | | (9 | ) | | | (11 | ) |
Long-term debt and finance lease obligations net of unamortized debt costs | | $ | 7,538 | | | $ | 10,821 | | |
Long-term debt and finance lease obligations, net of unamortized debt costs | | | $ | 5,831 | | | $ | 7,263 | |
Note Payable – Related Party
The Company has received the benefit of cash infusions from Gill Family Capital Management, Inc. (“GFCM”) in the form of secured promissory note obligations totaling $6,500,000 in principal as of OctoberApril 2, 2023 and December 31, 2022 and December 31,2021.(the “Note”). GFCM is an entity controlled by the Company’s Chairman, President and Chief Executive Officer, Jeffrey T. Gill, and one of our directors, R. Scott Gill. GFCM, Jeffrey T. Gill and R. Scott Gill are significant beneficial stockholders of the Company. As of OctoberApril 2, 2022, 2023, our principal commitment under the Note was $2,500,000 due on April 1,2023, $2,000,000 on April 1, 2024 and the balance on April 1,2026. Interest on the promissory note is payable quarterly, and the rate is reset on April 1 of each year, at the greater of 8.0% or 500 basis points above the five-yearfive-year Treasury note average during the preceding 90-day90-day period, in each case, payable quarterly.which was 8.8% as of April 2, 2023. The note allows for up to an 18-month18-month deferral of payment for up to 60% of the interest due on the portion of the notes maturing in April of 2023 and 2024. The Company paid $2,500,000 on the Note on April 3, 2023.
Obligations under the promissory note are guaranteed by all of the subsidiaries and are secured by a first priority lien on substantially all assets of the Company, including those in Mexico.
Finance Lease Obligations
As of OctoberApril 2, 2022, 2023, the Company had $3,722,000$3,579,000 outstanding under finance lease obligations for both property and machinery and equipment at its Sypris Technologies locations with maturities through 2026 and a weighted average interest rate of 8.5%8.6%.
Equipment Financing Obligations
As of OctoberApril 2, 2022, 2023, the Company had $1,235,000 million$1,830,000 outstanding under equipment financing obligations,facilities, with effective interest rates ranging from 4.4% to 8.1% and payments due through 2028. Payments on the Company’s equipment financing obligations are due as follows (in thousands):
Next 12 months | | $ | 466 | | | $ | 655 | |
12 to 24 months | | 429 | | | 548 | |
24 to 36 months | | 272 | | | 373 | |
36 to 48 months | | 147 | | | 283 | |
48 to 60 months | | 50 | | | 211 | |
Thereafter | | | 6 | | | | 0 | |
Total payments | | 1,370 | | | 2,070 | |
Less imputed interest | | | (135 | ) | | | (240 | ) |
Total equipment financing obligations | | $ | 1,235 | | | $ | 1,830 | |
The Company is organized into two business segments, Sypris Technologies and Sypris Electronics. The segments are each managed separately because of the distinctions between the products, markets, customers, technologies, and workforce skills of the segments. Sypris Technologies generates revenue primarily from the sale of forged, machined, welded and heat-treated steel components primarily for the heavy commercial vehicle and high-pressure energy pipeline applications. Sypris Electronics provides circuit card and box build manufacturing, high reliability manufacturing, systems assembly and integration, design for manufacturability and design to specification work to customers in the market for aerospace and defense electronics. There was no intersegment net revenue recognized for any period presented.
The Company includes the unallocated costs of its corporate office, including the employment costs of its senior management team and other corporate personnel, administrative costs and net corporate interest expense incurred at the corporate level under the caption “General, corporate and other” in the table below. Such unallocated costs include those for centralized information technology, finance, legal and human resources support teams, certain professional fees, director fees, corporate office rent, certain self-insurance costs and recoveries, software license fees and various other administrative expenses that are not allocated to our reportable segments. The unallocated assets include cash and cash equivalents maintained in its domestic treasury accounts and the net book value of corporate facilities and related information systems. The unallocated liabilities consist primarily of the related party notes payable. Domestic income taxes are calculated at an entity level and are not allocated to our reportable segments. Corporate capital expenditures and depreciation and amortization include items attributable to the unallocated fixed assets of the corporate office and related information systems.
The following table presents financial information for the reportable segments of the Company (in thousands):
| | | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | |
| | | October 2, | | October 3, | | October 2, | | October 3, | | | April 2, | | April 3, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | 2023 | | | 2022 | |
| | | (Unaudited) | | (Unaudited) | | | (Unaudited) | |
Net revenue from unaffiliated customers: | | |
Sypris Technologies | | $ | 16,990 | | | $ | 16,693 | | | $ | 52,096 | | | $ | 47,022 | | | $ | 19,500 | | | $ | 17,155 | |
Sypris Electronics | | | 8,209 | | | | 8,990 | | | | 28,313 | | | | 24,612 | | | | 12,792 | | | | 9,011 | |
| | | $ | 25,199 | | | $ | 25,683 | | | $ | 80,409 | | | $ | 71,634 | | |
| | | |
Total net revenue | | | $ | 32,292 | | | $ | 26,166 | |
Gross profit: | | |
Sypris Technologies | | $ | 1,071 | | | $ | 2,109 | | | $ | 6,334 | | | $ | 5,789 | | | $ | 2,639 | | | $ | 3,132 | |
Sypris Electronics | | | 900 | | | | 1,869 | | | | 3,926 | | | | 4,314 | | | | 1,522 | | | | 1,377 | |
| | | $ | 1,971 | | | $ | 3,978 | | | $ | 10,260 | | | $ | 10,103 | | |
Total gross profit | | | $ | 4,161 | | | $ | 4,509 | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | October 2, | | | October 3, | | | October 2, | | | October 3, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Operating (loss) income: | | (Unaudited) | | | (Unaudited) | |
Sypris Technologies | | $ | (361 | ) | | $ | 901 | | | $ | 2,243 | | | $ | 2,344 | |
Sypris Electronics | | | (56 | ) | | | 967 | | | | 1,280 | | | | 1,641 | |
General, corporate and other | | | (1,186 | ) | | | (897 | ) | | | (3,963 | ) | | | (3,187 | ) |
| | | $ | (1,603 | ) | | $ | 971 | | | $ | (440 | ) | | $ | 798 | |
(Loss) income before taxes: | | | | | | | | | | | | | | | | |
Sypris Technologies | | $ | (585 | ) | | $ | 701 | | | $ | 1,578 | | | $ | 1,642 | |
Sypris Electronics | | | (91 | ) | | | 957 | | | | 1,167 | | | | 1,621 | |
General, corporate and other | | | (1,582 | ) | | | (1,030 | ) | | | (4,624 | ) | | | (8 | ) |
| | | $ | (2,258 | ) | | $ | 628 | | | $ | (1,879 | ) | | $ | 3,255 | |
| | | October 2, | | December 31, | | | Three Months Ended | |
| | | 2022 | | | 2021 | | | April 2, | | April 3, | |
| | | (Unaudited) | | | | 2023 | | | 2022 | |
Total assets: | | |
| | | | (Unaudited) | |
Operating income (loss): | | |
Sypris Technologies | | $ | 36,773 | | | $ | 35,977 | | | $ | 1,161 | | | $ | 1,864 | |
Sypris Electronics | | 39,602 | | | 35,599 | | | 562 | | | 501 | |
General, corporate and other | | | 15,718 | | | | 7,929 | | | | (1,307 | ) | | | (1,245 | ) |
| | | $ | 92,093 | | | $ | 79,505 | | |
| | | |
Total liabilities: | | |
Total operating income | | | $ | 416 | | | $ | 1,120 | |
Income (loss) before taxes: | | |
Sypris Technologies | | $ | 21,870 | | | $ | 20,666 | | | $ | 1,023 | | | $ | 1,619 | |
Sypris Electronics | | 43,629 | | | 31,030 | | | 532 | | | 461 | |
General, corporate and other | | | 9,089 | | | | 8,523 | | | | (1,436 | ) | | | (1,377 | ) |
| | | $ | 74,588 | | | $ | 60,219 | | |
Total income (loss) before taxes | | | $ | 119 | | | $ | 703 | |
| | | April 2, | | | December 31, | |
| | | 2023 | | | 2022 | |
| | | (Unaudited) | | | | | |
| Total assets: | | | | | | | | |
Sypris Technologies | | $ | 42,191 | | | $ | 36,875 | |
Sypris Electronics | | | 58,540 | | | | 47,522 | |
General, corporate and other | | | 15,711 | | | | 19,747 | |
Total assets | | $ | 116,442 | | | $ | 104,144 | |
| Total liabilities: | | | | | | | | |
Sypris Technologies | | $ | 21,985 | | | $ | 19,492 | |
Sypris Electronics | | | 65,050 | | | | 56,073 | |
General, corporate and other | | | 8,418 | | | | 9,004 | |
Total liabilities | | $ | 95,453 | | | $ | 84,569 | |
(11)(11)
| Commitments and Contingencies |
The provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. The Company’s warranty liability, which is included in accrued liabilities in the accompanying consolidated balance sheets as of OctoberApril 2, 2022 2023 and December 31, 2021 2022 was $679,000$723,000 and $659,000,$690,000, respectively. The Company’s warranty expense for the three and nine months ended OctoberApril 2, 2023 and April 3, 2022 and October 3, 2021 was not material.
The Company bears insurance risk as a member of a group captive insurance entity for certain general liability, automobile and workers’ compensation insurance programs, a self-insured worker’s compensation program and a self-insured employee health program. The Company records estimated liabilities for its insurance programs based on information provided by the third-partythird-party plan administrators, historical claims experience, expected costs of claims incurred but not paid, and expected costs to settle unpaid claims. The Company monitors its estimated insurance-related liabilities on a quarterly basis. As facts change, it may become necessary to make adjustments that could be material to the Company’s consolidated results of operations and financial condition.
The Company is involved in certain litigation and contract issues arising in the normal course of business. While the outcome of these matters cannot, at this time, be predicted in light of the uncertainties inherent therein, management does not expect that these matters will have a material adverse effect on the consolidated financial position or results of operations of the Company. Additionally, the Company believes its product liability insurance is adequate to cover all potential liability claims.
The Company accounts for loss contingencies in accordance with U.S. GAAP. Estimated loss contingencies are accrued only if the loss is probable and the amount of the loss can be reasonably estimated. With respect to a particular loss contingency, it may be probable that a loss has occurred but the estimate of the loss is within a wide range or undeterminable. If the Company deems an amount within the range to be a better estimate than any other amount within the range, that amount will be accrued. However, if no amount within the range is a better estimate than any other amount, the minimum amount of the range is accrued.
The Company has various current and previously-owned facilities subject to a variety of environmental regulations. The Company has received certain indemnifications from either companies previously owning these facilities or from purchasers of those facilities. Additionally, certain property previously sold by the Company has been designated as a Brownfield Site and has been approved foris under development by the purchaser. As of OctoberApril 2, 2022 2023 and December 31, 2021, 2022, no amounts were accrued for any environmental matters.
On December 27, 2017, the U.S. Department of Labor (the “DOL”) filed a lawsuit alleging that the Company had misinterpreted the language of its Company’s 401(k)401(k) Plans (collectively, the “Plan”). The DOL does not appear to dispute that the Company reached such interpretation in good faith and after consultingthe Company consulted with independent ERISA counsel. On January 26, 2022, an opinion was issued by the judge indicating that certain of the Plan language in dispute is unambiguous and would therefore limit the Company’s right to interpret such language. Following the denial of motions for summary judgement from the Company and the DOL on April 28, 2022, a hearing took place on September 13, 2022 to review issues raised in the Company’s motion to amend its answer and its proposed counter claim and general next steps for the litigation proceedings, including settlement considerations. Following the hearing the judge issued an order denying the Company’s motion to amend its answer and proposed counter claim and further requested that the parties prepare a joint status report by November 14, 2022 relating to the schedule for the litigation proceedings. While the Company believes that it has affirmative defenses and is continuing to vigorously defend the matter, the Company has engaged in settlement discussions with the DOL. The Company recorded a reserve of $525,000$575,000 during the quarteryear ended October 2,December 31, 2022, and the Company currently estimates the range of possible loss is $0 to $108,000$58,000 in excess of the amount reserved. If a settlement is not reached and the DOL’s allegations were subsequently upheld by a court, the Company could be required to make additional contributions into the accounts of its Plan participants and penalties payable to the DOL could be imposed.
On February 17, 2017, several employees (“Lucas Plaintiffs”) of KapStone Charleston Kraft, LLC filed a lawsuit in South Carolina alleging that they had been seriously burned when they opened a hinged closure and a hot tar-like material spilled out. Among other claims, the Lucas Plaintiffs allege that Sypris Technologies designed and manufactured the closure, that the closure was defective and that those defects had caused or contributed to their injuries. Sypris Technologies’ motion to dismiss for lack of jurisdiction was denied on February 28, 2020. On November 21, 2022, the Company received a demand for settlement presented by the Lucas Plaintiffs, which was rejected. The Company regards these allegations to be without merit and any potential damages to be undeterminable. As a result, we are currently unable to estimate a loss or range of loss for this matter at this time. The Company’s general liability insurer has accepted the defense costs. The Company is continuing to vigorously defend the matter.
In order to reduce manufacturing lead times, the Company enters into agreements with certain suppliers to purchase inventory based on the Company’s requirements. A significant portion of the Company’s purchase commitments arising from these agreements consists of firm and non-cancelable commitments. These purchase commitments totaled $57,058,000$65,431,000 as of OctoberApril 2, 2022, 2023, of which $15,224,000$44,667,000 is for purchases to be made in 2022, $31,884,000 is for purchases to be made2023, $20,415,000 in 20232024 and $9,950,000 is for purchases to be madethe balance in 2024. The Company also had outstanding purchase commitments of $1,261,000 as of October 2, 2022 for the purchase of manufacturing equipment.2025.
The provision for income taxes includes federal, state, local and foreign taxes. The Company’s effective tax rate varies from period to period due to the proportion of foreign and domestic pre-tax income expected to be generated by the Company. The Company provides for income taxes for its domestic operations at a statutory rate of 21% in 20222023 and 20212022 and for its foreign operations at a statutory rate of 30% in 20222023 and 2021.2022. Reconciling items between the federal statutory rate and the effective tax rate also include the expected usage of federal net operating loss carryforwards, state income taxes, valuation allowances and certain other permanent differences.
The Company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements in accordance with ASC 740, Income Taxes (ASC 740)740). These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of assets or liabilities are recovered or settled. ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company evaluates its deferred tax position on a quarterly basis and valuation allowances are provided as necessary. During this evaluation, the Company reviews its forecast of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred tax assets to determine if a valuation allowance is needed.
Based on the Company’s consideration of all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations, the Company has established a valuation allowance against all U.S. deferred tax assets. Until an appropriate level and characterization of profitability is attained, the Company expects to continue to maintain a valuation allowance on its net deferred tax assets related to future U.S. tax benefits.
The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. To the Company’s knowledge, the Internal Revenue Service (IRS) is not currently examining the Company’s U.S. income tax returns for 2019 through 2021, for which the statute has yet to expire. During the first quarter of 2023, the Company’s wholly-owned subsidiary in Mexico received a formal tax assessment notice from Mexico’s Federal Tax Administration Service, Servicio de Administracion Tributaria’s (the “SAT”) pertaining to revenue variances and disallowed deductions related to an audit by the SAT of the 2016 tax year. The tax liability for the variances is $20,922,000 Mexican pesos, which includes annual adjustments for inflation, interest and penalties and equals approximately $1,150,000 USD at February 23, 2023. The Mexican subsidiary believes the variances can be substantially eliminated and filed an administrative appeal with the SAT in April 2023 and will further pursue all available legal actions in response to this assessment. No amounts have been accrued, as the Company does not believe a loss is probable. In addition, open tax years related to state and foreign jurisdictions remain subject to examination.
(13)(13)
| Employee Benefit Plans |
PensionThe following table details the components of pension (income) expense (benefit) consisted of the following (in thousands):
| | | Three Months Ended | | Nine Months Ended | | |
| | | October 2, | | October 3, | | October 2, | | October 3, | | | Three Months Ended | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | April 2, | | April 3, | |
| | | (Unaudited) | | (Unaudited) | | | 2023 | | | 2022 | |
| | | | (Unaudited) | |
Service cost | | $ | 1 | | | $ | 1 | | | $ | 3 | | | $ | 3 | | | $ | 1 | | | $ | 1 | |
Interest cost on projected benefit obligation | | 210 | | | 194 | | | 630 | | | 581 | | | 210 | | | 194 | |
Net amortizations, deferrals and other costs | | 140 | | | 153 | | | 420 | | | 459 | | |
Net amortizations of actuarial loss | | | 140 | | | 153 | |
Expected return on plan assets | | | (204 | ) | | | (189 | ) | | | (613 | ) | | | (567 | ) | | | (204 | ) | | | (188 | ) |
Net periodic benefit cost | | $ | 147 | | | $ | 159 | | | $ | 440 | | | $ | 476 | | | $ | 147 | | | $ | 160 | |
The net periodic benefit cost of the defined benefit pension plans incurred during the three and nine-monththree-month periods ended OctoberApril 2, 2023 and April 3, 2022 and October 3, 2021 are reflected in the following captions in the accompanying consolidated statements of operations (in thousands):
| | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | |
| | | October 2, | | October 3, | | October 2, | | October 3, | | | April 2, | | April 3, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | 2023 | | | 2022 | |
| | | (Unaudited) | | (Unaudited) | | | (Unaudited) | |
Service cost: | | |
Selling, general and administrative expenses | | $ | 1 | | | $ | 1 | | | $ | 3 | | | $ | 3 | | | $ | 1 | | | $ | 1 | |
Other net periodic benefit costs: | | |
Other expense, net | | | 146 | | | | 158 | | | | 437 | | | | 473 | | | | 146 | | | | 159 | |
Total | | $ | 147 | | | $ | 159 | | | $ | 440 | | | $ | 476 | | | $ | 147 | | | $ | 160 | |
(14)(14)
| Accumulated Other Comprehensive Loss |
The Company’s accumulated other comprehensive loss consists of employee benefit-relatedbenefit related adjustments and foreign currency translation adjustments.
Accumulated other comprehensive loss consisted of the following (in thousands):
| | | October 2, | | December 31, | | | April 2, | | December 31, | |
| | | 2022 | | | 2021 | | | 2023 | | | 2022 | |
| | | (Unaudited) | | | | | | (Unaudited) | | |
Foreign currency translation adjustments | | $ | (11,060 | ) | | $ | (11,440 | ) | | $ | (9,085 | ) | | $ | (10,458 | ) |
Employee benefit related adjustments – U.S., net of tax | | (11,745 | ) | | (11,745 | ) | | (10,488 | ) | | (10,488 | ) |
Employee benefit related adjustments – Mexico, net of tax | | | 191 | | | | 191 | | | | 101 | | | | 101 | |
Accumulated other comprehensive loss | | $ | (22,614 | ) | | $ | (22,994 | ) | | $ | (19,472 | ) | | $ | (20,845 | ) |
(15)(15)
| Fair Value of Financial Instruments |
Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial statements at their carrying amount which approximates fair value because of the short-term maturity of those instruments. The carrying amount of debt outstanding at OctoberApril 2, 2022 2023 approximates fair value, and is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments (Level 2)2).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a diversified provider of truck components, oil and gas pipeline components and aerospace and defense electronics. We offer a wide range of manufactured products, often under multi-year sole-source contracts.
We are organized into two business segments, Sypris Technologies and Sypris Electronics. Sypris Technologies, which is comprised of Sypris Technologies, Inc. and its subsidiaries, generates revenue primarily from the sale of forged, machined, welded and heat-treated steel components primarily for the heavy commercial vehicle and high-pressure energy pipeline applications. Sypris Electronics, which is comprised of Sypris Electronics, LLC, generates revenue primarily through circuit card and full “box build” manufacturing, high reliability manufacturing, systems assembly and integration, design for manufacturability and design to specification work.
We focus on those markets where we believe we have the expertise, qualifications and leadership position to sustain a competitive advantage. We target our resources to support the needs of industry participants that embrace technological innovation and flexibility, coupled with multi-year contractual relationships, as a strategic component of their supply chain management. These contracts, many of which are sole-source by part number, have historically created opportunities to invest in leading-edge processes or technologies to help our customers remain competitive. The productivity and innovation that can result from such investments helps to differentiate us from our competition when it comes to cost, quality, reliability and customer service.
Impact of COVID-19 on Our Business
The COVID-19 pandemic negatively impacted the Company’s results of operations, cash flowsDuring 2022 and financial position in 2020 and 2021, and in the first nine monthsquarter of 2022. We have also2023, residual effects of the COVID pandemic continued to experiencecontribute to various degrees of supply chain challenges, in the first nine months of 2022, including increased lead times for raw materials due to availability constraints and high demand. While we have elevated our engagement with our suppliers and used secondary suppliers and new methods of procurement where available to mitigate the supply chain pressures, we expect supply chain challenges to continue throughout 2022 and into 2023.
In connection with the supply chain challenges described above, we have experienced inflationary increases of certain raw materials, as well as logistics, transportation, utilities and labor costs. While we have taken pricing actions and we strive for productivity improvements that could help offset these inflationary cost increases, we expect inflationary cost increases to continue throughout 2022 and into 2023.
Sypris Technologies Outlook
Demand inConditions have remained relatively stable for the North American Class 4-8 commercial vehicle market began to recover in the second half of 2020 following an anticipated market decline in the first half of 2020 that was deepened by the impact of the COVID-19 pandemic. Market conditions have improved since then for commercial vehicles in addition to the automotive, sport utility vehicle and off-highway markets also served by Sypris Technologies. During the first quarter of 2023, production of Class 8 trucks in North America increased 17% over the first quarter of 2022. The outlook for 2023 is for continued strong demand for production during the first half of 2023 with levels decreasing during the second half as compared to 2022. While there is growing evidence of a slowing North American economy, we believe that the market diversification Sypris Technologies has accomplished over recent years by adding new programs in the automotive, sport-utility and off-highway markets has benefited and will continue to benefit the Company as the demand cycles for our products in these markets has experienced less volatilitydiffers from than the Class 8 commercial vehicle market.market, thereby reducing volatility in our revenue profile.
Reduced travel, business closures, and other economic impacts related to the COVID-19 pandemic suppressed oil and natural gas demand, thereby adversely impacting the oil and gas markets served by our Tube Turns® brand of engineered products. This caused major pipeline developers to significantly scale back near-term capital investments in new pipeline infrastructure, which resulted in reduced demand for our products for the oil and gas markets during 2021 and the first nine months of 2022. Sales in this market are dependent on, among other things, the level of worldwide oil and gas drilling, the price of crude oil and natural gas and capital spending by exploration and production companies and drilling contractors. The U.S. average land rig count continues to be below pre-pandemic levels but rose 42%8% in the thirdfirst quarter of 2023 compared to the first quarter of 2022 and 74% compared to the thirdfirst quarter of 2021. As commodity prices improve and activity increases, particularly in liquefied natural gas (“LNG”) shipments to Europe, we currently expect customer demand in this market to increase in the fourth quarter of 20222023 compared to same period of 2021.2022. However, the conflictwar between Russia and Ukraine has led to disruption, instability and volatility in global markets and industries that could negatively impact our operations.
We will continue to pursueare pursuing new business in a wide variety of markets from light automotive to valves to new energy related product lines to achieve a more balanced portfolio across our customers, markets and products. We have recently announced new awards that will contribute to revenue growth for Sypris Technologies going forward.
Sypris Electronics Outlook
As noted above, the COVID-19 pandemic continued to causecontribute to business impacts in the first nine months of 2022 including supply chain challenges and delays. The majority of the government aerospace and defense programs that we support require specific components that are sole-sourced to specific suppliers; therefore, the resolution of supplier constraints requires coordination with our customers or the end-users of the products. We have partnered with our customers to qualify alternative components or suppliers and will continue to focus on our supply chain to attempt to mitigate the impact of supply component shortages on our business. Electronic component shortages may continue to be a challenge during the remainder of 2022 and into 2023. We may not be successful in addressing these shortages and other supply chain issues.
During 20212022 and the first nine monthsquarter of 2022,2023, we announced new program awards and releases for Sypris Electronics, with certain programs continuing into 2024. In addition to contract awards from Department of Defense (“DoD”) prime contractors related to weapons systems, electronic warfare and infrared countermeasures in our traditional aerospace and defense markets, we have also been awarded subcontracts related to the communication and navigation markets, which align with our advanced capabilities for delivering products for complex, high cost of failure platforms.
On March 15, 2022, President Biden signed the Consolidated Appropriations Act, 2022, providing annual funding for the DoD and other government departments and agencies. The appropriation provided $781 billion for national defense, which includes the DoD, Department of Energy (DoE) nuclear weapons-related activities, and the national security activities of the Coast Guard, Federal Bureau of Investigation, and others. The DoD portion was $742.3 billion, $25 billion more than the President’s Fiscal Year (FY) 2022 request. Additionally, the legislation included $13.6 billion in supplemental funding to support Ukraine, including $3.5 billion for defense articles and $650 million in Foreign Military Financing (FMF) for Ukraine and other Eastern European allies. An additional $40 billion in emergency supplemental appropriations was approved by Congress in May 2022.
On March 28, 2022, President Biden’sBiden's Administration submitted to Congress the President’s FYFiscal Year (FY) 2023 budget request, which proposes $813proposed $813.4 billion in total national defense spending, of which $773 billion was for the base budget of the DoD.
On December 29, 2022, the President signed the FY 2023 Omnibus Appropriations Act into law, which provides $858 billion in total national defense funding, of which $816.7 billion is for the DoD base budget. This reflects a $44.6 billion increase over the FY 2023 request for national defense spending, and a $43.7 billion increase for the DoD. The President’s Fiscal Year (FY) 2024 budget request was submitted to Congress on March 9, 2023 initiating the FY 2024 defense authorization and appropriations legislative process. The request includes $866 billion for national defense. Thedefense spending, of which $842 billion is for the DoD portion of this request is $773 billion, a 4% increase abovebase budget.
In addition to the FY 2022 enacted amount. However,2024 budget process, Congress has not yet enacted an annual budget for FY 2023. To avert a government shutdown,will have to contend with the legal limit on September 30, 2022, a continuing resolution funding measureU.S. debt, commonly known as the debt ceiling. The current statutory limit of $31.4 trillion was enactedreached in January 2023, requiring the Treasury Department to finance alltake accounting measures to continue normally financing U.S. government activities through December 16, 2022. Underobligations while avoiding exceeding the continuing resolution, partial-yeardebt ceiling. It is expected, however, the U.S. government will exhaust these measures by June 2023. If the debt ceiling is not raised, the U.S. government may not be able to fulfill its funding at amounts consistent with appropriated levels for FY 2022obligations and there could be significant disruption to all discretionary programs and wider financial and economic repercussions. The federal budget and debt ceiling are available, subjectexpected to certain restrictions, but new spending initiatives are not authorized. Importantly, our key programs continue to be supportedthe subject of considerable congressional debate. Although we believe DoD, intelligence, and funded despite the continuing resolution financing mechanism. However, during periods covered by continuing resolutions, we may experience delays in procurement of products and services duehomeland security programs will continue to a lack ofreceive consensus support for increased funding and those delays may affectwould likely receive priority if this scenario came to fruition, the effect on individual programs or our results of operations.
It is difficult to predict the specific course of future defense budgets. However, we believe the ongoing conflict in Ukraine and the escalating tensions between China and Taiwan have highlighted some of the national security threats to our nation and our allies, and the need for strong deterrence and a robust defense capability, as well as impacting our political and economic environment. More generally, the threat to U.S. national security remains very substantial and we believe that our capabilities should help our customers defend against current and future threats and, as a result, continue to allow for long-term profitable business growth.cannot be predicted at this time.
We expect to compete for follow-on business opportunities as a subcontractor on future builds of several existing government programs. However, the federal budget and debt ceiling are expected to continue to be the subject of considerable uncertainty and the impact on demand for our products and services and our business are difficult to predict.
See also the discussion of Congressional budgetary constraints or reallocations risks within “Item 1A, Risk Factors” included in our 20212022 Form 10-K.
Results of Operations
The tablestable below comparecompares our segment and consolidated results for the three and nine month periodsfirst quarter of operations of 20222023 to the three and nine month periodsfirst quarter of operations of 2021. The tables present2022. It presents the results for each period, the change in those results from 20212022 to 20222023 in both dollars and as a percentage, change andas well as the results for each period as a percentage of net revenue.
| | ● | The first two columns in eachthe table show the absolute results for each period presented. |
| | ● | The columns entitled “Year Over Year Change” and “Year Over Year Percentage Change” show the change in results, both in dollars and percentages. These two columns show favorable changes as positive and unfavorable changes as negative. For example, when our net revenue increases from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative number in both columns. |
| | ● | The last two columns in eachthe table show the results for each period as a percentage of net revenue. In these two columns, the cost of sales and gross profit for each segment are given as a percentage of that segment’s net revenue. These amounts are shown in italics. |
In addition, as used in the table, “NM” means “not meaningful.”
Three Months Ended OctoberApril 2, 20222023 Compared to Three Months Ended OctoberApril 3, 20212022
| | | | | | | | | | | | | | | Year Over | | | | | | | | | | | | | | | | | | | | | | Year Over | | | | | | | | |
| | | | | | | | | | | Year Over | | Year | | Results as Percentage of | | | | | | | | | | | Year Over | | Year | | Results as Percentage of | |
| | | | | | | | | | | Year | | Percentage | | Net Revenue for the Three | | | | | | | | | | | Year | | Percentage | | Net Revenue for the Three | |
| | | Three Months Ended, | | Change | | Change | | Months Ended | | | Three Months Ended, | | | Change | | | Change | | | Months Ended | |
| | | October 2, | | October 3, | | Favorable | | Favorable | | October 2, | | October 3, | | | April 2, | | April 3, | | Favorable | | Favorable | | April 2, | | April 3, | |
| | | 2022 | | | 2021 | | | (Unfavorable) | | | (Unfavorable) | | | 2022 | | | 2021 | | | 2023 | | | 2022 | | | (Unfavorable) | | | (Unfavorable) | | | 2023 | | | 2022 | |
| | | (in thousands, except percentage data) | | | (in thousands, except percentage data) | |
Net revenue: | | | | | | | | | | | | | | |
Sypris Technologies | | $ | 16,990 | | | $ | 16,693 | | | $ | 297 | | | 1.8 | % | | 67.4 | % | | 65.0 | % | | $ | 19,500 | | | $ | 17,155 | | | $ | 2,345 | | | 13.7 | % | | 60.4 | % | | 65.6 | % |
Sypris Electronics | | | 8,209 | | | | 8,990 | | | | (781 | ) | | (8.7 | ) | | | 32.6 | | | | 35.0 | | | | 12,792 | | | | 9,011 | | | | 3,781 | | | 42.0 | | | | 39.6 | | | | 34.4 | |
Total | | 25,199 | | | 25,683 | | | (484 | ) | | (1.9 | ) | | 100.0 | | | 100.0 | | | 32,292 | | | 26,166 | | | 6,126 | | | 23.4 | | | 100.0 | | | 100.0 | |
| | | | | | | | | | | | | | | |
Cost of sales: | | | | | | | | | | | | | | |
Sypris Technologies | | 15,919 | | | 14,584 | | | (1,335 | ) | | (9.2 | ) | | | 93.7 | | | | 87.4 | | | 16,861 | | | 14,023 | | | (2,838 | ) | | (20.2 | ) | | | 86.5 | | | | 81.7 | |
Sypris Electronics | | | 7,309 | | | | 7,121 | | | | (188 | ) | | (2.6 | ) | | | 89.0 | | | | 79.2 | | | | 11,270 | | | | 7,634 | | | | (3,636 | ) | | (47.6 | ) | | | 88.1 | | | | 84.7 | |
Total | | 23,228 | | | 21,705 | | | (1,523 | ) | | (7.0 | ) | | 92.2 | | | 84.5 | | | 28,131 | | | 21,657 | | | (6,474 | ) | | (29.9 | ) | | 87.1 | | | 82.8 | |
| | | | | | | | | | | | | | | |
Gross profit: | | | | | | | | | | | | | | |
Sypris Technologies | | 1,071 | | | 2,109 | | | (1,038 | ) | | (49.2 | ) | | | 6.3 | | | | 12.6 | | | 2,639 | | | 3,132 | | | (493 | ) | | (15.7 | ) | | | 13.5 | | | | 18.3 | |
Sypris Electronics | | | 900 | | | | 1,869 | | | | (969 | ) | | (51.8 | ) | | | 11.0 | | | | 20.8 | | | | 1,522 | | | | 1,377 | | | | 145 | | | 10.5 | | | | 11.9 | | | | 15.3 | |
Total | | 1,971 | | | 3,978 | | | (2,007 | ) | | (50.5 | ) | | 7.8 | | | 15.5 | | | 4,161 | | | 4,509 | | | (348 | ) | | (7.7 | ) | | 12.9 | | | 17.2 | |
| | | | | | | | | | | | | | | |
Selling, general and administrative | | | 3,574 | | | | 3,007 | | | | (567 | ) | | (18.9 | ) | | | 14.2 | | | | 11.7 | | | | 3,745 | | | | 3,389 | | | | (356 | ) | | (10.5 | ) | | | 11.6 | | | | 13.0 | |
Operating (loss) income | | (1,603 | ) | | 971 | | | (2,574 | ) | | NM | | | (6.4 | ) | | 3.8 | | |
Operating income | | | 416 | | | 1,120 | | | (704 | ) | | (62.9 | ) | | 1.3 | | | 4.2 | |
| | | | | | | | | | | | | | | |
Interest expense, net | | 273 | | | 211 | | | (62 | ) | | (29.4 | ) | | 1.1 | | | 0.8 | | | 226 | | | 248 | | | 22 | | | 8.9 | | | 0.7 | | | 0.9 | |
Other expense, net | | | 382 | | | | 132 | | | | (250 | ) | | (189.4 | ) | | | 1.5 | | | | 0.5 | | | | 71 | | | | 169 | | | | 98 | | | 58.0 | | | | 0.2 | | | | 0.6 | |
| | | | | | | | | | | | | | | |
(Loss) income before taxes | | (2,258 | ) | | 628 | | | (2,886 | ) | | NM | | | (9.0 | ) | | 2.5 | | |
Income tax (benefit) expense, net | | | (16 | ) | | | 334 | | | | 350 | | | NM | | | | (0.1 | ) | | | 1.3 | | |
Income before taxes | | | 119 | | | 703 | | | (584 | ) | | (83.1 | ) | | 0.4 | | | 2.7 | |
Income tax expense, net | | | | 294 | | | | 466 | | | | 172 | | | 36.9 | | | | 0.9 | | | | 1.8 | |
| | | | | | | | | | | | | | | |
Net (loss) income | | $ | (2,242 | ) | | $ | 294 | | | $ | (2,536 | ) | | NM | | | | (8.9 | )% | | | 1.1 | % | | $ | (175 | ) | | $ | 237 | | | $ | (412 | ) | | NM | | | | (0.5 | )% | | | 0.9 | % |
Nine Months Ended October 2, 2022 Compared to Nine Months Ended October 3, 2021.
| | | | | | | | | | | | | | | Year Over | | | | | | | | | |
| | | | | | | | | | | Year Over | | | Year | | | Results as Percentage of | |
| | | | | | | | | | | Year | | | Percentage | | | Net Revenue for the Nine | |
| | | Nine Months Ended, | | | Change | | | Change | | | Months Ended | |
| | | October 2, | | | October 3, | | | Favorable | | | Favorable | | | October 2, | | | October 3, | |
| | | 2022 | | | 2021 | | | (Unfavorable) | | | (Unfavorable) | | | 2022 | | | 2021 | |
| | | (in thousands, except percentage data) | |
Net revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
Sypris Technologies | | $ | 52,096 | | | $ | 47,022 | | | $ | 5,074 | | | | 10.8 | % | | | 64.8 | % | | | 65.6 | % |
Sypris Electronics | | | 28,313 | | | | 24,612 | | | | 3,701 | | | | 15.0 | | | | 35.2 | | | | 34.4 | |
Total | | | 80,409 | | | | 71,634 | | | | 8,775 | | | | 12.2 | | | | 100.0 | | | | 100.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of sales: | | | | | | | | | | | | | | | | | | | | | | | | |
Sypris Technologies | | | 45,762 | | | | 41,233 | | | | (4,529 | ) | | | (11.0 | ) | | | 87.8 | | | | 87.7 | |
Sypris Electronics | | | 24,387 | | | | 20,298 | | | | (4,089 | ) | | | (20.1 | ) | | | 86.1 | | | | 82.5 | |
Total | | | 70,149 | | | | 61,531 | | | | (8,618 | ) | | | (14.0 | ) | | | 87.2 | | | | 85.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit: | | | | | | | | | | | | | | | | | | | | | | | | |
Sypris Technologies | | | 6,334 | | | | 5,789 | | | | 545 | | | | 9.4 | | | | 12.2 | | | | 12.3 | |
Sypris Electronics | | | 3,926 | | | | 4,314 | | | | (388 | ) | | | (9.0 | ) | | | 13.9 | | | | 17.5 | |
Total | | | 10,260 | | | | 10,103 | | | | 157 | | | | 1.6 | | | | 12.8 | | | | 14.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 10,700 | | | | 9,305 | | | | (1,395 | ) | | | (15.0 | ) | | | 13.3 | | | | 13.0 | |
Operating (loss) income | | | (440 | ) | | | 798 | | | | (1,238 | ) | | | NM | | | | (0.5 | ) | | | 1.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net | | | 784 | | | | 644 | | | | (140 | ) | | | (21.7 | ) | | | 1.0 | | | | 0.9 | |
Other expense, net | | | 655 | | | | 498 | | | | (157 | ) | | | (31.5 | ) | | | 0.8 | | | | 0.7 | |
Forgiveness of PPP Loan and related interest | | | 0 | | | | (3,599 | ) | | | (3,599 | ) | | | NM | | | | 0.0 | | | | (5.0 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) income before taxes | | | (1,879 | ) | | | 3,255 | | | | (5,134 | ) | | | NM | | | | (2.3 | ) | | | 4.6 | |
Income tax expense, net | | | 755 | | | | 768 | | | | 13 | | | | 1.7 | | | | 0.9 | | | | 1.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (2,634 | ) | | $ | 2,487 | | | $ | (5,121 | ) | | | NM | | | | (3.3 | )% | | | 3.5 | % |
Net Revenue. Sypris Technologies derives its revenue from the sale of forged and finished steel components and subassemblies and high-pressure closures and other fabricated products. Net revenue for Sypris Technologies for the three and nine-month periods ended October 2, 2022 increased $0.3 million and $5.1 million, respectively, from the prior year comparable periods. The comparison of net revenue for the three and nine month periods includes price adjustments for increases in the market price of steel over the past year, which is contractually passed through to customers under certain contracts. The steel price adjustments totaled approximately $0.9 million and $3.413.7%, or $2.3 million, for the three and nine month periods, respectively.first quarter of 2023 compared to the first quarter of 2022. The net revenue increase is partially offset by lower shipment volumefor the quarter was primarily attributable to increased sales volumes of $0.9 million attributable to the commercial vehicle market. Production of Class 8 commercial vehicles in North America continues to be impacted by supply chain constraints unrelated tomarket, $0.3 million from the availability of the drive axle shafts and other components we manufacture. This in turn has trickled down into our shipment volume, as our customers adjust their inventory levels to align with the end market build rates. Higher shipments ofautomotive, sport utility vehicle and off-highway markets and $1.1 million in energy components contributed to the revenue increase for the comparable three and nine month periods.product sales.
Sypris Electronics derives its revenue primarily from circuit card and full “box build” manufacturing, high reliability manufacturing and systems assembly and integration. Net revenue for Sypris Electronics decreased $0.8increased $3.8 million andto $12.8 million in the first quarter of 2023 compared to $9.0 million in the first quarter of 2022. Sales to customers serving the communications market increased $3.7 million, respectively, foras compared to the three and nine months ended October 2, 2022, fromfirst quarter of 2022. Additionally, material availability improved compared to the prior year comparable periods. The decreaseperiod, which resulted in revenue for the three months ended October 2, 2022 was primarily related to material availability, as receipts of a limited number of specific parts necessary to complete the build of products were delayed or, in other instances, required us to resource and obtain alternative parts or use alternative suppliers. Thean increase in sales for the nine months ended October 2, 2022, was a result of the ramping of production during the year for two follow-on programs that began shipments during the fourth quarter of 2021.sales.
Gross Profit. Sypris Technologies’ gross profit decreased $1.0 million and increased $0.5 million to $2.6 million in the first quarter of 2023 as compared to $3.1 million in the first quarter of 2022. The first quarter of 2023 was negatively impacted by foreign exchange rates for the three and nine months ended October 2, 2022, respectively, from the prior year comparable periods. Revenue mix was unfavorable for the three months ended October 2, 2022 contributing to theour Mexican subsidiary, resulting in a decrease in gross profit. Variable manufacturing costs also increased during the current year as inflationary pressure increased spend for consumable supplies and tooling, and natural gas and electricity rates increased from the prior year. Theprofit of $0.4 million. Additionally, gross profit variancewas negatively impacted by an unfavorable mix for both the threeour energy product sales and nine month periods also includes additional costs incurred during 2022 to support the previously forecasted increase in demand driven by the commercial vehicle market. For the nine months ended October 2, 2022, favorable revenue mix from our higher value add componentsmaterial prices. Gross margin for the sport utility and energy markets contributedfirst quarter of 2023 was 13.5% as compared to 18.3% in the increase in gross profit.first quarter of 2022.
Sypris Electronics’ gross profit decreased $1.0increased $0.1 million and $0.4to $1.5 million in the first quarter of 2023 as compared to $1.4 million for the three and nine months ended October 2, 2022, respectively, from the prior year comparable periods.first quarter of 2022. The decreaseincrease in gross profit for the three and nine months ended October 2, 2022 was primarily a result of lower marginsthe increase in revenue which also had a positive impact on newoverhead absorption. This was partially offset by an unfavorable mix of programs ramping during the period compared to margins on mature programs completed during 2021. Additional engineering costs were also incurred in 2022 on certain programs that have not yet reached full rate production.quarter. The order backlog for Sypris Electronics is expected to support a stable revenue rate during the balance of 2023. Gross margin for the first quarter of 2023 was 11.9% as compared to 15.3% in the first quarter of 2022.
Selling, General and Administrative. Selling, general and administrative expense increased by $0.6$0.4 million and $1.4to $3.7 million in the first quarter of 2023 as compared to $3.4 million for the three and nine month periods ended October 2,same period in 2022 respectively, as compared to the same periods in 2021, primarily as a result of a reinstatement of compensation for our Chairman, Presidentincrease sales commissions on the increase in energy product sales and CEO and certain other senior leadership and corporate personnel and our Board of Directors, which had been reduced in 2020 across the Company amid the onset of the COVID-19 pandemic.additional headcount. Selling, general and administrative expense increaseddecreased as a percentage of revenue to 14.2% and 13.3%11.6% for the three and nine months ended October 2, 2022, respectivelyfirst quarter of 2023 from 11.7% and 13.0% for the three and nine months ended October 3, 2021, respectively.
Forgiveness of PPP Loan and related interest. On June 28, 2021, the Company received notice from BMO Harris Bank National Association (“BMO”) that BMO had received confirmation from the Small Business Administration (“SBA”) that the Company’s application for forgiveness of a loan in the amount of $3.6 million (the “PPP Loan”) pursuant to expansion of the SBA 7(a) loan program, established under the CARES Act had been approved. The loan forgiveness request in the amount of $3.6 million was applied to the Company’s entire outstanding PPP Loan balance with BMO. During the nine months ended October 3, 2021, the Company recorded a gain on the forgiveness of the PPP Loan and accrued interest in the amount of $3.6 million.prior year comparable period.
Income Taxes. The Company’s income tax (benefit) expense for the three and nine months ended OctoberApril 2, 20222023 and OctoberApril 3, 20212022 consists primarily of currently payable state and local income taxes on domestic operations and foreign income taxes on one of its Mexican subsidiaries.
Deferred tax assets and liabilities are determined separately for each tax jurisdiction in which we conduct our operations or otherwise incur taxable income or losses. The Company evaluates its deferred tax position on a quarterly basis and valuation allowances are provided as necessary. During this evaluation, the Company reviews its forecast of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred tax assets to determine if a valuation allowance is needed. Based on its current forecast, the Company has established a valuation allowance against all U.S. deferred tax assets. Until an appropriate level and characterization of profitability is attained, the Company expects to continue to maintain a valuation allowance on its net deferred tax assets related to future U.S. tax benefits. If we determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to reduce the valuation allowance would increase net income in the period that such determination is made.
Liquidity and Capital Resources
Cash Balance. As of OctoberApril 2, 2022,2023, we had approximately $16.5$19.5 million of cash and cash equivalents, of which $2.7$5.6 million was held in jurisdictions outside of the U.S. that, if repatriated, could result in withholding taxes.
We have projected that ourexpect existing cash and cash equivalents willflows from operations to continue to be sufficient to allow us to continue operationsfund our operating activities and cash commitments for investing and financing activities, such as capital expenditures, for at least the next 12 months.months and beyond. Significant changes from our current forecasts, including, but not limited to: (i) the impact of the COVID-19 pandemic and changes in worldwide and U.S. economic conditions (ii) meaningful shortfalls in our projected revenue or sales proceeds from underutilized or non-core equipment, (iii)revenues, (ii) unexpected costs or expenses, (iv)and/or (iii) operating difficulties which cause unexpected delays in scheduled shipments, and/or (v) inflation, could require us to seek additional funding or force us to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects.
Material Cash Requirements
Gill Family Capital Management Note. The Company has received the benefit of cash infusions from GFCMGill Family Capital Management, Inc. (“GFCM”) in the form of secured promissory note obligations totaling $6.5 million in principal as of OctoberApril 2, 20222023 and December 31, 20212022 (the “Note”). GFCM is an entity controlled by the Company’s Chairman, President and Chief Executive Officer, Jeffrey T. Gill and one of our directors, R. Scott Gill. GFCM, Jeffrey T. Gill and R. Scott Gill are significant beneficial stockholders of the Company. As of OctoberApril 2, 2022,2023, our principal commitment under the Note was $2.5 million due on April 1, 2023, $2.0 million on April 1, 2024 and the balance on April 1, 2026. Interest on the Note is reset on April 1 of each year, at the greater of 8.0% or 500 basis points above the five-year Treasury note average during the preceding 90-day period, in each case, payable quarterly. The Note allows for up to an 18-month deferral of payment for up to 60% of the interest due on the portion of the notes maturing in April of 2023 and 2024.
Finance Lease Obligations. As of OctoberApril 2, 2022,2023, the Company had $3.7$3.6 million outstanding under finance lease obligations for both property and machinery and equipment at its Sypris Technologies locations with maturities through 2026 and a weighted average interest rate of 8.5%8.6%.
Equipment Financing Obligations. Obligations
As of OctoberApril 2, 2022,2023, the Company had $1.2$1.8 million outstanding under equipment financing facilities, with fixed interest rates ranging from 4.4% to 8.1% and payments due through 2028.
Purchase Commitments. We had purchase commitments totaling approximately $58.3$65.4 million at OctoberApril 2, 2022,2023, primarily for inventory and manufacturing equipment, which are due through 2024.equipment.
Cash Flows
Operating Activities.Net cash provided byused in operating activities was $8.3$1.2 million in the first nine monthsquarter of 20222023, as compared to $2.2$3.3 million in the same period of 2021.2022. The aggregate increase in inventoryaccounts receivable in 20222023 resulted in a usage of cash of $5.1$2.7 million primarily as a result of an increase in revenue for Sypris Technologies and Sypris Electronics over the prior year comparable period, partially offset by an early payment from a Sypris Technologies customer. The increase in inventory in 2023 resulted in a use of cash of $9.9 million. The increase in inventory is primarily in support of new program revenue growth for Sypris Electronics. A significant portion of the inventory receipts were funded through prepayments from customers of Sypris Electronics in 2022,2023, which are recorded as contract liabilities and are the primary component of the $10.8$7.3 million increase in accrued and other liabilities during the first nine months of 2022.2023. Accounts payable also increased during the first nine months of 2022,2023, primarily associated with the inventory additions, providing a source of cash of $3.9$3.1 million. Prepaid expenses and other current assets increased during the first nine months of 2022 resulting in a cash use of $2.2 million primarily as a result of increased capitalized costs associated with programs in the startup phase of production at Sypris Electronics and an increase in VAT taxes refundable in Mexico.
Investing Activities.Net cash used in investing activities was $2.8 million for the first nine months of 2022 as compared to $1.8 million for the first nine months of 2021. Net cash used in investing activities for the first nine months of 2022 was comprised of capital expenditures of $2.8 million. Net cash used in investing activities for the first nine months of 2021 was comprised of capital expenditures of $1.8 million.
Financing Activities. Net cash used in financing activities was $1.0$0.7 million for the first nine monthsquarter of 20222023 as compared to $0.9 million for the first nine monthsquarter of 2021. 2022.
Financing Activities. Net cash used in financing activities inwas $0.2 million for the first nine monthsquarter of 2022 included principal payments on finance leases2023 and was comprised of capital lease and equipment financing obligationsobligation payments of $1.0$0.4 million offset by proceeds from an equipment financing obligation of $0.2 million. Net cash used in financing activities inwas $0.3 million for the first nine monthsquarter of 2021 included principal payments on finance leases2022 and was comprised of capital lease and equipment financing obligations of $0.5 million andobligation payments of $0.4 million for minimum statutory tax withholdings on stock-based compensation.$0.3 million.
Critical Accounting Policies
See the information concerning our critical accounting policies included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022. There have been no significant changes in our critical accounting policies during the ninethree months ended OctoberApril 2, 2022.2023.
Forward-looking Statements
This Quarterly Report on Form 10-Q, and our other oral or written communications, may contain “forward-looking” statements. These statements may include our expectations or projections about the future of our business, industries, business strategies, prospects, potential acquisitions, liquidity, financial condition or financial results and our views about developments beyond our control, including domestic or global economic conditions, including inflation, supply chain conditions, government spending, industry trends and market developments. These statements, including those outlined in management’s recovery plan, are based on management’s views and assumptions at the time originally made, and, except as required by law, we undertake no obligation to update these statements, even if, for example, they remain available on our website after those views and assumptions have changed. There can be no assurance that our expectations, projections or views will come to pass, and undue reliance should not be placed on these forward-looking statements.
A number of significant factors could materially affect our specific business operations and cause our performance to differ materially from any future results projected or implied by our prior statements. Many of these factors are identified in connection with the more specific descriptions contained throughout this report. Other factors which could also materially affect such future results currently include: our failure to achieve and maintain profitability on a timely basis by steadily increasing our revenues from profitable contracts with a diversified group of customers, which would cause us to continue to use existing cash resources or require us to sell assets to fund operating losses; cost, quality and availability or lead times of raw materials such as steel, component parts (especially electronic components), natural gas or utilities including increased cost relating to inflation; the cost, quality, timeliness, efficiency and yield of our operations and capital investments, including the impact of inflation, tariffs, product recalls or related liabilities, employee training, working capital, production schedules, cycle times, scrap rates, injuries, wages, overtime costs, freight or expediting costs; risks of foreign operations, including foreign currency exchange rate risk exposure, which could impact our operating results; dependence on, retention or recruitment of key employees and highly skilled personnel and distribution of our human capital; cost, quality and availability or lead times of raw materials such as steel, component parts (especially electronic components), natural gas or utilities including increased cost relating to inflation; our failure to successfully win new business or develop new or improved products or new markets for our products; our failure to successfully complete final contract negotiations with regard to our announced contract “orders”, “wins” or “awards”; adverse impacts of new technologies or other competitive pressures which increase our costs or erode our margins; breakdowns, relocations or major repairs of machinery and equipment, especially in our Toluca Plant; volatility of our customers’ forecasts and our contractual obligations to meet current scheduling demands and production levels, which may negatively impact our operational capacity and our effectiveness to integrate new customers or suppliers, and in turn cause increases in our inventory and working capital levels; our failure to successfully complete final contract negotiations with regard to our announced contract “orders”, “wins” or “awards”; significant delays or reductions due to a prolonged continuing resolution or U.S. government shut down reducing the spending on products and services that Sypris Electronics provides; adverse impacts of new technologies or other competitive pressures which increase our costs or erode our margins; breakdowns, relocations or major repairs of machinery and equipment, especially in our Toluca Plant; the fees, costs and supply of, or access to, debt, equity capital, or other sources of liquidity; the termination or non-renewal of existing contracts by customers; the costs and supply of insurance on acceptable terms and with adequate coverage; our reliance on revenues from customers in the oil and gas and automotive markets, with increasing consumer pressure for reductions in environmental impacts attributed to greenhouse gas emissions and increased vehicle fuel economy; the impact of COVID-19 and economic conditions on our future operations; possible public policy response to the pandemic, including U. S or foreign government legislation or restrictions that may impact our operations or supply chain; the terminationour failure to successfully win new business or non-renewal of existing contracts by customers; inaccurate data aboutdevelop new or improved products or new markets customers or business conditions; disputes or litigation involving governmental, supplier, customer, employee, creditor, stockholder, product liability, warranty or environmental claims; risks of foreign operations; currency exchange rates; inflation;for our products; war, geopolitical conflict, terrorism, or political uncertainty, including disruptions resulting from the conflict between Russia and UkraineRussia-Ukraine war arising out of international sanctions, foreign currency fluctuations and other economic impacts; our reliance on a few key customers, third party vendors and sub-suppliers; inventory valuation risks including excessive or obsolescent valuations or price erosions of raw materials or component parts on hand or other potential impairments, non-recoverability or write-offs of assets or deferred costs; disputes or litigation involving governmental, supplier, customer, employee, creditor, stockholder, product liability, warranty or environmental claims; failure to adequately insure or to identify product liability, environmental or other insurable risks; unanticipated or uninsured product liability claims, disasters, public health crises, losses or business risks; the costs of compliance with our auditing, regulatory or contractual obligations; labor relations; strikes; union negotiations; costs associated with environmental claims relating to properties previously owned; pension valuation, health care or other benefit costs; our inability to patent or otherwise protect our inventions or other intellectual property rights from potential competitors;competitors or fully exploit such rights which could materially affect our reliance on revenues from customersability to compete in the oil and gas and automotive markets, with increasing consumer pressure for reductions in environmental impacts attributed to greenhouse gas emissions and increased vehicle fuel economy; U.S. government spending on products and services that Sypris Electronics provides, including the timing of budgetary decisions;our chosen markets; changes in licenses, security clearances, or other legal rights to operate, manage our work force or import and export as needed; cyber security threats and disruptions, including ransomware attacks on our systems and the systems of third-party vendors and other parties with which we conduct business, all of which may become more pronounced in the event of geopolitical conflicts and other uncertainties, such as the conflict in Ukraine; our ability to maintain compliance with the Nasdaq listing standards minimum closing bid price; risks related to owning our common stock, including increased volatility; or unknown risks and uncertainties and the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022.
Item Item 3.Quantitative and Qualitative Disclosures about Market Risk3.
| Quantitative and Qualitative Disclosures about Market Risk
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We are a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and thus are not required to provide the quantitative and qualitative disclosures about market risk specified in Item 305 of Regulation S-K.
Item Item 4.Controls and Procedures4.
| Controls and Procedures
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(a) Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Principal Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.
(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II.Other Information | Other Information
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Item 1.Legal Proceedings | Legal Proceedings
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Groundwater and other contamination has occurred at certain of our current and former facilities during the operation of those facilities by their former owners, and this contamination may occur at future facilities we operate or acquire. There is no assurance that environmental indemnification agreements we have secured from the former owners of certain of these properties will be adequate to protect us from liability. No administrative or judicial proceedings with respect to these or any other environmental regulations or conditions are pending against the Company or known by the Company to be contemplated by government authorities.
The Company is subject to other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for these other asserted legal and other claims. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. In addition, there may be other potential claims, liabilities, materials or design defects, or other customer complaints that have not been asserted, but which could adversely impact us in the future. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these other legal matters or potential matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.
The information set forth in Note 11 to the consolidated financial statements in this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1.
Item 1A.Risk Factors | Risk Factors
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Information regarding risk factors appears in Part I — Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements,” in this Quarterly Report on Form 10-Q, and in Part I — Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022. There have been no material changes during the fiscal quarter from the risk factors disclosed in our Annual Report on Form 10-K.10-K other than with respect to the risk factor discussed below.
Fluctuations in foreign currency exchange rates have increased, and could continue to increase, our operating costs.
We have manufacturing operations located in Mexico. Excluding the cost of steel used in production, a significant portion of our operating expenses are denominated in the Mexican Peso. Currency exchange rates fluctuate daily as a result of a number of factors, including changes in a country's political and economic policies. Volatility in the currencies of our entities and the United States dollar, as well as inflationary costs, could seriously harm our business, operating results and financial condition. The primary impact of currency exchange fluctuations is on the cash, payables and expenses of our Mexican operating entities. The Company does not currently hedge our Mexican Peso denominated expenses. Unexpected losses have occurred from increases in the value of the Mexican Peso relative to the United States dollar and further unexpected losses could occur, which could be material to our business, financial results, or operations.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds | Unregistered Sales of Equity Securities and Use of Proceeds
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None.
Item 3.Defaults Upon Senior Securities | Defaults Upon Senior Securities
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None.
Item 4.Mine Safety Disclosures | Mine Safety Disclosures
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Not applicable.
Item 5.Other Information | Other Information
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None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | SYPRIS SOLUTIONS, INC. | |
| | | | | (Registrant) | |
| | | | | | |
Date: | NovemberMay 16, 2022
2023 | | By: | /s/ Richard L. Davis | |
| | | | | (Richard L. Davis) | |
| | | | Vice President & Chief Financial Officer |
| | | | | | |
| | | | | | |
Date: | NovemberMay 16, 2022
2023 | | By: | /s/ Rebecca R. Eckert | |
| | | | | (Rebecca R. Eckert) | |
| | | | | Controller (Principal Accounting Officer) | |
