Jeffrey Gill - President and CEO Tony Allen - VP and CFO.

Jim Ricchiuti - Needham & Company Joel Cahill - The Jameson Companies, Inc..

Good day everyone and welcome to the Sypris Solutions, Inc. Fourth Quarter 2017 Conference. Just a reminder that today's call is being recorded. And at this time, it's my pleasure to turn the conference over to President and Chief Executive Officer, Mr. Jeffrey Gill. Please go ahead sir..

Thank you, Lori 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 2017. For those of you who have access to our PowerPoint presentation this morning, please advance to slide two 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 three.

I will lead you to 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 status of our transition plan implementation and our new business awards.

Tony will then provide you with a more detailed review of our financial results for the quarter and year as well as to provide you with a view into 2018 and the significant progress that we have made in terms of our cost structure. Now, let's begin with the overview on slide four.

During the quarter, we continued to make important progress across a number of fronts, the most significant of which was the closure of our 450,000 square foot Broadway Plant in November of last year. The closure of this facility represented the final step in our $26.3 million cost improvement program. We'll talk more about this momentarily.

From a financial standpoint, we're pleased to report that revenue for the quarter increased 7.6% from the prior period to $21.5 million. Sypris Electronics led the way, with shipments during the quarter increasing 72% on a year-over-year basis, while revenue for Sypris Technologies increased 7.2% on a sequential basis.

Gross margin for the company improved 740 basis points to 6.6% for the quarter, up from a loss of 0.8% for the prior year period and increased 350 basis points sequentially from the third quarter of 2017.

Results, while quite positive, were below our forecast for the period, driven by some unexpected challenges with material availability and the startup of new programs in Sypris Electronics. We now expect these issues to be substantially resolved by the second quarter of 2018.

We're pleased to report that Sypris Technologies reported a 1,560 basis point sequential improvement in gross margin to 10.7%, up from a loss of 4.9% in the third quarter of 2017. As a result, the business reported an operating profit for the period on an adjusted basis. This was clearly a signature event for our company.

And with the Broadway Plant now closed, we expect to benefit from further margin expansion as we move into 2018. The company's improved cost profile was evident in SG&A, where expenses were 39% lower than the prior year period, reflecting the divestiture of the CSS business and the results of our cost improvement initiatives.

Turning now to slide five, we're pleased to report that all major actions required to achieve our two-year $26.3 million cost improvement target have been completed as of last November, which includes the ahead of planned closure of our Broadway Plant.

Needless to say that finalization of these activities represents a significant accomplishment for our company and we have many people to thank. Our teammates at the Broadway Plant have done a fantastic job under very challenging circumstances. The performance metrics were amazing. Our quality measure just five PPMs, while on-time delivery exceeded 98%.

Our team in Toluca has been working round the clock to install equipment and otherwise prepare for production, both for the work being transferred from the Broadway Plant, but also for those news programs that we discussed during prior calls.

Even with this extra work burden, however, year-to-date metrics for quality and delivery for Toluca mirror those of the Broadway Plant. We can now look forward to reaping the benefits of this hard work in the form of expanding margins in 2018, as the full year impact of these savings are realized. Thank you, one and all.

Many of you may also remember that during our last call, we discussed the expenses that we were incurring in Toluca to launch new programs and to rebuild certain production assets that were needed to support increased volumes. I'm pleased to report that these items have been addressed and were successfully completed during the quarter.

Our new business development efforts continued to make important progress during the quarter. We've recently announced the award of several new contracts for the production of mission-critical electronic assemblies for use in US Military, Space and global Deep Sea programs.

The outlook for each of our major markets remains quite positive, with the heavy-duty truck market experiencing record-breaking sales in recent months. New orders for Class 8 trucks exceeded 40,000 units in each of the past three months, while the outlook for the year has been increased by FTR to 330,000 units.

According to FTR, there is a capacity crisis occurring as surging freight growth is combining with lower productivity due to the new DOT hours of service regulations. Many shippers began having problems finding trucks to move goods as early as September of 2017. Conditions continue to tighten and it now appears to be a nationwide issue.

Turning to slide six, the demand for production of oil and natural gas continues to increase, with exports from North America to other nations around the globe expected to grow exponentially during the coming years.

The recent signing of the $700 billion Defense Appropriations Bill is certainly expected to provide for growth, but perhaps even more importantly for the continuity in the funding of major multiyear programs that have been impacted in the past by short-term continuing resolutions and other disruptive budgetary measures.

In short, each of our major markets are expanding and flashing solid green. With our cost structure now aligned to our smaller and more efficient footprint, the company is positioned for a much improved 2018.

As a result, we're pleased to raise our revenue guidance for the year, with sales now expected to be in the range of $90 million to $96 million, which is up from our prior outlook of $86 million to $92 million. The increase reflects the impact to new program awards and positive market conditions.

From a timing standpoint, we expect the step-up in shipments to take place beginning in the second quarter, which is forecasted to benefit from higher sales in each of our business segments.

At the midpoint of our range, we expect revenue to increase 11.6% during the first half of 2018 when compared to the prior year, accelerating to 14.3% during the second half of 2018, again, on a year-over-year basis.

From a margin standpoint, we expect to report a substantial improvement in gross margin during the year, which is forecasted to range from 15% to 17% of revenue for 2018. We would anticipate that our margins will accrete with volume, thereby expanding further during the second half of the year.

In summary, the combination of revenue growth, improved mix and the significant reduction in our expense profile is expected to open up a new very positive chapter in our journey here at Sypris with a return to profitability for 2018.

Now, let's turn to slide seven and take a moment to review the purpose and components of our transition plan one last time. As we discussed during previous calls, we established a clear set of objectives for ourselves when we first embarked upon the plan.

We wanted to significantly improve our cost competitiveness on a sustained basis, which meant that we needed to address both capacity utilization and fixed and variable costs. It also meant that we needed to make a decision with regard to the direction and concentration of our business.

We wanted to establish and maintain a highly liquid balance sheet so that we could fund the completion of our transition at an internally generated funds. We wanted to diversify the company's book of business, both in terms of customers and markets served.

This would help to reduce the impacts of cyclicality and the risks associated with the completion of a program and/or loss of a customer in the future. And finally, we wanted to build shareholder value through a focus on innovation, growth and a culture based upon continuous improvement.

Turning to slide eight, many of you will recall that during 2016, we generated $12 million of proceeds through the sale and leaseback of our campus in Toluca, Mexico, which was less than 50% occupied.

We divested our CSS business for $42 million, which sounds very interesting groundbreaking technology, but we clearly did not have the resources to realize its potential in a timely manner.

We used the proceeds from these transactions to eliminate 100% of our high cost commercial debt, which has resulted in a $5.5 million savings on interest expense and other debt-related costs incurred during 2016.

We relocated the operations of Sypris Electronics, less the CSS portion of the business, into a modern 50,000 square foot facility, thereby reducing the overall footprint by over 250,000 square feet and saving $1.7 million in annual operating costs.

We've reduced salaried headcount by $2.7 million and initiated the transfer of certain forging and machining operations from the Broadway Plant to other Sypris locations. And as I mentioned a moment ago, we were successful in securing new orders to boost shipments for 2018 and beyond. During our last call, I mentioned that we have yet more to do.

Turning to slide nine. I'm pleased to report that we are currently on plan with regard to each of the remaining initiatives that we need to complete. We've received the required approvals from Daimler and have launched production for this important customer.

We have entered into the contract extension with Volvo/Mack and are in the process of completing the PPAP approval process for the final low-volume part numbers. We will be launching our new ERP platform shortly, which will ensure that each of our operations will be on the same system for the first time in the history of our company.

The transition from the Broadway Plant is now complete, with all programs launched in Toluca and all production ceased in Louisville. We will continue the orderly liquidation of idle and underutilized non-core assets as we proceed through the balance of the year.

We will also continue to relocate certain production assets to our Toluca plant to support future growth opportunities. We must also continue to operate effectively. We have several large orders in backlog that must be shipped on-time and under-budget so that we can continue to please our customers.

The coming quarters will serve as the measure of our progress and performance in this area. In summary, the transition plan is both ambitious and necessary. We now look forward to growing the business further and benefiting from substantially higher gross margins.

Advancing to slide 10, I'd like to conclude this portion of our presentation this morning with the following observations. At Sypris Technologies, we now have a globally competitive platform from which to serve our customers.

We have lowered our variable cost, eliminated redundant fixed overhead and capital requirements, and increased capacity utilization. We've retained important human talent and reassigned these individuals to new locations to accelerate product development, improve production processes, and drive continuous improvement activities.

Moving to slide 11, at Sypris Electronics, we now have a singular strategic vision. We manufacture complex, high cost of failure electronic hardware, where certifications, registrations and traceability standards are important elements of our customer's requirements.

In this instance, we've also greatly reduced fixed overhead and SG&A and thereby substantially improving our margins, overhead rates and competitiveness. And on a consolidated basis, we are now -- we now have a cost-competitive platform that is positioned for profitable growth.

All major actions required to achieve over $26 million of savings have been completed. Positive market conditions, recent multiyear program awards and the anticipated follow-on business to those awards are expected to drive the growth of the company's line -- topline during the coming years.

Our balance sheet is solid, and our margins are expected to continue to expand materially in 2018 as a result of all of the activities we have discussed here today.

The combination of the much improved expense profile with expected growth in future revenue provides important support for the meaningful increase in the company's profitability during the coming years. Much work clearly remains, but we have a solid footing from which to further build the business going forward.

Turning now to slide 12, Tony Allen will lead you through the balance of our presentation this morning.

Tony?.

Thanks Jeff. Good morning everyone. I'd like to discuss with you some of the highlights of our fourth quarter and full year 2017 financial results. Please advance to slide 13. Q3 consolidated revenue closed at $21.5 million, an increase of $1.5 million over the prior year period and at the upper end of our Q4 revenue target.

The revenue split between Sypris Technologies and Sypris Electronics was $14.5 million and $7 million respectively. Revenue for Sypris Electronics increased by $2.9 million compared to the prior year fourth quarter, which was partially offset by a decrease for Sypris Technologies of $1.4 million.

Sypris Technologies experienced year-over-year declines in each quarterly period during 2017, primarily due to the completion of a contract at the end of 2016. However, we expect this trend to reverse in 2018 based on new program launches and strong market conditions.

Our gross profit for Q4 was $1.4 million, which represents a $1.6 million improvement over the prior year period. Both segments contributed to the increase as Sypris Technologies was up $500,000 and Sypris Electronics was up $1.1 million.

Consolidated gross margin for the quarter of 6.6%, reflected an increase of 740 basis points from the prior year, but was short of expectations as Sypris Electronics was affected during the fourth quarter by an unfavorable revenue mix partly related to the electronic component shortages and extensive lead-time issues that are becoming prevalent in the electronic manufacturing industry, which will be discussed more on following slide.

Sypris Technologies performed well during the fourth quarter, as the benefits of the transfer of production from the Broadway Plant to Toluca are starting to flow into our financial performance. Gross margin for Sypris Technologies for the fourth quarter was 10.7%, which was the first double-digit gross margin result for this segment since 2014.

Selling, general and administrative expense was $3 million in Q4, a decline of $1.9 million from the prior year period and represents 13.8% of revenue in the current period as compared to 24.4% in the prior year.

Lower spend, primarily attributable to the cost reduction program we've discussed contributed to this improvement and we expect to continue to control spend in this area and see year-over-year improvements in SG&A as a percent of revenue in 2018.

The improvement in gross profit, combined with the reduction in SG&A, resulted in a $3.5 million improvement in adjusted operating income from the fourth quarter of 2016. This measure of performance excludes relocation and severance costs, which totaled $100,000 and $600,000 in the third -- in the fourth quarters of 2017 and 2016 respectively.

Please advance to slide 14. Full year consolidated revenue closed at $82.3 million, a decrease of $9.5 million from the prior year. The revenue split between Sypris Technologies and Sypris Electronics was $54.9 million and $27.4 million respectively.

Revenue for Sypris Electronics decreased by $1.1 million and Sypris Technologies decreased by $8.4 million from 2016. As noted on the previous slide, the decrease for Sypris Technologies was primarily due to a contract that ended in 2016 and the segment is now positioned to begin a growth cycle going into 2018.

The revenue decrease for Sypris Electronics takes into consideration revenue generated in 2016 by the Cyber Security Solutions business, which was sold in August 2016 and accounted for $11.1 million of revenue prior to the sale.

Excluding the effect of this divestiture, Sypris Electronics experienced an increase in revenue of $10 million, or 57%, in 2017 from 2016.

A strong performance, as this business reestablishes its identity as a leading electronic manufacturing partner for OEMs with product applications and unique regulated markets for the cost of failure, renders reliability, traceability and the certification of processes and absolute necessity.

Our current customer and program mix provides a solid foundation from which we expect to grow in 2018. Our gross profit for 2017 was $3 million, which represents a $2.2 million improvement over the prior year. Both segments contributed to the increase as Sypris Technologies was up $600,000 and Sypris Electronics was up $1.6 million.

Consolidated gross margin for 2017 of 3.6% was an increase of 280 basis points from the prior year. The strong fourth quarter performance by Sypris Technologies enabled this segment to offset the negative Q3 year-to-date gross margin and end the year just about breakeven with a full year gross margin of 0.7%.

This is noteworthy, given the additional costs incurred throughout 2017 associated with the transfer of production from the Broadway Plant to Toluca. The positive margin for 2017 also follows two years of negative margin for this segment and signals that we are turning the corner toward profitability.

Sypris Electronics ended 2017 with a gross margin of 9.4% for the full year, representing an improvement of 590 basis points over the prior year.

Although we were disappointed that our fourth quarter performance prevented this segment from achieving a double-digit gross margin for the year, we've remained focused on overcoming the supply chain challenges related to component availability and driving improved profitability in 2018.

SG&A expense was $13.1 million for 2017, a decline of $8.9 million from the prior year. SG&A represented 16% of revenue in 2017 as compared to 24% in 2016. A year ago, we announced the target of reducing SG&A expense by $7 million in 2017 and an additional $2 million in 2018.

We're pleased to report that we nearly achieved the full $9 million reduction in 2017 and we expect to maintain spend at or below the 2017 level in 2018. The year-over-year improvement in gross profit, combined with the reduction in SG&A, resulted in an $11.4 million improvement in adjusted operating income from 2016.

This measure of performance excluded the relocation and severance costs, which totaled $2.4 million in 2017 and $1.2 million in 2016. Please advance to slide 15. Revenue for Sypris Electronics decreased by $1.1 million, or 3.8%, to $27.4 million in 2017 as compared to $28.5 million in the prior year.

As noted on the previous slide, excluding the impact of the CSS sale, revenue for our core electronic manufacturing business increased by $10 million or 57%, over 2016. One of the key factors for the revenue growth was the ongoing production on one of our larger defense programs.

We worked closely with our customer during the first quarter to troubleshoot and resolve certain technical issues associated with the integration of our product and for the end users assembly and was able to increase production to a stable run rate by the end of the second quarter, which continued for the balance of the year.

Gross margin for Sypris Electronics improved to 9.4% for 2017 compared to 3.5% for 2016, an increase of 590 basis points. The increase in gross margin reflects the renewed focus by management on targeted markets following the sale of the CSS business one year ago.

The margin performance also reflects the significant change to the cost structure of the business, including the fixed overhead reductions driven by the relocation to a new facility at the beginning of 2017.

Following two consecutive quarters of gross margin in the mid-teens, we experienced new headwinds during the fourth quarter in our supply chain for this segment related to electronic component availability. Shortages and extensive lead times -- lead time issues are becoming prevalent in the electronic manufacturing industry.

The recent demand surge causing the electronic component shortage has come under greater strain due to the IoT explosion and growth in the industrial, mobile, and automotive markets. The constraints on our business are further complicated by component specifications that are sometimes sole-sourced to suppliers as directed by our customers.

We are working with our customers and our supplier partners to qualify alternative components where possible and to support our customer needs during this constrained period. Revenue mix further impacted fourth quarter margin as certain higher volume, higher margin programs were replaced with the startup of new programs.

Margins are typically lower on these programs as we work through design to manufacturability issues with our customers during the early stages of program launch. We experienced quality issues with a component on one program in the fourth quarter and recorded a charge related to the resolution of this issue.

We also recognized charges for certain inventory adjustments during the fourth quarter as we completed certain programs. Given the current pressure on our supply chain with regard to component availability, we expect revenue and margin in the first half of 2018 will be affected with the first quarter bearing the brunt for the impact.

Even with many component manufacturers increasing capacity, tight supplies are expected to last well into mid-2018 or longer. Our customer base is supporting our efforts to remove constraints and we recently hired a new Supply Chain Director with extensive industry experience to help navigate these challenges.

We expect SG&A spend in this segment, which declined $5.4 million, or nearly 70%, in 2017 from 2016 to remain flat in 2018. We have a healthy backlog to support expected shipments for 2018 together with a pipeline of opportunities to continue to grow the business.

Despite the headwinds attributable to component availability, we expect to drive gross margins back into the mid-teens for this segment for 2018, with the improvement weighted toward the second half of the year. Please advance to slide 16.

Revenue for Sypris Technologies decreased by $8.4 million or 13.3% to $54.9 million in 2017 as compared to $63.3 million in the prior year. Supply agreements with two customers were not renewed at the end of 2016, which accounted for a revenue decrease of $18.5 million in 2017.

We were able to offset a portion of this decline with increased shipments to our customers in the commercial vehicle, light truck, and automobile markets of $4.5 million and to the energy markets of $5.5 million.

Gross margin for 2017 reached a positive number at 0.7% after two years of negative margins, with the margin performance during the fourth quarter driving the year-over-year improvement. Gross margin for the fourth quarter was 10.7%, which was the highest and first double-digit gross margin since 2014.

Contributions to margin during both the fourth quarter and full year periods include an increase in product sales to the energy markets, which typically deliver higher margins than our heavy truck components. A key to the Q4 results was the completion of production at our Broadway Plant in Louisville.

This milestone marks the end of a long history of operations at this facility, extending decades back to periods prior to our ownership.

There were many challenges during the past year as we worked to transition operations from this facility, but one constant positive element contributing to a successful transition was the dedicated service by the employees at this operation. We appreciate their service and wish them well in their future endeavors.

During the third quarter, we discussed a number of the issues we were addressing with regard to product launches, rebuild of certain manufacturing assets and lower than planned labor productivity, partially due to employee hiring and training costs.

We also reported that we substantially reduced these costs beginning in October as our workforce stabilized and the equipment returned to operation. We're still in the early stages of moving from the launch phase into full run rates, but we are seeing improvements in labor productivity and operational availability of our equipment.

While the training of our workforce is a continuous process, we have made significant gains in this area, and we'll continue to raise our performance expectations as we move forward. We are extremely courage -- encouraged by the positive operating income results of Sypris Technologies during the fourth quarter.

A tremendous amount of effort has been put into transforming this business over the past three years by our entire workforce and we're pleased to see this segment move about breakeven for the first time since 2014.

This marks the beginning of what we expect will be sustained improvement in this segment's operating results and we look forward to reporting our progress toward this goal in future periods. On slide 17, we provide an update to the cost-reduction goals we discussed in our call one year ago.

Our two-year cost reduction goal is $26.3 million for 2018 as compared to the actual results of 2016. In the pie chart, we show the key elements of the cost reduction goal allocated in the amounts of $11.8 million for cost of sales, $9 million for SG&A, and $5.5 million for interest and charges for the extinguishment of debt.

The closing of the Broadway Plant in the fourth quarter is expected to position us to meet our cost of sales goal and marks the completion of the realignment in our operating footprint.

While the challenges and cost pressures we've discussed for Sypris Technologies had an impact on our cost of sales target for 2017, we expect to return to our targeted cost levels in 2018.

The lower cost structure resulting from the plant consolidation will drive the change, primarily through lower employment costs and closing a 450,000 square foot facility. SG&A expense is down $8.9 million in 2017 compared to 2016, nearly meeting the $9 million two-year goal we expect to -- and we expect to exceed this target in 2018.

We've repaid our senior credit facilities in the third quarter of 2016, which was the primary driver for the reduction in interest expense in 2017 as compared to 2016 and our only remaining debt obligation is the related party note payable.

All of the planned severance expense for the Broadway operation has been fully recognized as of the end of 2017 and we expect equipment relocation costs will decrease in 2018 as we complete the transfer of certain assets.

The major actions necessary to drive our cost improvement goals are now behind us, which leaves us well positioned to meet the two-year cost reduction target for our business. On slide 18, we highlight the significant improvement that has occurred since 2014. In customer concentration.

In 2014, our two largest customers accounted for 75% of our consolidated revenue. In 2017, our two largest customers accounted for approximately 27% of consolidated revenue. No single customer is expected to account for more than 15% of revenue, and the diversification of our customer base has improved in both segments of our business.

On slide 19, we show the impact our diversification efforts are having on revenue mix. In 2014, approximately 83% of our revenue was from our top three markets served, but nearly 70% of revenue was attributable to the heavy truck market, primarily with the two large customers noted on the previous slide.

In 2017, the same top three markets accounted for approximately 85% of revenue, with the distribution of revenue more evenly balanced between the heavy truck, energy, and aerospace and defense markets. We now have considerably less dependence on the heavy truck market and have plans to expand into new markets and further grow our business.

We believe our cost-reduction program is in line with our growth objectives and that we can be very competitive as we expand or enter these markets. Revenue for -- excuse me, please advance to slide 20.

Revenue for 2018 is expected to be in the range of $90 million to $96 million, an increase from the target of $86 million to $92 million we announced last quarter, as we now see opportunities for growth coming from stronger market conditions in both segments of our business.

We also have a solid backlog of Aerospace and Defense programs going into 2018. And bookings for energy-related product sales are showing strength as we entered the year. We expect revenue in the first half of 2018 in the range of $43 million to $45 million and increasing to $47 million to $51 million in the second half.

The primary reason for this sequential half-over-half improvement is the expected constraints on electronic component receipts during the first half, which we expect to improve during the year. We are maintaining our expectation for gross margin for 2018 at 15% to 17% of revenue.

The positive impact of cost reductions and operational improvements for Sypris Technologies that contributed to our fourth quarter results are expected to be recognized more fully beginning in the first quarter of 2018.

Similar to the revenue profile, we expect our margins to improve sequentially from the first half to the second half of the year, following the increase in revenue. We expect SG&A expense as a percent of revenue to decline to 13% to 14.5% for 2018 as we continue our cost reduction efforts and begin our growth cycle in revenue.

We believe our team is well-positioned to meet these targets and report a return to profitability on a consolidated basis for 2018. Please advance to slide 21.

This chart provides an overview of the journey we started in 2015 by looking at gross margin over the past three years as compared to expected performance for the first and second halves of 2018. Our annual revenue in 2014 was over $350 million, with approximately 70% generated from sales to the heavy truck market.

We were able to generate gross margin in 2014 of just under 11%, with a cost structure and footprint that were significantly greater than today's levels.

During the last three years, we completed a number of transition activities, including the divestiture of assets and the consolidation of operations for both segments in the smaller, more cost-competitive footprints.

Gross margin improved sequentially from the first half to the second half of 2017, as improved revenue mix and a lower cost structure contributed to drive gross margin up to 4.9%.

With the closure of our Broadway facility marking the final component of our cost reduction actions, we are expecting gross margin to improve sequentially to 13% to 15% in the first half of 2018 before improving further to 16% to 18% in the second half of the year.

For the full year 2018, our expectation is that gross margin will be in the range of 15% to 17%, representing an increase in gross margin of nearly 50% as compared to 2014. Please advance to slide 22, and I will wrap up with some key takeaways.

Our revenue for the fourth quarter was $21.5 million, an increase of $1.5 million, or 7.6%, from the prior year and at the upper end of the range we provided in our most recent call. Gross profit for the fourth quarter was $1.4 million, or 6.6% of revenue, compared to the negative 0.8% for the comparable prior year period.

SG&A expense was down $8.9 million for the full year 2017 compared to 2016, representing a 40% year-over-year decline and in line with the planned reduction we announced a year ago.

Sypris Technologies generated a positive operating income for the fourth quarter, its first profit since 2014 and what we expect will be the beginning of sustained profitability for this segment.

We ended production at our Broadway facility during the fourth quarter, which completes the production transition process and allows us to move forward and begin realizing the associated cost savings. This action also marks the completion of the major actions that were identified to drive our two-year $26.3 million cost improvement target.

We are raising our revenue guidance for 2018 to $90 million to $96 million as we see continued strength in the heavy truck, energy, and aerospace and defense markets in 2018. We are maintaining our outlook for gross margins in the 15% to 17% range for 2018, with sequential improvement expected from the first half to the second half.

We expect free cash flow to be positive for 2018 and believe we have additional upside to generate cash from the sale of idle or underutilized equipment from our Broadway facility.

We believe we now have a cost-competitive platform in both segments of our business, is well positioned for profitable growth, and we look forward to capitalizing on this opportunity. In closing, significant progress was made during the fourth quarter toward our goal of returning our business to profitability.

With strengthening market conditions and the completion of the cost improvement actions we announced a year ago, we are pleased to confirm our outlook for a profitable 2018. This concludes our call today. And at this time, I'd like to turn it back over to Lori to answer any questions you might have for us..

Thank you. [Operator Instructions] And we'll go first to Jim Ricchiuti at Needham & Company. Please go ahead sir..

Just a couple of questions. The -- in rough terms, Jeff and Tony, can you talk a little bit about the sequential decline in the electronics margins? Maybe just, again, in rough terms, what were the biggest contributing factors? Because you highlighted a couple of things; mix, the component shortages.

And I'd be curious what -- specifically, what types of components have you seen in short supply? And I think you also alluded to some inventory charges that might have impacted margins in that business. Thanks..

Thanks Jim. The mix issues, if I break it down in terms of the fourth quarter, I see the mix issues accounting for about half of the decline sequentially. And I see the inventory adjustments and some of the charges related to material quality and the closing out of contracts accounting for the other half.

So, in rough terms, I would say, as a percentage, about 8% of margin on both of those buckets. On the component side, we're seeing shortages in the industry. It's everything from the integrated circuits to passive components. It's across all of the electronic components in the industry.

Our issue, in particular, relates to some of the components that we have to sole-source with specific suppliers. So, we've been able to overcome a lot of these challenges. But on the sole-source parts, it's caused us additional headwinds..

Got it. Now, just with respect to the pipeline of business in the electronics side, I mean, we -- it looks like we have -- finally have a budget, although, I'd be curious, are you seeing -- things just still seem to be sliding a little bit to the right.

So, I don't know if that -- if you anticipate that impacting the actual flow of orders that you might see in the second half of the year.

What -- generally, what's your visibility in that part of the business?.

Jim, this is Jeff. For 2018, a large percentage of our business is in backlog. And so we don't see that being impacted by any issues going on with funding and that type of thing. And as we entered 2018, we probably had the smallest amount of book in turn business to fill the year that we've had in many, many years.

So, I think all of us feel very good about the outlook at least from a top line standpoint for this business..

Got it. And then final question for me. I'll jump back in the queue. Just on Sypris Technologies, the data would seem to suggest that we are seeing a recovery in demand in that area. How much visibility do you have in that business? What are you seeing? Are you seeing the uptick in orders? I mean Q4 looked a little bit better than expected. .

Yes, the market is strong. And I think increasingly, we'll be hearing about capacity issues and supply base issues and those things because the order rates have been incredible in terms of OEMs and new orders that they're receiving. So, our anticipation is that 2018 and 2019 will be at, I think, high levels of shipment..

Okay. Thanks a lot..

Yes, thank you Jim..

[Operator Instructions] And we'll go next to Joel Cahill at Jameson Company at Jameson Companies. .

Jeff and Tony, hey thank you for the call this morning..

Good morning Joel..

Good morning Joel..

He'd guy Glad to see revenue guidance going up and margin starting to allow for some bottom-line dollars here. We've -- you've -- as you were just speaking on -- with Jim that you've got pretty good visibility into 2018 margin expansion, if we could just kind of keep that chart on slide 21 going that same way would be beautiful.

And so I want to see what are your thoughts. 2018 looks like potentially can generate some positive income. And then 2019 as far as now being rightsized and cost effective and things.

Do you have insights out to that -- that far at this point?.

Sure, Joel. As shown on the slide 21, we do expect to see an uplift in margin as we move into the first half of this year.

And a lot of that will be driven by the fact that, with Broadway behind us and the cost reductions, the fixed overhead structure, the difference in employment costs there, we expect to see that business continue to ramp as we go through not only the first half of 2018, but also into the second half.

So, that's really the -- as we said, the last big piece of our cost improvement actions was getting that taken care of. And with that behind us, we expect to see some improvement. We also expect, as the chart shows, the second half to be better than the first half. And we see the components and the constraints impacting us thus far in Q1.

So we're looking at that and seeing improvements as we look into the second quarter based upon our backlog and ability to ship. But we do have some hurdles to overcome there, and that's why we're looking at more notable improvement from half one to half two for the electronics business.

Going into 2019, yes, we continue to see an uplift, not only in revenue, but also in margins. So, it's going out that far. We're looking forward to it. But first and foremost, we want to get through 2018 and meet our targets that we have set for the coming year..

Sure.

And the -- your family's note that -- is that supposed to come up at the beginning of 2019? And have there been any decisions on where you would go with that?.

The family notes now have been said to restructure -- they've been restructured and the maturities range from 2021 to 2025..

Got it.

And has interest rate stayed the same and payment is just interest only and through those terms?.

Yes..

Do you have any additional assets that you guys are looking to sell? I mean, I know we talked about some of the things at Broadway and then also that Broadway facility itself..

Yes. Yes, we do. And in fact, we have number of heavy upset forge presses that we're going to be looking at either selling or, on a specific basis, moving to Toluca. We'll be going through and doing our work to eventually liquidate the real property and the improvements.

And so our objective during the coming period is to eventually be completely out of the ownership of the Broadway facility..

Do you see that generating material cash?.

Well, we would certainly hope so, Joel. But we'll have to see with regard to timing and that type of thing. But we don't expect it to be immaterial, let's put it that way. .

Okay. And now I'll drop back if anybody else has any questions. Thank you guys..

Thank you, Joel..

[Operator Instructions] And gentlemen, it appears I have no additional questions at this time. I'll turn the program back over to you..

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

And ladies and gentlemen, once again, that does conclude today's conference. Again, I'd like to thank everyone for joining us today..