SYPRIS SOLUTIONS INC
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-Q
(Mark
One)
x
Quarterly Report
Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
1934
For the
quarterly period ended April 4,
2010
OR
¨
Transition Report
Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
1934
For the
transition period from _____ to _____
Commission
file number: 0-24020
SYPRIS
SOLUTIONS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
61-1321992
|
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
|
of
incorporation or organization)
|
Identification
No.)
|
|
101
Bullitt Lane, Suite 450
|
|
|
Louisville,
Kentucky 40222
|
(502)
329-2000
|
|
(Address
of principal executive
|
(Registrant’s
telephone number,
|
|
offices)
(Zip code)
|
including
area code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
.
x
Yes
o
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such reports).
o
Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
o
Large accelerated
filer
o
Accelerated
filer
o
Non-accelerated
filer
x
Smaller
reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
o
Yes
x
No
As of May
7, 2010, the Registrant had 19,674,459 shares of common stock
outstanding.
Table
of Contents
|
Part I.
|
Financial
Information
|
||
|
Item
1.
|
Financial
Statements
|
||
|
Consolidated
Statements of Operations for the Three Months Ended April
4,
2010 and April
5,
2009
|
2
|
||
|
Consolidated
Balance Sheets at April
4,
2010 and December
31,
2009
|
3
|
||
|
Consolidated
Cash Flow Statements for the Three Months Ended April 4, 2010 and April 5,
2009
|
4
|
||
|
Notes
to Consolidated Financial Statements
|
5
|
||
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
18
|
|
|
Item
4.
|
Controls
and Procedures
|
18
|
|
|
Part II.
|
Other
Information
|
||
|
Item
1.
|
Legal
Proceedings
|
18
|
|
|
Item 1A.
|
Risk
Factors
|
18
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
19
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
19
|
|
|
Item
4.
|
[Removed
and Reserved]
|
19
|
|
|
Item
5.
|
Other
Information
|
19
|
|
|
Item
6.
|
Exhibits
|
19
|
|
|
Signatures
|
20
|
||
1
Sypris
Solutions, Inc.
Consolidated
Statements of Operations
(in
thousands, except for per share data)
|
Three Months Ended
|
||||||||
|
April 4,
|
April 5,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Net
revenue:
|
||||||||
|
Outsourced
services
|
$ | 56,999 | $ | 51,550 | ||||
|
Products
|
5,904 | 16,159 | ||||||
|
Total
net revenue
|
62,903 | 67,709 | ||||||
|
Cost
of sales:
|
||||||||
|
Outsourced
services
|
52,215 | 54,837 | ||||||
|
Products
|
4,675 | 12,318 | ||||||
|
Total
cost of sales
|
56,890 | 67,155 | ||||||
|
Gross
profit
|
6,013 | 554 | ||||||
|
Selling,
general and administrative
|
6,575 | 7,746 | ||||||
|
Research
and development
|
155 | 959 | ||||||
|
Amortization
of intangible assets
|
28 | 28 | ||||||
|
Restructuring
expense, net
|
413 | 1,981 | ||||||
|
Operating
loss
|
(1,158 | ) | (10,160 | ) | ||||
|
Interest
expense, net
|
601 | 711 | ||||||
|
Other
expense, net
|
466 | 307 | ||||||
|
Loss
from continuing operations, before taxes
|
(2,225 | ) | (11,178 | ) | ||||
|
Income
tax expense
|
199 | 355 | ||||||
|
Loss
from continuing operations
|
(2,424 | ) | (11,533 | ) | ||||
|
Income
from discontinued operations, net of tax
|
— | 188 | ||||||
|
Net
loss
|
$ | (2,424 | ) | $ | (11,345 | ) | ||
|
Basic
income (loss) per share:
|
||||||||
|
Loss
per share from continuing operations
|
$ | (0.13 | ) | $ | (0.63 | ) | ||
|
Income
per share from discontinued operations
|
— | 0.01 | ||||||
|
Net
loss per share
|
$ | (0.13 | ) | $ | (0.62 | ) | ||
|
Diluted
income (loss) per share:
|
||||||||
|
Loss
per share from continuing operations
|
$ | (0.13 | ) | $ | (0.63 | ) | ||
|
Income
per share from discontinued operations
|
— | 0.01 | ||||||
|
Net
loss per share
|
$ | (0.13 | ) | $ | (0.62 | ) | ||
|
Weighted
average shares outstanding:
|
||||||||
|
Basic
|
18,543 | 18,434 | ||||||
|
Diluted
|
18,543 | 18,434 | ||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
2
Sypris
Solutions, Inc.
Consolidated
Balance Sheets
(in
thousands, except for share data)
|
April 4,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
(Note)
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 14,162 | $ | 15,608 | ||||
|
Restricted
cash - current
|
74 | 74 | ||||||
|
Accounts
receivable, net
|
39,848 | 38,317 | ||||||
|
Inventory,
net
|
31,190 | 29,042 | ||||||
|
Other
current assets
|
6,121 | 6,406 | ||||||
|
Total
current assets
|
91,395 | 89,447 | ||||||
|
Restricted
cash
|
3,000 | 3,000 | ||||||
|
Property,
plant and equipment, net
|
77,956 | 80,280 | ||||||
|
Goodwill
|
6,900 | 6,900 | ||||||
|
Other
assets
|
10,540 | 10,320 | ||||||
|
Total
assets
|
$ | 189,791 | $ | 189,947 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 38,539 | $ | 36,185 | ||||
|
Accrued
liabilities
|
21,332 | 22,279 | ||||||
|
Current
portion of long-term debt
|
5,000 | 4,000 | ||||||
|
Total
current liabilities
|
64,871 | 62,464 | ||||||
|
Long-term
debt
|
18,305 | 19,305 | ||||||
|
Other
liabilities
|
40,532 | 41,960 | ||||||
|
Total
liabilities
|
123,708 | 123,729 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, par value $0.01 per share, 975,150 shares authorized; no shares
issued
|
— | — | ||||||
|
Series
A preferred stock, par value $0.01 per share, 24,850 shares authorized; no
shares issued
|
— | — | ||||||
|
Common
stock, non-voting, par value $0.01 per share, 10,000,000 shares
authorized; no shares issued
|
— | — | ||||||
|
Common
stock, par value $0.01 per share, 30,000,000 shares authorized; 19,971,578
shares issued and 19,693,262 outstanding in 2010 and 20,015,128 shares
issued and 19,472,499 outstanding in 2009
|
200 | 200 | ||||||
|
Additional
paid-in capital
|
147,794 | 147,644 | ||||||
|
Retained
deficit
|
(66,855 | ) | (64,434 | ) | ||||
|
Accumulated
other comprehensive loss
|
(15,053 | ) | (17,187 | ) | ||||
|
Treasury
stock, 278,316 and 542,629 shares in 2010 and 2009,
respectively
|
(3 | ) | (5 | ) | ||||
|
Total
stockholders’ equity
|
66,083 | 66,218 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 189,791 | $ | 189,947 | ||||
Note: The
balance sheet at December 31,
2009 has been derived from
the audited consolidated financial statements at that date but does not include
all information and footnotes required by accounting principles generally
accepted in the United States for a complete set of financial
statements.
The
accompanying notes are an integral part of the consolidated financial
statements.
3
Sypris
Solutions, Inc.
Consolidated
Cash Flow Statements
(in
thousands)
|
Three Months Ended
|
||||||||
|
April 4,
|
April 5,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (2,424 | ) | $ | (11,345 | ) | ||
|
Income
from discontinued operations
|
— | 188 | ||||||
|
Loss
from continuing operations
|
(2,424 | ) | (11,533 | ) | ||||
|
Adjustments
to reconcile net (loss) income to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
3,720 | 3,960 | ||||||
|
Noncash
compensation expense
|
268 | 83 | ||||||
|
Other
noncash items
|
(400 | ) | 305 | |||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(1,541 | ) | (842 | ) | ||||
|
Inventory
|
(2,656 | ) | 5,816 | |||||
|
Other
current assets
|
286 | (160 | ) | |||||
|
Accounts
payable
|
2,330 | (4,824 | ) | |||||
|
Accrued
and other liabilities
|
(850 | ) | (511 | ) | ||||
|
Net
cash used in operating activities – continuing operations
|
(1,267 | ) | (7,706 | ) | ||||
|
Net
cash used in operating activities – discontinued
operations
|
— | (188 | ) | |||||
|
Net
cash used in operating activities
|
(1,267 | ) | (7,894 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Capital
expenditures, net
|
(244 | ) | (1,694 | ) | ||||
|
Proceeds
from sale of assets
|
8 | 26 | ||||||
|
Changes
in nonoperating assets and liabilities
|
57 | 142 | ||||||
|
Net
cash used in investing activities – continuing operations
|
(179 | ) | (1,526 | ) | ||||
|
Net
cash used in investing activities – discontinued
operations
|
— | (179 | ) | |||||
|
Net
cash used in investing activities
|
(179 | ) | (1,705 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Net
change in debt under revolving credit agreements
|
— | 2,000 | ||||||
|
Debt
modification costs
|
— | (652 | ) | |||||
|
Cash
dividends paid
|
— | (386 | ) | |||||
|
Net
cash provided by financing activities
|
— | 962 | ||||||
|
Net
decrease in cash and cash equivalents
|
(1,446 | ) | (8,637 | ) | ||||
|
Cash
and cash equivalents at beginning of period
|
15,608 | 13,717 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 14,162 | $ | 5,080 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
4
Sypris
Solutions, Inc.
Notes
to Consolidated Financial Statements
(1) Nature
of Business
Sypris is
a diversified provider of outsourced services and specialty products. The
Company performs a wide range of manufacturing, engineering, design, and other
technical services, typically under multi-year, sole-source contracts with
corporations and government agencies in the markets for industrial manufacturing
and aerospace & defense electronics. The Company provides such
services through its Industrial and Electronics Groups.
(2) Basis
of Presentation
The
accompanying unaudited consolidated financial statements include the accounts of
Sypris Solutions, Inc. and its wholly-owned subsidiaries (collectively, “Sypris”
or the “Company”), and have been prepared by the Company in accordance with the
rules and regulations of the Securities and Exchange Commission. All significant
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 4, 2010 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2010. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements, and notes thereto, for the year ended
December 31, 2009 as presented in the Company’s Annual Report on Form
10-K.
Certain
prior period amounts have been reclassified to conform to the current period
presentation. See Note 4, Discontinued Operations.
(3) Recent
Accounting Pronouncements
Any new
accounting pronouncements issued but not yet effective have been deemed not to
be relevant to the operations of the Company. Accordingly, the
effects of any such undisclosed new accounting pronouncements are not expected
to have any impact on the results of operations or financial position of the
Company.
(4) Discontinued
Operations
On
October 26, 2009, the Company sold all of the stock of its wholly
owned subsidiary, Sypris Test & Measurement, for $39,000,000, of which
$3,000,000 was deposited in an 18-month escrow account in connection with
certain customary representations, warranties, covenants and indemnifications of
the Company. The Test & Measurement business provided technical
services for the calibration, certification and repair of test & measurement
equipment in and outside the U.S., and prior to the sale was a part of the
Company’s Electronics Group. The Company used the proceeds of
$34,000,000 from the sale to reduce the amounts outstanding under its Revolving
Credit Agreement and Senior Notes.
The
results of the Test & Measurement segment have been reported as discontinued
operations in the consolidated statements of operations for all periods
presented. In accordance with the provisions of ASC 205-20-45-6
(
formerly
Allocation of Interest to
Discontinued Operations
EITF 87-24), interest expense incurred on the
debt required to be repaid from the net proceeds of the sale has been allocated
to discontinued operations. During the period ended April 5, 2009,
interest expense allocated to discontinued operations was $552,000 based on the
$34,000,000 in debt required to be repaid as a result of the
transaction.
5
The key
components of income from discontinued operations related to the Test &
Measurement segment were as follows (in thousands):
|
Three Months
|
||||
|
Ended
|
||||
|
April 5, 2009
|
||||
|
(Unaudited)
|
||||
|
Net
revenue
|
$ | 13,982 | ||
|
Cost
of sales and operating expense
|
(13,114 | ) | ||
|
Allocated
interest expense
|
(552 | ) | ||
|
Income
before taxes
|
316 | |||
|
Income
taxes
|
128 | |||
|
Income
from discontinued operations
|
$ | 188 | ||
(5) Dana
Claim
On
March 3, 2006, the Company’s largest customer, Dana Corporation
(“Dana”), and 40 of its U.S. subsidiaries, filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Southern District of New York. On
August 7, 2007, the Company entered into a comprehensive settlement
agreement with Dana (the “Settlement Agreement”) to resolve all outstanding
disputes between the parties, terminate previously approved arbitration payments
and replace three existing supply agreements with a single, revised contract
running through 2014. In addition, Dana provided the Company with an
allowed general unsecured non-priority claim in the face amount of $89,900,000
(the “Claim”).
Sypris
and Dana conducted a series of negotiations during the period beginning
March 3, 2006 and ending on the settlement date of
August 7, 2007. The negotiations covered a wide range of
commercial issues including compliance with the terms and conditions of past
contractual matters and establishing terms and conditions for a new long-term
supply agreement. Throughout these negotiations, Sypris developed and
maintained a discounted cash flow valuation methodology to determine the
potential economic impact to Sypris of each commercial issue under negotiation
and to assign a value to each issue. The discounted cash flow
valuation used the expected annual net cash flow from each commercial issue over
the specific time period associated with the issue.
The Claim
provided to Sypris was agreed to by Sypris and Dana as consideration for the
aggregate economic impact of the various elements the two parties were
negotiating. The Settlement Agreement did not specifically set forth
values attributable to each of the above defined elements, nor did Sypris and
Dana enter into any formal agreement as to the allocation of the
Claim. Therefore, after the aggregate Claim value of $89,900,000 was
established, Sypris allocated the aggregate Claim value to each commercial issue
based upon the estimated net present values determined by Sypris’ internal
valuation methodology.
Sypris
recorded the Claim at the estimated fair value of $76,483,000 on
August 7, 2007 in accordance with ASC 845-10 (formerly APB 29,
Accounting for Nonmonetary
Transactions).
Sypris allocated the estimated fair value of to each
commercial issue, and each of those items which required the Company’s continued
involvement was deferred and will be recognized over the applicable period of
the involvement.
The claim
entitled the Company to receive an initial distribution of 3,090,408 shares of
common stock in Dana Holding Corporation (“DHC”), the right to participate in
additional distributions of reserved shares of common stock of DHC if certain
disputed matters are ultimately resolved for less than Dana’s reserves for those
matters (estimated by the Company to represent an additional 739,000 shares) and
the right to receive a distribution of cash of $6,891,000.
Dana
emerged from bankruptcy on January 31, 2008, and on
February 1, 2008, the newly issued shares of DHC began trading on the
New York Stock Exchange. During 2008, the Company received
distributions of DHC common stock totaling 3,742,381 shares and a cash
distribution of $6,891,000. As of April 4, 2010, the Company has
received approximately 98% of the total common shares it expects to
receive.
The
Company determined that its investment in DHC common stock was
other-than-temporarily impaired as of December 31, 2008. Accordingly,
the Company recorded a $66,758,000 impairment charge during the fourth quarter
of 2008. The non-cash impairment was based on DHC’s closing stock
price of $0.74 per share on December 31, 2008.
6
During
the fourth quarter 2009, the Company liquidated its holdings in DHC common stock
for approximately $21,024,000 in net cash proceeds. The Company
recognized a gain of $18,255,000 on the sale.
At
April 4, 2010, the Company’s right to participate in additional
distributions of DHC common stock, presently estimated to be 87,000 additional
shares, is carried at $64,000 in other assets. Had these shares been
received at April 4, 2010, the Company would have recorded a $986,000
unrealized holding gain to other comprehensive loss.
(6)
Restructuring, Impairments and Other
Nonrecurring Charges
As
announced during the fourth quarter of 2008, the Company committed to a
restructuring program, which included the closure of its Kenton, Ohio facility,
significant reductions in the workforce in its Marion, Ohio facility and the
integration of its Electronics Group subsidiaries. The purpose of the
restructuring program is to reduce fixed costs, accelerate integration
efficiencies, exit certain unprofitable product lines and significantly improve
operating earnings on a sustained basis. The restructuring activities
are expected to result in $25,000,000 in annual savings. The
activities generating the expected savings are from the following: i) annual
savings of $12,500,000 from current and potential facility closings, ii) annual
savings of $7,500,000 from operational efficiencies, iii) annual savings of
$3,000,000 from product costing changes implemented during the first quarter of
2009, and iv) annual savings of $2,000,000 from various quality improvement
initiatives implemented during 2009. The Company expects to
substantially complete its program by the end of 2010. As a result of
these initiatives, the Company recorded charges of $413,000, or $0.02 per share,
and $1,981,000, or $0.11 per share during the first quarter of 2010 and 2009,
respectively in restructuring expense, net. All $413,000 incurred during the
three months ended April 4, 2010 was recorded within the Industrial
Group. Of these costs, $8,000 was for severance and benefit-related
costs, $99,000 related to equipment relocation costs, and $306,000 represented
other charges, primarily related to mothball costs associated with closed or
partially closed facilities. The charges for the three months ended
April 5, 2009 included $711,000 for severance and benefit-related
costs, $712,000 related to equipment relocation costs, $121,000 for non-cash
impairment costs and $437,000 for other costs, primarily related to IT and
process reengineering consultants. Of the expected aggregate
$54,767,000 of pre-tax costs for the total program, the Company expects
$15,251,000 will be cash expenditures, the majority of which has been spent as
of April 4, 2010. A summary of the pre-tax charges is as
follows (in thousands):
|
Costs Incurred
|
||||||||||||||||
|
Three Months
|
Total
|
Remaining
|
||||||||||||||
|
Total
|
Ended
|
Recognized
|
Costs to be
|
|||||||||||||
|
Program
|
April 4, 2010
|
to date
|
Recognized
|
|||||||||||||
|
Severance
and benefit related costs
|
$ | 4,090 | $ | 8 | $ | 3,708 | $ | 382 | ||||||||
|
Asset
impairments
|
13,517 | — | 13,517 | — | ||||||||||||
|
Deferred
contract costs write-offs
|
17,798 | — | 17,798 | — | ||||||||||||
|
Inventory
related charges
|
7,895 | — | 7,895 | — | ||||||||||||
|
Equipment
relocation costs
|
2,791 | 99 | 1,963 | 828 | ||||||||||||
|
Asset
retirement obligations
|
1,501 | — | 1,501 | — | ||||||||||||
|
Contract
termination costs
|
3,209 | — | 3,209 | — | ||||||||||||
|
Other
|
3,966 | 306 | 3,604 | 362 | ||||||||||||
| $ | 54,767 | $ | 413 | $ | 53,195 | $ | 1,572 | |||||||||
7
A summary
of restructuring activity and related reserves at April 4, 2010 is as follows
(in thousands):
|
Accrued
|
Accrued
|
|||||||||||||||
|
Balance at
|
Gross
|
Balance at
|
||||||||||||||
|
December 31,
|
2010
|
Cash
|
April 4,
|
|||||||||||||
|
2009
|
Charge
|
Payments
|
2010
|
|||||||||||||
|
Severance
and benefit related costs
|
$ | 211 | $ | 8 | $ | (23 | ) | $ | 196 | |||||||
|
Asset
retirement obligations
|
1,395 | — | (64 | ) | 1,331 | |||||||||||
|
Contract
termination costs
|
918 | — | — | 918 | ||||||||||||
|
Equipment
relocation costs
|
— | 99 | (99 | ) | — | |||||||||||
|
Other
|
— | 306 | (306 | ) | — | |||||||||||
| $ | 2,524 | $ | 413 | $ | (492 | ) | $ | 2,445 | ||||||||
A summary
of total expenses recognized to date by reportable segment is as follows (in
thousands):
|
Industrial
Group
|
Electronics
Group
|
Total
|
||||||||||
|
Severance
and benefit-related costs
|
$ | 2,562 | $ | 1,146 | $ | 3,708 | ||||||
|
Asset
impairments
|
13,517 | — | 13,517 | |||||||||
|
Deferred
contract costs write-offs
|
— | 17,798 | 17,798 | |||||||||
|
Inventory
related charges
|
— | 7,895 | 7,895 | |||||||||
|
Equipment
relocation costs
|
1,963 | — | 1,963 | |||||||||
|
Asset
retirement obligations
|
1,501 | — | 1,501 | |||||||||
|
Contract
termination costs
|
1,868 | 1,341 | 3,209 | |||||||||
|
Other
|
945 | 2,659 | 3,604 | |||||||||
| $ | 22,356 | $ | 30,839 | $ | 53,195 | |||||||
The total pre-tax costs of $54,767,000
expected to be incurred includes $23,149,000 within the Industrial Group and
$31,618,000 within the Electronics Group. The Company expects to
incur additional pre-tax costs of $1,572,000, including approximately $793,000
within the Industrial Group and $779,000 within the Electronics
Group.
(7) Stock-Based
Compensation
On
March 2, 2010, the Company granted 302,000 restricted stock awards
under a long term incentive program. These awards vest on the third
anniversary of the grant date. The Company also granted 131,889
options on March 2, 2010 with a five year life and cliff vesting at three years
of service. The grants did not have a significant impact on the
Company’s consolidated financial statements during the current
period.
(8) (Loss)
Earnings Per Common Share
Unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method. Accordingly, distributed and undistributed earnings
attributable to unvested restricted shares (participating securities) have been
excluded, as applicable, from net income or loss attributable to common
shareholders utilized in the basic and diluted earnings per share
calculations.
For the
three months ended April 4, 2010 and April 5, 2009, diluted
weighted average common shares do not include the impact of outstanding stock
options and unvested compensation-related shares because the effect of these
items on diluted net loss would be anti-dilutive
.
8
A
reconciliation of the weighted average shares outstanding used in the
calculation of basic and diluted (loss) earnings per common share is as follows
(in thousands):
|
Three Months Ended
|
||||||||
|
April 4,
|
April 5,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Earnings
attributable to stockholders:
|
||||||||
|
Loss
from continuing operations attributable to stockholders.
|
$ | (2,424 | ) | $ | (11,533 | ) | ||
|
Discontinued
operations, net of tax
|
— | 188 | ||||||
|
Net
loss
|
$ | (2,424 | ) | $ | (11,345 | ) | ||
|
Less
distributed and undistributed earnings allocable to restricted award
holders
|
— | — | ||||||
|
Net
income (loss) allocable to common stockholders
|
$ | (2,424 | ) | $ | (11,345 | ) | ||
|
Basic
earnings (loss) per common share attributable to
stockholders:
|
||||||||
|
Continuing
operations.
|
$ | (0.13 | ) | $ | (0.63 | ) | ||
|
Discontinued
operations
|
— | 0.01 | ||||||
|
Net
income (loss)
|
$ | (0.13 | ) | $ | (0.62 | ) | ||
|
Diluted
earnings (loss) per common share attributable to
stockholders:
|
||||||||
|
Continuing
operations.
|
$ | (0.13 | ) | $ | (0.63 | ) | ||
|
Discontinued
operations
|
— | 0.01 | ||||||
|
Net
income (loss)
|
$ | (0.13 | ) | $ | (0.62 | ) | ||
|
Weighted
average shares outstanding – basic.
|
18,543 | 18,434 | ||||||
|
Weighted
average additional shares assuming conversion of potential common
shares
|
— | — | ||||||
|
Weighted
average shares outstanding – diluted.
|
18,543 | 18,434 | ||||||
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 potential 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. All potential common shares were
excluded from earnings per share for the periods ended April 4, 2010
and April 5, 2009, because the effect of inclusion would be
anti-dilutive.
(9) Inventory
Inventory
consisted of the following (in thousands):
|
April 4,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Raw
materials
|
$ | 4,450 | $ | 3,916 | ||||
|
Work
in process
|
5,546 | 5,933 | ||||||
|
Finished
goods
|
2,684 | 2,899 | ||||||
|
Costs
relating to long-term contracts and programs
|
19,340 | 17,288 | ||||||
|
Reserve
for excess and obsolete inventory
|
(830 | ) | (994 | ) | ||||
| $ | 31,190 | $ | 29,042 | |||||
9
|
(10)
|
Segment
Data
|
The
Company is organized into two business groups, the Industrial Group and the
Electronics Group. The segments are each managed separately because
of the distinctions betweens products, services, markets, customers,
technologies and workforce skills of the segments. The Industrial
Group provides manufacturing services for a variety of customers that outsource
forged and finished steel components and subassemblies. The
Industrial Group also manufactures high-pressure closures and other fabricated
products. The Electronics Group provides manufacturing and technical
services as an outsourced service provider and manufactures complex data storage
systems. There was no intersegment net revenue recognized in any of
the periods presented.
The
following table presents financial information for the reportable segments of
the Company (in thousands):
|
Three Months Ended
|
||||||||
|
April
4,
|
April
5,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Net
revenue from unaffiliated customers:
|
||||||||
|
Industrial
Group
|
$ | 44,106 | $ | 37,498 | ||||
|
Electronics
Group
|
18,797 | 30,211 | ||||||
| $ | 62,903 | $ | 67,709 | |||||
|
Gross
profit (loss):
|
||||||||
|
Industrial
Group
|
$ | 2,453 | $ | (2,702 | ) | |||
|
Electronics
Group
|
3,560 | 3,256 | ||||||
| $ | 6,013 | $ | 554 | |||||
|
Operating
(loss) income:
|
||||||||
|
Industrial
Group
|
$ | (207 | ) | $ | (6,684 | ) | ||
|
Electronics
Group
|
1,062 | (1,225 | ) | |||||
|
General,
corporate and other
|
(2,013 | ) | (2,251 | ) | ||||
| $ | (1,158 | ) | $ | (10,160 | ) | |||
|
(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 balance
sheets, as of April 4, 2010 and December 31, 2009 was $956,000 and
$1,008,000, respectively. The Company’s warranty expense for the
quarters ended April 4, 2010 and April 5, 2009 was $122,000 and $135,000,
respectively.
Additionally,
the Company sells three and five-year extended warranties for one of its link
encryption products. The revenue from the extended warranties is
deferred and recognized ratably over the contractual term. As of
April 4, 2010 and December 31, 2009, the Company had
deferred $1,583,000 and $1,558,000, respectively, related to extended
warranties, which is included in other liabilities in the accompanying balance
sheets.
The
Company bears insurance risk as a member of a group captive insurance entity for
certain general liability, automobile and workers’ compensation insurance
programs 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 believes that its present insurance coverage and level of accrued
liabilities are adequate.
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.
10
As of
April 4, 2010, the Company had outstanding purchase commitments of
approximately $12,801,000, primarily for the acquisition of inventory and
manufacturing equipment. As of April 4, 2010, the Company also had
outstanding letters of credit approximating $2,398,000 primarily under the
aforementioned captive insurance program.
|
(12)
|
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 35% and for its foreign
operations at a statutory rate of 30% in 2010 and 28% in 2009. The
Company’s foreign operations are also subject to minimum income taxes in periods
where positive cash flows exceed taxable income. In the first quarter
of 2010, minimum income taxes were required for the Company’s foreign
operations. Reconciling items between the federal statutory rate and
the effective tax rate also include 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
(formerly SFAS
No. 109,
Accounting for Income
Taxes
). 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
current forecast, a valuation allowance of $1,065,000 was recorded through
earnings for the three months ended April 4, 2010; however, there can
be no assurances that the Company’s forecasts are now, or in the future will be,
accurate or that other factors impacting this deferred tax asset will not
materially and adversely affect its business, results of operations and
financial condition. The valuation allowance recorded for the three
months ended April 5, 2009 was $4,206,000.
|
(13)
|
Employee
Benefit Plans
|
Pension
expense (benefit) consisted of the following (in thousands):
|
Three Months Ended
|
||||||||
|
April
4,
|
April
5,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Service
cost
|
$ | 16 | $ | 18 | ||||
|
Interest
cost on projected benefit obligation
|
576 | 595 | ||||||
|
Net
amortizations, deferrals and other costs
|
146 | 252 | ||||||
|
Expected
return on plan assets
|
(657 | ) | (587 | ) | ||||
| $ | 81 | $ | 278 | |||||
11
|
(14)
|
Other
Comprehensive Loss
|
The
Company’s accumulated other comprehensive loss consists of the accumulated net
unrealized losses on available-for-sale investments, employee benefit related
adjustments and foreign currency translation adjustments.
The
components of comprehensive loss, net of tax, are as follows for the periods
indicated (in thousands):
|
Three Months Ended
|
||||||||
|
April
4,
|
April
5,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Net
loss
|
$ | (2,424 | ) | $ | (11,345 | ) | ||
|
Other
comprehensive loss:
|
||||||||
|
Unrealized
loss on available-for-sale securities
|
— | (299 | ) | |||||
|
Foreign
currency translation adjustments
|
2,134 | (502 | ) | |||||
|
Total
comprehensive loss
|
$ | (290 | ) | $ | (12,146 | ) | ||
Accumulated
other comprehensive loss consisted of the following (in thousands):
|
April
4,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Foreign
currency translation adjustments
|
$ | (2,570 | ) | $ | (4,704 | ) | ||
|
Employee
benefit related adjustments, net of tax of $2,512 – U.S.
|
(12,049 | ) | (12,049 | ) | ||||
|
Employee
benefit related adjustments - Mexico
|
(434 | ) | (434 | ) | ||||
|
Accumulated
other comprehensive loss
|
$ | (15,053 | ) | $ | (17,187 | ) | ||
|
(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 value for the Senior Notes approximates
fair value at April 4, 2010, given the agreement was signed in during
the fourth quarter of 2009. The carrying amount of debt outstanding
at April 4, 2010 and December 31, 2009 under the Credit
Agreement approximates fair value because borrowings are for terms of less than
six months and have rates that reflect currently available terms and conditions
for similar debt.
12
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a
diversified provider of outsourced services and specialty products. We perform a
wide range of manufacturing, engineering, design and other technical services,
typically under multi-year, sole-source contracts with corporations and
government agencies principally in the markets for industrial manufacturing and
aerospace & defense electronics.
We focus
on those markets where we have the expertise, qualifications and leadership
position to sustain a competitive advantage. We target our resources to support
the needs of industry leaders that embrace multi-year contractual relationships
as a strategic component of their supply chain management. These contracts, many
of which are sole-source by part number and are for terms of up to five years,
enable us to invest in leading-edge processes or technologies to help our
customers remain competitive. The productivity, flexibility and economies of
scale that can result offer an important opportunity for differentiating
ourselves from the competition when it comes to cost, quality, reliability and
customer service.
In
December 2008, we announced a restructuring program, which included the
closure of the Industrial Group’s Kenton, Ohio facility, the significant
reduction in volumes at the Marion, Ohio facility (which remains under
consideration for potential closure depending upon the cost of moving certain
equipment, the need for continuing capacity, the possibility of new business
opportunities and overall market conditions) and the consolidation of Sypris
Electronics and Sypris Data Systems into a single operation within the
Electronics Group. Additionally, we have exited several programs
within the Electronics Group. The purpose of the restructuring
program was to reduce fixed costs, accelerate integration efficiencies, and
significantly improve operating earnings on a sustained basis. As a
result of these initiatives, we recorded, or expect to record in future periods,
aggregate pre-tax expenses of approximately $54.8 million, consisting of
the following: $4.1 million in severance and benefit costs,
$13.5 million in non-cash asset impairments, $17.8 million in non-cash
deferred contract costs write-offs, $7.9 million in inventory related
charges, $2.8 million in equipment relocation costs, $1.5 million in
asset retirement obligations, $3.2 million in contract termination costs
and $4.0 million in other restructuring charges. Of the
aggregate $54.8 million in pre-tax costs, the Company expects approximately
$15.2 million to be cash-related.
Results
of Operations
The table
presented below, which compares our first quarterly period of operations from
2010 to 2009, presents the results for each period, the change in those results
from 2010 to 2009 in both dollars and percentage change and the results for each
period as a percentage of net revenue.
|
|
·
|
The
first two data columns in the 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 the 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 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.”
13
Three
Months Ended April 4, 2010 Compared to Three Months Ended April 5,
2009
|
Year Over
|
||||||||||||||||||||||||
|
Year Over
|
Year
|
Results as Percentage of
|
||||||||||||||||||||||
|
Year
|
Percentage
|
Net Revenue for the Three
|
||||||||||||||||||||||
|
Three
Months
Ended,
|
Change
|
Change
|
Months
Ended
|
|||||||||||||||||||||
|
April 4,
|
April 5,
|
Favorable
|
Favorable
|
April 4,
|
April 5,
|
|||||||||||||||||||
|
2010
|
2009
|
(Unfavorable)
|
(Unfavorable)
|
2010
|
2009
|
|||||||||||||||||||
|
(in
thousands, except percentage data)
|
||||||||||||||||||||||||
|
Net
revenue:
|
||||||||||||||||||||||||
|
Industrial
Group
|
$ | 44,106 | $ | 37,498 | $ | 6,608 | 17.6 | % | 70.1 | % | 55.4 | % | ||||||||||||
|
Electronics
Group
|
18,797 | 30,211 | (11,414 | ) | (37.8 | ) | 29.9 | 44.6 | ||||||||||||||||
|
Total
|
62,903 | 67,709 | (4,806 | ) | (7.1 | ) | 100.0 | 100.0 | ||||||||||||||||
|
Cost
of sales:
|
||||||||||||||||||||||||
|
Industrial
Group
|
41,653 | 40,200 | (1,453 | ) | (3.6 | ) | 94.4 | 107.2 | ||||||||||||||||
|
Electronics
Group
|
15,237 | 26,955 | 11,718 | 43.5 | 81.1 | 89.2 | ||||||||||||||||||
|
Total
|
56,890 | 67,155 | 10,265 | 15.3 | 90.4 | 99.2 | ||||||||||||||||||
|
Gross
profit (loss):
|
||||||||||||||||||||||||
|
Industrial
Group
|
2,453 | (2,702 | ) | 5,155 |
NM
|
5.6 | (7.2 | ) | ||||||||||||||||
|
Electronics
Group
|
3,560 | 3,256 | 304 | 9.3 | 18.9 | 10.8 | ||||||||||||||||||
|
Total
|
6,013 | 554 | 5,459 | 985.4 | 9.6 | 0.8 | ||||||||||||||||||
|
Selling,
general and administrative
|
6,575 | 7,746 | 1,171 | 15.1 | 10.5 | 11.4 | ||||||||||||||||||
|
Research
and development
|
155 | 959 | 804 | 83.8 | 0.2 | 1.4 | ||||||||||||||||||
|
Amortization
of intangible assets
|
28 | 28 | — | — | 0.0 | 0.0 | ||||||||||||||||||
|
Restructuring
expense, net
|
413 | 1,981 | 1,568 | 79.2 | 0.7 | 2.9 | ||||||||||||||||||
|
Operating
loss
|
(1,158 | ) | (10,160 | ) | 9,002 | 88.6 | (1.8 | ) | (15.0 | ) | ||||||||||||||
|
Interest
expense, net
|
601 | 711 | 110 | 15.5 | 1.0 | 1.1 | ||||||||||||||||||
|
Other
expense, net
|
466 | 307 | (159 | ) | (51.8 | ) | 0.7 | 0.4 | ||||||||||||||||
|
Loss
from continuing operations, before taxes
|
(2,225 | ) | (11,178 | ) | 8,953 | 80.1 | (3.5 | ) | (16.5 | ) | ||||||||||||||
|
Income
tax expense
|
199 | 355 | 156 | 43.9 | 0.3 | 0.5 | ||||||||||||||||||
|
Loss
from continuing operations
|
(2,424 | ) | (11,533 | ) | 9,109 | 79.0 | (3.9 | ) | (17.0 | ) | ||||||||||||||
|
Income
from discontinued operations, net of tax
|
— | 188 | (188 | ) |
NM
|
— | 0.3 | |||||||||||||||||
|
Net
loss
|
$ | (2,424 | ) | $ | (11,345 | ) | $ | 8,921 | 78.6 | (3.9 | )% | (16.7 | )% | |||||||||||
14
Net Revenue
. The Industrial
Group primarily derives its revenue from manufacturing services and product
sales. Net revenue in the Industrial Group increased 17.6% or
$6.6
million for
the three months ended April
4,
2010 compared
to the first quarter of 2009. Increased volumes for heavy duty
commercial trucks and light trucks have contributed to increased revenue of
$6.2
million and
$0.6
million for
the first quarter of 2010, respectively. Partially offsetting this
was a decline of $0.2
million for
the off-highway business in the first quarter of 2010.
The
Electronics Group derives its revenue from product sales and technical
outsourced services. Net revenue in the Electronics Group for the
first quarter of 2010 decreased 37.8% or $11.4
million from
the same period in 2009, primarily due to a delay on the production and shipping
for one of its secured communication products and the completion of shipments of
certain older programs. Additionally, sales for our data recording
products have decreased $1.6
million over
the prior year. The delay on one of the secured communication
products is due to a stop work order that the Company received on March 30, 2010
from the government due to a technical issue with the product. The
Company is currently working with the government to remediate the technical
issue, and we believe that the stop work order will be lifted and shipments will
resume during the third quarter of 2010. However, we cannot predict
the outcome of this matter with certainty and there could be additional delays
or costs associated with this issue. The Company has received
certification for one of its link encryption devices and expects to begin
shipping that product late in the second quarter with production ramping up
during the second half of the year. As a result, we expect revenues
in this segment to begin to increase in the third quarter of 2010.
Gross Profit.
The Industrial
Group’s gross profit increased to $2.5
million in
the first quarter of 2010 as compared to a loss of $2.7 million in the
first quarter of 2009. The increase in sales volume resulted in an
increase in gross profit of approximately $1.5
million. The
Industrial Group also realized an increase in gross profit of $3.2
million as a
result of restructuring efforts. Favorable health insurance costs
resulted in an increase in gross profit of approximately $0.6
million. Partially
offsetting this was a $0.2
million cost
increase due to the strengthening of the Mexican peso as compared to the prior
year quarter.
The
Electronics Group’s gross profit increased $0.3
million in
the first quarter of 2010, primarily due to product mix and the results of
continuous improvement initiatives. The Electronics Group experienced
increased sales on its higher margin space business during the quarter, which
helped offset the margin on lower sales. Additionally, the quarter
was favorably impacted by a $0.6
million
receipt for the completion and settlement on a certification assurance
program. Gross profit as a percentage of revenue in the first quarter
of 2010 increased to 18.9% as compared to 10.8% in the prior year
period.
Selling, General and
Administrative.
Selling, general and administrative expense decreased
$1.2
million in
the first quarter of 2010 and decreased as a percentage of revenue to 10.5% from
11.4% in the first quarter of 2009. The prior period results include
approximately $0.5 million of non-capitalized legal and professional fees
related to the debt amendment in that period. Additionally, selling
general and administrative expense decreased in the first quarter of 2010 as a
result of reductions in compensation and employee benefit costs.
Research and Development.
Research and development costs decreased $0.8
million to
$0.2
million in
the first quarter of 2010 from the prior year quarter primarily due to the
redirection of engineering efforts during the first quarter to assist with a
technical issue with one of our products, as noted
above. Additionally, development efforts within our Electronics Group
for a next generation secured communications device were largely completed
during the beginning of the first quarter of 2010. However, research
and development costs are expected to increase from current levels for the
balance of 2010 in support of the Electronics Group’s self-funded product and
technology development activities.
Restructuring Expense, Net.
As a result of the Company’s restructuring program we recorded
$0.4 million, or $0.02 per share, related to these initiatives during
the three months ended April 4, 2010, which is included in
restructuring expense, net on the consolidated statement of
operations. The charge consisted of $0.1 million in equipment
relocation costs and $0.3 million in other various charges, primarily
related to mothball costs associated with closed or partially closed
facilities. During the three months ended April 5, 2009, we recorded
$2.0 million, or $0.11 per share, related to these initiatives, which consisted
of $0.7 million for employee severance and benefit costs, $0.7 million in
equipment relocation costs, $0.1 million in non-cash asset impairments and $0.5
million in other various charges, primarily related to information technology
and process reengineering consultants. See Note 6 to the consolidated
financial statements included in this Form 10-Q.
15
Interest Expense.
Interest
expense for the first quarter of 2010 decreased $0.1 million due to a
decrease in the weighted average debt outstanding, partially offset by an
increase in the weighted average interest rate. Our weighted average
debt outstanding decreased to $19.2
million for
the first quarter of 2010 from $72.5
million
during the first quarter of 2009. The weighted average interest rate
increased to 9.6% in the first quarter of 2010 from 5.8% in the first quarter of
2009 as a result of the modification of our Credit Agreement and Senior Notes in
March 2009. Interest expense incurred on the debt required to be
repaid from the net proceeds of the sale of the Test & Measurement Segment
has been allocated to discontinued operations. During the period
ended April 5, 2009, interest expense allocated to discontinued operations was
$552,000 based on the $34,000,000 in debt required to be repaid as a result of
the transaction.
Income Taxes.
The provision
for income taxes in the first quarter of 2010 is associated exclusively with our
Mexican subsidiaries. The provision for income taxes in the first
quarter of 2009 includes a benefit of $0.1 million recorded due to the required
intraperiod tax allocation resulting from the loss from continuing operations
and income from discontinued operations.
Discontinued Operations.
On
October 26, 2009, the Company sold all of the outstanding stock of its
wholly owned subsidiary, Sypris Test & Measurement, for approximately
$39,000,000. In accordance with requirements of ASC 205-20-45
(formerly SFAS No. 144
Accounting for the Impairment
or Disposal of Long-Lived Assets)
, the results of the Test &
Measurement segment have been reported as discontinued operations for all
periods presented. This business was previously included within the
Electronics Group. Test & Measurement net income was
$0.2 million for the first quarter of 2009.
Liquidity,
Capital Resources and Financial Condition
Net cash
used by operating activities (continuing operations) was $1.3
million in
the first quarter of 2010, as compared to net cash used of $7.7
million in
the same period of 2009, primarily due to the decreased net loss experienced
during the first quarter of 2010. Accounts receivable increased
within the Industrial Group and used $4.9 million of cash as a result of an
overall increase in revenue primarily towards the end of the
period. Approximately 39% of the Industrial Group’s shipments
occurred during the last month of the first quarter. Partially
offsetting this was a decrease in accounts receivable within the Electronics
Group resulting from lower sales, providing $3.2 million of cash during the
period. Inventory increased and used $2.7
million of
cash primarily as a result of a shipping delay within the Electronics Group for
one of its secured communication products as discussed above. Other
current assets decreased and provided $0.3
million of
cash primarily as a result of the timing of prepaid expenses. In the
first quarter of 2010, accounts payable increased and provided $2.3
million
primarily due to the timing of payments to our suppliers and increased purchases
by our Industrial Group. Accrued liabilities decreased and used
$0.9
million of
cash primarily as a result of payments of state taxes related to the sale of
Sypris Test & Measurement and the timing of various accruals.
Net cash
used in investing activities (continuing operations) decreased $1.3
million to
$0.2
million for
the first three months of 2010, primarily due to lower capital
expenditures.
The
Company’s financing activities were cash neutral in the first three months of
2010, as compared to net cash provided of $1.0
million in
the first three months of 2009. We had no additional borrowings or
payments on the Revolving Credit Agreement during the three months ended
April
4,
2010 as
compared to additional borrowings of $2.0
million
during the three months ended April
5,
2009. Partially
offsetting the borrowings in 2009 were financing fees of $0.7
million paid
in conjunction with modifications of our debt in 2009 and dividends of $0.4
million paid
during the first quarter of 2009.
At
April 4, 2010, we had total availability for borrowings and letters of
credit under the Revolving Credit Agreement of $8.6
million along
with an unrestricted cash balance of $14.2 million, which provides for
total cash and borrowing capacity of $22.8
million. Approximately
$4.2
million of
the unrestricted cash balance relates to our Mexican
subsidiaries. Maximum borrowings available under the Revolving Credit
Agreement are $21.0 million, and standby letters of credit up to a maximum
of $15.0 million may be issued under the Revolving Credit Agreement, of which
$2.4
million
were issued
at April
4,
2010.
We also
had purchase commitments totaling approximately $12.8 million at April 4,
2010, primarily for inventory and manufacturing equipment.
16
We
believe that sufficient resources will be available to satisfy our cash
requirements for at least the next twelve months. Cash requirements
for periods beyond the next twelve months depend on our profitability, our
ability to manage working capital requirements and our rate of
growth. If our largest customers experience financial difficulty, or
if working capital and capital expenditure requirements exceed expected levels
during the next twelve months or in subsequent periods, we may require
additional external sources of capital. There can be no assurance
that any additional required financing will be available through bank
borrowings, debt or equity financings or otherwise, or that if such financing is
available, it will be available on terms acceptable to us. If
adequate funds are not available on acceptable terms, our business, results of
operations and financial condition could be adversely affected.
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 in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2009. There have been no
significant changes in our critical accounting policies during the first quarter
of 2010.
Forward-looking
Statements
This
quarterly report, 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 industries, business
strategies, potential acquisitions or financial results and our views about
developments beyond our control, including domestic or global economic
conditions, trends and market developments.
These
statements 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 inability to successfully
launch or sustain new or next generation programs;
the
effects of a continuing economic downturn which could reduce our revenues,
negatively impact our customers or suppliers and materially, adversely affect
our financial results; potential impairments, non-recoverability or write-offs
of goodwill, assets or deferred costs, including deferred tax assets in the U.S.
or Mexico; breakdowns, relocations or major repairs of machinery and equipment;
the cost, efficiency and yield of our operations and capital investments,
including working capital, production schedules, cycle times, scrap rates,
injuries, wages, overtime costs, freight or expediting costs; cost and
availability of raw materials such as steel, component parts, natural gas or
utilities; volatility of our customers’ forecasts, financial conditions, market
shares, product requirements or scheduling demands; adverse impacts of new
technologies or other competitive pressures which increase our costs or erode
our margins; failure to adequately insure or to identify environmental or other
insurable risks; inventory valuation risks including obsolescence, shrinkage,
theft, overstocking or underbilling; changes in government or other customer
programs; reliance on major customers or suppliers, especially in the automotive
or aerospace and defense electronics sectors; revised contract prices or
estimates of major contract costs; dependence on, recruitment or retention of
key employees; union negotiations; pension valuation, health care or other
benefit costs; labor relations; strikes; risks of foreign operations; currency
exchange rates; the costs and supply of debt, equity capital, or insurance;
fees, costs or other dilutive effects of refinancing, compliance with covenants
in, or acceleration of, our loan and other debt agreements; changes in licenses,
security clearances, or other legal rights to operate, manage our work force or
import and export as needed; weaknesses in internal controls; the costs of
compliance with our auditing, regulatory or contractual obligations; regulatory
actions or sanctions; disputes or litigation, involving customer, supplier,
lessor, landlord, creditor, stockholder, product liability or environmental
claims; war, terrorism or political uncertainty; unanticipated or uninsured
disasters, losses or business risks; inaccurate data about markets, customers or
business conditions; 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, 2009.
17
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
We are a
smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and
thus are not required to report the quantitative and qualitative measures of
market risk specified in Item 305 of Regulation S-K.
|
Item
4.
|
Controls
and Procedures
|
(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 Chief 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.
|
|
Other
Information
|
|
Item
1.
|
Legal
Proceedings
|
From
time-to-time, the Company is involved in litigation matters arising in the
normal course of business. Neither we, nor any of our subsidiaries,
are currently subject to any material legal proceedings, nor, to our knowledge,
is any material legal proceeding currently threatened against us.
|
Item
1A.
|
Risk
Factors
|
Information
regarding risk factors appears in “MD&A — Forward-Looking Statements,” in
Part I — Item
2 of this
Form
10-Q and in
Part I — Item 1A of our Report on Form
10-K for the
fiscal year ended December
31,
2009.
In
addition, on May 13, 2010, the Pension Benefit Guaranty Corp (“PBGC”) informed
the Company by telephone of its actuarial estimate that the Company could have
approximately $6.1 million in underfunded liabilities with respect to a defined
benefit plan for former employees of our Marion, Ohio plant (calculated as if
the plan were terminated). PBGC has asserted its view that the Company would be
liable to provide funding or other adequate security under Section 4062(e) of
ERISA in the amount of such underfunding, if the Company terminated a sufficient
number of plan participants as a result of a cessation of operations at the
Marion facility. The Company disputes whether such a cessation has occurred, the
potential amount of any liability under Section 4062(e) and whether this Section
is applicable to the Company’s maintenance of the plan at issue. However, there
can be no assurances that the PBGC will accept the Company’s position or that
the Company will otherwise prevail.
18
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
On
February 25, 2010, and March 1, 2010, the restrictions on
109,000 and 10,936 restricted shares expired, respectively. As a
result of such vesting, 39,315 and 4,235 shares, respectively, were withheld by
the Company to satisfy withholding tax obligations. The common shares
withheld were immediately cancelled. The following table summarizes
our repurchases during the first quarter ended April 4, 2010 (which
consisted entirely of shares withheld to satisfy withholding
taxes):
|
Total Number
of
|
Maximum
|
|||||||||||||||
|
Total
|
Average
|
Shares
Purchased
|
Number of Shares
|
|||||||||||||
|
Number
|
Price
|
as a Part of
|
that May Yet Be
|
|||||||||||||
|
of Shares
|
Paid per
|
Publicly Announced
|
Purchased Under the
|
|||||||||||||
|
Period
|
Purchased
|
Share
|
Plans or Programs
|
Plans or Programs
|
||||||||||||
|
February 25, 2010
|
39,315 | $ | 2.58 | - | $ | - | ||||||||||
|
March
1, 2010
|
4,235 | $ | 2.84 | - | $ | - | ||||||||||
|
Item
3.
|
Defaults
Upon Senior Securities
|
None.
|
Item
4.
|
[Removed
and Reserved]
|
|
Item
5.
|
Other
Information
|
None.
|
Exhibits
|
|
Exhibit
Number |
Description
|
|
|
4.1
|
Notice
of Removal of Rights Agent and Appointment of Successor rights Agent and
Amendment to the Right Agreement effective as of October 26,
2009.
|
|
|
10.1
|
Amended
2010 Executive Long-Term Incentive Program and Alternate Form of Executive
Long-Term Incentive Award Agreements for Grants to Executive
Officers.
|
|
|
10.2
|
Form
of Employment Agreement between Sypris Solutions, Inc. and participants in
the Sypris Solutions, Inc. Executive Long-Term Incentive Program for 2010
dated March
2,
2010.
|
|
|
31(i).1
|
CEO
certification pursuant to Section 302 of Sarbanes - Oxley Act of
2002.
|
|
|
31(i).2
|
CFO
certification pursuant to Section 302 of Sarbanes - Oxley Act of
2002.
|
|
|
32
|
CEO
and CFO certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.
|
19
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:
|
May 18, 2010
|
By:
|
/s/ Brian A. Lutes
|
|
|
(Brian
A. Lutes)
|
||||
|
Vice
President & Chief Financial Officer
|
||||
|
Date:
|
May 18, 2010
|
By:
|
/s/ Rebecca R. Eckert
|
|
|
(Rebecca
R. Eckert)
|
||||
|
Controller
(Principal Accounting
Officer)
|
20
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. [removed and Reserved]Item 5. Other InformationItem 6. Exhibits