Sypris Solutions Management Discusses Q1 2013 Results – Earnings Call … – Seeking Alpha

Sypris Solutions (SYPR) Q1 2013 Earnings Call May 14, 2013 9:00 AM ET

Operator

Good day, and welcome to the Sypris Solutions Inc. Conference Call. Today’s call is being recorded. At this time, for opening remarks, I would like to turn the call over to President and Chief Executive Officer, Mr. Jeffrey Gill. Please go ahead, sir.

Jeffrey T. Gill

Thank you, Alicia, and good morning, everyone. Brian Lutes, Tony Allen and I would like to welcome you to this call. The purpose of which is to review the trends reflected in the company’s financial results for the first quarter of 2013. For those of you who have access to our PowerPoint presentation this morning, please advance to Slide 2 now.

We always begin these calls with a note that some of what we might discuss here today may include projections and other forward-looking statements. No assurance can be given that these projections and statements will be achieved, and actual results could differ materially from those projected as a result of several factors. These factors are included in the company’s filings with the Securities and Exchange Commission. And in compliance with Regulation G, you can access our website at sypris.com to review the definitions of any non-GAAP financial measures that may be discussed during this call.

With these qualifications in mind, we’d now like to proceed with the business discussion. Please advance to Slide 3.

I will lead you through the first half of our presentation this morning, starting with an overview of the highlights for the quarter, to be followed by a brief discussion of each of our 2 business segments. Brian will then provide you with a more detailed review of our financial results for the quarter.

Now let’s begin with the overview on Slide 4.

We’re pleased to report that revenue was in line with our expectations for the quarter, albeit with a different mix than we would have forecast just a few months ago. Sales increased 16% sequentially from the fourth quarter of last year, rising to $78.4 million, driven by a 28% increase in revenue from our Industrial Group. The surprise came from our Aerospace & Defense segment, where shipments declined by 39% sequentially to $7.3 million as a result of program and approval delays associated with the sequester and other Department of Defense funding issues. So while the consolidated top line was consistent with our plans, gross profit was impacted by the change in mix between the 2 segments.

Gross profit for the quarter was $8.1 million or 10.3% of sales, driven by the strong performance of our Industrial Group. Unfortunately, the 45% sequential increase in profit on this group was offset by the breakeven performance of our A&D segment as a result of the lower sales volume reported for the period.

The company’s earnings for the quarter prior to the impairment of goodwill were $0.02 per diluted share, reflecting the change in sales mix between our 2 business segments noted a moment ago. We did make the decision during the quarter to write off all remaining goodwill on the A&D balance sheet commodity. The impact of which was a noncash charge of $0.36 per share.

So in summary, the performance of our business during the first quarter can best be summed up as a tale of two cities, one in which 90% for business performed exceedingly, while the other much smaller segment of our business was impacted sooner and more dramatically than we had anticipated.

Turning to Slide 5. Even though we had mentioned the uncertainties associated with defense funding concerns for some period of time, the impact of sequestration and other DoD funding issues on our business turned out to be more far-reaching and expedient than we had ever imagined. The impact took to many forms; planned shipments were delayed, funding for product purchases were moved out of the fiscal year, approvals were withheld and in one case, some long-standing programs were identified for in-sourcing by our customer. It was, as most of you can well imagine, a pretty hectic time for our team in charge of running this business. Against this backdrop, we made the decision to write off the balance of the goodwill, some of which had been carried on the A&D balance sheet since the acquisition of Metrum from Alliant Techsystems back in 1992. And while the move impacted earnings for the quarter, it positioned the A&D segment with a solid balance sheet going forward.

The quarter was not without its priced thoughts. We made important progress with our continuing R&D investments, advancing new groundbreaking technology closer to the proof-of-concept state. And we continue to make progress in new program wins having received notice of non [ph] selections from ITT, Northrop Grumman and Goodrich, the impact to which is expected to contribute to our top line once the awards are finalized and enter production later this year.

So in summary, the quarter was certainly a challenge for our A&D segment. In our view, the team performed well and did a nice job of balancing the short-term requirements of the business and its customers, while maintaining much-needed support for key long-term objectives.

Turning to Slide 6. We expect the impact of sequestration and other DoD funding-related issues to continue to affect our business until such time as new programs, products and cyber-related services achieve sufficient traction to offset the issues described a moment ago.

As many of you may recall, we made significant progress during 2012 in our efforts to expand international sales to customers in Australia, New Zealand and other Five Eye countries. The objective was and is to diversify our customer, product and service mix. For 2013, we are targeting additional perspective customers in the NATO countries, Japan and India. We will continue to focus on EMS sales for end-use applications that exhibit a high cost of failure and therefore require the unique pedigree, certifications and traceability standards that have long been an important part of our heritage. We will partner with national universities such as Purdue and Carnegie Mellon to develop new technologies to combat the exploding cyber threat, both for our country and for nations around the world. And we will pursue synergistic acquisitions as a means to both supplement our existing capabilities and to accelerate replacement of revenue that has been lost or delayed due to the issues we mentioned earlier. We remain focused on the future prospects for this business despite our most recent challenges. We have a great team in place and a number of new opportunities under development. We will manage it closely until such time as we exit the current turbulence, always striving to strike the right balance between short-term needs and long-term objectives.

Now let’s take a quick look at our Industrial Group, beginning with Slide 7. Revenue increased 28% sequentially from the fourth quarter of last year, driven by a combination of customers rebalancing inventory and re-shoring the manufacturing of components to the U.S.

Gross profit increased 45% sequentially to $8.1 million, up from $5.6 million for the fourth quarter of 2012 while gross margin increased by 130 basis points to 11.4%, up from 10.1% for the last quarter of 2012. EBITDA for the first period reached $9.4 million or 13.2% of revenue.

In addition to the positive financial results, the quarter was notable for the 7 new program wins that were awarded to Sypris during the period, 5 of which were for commercial vehicle customers and 2 of which were for off-highway customers. We continue to increase our investment in engineering and operational capability to make certain that we’ll be in a position to support the growth opportunities inherent in today’s global oil, gas and petrochemical markets. As we mentioned on our last call, we have engaged Toyota to accelerate the deployment of lean tools on our factories through the introduction of the Toyota production system, with the objective of further improving our processes and eliminating inefficiencies thereby increasing our competitiveness and margins. Solid progress is made during the quarter with the training phase now behind us.

In summary, the team responsible for our Industrial Group simply did an excellent job. The combination of positive financial results, numerous program wins and strong operational performance came together nicely during the period. And it is our pleasure to recognize them. Thank you one and all.

Turning now to Slide 8. The outlooks for our markets served by our Industrial Group appear to be shaping up fairly positively for 2013. The commercial vehicle market has strengthened since the fourth quarter of last year with orders placed during the 5-month period beginning in December of 2012 averaging in excess of 20,000 units per month. In fact, preliminary reports for April indicate orders in excess of 23,000 units, which would be 37% higher than those of last year. In any event, it appears that the fundamentals and orders are holding up to support a solid truck market for 2013.

The outlooks for our light truck and trailer markets, as well as our off-highway and agriculture markets also appear to be in good shape. We are looking forward to another year of profitable growth from our natural gas, oil and petrochemical markets with a global demand for our highly-engineered closures, insulated joints and other specialty piping components continues to be quite strong. The new business development pipeline remains quite active with 19 new quotes and process, representing an estimated $100 million or more of potential new business. If successful, many of these new programs would begin to contribute to the company’s top line as early as 2014.

During 2013, you can expect that we will continue to focus our efforts on 3 key strategic initiatives: Investing to increase productivity and efficiency, driving process improvements to reduce cycle times and increase reliability and selectively pursuing strategic opportunities to expand our customer and market share to leverage our fixed cost and organizational capabilities.

Turning now to Slide 9, Brian Lutes will review through the balance of our presentation this morning.

Brian A. Lutes

Great. Thanks, Jeff. Good morning, everyone. I’d like to take you through the highlights of our first quarter 2013 financial results. And as Jeff mentioned, please advance to Slide 10.

Q1 consolidated revenue totaled $78.4 million, this is down $18 million or 18.7%, attributed primarily to the much higher commercial vehicle volume in the prior year period. This was in line with our expectations for the quarter, but as Jeff mentioned, a much different mix. The defense spending uncertainty cause program and approval delays as a result of the continuing sequestration. Despite the lower year-over-year sales decrease, we achieved $8.1 million in gross profit, gross margin came in at 10.3%, again, driven by the strength of our Industrial Group, but offset by the breakeven performance within our A&D segment as a result of both the decrease of sales and a different product mix. I’ll discuss both of the segments in more detail, including sequential views in a moment.

With respect to earnings per diluted share, we came in at a $0.34 loss versus $0.27 positive in Q1 of 2012. But again, it does include a $6.9 million or $0.36 per share noncash impairment of all the remaining goodwill within our electronic group. In terms of the sequential view, let me move on and ask you to advance to Slide 11.

Consolidated revenues increased 16% sequentially from the fourth quarter of last year, rising to $78.4 million and driven by the 28% increase in revenue that our Industrial Group achieved. This was a result of both rebalancing and the resourcing onshore of these manufacturing components. In addition, gross profit for the quarter came in at $8.1 million or 10.3% of sales, again driven by the strength of the rebound. Unfortunately, the 45% sequential increase in profit from the Industrial Group was offset by the breakeven performance of our A&D segment.

Finally, you’ll note the earnings per share, again, as I mentioned earlier, came in was a $0.34 loss. It did include the noncash goodwill write-off versus a loss of approximately $0.05 for the fourth quarter of 2012.

Shifting our attention to the A&D segment, if you will, please advance to Slide 12. Starting on the left side, as we discussed, defense budgetary and funding uncertainties resulted in Q1 revenue that was well below our expectations. Year-over-year revenue decreased 48%, and when viewed sequentially, you’ll see a decrease by 39%. We began the year with a sense of optimism that the second term administration would either resolve or at least bring some stability to the budgetary uncertainty, impacting the DoD. It simply didn’t happen. And as a result, as you heard Jeff mention, we were impacted much sooner and far more dramatically than the team and us had anticipated.

Shifting to the right side of the page, you’ll see gross margin was essentially breakeven for the quarter, again, negatively impacted by the revenue profile and the change in product mix when compared to either the prior year or on a sequential basis. Again, we did fall beneath our internal expectations in the optimism we had, but for the time being, program delays or program losses can and will be offset by new wins eventually but these will result in timing differences that are likely to cause revenue gap as we move forward.

Shifting our attention to our industrial segment, please advance to Slide 13. Once again, on the left side, you’ll see that the Industrial Group’s first quarter revenue came in at $71.1 million. This was down $11.4 million or 14% from the prior year quarter, again, based on the rebound that was occurring in the first half of 2012. However, when viewed sequentially against fourth quarter, revenue increased $15.6 million or 28% for the fourth quarter.

And finally, shifting over to the right side of page, you’ll see our Industrial Group’s gross margin contracted a modest 60 basis points despite a 14% revenue decline versus the prior year quarter, again, reflecting continuing operating efficiencies across all the sites. Yet on a sequential basis, gross margin improved 130 basis points to 11.4% versus fourth quarter on revenue that increased $15.6 million. The first quarter truly demonstrated a renewed demand. This was driven by a combination of things, particularly with customers rebalancing their inventory level and the re-shoring of, pretty called [ph], components to the U.S. As Jeff mentioned, it’s worth noting again that all of our manufacturing sites within the Industrial segment did a tremendous job in responding to the increased customer demand.

In terms of summarizing our first quarter results, let me do that and ask you to advance to Slide 14. Once again, A&D did a tremendous job as well navigating the challenges imposed by sequestration, and as we mentioned, with the Industrial Group meeting the needs of the rebound in Q1, truly helped to offset the impact of sequestration on our financial results, particularly in Tampa. Obviously, we’re pleased that the commercial vehicle market has continued to rebound from the second half 2012 downturn as evidenced by a number of key facts. The industrial revenue was up 28% for the fourth quarter of ’12 — from the fourth quarter of ’12 to $71.1 million. Their gross margin was up 130 basis points from the fourth quarter to 11.4%. And finally, industrial EBITDA of $9.4 million was generated for the quarter. As you heard Jeff mention earlier, we’re underway with several important and exciting initiatives that will serve to further strengthen our overall competitive position and profitability. New programs underway in our A&D business that will both replenish and further diversify our revenue profile in future years. We continued funding several of A&D’s key R&D platforms as a means to expand its overall portfolio and drive future growth opportunities. You heard Jeff mention that within our Industrial Group, the implementation of the Toyota production system is underway to further advance, and in some cases, accelerate productivity gains. You heard us discuss new opportunities. These, in our industrial segment alone, represent an estimated $100 million or more per year of potential new business, which provide us with exceptional growth opportunities. Finally, and of significant importance, we continue to possess a very strong balance sheet and capital management that positions the company with flexibility to pursue meaningful synergistic growth opportunities.

This concludes our call today. At this time, I’d like to turn it back over to Alicia so we can open it up for any questions you might have.