SYPRIS SOLUTIONS INC - Quarter Report: 2019 September (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
For the quarterly period ended September 29, 2019

OR

☐ Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
For the transition period from _____ to _____

 

Commission file number: 0-24020

 

SYPRIS SOLUTIONS, INC.

 

(Exact name of registrant as specified in its charter)

 

Delaware	61-1321992
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)
101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222	(502) 329-2000
(Address of principal executive	(Registrant’s telephone number,
offices) (Zip code)	including area code)

 

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

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	SYPR	NASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes  ☐ No

 

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

 

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

 

☐ Large accelerated filer	☐ Accelerated filer	☐ Non-accelerated filer	☒ Smaller reporting company
☐ Emerging growth company

 

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

 

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

 

As of November 1, 2019, the Registrant had 21,308,426 shares of common stock outstanding.

 

 

 

Table of Contents

 

Part I. Financial Information
	Item 1.	Financial Statements
		Consolidated Statements of Operations for the Three and Nine Months Ended September 29, 2019 and September 30, 2018	2
		Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 29, 2019 and September 30, 2018	3
		Consolidated Balance Sheets at September 29, 2019 and December 31, 2018	4
		Consolidated Cash Flow Statements for the Nine Months Ended September 29, 2019 and September 30, 2018	5
		Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 29, 2019 and September 30, 2018	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
	Item 4.	Controls and Procedures	25
Part II. Other Information
	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	27
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
	Item 3.	Defaults Upon Senior Securities	28
	Item 4.	Mine Safety Disclosures	28
	Item 5.	Other Information	28
	Item 6.	Exhibits	29
Signatures			30

 

 

 

		Three Months Ended								Nine Months Ended
		September 29,				September 30,				September 29,				September 30,
		2019				2018				2019				2018
		(Unaudited)								(Unaudited)
Net revenue		$	22,259			$	21,101			$	66,267			$	64,014
Cost of sales			19,933				19,899				59,092				57,847
Gross profit			2,326				1,202				7,175				6,167
Selling, general and administrative			3,148				2,942				10,206				9,261
Severance, relocation and other costs			190				274				391				1,088
Operating loss			(1,012	)			(2,014	)			(3,422	)			(4,182	)
Interest expense, net			227				231				676				665
Other expense (income), net			286				56				(1,156	)			(1,651	)
Loss before taxes			(1,525	)			(2,301	)			(2,942	)			(3,196	)
Income tax expense			32				35				148				121
Net loss		$	(1,557	)		$	(2,336	)		$	(3,090	)		$	(3,317	)
Loss per share:
Basic		$	(0.07	)		$	(0.11	)		$	(0.15	)		$	(0.16	)
Diluted		$	(0.07	)		$	(0.11	)		$	(0.15	)		$	(0.16	)
Weighted average shares outstanding:
Basic			20,941				20,555				20,829				20,497
Diluted			20,941				20,555				20,829				20,497
Dividends declared per common share		$	0.00			$	0.00			$	0.00			$	0.00

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		Three Months Ended								Nine Months Ended
		September 29,				September 30,				September 29,				September 30,
		2019				2018				2019				2018
		(Unaudited)								(Unaudited)
Net loss		$	(1,557	)		$	(2,336	)		$	(3,090	)		$	(3,317	)
Other comprehensive (loss) income
Foreign currency translation adjustments			(238	)			395				(26	)			297
Comprehensive loss		$	(1,795	)			(1,941	)		$	(3,116	)		$	(3,020	)

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		September 29,				December 31,
		2019				2018
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	7,053			$	10,704
Accounts receivable, net			8,668				9,881
Inventory, net			20,566				18,584
Other current assets			4,672				4,755
Assets held for sale			1,288				1,474
Total current assets			42,247				45,398
Property, plant and equipment, net			13,262				14,655
Operating lease right-of-use assets			7,123				0
Other assets			1,599				1,515
Total assets		$	64,231			$	61,568
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	10,098			$	13,427
Accrued liabilities			16,557				14,965
Operating lease liabilities, current portion			820				0
Finance lease obligations, current portion			666				593
Total current liabilities			28,141				28,985
Note payable – related party			6,460				6,449
Operating lease liabilities, net of current portion			7,131				0
Finance lease obligations, net of current portion			2,535				2,804
Other liabilities			6,552				8,496
Total liabilities			50,819				46,734
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 975,150 shares authorized; no shares issued			0				0
Series A preferred stock, par value $0.01 per share, 24,850 shares authorized; no shares issued			0				0
Common stock, non-voting, par value $0.01 per share, 10,000,000 shares authorized; no shares issued			0				0
Common stock, par value $0.01 per share, 30,000,000 shares authorized; 21,324,618 shares issued and 21,308,426 outstanding in 2019 and 21,414,374 shares issued and 21,398,182 outstanding in 2018			214				214
Additional paid-in capital			154,640				154,388
Accumulated deficit			(116,574	)			(114,926	)
Accumulated other comprehensive loss			(24,868	)			(24,842	)
Treasury stock, 16,192 shares in 2019 and 2018			0				0
Total stockholders’ equity			13,412				14,834
Total liabilities and stockholders’ equity		$	64,231			$	61,568

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		Nine Months Ended
		September 29,				September 30,
		2019				2018
		(Unaudited)
Cash flows from operating activities:
Net loss		$	(3,090	)		$	(3,317	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,106				1,988
Stock-based compensation expense			389				493
Deferred loan costs recognized			11				11
Net (gain) loss on the sale of assets			(467	)			241
Insurance recovery gain			0				(2,275	)
Provision for excess and obsolete inventory			503				(125	)
Non-cash lease expense			541				0
Other noncash items			(122	)			127
Contributions to pension plans			(348	)			(77	)
Changes in operating assets and liabilities:
Accounts receivable			1,198				(2,164	)
Inventory			(2,485	)			(2,184	)
Other current assets			23				(2,681	)
Accounts payable			(3,314	)			4,007
Accrued and other liabilities			1,908				4,891
Net cash used in operating activities			(3,147	)			(1,065	)
Cash flows from investing activities:
Capital expenditures			(553	)			(1,321	)
Proceeds from sale of assets			653				1,388
Insurance proceeds for recovery of property damage, net			0				2,275
Net cash provided by investing activities			100				2,342
Cash flows from financing activities:
Principal payments on finance lease obligations			(466	)			(691	)
Indirect repurchase of shares of minimum statutory tax withholdings			(138	)			(107	)
Net cash used in financing activities			(604	)			(798	)
Net (decrease) increase in cash and cash equivalents			(3,651	)			479
Cash and cash equivalents at beginning of period			10,704				8,144
Cash and cash equivalents at end of period		$	7,053			$	8,623
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for finance lease obligations		$	269			$	0

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		Three Months Ended September 29, 2019
										Additional								Accumulated Other
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury
		Shares				Amount				Capital				Deficit				Loss				Stock
June 30, 2019 balance			21,329,708			$	214			$	154,538			$	(115,017	)		$	(24,630	)		$	0
Net income			0				0				0				(1,557	)			0				0
Foreign currency translation adjustment			0				0				0				0				(238	)			0
Noncash compensation			0				0				106				0				0				0
Retire treasury stock			(21,282	)			0				(4	)			0				0				0
September 29, 2019 balance			21,308,426			$	214			$	154,640			$	(116,574	)		$	(24,868	)		$	0

		Three Months Ended September 30, 2018
										Additional								Accumulated Other
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury
		Shares				Amount				Capital				Deficit				Loss				Stock
July 1, 2018 balance			21,398,182			$	214			$	154,099			$	(112,402	)		$	(25,649	)		$	0
Net income			0				0				0				(2,336	)			0				0
Foreign currency translation adjustment			0				0				0				0				395				0
Noncash compensation			0				0				145				0				0				0
Retire treasury stock			0				0				0				0				0				0
September 30, 2018 balance			21,398,182			$	214			$	154,244			$	(114,738	)		$	(25,254	)		$	0

		Nine Months Ended September 29, 2019
										Additional								Accumulated Other
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury
		Shares				Amount				Capital				Deficit				Loss				Stock
January 1, 2019 balance			21,398,182			$	214			$	154,388			$	(114,926	)		$	(24,842	)		$	0
Net loss			0				0				0				(3,090	)			0				0
Adoption of new accounting standards			0				0				0				1,442				0				0
Foreign currency translation adjustment			0				0				0				0				(26	)			0
Noncash compensation			60,000				0				389				0				0				0
Retire treasury stock			(149,756	)			0				(137	)			0				0				0
September 29, 2019 balance			21,308,426			$	214			$	154,640			$	(116,574	)		$	(24,868	)		$	0

		Nine Months Ended September 30, 2018
										Additional								Accumulated Other
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury
		Shares				Amount				Capital				Deficit				Loss				Stock
January 1, 2018 balance			21,422,077			$	214			$	153,858			$	(111,591	)		$	(25,551	)		$	0
Net loss			0				0				0				(3,317	)			0				0
Adoption of new accounting standards			0				0				0				170				0				0
Foreign currency translation adjustment			0				0				0				0				297				0
Noncash compensation			42,000				0				493				0				0				0
Retire treasury stock			(65,895	)			0				(107	)			0				0				0
September 30, 2018 balance			21,398,182			$	214			$	154,244			$	(114,738	)		$	(25,254	)		$	0

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(1)	Nature of Business

 

All references to “Sypris,” the “Company,” “we” or “our” include Sypris Solutions, Inc. and its wholly-owned subsidiaries. Sypris is a diversified provider of truck components, oil and gas pipeline components and aerospace and defense electronics. The Company produces a wide range of manufactured products, often under multi-year, sole-source contracts. The Company offers such products through its two business segments, Sypris Technologies, Inc. (“Sypris Technologies”) and Sypris Electronics, LLC (“Sypris Electronics”) (See Note 13).

 

 

(2)	Basis of Presentation

 

The accompanying unaudited consolidated financial statements include the accounts of Sypris Solutions, Inc. and its wholly-owned subsidiaries and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. The December 31, 2018 consolidated balance sheet data was derived from audited statements, but does not include all disclosures required by U.S. GAAP. The Company’s operations are domiciled in the United States (U.S.) and Mexico, and we serve a wide variety of domestic and international customers. All intercompany transactions and accounts have been eliminated.

 

In accordance with the Disclosure Modernization and Simplification final rule issued by the Securities and Exchange Commission (“SEC”) and effective for the Company beginning in the first quarter of 2019, a reconciliation of the changes of stockholders’ equity is presented for all periods for which the results of operations are presented.

 

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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2018 as presented in the Company’s Annual Report on Form 10-K.

 

 

(3)	Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (ASC 842). The new standard was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This standard affects any entity that enters into a lease, with some specified scope exemptions.

 

The Company adopted this update beginning on January 1, 2019 using the alternative modified retrospective transition method and will not recast comparative periods in transition to the new standard. In addition, we elected certain practical expedients which permit us to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to not reassess initial direct costs for any existing leases, and to not separate lease and nonlease components for all classes of underlying assets. We also made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet for all classes of underlying assets. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of right-of-use assets (ROU) of approximately $7,664,000 and lease liabilities of operating leases of approximately $8,549,000. The implementation decreased the accumulated deficit by $1,442,000, which was primarily due to the recognition of the remaining deferred gain related to the operating lease portion on a 2016 sale-leaseback directly into the accumulated deficit. There was no material impact to our consolidated statements of operations or cash flows as a result of the adoption of ASC 842. See Note 4 for further information regarding the impact of the adoption of ASC 842 on the Company’s financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows Topic 230: Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows with the objective of reducing existing differences in the presentation of these items. The amendments in ASU No. 2016-15 became effective for us in the first quarter of 2018 and were adopted retrospectively. The adoption of this update did not impact our consolidated financial statements.

 

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

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Entities are required to make additional disclosures, regardless of whether they elect to reclassify stranded amounts of tax effects. The Company adopted the standard effective January 1, 2019, and has elected to not reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings. The adoption of ASU 2018-02 did not have an impact on the Company’s consolidated financial statements.

 

 

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (ASU 2018-15). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.

 

 

(4)

Leases

 

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

 

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

 

 

These operating leases are included in “Operating lease right-of-use assets” on the Company’s consolidated balance sheets as of September 29, 2019, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligations to make lease payments are included in “Operating lease liabilities, current portion” and “Operating lease liabilities, net of current portion” on the Company’s consolidated balance sheets as of September 29, 2019. Based on the present value of the lease payments for the remaining lease term of the Company’s existing leases, the Company recognized right-of-use assets of approximately $7,664,000 and lease liabilities for operating leases of approximately $8,549,000 on January 1, 2019, and included adjustments for any unamortized lease incentives and prepaid and accrued rent. Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at the commencement date based on the present value of lease payments over the lease term. As of September 29, 2019, total right-of-use assets and operating lease liabilities were approximately $7,123,000 and $7,951,000, respectively.

 

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

 

The Company has entered into various short-term operating leases, primarily for office equipment with an initial term of twelve months or less. Lease payments associated with short-term leases are expensed as incurred and are not recorded on the Company’s balance sheet. The related lease expense for short-term leases was not material for the three and nine months ended September 29, 2019.

 

The following table presents information related to lease expense for the three and nine months ended September 29, 2019 (in thousands):

 

 

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

 

 

The annual future minimum lease payments as of September 29, 2019 are as follows (in thousands):

 

 

 

For the year ended December 31, 2018, and under legacy lease accounting (ASC 840), future minimum lease payments under non-cancellable leases as of December 31, 2018 were expected to be as follows:

 

 

The following table presents certain information related to lease terms and discount rates for leases as of September 29, 2019:

 

 

 

(5)	Revenue from Contracts with Customers

 

The Company recognizes revenue when it satisfies a performance obligation by transferring control of a promised product or rendering a service to a customer. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for the product or service (the “transaction price”). The Company’s transaction price in its contracts with customers is generally fixed; no payment discounts, rebates or refunds are included within its contracts. The Company also does not provide service-type warranties nor does it allow customer returns. In connection with the sale of various parts to customers, the Company is subject to typical assurance warranty obligations covering the compliance of the electronics parts produced to agreed-upon specifications (See Note 14). Customer returns, when they occur, relate to quality rework issues and are not connected to any repurchase obligation of the Company.

 

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

 

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

 

 

Our contract profit margins may include estimates of revenues for goods or services on which the customer and the Company have not reached final agreements, such as contract changes, settlements of disputed claims, and the final amounts of requested equitable adjustments permitted under the contract. These estimates are based upon management’s best assessment of the totality of the circumstances and are included in our contract profit based upon contractual provisions and our relationships with each customer.

 

The majority of our contractual arrangements with customers are for one year or less. For the remaining population of non-cancellable contracts greater than one year we had $24,263,000 of remaining performance obligations as of September 29, 2019, all of which were long-term Sypris Electronics’ contracts. We expect to recognize approximately 15% of our remaining performance obligations as revenue in 2019, 64% in 2020 and the balance thereafter.

 

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the three and nine months ended September 29, 2019 and September 30, 2018:

 

 

Contract Balances

 

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

 

Contract assets – Contract assets include unbilled amounts typically resulting from sales under contracts where revenue is recognized over time and revenue recognized exceeds the amount billed to the customer, and the right to payment is subject to conditions other than the passage of time. Contract assets are generally classified as current assets in the consolidated balance sheet. The balance of contract assets as of September 29, 2019 and December 31, 2018 were $1,214,000 and $839,000, respectively, and are included within other current assets in the accompanying consolidated balance sheets.

 

Contract liabilities – Some of the Company’s contracts within Sypris Electronics are billed as work progresses in accordance with the contract terms and conditions, either at periodic intervals or upon achievement of certain milestones. Often this results in billing occurring prior to revenue recognition resulting in contract liabilities. Additionally, the Company occasionally receives cash payments from customers in advance of the Company’s performance resulting in contract liabilities. These contract liabilities are classified as either current or long-term in the consolidated balance sheet based on the timing of when the Company expects to recognize revenue. As of September 29, 2019 and December 31, 2018, contract liabilities were $9,616,000 and $8,369,000, respectively, and are included within accrued liabilities in the consolidated balance sheets. Payments received from customers in advance of revenue recognition are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract.

 

The Company recognized revenue from contract liabilities of $2,408,000 and $5,035,000 during the three and nine months ended September 29, 2019, respectively. The Company recognized revenue from contract liabilities of $543,000 and $1,614,000 during the three and nine months ended September 30, 2018, respectively.

 

Practical expedients and exemptions

 

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

 

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

 

 

 

(6)	Exit and Disposal Activities

 

On February 21, 2017, the Board of Directors approved a modified exit or disposal plan with respect to the Broadway Plant, which included the relocation of production to other Company facilities, as needed, and/or the closure of the plant. The relocation of production was complete as of the end of 2017. The Company has relocated certain assets from the Broadway Plant to other manufacturing facilities, as needed, to serve its existing and target customer base and identified underutilized or non-core assets for disposal. Management is currently evaluating options for the real estate and any remaining assets in the Broadway Plant.

 

As a result of these initiatives, the Company recorded charges of $391,000, or $0.02 per share, and $1,088,000, or $0.05 per share, during the first nine months of 2019 and 2018, respectively, related to the transition of production from the Broadway Plant, which is included in severance, relocation and other costs in the consolidated statement of operations. All amounts incurred were recorded within Sypris Technologies. The charges for the first nine months of 2019 were primarily related to mothball costs associated with the closed facility. The charges for the first nine months of 2018 included $254,000 for equipment relocation costs and $834,000 for other costs, primarily related to mothball costs associated with the closed facility.

 

 

The Company expects to incur additional pre-tax costs of approximately $249,000 within Sypris Technologies, the majority of which is expected to be cash expenditures.

 

The following assets have been segregated and included in assets held for sale in the consolidated balance sheets (in thousands):

 

 

 

(7)	Other Expense (Income), Net

 

During the nine months ended September 29, 2019, the Company recognized a gain of $1,500,000 as a result of a settlement agreement with one of its customers to resolve various outstanding disputes between the two parties. As a result of the agreement, the customer paid the Company $1,500,000 in compensation during the three months ended September 29, 2019. Additionally, the Company recognized a net gain of $467,000 for the nine months ended September 29, 2019 related to the sale of idle assets, which was offset by pension expense of $743,000.

 

Subsequent to the transfer of production from the Broadway Plant, the primary water supply and sprinkler pipes within the facility suffered freeze damage during an extended period of extreme cold temperatures. The Company and its insurer reached a full and final settlement agreement with respect to the claim during the second quarter of 2018. During the nine months ended September 30, 2018, the Company received insurance proceeds of $2,447,000 and recognized an insurance recovery gain of $2,275,000, net of expenses incurred for claim related expenses. Additionally, the Company recognized a net loss of $241,000 related to the sale of certain idle assets and pension expense of $483,000 for the nine months ended September 30, 2018.

 

 

 

(8)	Stock-Based Compensation

 

During the nine months ended September 29, 2019, the Company granted options to purchase 691,000 shares of our common stock under a long-term incentive program. The options have a five-year term and cliff vest at three years of service. The grants did not have a significant impact on the Company’s consolidated financial statements during the three and nine months ended September 29, 2019.

 

 

(9)	Loss Per Common Share

 

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

 

Our potentially dilutive securities include potential common shares related to our stock options and restricted stock. Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted earnings per share excludes the impact of common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period. For the three and nine months ended September 29, 2019 and September 30, 2018, diluted weighted average common shares do not include the impact of any outstanding stock options and unvested compensation-related shares because the effect of these items on diluted net loss would be anti-dilutive.

 

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

 

 

 

 

(10)

Inventory

 

Inventory consists of the following (in thousands):

 

 

 

(11)	Property, Plant and Equipment

 

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

 

 

 

(12)

Debt

 

Debt outstanding consists of the following (in thousands):

 

 

(13)	Segment Data

 

The Company is organized into two business segments, Sypris Technologies and Sypris Electronics. The segments are each managed separately because of the distinctions between the products, markets, customers, technologies and workforce skills of the segments. Sypris Technologies manufactures forged and finished steel components and subassemblies, high-pressure closures and other fabricated products. Sypris Electronics is focused on circuit card and full “box build” manufacturing, high reliability manufacturing, systems assembly and integration, design for manufacturability and design to specification work. There was no intersegment net revenue recognized in any of the periods presented.

 

 

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

 

 

 

 

(14)	Commitments and Contingencies

 

The provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. The Company’s warranty liability, which is included in accrued liabilities in the accompanying condensed consolidated balance sheets as of September 29, 2019 and December 31, 2018 was $571,000 and $582,000, respectively. The Company’s warranty expense for the three and nine months ended September 29, 2019 and September 30, 2018 was not material.

 

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

 

 

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

 

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

 

The Company has various current and previously-owned facilities subject to a variety of environmental regulations. The Company has received certain indemnifications from either companies previously owning these facilities or from purchasers of those facilities. As of September 29, 2019 and December 31, 2018, no amounts were accrued for any environmental matters.

 

On December 27, 2017, the U.S. Department of Labor (the “DOL”) filed a lawsuit alleging that the Company had misinterpreted the language of the Company’s 401(k) Plans (collectively, the “Plan”). The DOL does not appear to dispute that the Company reached such interpretation in good faith after consulting with independent ERISA counsel. If the DOL’s allegations were upheld by a court, the Company could be required to make additional contributions into the accounts of its Plan participants. The Company regards the DOL’s allegations to be without merit and is continuing to vigorously defend the matter.

 

As of September 29, 2019, the Company had outstanding purchase commitments of approximately $9,276,000, primarily for the acquisition of inventory.

 

 

(15)	Income Taxes

 

The provision for income taxes includes federal, state, local and foreign taxes. The Company’s effective tax rate varies from period to period due to the proportion of foreign and domestic pre-tax income expected to be generated by the Company. The Company provides for income taxes for its domestic operations at a statutory rate of 21% in 2019 and 2018 and for its foreign operations at a statutory rate of 30% in 2019 and 2018. Reconciling items between the federal statutory rate and the effective tax rate also include the expected usage of federal net operating loss carryforwards, state income taxes, valuation allowances and certain other permanent differences.

 

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

 

 

 

(16)	Employee Benefit Plans

 

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

 

 

The net periodic benefit cost of the defined benefit pension plans incurred during the three and nine-month periods ended September 29, 2019 and September 30, 2018 are reflected in the following captions in the accompanying consolidated statements of operations (in thousands):

 

 

 

(17)	Accumulated Other Comprehensive Loss

 

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

 

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

 

 

 

(18)	Fair Value of Financial Instruments

 

Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial statements at their carrying amount which approximates fair value because of the short-term maturity of those instruments. The carrying amount of debt outstanding at September 29, 2019 approximates fair value, and is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments (Level 2).

 

 

 

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