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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
September 29, 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 October 22, 2002, the Registrant had 14,154,358 shares of Common Stock
outstanding.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Income Statements for the Three and Nine
Months Ended September 29, 2002 and September 30, 2001 ........... 2
Consolidated Balance Sheets at September 29, 2002 and
December 31, 2001 ................................................ 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 29, 2002 and September 30, 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
Item 4. Controls and Procedures ........................................... 13
Part II. Other Information
Item 1. Legal Proceedings ................................................. 14
Item 6. Exhibits and Reports on Form 8-K .................................. 14
Signatures ........................................................................... 15
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 Nine Months Ended
---------------------------- ----------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Net revenue:
Outsourced services ...................... $ 59,102 $ 54,246 $ 172,845 $ 152,510
Products ................................. 11,655 10,982 33,954 33,905
----------- ----------- ----------- -----------
Total net revenue ...................... 70,757 65,228 206,799 186,415
Cost of sales:
Outsourced services ...................... 49,320 47,106 146,689 132,588
Products ................................. 7,463 7,059 22,125 21,686
----------- ----------- ----------- -----------
Total cost of sales .................... 56,783 54,165 168,814 154,274
----------- ----------- ----------- -----------
Gross profit ........................... 13,974 11,063 37,985 32,141
Selling, general and administrative ......... 7,522 6,347 21,224 19,740
Research and development .................... 773 874 2,536 2,378
Amortization of intangible assets ........... 21 341 75 1,033
----------- ----------- ----------- -----------
Operating income ....................... 5,658 3,501 14,150 8,990
Interest expense, net ....................... 470 1,021 2,212 3,223
Other income, net ........................... (9) (248) (69) (367)
----------- ----------- ----------- -----------
Income before income taxes ............. 5,197 2,728 12,007 6,134
Income tax expense .......................... 1,663 968 3,843 2,146
----------- ----------- ----------- -----------
Net income ............................. $ 3,534 $ 1,760 $ 8,164 $ 3,988
=========== =========== =========== ===========
Earnings per share:
Basic .................................. $ 0.25 $ 0.18 $ 0.64 $ 0.41
Diluted ................................ $ 0.24 $ 0.18 $ 0.61 $ 0.40
Cash dividends per share .................... $ 0.03 $ -- $ 0.03 $ --
Weighted average shares outstanding:
Basic .................................. 14,121 9,852 12,763 9,791
Diluted ................................ 14,621 10,001 13,373 9,898
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)
September 29, December 31,
2002 2001
------------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents ................................................... $ 15,352 $ 13,232
Accounts receivable, net .................................................... 40,723 39,758
Inventory, net .............................................................. 61,127 60,574
Other current assets ........................................................ 8,322 7,991
------------- ------------
Total current assets ...................................................... 125,524 121,555
Property, plant and equipment, net ............................................. 73,415 70,452
Intangible assets, net ......................................................... 15,851 15,926
Other assets ................................................................... 4,633 3,511
------------- ------------
$ 219,423 $ 211,444
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................................ $ 29,882 $ 26,828
Accrued liabilities ......................................................... 19,491 19,902
Current portion of long-term debt ........................................... -- 7,500
------------- ------------
Total current liabilities ................................................. 49,373 54,230
Long-term debt ................................................................. 30,000 80,000
Other liabilities .............................................................. 5,344 7,094
------------- ------------
Total liabilities ......................................................... 84,717 141,324
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;
14,130,358 and 9,898,675 shares issued and outstanding in 2002 and
2001, respectively ........................................................ 141 99
Additional paid-in capital .................................................. 82,301 25,490
Retained earnings ........................................................... 54,166 46,427
Accumulated other comprehensive income (loss) ............................... (1,902) (1,896)
------------- ------------
Total stockholders' equity ................................................ 134,706 70,120
------------- ------------
$ 219,423 $ 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)
Nine Months Ended
-----------------------------
September 29, September 30,
2002 2001
------------- -------------
(Unaudited)
Cash flows from operating activities:
Net income .......................................................... $ 8,164 $ 3,988
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................... 8,367 7,446
Other noncash charges ............................................ 873 403
Changes in operating assets and liabilities:
Accounts receivable ............................................ (1,186) (5,887)
Inventory ...................................................... (1,029) (3,213)
Other assets ................................................... (358) (1,310)
Accounts payable ............................................... 7,656 4,529
Accrued liabilities ............................................ (1,938) 134
------------- -------------
Net cash provided by operating activities ..................... 20,549 6,090
Cash flows from investing activities:
Capital expenditures ................................................ (16,891) (20,581)
Purchase of the net assets of acquired entities ..................... -- (11,486)
Proceeds from sale of assets ........................................ 234 1,416
Changes in nonoperating assets and liabilities ...................... (798) (727)
------------- -------------
Net cash used in investing activities ......................... (17,455) (31,378)
Cash flows from financing activities:
Net (decrease) increase in debt under revolving credit agreements ... (57,500) 23,000
Proceeds from issuance of common stock .............................. 56,526 511
------------- -------------
Net cash (used in) provided by financing activities ........... (974) 23,511
------------- -------------
Net increase (decrease) in cash and cash equivalents ................... 2,120 (1,777)
Cash and cash equivalents at beginning of period ....................... 13,232 14,674
------------- -------------
Cash and cash equivalents at end of period ............................. $ 15,352 $ 12,897
============= =============
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 nine
months ended September 29, 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 Nine Months Ended
----------------------------- ----------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
Shares used to compute basic earnings
per share ...................................... 14,121 9,852 12,763 9,791
Dilutive effect of stock options ................. 500 149 610 107
------------- ------------- ------------- -------------
Shares used to compute diluted
earnings per share ............................. 14,621 10,001 13,373 9,898
============= ============ ============= =============
5
(4) Inventory
Inventory consists of the following (in thousands):
September 29, December 31,
2002 2001
------------- ------------
(Unaudited)
Raw materials ......................................................... $ 15,361 $ 19,003
Work in process ....................................................... 14,280 9,661
Finished goods ........................................................ 4,338 5,450
Costs relating to long-term contracts and programs, net of amounts
attributed to revenue recognized to date ............................ 35,613 37,908
Progress payments related to long-term contracts and programs ......... (3,079) (6,540)
LIFO reserve .......................................................... (1,092) (987)
Reserve for excess and obsolete inventory ............................. (4,294) (3,921)
------------- ------------
$ 61,127 $ 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 nine months ended September 29, 2002 and September 30, 2001 (in thousands):
Three Months Ended Nine Months Ended
--------------------------- -----------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
Net revenue from unaffiliated customers:
Electronics Group ........................ $ 46,341 $ 50,919 $ 139,714 $ 154,480
Industrial Group ......................... 24,416 14,309 67,085 31,935
------------- ------------- ------------- -------------
$ 70,757 $ 65,228 $ 206,799 $ 186,415
============= ============= ============= =============
Gross profit:
Electronics Group ........................ $ 10,230 $ 9,477 $ 27,935 $ 28,541
Industrial Group ......................... 3,744 1,586 10,050 3,600
------------- ------------- ------------- -------------
$ 13,974 $ 11,063 $ 37,985 $ 32,141
============= ============= ============= =============
Operating income:
Electronics Group ........................ $ 4,052 $ 3,474 $ 10,084 $ 9,577
Industrial Group ......................... 2,847 821 7,310 1,933
General, corporate and other ............. (1,241) (794) (3,244) (2,520)
------------- ------------- ------------- -------------
$ 5,658 $ 3,501 $ 14,150 $ 8,990
============= ============= ============= =============
(6) Commitments and Contingencies
The Company's Sypris Technologies subsidiary is a co-defendant in a lawsuit
arising out of an explosion at a coker plant owned by Exxon Mobil Corporation
located in Baton Rouge, Louisiana. In this lawsuit, it is alleged that a carbon
steel pipe elbow that Sypris Technologies manufactured was improperly installed
and the failure of which caused the explosion. In the third quarter of 2002, the
Company obtained a summary judgment in its favor, which is now final and
nonappealable, in a related lawsuit brought by Exxon Mobil in 1994 in state
district court in Louisiana claiming damages for destruction of the plant, which
Exxon Mobil estimated exceeded one hundred million dollars. The
6
pending 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 this action, 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 Nine Months Ended
-------------------------- ---------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Reported net income ......................... $ 3,534 $ 1,760 $ 8,164 $ 3,988
Adjustment for amortization of goodwill ..... -- 199 -- 602
----------- ----------- ----------- -----------
Adjusted net income ......................... $ 3,534 $ 1,959 $ 8,164 $ 4,590
=========== =========== =========== ===========
Basic earnings per share as reported ........ $ 0.25 $ 0.18 $ 0.64 $ 0.41
Adjustment for amortization of goodwill ..... -- 0.02 -- 0.06
----------- ----------- ----------- -----------
Adjusted basic earnings per share ........... $ 0.25 $ 0.20 $ 0.64 $ 0.47
=========== =========== =========== ===========
Diluted earnings per share as reported ...... $ 0.24 $ 0.18 $ 0.61 $ 0.40
Adjustment for amortization of goodwill ..... -- 0.02 -- 0.06
----------- ----------- ----------- -----------
Adjusted diluted earnings per share ......... $ 0.24 $ 0.20 $ 0.61 $ 0.46
=========== =========== =========== ===========
There has been no change to the carrying value of the Company's
goodwill since January 1, 2002. Goodwill at September 29, 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 and, on April 19, 2002, an additional
500,000 shares were issued through the exercise of an over-allotment option. The
shares were sold at $14.50 per share and generated proceeds, after underwriting
discounts and expenses, of approximately $55,659,000. Proceeds from the offering
have been used to repay debt of $52,500,000 during the period through September
29, 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 nine months ended
September 29, 2002 was 32.0%. 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
increased from $728,000 at December 31, 2001 to $737,000 at September 29, 2002
and was included in other liabilities on the consolidated balance sheet. The
change in fair market value, net of tax of $3,000, was recorded as other
comprehensive loss during the nine months ended September 29, 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) Long-Term Debt
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.
(13) Cash Dividend
On September 12, 2002, the Company's Board of Directors declared an
initial quarterly cash dividend of $0.03 (three cents) per common share
outstanding. The dividend is payable on November 15, 2002 to shareholders of
record as of October 25, 2002. A dividend payable of $425,000 is included in
accrued liabilities as of September 29, 2002 in the accompanying consolidated
balance sheet.
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 nine months ended September 29, 2002 and September 30, 2001.
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net revenue:
Electronics Group ................................ 65.5% 78.1% 67.6% 82.9%
Industrial Group ................................. 34.5 21.9 32.4 17.1
------------- ------------- ------------- -------------
Total net revenue ................................ 100.0 100.0 100.0 100.0
Cost of sales ....................................... 80.3 83.0 81.6 82.8
------------- ------------- ------------- -------------
Gross profit ........................................ 19.7 17.0 18.4 17.2
Selling, general and administrative ................. 10.6 9.7 10.3 10.6
Research and development ............................ 1.1 1.4 1.2 1.3
Amortization of intangible assets ................... -- 0.5 0.1 0.5
------------- ------------- ------------- -------------
Operating income .................................... 8.0% 5.4% 6.8% 4.8%
============= ============= ============= =============
Net income .......................................... 5.0% 2.7% 3.9% 2.1%
============= ============= ============= =============
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 $70.8 million for the third quarter of 2002,
an increase of $5.6 million, or 8.5%, from $65.2 million for the third quarter
of 2001. Net revenue was $206.8 million for the first nine months of 2002, an
increase of $20.4 million, or 10.9%, from $186.4 million for the first nine
months of 2001. Backlog at September 29, 2002 was $155.5 million, an increase of
$20.2 million from $135.3 million at September 30, 2001. Backlog for our
Electronics Group and Industrial Group at September 29, 2002 was $115.5 million
and $40.0 million, respectively.
Net revenue for our Electronics Group for the third quarter of 2002 was
$46.4 million, a decrease of $4.5 million, or 9.0%, from $50.9 million for the
third quarter of 2001. Net revenue for our Electronics Group for the first nine
months of 2002 was $139.7 million, a decrease of $14.8 million, or 9.6%, from
$154.5 million for the first nine months of 2001. Net revenue from manufacturing
services decreased $3.6 million and $10.5 million in the third quarter and first
nine months of 2002, respectively, primarily due to the completion of certain
contracts with aerospace and defense customers during 2001. Net revenue from
other outsourced services decreased $1.3 million and $4.2 million in the third
quarter and first nine months of 2002, respectively, due to weak economic
conditions and a slowdown in the telecommunications and commercial avionics
markets 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 $2.5 million in the first nine months of 2001. Net
revenue from product sales increased for the second consecutive quarter,
primarily due to increased sales quantities of data systems products. Comparable
period product sales increased by $0.4 million for the third quarter and
decreased
9
$0.1 million for the nine months. Although the Electronics Group has shown a
decrease in comparable period net revenue for each of 2002's first three
quarters, and further expects a comparable period decrease in the fourth
quarter, bookings have increased 16.2% for the nine-month comparable periods.
The bookings growth is primarily from manufacturing service contracts with
aerospace and defense customers, most of which have book-to-bill cycles of up to
one year. We expect net revenue in 2003 to show year-to-year growth as shipments
on these new contracts increase, particularly during the second half of the
year.
Net revenue for our Industrial Group for the third quarter of 2002 was
$24.4 million, an increase of $10.1 million, or 70.6%, from $14.3 million for
the third quarter of 2001. Net revenue for our Industrial Group for the first
nine months of 2002 was $67.1 million, an increase of $35.2 million, or 110%,
from $31.9 million for the first nine months of 2001. The contract with Dana
Corporation, which began late in the second quarter of 2001 for fully machined,
heavy-duty truck axle shafts and other drive train components, generated
outsourced services revenue of $11.2 million and $30.8 million for the third
quarter and first nine months of 2002, respectively, as compared to $7.9 million
and $10.6 million, respectively, for the comparable periods of 2001. Excluding
the Dana contract, our Industrial Group's net revenue increased $6.8 million and
$15.0 million for the third quarter and first nine 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. We expect fourth quarter net revenue for
the Industrial Group will increase from the prior year, however, comparable
period growth is expected to slow due to a forecasted decrease in demand in the
heavy-duty truck market. The lower market conditions are expected to continue
beyond the fourth quarter, with improvement anticipated during the second half
of 2003.
Gross Profit. Gross profit for the third quarter of 2002 was $14.0 million,
an increase of $2.9 million, or 26.3%, from $11.1 million for the third quarter
of 2001. Gross profit for the first nine months of 2002 was $38.0 million, an
increase of $5.9 million, or 18.2%, from $32.1 million for the first nine months
of 2001. Gross margin for the third quarter of 2002 increased to 19.7% from
17.0% for the third quarter of 2001. Gross margin for the first nine months of
2002 increased to 18.4% from 17.2% for the first nine months of 2001.
Gross profit for our Electronics Group for the third quarter of 2002 was
$10.2 million, an increase of $0.7 million, or 7.9%, from $9.5 million for the
third quarter of 2001. Gross profit for our Electronics Group for the first nine
months of 2002 was $27.9 million, a decrease of $0.6 million, or 2.1%, from
$28.5 million for the first nine months of 2001. Cost reductions and improved
manufacturing efficiencies produced increased gross margins for manufacturing
and other technical services during the comparable third quarter and nine-month
periods. This margin improvement yielded an increase in gross profit of $0.8
million for the third quarter and no change for the first nine months, during
periods in which the associated net revenue declined by $4.9 million and $14.7
million, respectively. Gross profit from product sales declined by $0.1 million
and $0.6 million during the third quarter and first nine months, respectively,
as compared to the year-earlier periods, primarily due to product mix.
Gross profit for our Industrial Group for the third quarter of 2002 was
$3.8 million, an increase of $2.2 million or 136% from $1.6 million for the
third quarter of 2001. Gross profit for our Industrial Group for the first nine
months of 2002 was $10.1 million, an increase of $6.5 million or 179% from $3.6
million for the first nine months of 2001. The increase in gross profit was
attributable to 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. Certain improvements to
our manufacturing processes have been implemented and will continue as we
increase production on this contract through the fourth quarter and
10
into 2003. These improvements are expected to reduce production costs to our
target level and thereby increase gross profit.
Selling, General and Administrative. Selling, general and
administrative expense for the third quarter of 2002 was $7.5 million, or 10.6%
of net revenue, as compared to $6.3 million, or 9.7% of net revenue for the
third quarter of 2001. Selling, general and administrative expense for the first
nine months of 2002 was $21.2 million, or 10.3% of net revenue, as compared to
$19.7 million, or 10.6% of net revenue for the first nine months of 2001. The
increase in selling, general and administrative expense 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
third quarter of 2002 was $0.8 million, or 1.1% of net revenue, as compared to
$0.9 million, or 1.3% of net revenue for the third quarter of 2001. Research and
development expense for the first nine months of 2002 was $2.5 million, or 1.2%
of net revenue, as compared to $2.4 million, or 1.3% of net revenue for the
first nine months of 2001. Our research and development spending in 2002 and
2001 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 goodwill and
indefinite lived intangible assets ceased when we adopted SFAS No. 142 effective
January 1,2002. Amortization of intangible assets for the third quarter and
first nine months of 2002 was $21,000 and $75,000, respectively. Amortization of
intangible assets for the third quarter and first nine months of 2001 was $0.3
million and $1.0 million, respectively.
Interest Expense, Net. Interest expense for the third quarter of 2002
was $0.5 million, as compared to $1.0 million for the third quarter of 2001.
Interest expense for the first nine months of 2002 was $2.2 million, as compared
to $3.2 million for the first nine 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 $34.0 million for
the third quarter of 2002 from approximately $80.9 million for the third quarter
of 2001. Our weighted average debt outstanding decreased to approximately $54.5
million for the first nine months of 2002 from approximately $72.1 million for
the first nine months of 2001. The weighted average interest rate for the third
quarter of 2002 was approximately 6.0% as compared to approximately 6.4% for the
prior period. The weighted average interest rate for the first nine months of
2002 was approximately 5.5% as compared to approximately 7.7% for the prior
period. There was no capitalized interest in 2002 as compared to $0.3 million
and $1.0 million for the third quarter and first nine months of 2001,
respectively.
Income Taxes. Income tax expense was $1.7 million for the third quarter
of 2002 as compared to $1.0 million for the third quarter of 2001. Income tax
expense was $3.8 million for the first nine months of 2002 as compared to $2.1
million for the first nine months of 2001. The effective tax rate for the first
nine months of 2002 was 32.0% as compared to 35.0% for the first nine months of
2001. The lower effective tax rate for the first nine 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 $20.5 million for the
first nine months of 2002, as compared to $6.1 million for the first nine months
of 2001. Accounts receivable increased by $1.2 million during the first nine
months of 2002, primarily due to third quarter shipments on the Dana and Visteon
contracts and product sales for the Electronics Group. Inventory increased by
$1.0 million during the first nine months of 2002, primarily to support the
Industrial Group's revenue growth. Accounts payable
11
increased by $7.7 million, excluding the impact of open accounts payable at the
end of the third quarter of 2002 and at December 31, 2001 related to capital
expenditures. The increase in accounts payable relates to the timing of payments
for material purchases for the Industrial Group. Accrued liabilities decreased
$1.9 million during the first nine 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 $17.5 million for the first
nine months of 2002 as compared to $31.4 million for the first nine months of
2001. Capital expenditures for our Electronics Group and Industrial Group
totaled $5.1 million and $11.7 million, respectively, for the first nine months
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
acquisition of certain assets related to the Dana contract for $11.5 million was
included in investing activities for the first nine months of 2001.
Net cash used in financing activities was $1.0 million for the first
nine months of 2002 as compared to net cash provided by financing activities of
$23.5 million for the first nine months of 2001. We received net proceeds of
$55.7 million for our public stock offering during March and April 2002. Prior
to the offering, we reduced debt by $5.0 million and proceeds from the offering
have been used to reduce debt by an additional $52.5 million through September
29, 2002. On September 12, 2002, our Board of Directors declared an initial
quarterly cash dividend of $0.03 (three cents) per common share outstanding. The
dividend is payable on November 15, 2002 to shareholders of record as of October
25, 2002.
We had total availability for borrowings and letters of credit under
the revolving credit facility of $94.9 million at September 29, 2002, which,
when combined with the cash balance of $15.4 million, provides for total cash
and borrowing capacity of $110.3 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 September 29, 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 $1.3 million at September 29, 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
12
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, including changes in laws or regulations; 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; the effect (including possible increases in the
cost of doing business) resulting from future war and terrorists activities or
political uncertainties; as well as 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. All of our outstanding debt was covered by the interest rate
swap agreements at September 29, 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 (1.0% at September 29, 2002) based
upon our leverage ratio. Since all debt outstanding at September 29, 2002 was
covered under the interest rate swap agreements, an increase in interest rates
would not affect interest expense. 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.
Item 4. Disclosure Controls
Within the 90 days prior to the filing date of this quarterly report,
an evaluation was performed under the supervision and with the participation of
the Company's management, including the President and Chief Executive Officer
(the "CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the evaluation.
13
Part II. Other Information
Item 1. Legal Proceedings
On July 25, 2002, the Company obtained a summary judgment in its favor,
which is now final and nonappealable, in the previously disclosed lawsuit filed
against the Company by Exxon Mobil in state district court in Louisiana. That
suit involved a claim for damages potentially exceeding one hundred million
dollars for the explosion of a coker plant in Baton Rouge, Louisiana. The
Company remains a party to a previously disclosed federal court class action
suit related to this matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
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 (incorporated
by reference to Exhibit 10.25 to the Company's Form 10-Q
filed on July 29, 2002).
99.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the three months ended
September 29, 2002.
14
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: October 30, 2002 By: /s/ David D. Johnson
------------------------ ------------------------------
(David D. Johnson)
Vice President & Chief
Financial Officer
Date: October 30, 2002 By: /s/ Anthony C. Allen
------------------------ ------------------------------
(Anthony C. Allen)
Vice President,
Controller & Chief
Accounting Officer
15
CERTIFICATIONS
I, Jeffrey T. Gill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sypris Solutions,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared,
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"), and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and,
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and,
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 30, 2002 By: /s/ Jeffrey T. Gill
------------------------ -----------------------------
Jeffrey T. Gill
President & Chief Executive
Officer
16
I, David D. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sypris Solutions,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared,
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"), and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and,
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and,
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 30, 2002 By: /s/ David D. Johnson
------------------------ ----------------------------
David D. Johnson
Vice President & Chief
Financial Officer
17