SYPR - NASDAQ

Good day, and welcome to the Sypris Solutions Fourth Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note today’s event is being recorded. And I would now like to turn the conference over to Jeffrey Gill, President and CEO. Please go ahead.

Thank you, Tom, and good morning, everyone. Tony Allen and I would like to welcome you to this call, the purpose of which is to review the company’s financial results for the fourth quarter and full year 2021. 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 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 an update on the outlook for each of our primary markets. Tony will then provide you with a more detailed review of our financial results for the quarter and the year. Now, let’s begin with the overview on Slide 4. We’re pleased to report that revenue for the quarter increased 25% year-over-year, driven by a 30% increase for Sypris Electronics and a 22% increase for Sypris Technologies. We are also pleased to note that the top-line performance was achieved despite the impact of material shortages and supply chain challenges that permeated across our business. Gross profit for the quarter increased 65% year-over-year, supported by an 83% expansion for Sypris Electronics and a 51% increase for Sypris Technologies. Gross margin for the company expanded 420 basis points year-over-year and 160 basis points sequentially, resulting in a consolidated gross margin of 17% for the quarter. This positive achievement was supported by both units, with gross margin for Sypris Electronics increasing 540 basis points to just under 19%, while gross margin for Sypris Technologies rose 310 basis points to almost 16% of revenue for the period. The combination of strong revenue growth and expanding margins resulted in a 133% increase in earnings per share for the quarter, increasing to $0.02 per share from the prior year loss of $0.06 per share. For the full year, earnings per share increased 62% to $0.13 per share up from $0.08 per share for 2020. We concluded 2021 with backlog up 57% year-over-year as orders for the services of Sypris Electronics surged 46% during the year. The order board for truck and all-terrain customers for Sypris Technologies continue to remain strong, limited only by OEM supply chain constraints. Turning now to Slide 5, we’ve been pleased to announce several additional new contract awards since we last spoke in November. More specifically, at Sypris Electronics, in late December, we announced the award of a contract to build embedded circuit card assemblies that will perform certain cryptographic functions for the Army Key Management System, or AKMS with production expected to start in early 2022. The AKMS is a fielded system that consists of 3 subsystems; local communications management software, automated communications engineering software, and the simple key load device. The embedded circuit card assemblies to be produced by Sypris will perform the cryptographic functions for a ruggedized portable handheld simple key load device that will be used to securely receive, store and transfer data between compatible cryptographic and communications equipment. In early February, we announced the receipt of a multi-year follow-on contract with the USD prime contractor to produce and test electronic power supply modules for a large, mission-critical Navy platform. The award is for an electronic warfare improvement program. The upgrade will provide the ability to actively jam incoming missiles that threaten the warship, cue decoys and adapt quickly to evolving threats. The improvements to the electronic attack portion will provide integrated countermeasures against radio frequency-guided threats, and extended frequency range coverage according to the Navy. The system is software defined. Unlike analog radars of the past, the transmitters and receivers can easily adjust to send and receive different waveforms, allowing the system to be more flexible. The adaptability for active electronic attack comes as foreign aggressors are simultaneously developing several new classes of missiles at a significant rate. Systems like this program and new directed energy weapons are part of the Navy’s efforts to enhance the useful life of existing systems. The system’s game-changing capability for non-kinetic electronic attack options can be further deployed in additional critical areas. From advanced communications to multi-role waveforms, the multi-function applications of the system will provide enhanced mission capabilities to the U.S. Navy Fleet, while presenting opportunities for future reductions in cost, size, weight, and power according to the U.S. Naval Institute. The contract calls for a significant increase in production volume from existing levels beginning in 2022. Also in February, we announced the receipt of a follow-on award from a U.S. DoD prime contractor to produce and test electronic power supply modules for a mission-critical long-range precision-guided anti-ship missile system. The program is designed to meet the needs of the Navy and Air Force war fighters. The missile system employs sophisticated precision routing and guidance capabilities. It is designed to detect and destroy specific targets within groups of ships by employing advanced technologies that reduce dependence on intelligence, surveillance, and reconnaissance platforms in contested environments. According to news releases, the system is designed to operate in severe weather and environmental conditions, and provides range, survivability and technology that no other current system offers. The contract calls for a material increase in production volume from existing levels beginning in 2022. And earlier this month, Sypris Technologies, we announced the receipt of a long-term, sole-source contract extension to provide drivetrain components for use in the production of medium and heavy duty commercial vehicles. In addition, the company was awarded a new program to supply components for use in the production of side-by-side all-terrain vehicles. The components produced by Sypris for using the drivetrain in medium and heavy duty trucks are essential to the performance of both the drive and the steer axles of the vehicles. The award of the contract extensions timely for the commercial vehicle market is in the middle of a multi-year expansion. Production in heavy duty vehicles increased 23.4% in 2021, while the outlook for each of 2022 and 2020 forecast additional double-digit growth, according to ACT Research. The new program award for side-by-side all-terrain vehicles provide Sypris with the opportunity for further growth in this burgeoning market. The finished components produced by Sypris to exacting specifications will be incorporated into the differentials of these vehicles. The all-terrain vehicle market set to grow at a compound annual rate of 16.8% between 2020 and 2025, according to Technavio Research. Production under this long-term contract award is scheduled to begin in 2023. Each of these contracts are representative of the high cost of failure applications for which Sypris is well known. We expect the momentum of new contract wins to continue during 2022, and we remain very optimistic about the potential for future program and revenue growth as we move forward. In summary then, we are pleased with a substantial progress that continues to be made across our business. The supply chain challenges are real and will continue to require persistence, flexibility, and a high degree of responsiveness and intimate coordination with our customers for the foreseeable future. When the supply chain issues do eventually subside, however, we should anticipate even better results. Now, let’s advance to Slide 6 to review the outlook for each of our major markets. According to ACT Research, the demand for the production of Class 8 heavy vehicles is expected to increase 11.9% in 2022 and an additional 21.6% in 2023. There are many factors that are having a positive influence on the demand for transportation, an increasingly strong U.S. economy, housing strength, manufacturing prosperity, carrier profitability, the acceleration of the transition to e-commerce, and fiscal stimulus are combining to drive demand for freight to high levels. Shortages of semiconductor chips, steel and other components are serving to hold back even higher levels of production, effectively pushing 2022 orders into 2023. OEM Class 8 backlog is currently up 32% year-over-year to an estimated 259,000 units. So despite the short-term issues, the outlook remains extremely healthy. Turning now to Slide 7, the market for the transportation and use of natural gas is key for Sypris to be followed by the market for the transportation and processing of crude oil. Oil prices have increased significantly over the past year with the price of West Texas Intermediate up 60% from March of 2021. Brent is up 58% for the same period. The current outlook is for oil prices to peak at around $112 per barrel by the end of the second quarter. Total rig count is up 65% over this time last year. Our sense is that the continued expansion of the U.S. economy will eventually result in higher prices for all forms of energy, which in turn will bode well for capital projects as providers adjust to meet increased levels of demand. Our energy product backlog through February of this year is up 60% from December of 2021, which is perhaps a positive sign for things to come. As you’ll see from the chart on Slide 8, the long-term market for defense spending remains positive. And within the overall budgetary allocations, spending for technology upgrades on strategic platforms continues to be a very high priority. Our backlog of future business is up 62% as of year-end with firm orders extending well into 2023. We are very pleased with the level of new business momentum and we were optimistic that this important trend will continue going forward. During previous calls, we discussed the changes that have taken place in our market mix over the past several years. Turning now to Slide 9. Please note that revenue is now forecast to increase 25% to 30% for 2022 with shipments to our customers in defense-related markets expected to result in a 20% increase in overall mix, rising to 36% of sales in 2022, up from 29% of sales in 2021. We believe that additional opportunity exists to further diversify our business, and we will continue to aggressively pursue this outcome. Now, let’s turn to Slide 10 for a brief summary. The fourth quarter of 2021 served as both a capstone for our year and as a solid foundation from which to support further growth in 2022. Revenue for the quarter increased 25%. Our backlog grew by 57%. Gross profit for the quarter rose 65%. Our gross margins expanded by 420 basis points. The rise in revenue and growth in margins resulted in a 133% or $0.08 per share improvement in year-over-year earnings. Our markets are in good shape with a positive outlook for the economy expected to have a beneficial impact on the demand for commercial vehicles and energy consumption. Defense spending is rising. Our backlog for this segment is up 62%, and we may yet feel some additional tailwind depending upon the future outcome of the current unfortunate geopolitical situation. Our recent contract awards are expected to provide further support for top-line expansion during the year, while we remain optimistic about the potential for yet additional contract wins and successes. As a result, we have increased our outlook for 2022, up from the initial guidance we provided in November of last year. Revenue is now expected to increase 25% to 30% year-over-year. We expect gross margin to follow suit, expanding 200 to 250 basis points in 2022, when compared to the prior year, while cash flow from operations is forecast to increase materially year-over-year supported by strong earnings growth. The wind is clearly at our back, so our focus must and will be on execution. Almost daily supply chain trials will continue and there will be surprises and most assuredly challenges, but this is always the case. Quite simply, we are really looking forward to the task of building the business profitably during the coming year and beyond. Turning now to Slide 11, Tony Allen will lead you through the balance of our presentation this morning. Tony?

Thank you, Jeff, and good morning, everyone. I’d like to discuss with you some of the highlights of our fourth quarter financial results. Q4 consolidated revenue was $25.8 million, an increase of 25.2% from the fourth quarter of last year. The revenue growth of $5.2 million was split evenly between our 2 segments, with each increasing by $2.6 million. The year-over-year growth rate breaks out at 21.7% for Sypris Technologies and 30% at Sypris Electronics. Demand for heavy truck components led the way for Technologies supported by additional volumes from the automotive, sport utility and off-highway markets. Electronics growth was driven by increased shipments on a defense program that transitioned into full rate production during Q4 following the successful completion of the limited rate build earlier this year. Consolidated gross profit for Q4 increased $1.7 million or 65.1% to $4.4 million in 2021 from $2.7 million in 2020. The higher volumes in both segments drove the profit improvement for the quarter with gross profit for Technologies up nearly $800,000 or 51.5%, and Electronics up nearly $1 million or 83.5% from the prior year. Gross margin improved to 17.1% for Q4, a 420 basis point increase over the 12.9% reported in the prior year and a 160 basis point sequential improvement. Gross margin for Sypris Technologies was 15.8% during Q4, up 310 basis points from the prior year. Technologies turned in and it has quarterly gross margin of the year, despite revenue being lower than both Q2 and Q3 due to the seasonal impact of customer schedules over the holidays. Gross margin for Sypris Electronics was 18.7%, an increase of 540 basis points from the prior year. Electronics gross margins have been within a 210 basis point range over the past 3 quarters following a slow start to the year with Q1 revenue nearly 40% below Q4 and gross margin for Q1 at only 9.5%. Gross margin for Electronics for the 9-month period, including Q2 to Q4 is 19.9%, which demonstrates the team’s ability to deliver consistently strong results when they have sufficient volume to balance their production schedule. Our consolidated SG&A expense was $3.3 million for Q4 or 12.8% of revenue compared to $2.8 million or 13.8% of revenue in the prior year. The spending measures put in place during the pandemic starting in March 2020 resulted in lower expense in the prior year, and certain of those actions were phased out in the second half of 2021 with the balance occurring in the first half of 2022. Our operating income for Q4 was $1.1 million or 4.3% of revenue, compared to a loss reported for Q4 of 2020 of $200,000. This is our third consecutive quarter with profitable results at the operating income line, generating 40 to 50 basis points sequential improvements in operating margin over that period. Our diluted earnings per share for Q4 was $0.02 per share compared to a loss of $0.06 per share a year ago. This is also the third consecutive quarter of being positive in EPS, a trend we expect to continue going forward. We are pleased to close out the year with another profitable quarter and both of our segments positioned well as we kick off the new year. Please advance to Slide 13. Consolidated revenue for the full year was $97.4 million, an increase of $15.1 million or 18.3%. At the segment level, revenue for Technologies increased $16.4 million, which was partially offset by $1.3 million decrease for Electronics. Similar to Q4, the growth for Technologies centered around a strong heavy truck market as well as contributions from our automotive, sport utility and off-highway customers. Revenue in 2020 was heavily impacted by the pandemic as demand plummeted in Q2 before starting to rebound in the second half of last year and continuing into 2021. We expect further improvement in the heavy truck market in both 2022 and 2023 with double-digit growth projected in each year. The slight drop in full year revenue for Electronics in 2021 reflected the slower than expected start to the year in Q1 that we discussed on the previous slide, while the balance of the year improved to reach a run rate in Q4 that is more indicative of the revenue level we expect for this segment in 2022. Consolidated gross profit increased $2.5 million or 20.4% to $14.5 million in 2021 from $12.1 million in 2020. Technologies provided $2 million of the increase, while Electronics contributed the balance of the profit improvement despite the drop in revenue we just discussed. The percentage increase in gross profit at the segment level was 31.7% for Technologies and 8.5% for Electronics. Gross margin improved to 14.9% for the year, up 30 basis points from the prior year. Gross margin for Sypris Technologies was 13.1%, which is a 50 basis point decline from the prior year as product mix included a lower percentage of energy products, and our operating supplies and equipment maintenance costs increased compared to the prior year. One of our initiatives has been to improve equipment uptime as demand increased in 2021 and to prepare for expected higher volumes in 2022 and 2023. Certain machines required additional spend to bring the equipment back in line with the OEM standards to operate more efficiently. Another area of focus has been to reduce tooling consumption in our machining operations. We have implemented new processes to address tooling and other operating supply expenses, which we expect to contribute to higher margins in 2022. Gross margin for Sypris Electronics was 17.9%, an increase of 200 basis points from the prior year. We were able to improve margins in this segment despite the drop in revenue with a more favorable program mix. This included improved pricing from a customer on certain units shipped during 2021 on one of our multi-year programs. Additionally, we had a price increase during 2021 on another key multi-year program that will continue into 2022. We also completed a program during 2021 that had component yield issues during the production phase of the program that negatively impacted margins. Our consolidated SG&A expense was $12.6 million, or 12.9% of revenue compared to $12 million, or 14.5% of revenue in the prior year. In addition to the pandemic related spending reductions that reduced our 2020 expense, our medical claim expense increased in 2021, which was primarily attributable to the number of high-cost claims incurred during the year. Our operating income for 2021 was $1.9 million or 2% of revenue, an increase of $1.8 million from the income reported for the prior year. We expect to improve our OI percentage further in 2022 with the anticipated increase in revenue. We look forward to reporting much higher levels of profitability in the coming year. Our diluted earnings per share for 2021 was $0.13 per share, an increase of 62.5% over the prior year. Our net income in 2021 includes $3.6 million from the forgiveness of our PPP loan, while net income in 2020 includes a deferred tax benefit of $3.7 million from the change in the valuation allowance for our Mexican subsidiary, partially offset by net changes in the foreign deferred tax assets during the year. Our cash flow from operations for 2021 was $4.2 million compared to $3.6 million for 2020. Our working capital increased during 2021 to support our revenue growth during the year. But the most significant portion of the working capital change relates to inventory procured in support of our order backlog for the Electronics segment for shipments in 2022 and 2023. We received customer payments on certain of our larger defense-related programs during 2021 to fund the purchase of inventory for the life of the programs. The payments are accounted for as contract liabilities and classified on our balance sheet as current or non-current based on the anticipated shipment dates. Therefore, although our inventory increased nearly $14 million during 2021, the cash flow impact of this change was substantially offset by the funds received from our customers. We are pleased with our performance for the year and look forward to driving further improvements in our operating results in 2022. Please advance to Slide 14. On this slide, we show our trend of consolidated gross margin over the last 5 years and our expectation for 2022. Consolidated gross margin was 14.9% for 2021, a 30 basis point improvement over the prior year. The margin performance for each segment was discussed on the previous slide, but it is worth highlighting our recent performance in 2021 as we review the trend in consolidated gross margin. In addition to the lower revenue generated by Electronics in Q1 of 2021 compared to the balance of the year, Technologies also started the year slow. At a consolidated Q1 revenue was only $20 million and gross margin was $9.1%. As volumes increased beginning in Q2 to an average quarterly run rate of $25.8 million for the balance of the year, our consolidated gross margin for the last 9 months was 16.4%. As compared to the outlook for gross margin we set 1 year ago on this call, our run rate for this 9-month period is just 10 basis points below the 16.5% target. With heavy truck market conditions currently projected to be favorable in 2022, and the increase in backlog for the Electronics segment as we enter the new year. We expect revenue growth in the range of 25% to 30%, and we expect to deliver year-over-year margin improvement in the range of 200 to 250 basis points, placing us at a 17.1% margin at the midpoint of this range in 2022. Please advance to Slide 15, and I will conclude my remarks. We closed 2021 on a positive note with Q4 revenue of 25.2% from the prior year to $25.8 million. For the full year, revenue was $97.4 million, an increase of 18.3% over 2020. Gross profit increased 65.1% in Q4 to $4.4 million with both segments contributing to the improvement. For the full year, gross profit was $14.5 million, an increase of 20.4% over 2020. Gross margin in Q4 improved 420 basis points over the prior year to 17.1%, while full year gross margin increased 30 basis points to 14.9%. Our margin performance over the final 3 quarters of 2021 provides a solid foundation for our outlook. Operating income was $1.1 million in Q4 and $1.9 million for the full year with positive OI reported for the last 3 quarters of the year. Earnings per share for Q4 was $0.02 per share, resulting in EPS of $0.13 per share for the full year. Demand from our customers in the commercial vehicle market was a key factor in our revenue growth during 2021. The market outlook remains strong with North American Class 8 production forecast to grow 11.9% in 2022, and an additional 21.6% in 2023. Positive market conditions together with the record backlog for the Electronics segment as we enter 2020 support our expectations for the coming year. We are currently projecting our top-line to grow 25% to 30% and expect gross margin to expand 200 to 250 basis points. We also expect cash flow from operations to improve in 2022 driven by improved profitability and continuing to aggressively manage working capital. We greatly appreciate the support of our employees, customers and suppliers, and we thank you for your continued interest and support of our business. At this time, I’d like to turn it over to Jeff for closing remarks.

Thank you, Tony. We’d like to thank you guys for joining us on the call this morning. We’re looking forward to a year of double-digit growth, expanding margins and increased profitability. And please note, we appreciate your continued interest in our business. Thank you and have a great day.