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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 July 3, 2022

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)

 


 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

SYPR

Nasdaq

 

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 every Interactive Data File required to be submitted pursuant to rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes  ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

☐ Large accelerated filer

☐ Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐ 

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 August 1, 2022, the Registrant had 22,134,021 shares of common stock outstanding

 

 

 

 

Table of Contents

 

Part I. Financial Information

 
     

Item 1.

Financial Statements

 
     
 

Consolidated Statements of Operations for the Three and Six Months Ended July 3, 2022 and July 4, 2021

2

     
 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended July 3, 2022 and July 4, 2021

3

     
 

Consolidated Balance Sheets at July 3, 2022 and December 31, 2021

4

     
 

Consolidated Cash Flow Statements for the Six Months Ended July 3, 2022 and July 4, 2021

5

     
 

Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended July 3, 2022 and July 4, 2021

6

     
 

Notes to Condensed Consolidated Financial Statements

7

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

     

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

 

 

1

 

Part I.         Financial Information

 

Item 1.         Financial Statements

 

Sypris Solutions, Inc.

Consolidated Statements of Operations

(in thousands, except for per share data)

 

 

   

Three Months Ended

   

Six Months Ended

 
   

July 3,

   

July 4,

   

July 3,

   

July 4,

 
   

2022

   

2021

   

2022

   

2021

 
   

(Unaudited)

   

(Unaudited)

 
                                 

Net revenue

  $ 29,044     $ 25,969     $ 55,210     $ 45,951  

Cost of sales

    25,264       21,660       46,921       39,826  
                                 

Gross profit

    3,780       4,309       8,289       6,125  

Selling, general and administrative

    3,737       3,416       7,126       6,298  
                                 

Operating income (loss)

    43       893       1,163       (173

)

                                 

Interest expense, net

    263       211       511       433  

Other expense, net

    104       145       273       366  

Forgiveness of PPP Loan and related interest

    0       (3,599

)

    0       (3,599

)

                                 

Loss (income) before taxes

    (324

)

    4,136

 

    379       2,627  

Income tax expense

    305       313       771       434  
                                 

Net (loss) income

  $ (629

)

  $ 3,823     $ (392

)

  $ 2,193  
                                 

(Loss) income per share:

                               

Basic

  $ (0.03

)

  $ 0.18     $ (0.02

)

  $ 0.10  

Diluted

  $ (0.03

)

  $ 0.17     $ (0.02

)

  $ 0.10  
                                 

Weighted average shares outstanding:

                               

Basic

    21,723       21,356       21,700       21,475  

Diluted

    21,723       22,846       21,700       22,979  
                                 

Dividends declared per common share

  $ 0.00     $ 0.00     $ 0.00     $ 0.00  

 

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

 

2

 

 

 

Sypris Solutions, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

   

Three Months Ended

   

Six Months Ended

 
   

July 3,

   

July 4,

   

July 3,

   

July 4,

 
   

2022

   

2021

   

2022

   

2021

 
   

(Unaudited)

   

(Unaudited)

 
                                 

Net (loss) income

  $ (629

)

  $ 3,823     $ (392

)

  $ 2,193  
                                 

Other comprehensive (loss) income

                               

Foreign currency translation adjustments

    (152

)

    355       431       (51

)

                                 

Comprehensive (loss) income

  $ (781

)

    4,178     $ 39     $ 2,142  

 

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

 

3

 

 

 

Sypris Solutions, Inc.

Consolidated Balance Sheets

(in thousands, except for share data)

 

  

July 3,

  

December 31,

 
  

2022

  

2021

 
  

(Unaudited)

     

Assets

 

Current assets:

        

Cash and cash equivalents

 $7,486  $11,620 

Accounts receivable, net

  9,478   8,467 

Inventory, net

  29,379   30,100 

Other current assets

  6,792   5,868 

Total current assets

  53,135   56,055 
         

Property, plant and equipment, net

  14,625   14,140 

Operating lease right-of-use assets

  4,699   5,140 

Other assets

  3,902   4,170 

Total assets

 $76,361  $79,505 

Liabilities and Stockholders Equity

 

Current liabilities:

        

Accounts payable

 $12,838  $11,962 

Accrued liabilities

  21,086   19,646 

Operating lease liabilities, current portion

  1,114   1,063 

Finance lease obligations, current portion

  1,016   983 

Equipment financing obligations, current portion

  347   336 

Note payable – related party, current portion

  2,500   0 
         

Total current liabilities

  38,901   33,990 
         

Operating lease liabilities, net of current portion

  4,306   4,878 

Finance lease obligations, net of current portion

  2,957   3,469 

Equipment financing obligations, net of current portion

  692   868 

Note payable – related party, net of current portion

  3,987   6,484 

Other liabilities

  5,880   10,530 
         

Total liabilities

  56,723   60,219 
         

Stockholders’ equity:

        

Preferred stock, par value $0.01 per share, 975,150 shares authorized; no shares issued

  0   0 

Series A preferred stock, par value $0.01 per share, 24,850 shares authorized; no shares issued

  0   0 

Common stock, non-voting, par value $0.01 per share, 10,000,000 shares authorized; no shares issued

  0   0 

Common stock, par value $0.01 per share, 30,000,000 shares authorized; 22,132,002 shares issued and 22,131,983 outstanding in 2022 and 21,864,743 shares issued and 21,864,724 outstanding in 2021

  221   218 

Additional paid-in capital

  155,214   154,904 

Accumulated deficit

  (113,234)  (112,842)

Accumulated other comprehensive loss

  (22,563)  (22,994)

Treasury stock, 19 in 2022 and 2021

  0   0 
         

Total stockholders’ equity

  19,638   19,286 
         

Total liabilities and stockholders’ equity

 $76,361  $79,505 

 

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

 

4

 

 

Sypris Solutions, Inc.

Consolidated Cash Flow Statements

(in thousands)

 

   

Six Months Ended

 
   

July 3,

   

July 4,

 
   

2022

   

2021

 
   

(Unaudited)

 

Cash flows from operating activities:

               

Net (loss) income

  $ (392 )   $ 2,193  

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

               

Depreciation and amortization

    1,531       1,274  

Forgiveness of PPP Loan and related interest

    0       (3,599 )

Deferred income taxes

    225       266  

Stock-based compensation expense

    349       163  

Deferred loan costs recognized

    3       3  

Net loss on the sale of assets

    10       11  

Provision for excess and obsolete inventory

    129       65  

Non-cash lease expense

    442       438  

Other noncash items

    91       90  

Contributions to pension plans

    (47 )     (254 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (1,155 )     (3,270 )

Inventory

    711       (7,063 )

Other current assets

    (819 )     (335 )

Accounts payable

    805       7,218  

Accrued and other liabilities

    (3,892 )     11,406  
                 

Net cash (used in) provided by operating activities

    (2,009 )     8,606  
                 

Cash flows from investing activities:

               

Capital expenditures

    (1,840 )     (1,213 )

Proceeds from sale of assets

    0       10  
                 

Net cash used in investing activities

    (1,840 )     (1,203 )
                 

Cash flows from financing activities:

               

Principal payments on finance lease obligations

    (479 )     (211 )

Principal payments on equipment financing obligations

    (165 )     (65 )

Indirect repurchase of shares for minimum statutory tax withholdings

    (36 )     (382 )
                 

Net cash used in financing activities

    (680 )     (658 )
                 

Effect of exchange rate changes on cash balances

    395       (157 )
                 

Net (decrease) increase in cash and cash equivalents

    (4,134 )     6,588  
                 

Cash and cash equivalents at beginning of period

    11,620       11,606  
                 

Cash and cash equivalents at end of period

  $ 7,486     $ 18,194  
                 

Supplemental disclosure of cash flow information:

               

Non-cash investing and financing activities:

               

Right-of-use assets obtained in exchange for finance lease obligations

  $ 0     $ 168  

Capital expenditures purchased through equipment financing obligations

    0       1,070  

 

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

 

5

 

 

 

Sypris Solutions, Inc.

Consolidated Statements of Stockholders equity

(in thousands)

 

   

Three Months Ended July 3, 2022

 
                                   

Accumulated

         
                   

Additional

           

Other

         
   

Common Stock

   

Paid-In

   

Accumulated

   

Comprehensive

   

Treasury

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Stock

 
                                                 

April 3, 2022 balance

    22,088,344     $ 220     $ 155,061     $ (112,605 )   $ (22,411 )   $ 0  

Net income

    0       0       0       (629 )     0       0  

Foreign currency translation adjustment

    0       0       0       0       (152 )     0  

Exercise of stock options

    28,639       1       (20 )     0       0       0  

Noncash compensation

    15,000       0       173       0       0       0  

July 3, 2022 balance

    22,131,983     $ 221     $ 155,214     $ (113,234 )   $ (22,563 )   $ 0  

 

   

Three Months Ended July 4, 2021

 
                                   

Accumulated

         
                   

Additional

           

Other

         
   

Common Stock

   

Paid-In

   

Accumulated

   

Comprehensive

   

Treasury

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Stock

 
                                                 

April 4, 2021 balance

    21,436,963     $ 214     $ 154,783     $ (117,395 )   $ (25,104 )   $ 0  

Net income

    0       0       0       3,823       0       0  

Foreign currency translation adjustment

    0       0       0       0       355       0  

Exercise of stock options

    60,482       1       (81 )     0       0       0  

Noncash compensation

    17,500       0       102       0       0       0  

July 4, 2021 balance

    21,514,945     $ 215     $ 154,804     $ (113,572 )   $ (24,749 )   $ 0  

 

   

Six Months Ended July 3, 2022

 
                                   

Accumulated

         
                   

Additional

           

Other

         
   

Common Stock

   

Paid-In

   

Accumulated

   

Comprehensive

   

Treasury

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Stock

 
                                                 

January 1, 2022 balance

    21,864,724     $ 218     $ 154,904     $ (112,842 )   $ (22,994 )   $ 0  

Net income

    0       0       0       (392 )     0       0  

Foreign currency translation adjustment

    0       0       0       0       431       0  

Issuance of restricted common stock

    197,500       2       (2 )     0       0       0  

Exercise of stock options

    39,759       1       (37 )     0       0       0  

Noncash compensation

    30,000       0       349       0       0       0  

July 3, 2022 balance

    22,131,983     $ 221     $ 155,214     $ (113,234 )   $ (22,563 )   $ 0  

 

   

Six Months Ended July 4, 2021

 
                                   

Accumulated

         
                   

Additional

           

Other

         
   

Common Stock

   

Paid-In

   

Accumulated

   

Comprehensive

   

Treasury

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Stock

 
                                                 

January 1, 2021 balance

    21,300,958     $ 213     $ 155,025     $ (115,765 )   $ (24,698 )   $ 0  

Net income

    0       0       0       2,193       0       0  

Foreign currency translation adjustment

    0       0       0       0       (51 )     0  

Exercise of stock options

    196,487       2       (384 )     0       0       0  

Noncash compensation

    17,500       0       163       0       0       0  

July 4, 2021 balance

    21,514,945     $ 215     $ 154,804     $ (113,572 )   $ (24,749 )   $ 0  

 

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

 

6

 

 

Sypris Solutions, Inc.

 

Notes to Condensed Consolidated Financial Statements

 

 

(1)

Nature of Business

 

All references to “Sypris,” the “Company,” “we” or “our” include Sypris Solutions, Inc. and its wholly-owned subsidiaries. Sypris is a diversified provider of truck components, oil and gas pipeline components and aerospace and defense electronics. The Company produces a wide range of manufactured products, often under multi-year, sole-source contracts. The Company offers such products through its two business segments, Sypris Technologies, Inc. (“Sypris Technologies”) and Sypris Electronics, LLC (“Sypris Electronics”) (See Note 10).

 

 

(2)

Basis of Presentation

 

The accompanying unaudited consolidated financial statements include the accounts of Sypris Solutions, Inc. and its wholly-owned subsidiaries and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. The December 31, 2021 consolidated balance sheet data was derived from audited statements, but does not include all disclosures required by U.S. GAAP. The Company’s operations are domiciled in the United States (U.S.) and Mexico, and we serve a wide variety of domestic and international customers. All intercompany transactions and accounts have been eliminated.

 

These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the results of operations, financial position and cash flows for the periods presented, and the disclosures herein are adequate to make the information presented not misleading. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the COVID-19 pandemic has increased the uncertainty with respect to developing these estimates and assumptions. The COVID-19 pandemic continues to rapidly evolve and the ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. Changes in facts and circumstances could have a significant impact on the resulting estimated amounts included in our consolidated financial statements. Actual results could differ from these estimates. Actual results for the three and six months ended July 3, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2021 as presented in the Company’s Annual Report on Form 10-K.

 

 

(3)

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Credit Losses – Measurement of Credit Losses on Financial Instruments, new guidance for the accounting for credit losses on certain financial instruments. This guidance introduces a new approach to estimating credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. This guidance, which becomes effective January 1, 2023, is not expected to have a material impact on our consolidated financial statements.

 

 

(4)

Leases

 

The Company determines if an arrangement is a lease at its inception. The Company has entered into operating leases for real estate. These leases have initial terms which range from 10 years to 11 years, and often include one or more options to renew. These renewal terms can extend the lease term by 5 years, and will be included in the lease term when it is reasonably certain that the Company will exercise the option. The Company’s existing leases do not contain significant restrictive provisions; however, certain leases contain provisions for payment of real estate taxes, insurance and maintenance costs by the Company. The lease agreements do not contain any residual value guarantees. Some of the real estate lease agreements include periods of rent holidays and payments that escalate over the lease term by specified amounts. All operating lease expenses are recognized on a straight-line basis over the lease term. For finance leases, interest expense is recognized on the lease liability and the right-of-use asset is amortized over the lease term.

 

7

 

Some leases may require variable lease payments based on factors specific to the individual agreements. Variable lease payments for which we are typically responsible include real estate taxes, insurance and common area maintenance expenses based on the Company’s pro-rata share, which are excluded from the measurement of the lease liability. Additionally, one of the Company’s real estate leases has lease payments that adjust based on annual changes in the Consumer Price Index (“CPI”). The leases that are dependent upon CPI are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Incremental payments due to changes in the index are treated as variable lease costs and expensed as incurred.

 

These operating leases are included in “Operating lease right-of-use assets” on the Company’s consolidated balance sheets, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligations to make lease payments are included in “Operating lease liabilities, current portion” and “Operating lease liabilities, net of current portion” on the Company’s consolidated balance sheets. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As of July 3, 2022, total right-of-use assets and operating lease liabilities were approximately $4,699,000 and $5,420,000, respectively. As of December 31, 2021, total right-of-use assets and operating lease liabilities were approximately $5,140,000 and $5,941,000, respectively.

 

We primarily use our incremental borrowing rate, which is updated quarterly, based on the information available at commencement date, in determining the present value of lease payments. If readily available, we would use the implicit rate in a new lease to determine the present value of lease payments. The Company has certain contracts for real estate which may contain lease and non-lease components which it has elected to treat as a single lease component.

 

The Company has entered into various short-term operating leases, primarily for office equipment with an initial term of twelve months or less. Lease payments associated with short-term leases are expensed as incurred and are not recorded on the Company’s balance sheet. The related lease expense for short-term leases was not material for the three and six months ended July 3, 2022 and July 4, 2021.

 

The following table presents information related to lease expense for the three and six months ended July 3, 2022 and July 4, 2021 (in thousands):

 

  

Three Months Ended

  

Six Months Ended

 
  

July 3,

  

July 4,

  

July 3,

  

July 4,

 
  

2022

  

2021

  

2022

  

2021

 
  

(Unaudited)

  

(Unaudited)

 

Finance lease expense:

                

Amortization expense

 $171  $87  $320  $173 

Interest expense

  87   59   178   117 

Operating lease expense

  350   351   701   702 

Variable lease expense

  84   76   169   154 

Total lease expense

 $692  $573  $1,368  $1,146 

 

The following table presents supplemental cash flow information related to leases (in thousands):

 

   

Six Months Ended

 
   

July 3,

   

July 4,

 
   

2022

   

2021

 
   

(Unaudited)

 

Cash paid for amounts included in the measurement of lease liabilities:

               

Operating cash flows from operating leases

  $ 857     $ 764  

Operating cash flows from finance leases

    178       117  

Financing cash flows from finance leases

    479       211  

 

8

 

The annual future minimum lease payments as of July 3, 2022 are as follows (in thousands):

 

   

Operating

   

Finance

 
   

Leases

   

Leases

 

Next 12 months

  $ 1,501     $ 1,315  

12 to 24 months

    1,466       1,286  

24 to 36 months

    1,222       1,209  

36 to 48 months

    1,062       778  

48 to 60 months

    832       51  

Thereafter

    421       0  

Total lease payments

    6,504       4,639  

Less imputed interest

    (1,084 )     (666 )

Total

  $ 5,420     $ 3,973  

 

The following table presents certain information related to lease terms and discount rates for leases as of July 3, 2022 and December 31, 2021:

 

   

July 3,

   

December 31,

 
   

2022

   

2021

 
   

(Unaudited)

         

Weighted-average remaining lease term (years):

               

Operating leases

    4.8       5.3  

Finance leases

    3.5       4.0  
                 

Weighted-average discount rate (percentage):

               

Operating leases

    8.0       8.0  

Finance leases

    8.5       8.5  

 

 

(5)

Revenue from Contracts with Customers

 

The Company recognizes revenue when it satisfies a performance obligation by transferring control of a promised product or rendering a service to a customer. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for the product or service (the “transaction price”). The Company’s transaction price in its contracts with customers is generally fixed; no payment discounts, rebates or refunds are included within its contracts. The Company also does not provide service-type warranties nor does it allow customer returns. In connection with the sale of various parts to customers, the Company is subject to typical assurance warranty obligations covering the compliance of the electronics parts produced to agreed-upon specifications. Customer returns, when they occur, relate to quality rework issues and are not connected to any repurchase obligation of the Company.

 

A performance obligation is a promise in a contract to transfer a distinct product or render a service to a customer and is the unit of account to which the transaction price is allocated under ASC 606. When a contract contains multiple performance obligations, we allocate the transaction price to the individual performance obligations using the price at which the promised goods or services would be sold to customers on a standalone basis. For most sales within our Sypris Technologies segment and a portion of sales within Sypris Electronics, control transfers to the customer at a point in time. Indicators that control has transferred to the customer include the Company having a present right to payment, the customer obtaining legal title and the customer having the significant risks and rewards of ownership. The Company’s principal terms of sale are FOB Shipping Point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment.

 

For contracts where Sypris Electronics serves as a contractor for aerospace and defense companies under federally funded programs, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contracts that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Because control is transferred over time, revenue and gross profit is recognized based on the extent of progress towards completion of the performance obligation. We use labor hours incurred as a measure of progress for these contracts because it best depicts the Company’s performance of the obligation to the customer, which occurs as we incur labor on our contracts. Under this measure of progress, the extent of progress towards completion is measured based on the ratio of labor hours incurred to date to the total estimated labor hours at completion of the performance obligation.

 

9

 

Many of Sypris Electronics’ contractual arrangements with customers are for one year or less. For the remaining population of non-cancellable contracts greater than one year we had $78,327,000 of remaining performance obligations as of July 3, 2022, all of which were long-term Sypris Electronics’ contracts. We expect to recognize approximately 21% of our remaining performance obligations as revenue in 2022, 54% in 2023 and the balance in 2024.

 

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the three and six months ended July 3, 2022 and July 4, 2021:

 

   

Three Months Ended

   

Six Months Ended

 
   

July 3,

   

July 4,

   

July 3,

   

July 4,

 
   

2022

   

2021

   

2022

   

2021

 
   

(Unaudited)

   

(Unaudited)

 

Sypris Technologies – transferred point in time

  $ 17,951     $ 17,139     $ 35,106     $ 30,329  

Sypris Electronics – transferred point in time

    1,844       2,655       3,797       3,270  

Sypris Electronics – transferred over time

    9,249       6,175       16,307       12,352  
    $ 29,044     $ 25,969     $ 55,210     $ 45,951  

 

Contract Balances

 

Differences in the timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and deferred revenue, customer deposits and billings in excess of revenue recognized (contract liabilities) on the consolidated balance sheets.

 

Contract assets – Contract assets include unbilled amounts typically resulting from sales under contracts where revenue is recognized over time and revenue recognized exceeds the amount billed to the customer, and the right to payment is subject to conditions other than the passage of time. Contract assets are generally classified as current assets in the consolidated balance sheet. The balance of contract assets as of July 3, 2022 and December 31, 2021 were $2,343,000 and $1,913,000, respectively, and are included within other current assets in the accompanying consolidated balance sheets.

 

Contract liabilities – Some of the Company’s contracts within Sypris Electronics are billed as work progresses in accordance with the contract terms and conditions, either at periodic intervals or upon achievement of certain milestones. Often this results in billing occurring prior to revenue recognition resulting in contract liabilities. Additionally, the Company occasionally receives cash payments from customers in advance of the Company’s performance resulting in contract liabilities. These contract liabilities are classified as either current or long-term in the consolidated balance sheet based on the timing of when the Company expects to recognize revenue. As of July 3, 2022, the contract liabilities balance was $15,774,000, which was included within accrued liabilities in the accompanying consolidated balance sheets. As of December 31, 2021, the contract liabilities balance was $19,888,000, of which $15,013,000 was included within accrued liabilities and $4,875,000 was included within other liabilities in the accompanying consolidated balance sheets. Payments received from customers in advance of revenue recognition are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract.

 

The Company recognized revenue from contract liabilities of $4,464,000 and $7,640,000 during the three and six months ended July 3, 2022, respectively. The Company recognized revenue from contract liabilities of $1,607,000 and $3,609,000 during the three and six months ended July 4, 2021, respectively.

 

Practical expedients and exemptions

 

Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in selling, general and administrative expense in the consolidated statements of operations.

 

We do not disclose the value of unsatisfied performance obligations for contracts with original expected lengths of one year or less.

 

10

 
 

(6)

Earnings (Loss) Per Common Share

 

The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and participating securities. Restricted stock granted by the Company is considered a participating security since it contains a non-forfeitable right to dividends.

 

Our potentially dilutive securities include potential common shares related to our stock options and restricted stock. Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted earnings per share excludes the impact of common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period. For the three and six months ended July 3, 2022, diluted weighted average common shares do not include the impact of any outstanding stock options and unvested compensation-related shares because the effect of these items on diluted net loss would be anti-dilutive. There were 4,000 potential common shares excluded from diluted earnings per share for the three and six months ended July 4, 2021.

 

A reconciliation of the weighted average shares outstanding used in the calculation of basic and diluted (loss) income per common share is as follows (in thousands):

 

  

Three Months Ended

  

Six Months Ended

 
  

July 3,

  

July 4,

  

July 3,

  

July 4,

 
  

2022

  

2021

  

2022

  

2021

 
  

(Unaudited)

  

(Unaudited)

 

(Loss) income attributable to stockholders:

                

Net (loss) income as reported

 $(629) $3,823  $(392

)

 $2,193 

Less distributed and undistributed earnings allocable to restricted award holders

  0   0   0   0 

Less dividends declared attributable to restricted award holders

  0   0   0   0 

Net (loss) income allocable to common stockholders

 $(629

)

 $3,823  $(392

)

 $2,193 
                 

Income (loss) per common share attributable to stockholders:

                

Basic

 $(0.03

)

 $0.18  $(0.02

)

 $0.10 

Diluted

 $(0.03

)

 $0.17  $(0.02

)

 $0.10 
                 

Weighted average shares outstanding – basic

  21,723   21,356   21,700   21,475 

Weighted average additional shares assuming conversion of potential common shares

  0   1,490   0   1,504 

Weighted average shares outstanding – diluted

  21,723   22,846   21,700   22,979 

 

 

(7)

Inventory

 

Inventory consists of the following (in thousands):

 

   

July 3,

   

December 31,

 
   

2022

   

2021

 
   

(Unaudited)

         

Raw materials

  $ 25,717     $ 23,694  

Work in process

    4,364       6,702  

Finished goods

    1,236       1,497  

Reserve for excess and obsolete inventory

    (1,938 )     (1,793 )

Total

  $ 29,379     $ 30,100  

 

11

 
 

(8)

Property, Plant and Equipment

 

Property, plant and equipment consists of the following (in thousands):

 

   

July 3,

   

December 31,

 
   

2022

   

2021

 
   

(Unaudited)

         

Land and land improvements

  $ 43     $ 43  

Buildings and building improvements

    7,927       7,863  

Machinery, equipment, furniture and fixtures

    62,261       61,050  

Construction in progress

    1,567       858  
      71,798       69,814  

Accumulated depreciation

    (57,173 )     (55,674 )
    $ 14,625     $ 14,140  

 

 

(9)

Debt

 

Debt outstanding consists of the following (in thousands):

 

  

July 3,

  

December 31,

 
  

2022

  

2021

 
  

(Unaudited)

     

Current:

        

Finance lease obligation, current portion

 $1,016  $983 

Equipment financing obligations, current portion

  347   336 

Note payable – related party, current portion

  2,500   0 

Current portion of long term debt and finance lease obligations

 $3,863  $1,319 

Long Term:

        

Finance lease obligation

 $2,957  $3,469 

Equipment financing obligations

  692   868 

Note payable – related party

  4,000   6,500 

Less unamortized debt issuance and modification costs

  (13)  (16)

Long term debt and finance lease obligations net of unamortized debt costs

 $7,636  $10,821 

 

Note Payable Related Party

 

The Company has received the benefit of cash infusions from Gill Family Capital Management, Inc. (“GFCM”) in the form of secured promissory note obligations totaling $6,500,000 in principal as of July 3, 2022 and December 31, 2021. GFCM is an entity controlled by the Company’s Chairman, President and Chief Executive Officer, Jeffrey T. Gill, and one of our directors, R. Scott Gill. GFCM, Jeffrey T. Gill and R. Scott Gill are significant beneficial stockholders of the Company. As of July 3, 2022, our principal commitment under the Note was $2,500,000 due on April 1, 2023, $2,000,000 on April 1, 2024 and the balance on April 1, 2026. Interest on the promissory note is reset on April 1 of each year, at the greater of 8.0% or 500 basis points above the five-year Treasury note average during the preceding 90-day period, in each case, payable quarterly. The note allows for up to an 18-month deferral of payment for up to 60% of the interest due on the portion of the notes maturing in April of 2023 and 2024.

 

Obligations under the promissory note are guaranteed by all of the subsidiaries and are secured by a first priority lien on substantially all assets of the Company, including those in Mexico.

 

Finance Lease Obligations

 

As of July 3, 2022, the Company had $3,973,000 outstanding under finance lease obligations for both property and machinery and equipment at its Sypris Technologies locations with maturities through 2026 and a weighted average interest rate of 8.5%.

 

12

 

Equipment Financing Obligations

 

As of July 3, 2022, the Company had $1,039,000 million outstanding under equipment financing facilities, with effective interest rates ranging from 4.4% to 8.1% and payments due through 2026. Payments on the Company’s equipment financing obligations are due as follows (in thousands):

 

Next 12 months

 $403 

12 to 24 months

  376 

24 to 36 months

  254 

36 to 48 months

  90 

48 to 60 months

  23 

Thereafter

  0 

Total payments

  1,146 

Less imputed interest

  (107)

Total equipment financing obligations

 $1,039 

 

 

(10)

Segment Data

 

The Company is organized into two business segments, Sypris Technologies and Sypris Electronics. The segments are each managed separately because of the distinctions between the products, markets, customers, technologies, and workforce skills of the segments. Sypris Technologies generates revenue primarily from the sale of forged, machined, welded and heat-treated steel components primarily for the heavy commercial vehicle and high-pressure energy pipeline applications. Sypris Electronics provides circuit card and box build manufacturing, high reliability manufacturing, systems assembly and integration, design for manufacturability and design to specification work to customers in the market for aerospace and defense electronics. There was no intersegment net revenue recognized for any period presented.

 

The Company includes the unallocated costs of its corporate office, including the employment costs of its senior management team and other corporate personnel, administrative costs and net corporate interest expense incurred at the corporate level under the caption “General, corporate and other” in the table below. Such unallocated costs include those for centralized information technology, finance, legal and human resources support teams, certain professional fees, director fees, corporate office rent, certain self-insurance costs and recoveries, software license fees and various other administrative expenses that are not allocated to our reportable segments. The unallocated assets include cash and cash equivalents maintained in its domestic treasury accounts and the net book value of corporate facilities and related information systems. The unallocated liabilities consist primarily of the related party notes payable. Domestic income taxes are calculated at an entity level and are not allocated to our reportable segments. Corporate capital expenditures and depreciation and amortization include items attributable to the unallocated fixed assets of the corporate office and related information systems.

 

The following table presents financial information for the reportable segments of the Company (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

July 3,

   

July 4,

   

July 3,

   

July 4,

 
   

2022

   

2021

   

2022

   

2021

 
   

(Unaudited)

   

(Unaudited)

 

Net revenue from unaffiliated customers:

                               

Sypris Technologies

  $ 17,951     $ 17,139     $ 35,106     $ 30,329  

Sypris Electronics

    11,093       8,830       20,104       15,622  
    $ 29,044     $ 25,969     $ 55,210     $ 45,951  
                                 

Gross profit:

                               

Sypris Technologies

  $ 2,131     $ 2,509     $ 5,263     $ 3,680  

Sypris Electronics

    1,649       1,800       3,026       2,445  
    $ 3,780     $ 4,309     $ 8,289     $ 6,125  

 

13

 
   

Three Months Ended

    Six Months Ended  
   

July 3,

    July 4,     July 3,     July 4,  
   

2022

    2021     2022     2021  
    (Unaudited)        (Unaudited)  

Operating income (loss):

                               

Sypris Technologies

  $ 740     $ 1,316     $ 2,604     $ 1,443  

Sypris Electronics

    835       844       1,336       674  

General, corporate and other

    (1,532

)

    (1,267 )     (2,777

)

    (2,290

)

    $ 43     $ 893     $ 1,163     $ (173

)

Income (loss) before taxes:

                               

Sypris Technologies

  $ 544     $ 1,105     $ 2,163     $ 941  

Sypris Electronics

    797       840       1,258       664  

General, corporate and other

    (1,665

)

    2,191       (3,042

)

    1,022  
    $ (324

)

  $ 4,136     $ 379     $ 2,627  

 

   

July 3,

   

December 31,

 
   

2022

   

2021

 
   

(Unaudited)

         

Total assets:

               

Sypris Technologies

  $ 36,475     $ 35,977  

Sypris Electronics

    34,540       35,599  

General, corporate and other

    5,346       7,929  
    $ 76,361     $ 79,505  
                 

Total liabilities:

               

Sypris Technologies

  $ 21,964     $ 20,666  

Sypris Electronics

    26,264       31,030  

General, corporate and other

    8,495       8,523  
    $ 56,723     $ 60,219  

 

 

(11)

Commitments and Contingencies

 

The provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. The Company’s warranty liability, which is included in accrued liabilities in the accompanying consolidated balance sheets as of July 3, 2022 and December 31, 2021 was $680,000 and $659,000, respectively. The Company’s warranty expense for the three and six months ended July 3, 2022 and July 4, 2021 was not material.

 

The Company bears insurance risk as a member of a group captive insurance entity for certain general liability, automobile and workers’ compensation insurance programs, a self-insured worker’s compensation program and a self-insured employee health program. The Company records estimated liabilities for its insurance programs based on information provided by the third-party plan administrators, historical claims experience, expected costs of claims incurred but not paid, and expected costs to settle unpaid claims. The Company monitors its estimated insurance-related liabilities on a quarterly basis. As facts change, it may become necessary to make adjustments that could be material to the Company’s consolidated results of operations and financial condition.

 

The Company is involved in certain litigation and contract issues arising in the normal course of business. While the outcome of these matters cannot, at this time, be predicted in light of the uncertainties inherent therein, management does not expect that these matters will have a material adverse effect on the consolidated financial position or results of operations of the Company. Additionally, the Company believes its product liability insurance is adequate to cover all potential liability claims.

 

14

 

The Company accounts for loss contingencies in accordance with U.S. GAAP. Estimated loss contingencies are accrued only if the loss is probable and the amount of the loss can be reasonably estimated. With respect to a particular loss contingency, it may be probable that a loss has occurred but the estimate of the loss is within a wide range or undeterminable. If the Company deems an amount within the range to be a better estimate than any other amount within the range, that amount will be accrued. However, if no amount within the range is a better estimate than any other amount, the minimum amount of the range is accrued.

 

The Company has various current and previously-owned facilities subject to a variety of environmental regulations. The Company has received certain indemnifications from either companies previously owning these facilities or from purchasers of those facilities. Additionally, certain property previously sold by the Company has been designated as a Brownfield Site and has been approved for development by the purchaser. As of July 3, 2022 and December 31, 2021, no amounts were accrued for any environmental matters.

 

On December 27, 2017, the U.S. Department of Labor (the “DOL”) filed a lawsuit alleging that the Company had misinterpreted the language of its Company’s 401(k) Plans (collectively, the “Plan”). The DOL does not appear to dispute that the Company reached such interpretation in good faith and after consulting with independent ERISA counsel. On January 26, 2022, an opinion was issued by the judge indicating that certain of the Plan language in dispute is unambiguous and would therefore limit the Company’s right to interpret such language. On March 28, 2022, an opinion and order was issued by the judge that denied motions for summary judgement from the Company and the DOL and on April 28, 2022 the judge approved a revised schedule for the litigation proceedings. If the DOL’s allegations were upheld by a court, the Company could be required to make additional contributions into the accounts of its Plan participants and penalties payable to the DOL could be imposed. The Company believes that it has affirmative defenses and is continuing to vigorously defend the matter. We are currently unable to estimate a loss or range of loss for this matter.

 

On February 17, 2017, several employees (“Lucas Plaintiffs”) of KapStone Charleston Kraft, LLC filed a lawsuit in South Carolina alleging that they had been seriously burned when they opened a hinged closure and a hot tar-like material spilled out. Among other claims, the Lucas Plaintiffs allege that Sypris Technologies designed and manufactured the closure, that the closure was defective and that those defects had caused or contributed to their injuries. Sypris Technologies’ motion to dismiss for lack of jurisdiction was denied on February 28, 2020. The Company regards these allegations to be without merit and any potential damages to be undeterminable. As a result, we are currently unable to estimate a loss or range of loss for this matter at this time. The Company’s general liability insurer has accepted the defense costs. The Company is continuing to vigorously defend the matter.

 

In order to reduce manufacturing lead times, the Company enters into agreements with certain suppliers to produce inventory based on the Company’s requirements. A significant portion of the Company’s purchase commitments arising from these agreements consists of firm and non-cancelable commitments. These purchase commitments totaled $60,104,000 as of July 3, 2022, of which $21,558,000 will be payable in 2022, $28,339,000 is due in 2023 and $10,207,000 will be due in 2024. The Company also had outstanding purchase commitments of $1,774,000 as of July 3, 2022 for the purchase of manufacturing equipment.

 

 

(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 21% in 2022 and 2021 and for its foreign operations at a statutory rate of 30% in 2022 and 2021. Reconciling items between the federal statutory rate and the effective tax rate also include the expected usage of federal net operating loss carryforwards, state income taxes, valuation allowances and certain other permanent differences.

 

The Company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements in accordance with ASC 740, Income Taxes (ASC 740). These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of assets or liabilities are recovered or settled. ASC 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company evaluates its deferred tax position on a quarterly basis and valuation allowances are provided as necessary. During this evaluation, the Company reviews its forecast of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred tax assets to determine if a valuation allowance is needed.

 

15

 

Based on the Company’s consideration of all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations, the Company has established a valuation allowance against all U.S. deferred tax assets. Until an appropriate level and characterization of profitability is attained, the Company expects to continue to maintain a valuation allowance on its net deferred tax assets related to future U.S. tax benefits.

 

 

(13)

Employee Benefit Plans

 

Pension expense (benefit) consisted of the following (in thousands):

 

  

Three Months Ended

  

Six Months Ended

 
  

July 3,

  

July 4,

  

July 3,

  

July 4,

 
  

2022

  

2021

  

2022

  

2021

 
  

(Unaudited)

  

(Unaudited)

 
                 

Service cost

 $1  $1  $2  $2 

Interest cost on projected benefit obligation

  226   116   420   387 

Net amortizations, deferrals and other costs

  127   148   280   306 

Expected return on plan assets

  (221

)

  (136

)

  (409

)

  (378

)

Net periodic benefit cost

 $133  $129  $293  $317 

 

The net periodic benefit cost of the defined benefit pension plans incurred during the three and six-month periods ended July 3, 2022 and July 4, 2021 are reflected in the following captions in the accompanying consolidated statements of operations (in thousands):

 

  

Three Months Ended

  

Six Months Ended

 
  

July 3,

  

July 4,

  

July 3,

  

July 4,

 
  

2022

  

2021

  

2022

  

2021

 
  

(Unaudited)

  

(Unaudited)

 

Service cost:

                

Selling, general and administrative expenses

 $1  $1  $2  $2 

Other net periodic benefit costs:

                

Other expense (income), net

  132   128   291   315 

Total

 $133  $129  $293  $317 

 

 

(14)

Accumulated Other Comprehensive Loss

 

The Company’s accumulated other comprehensive loss consists of employee benefit-related adjustments and foreign currency translation adjustments.

 

Accumulated other comprehensive loss consisted of the following (in thousands):

 

   

July 3,

   

December 31,

 
   

2022

   

2021

 
   

(Unaudited)

         

Foreign currency translation adjustments

  $ (11,009 )   $ (11,440 )

Employee benefit related adjustments – U.S., net of tax

    (11,745 )     (11,745 )

Employee benefit related adjustments – Mexico, net of tax

    191       191  

Accumulated other comprehensive loss

  $ (22,563 )   $ (22,994 )

 

 

(15)

Fair Value of Financial Instruments

 

Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial statements at their carrying amount which approximates fair value because of the short-term maturity of those instruments. The carrying amount of debt outstanding at July 3, 2022 approximates fair value, and is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments (Level 2).

 

16

 
 

Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are a diversified provider of truck components, oil and gas pipeline components and aerospace and defense electronics. We offer a wide range of manufactured products, often under multi-year sole-source contracts.

 

We are organized into two business segments, Sypris Technologies and Sypris Electronics. Sypris Technologies, which is comprised of Sypris Technologies, Inc. and its subsidiaries, generates revenue primarily from the sale of forged, machined, welded and heat-treated steel components primarily for the heavy commercial vehicle and high-pressure energy pipeline applications. Sypris Electronics, which is comprised of Sypris Electronics, LLC, generates revenue primarily through circuit card and full “box build” manufacturing, high reliability manufacturing, systems assembly and integration, design for manufacturability and design to specification work.

 

We focus on those markets where we believe we have the expertise, qualifications and leadership position to sustain a competitive advantage. We target our resources to support the needs of industry participants that embrace technological innovation and flexibility, coupled with multi-year contractual relationships, as a strategic component of their supply chain management. These contracts, many of which are sole-source by part number, have historically created opportunities to invest in leading-edge processes or technologies to help our customers remain competitive. The productivity and innovation that can result from such investments helps to differentiate us from our competition when it comes to cost, quality, reliability and customer service.

 

Impact of COVID-19 on Our Business

 

The COVID-19 pandemic negatively impacted the Company’s results of operations, cash flows and financial position in 2020 and 2021, and in the first half of 2022. We have also continued to experience various degrees of supply chain challenges in the first half of 2022, including increased lead times for raw materials due to availability constraints and high demand. While we have elevated our engagement with our suppliers and used secondary suppliers and new methods of procurement where available to mitigate the supply chain pressures, we expect supply chain challenges to continue throughout 2022.

 

In connection with the supply chain challenges described above, we have experienced inflationary increases of certain raw materials, as well as logistics, transportation, utilities and labor costs. While we have taken pricing actions and we strive for productivity improvements that could help offset these inflationary cost increases, we expect inflationary cost increases to continue throughout 2022.

 

Sypris Technologies Outlook

 

Demand in the North American Class 4-8 commercial vehicle market began to recover in the second half of 2020 following an anticipated market decline in the first half of 2020 that was deepened by the impact of the COVID-19 pandemic. Market conditions have improved since then for commercial vehicles in addition to the automotive, sport utility vehicle and off-highway markets served by Sypris Technologies. While there is growing evidence of a slowing North American economy, the outlook for the remainder of 2022 for the commercial vehicle market indicates strong demand with Class 8 production expected to be up 15% over 2021 due to pent-up demand, capacity shortfalls and carrier profitability. Additionally, we believe that the market diversification Sypris Technologies has accomplished over recent years by adding new programs in the automotive, sport-utility and off-highway markets has benefited and will continue to benefit the Company as demand for our products in these markets has experienced less volatility than the Class 8 commercial vehicle market.

 

Reduced travel, business closures, and other economic impacts related to the COVID-19 pandemic suppressed oil and natural gas demand, which had adversely impacted the oil and gas markets served by our Tube Turns® brand of engineered product lines. This caused major pipeline developers to significantly scale back near-term capital investments in new pipeline infrastructure, which resulted in reduced demand for our products for the oil and gas markets during 2021 and the first half of 2022. Sales in this market are dependent on, among other things, the level of worldwide oil and gas drilling, the price of crude oil and natural gas and capital spending by exploration and production companies and drilling contractors. The U.S. land average rig count continues to be below pre-pandemic levels, but rose 13% in the second quarter of 2022 compared to the first quarter of 2022. As commodity prices improve and activity increases, we currently expect customer demand in this market to increase in 2022 compared to 2021. However, the conflict between Russia and Ukraine has led to disruption, instability and volatility in global markets and industries that could negatively impact our operations.

 

17

 

We will continue to pursue new business in a wide variety of markets from light automotive to new energy related product lines to achieve a more balanced portfolio across our customers, markets and products.

 

Sypris Electronics Outlook

 

As noted above, the COVID-19 pandemic continued to cause business impacts in the first half of 2022 including supply chain challenges and delays. The majority of the government aerospace and defense programs that we support require specific components that are sole-sourced to specific suppliers; therefore, the resolution of supplier constraints requires coordination with our customers or the end-users of the products. We have partnered with our customers to qualify alternative components or suppliers and will continue to focus on our supply chain to attempt to mitigate the impact of supply component shortages on our business. Electronic component shortages may continue to be a challenge during the remainder of 2022. We may not be successful in addressing these shortages and other supply chain issues.

 

During 2021 and the first half of 2022, we announced new program awards for Sypris Electronics, with certain programs continuing into 2024. In addition to contract awards from Department of Defense (“DoD”) prime contractors related to weapons systems, electronic warfare and infrared countermeasures in our traditional aerospace and defense markets, we have also been awarded subcontracts related to the communication and navigation markets, which align with our advanced capabilities for delivering products for complex, high cost of failure platforms.

 

On March 15, 2022, President Biden signed the Consolidated Appropriations Act, 2022, providing annual funding for the DoD and other government departments and agencies. The appropriation provided $781 billion for national defense, which includes the DoD, Department of Energy (DoE) nuclear weapons-related activities, and the national security activities of the Coast Guard, Federal Bureau of Investigation, and others. The DoD portion was $742.3 billion, $25 billion more than the President’s Fiscal Year (FY) 2022 request. Additionally, the legislation included $13.6 billion in supplemental funding to support Ukraine, including $3.5 billion for defense articles and $650 million in Foreign Military Financing (FMF) for Ukraine and other Eastern European allies. An additional $40 billion in emergency supplemental appropriations was approved by Congress in May 2022.

 

On March 28, 2022, President Biden’s Administration submitted to Congress the President’s FY 2023 budget request, which proposes $813 billion for national defense. The DoD portion of this request is $773 billion, a 4% increase above the FY 2022 enacted amount. On July 18, 2022, the Senate Armed Services Committee released its annual defense bill, which authorizes $847 billion in defense spending, an increase over President Biden’s Administration’s budget request. It is difficult to predict the specific course of future defense budgets. However, we believe the ongoing conflict in Ukraine has highlighted some of the national security threats to our nation and our allies, and the need for strong deterrence and a robust defense capability, as well as impacting our political and economic environment. More generally, the threat to U.S. national security remains very substantial and we believe that our capabilities should help our customers defend against current and future threats and, as a result, continue to allow for long-term profitable business growth.

 

We expect to compete for follow-on business opportunities as a subcontractor on future builds of several existing government programs. However, the federal budget and debt ceiling are expected to continue to be the subject of considerable uncertainty and the impact on demand for our products and services and our business are difficult to predict.

 

See also the discussion of Congressional budgetary constraints or reallocations risks within “Item 1A, Risk Factors” included in our 2021 Form 10-K.

 

18

 

 

Results of Operations

 

The tables below compare our segment and consolidated results for the three and six month periods of operations of 2022 to the three and six month periods of operations of 2021. The tables present the results for each period, the change in those results from 2021 to 2022 in both dollars and percentage change and the results for each period as a percentage of net revenue.

 

 

The first two columns in each 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 each 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.”

 

Three Months Ended July 3, 2022 Compared to Three Months Ended July 4, 2021

 

                           

Year Over

                 
                   

Year Over

   

Year

   

Results as Percentage of

 
                   

Year

   

Percentage

   

Net Revenue for the Three

 
   

Three Months Ended,

   

Change

   

Change

   

Months Ended

 
   

July 3,

   

July 4,

   

Favorable

   

Favorable

   

July 3,

   

July 4,

 
   

2022

   

2021

   

(Unfavorable)

   

(Unfavorable)

   

2022

   

2021

 
   

(in thousands, except percentage data)

 

Net revenue:

                                               

Sypris Technologies

  $ 17,951     $ 17,139     $ 812       4.7 %     61.8 %     66.0 %

Sypris Electronics

    11,093       8,830       2,263       25.6       38.2       34.0  

Total

    29,044       25,969       3,075       11.8       100.0       100.0  
                                                 

Cost of sales:

                                               

Sypris Technologies

    15,820       14,630       (1,190 )     (8.1 )     88.1       85.4  

Sypris Electronics

    9,444       7,030       (2,414 )     (34.3 )     85.1       79.6  

Total

    25,264       21,660       (3,604 )     (16.6 )     87.0       83.4  
                                                 

Gross profit:

                                               

Sypris Technologies

    2,131       2,509       (378 )     (15.1 )     11.9       14.6  

Sypris Electronics

    1,649       1,800       (151 )     (8.4 )     14.9       20.4  

Total

    3,780       4,309       (529 )     (12.3 )     13.0       16.6  
                                                 

Selling, general and administrative

    3,737       3,416       (321 )     (9.4 )     12.9       13.2  

Operating income

    43       893       (850 )     (95.2 )     0.1       3.4  
                                                 

Interest expense, net

    263       211       (52 )     (24.6 )     0.9       0.8  

Other expense, net

    104       145       41       28.3       0.4       0.6  

Forgiveness of PPP Loan and related interest

    0       (3,599 )     (3,599 )     NM       0.0       (13.9 )
                                                 

(Loss) income before taxes

    (324 )     4,136       (4,460 )     NM       (1.1 )     15.9  

Income tax expense, net

    305       313       8       2.6       1.1       1.2  
                                                 

Net (loss) income

  $ (629 )   $ 3,823     $ (4,452 )     NM       (2.2 )%     14.7 %

 

19

 

 

Six Months Ended July 3, 2022 Compared to Six Months Ended July 4, 2021.                            

 

                           

Year Over

                 
                   

Year Over

   

Year

   

Results as Percentage of

 
                   

Year

   

Percentage

   

Net Revenue for the Six

 
   

Six Months Ended,

   

Change

   

Change

   

Months Ended

 
   

July 3,

   

July 4,

   

Favorable

   

Favorable

   

July 3,

   

July 4,

 
   

2022

   

2021

   

(Unfavorable)

   

(Unfavorable)

   

2022

   

2021

 
   

(in thousands, except percentage data)

 

Net revenue:

                                               

Sypris Technologies

  $ 35,106     $ 30,329     $ 4,777       15.8 %     63.6 %     66.0 %

Sypris Electronics

    20,104       15,622       4,482       28.7       36.4       34.0  

Total

    55,210       45,951       9,259       20.1       100.0       100.0  
                                                 

Cost of sales:

                                               

Sypris Technologies

    29,843       26,649       (3,194 )     (12.0 )     85.0       87.9  

Sypris Electronics

    17,078       13,177       (3,901 )     (29.6 )     84.9       84.3  

Total

    46,921       39,826       (7,095 )     (17.8 )     85.0       86.7  
                                                 

Gross profit:

                                               

Sypris Technologies

    5,263       3,680       1,583       43.0       15.0       12.1  

Sypris Electronics

    3,026       2,445       581       23.8       15.1       15.7  

Total

    8,289       6,125       2,164       35.3       15.0       13.3  
                                                 

Selling, general and administrative

    7,126       6,298       (828 )     (13.1 )     12.9       13.7  

Operating income (loss)

    1,163       (173 )     1,336       NM       2.1       (0.4 )
                                                 

Interest expense, net

    511       433       (78 )     (18.0 )     0.9       0.9  

Other expense, net

    273       366       93       25.4       0.5       0.8  

Forgiveness of PPP Loan and related interest

    0       (3,599 )     (3,599 )     NM       0.0       (7.8 )
                                                 

Income before taxes

    379       2,627       (2,248 )     (85.6 )     0.7       5.7  

Income tax expense, net

    771       434       (337 )     (77.6 )     1.4       0.9  
                                                 

Net (loss) income

  $ (392 )   $ 2,193     $ (2,585 )     NM       (0.7 )%     4.8 %

 

Net Revenue. Sypris Technologies derives its revenue from the sale of forged and finished steel components and subassemblies and high-pressure closures and other fabricated products. Net revenue for Sypris Technologies for the three and six-month periods ended July 3, 2022 increased $0.8 million and $4.8 million, respectively, from the prior year comparable periods. The comparison of net revenue for the three and six month periods includes price adjustments for increases in the market price of steel over the past year, which is contractually passed through to customers under certain contracts. The steel price adjustments totaled approximately $1.3 million and $2.4 million for the three and six month periods, respectively. The increase is partially offset by lower shipment volume to the commercial vehicle market. Production of Class 8 commercial vehicles in North America continues to be impacted by supply chain constraints unrelated to the availability of the drive axle shafts and other components we manufacture. This in turn has trickled down into our shipment volume, as our customers adjust their inventory levels to align with the end market build rates. Higher shipments of automotive, sport utility and energy components contributed to the revenue increase for the comparable six month periods.

 

Sypris Electronics derives its revenue primarily from circuit card and full “box build” manufacturing, high reliability manufacturing and systems assembly and integration. Net revenue for Sypris Electronics increased $2.3 million and $4.5 million, respectively, for the three and six months ended July 3, 2022, from the prior year comparable periods. The increase in revenue for the three and six months ended July 3, 2022 was primarily related to the ramping of production during the year for two follow-on programs that began shipments during the fourth quarter of 2021. Additionally, the prior year was impacted by material availability, as receipts of a limited number of specific parts necessary to complete the build of products were delayed or, in other instances, required us to resource and obtain alternative parts or use alternative suppliers. While certain programs continue to be impacted by material availability during the current year, the impact has been less significant than in the prior year.

 

20

 

Gross Profit. Sypris Technologies’ gross profit decreased $0.4 million and increased $1.6 million for the three and six months ended July 3, 2022, respectively, from the prior year comparable periods. Revenue mix was slightly unfavorable for the three months ended July 3, 2022 contributing to the decrease in gross profit. Variable manufacturing costs also increased during the current year as inflationary pressure increased spend for consumable supplies and tooling, and natural gas and electricity rates increased from the prior year. The gross profit variance for both the three and six month periods also includes additional costs incurred during 2022 to support the increase in demand driven by the commercial vehicle market anticipated over the balance of 2022 and 2023. For the si