UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

☒ Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
For the quarterly period ended April 3, 2016

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. ☒ Yes  ☐ 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). ☒ Yes  ☐ 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.

 

☐ Large accelerated filer

☐ Accelerated filer

☐ Non-accelerated filer

☒ Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐  Yes ☒  No

 

As of May 9, 2016, the Registrant had 21,310,044 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 3, 2016 and April 5, 2015	2
		Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended April 3, 2016 and April 5, 2015	3
		Consolidated Balance Sheets at April 3, 2016 and December 31, 2015	4
		Consolidated Cash Flow Statements for the Three Months Ended April 3, 2016 and April 5, 2015	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
	Item 4.	Controls and Procedures	24
Part II. Other Information
	Item 1.	Legal Proceedings	25
	Item 1A.	Risk Factors	25
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
	Item 3.	Defaults Upon Senior Securities	25
	Item 4.	Mine Safety Disclosures	25
	Item 5.	Other Information	25
	Item 6.	Exhibits	26
Signatures			27

 

 

Part I.     Financial Information

 

Item 1.     Financial Statements

Sypris Solutions, Inc.

Consolidated Statements of Operations

(in thousands, except for per share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Sypris Solutions, Inc.

Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Sypris Solutions, Inc.

Consolidated Balance Sheets

(in thousands, except for share data)

 

        

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Sypris Solutions, Inc.

Consolidated Cash Flow Statements

 

(in thousands)

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Sypris Solutions, Inc.

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

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, often under sole-source contracts with corporations and government agencies principally in the markets for industrial manufacturing and aerospace and defense electronics.

 

We are organized into two business groups, Sypris Technologies and Sypris Electronics. Sypris Technologies, which is comprised of Sypris Technologies, Inc. and its subsidiaries, generates revenue primarily from the sale of manufacturing services to customers in the market for truck components and assemblies and from the sale of products to the energy and chemical markets. Sypris Electronics, which is comprised of Sypris Electronics, LLC and its subsidiary, generates revenue primarily from the sale of manufacturing services, technical services and products to customers in the market for aerospace and defense electronics, trusted solutions for identity management, cryptographic key distribution and cyber analytics.

 

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, historically, have been renewed for sufficient periods to 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 our competitors when it comes to cost, quality, reliability and customer service.

 

Sypris Technologies Outlook

 

In North America, production levels for light, medium and heavy duty trucks steadily increased from a low in the depressed economic environment of 2008 and 2009 through 2015, but are anticipated to decrease from 2015 to 2016. Production levels for the remainder of 2016 are expected to remain relatively consistent with the lower levels experienced in the first quarter of 2016 and increase slightly in 2017. Oil and gas markets, served by our engineered products line of Tube Turns® products, have been impacted, as some of our customers’ revenues and near term capital expenditures have declined along with oil prices generally. However, the oil and gas outlook appears to be stabilizing as oil prices show signs of recovery and domestic pipeline projects continue to be active.

 

Sypris Electronics Outlook

 

We continue to face challenges within Sypris Electronics, such as the uncertainty in the worldwide macroeconomic climate and its impact on aerospace and defense spending patterns globally, the emergence of new competitors to our product and service offerings, as well as federal government spending uncertainties in the U.S. and the allocation of funds by the U.S. Department of Defense.

 

Sypris Electronics’ revenue had declined from 2009 through 2014 primarily due to our inability to replace the declining demand for certain legacy products and services with competitive new offerings. However, revenues increased in 2015 and in the first quarter of 2016, and we have begun to generate revenue from the ramp-up of new electronic manufacturing services and other technical service programs. The Company is continuing to develop new products and pursue new programs to attempt to fully replace our legacy programs within Sypris Electronics.

 

The U.S. Government's continued focus on addressing federal budget deficits and the growing national debt exacerbates this challenging environment for Sypris Electronics. It is likely that U.S. government discretionary spending levels for Fiscal Year 2016 and beyond will continue to be subject to significant pressure, including risk of future budget cuts. Significant uncertainty also continues with respect to program-level appropriations for the U.S. Department of Defense (U.S. DoD) and other government agencies within the overall budgetary framework described above. Future budget cuts, including cuts mandated by sequestration, or future procurement decisions associated with the authorization and appropriations process could result in reductions, cancellations and/or delays of existing contracts or programs. Congress and the Administration continue to debate these long and short-term funding issues, but reductions in U.S. DoD spending could materially and adversely affect the results of Sypris Electronics, and we expect that certain military and defense programs will experience delays while the receipt of government approvals remain pending.

 

 

As a result, the Company expects ongoing uncertainty within this segment in the near term. For the longer term, we are continuing to evaluate various alternatives, including new investments in products and programs to further improve the attractiveness of our business portfolio, with a specific emphasis on trusted solutions for identity management, cryptographic key distribution and cyber analytics, among other strategies. There can be no assurance that the Company’s investment in and efforts to introduce any new products and services will result in new business or revenue. In addition, while the Company continues to evaluate and implement cost reduction measures in this segment, the Company may not be able to reduce its cost structure to offset the impact of lower revenues. The Company is considering all of its strategic alternatives, including potential divestitures and further cost reductions or other downsizing measures, which could be costly and adversely impact our financial performance.

 

Management’s Recovery Plans

 

Given the loss of a significant customer in early 2015 and unfavorable growth trends and softness in commercial vehicle manufacturing and the oil and gas markets served by Sypris Technologies, management has developed various profit recovery and protection plans and is evaluating strategic alternatives to optimize asset values in each of the Company’s segments. Management has engaged advisors during various periods to provide recommendations for cost reductions and actions that can be taken to improve profitability. Management prepared a revised forecast during March 2016 with plans to further reduce costs, optimize cash flow and remain in compliance with its debt covenant requirements throughout 2016. The Company completed a number of profit recovery and protection actions in 2015 and the first quarter of 2016, including: (i) the sale of certain assets used in the Company’s manufacturing facility in Morganton, North Carolina within the Sypris Technologies segment, (ii) reduction in workforce at all locations, and (iii) other reductions in employment costs through reduced work schedules, senior management pay reductions, deferral of merit increases and certain benefit payments.

 

Additionally, in 2015, the Company’s debt was restructured, and the Company has received the benefit of cash infusions from Gill Family Capital Management, Inc. (“GFCM”), an entity controlled by the Company’s president and chief executive officer, Jeffrey T. Gill and one of our directors, R. Scott Gill, in the form of subordinated promissory note obligations totaling $6.5 million in principal through the first quarter of 2016.

 

During the first quarter of 2016, the Company generated additional liquidity through the sale and partial lease back of its facility located in Toluca, Mexico, which generated gross proceeds of approximately $12.2 million. Of these proceeds, $6.0 million was deposited into a cash collateral account to be held for up to one year as additional collateral for the Term Loan (see Note 6 “Toluca Sale-Leaseback and Note 10 “Debt” to the consolidated financial statement in this Form 10-Q). Management will continue to operate in Toluca, but given the loss of a key customer in 2015 and the overall downturn in the commercial vehicle markets, management determined that the underutilized Toluca real estate value could be better optimized with a sale and lease back arrangement where some but not all of the facility would continue to be occupied and managed by Sypris Technologies. The Company’s base rent on the lease, which is denominated in U.S. currency, is $0.9 million annually, adjusted based on U.S. CPI with certain cap conditions.

 

The commercial vehicle industry has softened beginning in the fourth quarter of 2015 along with other durable and non-durable goods sectors in the North America economy. Management has identified additional cost reduction actions in the Sypris Technologies segment. Reductions in selling, general and administrative expense and labor expense were implemented during the first quarter of 2016, and additional cost reductions are planned during the second and third quarters. Although the expected benefits of the cost reductions will be partially offset by the impact of minor investments and severance required to enable the cost reductions, the actions are expected to contribute to improved liquidity during 2016.

 

Management has identified a number of new customer opportunities that are expected to provide higher gross margin opportunities, even at lower volumes. Management is implementing operational efficiencies that are expected to enable reductions in the machinery set-up time for new commercial vehicle orders which should enable the Company to quote on customer requirements that are higher margin but with somewhat shorter run lengths. These new business activities are anticipated to enable the Company to diversify its revenue sources over a larger and more profitable customer base.

 

 

The oil and gas industry has experienced significant price erosion, and as a result, the Company’s customers are delaying capital expenditures that support their growth and maintenance projects. The Company has identified some capacity reallocation opportunities between plants in the United States and Mexico. The Company has initiated the process of qualifying production for certain components in Mexico that are currently produced in the United States and completed the qualification for the first group of these components. The Company expects the capacity reallocation will accelerate during 2016 as the capital necessary to fund the reallocation becomes available and the qualification process for the production is complete.

 

Sypris Electronics has continued to invest in a number of product development projects. The Company was awarded a significant engineering services contract in the defense sector during the first quarter of 2016. Nevertheless, the Company has identified certain cost reduction and cash flow enhancements in the Sypris Electronics segment that can be implemented during the second and third quarters that are not expected to impact the future growth in the Sypris Electronics segment.

 

Sypris Electronics has filed a number of patent applications for technology related to its new SiOMetrics^TM hardware authentication solutions, which may enable the Company to address commercial markets for infrastructure and the Internet of Things (IoT) markets. New commercial opportunities in the automotive, industrial controls, communications, infrastructure, utilities, automation, aviation, retail, and personal communication devices could benefit from the technology that Sypris Electronics has patented or for which it has patents pending. Sypris Electronics now provides a platform of layered security protocols that will enable customers in a number of industries to tailor the security solutions to their individual requirements. Management has taken steps to diversify its product and service offerings in the Sypris Electronics segment whereby the Company intends to be less dependent upon the Defense markets and better positioned to take advantage of the rapidly growing commercial security and encryption markets going forward.

 

Management has identified certain cost reductions at the corporate headquarters that are expected to improve profitability and cash flow throughout 2016. Salary reductions and other selling, general and administrative cost reductions were implemented during the first quarter of 2016 that management believes will continue to benefit the company throughout future periods. Additional cost reductions have been identified in the area of professional services, administration and lease expense.

 

Our failure or inability to realize our key financial objectives could materially and adversely impair the Company’s ability to operate, its cash flows, financial condition and ongoing results.

 

 

Results of Operations

 

The table below compares our segment and consolidated results for the first quarterly period of operations of 2016 to the first quarterly period of operations of 2015. It presents the results for each period, the change in those results from 2015 to 2016 in both dollars and as a percentage, as well as the results for each period as a percentage of net revenue.

 

●

The first two 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 segment are given as a percentage of that segment’s net revenue. These amounts are shown in italics.

 

In addition, as used in the table, “NM” means “not meaningful.”

 

Three Months Ended April 3, 2016 Compared to Three Months Ended April 5, 2015

 

														Year Over
										Year Over				Year				Results as Percentage of
										Year				Percentage				Net Revenue for the Three
		Three Months Ended,								Change				Change				Months Ended
		April 3,				April 5,				Favorable				Favorable				April 3,				April 5,
		2016				2015				(Unfavorable)				(Unfavorable)				2016				2015
		(in thousands, except percentage data)
Net revenue:
Sypris Technologies		$	17,827			$	28,070			$	(10,243	)			(36.5	)%			66.2	%			75.8	%
Sypris Electronics			9,111				8,939				172				1.9				33.8				24.2
Total			26,938				37,009				(10,071	)			(27.2	)			100.0				100.0
Cost of sales:
Sypris Technologies			18,483				32,174				13,691				42.6				103.7				114.6
Sypris Electronics			7,728				7,992				264				3.3				84.8				89.4
Total			26,211				40,166				13,955				34.7				97.3				108.5
Gross profit (loss):
Sypris Technologies			(656	)			(4,104	)			3,448				84.0				(3.7	)			(14.6	)
Sypris Electronics			1,383				947				436				46.0				15.2				10.6
Total			727				(3,157	)			3,884				NM				2.7				(8.5	)
Selling, general and administrative			6,503				9,118				2,615				28.7				24.1				24.6
Research and development			124				333				209				62.8				0.5				0.9
Severance			484				285				(199	)			(69.8	)			1.8				0.8
Operating loss			(6,384	)			(12,893	)			6,509				50.5				(23.7	)			(34.8	)
Interest expense, net			876				334				(542	)			(162.3	)			3.2				0.9
Other (income), net			(2,162	)			(179	)			1,983				NM				(8.0	)			(0.5	)
Loss before taxes			(5,098	)			(13,048	)			7,950				60.9				(18.9	)			(35.2	)
Income tax expense (benefit), net			1				(15	)			(16	)			NM				—				—
Net loss		$	(5,099	)		$	(13,033	)		$	7,934				60.9				(18.9	)%			(35.2	)%

  

Net Revenue. Sypris Technologies primarily derives its revenue from manufacturing services and product sales. Net revenue for Sypris Technologies decreased 36.5% or $10.2 million for the first quarter of 2016 compared to the first quarter of 2015. The loss of the trailer axle revenue with the sale of assets in Morganton accounted for $4.8 million of the decline. Additionally, the Company experienced a decrease in revenue of $5.4 million in the first quarter of 2016 as compared to the first quarter of 2015 resulting primarily from lower demand from customers in the commercial vehicle industry.

 

 

Sypris Electronics derives its revenue from product sales and technical outsourced services. Net revenue for Sypris Electronics for the first quarter of 2016 increased 1.9% or $0.2 million compared to the same period in 2015, reflecting new cyber related sales and an increase in product sales. Partially offsetting this was a decrease in electronic manufacturing services due the completion of a program in 2015.

 

Gross Profit. Sypris Technologies’ gross profit increased $3.4 million to a loss of $0.7 million in the first quarter of 2016 as compared to a loss of $4.1 million in the first quarter of 2015. The Company experienced productivity challenges in the prior year period as a result of the significant loss of business from a key customer. Sypris Technologies has continued to adjust its fixed overhead structure in order to better align with current volumes, resulting in improvements in gross profit. Additionally, depreciation expense decreased $0.7 million in the first quarter of 2016 as compared to the first quarter of 2015, primarily as a result of the sale of the Morganton assets in 2015. Partially offsetting this was a decrease in gross profit of $0.9 million resulting from the decrease in volume attributable to lower demand from customers in the commercial vehicle industry.

 

Sypris Electronics’ gross profit increased $0.4 million to $1.4 million in the first quarter of 2016 as compared to $0.9 million for the first quarter of 2015. The improvement in gross profit was primarily as a result of a favorable mix in sales of higher margin products and services in addition to a reduction in the overhead structure from the prior year.

 

Selling, General and Administrative. Selling, general and administrative expense decreased $2.6 million to $6.5 million in the first quarter of 2016 as compared to $9.1 million for the same period in 2015 primarily as a result of a decrease in legal expenses regarding contract negotiations and the related dispute with a key customer, as the litigation is currently estimated to be substantially complete. Additionally, the Company initiated various cost reduction activities in 2015 in response to the loss of a significant customer including employee compensation and headcount reductions and the sale of the Company’s Morganton facility (See Note 5, “Morganton Sale” to the consolidated financial statement in this Form 10-Q). Partially offsetting this was an increase in consulting fees related to our debt refinancing and cash management efforts and a $0.5 million accrual for a contingent liability related to the exit of one of our leased facilities (See Note 12 “Commitments and Contingencies” to the consolidated financial statements in this Form 10-Q).

 

Research and Development. Research and development costs were $0.1 million in the first quarter of 2016 as compared to $0.3 million for the same period of 2015 in support of the Sypris Electronics’ self-funded product and technology development activities.

 

Severance. Severance costs were $0.5 million for the first quarter of 2016 as compared to $0.3 million for the first quarter of 2015, and were comprised exclusively of headcount reductions within Sypris Technologies (See Note 4 “Management’s Recovery Plans” to the consolidated financial statements in this Form 10-Q).

 

Interest Expense. Interest expense for the first quarter of 2016 increased $0.5 million to $0.8 million from $0.3 million for the first quarter of 2015. The weighted average interest rate increased to 11.2% in the first quarter of 2016 as compared to 4.7% in the first quarter of 2015. The increase in interest expense is a result of the Revolving Credit Facility and Term Loan entered into in the fourth quarter of 2015 and the note payable to GFCM, which increased the Company’s interest rate structure (see Note 10 “Debt” to the consolidated financial statements in this Form 10-Q). Interest expense is expected to increase going forward. Additionally, our weighted average debt outstanding increased to $20.2 million for the first quarter of 2016 from $16.5 million during the first quarter of 2015.

 

Other (Income), Net. The Company recognized other income, net of $2.2 million for the first quarter of 2016 compared to $0.2 million for the first quarter of 2015. Other income, net for the first quarter of 2016 includes $2.4 million related to the gain recognized on the sale lease-back transaction of our Toluca, Mexico facility completed during the first quarter of 2016 (See Note 6 “Toluca Sale-Leaseback” to the consolidated financial statements in this Form 10-Q). The gain was partially offset by foreign currency related losses of $0.3 million recognized in the first quarter of 2016.

 

Other income, net for the first quarter of 2015 includes gains of $0.1 million related to the net U.S. dollar denominated monetary asset position of our Mexican subsidiaries for which the Mexican peso is the functional currency.

 

 

Liquidity and Capital Resources

 

As described in more detail elsewhere in this report, as a result of the loss of a key customer, the Company experienced substantially reduced levels of revenue and cash flows in 2015. Additionally, softness in the commercial vehicle market, which began in the fourth quarter of 2015, has continued through the first quarter of 2016 and is expected to continue through the remainder of the year. These developments have required us to reexamine our strategies and cut our costs significantly. Reductions in our available liquidity have also required closer monitoring of the timing of our capital expenditures and cash flows in order to manage our business operations.

 

In response, we took significant actions during 2015 to pursue new business opportunities with existing and potential customers, identify alternative uses for the related assets and other contingency plans, including the sale of certain assets used in the Company’s manufacturing facility in Morganton, North Carolina within the Sypris Technologies segment. In 2015, we received approximately $15.7 million in total consideration for the Morganton Sale and related transactions, all of which were applied to pay down our senior secured debt (See Note 5 “Morganton Sale” to the consolidated financial statements in this Form 10-Q). On October 30, 2015, the Company’s prior senior secured debt was replaced by the Loan Agreements and paid in full. In addition, the Company has received three cash infusions from GFCM, in the form of subordinated promissory note obligations totaling $6,500,000 in principal through the first quarter of 2016.

 

Additionally, during the first quarter of 2016 and, in compliance with the Loan Agreements, the Company entered into a sale lease-back agreement with Promotora y Desarrolladora Pulso Inmobiliario, S.C. (“Pulso”) whereby we sold the entire facility and leased back the portion of the facility currently occupied by the Company in Toluca, Mexico, for our continued use as a manufacturing facility for ten years commencing upon the execution of the lease and terminating on March 9, 2026 (“Toluca Sale-Leaseback”). The Company’s base rent, which is denominated in U.S. currency, is $0.9 million annually, adjusted based on U.S. CPI with certain cap conditions. The transaction generated gross proceeds of 215.0 million Mexican Pesos, or approximately $12.2 million dollars in U.S. currency.

 

Revolving Credit Facility and Term Loan. On October 30, 2015, the Company entered into Loan Agreements providing for a $12.0 million Term Loan and a $15.0 million Revolving Credit Facility. Proceeds from the Loan Agreements were used to repay the prior senior secured debt and the Meritor Note. Borrowing availability under the Revolving Credit Facility is determined by a weekly borrowing base collateral calculation that is based on specified percentages of the value of eligible accounts receivable and inventory, less certain reserves and subject to certain other adjustments. Borrowing availability under the Term Loan is also evaluated using a separate borrowing base collateral calculation that includes designated percentages of real estate, machinery and equipment appraisals, in each case less certain reserves and subject to certain other adjustments. If the appraised values of such collateral causes the Term Loan borrowing base to fall below the then current Term Loan balance, the Company can be required to make a partial prepayment of such difference and related fees.

 

On February 25, 2016, the Company entered into an amendment (the “Term Loan Amendment”) to the Term Loan and an amendment (the “Revolving Credit Facility Amendment”) to the Revolving Credit Facility (together, the “Amendments”). The Amendments had the effect, among other things, of increasing the Company’s borrowing capability under its Revolving Credit Agreement and providing for an agreement on the use of proceeds from the Toluca Sale-Leaseback, as described below. As part of the Amendments, the Company also received an additional $1.0 million subordinated loan from GFCM, as described below.

 

As a result of the Term Loan Amendment, the Company deposited $6.0 million of the proceeds of the Toluca Sale-Leaseback into a Cash Collateral Account, to be held for one year as additional collateral for the Term Loan. Amounts deposited in the Cash Collateral Account that are subsequently used to pay down the principal of the Term Loan must be accompanied by an additional amount equal to the present value of the avoided interest associated with the principal payment. The Term Loan Amendment further provides that the Company will be permitted to retain the remaining balance of the proceeds from Toluca Sale-Leaseback, and increases the interest rate of the Term Loan by 1.0%.

 

In addition, under the Term Loan Amendment and Revolving Credit Facility Amendment, the Company’s minimum excess availability provisions were reduced from $4.0 million to $3.0 million. The lender further agreed to remove certain reserves which were counted against the Company’s “borrowing base.” These changes are estimated to provide the Company with approximately $1.7 million in additional borrowing capacity under the Revolving Credit Facility.

 

 

In connection with the Amendments, the Company retained a financial advisor to review the Company’s existing business plan and make recommendations in the form of a revised business plan. If the Company meets certain milestones as determined by the lender after its review of such plan, up to $1.0 million may be released from the Cash Collateral Account to the Company.

 

The Company’s obligations under each of the Revolving Credit Facility and the Term Loan, as amended, continue to be guaranteed by the Company’s U.S. subsidiaries and are secured by a first priority lien on substantially all assets of the Company and the guarantors. Each of the Revolving Credit Facility Amendment and the Term Loan Amendment contains certain customary representations, warranties and covenants.

 

The Loan Agreements contain a number of affirmative, negative and financial maintenance covenants, representations, warranties, events of default and remedies upon default, including acceleration and rights to foreclose on the collateral securing each lender. If the Company’s borrowing availability under the Revolving Credit Facility falls below $3.0 million, the Company must maintain a fixed charge coverage ratio of at least 1 to 1, as measured on a trailing twelve months’ basis.

 

Based on the borrowing base calculation at April 3, 2016, the Company had actual total availability for borrowing under the Revolving Credit Facility of $5.9 million, of which we had drawn $2.6 million, leaving $3.3 million still available for borrowing, $3.0 million of which was reserved for compliance with the minimum excess availability provisions of the Revolving Credit Facility. Along with an unrestricted cash balance of $2.3 million, we had total cash and borrowing capacity of $2.6 million as of April 3, 2016. Approximately $2.2 million of the unrestricted cash balance relates to the Company’s Mexican subsidiaries. It is anticipated that the Company will utilize a substantial portion of its borrowing availability from time to time in the ordinary course of business.

 

Non-compliance with the Company’s debt covenants would provide the debt holders with certain contractual rights, including the right to demand immediate repayment of all outstanding borrowings.  Since the loss of the Dana business (see Note 4 “Management’s Recovery Plans” to the consolidated financial statements in this Form 10-Q), the Company has also experienced negative cash flows from operating activities which could hamper or materially increase the costs of the Company’s ability to comply with such covenants.  The Company’s consolidated financial statements have been prepared assuming the ongoing realization of assets, satisfaction of liabilities and continuity of operations as a going concern in the ordinary course of business, but there can be no assurances that the Company’s current initiatives and plans will ultimately succeed, which could materially and adversely impair the Company’s ability to operate, its cash flows, financial condition and ongoing results.

 

The Company is considering opportunities to support its cash flow from operations in 2016 through other investing activities. The Company is exploring alternatives to monetize certain assets of the Company for values in excess of the availability being provided under the Loan Agreements, thereby generating additional sources of liquidity for the Company.

 

Our ability to service our indebtedness will require a significant amount of cash. Our ability to generate this cash will depend largely on future operations including the success of our revenue recovery plans. Based upon our current forecast for 2016, we expect to be able to meet the financial covenants of our Loan Agreements, and we believe that we will have sufficient liquidity to finance our operations throughout 2016. Although we believe the assumptions underlying our current forecast are reasonable, we have considered the possibility of even lower revenues and other risks. If we are unable to achieve our forecasted revenue, or if our costs are higher than expected, we may be required to revise our recovery plans to provide for additional cost-cutting measures or to consider other strategic alternatives.

 

If we have insufficient cash flow to fund our liquidity needs and are unable to raise additional capital, we would risk being in default under our Revolving Credit Facility and Term Loan, unless our lenders agreed to modify or waive such requirements. In such circumstances, we believe that the Company would have the continuing ability to sell certain of its assets if necessary to repay its outstanding indebtedness. However, there can be no assurances that such efforts will succeed, and if we sold such assets we may be unable to pursue certain opportunities for new revenues that are part of our recovery plan and we may be required to defer our planned capital expenditures (See Note 10 “Debt” to the consolidated financial statements in this Form 10-Q).

 

 

Gill Family Capital Management Note. In connection with the amendments to the prior senior secured debt, the Company received the proceeds of new subordinated indebtedness from GFCM in an amount of $5.5 million (“GFCM Note”). On February 26, 2016, the Company amended the GFCM Note to increase the amount to $6.5 million in connection with the amendments to the Revolving Credit Facility and Term Loan. GFCM is an entity controlled by the Company’s president and chief executive officer, Jeffrey T. Gill and one of our directors, R. Scott Gill. GFCM, Jeffrey T. Gill and R. Scott Gill are significant beneficial stockholders of the Company. The promissory note bears interest at a rate of 8.0% per year and all principal and interest on the promissory note will be due and payable on the maturity date, January 30, 2019.

 

Purchase Commitments. We also had purchase commitments totaling approximately $8.2 million at April 3, 2016, primarily for inventory.

 

Cash Flows

 

Operating Activities. Net cash used in operating activities was $4.7 million in the first quarter of 2016, as compared to $5.3 million in the same period of 2015. The aggregate increase in accounts receivable in 2016 resulted in the usage of cash of $1.1 million. The aggregate decrease in accounts payable, resulted in a usage of cash of $1.0 million. Partially offsetting this was an increase in accrued and other liabilities resulting in an increase in cash of $2.4 million.

 

Investing Activities. Net cash provided by investing activities was $5.0 million for the first quarter of 2016 as compared to cash used of $0.3 million for the first quarter of 2015. As a result of the Toluca Sale-Leaseback transaction completed in the first quarter of 2016, the Company received net cash proceeds of $11.1 million. As required under the Term Loan Amendment, the Company deposited $6.0 million of the proceeds of the Toluca Sale-Leaseback into a Cash Collateral Account, to be held for one year as additional collateral for the Term Loan. Capital expenditures in both periods represented maintenance levels of investment.

 

Financing Activities. Net cash provided by financing activities was $0.6 million in the first quarter of 2016 as compared to $2.0 million during the first quarter of 2015. Net cash provided by financing activities in the first quarter of 2015 included proceeds from the subordinated note from Gill Family Capital Management of $1.0 million and an increase in debt under the Revolving Credit Facility of $0.5 million. Partially offsetting this were principal payments on the Term Loan of $0.4 million and financing fees of $0.4 million in conjunction with the amendments of our Revolving Credit Facility and Term Loan during the first quarter of 2016.

 

Net cash used provided by financing activities in the first quarter of 2015 included proceeds from the subordinated note from Gill Family Capital Management of $4.0 million partially offset by a senior secured debt reduction of $1.1 million, dividend payments of $0.4 million and payments of $0.1 million for minimum statutory tax withholdings on stock-based compensation. Additionally, we paid $0.4 million in financing fees in conjunction with the amendment of our senior secured debt in the first quarter of 2015.

 

Critical Accounting Policies

 

See the information concerning our critical accounting policies included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There have been no significant changes in our critical accounting policies during the three months ended April 3, 2016.

 

Forward-looking Statements

 

This Quarterly Report on Form 10-Q, and our other oral or written communications, may contain “forward-looking” statements. These statements may include our expectations or projections about the future of our business, industries, business strategies, prospects, potential acquisitions, liquidity, financial condition or financial results and our views about developments beyond our control, including domestic or global economic conditions, trends and market developments. These statements, including those outlined in management’s recovery plan, are based on management’s views and assumptions at the time originally made, and, except as required by law, we undertake no obligation to update these statements, even if, for example, they remain available on our website after those views and assumptions have changed. There can be no assurance that our expectations, projections or views will come to pass, and undue reliance should not be placed on these forward-looking statements.

 

 

A number of significant factors could materially affect our specific business operations and cause our performance to differ materially from any future results projected or implied by our prior statements. Many of these factors are identified in connection with the more specific descriptions contained throughout this report. Other factors which could also materially affect such future results currently include: our failure to develop and implement plans to mitigate the impact of loss of revenues from Dana or to adequately diversify our revenue sources on a timely basis; orders received may be cancelled or delayed by our customers, and even if we have a contractual right to manufacture and ship such orders, we must balance such rights against our longer term customer relationships; reliance on major customers or suppliers, including the renewal of significant contracts or the continued provision of trade credit terms despite concerns about our financial condition or liquidity; declining markets or market share in our commercial vehicle and energy-related product lines, especially as we attempt to transition from legacy products and services into new market segments, customers and technologies; the fees, costs and supply of, or access to, debt, equity capital, or other sources of liquidity, including the potentially material costs of our compliance with covenants in, or the potential default under or acceleration of, our new credit facilities; volatility of our customers’ forecasts, scheduling demands and production levels which negatively impact our operational capacity and our effectiveness to integrate new customers or suppliers; dependence on, retention or recruitment of key employees especially in challenging markets; the cost, quality, timeliness, 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; disputes or litigation involving lessor, supplier, customer, employee, landlord, creditor, stockholder, product liability or environmental claims; our ability to successfully develop, launch or sustain new products and programs; inventory valuation risks including excessive or obsolescent valuations; potential impairments, non-recoverability or write-offs of assets or deferred costs; our inability to successfully complete definitive agreements for our targeted acquisitions or divestitures due to negative due diligence findings or other factors; the costs of compliance with our auditing, regulatory or contractual obligations; our inability to patent or otherwise protect our inventions or other intellectual property from potential competitors; our reliance on third party vendors and sub-suppliers; adverse impacts of new technologies or other competitive pressures which increase our costs or erode our margins; cost and availability of raw materials such as steel, component parts, natural gas or utilities; regulatory actions or sanctions (including FCPA, OSHA and Federal Acquisition Regulations, among others); potential weaknesses in internal controls over financial reporting and enterprise risk management; U.S. government spending on products and services that Sypris Electronics provides, including the timing of budgetary decisions; changes in licenses, security clearances, or other legal rights to operate, manage our work force or import and export as needed; breakdowns, relocations or major repairs of machinery and equipment; pension valuation, health care or other benefit costs; labor relations; strikes; union negotiations; cyber security threats and disruptions; changes or delays in customer budgets, funding or programs; failure to adequately insure or to identify environmental or other insurable risks; revised contract prices or estimates of major contract costs; risks of foreign operations; currency exchange rates; 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, 2015.

 

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 provide the quantitative and qualitative disclosures about 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 Principal Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

 

(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

Part II.     Other Information

 

Item 1.     Legal Proceedings

 

We are involved from time to time in litigation and other legal or environmental proceedings incidental to our business. On November 25, 2013, Sypris Technologies, Inc. initiated an arbitration proceeding against Dana Limited under the Non-Administered Arbitration Rules of the International Institute for Conflict Prevention & Resolution alleging that Dana Limited had entered and then repudiated a five year extension of the parties’ long term supply agreement, to run through 2019 or in the alternative had acted in bad faith by refusing to formalize that agreement. On December 30, 2013, Sypris filed a Notice of Supplemental Claims in the same arbitration proceeding, seeking damages for Dana’s alleged breach of the parties’ original 2007 supply agreement; and Dana filed a counterclaim for certain unpaid price rebates. The arbitrator awarded $505,000 to Sypris Technologies and dismissed Dana’s claims. On January 17, 2014, Dana initiated a declaratory judgment action in the Court of Common Pleas for Lucas County, Ohio challenging the arbitrability of the existence and enforceability of the extended supply agreement and seeking a ruling that the extended agreement was unenforceable. On February 28, 2015, the Lucas County Court granted Dana’s motion, which was subsequently upheld by the Sixth District Court of Appeals for Ohio. Our remaining claim of bad faith and Dana’s various potential claims for alleged nonperformance have been mutually released and dismissed effective as of May 2, 2016.

 

On January 15, 2016, Sypris Electronics initiated a declaratory judgment action in the Circuit Court of Hillsborough County, Florida seeking to resolve certain claims made by Sweetwell Industrial Associates, LLP (“Sweetwell”), in a notice of alleged default under our lease in Tampa, Florida. On February 16, 2016, Sweetwell, the landlord under that lease, filed its answer and counterclaim and its third party complaint against the Company, as a guarantor under the lease. The landlord claims that certain repairs must be made immediately and/or at the end of the current lease term. As such, it is reasonably possible that the Company may be required to make certain repairs to the current facility upon exit. The current estimate of the Company’s reasonably possible loss contingency is from no liability to $4,000,000. While the Company intends to vigorously dispute these claims, the Company accrued $500,000 during the three months ended April 3, 2016 related to its estimated potential obligation under the lease. This accrual is included in accrued liabilities in the Company’s consolidated balance sheet as of April 3, 2016. There are currently no other material pending legal proceedings to which we are a party.

 

Item 1A.     Risk Factors

 

Information regarding risk factors appears in Part I — Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements,” in this Quarterly Report on Form 10-Q, and in Part I — Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There have been no material changes during the fiscal quarter from the risk factors disclosed in our Annual Report on Form 10-K.

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.     Defaults Upon Senior Securities

 

None.

 

Item 4.     Mine Safety Disclosures

 

Not applicable.

 

Item 5.     Other Information

 

None.

 

 

Item 6.     Exhibits

 

Exhibit
Number	Description
10.1	First Amendment to Amended and Restated Loan and Security Agreement between Sypris Solutions, Inc. and Siena Lending Group LLC, dated February 25, 2016.
10.2	First Amendment to Loan and Security Agreement between Sypris Solutions, Inc. and Great Rock Capital Partners Management, LLC, dated February 25, 2016.
10.3	Amended and Restated Promissory Note, issued by Sypris Solutions, Inc. in favor of Gill Family Capital Management, dated February 25, 2016.
10.4	Lease agreement between Promotora y Desarrolladora Pulso Inmobiliario, S.C. and Sypris Technologies Mexico, S. de R.L. de C.V dated January 29, 2016.
31(i).1	CEO certification pursuant to Section 302 of Sarbanes - Oxley Act of 2002.
31(i).2	Principal Financial Officer certification pursuant to Section 302 of Sarbanes - Oxley Act of 2002.
32	CEO and Principal Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

  

 

 

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, 2016	By:	/s/ Anthony C. Allen
		(Anthony C. Allen)
		Vice President & Chief Financial Officer

 

Date:          May 18, 2016	By:	/s/ Rebecca R. Eckert
		Rebecca R. Eckert)
		Controller (Principal Accounting Officer)

 

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