Item 1. Financial Statements
Item 1. Financial Statements
Sypris Solutions, Inc.
Consolidated Statements of Operations
(in thousands, except for per share data)
(Unaudited)
Three Months Ended
April 5,
March 31,
2020
2019
Net revenue
$
22,425
$
19,564
Cost of sales
18,834
18,704
Gross profit
3,591
860
Selling, general and administrative
3,223
3,454
Severance, relocation and other costs
91
98
Operating income (loss)
277
(2,692
)
Interest expense, net
227
217
Other expense, net
283
51
Loss before taxes
(233
)
(2,960
)
Income tax expense, net
72
76
Net loss
$
(305
)
$
(3,036
)
Loss per share:
Basic
$
(0.01
)
$
(0.15
)
Diluted
$
(0.01
)
$
(0.15
)
Weighted average shares outstanding:
Basic
20,988
20,669
Diluted
20,988
20,669
Dividends declared per common share
$
0.00
$
0.00
The accompanying notes are an integral part of the consolidated financial statements.
2
Sypris Solutions, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
Three Months Ended
April, 5,
March 31,
2020
2019
Net loss
$
(305
)
$
(3,036
)
Other comprehensive (loss) income:
Foreign currency translation adjustments, net of tax
(1,906
)
125
Comprehensive loss
$
(2,211
)
$
(2,911
The accompanying notes are an integral part of the consolidated financial statements.
3
Sypris Solutions, Inc.
Consolidated Balance Sheets
(in thousands, except for share data)
April 5,
December 31,
2020
2019
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
$
5,206
$
5,095
Accounts receivable, net
8,922
7,444
Inventory, net
19,401
20,784
Other current assets
3,782
4,282
Assets held for sale
2,167
2,233
Total current assets
39,478
39,838
Property, plant and equipment, net
9,687
11,675
Operating lease right-of-use assets
6,727
7,014
Other assets
1,374
1,529
Total assets
$
57,266
$
60,056
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
10,686
$
9,346
Accrued liabilities
11,624
12,495
Operating lease liabilities, current portion
862
841
Finance lease obligations, current portion
667
684
Note payable – related party, current portion
2,500
0
Total current liabilities
26,339
23,366
Operating lease liabilities, net of current portion
6,672
6,906
Finance lease obligations, net of current portion
2,225
2,351
Note payable – related party
3,967
6,463
Other liabilities
6,756
7,539
Total liabilities
45,959
46,625
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 975,150 shares authorized; no shares issued
0
0
Series A preferred stock, par value $0.01 per share, 24,850 shares authorized; no shares issued
0
0
Common stock, non-voting, par value $0.01 per share, 10,000,000 shares authorized; no shares issued
0
0
Common stock, par value $0.01 per share, 30,000,000 shares authorized; 21,324,395 shares issued and 21,309,580 outstanding in 2020 and 21,324,618 shares issued and 21,298,426 outstanding in 2019
213
213
Additional paid-in capital
154,789
154,702
Accumulated deficit
(117,738
)
(117,433
)
Accumulated other comprehensive loss
(25,957
)
(24,051
)
Treasury stock, 15,038 and 26,192 shares in 2020 and 2019, respectively
0
0
Total stockholders’ equity
11,307
13,431
Total liabilities and stockholders’ equity
$
57,266
$
60,056
The accompanying notes are an integral part of the consolidated financial statements.
4
Sypris Solutions, Inc.
Consolidated Cash Flow Statements
(in thousands)
(Unaudited)
Three Months Ended
April 5,
March 31,
2020
2019
Cash flows from operating activities:
Net loss
$
(305
)
$
(3,036
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
620
691
Stock-based compensation expense
94
111
Deferred loan costs recognized
4
4
Net gain on the sale of assets
(154
)
0
Provision for excess and obsolete inventory
40
37
Non-cash lease expense
288
164
Other noncash items
190
(86
)
Contributions to pension plans
(34
)
(10
)
Changes in operating assets and liabilities:
Accounts receivable
(1,478
)
758
Inventory
846
(2,486
)
Other current assets
(99
)
473
Accounts payable
1,474
(1,187
)
Accrued and other liabilities
(772
)
40
Net cash provided by (used in) operating activities
714
(4,527
)
Cash flows from investing activities:
Capital expenditures, net
(453
)
(348
)
Proceeds from sale of assets
288
0
Net cash used in investing activities
(165
)
(348
)
Cash flows from financing activities:
Principal payments on finance lease obligations
(143
)
(146
)
Indirect repurchase of shares of minimum statutory tax withholdings
(7
)
(49
)
Net cash used in financing activities
(150
)
(195
)
Effect of exchange rate changes on cash balances
(288
)
55
Net increase (decrease) in cash and cash equivalents
111
(5,015
)
Cash and cash equivalents at beginning of period
5,095
10,704
Cash and cash equivalents at end of period
$
5,206
$
5,689
The accompanying notes are an integral part of the consolidated financial statements.
5
Sypris Solutions, Inc.
Consolidated Statements of Stockholders’ equity
(in thousands)
Accumulated
Additional
Other
Common Stock
Paid-In
Accumulated
Comprehensive
Treasury
Shares
Amount
Capital
Deficit
Loss
Stock
January 1, 2019 balance
21,398,182
$
214
$
154,388
$
(114,926
)
$
(24,842
)
$
0
Net loss
0
0
0
(3,036
)
0
0
Adoption of new accounting standards
0
0
0
1,442
0
0
Foreign currency translation adjustment
0
0
0
0
125
0
Noncash compensation
0
0
111
0
0
0
Retire treasury stock
(43,979
)
0
(49
)
0
0
0
March 31, 2019 balance
21,354,203
$
214
$
154,450
$
(116,520
)
$
(24,717
)
$
0
Accumulated
Additional
Other
Common Stock
Paid-In
Accumulated
Comprehensive
Treasury
Shares
Amount
Capital
Deficit
Loss
Stock
January 1, 2020 balance
21,298,426
$
213
$
154,702
$
(117,433
)
$
(24,051
)
$
0
Net loss
0
0
0
(305
)
0
0
Foreign currency translation adjustment
0
0
0
0
(1,906
)
0
Exercise of stock options
11,154
0
(7
)
0
0
0
Noncash compensation
0
0
94
0
0
0
April 5, 2020 balance
21,309,580
$
213
$
154,789
$
(117,738
)
$
(25,957
)
$
0
The accompanying notes are an integral part of the consolidated financial statements.
6
Sypris Solutions, Inc.
Notes to Consolidated Financial Statements
(1)
Nature of Business
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 11).
(2)
Basis of Presentation
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-Q and Article 10 of Regulation S-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, 2019 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. Actual results for the three months ended April 5, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2019 as presented in the Company’s Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform with current period presentation.
COVID-19 Assessment
In March 2020, the World Health Organization categorized the current coronavirus disease (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. While the Company expects the effects of the pandemic to negatively impact its results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time. The Company’s consolidated financial statements presented herein reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Such estimates and assumptions affect, among other things, the Company’s long-lived asset valuation; inventory valuation; valuation of deferred income taxes and income tax contingencies; the allowance for doubtful accounts; and pension plan assumptions. Events and changes in circumstances arising after April 5, 2020, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods. Factors deriving from the COVID-19 response that have or may negatively impact sales and gross margin in the future include, but are not limited to: limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the material components we utilize in the manufacture of the products we sell, or to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; limitations on the ability of our customers to conduct their business and purchase our products; and limitations on the ability of our customers to pay us on a timely basis.
7
( 3 )
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans . The guidance eliminated certain disclosures about defined benefit plans, added new disclosures, and clarified other requirements. This guidance became effective January 1, 2020. There were no changes to interim disclosure requirements. As this standard relates only to financial disclosures, its adoption did not have an impact to our operating results, financial position or cash flows.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (ASU 2018-15). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance became effective January 1, 2020 and did not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Credit Losses – Measurement of Credit Losses on Financial Instruments , new guidance for the accounting for credit losses on certain financial instruments. This guidance introduces a new approach to estimating credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. This guidance, which becomes effective January 1, 2023, is not expected to have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes . This guidance is intended to simplify various aspects of income tax accounting including the elimination of certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This guidance becomes effective January 1, 2021 and early adoption is permitted. Adoption of this guidance requires certain changes to primarily be made prospectively, with some changes to be made retrospectively. We are currently assessing the impact of this guidance on our consolidated financial statements.
( 4 )
Leases
The Company determines if an arrangement is a lease at its inception. The Company has entered into operating leases for real estate and personal property, including manufacturing and information technology equipment. These real estate leases have initial terms which range from 10 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.
Some leases may require variable lease payments based on factors specific to the individual agreements. Variable lease payments for which we are typically responsible for include real estate taxes, insurance and common area maintenance expenses based on the Company’s pro-rata share, which are excluded from the measurement of the lease liability. Additionally, one of the Company’s real estate leases has lease payments that adjust based on annual changes in the Consumer Price Index (“CPI”). The leases that are dependent upon CPI are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Incremental payments due to changes in the index are treated as variable lease costs and expensed as incurred.
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 April 5, 2020, total right-of-use assets and operating lease liabilities were approximately $6,727,000 and $7,534,000, respectively. As of December 31, 2019, total right-of-use assets and operating lease liabilities were approximately $7,014,000 and $7,747,000, respectively.
8
We primarily use our incremental borrowing rate, which is updated quarterly, based on the information available at 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 months ended April 5, 2020 and March 31, 2019.
The following table presents information related to lease expense for the three months ended April 5, 2020 and March 31, 2019 (in thousands):
Three Months Ended
April 5,
March 31,
2020
2019
(Unaudited)
Finance lease expense:
Amortization expense
$
120
$
111
Interest expense
77
91
Operating lease expense
351
351
Variable lease expense
68
79
Total lease expense
$
616
$
632
The following table presents supplemental cash flow information related to leases (in thousands):
Three Months Ended
April 5,
March 31,
2020
2019
(Unaudited)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
329
$
354
Operating cash flows from finance leases
77
91
Financing cash flows from finance leases
143
146
The annual future minimum lease payments as of April 5, 2020 are as follows (in thousands):
Operating
Finance
Leases
Leases
Next 12 months
$
1,428
$
927
12 to 24 months
1,480
612
24 to 36 months
1,496
613
36 to 48 months
1,514
607
48 to 60 months
1,244
549
Thereafter
2,623
457
Total lease payments
9,785
3,765
Less imputed interest
(2,251
)
(873
)
Total
$
7,534
$
2,892
9
The following table presents certain information related to lease terms and discount rates for leases as of April 5, 2020:
Operating
Finance
Leases
Leases
Weighted-average remaining lease term (years)
6.9
5.1
Weighted-average discount rate (percentage)
8.0
10.3
( 5 )
Revenue from Contracts with Customers
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 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.
Our contract profit margins may include estimates of revenues for goods or services on which the customer and the Company have not reached final agreements, such as contract changes, settlements of disputed claims, and the final amounts of requested equitable adjustments permitted under the contract. These estimates are based upon management’s best assessment of the totality of the circumstances and are included in our contract profit based upon contractual provisions and our relationships with each customer.
The majority of Sypris Electronics’ contractual arrangements with customers are for one year or less. For the remaining population of non-cancellable contracts greater than one year we had $19,068,000 of remaining performance obligations as of April 5, 2020, all of which were long-term Sypris Electronics’ contracts. We expect to recognize approximately 63% of our remaining performance obligations as revenue in 2020, 36% in 2021 and the balance in 2022.
10
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the three months ended April 5, 2020 and March 31, 2019 (in thousands):
April 5,
March 31,
2020
2019
(Unaudited)
Sypris Technologies – transferred point in time
$
13,717
$
16,141
Sypris Electronics – transferred point in time
2,107
682
Sypris Electronics – transferred over time
6,601
2,741
Net revenue
$
22,425
$
19,564
Contract Balances
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.
Contract assets – Contract assets include unbilled amounts typically resulting from sales under contracts where revenue is recognized over time and revenue recognized exceeds the amount billed to the customer, and the right to payment is subject to conditions other than the passage of time. Contract assets are generally classified as current assets in the consolidated balance sheet. The balance of contract assets as of April 5, 2020 and December 31, 2019 were $936,000 and $906,000, respectively, and are included within other current assets in the accompanying consolidated balance sheets.
Contract liabilities – Some of the Company’s contracts within Sypris Electronics are billed as work progresses in accordance with the contract terms and conditions, either at periodic intervals or upon achievement of certain milestones. Often this results in billing occurring prior to revenue recognition resulting in contract liabilities. Additionally, the Company occasionally receives cash payments from customers in advance of the Company’s performance resulting in contract liabilities. These contract liabilities are classified as either current or long-term in the consolidated balance sheet based on the timing of when the Company expects to recognize revenue. As of April 5, 2019, the contract liabilities balance was $7,176,000, of which $5,811,000 was included within accrued liabilities and $1,365,000 was included within other liabilities in the accompanying consolidated balance sheets. As of December 31, 2019, the contract liabilities balance was $7,504,000, of which $5,769,000 was included within accrued liabilities and $1,735,000 was included within other liabilities in the accompanying consolidated balance sheets. Payments received from customers in advance of revenue recognition are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract.
The Company recognized revenue from contract liabilities of $2,312,000 and $1,344,000 during the three months ended April 5, 2020 and March 31, 2019, respectively.
Practical expedients and exemptions
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.
We do not disclose the value of unsatisfied performance obligations for contracts with original expected lengths of one year or less.
( 6 )
Exit and Disposal Activities
On February 21, 2017, the Board of Directors approved a modified exit or disposal plan with respect to the Broadway Plant, which included the relocation of production to other Company facilities, as needed, and/or the closure of the plant. The relocation of production was complete as of the end of 2017. The Company has relocated certain assets from the Broadway Plant to other manufacturing facilities, as needed, to serve its existing and target customer base and identified underutilized or non-core assets for disposal. Management expects to apply the proceeds from the sale of any underutilized or non-core assets to help fund the costs to transfer any additional equipment from the Broadway Plant. On April 13, 2020, the Company completed the sale of the Broadway Plant real estate for $1,700,000 and recognized a gain of $807,000. Management is currently evaluating options for any remaining assets in the Broadway Plant.
11
As a result of these initiatives, the Company recorded charges of $91,000, or less than $0.01 per share, and $98,000, or less than $0.01 per share, during the first three months of 2020 and 2019, respectively, related to the transition of production from the Broadway Plant, which is included in severance, relocation and other costs in the consolidated statement of operations. All amounts incurred were recorded within Sypris Technologies. The charges for the three months ended April 5, 2020 were primarily related to mothball costs associated with the closed facility.
A summary of the total pre-tax charges is as follows (in thousands):
Costs Incurred
Three Months
Total
Remaining
Total
Ended
Recognized
Costs to be
Program
April 5, 2020
to date
Recognized
Severance and benefit related costs
$
1,350
$
0
$
1,350
$
0
Asset impairments
188
0
188
0
Equipment relocation costs
1,826
0
1,826
0
Other
1,689
91
1,637
52
$
5,053
$
91
$
5,001
$
52
The Company expects to incur additional pre-tax costs of approximately $52,000 within Sypris Technologies, the majority of which is expected to be cash expenditures.
As noted above, management expects to use proceeds from the sale of underutilized or non-core assets to fund costs incurred on the transfer of equipment from the Broadway Plant. The following assets have been segregated and included in assets held for sale in the consolidated balance sheets (in thousands):
April 5,
December 31,
2020
2019
(Unaudited)
Property, plant and equipment
$
13,623
$
13,346
Accumulated depreciation
(11,456
)
(11,113
)
Property, plant and equipment, net
$
2,167
$
2,233
( 7 )
Loss Per Common Share
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and participating securities. Restricted stock granted by the Company is considered a participating security since it contains a non-forfeitable right to dividends.
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 months ended April 5, 2020 and March 31, 2019, 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.
12
A reconciliation of the weighted average shares outstanding used in the calculation of basic and diluted loss per common share is as follows (in thousands):
Three Months Ended
April 5,
March 31,
2020
2019
(Unaudited)
Loss attributable to stockholders:
Net loss as reported
$
(305
)
$
(3,036
)
Less distributed and undistributed earnings allocable to restricted awarded holders
0
0
Less dividends declared attributed to restricted awarded holders
0
0
Net loss allocable to common stockholders
$
(305
)
$
(3,036
)
Loss per common share attributable to stockholders:
Basic
$
(0.01
)
$
(0.15
)
Diluted
$
(0.01
)
$
(0.15
)
Weighted average shares outstanding – basic
20,988
20,669
Weighted average additional shares assuming conversion of potential common shares
0
0
Weighted average shares outstanding – diluted
20,988
20,669
( 8 )
Inventory
Inventory consists of the following (in thousands):
April 5,
December 31,
2020
2019
(Unaudited)
Raw materials
$
14,639
$
15,139
Work in process
5,332
5,889
Finished goods
1,550
1,675
Reserve for excess and obsolete inventory
(2,120
)
(1,919
)
Total
$
19,401
$
20,784
( 9 )
Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
April 5,
December 31,
2020
2019
(Unaudited)
Land and land improvements
$
50
$
50
Buildings and building improvements
7,111
8,108
Machinery, equipment, furniture and fixtures
49,198
55,520
Construction in progress
607
371
56,966
64,049
Accumulated depreciation
(47,279
)
(52,374
)
$
9,687
$
11,675
13
( 1 0 )
Debt
Debt outstanding consists of the following (in thousands):
April 5,
December 31,
2020
2019
(Unaudited)
Current:
Finance lease obligation, current portion
$
667
$
684
Note payable – related party, current portion
2,500
0
Current portion of long term debt
$
3,167
$
684
Long Term:
Finance lease obligation
$
2,225
$
2,351
Note payable – related party
4,000
6,500
Less unamortized debt issuance and modification costs
(33
)
(37
)
Long term debt net of unamortized debt costs
$
6,192
$
8,814
( 1 1 )
Segment Data
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 manufactures forged and finished steel components and subassemblies, high-pressure closures and other fabricated products. Sypris Electronics is focused on circuit card and full “box build” manufacturing, high reliability manufacturing, systems assembly and integration, design for manufacturability and design to specification work. There was no intersegment net revenue recognized in any of the periods 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
April 5,
March 31,
2020
2019
(Unaudited)
Net revenue from unaffiliated customers:
Sypris Technologies
$
13,717
$
16,141
Sypris Electronics
8,708
3,423
$
22,425
$
19,564
Gross profit (loss):
Sypris Technologies
$
2,493
$
2,304
Sypris Electronics
1,098
(1,444
)
$
3,591
$
860
14
Three Months Ended
April 5,
March 31,
2020
2019
(Unaudited)
Operating income (loss):
Sypris Technologies
$
1,126
$
1,052
Sypris Electronics
408
(2,310
)
General, corporate and other
(1,257
)
(1,434
)
$
277
$
(2,692
)
Income (loss) before taxes:
Sypris Technologies
$
759
$
907
Sypris Electronics
399
(2,327
)
General, corporate and other
(1,391
)
(1,540
)
$
(233
)
$
(2,960
)
April 5,
December 31,
2020
2019
(Unaudited)
Total assets:
Sypris Technologies
$
26,847
$
29,694
Sypris Electronics
24,733
24,985
General, corporate and other
5,686
5,377
$
57,266
$
60,056
Total liabilities:
Sypris Technologies
$
19,664
$
19,989
Sypris Electronics
17,471
17,416
General, corporate and other
8,824
9,220
$
45,959
$
46,625
( 1 2 )
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 April 5, 2020 and December 31, 2019 was $581,000 and $569,000, respectively. The Company’s warranty expense for the three months ended April 5, 2020 and March 31, 2019 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-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.
15
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. As of April 5, 2020 and December 31, 2019, 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) Plans (collectively, the “Plan”). The DOL does not appear to dispute that the Company reached such interpretation in good faith and after consulting with independent ERISA counsel. If the DOL’s allegations were upheld by a court, the Company could be required to make additional contributions into the accounts of its Plan participants. The Company regards the DOL’s allegations to be without merit and is continuing to vigorously defend the matter.
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, Inc. (“ST”) designed and manufactured the closure, that the closure was defective and that those defects had caused or contributed to their injuries. ST’s motion to dismiss for lack of jurisdiction was denied on February 28, 2020. The Company regards these allegations to be without merit and any damages to be undeterminable at this time. The Company’s general liability insurer has accepted the defense costs. The Company is continuing to vigorously defend the matter.
As of April 5, 2020, the Company had outstanding purchase commitments of approximately $7,977,000, primarily for the acquisition of inventory and manufacturing equipment.
( 1 3 )
Income Taxes
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 2020 and 2019 and for its foreign operations at a statutory rate of 30% in 2020 and 2019. 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). 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 its current forecast, the Company has established a valuation allowance against all U.S. deferred tax assets and a portion of its non-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. and a portion of its non-U.S. tax benefits.
( 1 4 )
Employee Benefit Plans
The following table details the components of pension (income) expense (in thousands):
Three Months Ended
April 5,
March 31,
2020
2019
(Unaudited)
Service cost
$
1
$
1
Interest cost on projected benefit obligation
352
329
Net amortizations of actuarial loss
166
158
Expected return on plan assets
(270
)
(325
)
Net periodic benefit cost
$
249
$
163
16
The net periodic benefit cost of the defined benefit pension plans incurred during the three-month periods ended April 5, 2020 and March 31, 2019 are reflected in the following captions in the accompanying consolidated statements of operations (in thousands):
Three Months Ended
April 5,
March 31,
2020
2019
(Unaudited)
Service cost:
Selling, general and administrative expenses
$
(1
)
$
(1
)
Other net periodic benefit costs:
Other expense (income), net
(248
)
(162
)
Total
$
(249
)
$
(163
)
( 1 5 )
Accumulated Other Comprehensive Loss
The Company’s accumulated other comprehensive loss consists of employee benefit related adjustments and foreign currency translation adjustments.
Accumulated other comprehensive loss consisted of the following (in thousands):
April 5,
December 31,
2020
2019
(Unaudited)
Foreign currency translation adjustments
$
(12,529
)
$
(10,623
)
Employee benefit related adjustments – U.S., net of tax
(13,544
)
(13,544
)
Employee benefit related adjustments – Mexico, net of tax
116
116
Accumulated other comprehensive loss
$
(25,957
)
$
(24,051
( 1 6 )
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 April 5, 2020 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).
(1 7 )
Subsequent Events
There are many uncertainties regarding the current COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of our business, including how it will impact our customers, employees, suppliers, vendors, business partners and distribution channels. While the pandemic did not materially adversely affect the Company’s financial results and business operations in the Company’s first fiscal quarter ended April 5, 2020, we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. The Company expects to continue to assess the evolving impact of the COVID-19 pandemic and intends to make adjustments to its responses accordingly.
Subsequent to April 5, 2020, the Company reduced production at our operations in response to COVID-19 related government mandates, reduced demand conditions and other operational drivers, primarily in our Sypris Technologies segment. This resulted in temporarily suspending operations on certain production lines with corresponding reductions in headcount or work hours for our employees, primarily at our facility in Toluca, Mexico. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and suppliers and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in the United States. On April 27, 2020, the Company received approval from the U.S. Small Business Administration (the “SBA”) to fund its request for a loan under the SBA’s Paycheck Protection Program created as part of the CARES Act. In connection with the approval, on May 1, 2020, the Company entered into a promissory note in favor of BMO Harris Bank National Association (“BMO”), as lender, with a principal amount of $3,558,000 pursuant to the Paycheck Protection Program (the “PPP Note”). The PPP Note bears interest at a fixed rate of 1.0% per annum, with the first six months of principal and interest deferred. Beginning in October 2020, the Company expects to make 18 equal payments of principal and interest with the final payment due in April 2022. The PPP Note may be accelerated upon the occurrence of an event of default.
The PPP Note is unsecured and guaranteed by the SBA. The Company may apply for forgiveness of the PPP Note, with the amount which may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company during the eight-week period beginning upon receipt of PPP Note funds, subject to limitations and calculated in accordance with the terms of the CARES Act. Any forgiveness of the PPP Note shall be subject to approval of the SBA and will require the Company and BMO to apply to the SBA for such treatment in the future. We intend to comply with the necessary requirements to seek forgiveness of all or a portion of the PPP Note, but no assurance can be provided that we will obtain forgiveness of the PPP Note in whole or in part.
On April 13, 2020, the Company completed the sale of the Broadway Plant real estate for $1,700,000 and recognized a gain of $807,000.
17
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.