Good day, and welcome to the Sypris Solutions Incorporated conference call..

Today's call is being recorded. At this time, for opening remarks, I would like to turn the call over to the President and Chief Executive Officer, Mr. Jeffrey Gill. Please go ahead, sir. .

Thank you, Michael, and good morning, everyone. Tony 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 2014. 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. Tony will then provide you with a more detailed review of our financial results for the quarter..

Now let's begin with an overview on Slide 4. I'm pleased to report that the company got off to a strong start for 2014 with revenue, gross profit, gross margin and earnings per share all rising on both a year-over-year and on a sequential basis. .

Consolidated sales increased 7% to $84.2 million, up from $78.4 million for the first quarter of 2013. Gross profit rose 31% to $10.6 million, up from $8.1 million for the prior year period, while gross margin increased 220 basis points to 12.5%. .

The results were even more favorable when compared on a sequential basis to the fourth quarter of 2013 with sales up 14%, gross profit up 66% and gross margin up 390 basis points. The company reported earnings of $0.08 per diluted share, which reflected a positive increase from both the first and fourth quarters of 2013.

Cash flow from operations was the strongest in over a year and, when combined with lower levels of capital investment, resulted in positive free cash flow for the period..

During the quarter, we were very pleased to announce the award of a contract with our in-country partner, NEC Asia Pacific, to develop a Cyber Security Lab for the Singapore Government. The lab will be used to train homeland affairs and other personnel in the defense of and response to cyber security attacks on agencies of the Singapore Government.

NEC will provide the hardware for the platform, including the Internet traffic generation equipment, while we will provide the simulation and training software. The value of our portion of the contract approximates $3.1 million, which does not include the value of options for the future value of annual licensing and maintenance fees.

The initial commissioning is scheduled for midyear with total program deliveries to take place over the ensuing 18 months..

In summary, we were pleased with the results for the quarter. We are off to a good start to 2014, and we look forward to more progress as we move through the year..

Turning now to Slide 5. Revenue for our Aerospace and Defense segment increased 16% to $8.4 million from $7.3 million through the same period in 2013. Gross profit and gross margin declined slightly during the quarter due to the change in mix of electronics manufacturing services during the period.

It is important to note, however, that the quarter did not contain any contribution from the award of the Singapore Cyber Security Lab contract, which will be recognized in future periods. .

The Cyber Range represents the first of 3 technological platforms that have been under development for the past several years with the Range being the first to market.

As many of you may recall, the Range has been developed into a critical platform for organizations to train their personnel to expertly identify, prioritize and respond to increasingly complex cyber attacks.

The recent award by the Singapore Government represents our first international sale, where momentum continues to build with sales discussions now exceeding $25 million of potential business..

During the quarter, we maintained our investments in new product development, the financial impact of which was reduced on the P&L when compared to prior periods due to the receipt of customer funding to complete the development of our second platform, SYPHER, a field programmable gate array that will serve as the encryption core for future secure communications products..

We also continue to hold discussions with potential customers to complete the development of our third platform, SIOMETRICS, which is a breakthrough technology that utilizes unique characteristics in a silicon wafer for identity authentication rather than through software-based identification. .

The potential for this technology is quite intriguing for a couple of reasons. To start with, it eliminates the need to authenticate and store end user pass codes, thereby making identity authentication more easily scalable.

The potential applications are numerous, ranging from use in electrical meters to large-scale networks to automobile electronic systems. It becomes even more interesting, however, when the SIOMETRICS technology is combined with our SYPHER encrypted processors, which results in a chipset that is exponentially less vulnerable to cyber attacks..

As I mentioned a minute ago, we are currently under review by several customers to fund the integration of the SIOMETRICS technology into an existing application. We believe that it should take an estimated 18 months to complete this work. In the short term, any customer funding would serve to reduce expenses currently being incurred by Sypris.

In the long term, however, if successful, the potential would appear to be significant..

The first quarter continued on a positive note for EMS sales to customers with applications in severe environments, including Northrop Grumman, Lockheed Martin and Exelis. Business activity continued to grow in this area, supporting our expectations for double-digit growth in 2014..

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

As we've discussed in the past, we are making important progress with our efforts to secure additional funding for specific research and development opportunities.

If successful, these funds will help us to accelerate the introduction of these new promising technologies into the marketplace and will reduce the expense being incurred on our financial statements. .

We will continue to focus on EDMS 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.

And we will pursue synergistic acquisitions as a means to both supplement our existing capabilities and to accelerate the replacement of revenue that has been lost or delayed due to the issues we mentioned earlier..

Now let's take a quick look at our Industrial Group beginning with Slide 7. Sales increased 7% to $75.8 million, up from $71.1 million for the first quarter of 2013. Gross profit rose 37% to $11.2 million, up from $8.1 million for the prior year period, while gross margin increased 330 basis points to almost 15%.

EBITDA increased 18% to $11.1 million or approximately 15% of sales. Results were even more favorable when compared on a sequential basis to the fourth quarter of 2013 with sales up 19%, gross profit up 54% and gross margin up 340 basis points, while EBITDA increased 75%. .

The strong performance for the quarter reflected solid demand across all markets, the impact of TPS initiatives on operational efficiencies and an attractive mix of shipments to end users. Key metrics for quality and delivery remained at world-class levels..

Our investments and process improvements and the results from our partnering with Toyota are beginning to pay real dividends in terms of increasing manufacturing efficiencies and improving equipment uptime while simultaneously reducing cycle times and scrap.

We remain optimistic that the company will realize substantial additional benefits as we continue to implement the TPS tools and culture at all of our plants during the coming years..

We continue to make investments during the period in production technology and product engineering, resulting in patent applications for new drivetrain component designs that are expected to reduce the weight of certain parts by as much as 16% when compared to current customer designs.

We hope to introduce these parts to the marketplace later this year. The potential benefits are meaningful in terms of material savings for the customer and weight savings for the end user, who will benefit from fuel savings and/or greater load capacity.

We plan to have these products in test in the very near term, and we'll be looking forward to the results..

Turning now to Slide 8. The outlooks for the markets served by our Industrial Group appear to be shaping up fairly positively for the coming year. The commercial vehicle market for Class 8 trucks continues to improve.

Orders from fleets have been exceptionally strong recently with bookings over the past 5 months averaging well over 300,000 units on an annualized basis. Should this order rate continue into May and June, schedules will inevitably be increased relatively soon..

Demand for class 4 through 7 medium-duty trucks continues to recover along with the housing markets, while the outlooks for our light truck and trailer markets as well as for our off-highway and agricultural markets also appear to be in good shape for the coming year..

We are looking forward to another year of profitable growth from our natural gas, oil, petrochemical markets. The global demand for our highly engineered closures, insulated joints and other specialty piping components continues to be quite strong. .

With all of the operational progress that has been made in recent years, it should be of no surprise that our quoting activity from new business with both existing customers and with new potential customers is quite active.

As many of you may recall, the potential aggregate contract value of these discussions currently ranges from $85 million to $110 million per year and could impact the business, if successful, as early as 2015..

investing to increase productivity and efficiency, driving process improvements through the use of TPS techniques to reduce cycle times and increase reliability and selectively pursuing strategic opportunities to expand our customer and market share to leverage our fixed costs and organizational capabilities. .

In summary then, we believe that the company is well positioned for a positive 2014..

Turning now to Slide 9. Tony will lead you through the balance of our presentation this morning.

Tony?.

Thanks, Jeff, and good morning, everyone. And I'd like to take you through the highlights of our financial results for the first quarter of 2014. I will begin with our consolidated group results and ask you to advance to Slide 10..

Q1 consolidated revenue totaled $84.2 million, up $5.8 million, or 7%, as compared to the prior year. While both segments report increased revenue year-over-year, the Industrial Group led the way with a $4.7 million improvement. This increase was primarily due to higher commercial vehicle volumes.

The A&D segment also increased $1.1 million year-over-year to $8.4 million for the quarter..

Gross profit increased to $10.6 million in the quarter from $8.1 million in the prior year period. We achieved a gross margin of 12.5%, driven by the performance of our Industrial Group, reflecting favorable product mix and greater operating efficiencies. .

Earnings per diluted share came in at $0.08 per share versus a loss of $0.34 per share in the first quarter of 2013. Our bottom line improvement was driven by revenue growth, favorable mix and operating efficiencies for the Industrial Group and provides a solid foundation for the year given our current view of the market for the balance of 2014. .

One further note. As you will recall, our 2013 results included a $6.9 million or $0.36 per share goodwill impairment..

Let me move on to our sequential consolidated first quarter results and ask you to please advance to Slide 11. .

Consolidated revenues increased 14% sequentially from the fourth quarter of last year, rising to $84.2 million and driven by a 19% increase in revenue for -- from our Industrial Group.

Our consolidated gross profit of $10.6 million for the quarter was up $4.2 million or 66% sequentially from Q4 attributable to the conversion on additional Industrial Group revenue, favorable mix and operating efficiencies. These items are also reflected in the gross margin increase of 390 basis points to 12.5% from 8.6% in Q4. .

And finally, our first quarter earnings of $0.08 per share was an improvement sequentially from Q4's bottom line, which was slightly above breakeven. .

Next, we will discuss our Aerospace and Defense segment's performance and ask you to please advance to Slide 12. .

Starting on the left side of the slide, we had an increase in first quarter year-over-year revenue of $1.1 million to $8.4 million for the quarter. Sequentially, however, we ended below the $10 million top line for the fourth quarter of 2013.

Among the positives for the quarter, we saw continued growth within A&D for our Electronic Manufacturing Services operations. However, the mix of revenue from the higher margin severe environment programs was lower this period than the prior year.

Our customer base in this area has responded favorably to our successful onboarding of new EMS programs, and we are actively pursuing opportunities to increase scope on certain programs, and we are competing for new business with both existing and potential customers..

We were also impacted in Q1 as we continued to await approval from a customer to begin production on a sizable EMS contract. The delayed approval is related to the pending resolution of a technical issue between our customer and the end user.

Material for this program is in-house, our manufacturing process is proven and we will begin production immediately upon receipt of customer approval. .

And finally, we wanted to note that revenue associated with the award of the Cyber Lab will be recognized in future periods based upon the applicable accounting guidance..

Now moving to the right side of the slide, our gross profit was below breakeven for the quarter with a loss of $600,000, which was unfavorable to the comparable prior year quarter but up from the sequential quarter.

Last year, you might recall that we discussed the loss of a customer in our space or severe environment EMS operation during the first quarter.

Although we've replaced the loss in the revenue stream from a year ago, our profitability has been impacted as the revenue on the new programs has a higher material content and, therefore, lower contribution margin than the space revenue that exited our business.

We are, however, seeing higher margins on the new EMS business as we move beyond the ramp-up period for these new programs, and this is reflected in the sequential improvement in gross margin..

Our team for the A&D segment continues to control variable spending and is managing their resources judiciously. However, our challenge is to continue to win new programs and drive more top line growth to return this segment to profitability..

Let me now shift to our Industrial segment performance and ask you to please advance to Slide 13. .

Our team in Sypris Technologies delivered outstanding results for the first quarter, generating $75.8 million in revenue and $11.2 million in gross profit. On the left side of the slide, we show the year-over-year revenue increase of $4.7 million, or 7%, and a sequential quarterly increase of $11.9 million or 19%.

Our customer orders are following the trend of the overall commercial vehicle market, which enjoyed a strong first quarter and continues to show a forecast that should support comparable period revenue growth for the Industrial Group throughout 2014.

The recent industry forecast by ACT Research shows full year Class 8 production up 16.5% in 2014 over 2013 and Classes 5 through 7 up 6.3% in 2014 over 2013. We believe our team is well positioned to meet this growth in demand as the market upturn continues..

Now shifting to the right side of the slide, you'll see gross margin for the Industrial segment also showed year-over-year and sequential improvements of 330 and 340 basis points, respectively.

As previously mentioned, we had a favorable product mix for the Industrial Group during the first quarter, and productivity metrics improved during the quarter, reflecting the efforts of our team to prepare our people, processes and equipment for the increased volumes associated with the market upturn and then the daily execution of our team to efficiently move the product through our plants..

Let me now close with a brief summary of our first quarter performance and ask you to please advance to Slide 14. .

We are pleased to report a solid start to 2014 with first quarter earnings of $0.08 per share driven by our Industrial Group's performance. Our order board for the Industrial Group as we exit Q1 continues to look strong, and we have a positive outlook for the balance of 2014.

We continue to hit our targets in the Industrial Group for quality, on-time delivery and other key operational metrics as we respond to the increased demand.

The deployment of TPS across all Industrial Group's facilities is generating additional production capacity as we reduce setup, changeover and production cycle times and increase equipment uptime in our existing operations. .

The successful onboarding of EMS programs of our Aerospace and Defense segment is generating sequential improvements in contribution margin and driving new business opportunities with existing and potential customers. .

The award for the Cyber Security Laboratory demonstrates the ability of our Aerospace and Defense team to advance their technology from concept to development to delivery to the end user and is opening doors for us with both additional business partners and customers for our cyber platform. .

Our A&D segment has additional technology platforms under development, which are being funded both internally and externally to support the long-term plans for this segment..

Finally, we believe we have a real opportunity to continue to deliver quarterly, year-over-year improvements based upon the current outlook for the balance of 2014..

This concludes our call today. And at this time, I'd like to turn it back over to Michael so we can open it up for any questions you might have for us at this time. .

[Operator Instructions] And we'll take our first question from Jim Ricchiuti of Needham & Company. .

I have a few questions on the electronics portion of the business.

First off, on the Singapore contract, can you say how much of that you might see in revenue in 2014? Is it -- is the bulk of it in 2015? Can you give us some sense as to how that plays out?.

Yes, it's really difficult to lay that out at this point, Jim. What we're working through right now as we close the quarter and move into the second quarter is really matching up the contract with the accounting guidance. It's a complex area.

We don't think that it's going to be material in the near term, but we still have a lot to work through on that issue. .

Okay.

And you alluded to additionally some business, and I think the number that you put out there, potentially $25 million, now is that cyber-related business, Jeff, that you see over the next couple of years?.

Yes, that's -- it's -- Jim, that's -- the $25 million is with regard to the Cyber Range specifically. .

Okay. And is there -- obviously, there are some milestones and there's timelines associated with that.

But can you give us any feel as to whether you see this opportunity playing out in 2015 where it could be meaningful? Or is it looking beyond 2015?.

No, I think that the opportunity to secure additional awards for the Cyber Range is very positive this year. And each contract will be somewhat different, and so the revenue and profit recognition off of that will be dependent upon the milestones within each contracts.

So I guess the best way to answer your question, Jim, is we see the opportunity to book additional cyber contracts this year, the recognition of which revenue will take place over different periods depending upon the composition or nature of the contract. .

Okay, that's helpful. And when I look at your R&D spend, it's fairly modest. And given what you're doing, it's -- to what extent can you maintain this level of investment given the opportunities? I mean, clearly, you're trying to get some additional fundings from -- externally.

What needs to be done? I mean, will we see your R&D ramp up if you're not able to secure this additional funding?.

Well, for 2014, our R&D under any circumstances will be less than prior years because we have secured some funding to take SYPHER, for example, to implementation stage. Some of the R&D funding we incurred in the past was for the Cyber Range.

So we're looking at ways to further support a reduction in R&D expense in terms of our burn rate as well as to accelerate these other 2 platforms into the marketplace. But as you model 2014, under any alternative, R&D will be less than prior years. .

Got it. And then one final question and I'll jump back in the queue is also on the electronics business. It sounds like you see some potential pickup in the EMS portion of the business. You alluded to what, I guess, is a fairly sizable piece of business where you already acquired materials for.

Is -- can you give us any time line as to when that could kick in? Is that something as -- or potentially as early as Q3?.

Yes, I would say Q3 would be a reasonable estimate. So somewhere between Q3 and Q4. .

[Operator Instructions] We will take our next question from Tristan Thomas with Sidoti & Company. .

Two quick questions. First was a continuation of Jim's R&D question.

Do you expect R&D to remain lower in 2015 as well? Or is it a little too early to tell?.

It's a little too early to tell, Tristan. I think that the success that we're having today in getting products to the point where we can seek customer funding, we're going to continue down that path and hopefully be able to externally fund a lot of the R&D that we have today. So I wouldn't see a significant ramp in 2015. But it's a bit early. .

Okay. And then I know you mentioned product mix in the Industrial Group was favorable.

Could you elaborate a little more on that and then if you expect that to continue into the rest of 2014?.

Tristan, this is Jeff. The mix is coming. We're having an improved or higher shipment levels in going to some of our more niche markets such as off-highway, agriculture. Our energy markets remain strong, and so that's influencing it.

Our margins are also being driven by the efficiency and the TPS initiatives that have been under way now for several years. And so we're really seeing some benefits coming from not just reduced scrap and those types of things but reduced cycle times, which means we're -- and reduced setup times. And so we're just being much more efficient.

We're turning the work more quickly. We're able to do it in smaller lots. And so the plants are just running better. And that's also a big contributor. .

Okay.

And do you think there's still significant room for you to improve your internal processes?.

Oh, yes. Yes. Absolutely. .

[Operator Instructions] And at this time, we have no further questions in the queue. .

All right. Well, thank you, Michael. Tony and I would like to thank you for joining us for this call. We welcome your continued interest and, of course, your questions about our business. Thank you, and have a great day. .

And ladies and gentlemen, that does conclude today's conference. We thank you for your participation..