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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934.
For the quarterly period ended June 30, 2002.
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 of (I.R.S. Employer
Incorporation or Organization) Identification No.)
101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222
(Address of principal executive offices, including zip code)
(502) 329-2000
(Registrant's telephone number, 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 X No ____
-----
As of July 20, 2002, the Registrant had 14,111,141 shares of Common Stock
outstanding.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Income Statements for the Three and Six
Months Ended June 30, 2002 and July 1, 2001 .................... 2
Consolidated Balance Sheets at June 30, 2002 and
December 31, 2001 .............................................. 3
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and July 1, 2001 .................... 4
Notes to Consolidated Financial Statements ....................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 13
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders .............. 14
Item 6. Exhibits and Reports on Form 8-K ................................. 15
Signatures ........................................................................... 16
1
Part I. Financial Information
Item 1. Financial Statements
Sypris Solutions, Inc.
Consolidated Income Statements
(in thousands, except for per share data)
Three Months Ended Six Months Ended
-------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Net revenue:
Outsourced services ................................ $ 61,082 $ 52,246 $ 113,743 $ 98,264
Products ........................................... 12,427 10,906 22,299 22,923
----------- ----------- ---------- ---------
Total net revenue ................................ 73,509 63,152 136,042 121,187
Cost of sales:
Outsourced services ................................ 52,556 45,493 97,369 85,482
Products ........................................... 8,071 6,745 14,662 14,627
----------- ----------- ---------- ---------
Total cost of sales .............................. 60,627 52,238 112,031 100,109
----------- ----------- ---------- ---------
Gross profit ..................................... 12,882 10,914 24,011 21,078
Selling, general and administrative ................... 7,188 6,818 13,702 13,393
Research and development .............................. 932 827 1,763 1,504
Amortization of intangible assets ..................... 3 357 54 692
----------- ----------- ---------- ---------
Operating income ................................. 4,759 2,912 8,492 5,489
Interest expense, net ................................. 660 1,073 1,742 2,202
Other (income) expense, net ........................... (31) 33 (60) (119)
----------- ----------- ---------- ---------
Income before income taxes ....................... 4,130 1,806 6,810 3,406
Income tax expense .................................... 1,325 597 2,180 1,178
----------- ----------- ---------- ---------
Net income ....................................... $ 2,805 $ 1,209 $ 4,630 $ 2,228
=========== =========== ========== =========
Net income per common share:
Basic ............................................ $ 0.20 $ 0.12 $ 0.38 $ 0.23
Diluted .......................................... $ 0.19 $ 0.12 $ 0.36 $ 0.23
Shares used in computing per common share amounts:
Basic ............................................ 13,971 9,786 12,081 9,757
Diluted .......................................... 14,696 9,878 12,736 9,836
The accompanying notes are an integral part of the consolidated financial
statements.
2
Sypris Solutions, Inc.
Consolidated Balance Sheets
(in thousands, except for share data)
June 30, December 31,
2002 2001
----------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents ................................................... $ 15,638 $ 13,232
Accounts receivable, net .................................................... 43,849 39,758
Inventory, net .............................................................. 59,282 60,574
Other current assets ........................................................ 6,220 7,991
--------- ---------
Total current assets ...................................................... 124,989 121,555
Property, plant and equipment, net ............................................. 73,709 70,452
Intangible assets, net ......................................................... 15,873 15,926
Other assets ................................................................... 4,422 3,511
--------- ---------
$ 218,993 $ 211,444
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................................ $ 22,924 $ 26,828
Accrued liabilities ......................................................... 18,152 19,902
Current portion of long-term debt ........................................... -- 7,500
--------- ---------
Total current liabilities ................................................. 41,076 54,230
Long-term debt ................................................................. 40,000 80,000
Other liabilities .............................................................. 6,698 7,094
--------- ---------
Total liabilities ......................................................... 87,774 141,324
Stockholders' equity:
Preferred stock, par value $.01 per share, 981,600 shares
authorized; no shares issued .............................................. -- --
Series A preferred stock, par value $.01 per share, 18,400
shares authorized; no shares issued ....................................... -- --
Common stock, non-voting, par value $.01 per share,
10,000,000 shares authorized; no shares issued ............................ -- --
Common stock, par value $.01 per share, 30,000,000 shares
authorized; 14,093,936 and 9,898,675 shares issued and
outstanding in 2002 and 2001, respectively ................................ 141 99
Additional paid-in capital .................................................. 81,913 25,490
Retained earnings ........................................................... 51,057 46,427
Accumulated other comprehensive income (loss) ............................... (1,892) (1,896)
--------- ---------
Total stockholders' equity ................................................ 131,219 70,120
--------- ---------
$ 218,993 $ 211,444
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
Sypris Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
---------------------------
June 30, July 1,
2002 2001
----------- -----------
(Unaudited)
Cash flows from operating activities:
Net income ..................................................................... $ 4,630 $ 2,228
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................................... 5,423 4,870
Other noncash charges ....................................................... 558 335
Changes in operating assets and liabilities:
Accounts receivable ....................................................... (4,212) (4,028)
Inventory ................................................................. 1,020 (213)
Other assets .............................................................. 1,753 1,296
Accounts payable .......................................................... 903 786
Accrued liabilities ....................................................... (1,673) 1,285
----------- -----------
Net cash provided by operating activities ................................ 8,402 6,559
Cash flows from investing activities:
Capital expenditures ........................................................... (14,478) (12,934)
Purchase of the net assets of acquired entities ................................ -- (11,486)
Proceeds from sale of assets ................................................... 72 66
Changes in nonoperating assets and liabilities ................................. (323) (464)
----------- -----------
Net cash used in investing activities .................................... (14,729) (24,818)
Cash flows from financing activities:
Net (decrease) increase in debt under revolving credit agreements .............. (47,500) 17,500
Proceeds from issuance of common stock ......................................... 56,233 300
----------- -----------
Net cash provided by financing activities ................................ 8,733 17,800
----------- -----------
Net increase (decrease) in cash and cash equivalents .............................. 2,406 (459)
Cash and cash equivalents at beginning of period .................................. 13,232 14,674
----------- -----------
Cash and cash equivalents at end of period ........................................ $ 15,638 $ 14,215
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
Sypris Solutions, Inc.
Notes to Consolidated Financial Statements
(1) Nature of Business
Sypris is a diversified provider of outsourced services and specialty
products. The Company performs a wide range of manufacturing, engineering,
design, testing and other technical services, typically under multi-year,
sole-source contracts with major companies and government agencies in the
markets for aerospace & defense electronics, truck components & assemblies, and
for users of test & measurement equipment.
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Sypris Solutions, Inc. and its wholly-owned subsidiaries
(collectively, "Sypris" or the "Company"), Sypris Electronics, LLC, Sypris Test
& Measurement, Inc., Sypris Data Systems, Inc., and Sypris Technologies, Inc.,
and have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission. All significant
intercompany transactions and accounts have been eliminated. These unaudited
consolidated financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to fairly state the results of operations, financial position and cash flows for
the periods presented, and the disclosures herein are adequate to make the
information presented not misleading. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. Actual results for the three and six
months ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements, and notes thereto, for the year ended
December 31, 2001 as presented in the Company's annual report on Form 10-K.
(3) Earnings Per Share
There were no adjustments required to be made to net income for purposes of
computing basic and diluted earnings per share. A reconciliation of the weighted
average shares outstanding used in the calculation of basic and diluted earnings
per share is as follows (in thousands):
Three Months Ended Six Months Ended
-------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Shares used to compute basic earnings
per share ....................................... 13,971 9,786 12,081 9,757
Dilutive effect of stock options ................... 725 92 655 79
----------- ----------- ----------- -----------
Shares used to compute diluted
earnings per share ............................... 14,696 9,878 12,736 9,836
=========== =========== =========== ===========
5
(4) Inventory
Inventory consists of the following (in thousands):
June 30, December 31,
2002 2001
----------- -----------
(Unaudited)
Raw materials ............................................................ $ 17,305 $ 19,003
Work in process .......................................................... 13,018 9,661
Finished goods ........................................................... 3,666 5,450
Costs relating to long-term contracts and programs, net of amounts
attributed to revenue recognized to date ............................... 34,200 37,908
Progress payments related to long-term contracts and programs ............ (3,611) (6,540)
LIFO reserve ............................................................. (1,092) (987)
Reserve for excess and obsolete inventory ................................ (4,204) (3,921)
----------- -----------
$ 59,282 $ 60,574
=========== ===========
(5) Segment Data
The Company's operations are conducted in two reportable business segments:
the Electronics Group and the Industrial Group. There was no intersegment net
revenue recognized in all of the periods presented. The following table presents
financial information for the reportable segments of the Company for the three
and six months ended June 30, 2002 and July 1, 2001 (in thousands):
Three Months Ended Six Months Ended
-------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Net revenue from unaffiliated customers:
Electronics Group .......................... $ 49,297 $ 53,480 $ 93,373 $ 103,561
Industrial Group ........................... 24,212 9,672 42,669 17,626
----------- ----------- ----------- -----------
$ 73,509 $ 63,152 $ 136,042 $ 121,187
=========== =========== =========== ===========
Gross profit:
Electronics Group .......................... $ 9,017 $ 9,764 $ 17,705 $ 19,064
Industrial Group ........................... 3,865 1,150 6,306 2,014
----------- ----------- ----------- -----------
$ 12,882 $ 10,914 $ 24,011 $ 21,078
=========== =========== =========== ===========
Operating income:
Electronics Group .......................... $ 2,882 $ 2,870 $ 6,032 $ 6,103
Industrial Group ........................... 3,005 714 4,463 1,112
General, corporate and other ............... (1,128) (672) (2,003) (1,726)
----------- ----------- ----------- -----------
$ 4,759 $ 2,912 $ 8,492 $ 5,489
=========== =========== =========== ===========
(6) Commitments and Contingencies
The Company's Sypris Technologies subsidiary is a co-defendant in two
lawsuits arising out of an explosion at a coker plant owned by Exxon Mobil
Corporation located in Baton Rouge, Louisiana. In each of these lawsuits, it is
alleged that a carbon steel pipe elbow that Sypris Technologies manufactured was
improperly installed and the failure of which caused the explosion. One of the
actions was brought by Exxon Mobil in 1994 in state district court in Louisiana
and claims damages for destruction of the plant, which Exxon Mobil estimates
exceed one hundred million dollars. Sypris Technologies is a co-defendant in
this action with the fabricator who built the pipeline into which the elbow was
incorporated and with
6
the general contractor for the plant. The second action is a class action suit
also filed in 1994 in federal court in Louisiana on behalf of the residents
living around the plant and claims unspecified damages. Sypris Technologies is a
co-defendant in this action with Exxon Mobil, the contractor and the fabricator.
In both actions, the Company maintains that the carbon steel pipe elbow at issue
was appropriately marked as carbon steel and was improperly installed, without
Sypris Technologies' knowledge, by the fabricator and general contractor in
circumstances that required the use of a chromium steel elbow. Although the
Company believes these defenses to be meritorious, there can be no assurance
that the Company will not be found liable for some or all of the alleged
damages. If the Company was to be found liable and the damages exceeded
available insurance coverage, the impact could materially and adversely affect
the Company's financial condition and results of operations.
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.
(7) Adoption of Recently Issued Accounting Standard
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
Under SFAS No. 142, goodwill and indefinite lived intangible assets are no
longer amortized but will be reviewed at least annually for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The Company completed the
first of the required impairment tests of goodwill and indefinite lived
intangible assets during the three months ended March 31, 2002 and no adjustment
to the carrying value of goodwill was required.
The nonamortization of goodwill has increased the Company's net income and
earnings per share. Following are pro forma results assuming goodwill had not
been amortized prior to January 1, 2002 (in thousands, except for per share
data):
Three Months Ended Six Months Ended
-------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Reported net income ........................... $ 2,805 $ 1,209 $ 4,630 $ 2,228
Adjustment for amortization of goodwill ....... -- 220 -- 403
----------- ----------- ----------- -----------
Adjusted net income ........................... $ 2,805 $ 1,429 $ 4,630 $ 2,631
=========== =========== =========== ===========
Basic earnings per share as reported .......... $ 0.20 $ 0.12 $ 0.38 $ 0.23
Adjustment for amortization of goodwill ....... -- 0.03 -- 0.04
----------- ----------- ----------- -----------
Adjusted basic earnings per share ............. $ 0.20 $ 0.15 $ 0.38 $ 0.27
=========== =========== =========== ===========
Diluted earnings per share as reported ........ $ 0.19 $ 0.12 $ 0.36 $ 0.23
Adjustment for amortization of goodwill ....... -- 0.02 -- 0.04
----------- ----------- ----------- -----------
Adjusted diluted earnings per share ........... $ 0.19 $ 0.14 $ 0.36 $ 0.27
=========== =========== =========== ===========
There has been no change to the carrying value of the Company's goodwill
since January 1, 2002. Goodwill at June 30, 2002 for the Electronics Group and
the Industrial Group was $13,818,000 and $440,000, respectively. The Company's
intangible assets subject to amortization and the related
7
amortization expense are not material to the Company's consolidated financial
position or results of operations, respectively.
(8) Issuance of Common Stock
On March 26, 2002, the Company completed a public stock offering of
3,600,000 shares of its common stock at $14.50 per share and generated proceeds,
after underwriting discounts and expenses, of approximately $48,844,000. On
April 19, 2002, an over-allotment option was exercised for 500,000 shares at
$14.50 per share and generated proceeds, after underwriting discounts and
expenses, of approximately $6,817,000. The proceeds of the offering were used to
repay debt of $30,000,000 during March 2002 and $22,500,000 during April 2002.
On May 7, 2002, the Company's shareholders approved an amendment to increase the
Company's authorized common stock from 20,000,000 shares to 30,000,000 shares.
(9) Income Taxes
The Company's effective tax rate for the three and six months ended June
30, 2002 was 32.1% and 32.0%, respectively. Reconciling items between the
federal statutory income tax rate and the effective tax rate include
management's estimate for 2002 of research and development tax credits, state
income tax benefits and certain other permanent differences.
(10) Accumulated Other Comprehensive Income
The aggregate fair market value of all interest rate swap agreements
decreased from $728,000 at December 31, 2001 to $722,000 at June 30, 2002 and
was included in other liabilities on the consolidated balance sheet. The change
in fair market value, net of tax of $2,000, was recorded as other comprehensive
income during the six months ended June 30, 2002.
(11) Stock Option Plans
On May 7, 2002, the Company's shareholders approved amendments to certain
of its stock compensation plans for officers, key employees and non-employee
directors to increase the aggregate number of shares of common stock reserved
for issuance thereunder from 3,000,000 to 4,750,000.
(12) Subsequent Event
On July 3, 2002, the Company's credit agreement with its bank syndicate
was amended to increase the aggregate commitment provided thereunder from
$100,000,000 to $125,000,000. Substantially all other terms and conditions of
the credit agreement remained the same.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth certain financial data, expressed as a
percentage of net revenue, from the Company's Consolidated Income Statements for
the three and six months ended June 30, 2002 and July 1, 2001.
Three Months Ended Six Months Ended
----------------------- ----------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------- ---------- ---------- ---------
Net revenue ............................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................................... 82.5 82.7 82.4 82.6
-------- ------- -------- -------
Gross profit ........................................... 17.5 17.3 17.6 17.4
Selling, general and administrative .................... 9.8 10.8 10.1 11.1
Research and development ............................... 1.2 1.3 1.3 1.2
Amortization of intangible assets ...................... -- 0.6 -- 0.6
-------- ------- -------- -------
Operating income ....................................... 6.5% 4.6% 6.2% 4.5%
======== ======= ======== =======
Net income ............................................. 3.8% 1.9% 3.4% 1.8%
======== ======= ======== =======
For reporting purposes, the operations of Sypris Electronics, Sypris
Test & Measurement and Sypris Data Systems are included in the Electronics
Group, and Sypris Technologies' operations are included in the Industrial Group.
Segment discussion is included in the following discussion and analysis of our
consolidated results of operations.
Net Revenue. Net revenue was $73.5 million for the second quarter of
2002, an increase of $10.3 million, or 16.4%, from $63.2 million for the second
quarter of 2001. Net revenue was $136.0 million for the first six months of
2002, an increase of $14.8 million, or 12.3%, from $121.2 million for the first
six months of 2001. Backlog at June 30, 2002 was $161.8 million, an increase of
$19.5 million from $142.3 million at July 1, 2001. Backlog for our Electronics
Group and Industrial Group at June 30, 2002 was $115.2 million and $46.6
million, respectively.
Net revenue for our Electronics Group for the second quarter of 2002
was $49.3 million, a decrease of $4.2 million, or 7.8%, from $53.5 million for
the second quarter of 2001. Net revenue for our Electronics Group for the first
six months of 2002 was $93.4 million, a decrease of $10.2 million, or 9.8%, from
$103.6 million for the first six months of 2001. Net revenue from manufacturing
services decreased $4.7 million and $6.8 million in the second quarter and first
six months of 2002, respectively, primarily due to the completion of certain
contracts with aerospace and defense customers during 2001. Although we began
production on new contract awards during the second half of 2001 and the first
quarter of 2002, revenue derived from the new contracts only partially offset
the volume decline attributable to the completion of the mature contracts. Net
revenue from other outsourced services decreased $1.0 million and $2.9 million
in the second quarter and first six months of 2002, respectively, due to weak
economic conditions and a slowdown in the commercial avionics market that
negatively impacted our customers' demand for test and measurement services. We
also divested a test facility in the third quarter of 2001, which accounted for
net revenue of $1.7 million in the first six months of 2001. Net revenue from
product sales increased $1.5 million in the second quarter of 2002, primarily
due to increased sales quantities of data systems products; however, due to low
product sales in the first quarter, net revenue for the comparable six month
periods decreased $0.5 million. Production schedules for the new manufacturing
services contracts with our aerospace and defense customers combined with
economic
9
pressures on our customers for other outsourced services is expected to keep
revenue levels at or below comparable prior periods through the fourth quarter
of 2002.
Net revenue for our Industrial Group for the second quarter of 2002 was
$24.2 million, an increase of $14.5 million, or 150.3%, from $9.7 million for
the second quarter of 2001. Net revenue for our Industrial Group for the first
six months of 2002 was $42.6 million, an increase of $25.0 million, or 142.1%,
from $17.6 million for the first six months of 2001. The contract with Dana
Corporation, which began in the second quarter of 2001 for fully machined,
heavy-duty truck axle shafts and other drive train components, generated
outsourced services revenue of $11.3 million and $19.5 million for the second
quarter and first six months of 2002, respectively, as compared to $2.7 million
for the comparable periods of 2001. Excluding the Dana contract, our Industrial
Group's net revenue increased $5.9 million and $8.2 million for the second
quarter and first six months of 2002, respectively, over the comparable prior
year periods. The increase in net revenue, excluding the Dana contract, was
primarily due to increased production volume for a new contract under which we
began supplying light axle shafts to Visteon Corporation for the Ford F-150,
F-250, F-350 and Ranger series pickup trucks, Expedition, Mustang GT, and the
Lincoln Navigator.
Gross Profit. Gross profit for the second quarter of 2002 was $12.9
million, an increase of $2.0 million, or 18.0%, from $10.9 million for the
second quarter of 2001. Gross profit for the first six months of 2002 was $24.0
million, an increase of $2.9 million, or 13.9%, from $21.1 million for the first
six months of 2001. Gross margin for the second quarter of 2002 increased to
17.5% from 17.3% for the second quarter of 2001. Gross margin for the first six
months of 2002 increased to 17.6% from 17.4% for the first six months of 2001.
Gross profit for our Electronics Group for the second quarter of 2002 was
$9.0 million, a decrease of $0.7 million, or 7.7%, from $9.7 million for the
second quarter of 2001. Gross profit for our Electronics Group for the first six
months of 2002 was $17.7 million, a decrease of $1.4 million, or 7.1%, from
$19.1 million for the first six months of 2001. The reduction in sales volume
for manufacturing and other technical services accounted for a $1.0 million
decrease in second quarter gross profit, which was partially offset by a $0.3
million increase attributable to higher product sales. Cost reductions in
anticipation of the expected decline in sales volume and improved manufacturing
efficiencies have contributed to an increase in gross margin for manufacturing
and other technical services for the comparable six-month periods and partly
offset the impact of the decline in volume on gross profit, resulting in a $0.9
million decrease in gross profit. Product sales decreased for the comparable
six-month periods and, when combined with reduced gross margin, yielded a $0.5
million decrease in gross profit.
Gross profit for our Industrial Group for the second quarter of 2002 was
$3.9 million, an increase of $2.7 million or 236% from $1.2 million for the
second quarter of 2001. Gross profit for our Industrial Group for the first six
months of 2002 was $6.3 million, an increase of $4.3 million or 213% from $2.0
million for the first six months of 2001. The increase in gross profit was
attributable to our revenue growth in the heavy-duty truck market resulting
primarily from the Dana contract. Start-up costs and manufacturing
inefficiencies related to our initial production under the Visteon contract
limited the profit contribution from this new business. We anticipate
profitability will improve during the second half of 2002 as we implement
improvements to our manufacturing processes that are expected to reduce costs on
the Visteon contract.
Selling, General and Administrative. Selling, general and administrative
expense for the second quarter of 2002 was $7.2 million, or 9.8% of net revenue,
as compared to $6.8 million, or 10.8% of net revenue for the second quarter of
2001. Selling, general and administrative expense for the first six months of
2002 was $13.7 million, or 10.1% of net revenue, as compared to $13.4 million,
or 11.1% of net revenue for the first six months of 2001. The increase in
selling, general and administrative expense
10
was primarily attributable to additional management and administrative
infrastructure to support the growth in our Industrial Group, partially offset
by reduced selling expenses of our Electronics Group.
Research and Development. Research and development expense for the second
quarter of 2002 was $0.9 million, or 1.2% of net revenue, as compared to $0.8
million, or 1.3% of net revenue for the second quarter of 2001. Research and
development expense for the first six months of 2002 was $1.8 million, or 1.3%
of net revenue, as compared to $1.5 million, or 1.2% of net revenue for the
first six months of 2001. The increase in research and development expense was
attributable to our Electronics Group and was related to new product releases
for the data systems product lines.
Amortization of Intangible Assets. Amortization of intangible assets for
the first six months of 2002 was $0.1 million as compared to $0.4 million and
$0.7 million for the second quarter and first six months of 2001, respectively.
Amortization of goodwill and indefinite lived intangible assets ceased when we
adopted SFAS No. 142 effective January 1, 2002.
Interest Expense, Net. Interest expense for the second quarter of 2002
was $0.7 million, as compared to $1.1 million for the second quarter of 2001.
Interest expense for the first six months of 2002 was $1.7 million, as compared
to $2.2 million for the first six months of 2001. The decrease in interest
expense for the comparable periods reflects the repayment of debt with proceeds
from our public stock offering combined with a reduction in interest rates. Our
weighted average debt outstanding decreased to approximately $42.3 million for
the second quarter of 2002 from approximately $71.9 million for the second
quarter of 2001. Our weighted average debt outstanding decreased to
approximately $64.8 million for the first six months of 2002 from approximately
$67.6 million for the first six months of 2001. The weighted average interest
rate for the second quarter of 2002 was approximately 5.6% as compared to
approximately 7.7% for the prior period. The weighted average interest rate for
the first six months of 2002 was approximately 5.3% as compared to approximately
8.5% for the prior period. There was no capitalized interest in 2002 as compared
to $0.3 million and $0.7 million for the second quarter and first six months of
2001, respectively.
Income Taxes. Income tax expense was $1.3 million for the second quarter
of 2002 as compared to $0.6 million for the second quarter of 2001. Income tax
expense was $2.2 million for the first six months of 2002 as compared to $1.2
million for the first six months of 2001. The effective tax rate for the first
six months of 2002 was 32.0% as compared to 34.6% for the first six months of
2001. The lower effective tax rate for the first six months of 2002 was
principally due to tax credits and state income tax benefits that we expect to
realize during 2002.
Liquidity, Capital Resources and Financial Condition
Net cash provided by operating activities was $8.4 million for the first
six months of 2002, as compared to $6.6 million for the first six months of
2001. Accounts receivable increased by $4.2 million during the first six months
of 2002, primarily due to second quarter shipments on the Dana and Visteon
contracts and product sales for the Electronics Group. Inventory decreased by
$1.0 million during the first six months of 2002, reflecting inventory
reductions attributable to lower sales volume in the Electronics Group partially
offset by an increase in the Industrial Group's inventory to support the revenue
growth. Accounts payable increased by $0.9 million, excluding the impact of open
accounts payable at the end of the second quarter of 2002 and at December 31,
2001 related to capital expenditures. Accrued liabilities decreased $1.7 million
during the first six months of 2002, primarily due to the timing of payments
related to certain employee compensation and benefit programs.
Net cash used in investing activities was $14.7 million for the first six
months of 2002 as compared to $24.8 million for the first six months of 2001.
Capital expenditures for our Electronics Group and Industrial Group totaled $3.9
million and $10.5 million, respectively, for the first six months
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of 2002. Capital expenditures for our Electronics Group were principally
comprised of manufacturing, assembly and test equipment. Our Industrial Group's
capital expenditures included new forging and machining equipment to increase
and expand the range of production capabilities. The Industrial Group's
acquistion of certain assets related to the Dana contract for $11.5 million was
included in investing activities for the first six months of 2001.
Net cash provided by financing activities was $8.7 million for the first
six months of 2002 as compared to $17.8 million for the first six months of
2001. We received net proceeds of $55.7 million for our public stock offering
during March and April 2002, $52.5 million of which has been used to reduce debt
through June 30, 2002.
We had total availability for borrowings and letters of credit under the
revolving credit facility of $59.9 million at June 30, 2002, which, when
combined with the cash balance of $15.6 million, provides for total cash and
borrowing capacity of $75.5 million. Our borrowing capacity was increased by
$25.0 million in July 2002, as we agreed with our bank group to raise maximum
borrowings on the revolving credit facility from $100.0 million to $125.0
million. All other terms of the credit agreement remained substantially the
same. Borrowings under the revolving credit facility may be used to finance
working capital requirements, acquisitions and for general corporate purposes,
including capital expenditures. Most acquisitions require the approval of our
bank group.
Our principal commitments at June 30, 2002 consisted of repayments of
borrowings under the credit agreement and obligations under operating leases for
certain of our real property and equipment. We also had purchase commitments
totaling approximately $3.4 million at June 30, 2002, primarily for
manufacturing equipment.
We believe that sufficient resources will be available to satisfy our
cash requirements for at least the next twelve months. Cash requirements for
periods beyond the next twelve months depend on our profitability, ability to
manage working capital requirements and rate of growth. If we make significant
acquisitions or if working capital and capital expenditure requirements exceed
expected levels during the next twelve months or in subsequent periods, we may
require additional external sources of capital. There can be no assurance that
any additional required financing will be available through bank borrowings,
debt or equity financings or otherwise, or that if such financing is available,
it will be available on terms acceptable to us. If adequate funds are not
available on acceptable terms, our business, results of operations and financial
condition could be adversely affected.
Forward-looking Statements
This Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Similar forward-looking
statements are made periodically in reports to the Securities and Exchange
Commission, press releases, reports and documents and in written and oral
presentations to investors, stockholders, analysts and others, regarding future
results or expected developments. Words such as "anticipates," "believes,"
"estimates," "expects," "is likely," "predicts," and variations of such words
and similar expressions are intended to identify such forward-looking
statements. Although we believe that our expectations are based on reasonable
assumptions, we cannot assure that the expectations contained in such statements
will be achieved. Such statements involve risks and uncertainties which may
cause actual future activities and results of operations to be materially
different from those suggested in this report, including, among others: our
dependence on our current management; the risks and uncertainties present in our
business; business conditions and growth in the general economy and the
electronics and industrial markets served by us; competitive factors and price
pressures; availability of third party component parts at reasonable prices;
inventory risks due to shifts in market demand and/or price erosion of purchased
components; changes in product mix; cost and yield issues associated with our
manufacturing facilities; our ability to successfully manage growth; as well as
12
other factors described elsewhere in this report and in our other filings with
the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
On July 26, 2001, we entered into interest rate swap agreements with
three banks that effectively convert a portion of our variable rate debt to a
fixed rate basis through July 2003. We entered into interest rate swap
agreements as a means to reduce the impact of interest rate changes on future
interest expense. Approximately 75% ($30.0 million) of our outstanding debt was
covered by the interest rate swap agreements at June 30, 2002. We are exposed to
financial market risks, including changes in interest rates and foreign currency
exchange rates. Excluding the borrowings included in the interest rate swap
agreements, all other borrowings under our credit agreement bear interest at a
variable rate based on the prime rate, the London Interbank Offered Rate, or
certain alternative short-term rates, plus a margin (1.25% at June 30, 2002)
based upon our leverage ratio. An increase in interest rates of 100 basis points
would result in additional interest expense of approximately $0.1 million on an
annualized basis, based upon our debt outstanding at June 30, 2002. The vast
majority of our transactions are denominated in U.S. dollars; as such,
fluctuations in foreign currency exchange rates have historically had little
impact on us. Inflation has not been a significant factor in our operations in
any of the periods presented, and it is not expected to affect operations in the
near future.
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Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 7, 2002 in
Louisville, Kentucky. A proposal to amend Article Sixth of the Company's
Certificate of Incorporation to create a classified Board of Directors was
approved by a vote of the majority of the shares of the Company's common stock
represented at the meeting: 8,753,073 shares were voted in favor of the
proposal; 685,560 were voted against; and 1,361 abstained. Thereafter, at the
meeting, stockholders elected a classified Board of Directors as follows:
Votes in Votes
Director Favor Withheld
Class I (initial term of one year):
Henry F. Frigon ......................... 9,056,702 534,124
Robert E. Gill .......................... 9,056,702 534,124
William L. Healey ....................... 9,056,702 534,124
Class II (initial term of two years):
R. Scott Gill ........................... 9,056,702 534,124
Roger W. Johnson ........................ 9,011,852 578,974
Robert Sroka ............................ 8,789,127 801,699
Class III (initial term of three years):
Jeffrey T. Gill ......................... 9,056,702 534,124
Sidney R. Petersen ...................... 9,012,352 578,474
A proposal to approve amending Article Fifth of the Company's Certificate
of Incorporation to increase the number of shares of authorized common stock
from 20,000,000 shares to 30,000,000 shares was approved by a vote of the
majority of the shares of the Company's common stock represented at the meeting:
9,579,224 shares were voted in favor of the proposal; 10,483 were voted against;
and 1,119 abstained.
A proposal to approve amending Article Eighth of the Company's
Certificate of Incorporation to eliminate stockholder action by written consent
and increase the percentage of stockholders required to call a special meeting
was approved by a vote of the majority of the shares of the Company's common
stock represented at the meeting: 8,795,421 shares were voted in favor of the
proposal; 643,212 were voted against; and 1,361 abstained.
A proposed amendment of the Company's 1994 Stock Option Plan for Key
Employees to increase the number of shares of common stock available for
issuance under the plan from 2,500,000 shares to 4,000,000 shares was approved
by a vote of the majority of the shares of the Company's common stock
represented at the meeting: 9,103,591 shares were voted in favor of the
proposal; 329,662 were voted against; and 6,741 abstained.
A proposed amendment of the Company's Independent Directors' Stock Option
Plan to increase the number of shares of common stock available for issuance
under the plan from 500,000 shares to 750,000 shares was approved by a vote of
the majority of the shares of the Company's common stock represented at the
meeting: 8,850,024 shares were voted in favor of the proposal; 582,467 were
voted against; and 7,503 abstained.
The total number of shares of common stock outstanding as of March 19, 2002, the
record date of the Annual Meeting of Stockholders, was 9,945,953.
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Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of the Company, as amended on
May 7, 2002 (incorporated by reference to Exhibit 4.1 to
the Company's Form S-8 filed on May 9, 2002 (Registration
No. 333-87880)).
3.2 Bylaws of the Company, as amended on May 7, 2002
(incorporated by reference to Exhibit 4.2 to the Company's
Form S-8 filed on May 9, 2002 (Registration No.
333-87880)).
10.22 Sypris Solutions, Inc. 1994 Stock Option Plan for Key
Employees as Amended and Restated effective February 26,
2002 (incorporated by reference to Exhibit 4.5 to the
Company's Form S-8 filed on May 9, 2002 (Registration No.
333-87880)).
10.23 Sypris Solutions, Inc. Independent Directors' Stock Option
Plan as Amended and Restated effective February 26, 2002
(incorporated by reference to Exhibit 4.5 to the Company's
Form S-8 filed on May 9, 2002 (Registration No.
333-87882)).
10.24 Sypris Solutions, Inc. Independent Directors Compensation
Program Amended and Restated on May 7, 2002, dated
September 1, 1995.
10.25 2002B Amendment to Loan Documents between Bank One,
Kentucky, NA, Sypris Solutions, Inc., Sypris Test &
Measurement, Inc., Sypris Technologies, Inc., Sypris
Electronics, LLC, Sypris Data Systems, Inc. and Sypris
Technologies Marion, LLC dated July 3, 2002.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the three months ended
June 30, 2002.
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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: July 29, 2002 By: /s/ David D. Johnson
------------------------ ---------------------------------
(David D. Johnson)
Vice President & Chief Financial
Officer
Date: July 29, 2002 By: /s/ Anthony C. Allen
------------------------ ---------------------------------
(Anthony C. Allen)
Vice President, Controller & Chief
Accounting Officer
16