Jeffrey Gill - President and Chief Executive Officer Tony Allen - VP and Chief Financial Officer.

Jim Ricchiuti - Needham & Company.

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

Thank you, Henna. And good morning, everyone. 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 third quarter of 2015. 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 two business segments.

Tony 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.

As we mentioned in our previous calls and in our Annual Report to stockholders for the year 2014, the discontinuation of long-term supply agreement with Dana at year-end was expected to have a material impact on the future outlook for our business since Dana represented approximately 59% of consolidated net revenue in 2014.

We noted that the brunt of the financial impact was expected to be felt during the first half of 2015, after which the combined contribution from reduced costs and new program launches was anticipated to have an increasingly positive impact on the company’s margins and bottom line results.

The first half of 2015 has met expectations as did the third quarter, which marked a significant improvement in financial performance on a sequential basis.

The top line decline slightly to $38.4 million reflecting the loss of revenue associated with the divesture of our Morganton operation, offset by top line growth for both Sypris Electronics and the ongoing operations of Sypris Technologies.

Gross margins increased to 6.4% of revenue from essentially breakeven in Q2 and up from loss of 8.5% of revenue during the first quarter of this year. Earnings per share improved to a loss of $0.01 per share which represented an improvement of $0.42 per share from Q2 and up $0.65 per share from Q1 of this year.

The earnings per share for the quarter do reflect a number of unusual items including the gain on the sale of the Morganton assets, offset in part by a series of non-recurring expenses and deferred tax accruals.

Tony will cover these items in greater detail shortly but needless to say the financial results for the quarter reflect a continued importance sequential progress for the company.

The company's net debt was reduced by 42% during the quarter to $13.8 million which included $5.5 million of junior subordinated debt whose maturity was subsequently extended to January of 2019 in conjunction with the refinancing of the company's credit facilities at the end of October.

During the quarter, the installation of the company's Cyber Range in the Security Operations Center for the Ministry of Home Affairs in Singapore was commissioned enabling the company to recognize revenue and contribution from this important project.

The months of July and August were also consumed with the implementation of additional overhead cost reduction initiatives that impacted all operations. With an estimated annual saving in excess of $4.7 million per year, the benefit should start to flow through the company's financial results later this year.

Subsequent to quarter end, we had a number of important events take place that are expected to have a positive impact on the company going forward. The company completed the refinancing of its $8.5 million senior revolving credit facility replacing it with a new $27 million credit facility.

The refinancing represented another important step forward in our journey. Tony will provide you with additional details shortly. We received an order from NEC for the Cyber Range with delivery scheduled for the fourth quarter of this year.

NEC plans to use the Range to assess the capabilities of its personnel to respond to cyber attacks and to provide training to dramatically improve the effectiveness of their response.

We entered into a long-term contract with Detroit Diesel, a subsidiary of Daimler Trucks North America, to supply the Sypris Ultra series lightweight axle shaft for use in Detroit Axles, which are used exclusively in freightliner trucks in the North American market.

We also announced a new contract with Volvo Group North America and Mack Trucks for the supply of axle shafts for use in Mack Trucks branded axle assemblies through 2018. We will go into greater details on both the Detroit Axles and the Volvo contracts in just a few minutes.

To summarize then, the quarter represented another significant step forward for the company in terms of financial performance, liquidity and new business generation. The achievement of these important milestones would not have been possible without the dedication of many for whom we are clearly indebted. Thank you.

Much hard work certainly remains and I am certain that there will be bumps on the journey ahead but we have an excellent team and we are looking forward to 2016. Turning now to Slide 5.

Revenue for Sypris Electronics increased 39% to $10.6 million from the same period in 2014 and increased 21% sequentially from the second quarter of this year reflecting the positive impact of the increased product shipments and the commissioning of the Cyber Range in Singapore.

Gross profit was $0.5 million compared to a loss of $1.1 million for the prior year period and a loss of $0.6 million for the second quarter of this year.

The commissioning of our Cyber Range in Singapore certainly contributed to the improvement in the financial results for Sypris Electronics and reflects our long-term plans to increase the margins and the profitability of this business through the development and sale of proprietary products.

As we mentioned a moment ago, we received an order for the Cyber Range from NEC for the intended use of evaluating and training its personnel on responding to cyber attacks.

The delivery of the range to NEC during the fourth quarter will represent our second non US installation, and represents what we hope will be the beginning of a much deeper demand from a variety of government and commercial markets.

Subsequent to quarter end, we demonstrated the unique capabilities of SiOMetrics at GovWare in Singapore in early October and at Delaware later that same month.

The demonstration which included the use of sensors from analog devices, gateways from Dell Computer and cloud security sampler from NEC focused on unique identity and key management attributes of SiOMetrics and its ability to dramatically increase the security of cloud based computing.

We continue to have high expectations with this ground breaking technology. We've entered into discussions with a number of companies to determine how we might best accelerate the introduction of SiOMetrics in the market place. We have now filed more than a dozen patent applications to protect unique features of this software.

Much progress has been made since our last call and we will continue to keep you informed as we move forward. And finally, we were proud to be recognized recently by Northrop Grumman for our performance on the Joint Strike Fighter Program.

The recognition which requires the approval of a senior executive committee representing all of Northrop Grumman required a perfect score in five different categories. Sypris is one of 24 companies out of an estimated 5,600 suppliers to receive this award for excellence.

Turning now to Slide 6, as we have said on many occasions, we expect the impact of DoD funding related issues to continue to affect our business until such time as new programs, products and cyber-related services achieve sufficient volume to offset these issues. The good news is that we’re making progress.

Our outlook for the fourth quarter of this year is targeted to benefit from increased product shipments and the delivery of the Cyber Range to NEC. With revenue, gross profit and EBITDA each target to increase on a year-over-year basis. These improvements also reflect the positive impact of the cost reduction initiatives mentioned earlier.

Now let’s take a quick look at Sypris Technologies beginning with Slide 7. The long road to recovery is underway. Sales increased by close to 10% sequentially excluding the impact of the Morganton divesture as new programs and increased demand begin to fill the void left at year end.

Gross margin increased to 7.1% of revenue, up from 1.8% of revenue for the second quarter and up from a loss of 14.6% of revenue for the first quarter of this year.

As we mentioned during our last call, the team did an excellent job managing the down-scoping of operations in both North Carolina and Mexico, the two primary locations affected by the reduced levels of business.

With the completion of the sale of the Morganton plant, headcount at Sypris Technologies is now down 50% below 2014 levels and should be stable going forward. Inventory levels we watched closely, while quality and delivery to customers remained at world class levels, no mean feat during this period of change and disruption.

The sale of the Morganton plant to Meritor represented another key step in our journey forward.

In addition to the receipt of cash, the avoidance of future losses and the recognition of a gain on the transaction, we’re able to retain over 50 pieces of valuable axle shaft machining equipment that is currently in the process of being relocated to other Sypris facilities.

Toyota has agreed to assist us with the planning, layout and integration of this equipment which will be completed during the coming months. Just as importantly, however, the move was a good one for our employees. Meritor is a leader in our industry, a big employer in North Carolina and a wonderful company of which to build a career.

Meritor is also in the unique position to be able to fill the plant with new work faster and more effectively than most. As a result, the future outlook for our former employees just improved dramatically, while Meritor picked up some first-class people, clearly a good move for all.

Subsequent to quarter end, we announced the award of two new contracts. One with Detroit Axles and the other with Volvo Group, North America. The contracts represent important milestones for reasons that are in addition to the obvious benefit of ensuring the continuity and certainty of future demand.

To begin with both contracts effectively establish Sypris is a tier one supplier the Daimler straight liner and Volvo's Mac brands. The combination of which represented an estimated 50% share of the North American class A truck market.

As a direct supplier to these large OEMs, we now have the opportunity to sell products and services that reach far behind the provision of axle shafts. Secondly, Detroit Axles service our launch partner for the Sypris ultra series light weight axle shaft.

The use of ultra series shaft as designed specifically for Detroit Diesel will reduce the weight of drive axle assemblies by an estimated 16 pounds for the typical heavy duty truck.

This important weight savings translates into lower material cost for the manufacture and contributes to shorter breaking distances and greater fuel efficiency for the fleet owner. The agreement encompasses both current and new business.

Both companies anticipate that Sypris' ultra series will bring significant value to Detroit Axles as well as Daimler Trucks North America. Needless to say we are very pleased to have Detroit Axles service our launch partner plays important patent pending product.

We’re in the process of preparing our plants in Kentucky and Mexico for the production of this breakthrough product which is lighter, stronger, and less costly to produce another axle shafts currently on the market. We plan to be in production in the very near future. The Volvo contract was announced in a brief press release this past Friday.

We had expected the news of the contract which has been completed several months ago to be well received in the context that it followed news of both Detroit Axles contract and the completion of our refinancing. But resulting trading volume on NASDAQ was a surprise.

Many of you may recall that we had provided product Mack for more than a decade only through various tier one suppliers. Therefore this contract was important to us from the standpoint of cementing the relationship directly with Volvo Mack which in turn would provide us with the opportunity to expand their sales over time to this important OEM.

In the short term, however, we do not anticipate a material change in shipments. For sometime now we have discussed our plans to acquire Reynolds Machine. We mentioned during our last call that we have substantially completed due diligence which have confirmed in all material respects the quality of the company and its production capabilities.

Unfortunately, the transaction ultimately became a victim to our downsizing and refinancing activities, resulting in delays it finally and understandably tried the patience of Mr. Reynolds. We understand that the company is now under some form of agreement with another buyer and we wish both parties the very best for the future. Turning now to Slide 8.

Let's take a brief look at the outlook for the market served by Sypris Technologies. The commercial vehicle market for Class 5 through 8 trucks is forecast by ACT Research to contract by 9% during the coming year, while the forecast for the light truck market for 2016 remain solid.

We've benefited from some important strength in our energy markets for quite sometime. Looking forward, the future continue to look reasonably positive with some softening in demand from oil related customers being offset by the continued strength and demand from customers involved with the extraction and transportation of natural gas.

Our outlook for the fourth quarter reflects in part the softening we've seen in demand of class 5 through 8 trucks in 2016, fewer work days in the quarter and the results that we expect to generate in the lower cost profile we mentioned earlier. Turning now to Slide 9. Tony will lead you to the balance of our presentation this morning.

Tony?.

Thanks, Jeff. And good morning, everyone. I’d like to take you through the highlights of our financial results for the third quarter of 2015. I will begin with our consolidated results and ask you to advance to Slide 10.

Q3 consolidated revenue totaled $38.4 million, a decrease of $2.4 million sequentially, but down substantially compared to the prior year as expected reflecting the discontinuation of shipments to Dana effective January 1. The sequential decline from Q2 reflects a sale of Sypris Technologies Morganton to North Carolina plant to Meritor on July 9.

The impact from the Morganton sale on sequential revenue was a decrease of $6.6 million. Revenue for the balance of Sypris Technologies operations increased sequentially by 10% and revenue for Sypris Electronics increased sequentially by 21%.

Gross profit for the third quarter was $2.5 million, or 6.4% of revenue compared to the nearly breakeven amount reported for the second quarter but also well below the prior year period which included the Dana volume.

Both segments contributed to the sequential improvement and gross profit from Q2 with Technologies posting a $1.4 million improvement and Electronics adding $1.1 million. SG&A expense declined $1.4 million from Q2 to Q3 which includes cost reduction actions across both segments as well as within the corporate structure.

Lower health insurance expense during Q3 and a refund for favorable claim experience for prior years under our workers' compensation program. Partially offsetting these items was an increase in financial advisory and professional services associated with our refinancing efforts.

The quarterly expense for these services increased from approximately $300,000 in Q2 to approximately $900,000 in Q3. With a completion of our refinancing on October 30, we expect these expenses to decrease sequentially in Q4.

Legal fees which were a large component of SG&A during Q1 have not been material in Q2 or Q3 as cost have decline significantly in legal actions related to the Dana litigation.

Workforce reductions and response to the decline in revenue gave rise to our third consecutive quarter severance cost was just under $500,000 recognized during the third quarter and classified as a separate line item on our income statement. For this presentation, we've not included severance as an add back to EBITDA.

In addition to the margin improvement and cost reduction activities in both segments, EBITDA for Q3 includes a gain of approximately $7.7 million on the sale of the Morganton facility.

Free cash flow for Q3 was negative $4 million compared to negative $3.2 million in Q2, primarily attributable to a use of cash for working capital during the third quarter following two consecutive quarters of declining working capital investment.

During the third quarter, working capital accounted for use of cash of approximately $2.3 million compared to a source of cash of over $5million in Q2 as working capital was being reduced to align with the reduction in revenue. Free cash flow does include the $50.7 million in proceeds received from the sale of Morganton facility.

Not shown on these metrics but included in our net loss for the third quarter was a deferred tax expense for approximately $2.4 million related to valuation allowance on our Mexican deferred tax assets.

We have had a full valuation allowance on our domestic deferred tax assets since 2008 and based upon increased uncertainty regarding the realization of the Mexican deferred tax assets, we no longer meet the more likely than not threshold required to maintain the assets and therefore recorded a full valuation allowance in the third quarter.

Let me now shift to segment performance and asked you to please advance to Slide 11. Sypris Technologies reported $27.8 million in revenue, $2 million in gross profit and $8.4 million in EBITDA during the third quarter. EBITDA for the third quarter includes a gain of $7.7 million on the sale of Morganton.

The sequential decrease in revenue from $32 million in Q2 to $27.8 million in Q3 includes a $6.6 million impact associated with Morganton previously discussed. Aside from Morganton, revenue for Sypris Technologies increased approximately 10% sequentially from Q2 to Q3.

We remained focus on revenue growth for our Toluca and Loygo [ph] plants as this present our biggest challenge and opportunity for the balance of 2015 and 2016. We remain confident that our available capacity and capabilities will be utilized in serving our markets.

However, the cycle time in filling this capacity will continue to require patience and a lot of hard work. Our team is up to this challenge and we remain focused on completing its mission. Gross margin for Technologies improved to 7.1% during the third quarter.

While this is well below the double digit margins for 2014 and where we are aiming into 2016 and beyond, it represents another important step forward in our transition.

The improvement in gross margin not only reflects cost reduction actions in response to the revenue decline, it also includes our focus on continuous improvement through the ongoing implementation of the Toyota production system to which we remain committed and our objective to improve our competitive position in the markets we serve EBITDA for Technologies increased $8.4 million from Q2 to Q3 and this metric for both periods include certain non-recurring items.

During Q2, we reported income of $0.5 million for a settlement related to the Dana arbitration. And during Q3, we reported the $7.7 million gain on the sale of Morganton.

Excluding these specific items, the sequential increase in EBITDA is driven by the improved gross margin and a decrease in SG&A expenses which was partially offset by an increase in severance expense. Sypris Electronics reported $10.6 million in revenue, $0.5 million in gross profit and negative $0.6 million in EBITDA for the third quarter.

Revenue for the third quarter includes $2 million for the Cyber Range commissioned in Singapore as discussed earlier by Jeff. This was important milestone for our electronics business and one which we believe will provide additional momentum in our quest to broaden our base in installed product.

Jeff also mentioned the subsequent order received from NEC Corporation for Cyber Range which we hope further builds the momentum and confidence our team for the future growth in this area. We also receive the release of orders for certain classified products which had been delayed as we discussed during our second quarter call.

Although the release arrived later than hoped, the shipments went out during the third quarter and contributed to the sequential increase in gross profit as these products generally carry a higher contribution margin than our electronics manufacturing services revenue.

Gross profit for the third quarter was 4.7% of revenue and although an improvement both year-over-year and sequentially, this level is still well short of the performance needed to bring electronics back to profitability.

The gross margin realized on the Cyber Range commissioning in Q3 was lower than what we expect from future range deliveries as this deployment included certain cost that will not be repeated.

Otherwise margins were generally consistent with the second quarter across our programs with the higher mix of product sales contributing to the profit improvement.

The initiatives described by Jeff to achieve revenue growth through the increased demand for our Cyber Range offering and the introduction of the SiOMetrics technology into the market are expected to be the key factors in returning the electronics business to profitability.

We are also pursuing growth in electronic manufacturing services with additional programs from our current DoD customer base and continued expansion in non DoD markets and with new customers.

SG&A expense declined sequentially within electronics as cost reduction were made during Q3 in certain function areas, engineering resources were deployed on more direct charge programs in Q3 as compared to certain bid and proposal activities in Q2.

EBITDA for the third quarter improved about $1.8 million sequentially reflecting the higher margin revenue mix and lower SG&A. However, this metric remain in negative territory. Our team continues to meet customer expectation on quality as evidenced by Northrop Grumman recognition of Sypris performance on a Joint Strike Fighter Program.

Our ability to continue to perform at a comparable level on our existing contracts together with the additional volume we are pursuing with a higher margin product and service offering are expected to drive profitable results in the future. Our team is focused on the actions necessary to achieve that objective in 2016.

Please advance to Slide 12 and I will discuss our debt status. We entered into new loan agreements on October 30 and repaid our prior credit facility with PNC and our subordinated debt with Meritor. The new agreement is for a term of three years.

The new loan agreement includes a revolving credit facility with a total commitment of up to $15 million and $12 million term facility. Availability under the revolver is subject to a borrowing base formula which includes specified percentages of eligible accounts receivable and inventory.

Monthly principal payments are due on the term facility based on an 84 month amortization schedule. Interest issue monthly on both the revolver and term facility. Additionally, we extended the maturity date on the $5.5 million subordinated debt outstanding at the closing date to 2019.

We are pleased to have this initiative completed and look forward to building relationship with our new lenders. We appreciate the support received from our operations team throughout the due diligence process of the refinancing. And with this milestone completed, our internal resources could focus on delivering improved operating results.

Let me now close with the brief summary and asked you to please to advance to Slide 13. Gross margin for Q3 was 6.4% compared to the losses of 0.1% and 8.5% of Q2 and Q1.

The sale of the Morganton facility generated cash proceeds of $15.7 million during the third quarter and allowed us to reduce our net debt from $23.7 million at the end of Q2 to $13.8 million, or 42% at the end of Q3. Our net loss per share for the quarter was at $0.01 compared to the losses of $0.43 and $0.66 for Q2 and Q1.

Subsequent to quarter end, we closed on our new loan agreements, received a new Cyber Range order from NEC and announced new contracts with the Detroit Axles and Volvo. We've made important progress during the first nine months of 2015 and are targeting further margin expansion and EBITDA growth in 2016.

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

[Operator Instructions] And we will take our first question from Jim Ricchiuti with Needham & Company..

Thank you. Good morning. I am wondering if there is a way that we can look at these two long-term supply agreements that you have announced and perhaps gauge what might be incremental, particularly in light of the forecast for the Class 8 market next year. .

Jim, it's a good question. Under a steady state situation we would not anticipate an incremental lift in the short term. But what we do see is freightliner in particular being very successful in increasing its market share. And we also see that Detroit Axles which is part of the Daimler group increasing its percentage of freightliners axles assemblies.

And so we would anticipate particularly in the case of Detroit Axles that there would be some offset to what would otherwise take place with the market cycle. .

Got it. Just with respect to gross margins in the quarter, the gross margins that you were, yes, surprisingly good at Sypris Technologies just given the low level of revenue.

And I am just wondering was there anything unusual in that mix of revenues?.

No, Jim. Really it was not, it is just we've reduced cost, the performance continues to improve and so it was a - represented a good progression if you will as you look at how we’ve trended from Q1 to Q2 to Q3..

Okay.

And Jeff just going forward as we look at that part of the business, you are obviously pursuing business to replace what was lost, how does that pipeline look in terms of new business and does the fact that you weren't able to move forward with Reynolds, does that do anything to you competitively I wonder?.

Okay. Well. .

Two questions..

Yes, two questions. In the first, dealing with the first question, we do have a robust funnel of new business opportunities and so we have been very pleased with how those have come together and we've been pleased quite frankly with the range of different potential customers that we are talking to about utilizing the capacity that we have.

It is still going to take I think some time to not only land them but then launch and so we would expect to see a lot of that kind of churning in 2016. But it has been very positive from that standpoint. With regard to the Reynolds transaction, we were really sorry to see that transaction fall by the wayside. Mr.

Reynolds has a great business, he does a great job. And in particular when we started down the road with Mr. Reynolds, our main desire was to combine that operation with our Morganton operation.

And we did many similar things in Morganton, North Carolina that Reynolds Machine did and so it was believed that by combining Reynolds with our Morganton operation that we could really learn from that and step up the productive output in North Carolina.

When we switched directions and divested Morganton then that changed part of the synergistic benefit that was to be associated with that. .

Okay. If I could just switch gears for a second and if we exclude the Cyber Range revenue from Singapore in the quarter, it looks like you are showing double digit growth in that business.

Is there -- are we at that point where we can see growth returning to the business ex some of these one time pieces of revenue that you are also assuming in Q4 with NEC?.

Jim, I think if I can answer your question this way, I think you are looking at it correctly in the sense that we anticipate that we may have some lumpiness with things like range sales and things of this nature. And if you peel the range away from it then perhaps we have more of a stable level of business underneath that.

And so we are looking at this as being relatively stable and reliable subject to upside associated with being able to complete the sale and installation of some of these Cyber Ranges. .

Is NEC similar in revenues or little bit lower in terms of Q4 contribution?.

It will not be as large as the Singapore range. It is structured differently and configured differently. But we anticipate as Tony said that it will probably be more attractive in terms of its margins because we don't have the cost embedded to do it. .

[Operator Instructions] And we will go back to Jim Ricchiuti. .

Jeff, just in terms of the funnel that you see for Cyber Range, are we in a situation now where the market needs to be able to evaluate what you've done before potential other deals get closed? In other words is it a case where you get this reference accounts and are you able to evaluate and share some information with prospective customers?.

Well, certainly in the context of getting the Singapore range installed in the Security Operations Center and getting it commissioned and having now a strong flow of activity going through it was really an important milestone.

And as you recall it took us longer to get that done than we had anticipated but now that it is done, it’s really served as a wonderful demonstration point if you will for other potential customers.

And I think you are right that with the installation this quarter for NEC that other customers now will have more than one range that they can look at and validate that it does do what we’ve said it does. And so we would anticipate kind of the pace of activity in this side of our business picking up as we move into 2016..

Okay. And then looking at the core or the legacy business in the electronics business. The fact that there have been some developments in terms of government funding that maybe provide a little bit more stability going forward.

Do you see any change in that market that makes it a bit more predictable going forward for you?.

Let me answer the question this way, Jim. .

Thank you. I know it is --.

Yes. We are cautiously optimistic about 2016. Let me put it that way. And if things run more smoothly everyone will be very pleased. .

[Operator Instructions] And there are no further questions in queue. .

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

And this concludes today's conference. Thank you for your participation..