Jeffrey T. Gill - Chief Executive Officer, President and Director Anthony C. Allen - Vice President, Treasurer and Assistant Secretary.

James Ricchiuti - Needham & Company, LLC, Research Division Tristan Thomas - Sidoti & Company, Inc. Alan W. Weber - Robotti & Company, Incorporated Justyn R. Putnam - Talanta Investment Group, LLC.

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

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 cost and organizational capabilities.

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

the first being the nonbinding letter of intent for an acquisition that, if successful, would merge into the existing footprint for our Industrial Group; and the second being the potential joint venture for the manufacture and sale of driveline products in Asia.

This concludes our call today, and at this time, I'd like to turn it back over to Matt, so we can open it up for any questions that you might have for us. Thank you, very much..

[Operator Instructions] We'll take our first question from Jim Ricchiuti with Needham & Company..

First off, just if we could talk a little bit about gross margin, so the step down in gross margin, first half to Q3, is it fair to say that the issues that surfaced in the industrial business appear more temporary, and that you could assume if revenues remain at these levels in Q4 that we would see margins recover somewhat in this business?.

Yes. Jim, we do expect that the issues largely that we experienced during the third quarter are behind us on the Industrial Group in terms of the major maintenance issues, and we would look to -- for revenue to remain at the Q3 levels in Q4, and we look for margins to return to something that resembles more what we had in the first half..

Okay.

Now on the Electronics Group, I mean, clearly with A&D, I mean, it seems like it's -- at least, in large part, an issue of volume and revenue, and certainly mix plays into it, but it doesn't sound like unless we see some improvement in the overall revenue picture in the Electronics Group that there would be much in a way of margin improvement in Q4, is that fair to say?.

Yes, I think that's fair. Certainly, the -- we're not expecting a significant change in revenue level during Q4. The mix, I think, we -- that we experienced in Q3, we could have some improved mix in Q4 that will benefit us, but not a significant change in margins..

Got it. And if we just switch gears a little bit, Jeff, can you elaborate, can you expand at all on the agreement that you have in place with respect to this acquisition? You refer it to as an acquisition of a North American company, any -- is it a U.S.

company, and I wonder if you could talk a little bit if you can about the end markets, and perhaps, customer overlap?.

Pleased to, Jim. Yes, it is based in the U.S. It will expand our customer share in, I think, a very positive way with our existing customer base.

We have had the chance to inform our customers of the transaction, and they were uniformly positive in their responses, and this business has done a very nice job of staying well up to date in terms of its manufacturing processes and technologies, and so it will add a very, very efficient operation to our existing Industrial Group..

We'll go next to Tristan Thomas with Sidoti..

Just kind of a couple follow-on questions just regarding the acquisition, I mean, is this a higher margin business in which you're currently in? I mean, just -- could you maybe give us a little color on that?.

Tristan, the margins are consistent with our Industrial Group generally..

Okay, got you.

Any seasonality in that business we should be aware of or is it pretty similar to your business?.

Very similar..

Okay. Jumping back over to A&D, just to clarify something, you said bookings were 80% higher than shipments.

That's consolidated between EMS and cyber security, right?.

Yes, for this segment..

Okay, right. And then Tony mentioned that you had a government order push back to the government calendar year end.

Is that something you're seeing a lot of or was that a one-time isolated event?.

We have seen a number of programs get shifted, Tristan, and a lot of it happens to -- relate to what's going on around the world in defense spending generally by the U.S. government. So it is something that we see that is common. It's not necessarily a one-time thing, and we're certainly doing our best to manage what element of that we can control..

Okay, so we should just view that as really a continuation of the uncertainty in the defense budget that everyone's still trying to push things to the right?.

I think that's fair..

We'll go next to Alan Weber with Robotti & Company..

First, regarding the acquisition, could you talk about how much you're paying for the acquisition?.

We haven't agreed to disclose that at this time unfortunately, but as we get closer and when the transaction is completed, then I'm sure a lot of that will be disclosed..

Okay, and what about -- is it all cash?.

Yes..

Okay.

And then do you have the -- I mean, you have the gross margins for both businesses, do you know what the operating income was for both businesses?.

Yes, the -- our segment disclosures that are included in the 10-Q, the gross -- so your question is the gross -- the operating income numbers for each business?.

Correct..

Okay. The operating income for the Industrial Group for the quarter is 5.4, and the Electronics Group is negative 3.6..

What was it last year in the quarter for the Industrial?.

It was 4.6 for Industrial..

So the Industrial operating income is actually higher this quarter versus last year?.

That's correct..

Okay. And despite having lower gross -- well, actually -- okay, that makes sense.

And then my last question was can you just talk more about the Dana contract, which I guess technically expires at the end of the year?.

Yes, that's correct. And we've had a contract dispute with Dana for quite some time now, and we're in conversations to see if we can resolve that in a way that's acceptable to both parties..

I mean, I guess, the question is do you run the company expecting that contract to be renewed?.

Well, I would say this, I would say that the industry is at a very high level that in several other things -- several other products that we produce, we're the largest if -- one of the largest, if not, the largest producers of this products in the world, and we would hope that the capabilities that we bring to the table are found to be attractive to all of our customers.

So we're looking for a way for this -- disagreement to these concluded in a mutually satisfactory way..

Okay.

And I guess my last question on the acquisition, how many facilities does that company have?.

It has a single -- it has 2 facilities..

[Operator Instructions] We'll go to Justin Portman with Talanta Investment Group..

My question is I just wanted to consolidate some of the other questions that have been asked about the A&D segment.

Jeff, did I hear you correctly earlier in your discussion that you said you expected that segment to be profitable in 2015?.

We've talked before on many occasions that we're looking for that piece of our business to return to breakeven during the coming year..

Breakeven at the gross margin level or breakeven operating income?.

Operating..

[Operator Instructions] We'll take a follow-up from Jim Ricchiuti with Needam & Company..

Just regarding the Dana issue, just given the time line on the contract expiration, is there any -- do you see the customer at all increasing inventory levels in Q4, perhaps, to provide some buffer if the negotiations just get extended further?.

Jim, I'd only be speculating, but I'm guessing that Dana would take where ever precautions if felt was necessary to protect its interest for sure..

Okay, but there's no evidence of that yet and....

Certainly, I haven't seen any reports that they've published that would do that, but again, it would be speculation, and I'm confident that they're taking whatever steps that they feel be appropriate to protect their customer interest..

Got it. And Jeff, just to switch gears for a second, the oil and gas market has remained -- appears to have remained fairly strong for you. You may have sized this in the past, what percent in rough terms it represents of the Industrial business. Clearly, it's, I guess, a nicely profitability piece of that business.

Do you see any change in the demand in that business just in light of the decline in oil prices?.

No, we haven't, Jim. And I think the key to this piece of the business is that the products that we provide typically go into projects later in their development.

So if it's for a natural gas pipeline or a petrochemical application, typically, the products that we provide are installed later in the process, and so as a consequence, there's usually a substantial lead time on the breaking ground of the project if you will.

And as we look towards the future, we've been reading a lot about increased emphasis on the export -- exportation of natural gas.

And so if in fact that becomes a reality for the United States, the expectation is that there will be substantial investments in the future to support the exportation of natural gas, which we would view as being a positive development for this part of our business..

Got it.

And in Q3, can you say what percent this market represented of the Industrial business?.

No, we haven't broken our operations out that way at this time..

Mr. Allen and Mr. Gill, we have no additional questions. I'd like to turn the call back to you for any additional or closings comments..

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

And that does concludes today's conference. Thank you, again, for your participation..