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 July 1, 2001.
or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from _________________
to ________________.
Commission file number: 0-24020
SYPRIS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1321992
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222
(Address of principal executive offices, including zip code)
(502) 329-2000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _________.
-------
As of July 20, 2001, the Registrant had 9,804,798 shares of Common Stock
outstanding.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Income Statements for the Three and Six
Months Ended July 1, 2001 and July 2, 2000........................................... 2
Consolidated Balance Sheets at July 1, 2001
and December 31, 2000................................................................ 3
Consolidated Statements of Cash Flows for the Six
Months Ended July 1, 2001 and July 2, 2000........................................... 4
Notes to Consolidated Financial Statements........................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................... 12
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.................................. 13
Item 6. Exhibits and Reports on Form 8-K..................................................... 13
Signatures............................................................................................... 14
1
Part I. Financial Information
Item 1. Financial Statements
Sypris Solutions, Inc.
Consolidated Income Statements
(in thousands, except for per share data)
Three Months Ended Six Months Ended
--------------------- ----------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
---------- -------- ---------- --------
(Unaudited) (Unaudited)
Net revenue:
Outsource services................................. $ 52,246 $ 40,231 $ 98,264 $ 80,083
Products........................................... 10,906 11,887 22,923 22,732
---------- -------- ---------- --------
Total net revenue................................. 63,152 52,118 121,187 102,815
Cost of sales:
Outsource services................................. 45,493 33,341 85,482 66,902
Products........................................... 6,745 7,424 14,627 13,806
---------- -------- ---------- --------
Total cost of sales............................... 52,238 40,765 100,109 80,708
---------- -------- ---------- --------
Gross profit...................................... 10,914 11,353 21,078 22,107
Selling, general and administrative expense......... 6,818 6,726 13,393 13,029
Research and development............................ 827 794 1,504 1,961
Amortization of intangible assets................... 357 362 692 724
Special charges..................................... -- 732 -- 2,472
---------- -------- ---------- --------
Operating income.................................. 2,912 2,739 5,489 3,921
Interest expense, net............................... 1,073 929 2,202 1,860
Other expense (income), net......................... 33 (144) (119) (149)
---------- -------- ---------- --------
Income before income taxes....................... 1,806 1,954 3,406 2,210
Income tax expense.................................. 597 586 1,178 663
---------- -------- ---------- --------
Net income........................................ $ 1,209 $ 1,368 $ 2,228 $ 1,547
========== ======== ========== ========
Net income per common share:
Basic............................................. $ 0.12 $ 0.14 $ 0.23 $ 0.16
Diluted........................................... $ 0.12 $ 0.14 $ 0.23 $ 0.15
Shares used in computing per common share amounts:
Basic............................................. 9,786 9,659 9,757 9,647
Diluted........................................... 9,878 10,052 9,836 10,018
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)
July 1, December 31,
2001 2000
----------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents............................................................................. $ 14,215 $ 14,674
Accounts receivable, net.............................................................................. 35,837 31,896
Inventory, net........................................................................................ 57,859 51,055
Other current assets.................................................................................. 6,399 7,695
------------ ------------
Total current assets................................................................................. 114,310 105,320
Property, plant and equipment, net..................................................................... 69,155 54,317
Intangible assets, net................................................................................. 17,383 17,154
Other assets........................................................................................... 2,924 2,331
------------ ------------
$ 203,772 $ 179,122
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable...................................................................................... $ 24,967 $ 25,670
Accrued liabilities................................................................................... 19,907 18,548
Current portion of long-term debt..................................................................... -- 2,500
------------ ------------
Total current liabilities............................................................................ 44,874 46,718
Long-term debt......................................................................................... 82,500 62,500
Other liabilities...................................................................................... 9,478 5,699
------------ ------------
Total liabilities.................................................................................... 136,852 114,917
Shareholders' equity:
Preferred stock, no par value, 1,000,000 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, 20,000,000 shares authorized; 9,804,798 and 9,709,669 shares
issued and outstanding in 2001 and 2000, respectively................................................ 98 97
Additional paid-in capital............................................................................ 24,887 24,401
Retained earnings..................................................................................... 42,288 40,060
Accumulated other comprehensive income (loss)......................................................... (353) (353)
------------ ------------
Total shareholders' equity........................................................................... 66,920 64,205
------------ ------------
$ 203,772 $ 179,122
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
Sypris Solutions, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
--------------------
July 1, July 2,
2001 2000
-------- --------
(Unaudited)
Cash flows from operating activities:
Net income................................................................................... $ 2,228 $ 1,547
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization.............................................................. 4,870 4,825
Other noncash charges...................................................................... 335 119
Changes in operating assets and liabilities:
Accounts receivable....................................................................... (4,028) (8,704)
Inventory................................................................................. (213) (4,200)
Other assets.............................................................................. 1,296 2,058
Accounts payable.......................................................................... 786 5,931
Accrued liabilities....................................................................... 1,285 (2,136)
-------- --------
Net cash provided by (used in) operating activities...................................... 6,559 (560)
Cash flows from investing activities:
Capital expenditures......................................................................... (12,934) (12,046)
Purchase of the net assets of acquired entities.............................................. (11,486) --
Proceeds from sale of equipment.............................................................. 66 --
Other........................................................................................ (464) (3)
-------- --------
Net cash used in investing activities.................................................... (24,818) (12,049)
Cash flows from financing activities:
Net increase in debt under revolving credit agreements....................................... 17,500 12,400
Proceeds from issuance of common stock....................................................... 300 224
-------- --------
Net cash provided by financing activities................................................ 17,800 12,624
-------- --------
Net (decrease) increase in cash and cash equivalents.......................................... (459) 15
Cash and cash equivalents at beginning of period.............................................. 14,674 10,406
-------- --------
Cash and cash equivalents at end of period.................................................... $ 14,215 $ 10,421
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
Sypris Solutions, Inc.
Notes to Consolidated Financial Statements
(1) Organization
Sypris Solutions, Inc. is a diversified provider of technology-based
outsource services and specialized industrial products. The Company performs a
wide range of manufacturing and technical services, typically under long-term
contracts with major manufacturers. The Company also manufactures and sells
complex data storage systems, magnetic instruments, current sensors, high-
pressure closures and a variety of other industrial products.
(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"), Bell Technologies, Inc. ("Bell"),
Group Technologies Corporation ("GroupTech"), Metrum-Datatape, Inc. ("Metrum-
Datatape"), and Tube Turns Technologies, Inc. ("Tube Turns"), and have been
prepared by the Company in accordance with the rules and regulations of the
Securities and Exchange Commission (the "Commission"). All significant
intercompany transactions and accounts have been eliminated. These unaudited
consolidated financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to fairly state the results of operations, financial position and cash flows for
the periods presented, and the disclosures herein are adequate to make the
information presented not misleading. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. Actual results for the three and six
months ended July 1, 2001 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2001. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements, and notes thereto, for the year ended December 31, 2000 as
presented in the Company's annual report on Form 10-K.
(3) Net Income per Common Share
There were no adjustments required to be made to net income for purposes of
computing basic and diluted net income per common share. A reconciliation of the
average number of common shares outstanding used in the calculation of basic and
diluted net income per common share is as follows (in thousands):
Three Months Ended Six Months Ended
--------------------- --------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
----------- -------- ---------- -------
(Unaudited) (Unaudited)
Shares used to compute basic net income per common share.... 9,786 9,659 9,757 9,647
Dilutive effect of stock options............................ 92 393 79 371
----------- -------- ---------- -------
Shares used to compute diluted net income per common share.. 9,878 10,052 9,836 10,018
=========== ======== ========== =======
5
(4) Acquisition
During the second quarter of 2001, the Company acquired certain assets and
liabilities of the Marion Forge plant from Dana Corporation. The business
produces fully machined, heavy-duty truck axle shafts and other drive components
for integration into subassemblies and is included with Tube Turns in the
Industrial Group. The transaction was accounted for as a purchase, in which the
purchase price of $11,500,000 was allocated based on the fair values of the
assets and liabilities acquired, with the excess amount allocated to goodwill,
which totaled $238,000. As of July 1, 2001, the purchase price allocation was
not final. The results of operations of the acquired business have been included
in the consolidated financial statements since the acquisition date. The
acquisition was financed by the Company's Credit Agreement.
(5) Inventory
Inventory consists of the following (in thousands):
July 1, December 31,
2001 2000
----------- -------------
(Unaudited)
Raw materials................................................................................ $ 14,805 $ 13,567
Work-in-process.............................................................................. 11,628 8,388
Finished goods............................................................................... 4,684 1,632
Costs relating to long-term contracts and programs, net of amounts attributed to revenue
recognized to date.......................................................................... 48,366 45,542
Progress payments related to long-term contracts and programs................................ (16,717) (14,011)
LIFO reserve................................................................................. (1,260) (1,059)
Reserve for excess and obsolete inventory.................................................... (3,647) (3,004)
--------- ------------
$ 57,859 $ 51,055
========= ============
(6) Special Charges
Special charges of $732,000 and $2,472,000 were recognized during the three
and six months ended July 2, 2000, respectively, for activities related to the
consolidation of certain operations within the Electronics Group. The special
charges incurred for these activities include workforce reductions, facilities
rearrangement and relocation expenses, and employment costs related to the
transfer of production.
6
(7) 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 for all periods presented. The following table presents
financial information for the reportable segments of the Company for the three
and six months ended July 1, 2001 and July 2, 2000 (in thousands):
Three Months Ended Six Months Ended
--------------------- ---------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Net revenue from unaffiliated customers:
Electronics Group......................... $53,480 $42,774 $103,561 $ 84,084
Industrial Group.......................... 9,672 9,344 17,626 18,731
---------- -------- --------- ---------
$63,152 $52,118 $121,187 $102,815
========== ======== ========= =========
Gross profit:
Electronics Group......................... $ 9,764 $ 9,874 $ 19,064 $ 19,061
Industrial Group.......................... 1,150 1,479 2,014 3,046
---------- -------- --------- ---------
$10,914 $11,353 $ 21,078 $ 22,107
========== ======== ========= =========
Operating income:
Electronics Group......................... $ 2,870 $ 2,631 $ 6,103 $ 3,524
Industrial Group.......................... 714 951 1,112 1,989
General, corporate and other.............. (672) (843) (1,726) (1,592)
---------- -------- --------- ---------
$ 2,912 $ 2,739 $ 5,489 $ 3,921
========== ======== ========= =========
(8) Commitments and Contingencies
Tube Turns is a co-defendant in two separate lawsuits filed in 1993 and
1994, one pending in federal court and one pending in state district court in
Louisiana, arising out of an explosion in a coker plant owned by Exxon
Corporation located in Baton Rouge, Louisiana. The suits are being defended for
Tube Turns by its insurance carrier, and the Company intends to vigorously
defend its case. The Company believes that a settlement or related judgment
would not result in a material loss to Tube Turns or the Company.
More specifically, according to the complaints, Tube Turns is the alleged
manufacturer of a carbon steel pipe elbow which failed, causing the explosion
which destroyed the coker plant and caused unspecified damages to surrounding
property owners. One of the actions was brought by Exxon and claims damages for
destruction of the plant, which Exxon estimates exceed one hundred million
dollars. In this action, Tube Turns is a co-defendant with the fabricator who
built the pipe line in which the elbow was incorporated and with the general
contractor for the plant. The second action is a class action suit filed on
behalf of the residents living around the plant and claims damages in an amount
as yet undetermined. Exxon is a co-defendant with Tube Turns, the contractor and
the fabricator in this action. In both actions, Tube Turns maintains that the
carbon steel pipe elbow at issue was appropriately marked as carbon steel and
was improperly installed, without the knowledge of Tube Turns, by the fabricator
and general contractor in a part of the plant requiring a chromium steel elbow.
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, the amount of
any ultimate liability with respect to these actions will not materially affect
the Company's consolidated financial statements or results of operations.
7
(9) Subsequent Event
On July 26, 2001, the Company entered into interest rate swap agreements
that effectively convert a portion of its floating rate debt to a fixed rate
basis for the next two years, thus reducing the impact of interest rate changes
on future interest expense. Approximately 36% ($30,000,000) of the Company's
outstanding debt was designated as the hedged items to interest rate swap
agreements at July 26, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth certain financial data, expressed as a
percentage of net revenue, from the Company's Consolidated Income Statements for
the three and six months ended July 1, 2001 and July 2, 2000.
Three Months Ended Six Months Ended
--------------------------- --------------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
------- ------- ------- -------
Net revenue.................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 82.7 78.2 82.6 78.5
----- ----- ----- -----
Gross profit................................. 17.3 21.8 17.4 21.5
Selling, general and administrative expense.. 10.8 12.9 11.1 12.7
Research and development..................... 1.3 1.5 1.2 1.9
Amortization of intangible assets............ 0.6 0.7 0.6 0.7
Special charges.............................. -- 1.4 -- 2.4
----- ----- ----- -----
Operating income............................. 4.6% 5.3% 4.5% 3.8%
===== ===== ===== =====
Net income................................... 1.9% 2.6% 1.8% 1.5%
===== ===== ===== =====
For reporting purposes, the operations of Bell, GroupTech and Metrum-
Datatape are included in the Electronics Group, and Tube Turns' operations are
included in the Industrial Group. Segment discussion is included in the
following discussion and analysis of the Company's consolidated results of
operations.
Net revenue totaled $63.1 million for the second quarter of 2001, an
increase of $11.0 million, or 21.2%, from $52.1 million for the second quarter
of 2000. Net revenue for the first six months of 2001 was $121.2 million, an
increase of $18.4 million, or 17.9%, from $102.8 million for the first six
months of 2000. Sequential quarterly net revenue increased $5.1 million from
$58.0 million in the first quarter of 2001. Outsource services revenue
contributed $6.2 million to the sequential increase while product revenue
declined by $1.1 million. Backlog for the Electronics Group and the Industrial
Group at July 1, 2001 was $115.9 million and $26.4 million, respectively.
The Electronics Group's net revenue for the second quarter of 2001 was
$53.5 million, an increase of $10.7 million, or 25.0%, from $42.8 million for
the second quarter of 2000. Net revenue for the Electronics Group for the first
six months of 2001 was $103.6 million, an increase of $19.5 million, or 23.2%,
from $84.1 million for the first six months of 2000. The Electronics Group's
increase in net revenue was primarily from contracts for manufacturing services,
which generated an increase of $12.6
8
million and $19.9 million for the second quarter and first six months of 2001,
respectively, over the prior year periods. Shipments increased during the first
half of 2001 on several contracts with defense and aerospace customers, the
majority of which were included in the Electronics Group's backlog of $143.2
million at December 31, 2000. The Electronics Group anticipates that revenue in
the second half of 2001 will approximate the amount reported for the first half
of 2001. Other outsource services and product sales accounted for a net decrease
in net revenue of $1.9 million and $0.4 million during the second quarter and
first six months of 2001, respectively. This decrease was primarily due to
reduced sales quantities for data storage products. Demand for the Electronics
Group's data storage products during the second half of 2001 is expected to
approximate demand during the first half of 2001.
The Industrial Group's net revenue for the second quarter of 2001 was $9.7
million, an increase of $0.4 million, or 3.5%, from $9.3 million for the second
quarter of 2000. Net revenue for the Industrial Group for the first six months
of 2001 was $17.6 million, a decrease of $1.1 million, or 5.9%, from $18.7
million for the first six months of 2000. During the second quarter of 2001, the
Industrial Group acquired a business which produces fully machined, heavy-duty
truck axle shafts and other drive components. This acquisition generated
outsource services revenue of $2.7 million during the second quarter and first
six months of 2001. Excluding the acquisition, the Industrial Group's net
revenue declined $2.3 million and $3.8 million for the second quarter and first
six months of 2001, respectively, from the prior year periods. The decrease in
net revenue for the respective periods was primarily due to a decline in
outsource services provided to customers in the heavy-duty truck market.
Unfavorable market conditions that arose during the second half of 2000 for
heavy-duty truck production resulted in an overall market decrease of
approximately 40%. This reduced the volume of forged truck axles provided under
manufacturing service agreements by the Industrial Group and accounted for a
decrease in net revenue of $2.2 million and $4.6 million for the second quarter
and first six months of 2001, respectively. The Company expects demand in the
heavy-duty truck market to remain weak during 2001, however, further significant
declines in demand are not anticipated. Revenue derived from manufacturing
services in other markets served by the Industrial Group and fabricated product
sales decreased by $0.1 million and increased by $0.8 million for the second
quarter and first six months of 2001, respectively. The capital program to
expand the Industrial Group's forging capacity and add new machining
capabilities continued during the first half of 2001 with expenditures totaling
$7.7 million. Capital expenditures for the remainder of 2001 are projected to
approximate $13.5 million. The Industrial Group began producing parts for
customer qualification in the second quarter of 2001 using certain new machining
equipment, with actual production and shipments expecting to begin late in the
third quarter of 2001.
Gross profit totaled $10.9 million for the second quarter of 2001, a
decrease of $0.5 million, or 3.9%, from $11.4 million for the second quarter of
2000. Gross profit for the first six months of 2001 was $21.1 million, a
decrease of $1.0 million, or 4.7%, from $22.1 million for the first six months
of 2000. The factors impacting gross profit are discussed immediately below for
each segment.
The Electronics Group's gross profit for the second quarter of 2001 was
$9.8 million, a decrease of $0.1 million, or 1.1%, from $9.9 million for the
second quarter of 2000. Gross profit for the Electronics Group for the first six
months of 2001 was $19.1 million, which was consistent with gross profit
recognized in the first six months of 2000. The increase in manufacturing
services revenue generated an increase in gross profit of $0.9 million and $1.6
million for the second quarter and six month periods, respectively. The
contribution to gross profit from the revenue growth was diminished by
manufacturing inefficiencies related to electronic component shortages, costs
associated with the ramp-up in production volume and unfavorable labor variances
on certain programs. Although supply levels for certain components improved
during 2001, the shortages, extended lead times and increased cost for the
purchase of certain components continued to negatively impact gross profit,
particularly when compared to the first half of 2000. These factors contributed
to a decrease in the Electronics Group's outsource services gross margin from
16.9% in the first half of 2000 to 12.7% in the second half of 2000, before
rebounding to
9
14.0% for the first half of 2001. While management believes that a sufficient
supply of electronic components will be available to enable it to substantially
meet its customer delivery schedules for the remainder of 2001, the Company's
results of operations or financial position could be negatively impacted by
these component market conditions. Gross profit from other outsource services
decreased by $0.4 million and $0.7 million for the second quarter and six month
periods, respectively, primarily due to increased labor costs. Gross profit from
product sales decreased by $0.6 million and $0.9 million for the second quarter
and six month periods, respectively, primarily due to reduced demand for certain
product offerings.
The Industrial Group's gross profit for the second quarter of 2001 was $1.2
million, a decrease of $0.3 million, or 22.2%, from $1.5 million for the second
quarter of 2000. Gross profit for the Industrial Group for the first six months
of 2001 was $2.0 million, a decrease of $1.0 million or 33.9% from $3.0 million
for the first six months of 2000. Excluding the acquisition made in the second
quarter of 2001, the Industrial Group's gross profit declined $0.5 million and
$1.2 million for the second quarter and first six months of 2001, respectively,
from the prior year periods. The decrease in gross profit was primarily due to
the downturn of the heavy-duty truck market. The reduction in demand and
corresponding impact on shipments occurred as the organizational infrastructure
to support future growth plans was being developed. The increased cost structure
associated with the additional people and systems required to meet future
contractual requirements and the underabsorption of overhead due to the volume
decline resulted in gross margin levels which were lower than the comparable
prior year periods. The Company expects gross profit to continue to be adversely
effected, as the truck market demand is not expected to increase during 2001.
Selling, general and administrative expense for the second quarter of
2001 was $6.8 million, or 10.8% of net revenue, as compared to $6.7 million, or
12.9% of net revenue for the second quarter of 2000. Selling, general and
administrative expense for the first six months of 2001 was $13.4 million, or
11.1% of net revenue, as compared to $13.0 million, or 12.7% of net revenue for
the first six months of 2000. The second quarter and first six months of 2001
included the full impact of certain additions to the Company's organizational
infrastructure, which began during 2000. Selling, general and administrative
expense as a percent of revenue is expected to remain below the comparable prior
year's percentage during the second half of 2001.
Research and development expense for the second quarter of 2001 was
$0.8 million, which was consistent with the amount reported for the second
quarter of 2000. Research and development expense for the first six months of
2000 was $1.5 million, or 1.2% of net revenue, as compared to $2.0 million, or
1.9% of net revenue for the first six months of 2000. The decrease in research
and development expense was attributable to the Electronics Group, and relates
to the quantity and timing of new product releases for the data acquisition,
storage and analysis product lines and the utilization of strategic alliances
with suppliers for product development.
Amortization of intangible assets for the second quarter and first six
months of 2001 was $0.3 million and $0.7 million, respectively, which was
consistent with the amount of amortization expense recognized for the comparable
prior year periods.
Special charges of $0.7 million and $2.5 million were recognized
during the second quarter and the first six months of 2000 for activities
related to the consolidation of certain operations within the Electronics Group.
During 2000, management identified potential cost savings that could be realized
through the elimination of redundant manufacturing operations and staffing of
functional areas between two related facilities. The special charges incurred
for these activities include workforce reductions, facilities rearrangement and
relocation expenses, and employment costs related to the transfer of production.
The consolidation activities were completed in 2000 and the Company does not
expect to incur additional special charges for these consolidation activities in
2001.
10
Interest expense for the second quarter of 2001 was $1.1 million, an
increase of $0.2 million, or 15.5%, from $0.9 million for the comparable period
of 2000. Interest expense for the first six months of 2001 was $2.2 million, an
increase of $0.3 million, or 18.4%, from $1.9 million for the comparable period
of 2000. The interest expense of $1.1 million and $2.2 million for the second
quarter and first six months of 2001, respectively, was net of capitalized
interest of $0.3 million and $0.7 million, respectively. The capitalized
interest was related to the capital expenditure program in the Industrial Group.
The increase in interest expense for the respective periods was primarily due to
an increase in the weighted average debt outstanding, partially offset by a
reduction in interest rates beginning in the second quarter of 2001. The
Company's weighted average debt outstanding increased to approximately $67.6
million in the first six months of 2001 from approximately $50.7 million in the
first six months of 2000. This increase included the effect of the $11.5 million
purchase price for the acquisition made by the Industrial Group in the second
quarter of 2001 and capital expenditures during 2000 and the first half of 2001
to support the Company's new business opportunities. The weighted average
interest rate for the second quarter of 2001 was approximately 7.3% as compared
to approximately 7.8% for the prior year period. The weighted average interest
rate for the first six months of 2001 was approximately 8.2% as compared to
approximately 7.6% for the prior year period.
Income tax expense of $0.6 million was recognized during the second
quarter of 2001, which was consistent with the amount recognized in the second
quarter of 2000. Income tax expense of $1.2 million was recognized during the
first six months of 2001 as compared to $0.7 million recognized during the prior
year period. The effective tax rate for the first six months of 2001 was
approximately 35% as compared to approximately 30% for the prior year period.
The lower effective tax rate for the second quarter and first six months of 2000
was principally due to a reduction in the Company's valuation allowance for
deferred tax assets.
Liquidity, Capital Resources and Financial Condition
Net cash provided by operating activities was $6.6 million for the
first six months of 2001, as compared to net cash used in operating activities
of $0.6 million for the year-earlier period. Accounts receivable increased by
$4.0 million, primarily due to increased shipments during the second quarter of
2001. Inventory and accounts payable also increased by $0.2 million and $0.8
million, respectively, to support the shipment levels of the second quarter of
2001 and expected shipments for the second half of 2001. Other assets decreased
by $1.3 million, primarily due to a federal income tax refund. An increase in
various accrued liabilities provided operating cash flow of $1.3 million.
Net cash used in investing activities was $24.8 million for the first
six months of 2001 as compared to $12.0 million for the year-earlier period. The
increase was mainly attributable to the acquisition made by the Industrial Group
in the second quarter of 2001 for $11.5 million. Capital expenditures for the
Electronics Group and the Industrial Group totaled $5.2 million and $7.7
million, respectively, for the first six months of 2001. Capital expenditures
for the Electronics Group were principally comprised of manufacturing, assembly
and test equipment. The Industrial Group's capital expenditures included new
forging and machining equipment to increase and expand the range of production
capabilities.
Net cash provided by financing activities was $17.8 million during the
first six months of 2001 as compared to $12.6 million during the year-earlier
period. The Company's debt outstanding under its Credit Agreement increased
$17.5 million during the first half of 2001, primarily to fund the acquisition
made by the Industrial Group and capital expenditures.
Under the terms of the Credit Agreement between the Company and its
lenders, the Company had total availability for borrowings and letters of credit
under its revolving credit facility of $17.5 million at July 1, 2001, which,
when combined with the cash balance of $14.2 million, provides for total cash
and
11
borrowing capacity of $31.7 million. Maximum borrowings on the revolving credit
facility are $100.0 million, subject to a $15.0 million limit for letters of
credit. Borrowings under the Credit Agreement may be used to finance working
capital requirements, eligible acquisitions as defined in the Credit Agreement
and for general corporate purposes, including capital expenditures.
The Company's principal commitments at July 1, 2001 consisted of
repayments of borrowings under the Credit Agreement and obligations under
operating leases for certain of its real property and equipment. The Company
also had purchase commitments for manufacturing equipment totaling approximately
$9.8 million at July 1, 2001.
The Company believes sufficient resources will be available to satisfy
the Company's cash requirements for at least the next twelve months. Cash
requirements for periods beyond the next twelve months depend on the Company's
profitability, its ability to manage working capital requirements and its rate
of growth. If the Company makes significant acquisitions or if working capital
and capital expenditure requirements exceed expected levels during 2001 or in
the foreseeable future, it may require additional external sources of capital.
Forward-looking Statements
This Form 10-Q contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Similar forward looking
statements are made periodically in reports to the Securities and Exchange
Commission, press releases, reports and documents and in written and oral
presentations to investors, shareholders, 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 Sypris believes that its expectations are based on
reasonable assumptions, it 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: the Company's dependence on its current management; the risks and
uncertainties present in the Company's business; business conditions and growth
in the general economy and the electronics and industrial markets served by the
Company; 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 the Company's manufacturing facilities; as
well as other factors described elsewhere in this report and in the Company's
other filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company had no holdings of derivative financial or commodity
instruments at July 1, 2001. However, on July 26, 2001, the Company entered into
interest rate swap agreements with a syndicate of banks as discussed in Note 9
of the consolidated financial statements. The Company is 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 the Company's Credit Agreement bear interest at a
variable rate based on the prime rate, the London Interbank Offered Rate, or
certain alternative short-term rates. An increase in interest rates of 100 basis
points would result in additional interest expense of approximately $0.8 million
on an annualized basis, based upon the Company's debt outstanding at July 1,
2001. Substantially all of the Company's business is transacted in U.S. dollars.
Accordingly, foreign exchange rate fluctuations have never had a significant
impact on the Company, and they are not expected to in the foreseeable future.
12
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 1, 2001 in
Louisville, Kentucky. At the meeting, stockholders elected a Board of eight
directors pursuant to the following votes:
Votes in Votes
Director Favor Withheld
-------- --------- --------
Robert E. Gill....................... 9,488,565 4,180
Jeffrey T. Gill...................... 9,488,988 3,757
R. Scott Gill........................ 9,489,405 3,340
Henry F. Frigon...................... 9,488,691 4,054
William L. Healey.................... 9,489,441 3,304
Roger W. Johnson..................... 9,488,691 4,054
Sidney R. Petersen................... 9,489,891 2,854
Robert Sroka......................... 9,489,441 3,304
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
2.1 Asset Purchase Agreement dated April 6, 2001 by and between Tube
Turns Technologies, Inc. and Dana Corporation as amended by a First
Amendment dated May 4, 2001 and as amended by a Second Amendment on
May 15, 2001.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the three months ended July
1, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYPRIS SOLUTIONS, INC.
(Registrant)
Date: July 30, 2001 By: /s/ David D. Johnson
------------- --------------------
(David D. Johnson)
Vice President & Chief
Financial Officer
Date: July 30, 2001 By: /s/ Anthony C. Allen
------------- --------------------
(Anthony C. Allen)
Vice President, Controller &
Chief Accounting Officer
14