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 the President and Chief Executive Officer; Mr. Jeffrey Gill. Please go ahead, sir..

Thank you, Kate, and good morning, everyone. Tony Allen and I would like to welcome you to this call. Purpose of which is to review the company's financial results for the third quarter of 2020. 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 can 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. 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 an update on the outlook for each of our primary markets.

Tony will then provide you with a more detailed review of our financial results for the quarter. Before we begin on Slide 4, however, I'd like to take just a moment to discuss our current environment, especially in light of the public and private activities being taken to address the COVID-19 virus and the potential impact of these actions on Sypris.

We have taken a number of steps to ensure a safe work environment, many of which include best practices recommended by the Center for Disease Control, OSHA and others. We have on-site medical professionals at our largest campus to both be of service to our employees and to check any incoming visitors before admitting them into our facilities.

Travel has been limited. Spacing has been increased. Gathering sizes have been reduced, and hygiene has been and continues to be emphasized, both at work and at home. We are providing employees with regular updates while requesting their feedback and suggestions with regard to additional steps that we might take.

We are discussing the importance of personal responsibility, recognizing that the majority of their day actually occurs outside of the confines of Sypris.

We are also providing special consideration for any specific [Technical Difficulty] happens to be of an age or with an underlying respiratory, pulmonary or other such conditions that would otherwise place the individual at substantial risk should he or she contract the virus.

We continue to monitor the situation of both our customers and our suppliers on a daily basis. During the months of April and May, we had certain commercial vehicle and automotive customers closed for weeks at a time and/or reduce their demand, while the defense and communications markets remained rock solid.

Beginning in late June and early July, customers began to progressively open up. Our sense is the trough is well behind us, but the environment is certainly dynamic and circumstances may change rapidly.

We will continue to focus on meeting the commitments we have made to our customers, while working to provide a safe work environment for our employees and their families. Now let's begin with the overview on Slide 4.

Revenue was flat year-over-year but increased 29.2% sequentially as demand from customers of Sypris Technologies increased 62.1% from the second quarter of 2020.

Revenue for Sypris Electronics increased 52.6% year-over-year and 3.9% sequentially during the period, reflecting the continued strong demand from customers in its defense and communications markets.

The lift from both businesses, when combined with improved operating performance and program mix, drove a 47.1% year-over-year and a 70.8% sequential increase in gross profit for the company. In a similar fashion, gross margin increased 490 basis points year-over-year and increased 370 basis points sequentially.

We believe these margins are reflective of the vast improvements that have been achieved operationally as well as the improved mix that reflects the diversification that has taken place in recent years. We believe that there's room for further margin expansion as our markets continue to recover going forward.

The positive operating results were further boosted by the release of a deferred tax valuation allowance, which reflected the sustained profitability of and positive outlook for our operations in Mexico.

As many of you may recall, the decision by a customer to change its sourcing strategy beginning in 2015 had a significant impact on our Mexican operations, reducing revenue for 2015 by over 90% from the previous year. We have been working since that time to rebuild this important operation.

Our success in so doing can be measured by the fact that it's been profitable now on a trailing 36-month basis while its prospects going forward are even stronger. As a result of these and other factors, the valuation allowance was reversed for our Mexican operations.

The resulting earnings per share of $0.17 for the quarter compared favorably to the loss of $0.07 per share for the prior year. It's interesting to note that while both periods reported revenue of $22-plus million, gross margin for the third quarter of 2020 was 490 basis points higher than that of the prior year, while SG&A was 18.1% lower.

Clearly, a good combination and one that we plan to further build upon going forward. The quarter concluded with a number of positive announcements regarding recent contract awards in both business segments.

We will talk further about these in just a minute but suffice it to say they were certainly indicative of the positive momentum that we experienced across our business during the period. Now let's take a look at the performance of each of our business units, starting with Sypris Electronics on Slide 5.

As I mentioned a moment ago, revenue for Sypris Electronics increased 52.6% during the period from year-ago levels and increased 3.9% sequentially. The company's strong backlog of orders fed the growth while the availability of components did not hinder the top line as it has periodically in the past.

Sales for the first nine months of 2020 are up 62% year-over-year while backlog has increased 27.2% since December of 2019. Our book of business now extends well into 2021. Gross profit and gross margin followed suit with each of these key financial metrics expanding significantly on a year-over-year basis.

Operating margins were also healthy, increasing to 8% of revenue from a loss for the prior year. During the quarter, we announced an initial contract award from Leonardo DRS Naval Electronics to manufacture and test electronic assemblies for a naval radar tracking system. Work under this contract is scheduled to begin during 2020.

We also announced contract awards to manufacture a variety of electronic assemblies for mission-critical airborne munition dispensing systems with production slated to begin during 2020 and continue into 2021.

In short, it was another positive quarter for Sypris Electronics in almost all respects, and we remain positive as we look to the future for this business. Backlog was up 19.5% year-over-year and is up 27.2% since year end after having supported strong top line growth during the first 9 months of 2020.

Now let's advance to Slide 6 to review the performance of Sypris Technologies during the quarter. Revenue increased 62.1% sequentially as customers reopened operations that were temporarily idle during the second quarter in response to the pandemic.

Gross profit increased 732.8% sequentially, while gross margin expanded to 15.8%, up from 3.1% sequentially. SG&A expense was 24.4% lower than the prior year, resulting in operating margins that were 110 basis points higher than those in the prior year period.

Clearly, much operational progress has been made while new programs are supporting the expansion of margins. During the quarter, we announced the award of new orders of closures for projects located in Brazil and Canada.

In the case of Libra oil field in Brazil, the project is one of the world's largest ultra-deepwater oil discoveries and over 6,600 feet deep and containing between 7.9 billion and 15 billion barrels of oil. The project is expected to produce up to 1.4 million barrels of oil per day by 2021, with an estimated development cost of $80 billion.

We will be providing specialty closures for this project that can handle pressure approximating 10,000 psi. In Canada, the Trans Mountain Pipeline Expansion Project will add 609 miles of 42-inch pipeline to transport 590,000 barrels of oil per day, Canada's West Coast for shipment to world markets. The project is estimated to cost $12.6 billion.

We will be providing closures ranging in size from 30 inches to 48 inches in diameter that will be automated for ease of opening.

We also announced a contract for the delivery of 58-inch toolless closures weighing 5.5 tons each for use in the Alberta XPress Gas project, which will expand transmission capacity from Manitoba to delivery locations in the Midwestern and Southern U.S. Shipments for this program will be completed prior to year end 2020.

These 3 projects serve as an excellent examples of the type of work we do for demanding, high cost of failure applications around the world. From a business development standpoint, we continue to experience a great deal of activity as companies look to increase their North American sourcing content.

As we evaluate these opportunities, our focus continues to be on further diversifying our business, both in terms of markets, customers and technology. During our last call, we discussed the changes that have taken place in our market mix over the past several years. Turning now to Slide 7.

Please note that in 2020, we now expect revenue from defense electronics to exceed 35% of our total sales, up from 22% last year while sales to commercial vehicle customers are expected to represent 25% of the business, down from 41% in 2019.

Some of you may recall that in 2014, commercial vehicle represented fully 70% of revenue, and these sales were highly concentrated with 2 customers. We have made much -- we have a much more balanced business today both in terms of market served and customer concentration.

This diversification has served us well during the pandemic, both in terms of volume and margin. Looking forward, we expect margins to expand further, reflecting increased value-add and technical requirements, while continuing to move away from commodity products and services.

We believe that additional opportunity exists to further diversify our business, and we will continue to aggressively pursue this outpoint. Now let's turn to Slide 8 to review the outlook for each of our major markets. DoD spending continues to remain solid, with U.S.

military spending expanding, especially with regard to key long-term strategic programs that are expected to run for many, many years. Our backlog has increased by 27.2% since year end, and our margins have increased significantly with the growth in the top line.

Demand from commercial vehicles, specialty, automotive, all terrain and our highway customers resumed in June, and the current outlook for the balance of 2020 has improved significantly. The key question, of course, is will it last? Or will there be another shutdown of the economy? Time will tell, but we believe that we are prepared for either event.

In the long term, we believe that the economy and trucking will benefit significantly from the stimulus programs that have been implemented during this year. In recent months, the benchmark price for crude oil has recovered somewhat, with the near-term outlook for oil producers in the sector remaining somewhat uncertain.

Within the broad energy market, however, the conversion of power generation to natural gas as well as the construction of pipelines and LNG terminals to support export activities continues to be a source of opportunity for Sypris on both the domestic and on an international front.

Our performance during the first nine months of 2020 has been solid, especially under the circumstances. And we believe that we are well positioned for future success once the economy remains open on a reliably sustained basis.

In the interim, we will continue to be responsive to the safety needs of our employees and their families while working hard to meet the commitments we have made to our customers. We must and will remain agile and responsive to new data as it develops. Turning now to Slide 9.

Tony Allen will lead you through the balance of our presentation this morning.

Tony?.

Thanks, Jeff, and good morning, everyone. I'd like to discuss with you some of the highlights of our third quarter financial results. Please advance to Slide 10. Q3 consolidated revenue was $22.2 million, an increase of 29.2% sequentially from Q2 and in line with the third quarter of last year.

The recovery in the third quarter was driven by Sypris Technologies, which increased 62.1% over Q2 to $12.1 million as customer demand improved following the low demand months of April and May.

Revenue for Sypris Electronics broke the $10 million level and was favorable on both a year-over-year and sequential basis, up 52.6% from Q3 2019 and 3.9% from Q2 2020. Consolidated gross profit improved $1.4 million sequentially to $3.4 million, primarily driven by the revenue increase and the related contribution margin for Sypris Technologies.

Consolidated gross margin for Q3 was 15.4%, an increase of 490 basis points from a year ago. Gross margin for Sypris Technologies rebounded from Q2 to 15.8% and was in line with the 15.9% margin reported for the full year 2019.

Gross margin for Sypris Electronics of 15% was up significantly from the negative margin for Q3 of 2019 and was just below the 15.6% reported for the first half of 2020. Our consolidated SG&A expense was $2.6 million for Q3, a decrease of approximately $300,000 sequentially and $600,000 from the prior year.

The decrease in Q3 SG&A primarily reflects actions by management to reduce discretionary spend in response to the COVID-19 pandemic.

Cost reduction actions included reducing hiring activities, reduced compensation for our CEO and certain other senior leadership and corporate personnel, suspended fees paid to our Board of Directors, lower travel-related spend and reductions in other areas of controllable cost.

We also recognized a credit of approximately $200,000 in Q3 related to favorable claim performance on one of our casualty insurance programs. Many of the spending measures are expected to remain in place until we see the economy moving in the right direction and have better visibility to customer demand.

Consolidated operating income was $844,000 for Q3, driven by the margin performance in both segments for the period and lower consolidated SG&A expense. The Q3 operating income basically offsets our loss from the sequential Q2 period and puts the business back in a positive operating income position on a year-to-date basis.

Our Q3 operating income also compares favorably to the losses reported for both the quarterly and year-to-date periods of the prior year.

We are pleased with the performance of the business for Q3 and believe it is indicative of a level we can build on in future periods, absent significant impacts of COVID-19, such as those experienced in the second quarter.

During the third quarter, we also determined that the valuation allowance we've been carrying against the deferred tax assets of our Mexican operating subsidiary could be released, which resulted in the recognition of a net income tax benefit of $3.2 million in the period.

The cumulative trailing three year profitability of this operation and our expectation of the continued profitability of the operation for the foreseeable future, together with other factors, provided management with sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized.

The recognition of the tax benefit in Q3, combined with our pretax income, resulted in consolidated net income of $3.5 million or $0.17 per share for the period. Please advance to Slide 11. Consolidated revenue for the first nine months was $61.7 million, a decrease of $4.5 million or 6.8% from the first nine months of 2019.

The comparison for the nine month period reflects the impact of the pandemic on revenue during the second quarter, which primarily affected Sypris Technologies. Despite the drop in consolidated revenue from 2019, gross margin improved 380 basis points in the first 9 months of 2020 over the prior year.

The margin improvement reflects favorable mix associated with our diversification efforts and improved efficiencies driven by our continuous improvement initiatives.

Year-to-date revenue for Sypris Technologies was $33.2 million, which is $15.4 million below the prior year, reflecting both the COVID-19 impact and the cyclical decline in the Class 8 commercial vehicle market. The launch of new programs provided some boost to revenue for the period, but not enough to overcome the lower market demand.

We have also experienced some softening in our energy product orders since the pandemic outbreak as customers have delayed projects or reduce spending as they navigate through these uncertain times. Although revenue on a year-to-date basis is down nearly 32% from the prior year, gross margin for this segment is at 13.9% for the first 9 months.

Demand is expected to remain stable in Q4 with revenue at or above Q3 levels. Year-to-date revenue for Sypris Electronics was $28.5 million, an increase of $10.9 million or 62% above the prior year.

The material availability issues we experienced in the prior year period have largely been resolved, and our team has worked effectively with our customer base to successfully manage the routine production challenges we face daily and deliver more consistent results in 2020.

Our team's confidence continues to grow and with our existing backlog of business and the new opportunities we are pursuing, our outlook for the coming year remains favorable. Gross margin for this segment is at 15.4% for the first 9 months of the year, a considerable improvement over the negative margin for the comparable period in 2019.

Our consolidated SG&A expense was $8.6 million for the first nine months, a decrease of $1.6 million or over 15% from the prior year. Year-to-date, SG&A expense represents 14% of revenue.

Certain of the spending reductions discussed on the previous slide were implemented late in Q1 in response to the COVID-19 outbreak with the full impact reflected in both Q2 and Q3.

Additionally, we incurred certain consulting fees related to the implementation of a new ERP system for Sypris Electronics during the first nine months of 2019, and those costs were not incurred in the current year.

Consolidated operating income for the first nine months is $261,000 as we recovered from the Q2 setback from COVID-19, which represents an improvement of $3.7 million year-over-year despite the 6.8% decline in revenue.

Given the challenges imposed by COVID-19, we are pleased with our performance over the first nine months of the year and remain driven and focused on closing the final quarter of the year with continued profitability. Please advance to Slide 12.

We will take a quick look at our consolidated quarterly revenue trend for 2019 and the first three quarters of 2020. The Class 8 commercial vehicle market started its downturn in Q4 of last year.

New program launches at Sypris Technologies for automotive and sport utility components began contributing to revenue in the first quarter of 2020, partially offsetting some of the softness in the market. Additionally, the Electronics segment increased revenue as component availability improved and backlog remained healthy.

This allowed Q1 revenue to increase sequentially from Q4 before COVID-19 began affecting revenue in late March. The impact of COVID-19 on Sypris Technologies drove segment revenue down significantly in Q2 before recovering in Q3.

Sypris Electronics reported its fourth consecutive quarter of revenue growth during Q3, reaching over $10 million for the quarter, an increase of 52.6% from the same period in 2019.

As Jeff pointed out earlier, our market conditions are generally favorable as we look forward to Q4 and 2021, subject, of course, to the impact COVID-19 could have on the economy and our business as we move through the winter months. Please advance to Slide 13.

On this slide, we show our trend of consolidated gross margin over the most recent 4 years, along with the performance for the first 9 months of 2020. Consolidated gross margin is at 14.6% year-to-date as quarterly gross margin improved 370 basis points sequentially from Q2 to Q3.

The Electronics segment continued to show year-over-year margin improvement at 15.4% for the first 9 months, an increase of 1,880 basis points from the prior year. The increase in margin for Sypris Electronics demonstrates the leverage that we gained from the growth in revenue by this segment.

The contribution margin we pick up on additional revenue converts to higher gross margin. Improved material availability also contributed to the SE margin improvement, which enabled our management team to more efficiently balance production schedules and increase our overhead absorption.

Sypris Technologies is at 13.9% gross margin year-to-date, which is 210 basis points below the prior year, but includes the second quarter that was heavily impacted by COVID-19 and saw gross margin decline to only 3.1%.

If we look at the combined results of Q1 and Q3, Sypris Technologies had a gross margin of 17.1%, which is in line with our expectations for this business under more normal economic conditions.

Our outlook calls for stable demand for Sypris Technologies in Q4, which is expected to drive our full year margins above the year-to-date level of 13.9% to show further improvement in 2021, including the anticipated results of continuous improvement initiatives that are underway. Please advance to Slide 14, and I will offer a few takeaways.

Consolidated revenue for Q3 was $22.2 million, an increase of 29.2% sequentially and in line with Q3 of 2019. Gross profit for Q3 increased $1.1 million or 47.1% over the prior year to $3.1 million for the quarter. Our gross margin for Q3 is 15.4%, up 490 basis points from Q3 of 2019.

After the very difficult months of April and May, Sypris Technologies began to see customer demand rebound in June as customers resumed operations at their facilities. Demand continued to recover in Q3, and our current outlook shows a positive trend as we close Q4 and prepare for the coming year.

Revenue for Sypris Electronics was up 52.6% year-over-year and 3.9% sequentially, closing with another good performance for the quarter. Electronic component availability throughout 2020 has improved over the prior year and a solid base of programs has contributed to year-to-date revenue growth of 62% over the prior year.

Consolidated operating income for Q3 was $844,000, which offset the results of Q2 as the pandemic outbreak nearly halted the economy. The performance in Q3 moved us to a year-to-date operating income of over $0.25 million despite the loss incurred in the second quarter.

We've released a valuation allowance on our Mexico deferred tax assets during Q3 that resulted in a $3.2 million tax benefit for the quarter. The profitability of this operation has continued to improve over the last three years and a favorable outlook for Q4 and 2021 provides additional positive evidence for management's conclusion on this matter.

Our ability to increase our revenue and continue to pursue market diversification will provide us the opportunity to further expand our margins as we leverage our current business model.

The extent and duration of the impacts that COVID-19 may have on our business are not known at this time, and we will take every action possible to protect the health of all of our business associates and mitigate the impact to our business.

We greatly appreciate the continued support of our employees, customers and suppliers during this uncertain and challenging period. This concludes our call today, and at this time, I'd like to turn it back over to Kate to answer any questions you might have for us at this time. Thank you very much..

Operator:.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..