SYPRIS SOLUTIONS INC - Quarter Report: 2021 April (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 April 4, 2021

OR

 

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

 

Commission file number: 0-24020

 

SYPRIS SOLUTIONS, INC.

 

(Exact name of registrant as specified in its charter)

 

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

---

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of May 8, 2021, the Registrant had 21,470,282 shares of common stock outstanding.

 

 

 

Table of Contents

Part I.  Financial Information
	Item 1.	Financial Statements
		Consolidated Statements of Operations for the Three Months Ended April 4, 2021 and April 5, 2020	2
		Consolidated Statements of Comprehensive Loss for the Three Months Ended April 4, 2021 and April 5, 2020	3
		Consolidated Balance Sheets at April 4, 2021 and December 31, 2020	4
		Consolidated Cash Flow Statements for the Three Months Ended April 4, 2021 and April 5, 2020	5
		Consolidated Statements of Stockholders’ Equity for the Three Months Ended April 4, 2021 and April 5, 2020	6
		Notes to 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	26
	Item 1A.	Risk Factors	26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
	Item 3.	Defaults Upon Senior Securities	26
	Item 4.	Mine Safety Disclosures	26
	Item 5.	Other Information	26
	Item 6.	Exhibits	27
Signatures			28

 

 

 

		Three Months Ended
		April 4,				April 5,
		2021				2020
Net revenue		$	19,982			$	22,425
Cost of sales			18,166				18,700
Gross profit			1,816				3,725
Selling, general and administrative			2,882				3,448
Operating (loss) income			(1,066	)			277
Interest expense, net			222				227
Other expense, net			221				283
Loss before taxes			(1,509	)			(233	)
Income tax expense, net			121				72
Net loss		$	(1,630	)		$	(305	)
Loss per share:
Basic		$	(0.08	)		$	(0.01	)
Diluted		$	(0.08	)		$	(0.01	)
Weighted average shares outstanding:
Basic			21,394				20,988
Diluted			21,394				20,988
Dividends declared per common share		$	0.00			$	0.00

 

		Three Months Ended
		April 4,					April 5,
		2021					2020
Net loss		$	(1,630	)		$	(305	)
Other comprehensive loss:
Foreign currency translation adjustments, net of tax			(406	)			(1,906	)
Comprehensive loss		$	(2,036	)		$	(2,211	)

 

		April 4,				December 31,
		2021				2020
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	9,369			$	11,606
Accounts receivable, net			7,962				7,234
Inventory, net			18,675				16,236
Other current assets			4,580				4,360
Total current assets			40,586				39,436
Property, plant and equipment, net			10,430				10,161
Operating lease right-of-use assets			5,887				6,103
Other assets			4,691				5,008
Total assets		$	61,594			$	60,708
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	10,056			$	6,734
Accrued liabilities			11,681				13,409
Operating lease liabilities, current portion			988				965
Finance lease obligations, current portion			403				393
Equipment financing obligations, current portion			104				0
Note payable – PPP Loan, current portion			1,779				1,186
Note payable – related party, current portion			2,500				0
Total current liabilities			27,511				22,687
Operating lease liabilities, net of current portion			5,683				5,941
Finance lease obligations, net of current portion			1,822				1,927
Equipment financing obligations, net of current portion			197				0
Note payable – PPP Loan, net of current portion			1,779				2,372
Note payable – related party, net of current portion			3,979				6,477
Other liabilities			8,125				6,529
Total liabilities			49,096				45,933
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; 21,436,982 shares issued and 21,436,963 outstanding in 2021 and 21,302,194 shares issued and 21,300,958 outstanding in 2020			214				213
Additional paid-in capital			154,783				155,025
Accumulated deficit			(117,395	)			(115,765	)
Accumulated other comprehensive loss			(25,104	)			(24,698	)
Treasury stock, 19 and 1,236 shares in 2021 and 2020, respectively			0				0
Total stockholders’ equity			12,498				14,775
Total liabilities and stockholders’ equity		$	61,594			$	60,708

 

		Three Months Ended
		April 4,				April 5,
		2021				2020
Cash flows from operating activities:
Net loss		$	(1,630	)		$	(305	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			621				620
Deferred income taxes			116				0
Non-cash compensation expense			61				94
Deferred loan costs recognized			2				4
Net loss (gain) on the disposal or abandonment of assets			20				(154	)
Provision for excess and obsolete inventory			2				40
Non-cash lease expense			217				288
Other noncash items			36				190
Contributions to pension plans			(120	)			(34	)
Changes in operating assets and liabilities:
Accounts receivable			(733	)			(1,478	)
Inventory			(2,431	)			846
Prepaid expenses and other assets			(108	)			(99	)
Accounts payable			3,346				1,474
Accrued and other liabilities			(309	)			(772	)
Net cash (used in) provided by operating activities			(910	)			714
Cash flows from investing activities:
Capital expenditures, net			(790	)			(453	)
Proceeds from sale of assets			0				288
Net cash used in investing activities			(790	)			(165	)
Cash flows from financing activities:
Principal payments on finance lease obligations			(94	)			(143	)
Principal payments on equipment financing obligations			(22	)			0
Indirect repurchase of shares of minimum statutory tax withholdings			(301	)			(7	)
Net cash used in financing activities			(417	)			(150	)
Effect of exchange rate changes on cash balances			(120	)			(288	)
Net (decrease) increase in cash and cash equivalents			(2,237	)			111
Cash and cash equivalents at beginning of period			11,606				5,095
Cash and cash equivalents at end of period		$	9,369			$	5,206
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Fixed assets acquired with equipment financing loan		$	323			$	0

 

																		Accumulated
										Additional								Other
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury
		Shares				Amount				Capital				Deficit				Loss				Stock
January 1, 2020 balance			21,298,426			$	213			$	154,702			$	(117,433	)		$	(24,051	)		$	0
Net loss			0				0				0				(305	)			0				0
Foreign currency translation adjustment			0				0				0				0				(1,906	)			0
Exercise of stock options			11,154				0				(7	)			0				0				0
Noncash compensation			0				0				94				0				0				0
April 5, 2020 balance			21,309,580			$	213			$	154,789			$	(117,738	)		$	(25,957	)		$	0

																		Accumulated
										Additional								Other
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury
		Shares				Amount				Capital				Deficit				Loss				Stock
January 1, 2021 balance			21,300,958			$	213			$	155,025			$	(115,765	)		$	(24,698	)		$	0
Net loss			0				0				0				(1,630	)			0				0
Foreign currency translation adjustment			0				0				0				0				(406	)			0
Exercise of stock options			136,005				1				(303	)			0				0				0
Noncash compensation			0				0				61				0				0				0
April 4, 2021 balance			21,436,963			$	214			$	154,783			$	(117,395	)		$	(25,104	)		$	0

 

(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 11).

 

(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, 2020 consolidated balance sheet data was derived from audited statements, but does not include all disclosures required by U.S. GAAP. The Company’s operations are domiciled in the United States (U.S.) and Mexico, and we serve a wide variety of domestic and international customers. All intercompany transactions and accounts have been eliminated.

 

These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the results of operations, financial position and cash flows for the periods presented, and the disclosures herein are adequate to make the information presented not misleading. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the COVID-19 pandemic has increased the uncertainty with respect to developing these estimates and assumptions. The COVID-19 pandemic continues to rapidly evolve and the ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. Changes in facts and circumstances could have a significant impact on the resulting estimated amounts included in our consolidated financial statements. Actual results could differ from these estimates. Actual results for the three months ended April 4, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 2020 as presented in the Company’s Annual Report on Form 10-K.

 

Certain prior period amounts have been reclassified to conform to the 2021 presentation, which had no impact to the previously reported net loss and stockholder’s equity.

 

(3)	Recent Accounting Pronouncements

 

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

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. This guidance is intended to simplify various aspects of income tax accounting including the elimination of certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This guidance became effective January 1, 2021. Adoption of this guidance requires certain changes to primarily be made prospectively, with some changes to be made retrospectively. The adoption did not have a material impact on the Company’s consolidated financial statements.

 

 

 

(4)

Leases

 

The Company determines if an arrangement is a lease at its inception. The Company has entered into operating leases for real estate and personal property, including manufacturing and information technology equipment. These real estate 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 right-of-use 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, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligations to make lease payments are included in “Operating lease liabilities, current portion” and “Operating lease liabilities, net of current portion” on the Company’s consolidated balance sheets. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As of April 4, 2021, total right-of-use assets and operating lease liabilities were approximately $5,887,000 and $6,671,000, respectively. As of December 31, 2020, total right-of-use assets and operating lease liabilities were approximately $6,103,000 and $6,906,000, 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 months ended April 4, 2021 and April 5, 2020.

 

The following table presents information related to lease expense for the three months ended April 4, 2021 and April 5, 2020 (in thousands):

 

 

 

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

 

 

The annual future minimum lease payments as of April 4, 2021 are as follows (in thousands):

 

 

The following table presents certain information related to lease terms and discount rates for leases as of April 4, 2021 and December 31, 2020:

 

 

 

(5)	Revenue from Contracts with Customers

 

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

 

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

 

 

For contracts where Sypris Electronics serves as a contractor for aerospace and defense companies under federally funded programs, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contracts that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Because control is transferred over time, revenue 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 Sypris Electronics’ contractual arrangements with customers are for one year or less. For the remaining population of non-cancellable contracts greater than one year we had $42,146,000 of remaining performance obligations as of April 4, 2021, all of which were long-term Sypris Electronics’ contracts. We expect to recognize approximately 53% of our remaining performance obligations as revenue in 2021, 25% in 2022 and the balance thereafter.

 

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the three months ended April 4, 2021 and April 5, 2020 (in thousands):

 

 

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 April 4, 2021 and December 31, 2020 were $1,436,000 and $1,240,000, 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 April 4, 2021, the contract liabilities balance was $7,977,000, of which $5,621,000 was included within accrued liabilities and $2,356,000 was included within other liabilities in the accompanying consolidated balance sheets. As of December 31, 2020, the contract liabilities balance was $7,339,000, of which $6,816,000 was included within accrued liabilities and $523,000 was included within other liabilities in the accompanying consolidated balance sheets. Payments received from customers in advance of revenue recognition are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract.

 

 

The Company recognized revenue from contract liabilities of $2,255,000 and $2,312,000 during the three months ended April 4, 2021 and April 5, 2020, 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)	Assets Held for Sale

 

On February 21, 2017, the Board of Directors approved a modified exit or disposal plan with respect to the Company’s Louisville, Kentucky automotive and commercial vehicle manufacturing plant (the “Broadway Plant”), which included the relocation of production to other Company facilities and the closure of the plant. The Company has relocated certain assets from the Broadway Plant to other manufacturing facilities to serve its existing and target customer base within the Sypris Technologies segment. Additionally, the Company identified underutilized or non-core assets for disposal.

 

On April 13, 2020, the Company completed the sale of the Broadway Plant real estate for $1,700,000. The Company also sold other equipment during 2020 for $268,000 while certain equipment at the Broadway Plant was abandoned as of December 31, 2020. Management continues to market certain other equipment located at its facility in Toluca, Mexico, which has been classified as assets held for sale and included in other current assets as of April 4, 2021 and December 31, 2020.

 

All assets held for sale are within the Sypris Technologies segment. The following assets have been segregated and included in other current assets in the consolidated balance sheets (in thousands):

 

 

 

(7)	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 months ended April 4, 2021 and April 5, 2020, 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):

 

 

 

(8)

Inventory

 

Inventory consists of the following (in thousands):

 

 

 

 

(9)	Property, Plant and Equipment

 

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

 

 

 

 

(10)

Debt

 

Debt outstanding consists of the following (in thousands):

 

 

Paycheck Protection Program

 

During the second quarter of 2020, the Company secured a $3,558,000 term loan (the “PPP Loan”) with BMO Harris Bank National Association (“BMO”). Proceeds from the PPP Loan have been used to retain workers and maintain payroll and make lease and utility payments. The PPP Loan is evidenced by a promissory note in favor of BMO, as lender, with a principal amount of $3,558,000 that bears interest at a fixed annual rate of 1.00%. The term of the PPP Loan is two years, with no payments due under the PPP Loan until July 2021, although interest will accrue during the deferment period. Beginning July 2021, the Company expects to pay equal monthly installments of principal and interest in the amount necessary to fully amortize the PPP Loan through the maturity date, less any amount of potential forgiveness. Recent legislation under the Paycheck Protection Program Flexibility Act of 2020 provides for an extension of the maturity date up to five years, an extension of the principal and interest deferral period to the date of a loan forgiveness determination and modifications to the debt amortization schedule if the Company and BMO reach an agreement on modified terms. The PPP Loan may be accelerated upon the occurrence of an event of default.

 

The PPP Loan is unsecured and guaranteed by the U.S. Small Business Administration (the “SBA”). During the fourth quarter of 2020, the Company applied for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company during the 24-week period beginning upon receipt of funds from the PPP Loan, subject to limitations and calculated in accordance with the terms of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Any forgiveness of the PPP Loan is subject to approval of the SBA. While the Company applied for forgiveness for the total amount due on the PPP Loan, no assurance can be provided that we will obtain forgiveness of the PPP Loan in whole or in part. As a result, the Company is taking the approach that a portion of the PPP Loan is short-term and a portion is long-term, and has reflected such borrowing on the Company’s consolidated balance sheet, as appropriate. The Company will record any amounts of the loan that are forgiven as a gain on extinguishment in the period in which legal release is received. The Company also anticipates that any payments due on the PPP Loan will be deferred beyond July 2021 in the event that the SBA does not respond to the Company’s forgiveness application prior to that date.

 

Note Payable – Related Party

 

The Company has received the benefit of cash infusions from Gill Family Capital Management, Inc. (“GFCM”) in the form of secured promissory note obligations totaling $6,500,000 in principal as of April 4, 2021 and December 31, 2020. GFCM is an entity controlled by the Company’s Chairman, President and Chief Executive Officer, Jeffrey T. Gill, and one of our directors, R. Scott Gill. GFCM, Jeffrey T. Gill and R. Scott Gill are significant beneficial stockholders of the Company. As of April 4, 2021, our principal commitment under the Note was $2,500,000 due on April 1, 2022, $2,000,000 on April 1, 2024 and the balance on April 1, 2026. Interest on the promissory note is reset on April 1 of each year, at the greater of 8.0% or 500 basis points above the five-year Treasury note average during the preceding 90-day period, in each case, payable quarterly. The note allows for up to an 18-month deferral of payment for up to 60% of the interest due on the portion of the notes maturing in April of 2022 and 2024. During the first quarter of 2020, the Company provided notice to GFCM of its intention to elect to defer the specified portion of the interest payments due beginning on April 6, 2020. All accrued but unpaid interest was paid on January 4, 2021.

 

 

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

 

Finance Lease Obligations

 

On March 9, 2016, the Company completed the sale of its 24-acre Toluca property for 215,000,000 Mexican Pesos, or approximately $12,182,000 in U.S. dollars. Simultaneously, the Company entered into a ten-year lease of the 9 acres and buildings currently occupied by the Company and needed for its ongoing business in Toluca. As a result of the Toluca sale-leaseback, the Company has a finance lease obligation of $2,057,000 for the building as of April 4, 2021.

 

In February 2019, the Company entered into a 60-month capital lease for $269,000 for new machinery at its Sypris Technologies facility in the U.S. The balance of the finance lease obligation as of April 4, 2021 was $168,000.

 

Equipment Financing Obligations

 

As of April 4, 2021, the Company had $301,000 outstanding under equipment financing facilities, with fixed interest rates ranging from 8.02% to 8.06% and payments due through 2025.

 

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

 

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

 

 

 

 

 

 

(12)	Commitments and Contingencies

 

The provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. The Company’s warranty liability, which is included in accrued liabilities in the accompanying consolidated balance sheets as of April 4, 2021 and December 31, 2020 was $587,000 and $638,000, respectively. The Company’s warranty expense for the three months ended April 4, 2021 and April 5, 2020 was not material.

 

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

 

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

 

 

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

 

The Company has various current and previously-owned facilities subject to a variety of environmental regulations. The Company has received certain indemnifications from either companies previously owning these facilities or from purchasers of those facilities. Additionally, certain property previously sold by the Company has been designated as a Brownfield Site and has been approved for development by the purchaser. As of April 4, 2021 and December 31, 2020, no amounts were accrued for any environmental matters.

 

On December 27, 2017, the U.S. Department of Labor (the “DOL”) filed a lawsuit alleging that the Company had misinterpreted the language of its Company’s 401(k) Plans (collectively, the “Plan”). The DOL does not appear to dispute that the Company reached such interpretation in good faith and after consulting with independent ERISA counsel. 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.

 

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

 

As of April 4, 2021, the Company had outstanding purchase commitments of approximately $24,636,000, primarily for the acquisition of inventory and manufacturing equipment.

 

(13)	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 2021 and 2020 and for its foreign operations at a statutory rate of 30% in 2021 and 2020. 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 the Company’s consideration of all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations, the Company has established a valuation allowance against all U.S. deferred tax assets. Until an appropriate level and characterization of profitability is attained, the Company expects to continue to maintain a valuation allowance on its net deferred tax assets related to future U.S. tax benefits.

 

 

 

(14)	Employee Benefit Plans

 

The following table details the components of pension (income) expense (in thousands):

 

 

The net periodic benefit cost of the defined benefit pension plans incurred during the three-month periods ended April 4, 2021 and April 5, 2020 are reflected in the following captions in the accompanying consolidated statements of operations (in thousands):

 

 

 

(15)	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):

 

 

(16)	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 April 4, 2021 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).