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

Jim Ricchiuti - Needham & Company Alan Weber - Robotti Advisors.

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

Thank you, Ron, 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 third quarter of 2016. 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 clarifications in mind, we would 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 and the outlook for our business going forward.

Tony will then provide you with a more detailed review of our financial results for the quarter and the impact of the CSS sale on our business. Now let’s begin with the overview on Slide 4. The sale of our Cyber Security Solutions business to Analog Devices was clearly the highlight for the quarter.

The sales price was attractive by almost any measure as was the timing of the transaction. For the fiscal year 2015, CSS reported $16.7 million of ales and lost money, while the prospects for 2016 were very similar.

The [fit width] [ph] and synergy for ADI was important and unique, factors which certainly contributed to the positive outcome for both parties. Net income for the quarter was impacted positively by the transaction resulting in $21 million of net income and earnings of $1.02 per diluted share.

The reconciliation of the gain including the impact of fees, expenses, non-cash items, and operational and efficiencies both leading up to and following the conclusion of the transaction were meaningful.

Tony will address these in brief shortly, but for the purpose of improving clarity, we plan to hold another conference call in the near future to bridge our ongoing operations into 2017.

The third quarter for 2016 also proved to be positive for the remaining operations of Sypris Electronics with backlog increasing 13.1% sequentially and 152% on a year-over-year basis to $30.3 million. Sypris Electronics also initiated the relocation of equipment, programs and people into our new location in Tampa, Florida.

We expect to be substantially out of our existing facility by this Thanks Giving, which represents a tremendous accomplishment by all involved. We expect the annual savings to approach $2 million per year in operating expenses, which will take effect beginning in January of 2017.

Now let’s turn to Slide 5 to discuss the transaction with Analog Devices in somewhat greater detail. On August 16, we closed on the sale of our Cyber Security Solutions business to Analog Devices.

The CSS business, as we refer to it internally, is a segment of Sypris Electronics that supply secured communications equipment, identity authentication, key management, and encryption services to U.S. government and its foreign allies. The all cash purchase price was $42 million.

The gain on the sale after expenses in escrow approximated $31.2 million or $1.58 per share. The net proceeds of approximately $37.8 million were used to repay all senior debt with a balance being retained or reinvested in the company going forward. Tony will review these and other details with you shortly.

The transaction was structured as a purchase of assets, excluding most working capital and included all intellectual property and know-how associated with the SiOMetrics, Sypher, Cyber Range and Data Systems product lines.

Advancing to Slide 6, approximately 67 people or 33% of Sypris Electronics workforce will eventually transfer to ADI as part of the transaction, but are expected to remain in their existing geographic locations at Tampa, Florida; Columbia, Maryland; West Lafayette, Indiana; and Copenhagen, Denmark.

The transaction and also included a long-term supply agreement between Sypris and Analog under which Sypris will continue to build circuit card assemblies for certain of the product lines being purchased by ADI. We believe that this transaction will be viewed as one of the rare, but nice occurrences when an event is truly a win-win for all parties.

For our people in the CSS business, they will find a new home with a large extremely well-run technology company with a global footprint.

With the addition of ADI's resources, the opportunity will exist to accelerate the introduction of SiOMetrics, Sypher, and the Cyber Range into a wide variety of automotive, industrial, aerospace, healthcare, IOT and safe cities applications.

The Internet of Things will become a reality for these technologies and the unique capabilities of our people in conjunction with the resources of ADI will be the key drivers that make it happen. We will certainly miss them and we wish them much success, what an opportunity.

For Sypris, we can now move forward with the strong liquid balance sheet and start building our business for the future. We will have a refined focus on providing manufacturing services for select group of strategic customers that need the unique qualifications that we bring to the table. If you love building product, what a great place to be.

Turning now to Slide 7. Sypris will retain its core trusted manufacturing operations in Tampa, Florida as we discussed a moment ago. The new smaller manufacturing footprint will house approximately 130 remaining employees.

We will continue to focus on the special needs of customer such as Harris, Lockheed Martin, Northrop Grumman, Rockwell Collins, TE SubCom and now Analog Devices, where the cost of product failure is significant and therefore the reliability of the product is paramount.

Typical applications include satellites, deep sea communications, and aircraft avionics. The business is healthy and poised for a very bright future. Backlog at the end of the third quarter reached $30.3 million, up from $12 million for the third quarter of 2015.

A new chapter is opening for Sypris Electronics and we expect it to be an interesting, fun, and rewarding read. Now, let’s turn to Slide 8 and conclude the first half of our presentation this morning with Sypris Technologies.

The Class 8 demand for vehicles in North America continues to soften during the quarter, which when combined with inventory rebalancing by a few customers led to a decline in sequential revenue for Sypris Technologies during the quarter.

ACT is forecasting a 30% year-over-year decline in Class 8 production, which would indicate that we will see some further softening as we move through the balance of 2016. The demand for medium duty trucks on the other hand continues to remain solid driven in part by the strong automotive and housing sectors.

Gross profit reflected a loss of $400,000, essentially in line with the second quarter of this year and as a result our management team continues to manage SG&A and labor expenses as appropriate. The energy markets appear to be firming with increased spending driving our backlog up 42% on a year-over-year basis and up 38% sequentially.

Our sales funnel in this area of our business remains quite robust and we look forward to strong year of growth in 2017. Subsequent to quarter end, we conclude the discussions with Meritor that will result in a reduction in business beginning in 2017.

With combined sales to Meritor and Sisamex, Meritor's joint venture in Mexico, expected to represent approximately 20% of sales in 2017, down from 45% of sales in 2016. As we look forward into the New Year, we expect to see a fairly significant shift in our markets served.

Turning to Slide 9, our growing backlog, the existence of large international projects, and increased maintenance and repair spending are expected to support the material expansion of shipments to our customers in the oil and gas industry where we expect energy to comprise more than 40% of our business in 2017, up from 26% in 2016.

The outlook for commercial vehicle sales in North America in 2017 remains solid, with the current outlook for 2018 forecasting a rebound. For Sypris, we expect sales to commercial vehicle customers to comprise less than half of our revenue in 2017, down from an estimated 68% in 2016.

Shipments to light truck and our highway customers are expected to count for roughly 9% of revenue during the coming year, up from an estimated 6% in 2016. These changes and mix bode well for the company going forward.

The increase in concentration for both the energy and light truck off-highway markets is expected to have a positive impact on operating margins since both of these businesses benefit from more favorable pricing dynamics when compared to the commercial vehicle market.

Our company loss would be far more diversified going forward with no single customer representing more than 20% of sales. As many of you know, the achievement of this new balance represents a very important milestone for the company.

In summary, the third quarter of 2016 marked a period of important continued progress for Sypris, while the just completed transaction with ADI represents a significant positive inflection point for the company.

Heading into 2017, we expect to benefit from a growing energy business, increased diversification, and a solid balance sheet to support growth opportunities. Turning now to Slide 10, Tony Allen will lead you to the balance of our presentation this morning. Tony..

Thanks Jeff. Good morning everyone. I’d like to begin by taking you through the highlights of our financial results for the third quarter 2016 and the transaction completed by the electronics segment during the quarter. Please advance to Slide 11. Q3 consolidated revenue totaled $21.4 million, down $17 million compared to the prior year.

Both segments contributed to the decline in revenue for the third quarter with Sypris Technologies down $13 million and Sypris Electronics down $4 million compared to the prior year. The factors impacting revenue for Sypris Technologies during the quarter are consistent with our discussions during Q1 and Q2.

Reduced demand from customers and the commercial vehicle market is the primary cause of the reduction for both three and nine month periods. Our shipments to oil and gas customers also lag behind the prior year. However, backlog has increased and we expect the revenue trend in this market to reverse beginning in the fourth quarter.

And finally, a steel revaluation in 2016 lowered both revenue and cost of sales on shipments to certain customers, as compared to the prior year.

The decline in year-over-year revenue for Sypris Electronics is primarily due to the divestiture of the CSS business, which accounted for revenue of $6.8 million in Q3 of 2015 versus only $1.8 million in Q3 of 2016.

The comparison of revenue for our ongoing trusted manufacturing business increased $1 million in Q3 2016, compared to Q3 2015 and with the backlog of $30 million as of the end of the quarter we are well positioned to deliver top line growth in this business in 2017.

Gross profit declined to a loss of $700,000 in the quarter, compared to the $2.5 million profit in the prior year period.

Q3's gross profit for Sypris Technologies was within $100,000 of Q2's gross profit on a sequential basis, however still not acceptable and management is reviewing its growth initiatives and further cost reduction actions based on current volumes to improve profitability for this segment.

Sypris Electronics was impacted by a number of inefficiencies during the third quarter both prior to and following the sale transaction.

The management team was balancing a number of priorities prior to the sale and the consummation of the sale introduced a number of new complexities related to carving out the divested operations and defining and implementing the transition services for those operations.

The team also began the process of relocating to its new facility, which will be complete during Q4. EBITDA for Q3 2016 included a $31.2 million gain for the CSS sale by Sypris electronics, while Q3 2015 includes a $7.7 million gain for the Morganton sale of our Sypris Technologies.

The EBITDA improvement also includes the reduction in SG&A expense from $6 million in Q3 of 2015 to $5.2 million in Q3 of 2016.

Our adjusted net debt as of the end of the third quarter is showing us negative $12.9 million, reflecting our cash position of $21.1 million combined with restricted cash of $1.5 million being greater than our related party debt of $6.5 million and the capitalized lease obligation of $3.2 million.

Let me now ask you to please advance to Slide 12 for comments on the transaction. As previously discussed, Sypris Electronics sold its Cyber Security Solutions Business for $42 million on August 16. The gain on the transaction was $31.2 million or $1.58 per share.

Our net proceeds at closing was $37.8 million of which $10.8 million was used to repay all senior debt outstanding.

Following the closing, we incurred capital expenditures related to the Sypris Electronics facility relocation, invested in working capital to support both segments, and use cash to cover operating activities resulting in a $21.1 million cash balance at the end of Q3.

The repayment of our senior debt eliminates annualized interest expense of $2.4 million. Continuing with this discussion let me ask you to please advance to Slide 13. The assets sold in the transaction include intellectual property, certain inventory, and PPE directly related to the CSS business.

We retained substantially all working capital and manufacturing equipment located in Tampa. These assets will continue to be used to support the trusted manufacturing operation and providing services to the customers Jeff described earlier.

The net value of divested assets is $8.1 million and was accounted for in the calculation of the gain on the transaction. The relocation of the retained trusted manufacturing business to a new facility is underway with the lease commencing in January 2017.

As a result of this move, we estimate we will achieve a $2 million annual operating expense saving as compared to the cost at our current facility. The transaction also eliminates approximately $600,000 of annualized R&D spend based on historical rates that was previously attributable to the CSS operation.

Please advance to Slide 14 for a discussion of our debt and cash positions. Both the term debt and the revolver were repaid in full and retired during the quarter. The subordinated debt of $6.5 million will remain outstanding with the scheduled maturity date in January 2019.

Also reflected is the capitalized lease obligation and a $1.2 million reduction in unamortized loan costs previously associated with the term debt. We end the quarter with total debt of $9.6 million, consisting of our subordinated debt to a related party and the capitalized lease obligation for our Toluca facility.

Our cash position increased to $22.6 million, consisting of available cash of $21.1 million, and $1.5 million of restricted cash for the escrow agreement. Let me now close with a brief summary and ask you to please advance to Slide 15.

Reductions in revenue in both segments contributed to a decline in gross profit for the comparable third quarter periods. Earnings per share for the quarter was $1.02 per share, reflecting the gain on sale of the CSS business of Sypris Electronics.

Our balance sheet improved as of the end of Q3 with available cash of $21.1 million, shareholders equity of $30.2 million, and the elimination of all senior debt as of the end of Q3.

As we look to the future, we expect profitability improvements from a reduction in annual interest expense of $2.4 million, a reduction in annual facility operating expense for Sypris Electronics of approximately $2 million, and a reduction in annual research and development cost of approximately $600,000.

With a stronger balance sheet and a clear view to the future for both segments we're well positioned to complete the final step of the transformation process for Sypris that started at the beginning of 2015.

And finally, we are excited to move into the next phase in the company's history and we look forward to the opportunity to build a stronger and more profitable business. As Jeff mentioned, we will be providing more discussion and analysis on our business outlook for 2017 in a conference call to be announced in the near future.

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

Thank you. [Operator Instructions] And we’ll take our first question from Jim Ricchiuti from Needham & Company..

Hi morning..

Good morning Jim.

Question, Tony, for you, if we back out the gain from CSS you still looking at a loss of, I guess, $0.56 or so, but I mean there are a lot of moving parts it sounds like, so I’m wondering if we can pull out some of the other potential transaction-related expense or inefficiencies that you might have experienced in the quarter just to get to what the loss might have looked like?.

The one that I would call out certainly that is included in our G&A, we have about I would say about $700,000 of expenses within G&A that are identifiable or distinguishable from other existing operations that would call out.

The balance of the inefficiencies that would have affected our cost of goods sold during the period are a little bit harder to quantify..

Okay. That’s helpful.

Jeff you provided some color as to how you're thinking about Sypris Technologies mix of business looking out to 2017, so you're anticipating, I guess a shift in the energy business from a much lower percentage of revenues, are you anticipating - do you expect the industrial, the Sypris Technologies business to be up next year? I mean, it sounds like you’ve already given some thought to how the year looks as of now, what are your expectations for that business next year?.

Well Jim I think that commercial vehicle will continue to be soft, though not as soft as 2016. And we believe that the light truck and off-highway and energy markets will be very positive, and the energy in particular.

So when we have our conference call here in the near term to discuss the walk from 2016 to 2017 we will be in a position to go into that further, but the real benefit I think of the transition from 2016 to 2017 is going to be a mix and therefore margin that the energy business is quite frankly much more attractive from a pricing dynamic than is the commercial vehicle business.

And so while the top line may not be the same from year-to-year, we anticipate the margin and the income performance to improve significantly..

Okay. That's helpful.

The rebalancing, are we pretty much beyond, past that, do you see any pickup in the quarter just as some of the customers moved to a more normalized ordering?.

Well, I mean Jim you know how our year-end always goes with customers. So, I would anticipate that we’ll see those same types of things at year end where our order boards are at a certain point and then we get into that final week of the quarter and we have trouble getting trucks, but we’ll see..

Okay.

And again, you may be touching on this in this next call that you’ve got planned, but I'm just wondering, going forward, how we might think about OpEx?.

I'm sorry, I didn't quite catch that..

I'm sorry.

You may be touching on this in your next conference call as you talk about bridging the business looking out to 2017, but I'm just wondering if you can give us any help on how to think about operating expense, I think R&D is pretty clear where that’s going to be, but maybe just the G&A expense going forward, how we might think about that, that SG&A line with the divesture of the CSS business..

Clearly Jim the SG&A will be declining.

And so yes, when we get together in our next conference call, the real objective is to be able to - as you kind of alluded to earlier to take the noise out of Q3 and provide you with a clear view of what the stabilized outlook should be and as part of that to bridge you to when we have that call, we would expect SG&A to be down..

Okay. Thanks a lot..

Yes, thank you..

[Operator Instructions] We’ll take our next question from Alan Weber from Robotti Advisors..

Good morning.

First question was when you talked about the relocating of the facility, is that currently a leased facility or do you own that facility that you’re getting out of?.

It will be a leased facility..

Okay..

Both are leased. The current and the new facility are both leased..

Okay.

And then can you talk about in the energy side, what specifically are you doing and why the margins are higher? And is it a kind of a - do you think it’s like a recurring revenue kind of business or is it just kind of one-time business?.

Alan for this side of our business, historically the margins have been much more attractive because of the unique nature, the proprietary nature of the products that we make, and they go into a variety of applications, but most typically into transmission and storage type applications, and so the reliability of the products is critical, they have to perform over an extended period of time.

And we’ve been in this market in one way or another for roughly 60 years and so the brand is known as Tube Turns and it is a well-known brand throughout the industry and the world actually.

And in many cases we’re actually specified in by brand name into new projects and so that’s just a very different animal from building [inaudible] if you will for the commercial vehicle market.

In terms of what we’re experiencing, everyone is aware of the reduction in capital that’s gone into exploration activities and extraction activities and those types of things. But we found generally speaking that the transmission, the pipeline's things of this nature have held much better than the exploration.

And in addition, we're finding that firms are starting to put more money into maintenance and repair of existing systems. And so we would hope that that would continue going forward..

Okay great.

And just a follow on to the previous question, so for 2017 do you expect to be cash flow positive?.

I think yes. The answer would be yes. And that again would be something that we would go through in greater detail during our next call..

Okay great. Thank you very much..

Thank you..

[Operator Instructions] And it appears we have no further questions at this time..

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

That will conclude today's conference. We appreciate your participation. You may now disconnect..