Sypris Solutions, Inc.
Q4 2012 Earnings Call Transcript

Published: 12 Mar 2013

[Operator:]

Good day, and welcome to the Sypris Solutions Incorporated Earnings 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, sir.

[Jeffrey T. Gill:]

Thank you, Rochelle, and good morning, everyone. Brian Lutes, Tony Allen and I would like to welcome you to this call. The purpose of which to review the trends reflected in the company's financial results for the fourth quarter and full year 2012. 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 year, to be followed by a brief discussion of each of our 2 business segments. Brian will then provide you with a more detailed review of our financial results for the quarter and year. Now let's begin with the overview on Slide 4. We're pleased to report that 2012 represented another year of accomplishment for Sypris Solutions, one in which the company's margins and earnings continued to expand at a rate in excess of its top line growth. The company's profit performance reflected the impact of these extensive efforts to expand international sales, introduce new technologies, increase productivity and eliminate inefficiencies during the year. The results were encouraging. While revenue for the year increased 2% to $342 million from $336 million the prior year, gross profit increased 24% to $44 million, up from $35 million in 2011. Gross margin increased 230 basis points to 12.8%, up from 10.5% in 2011. The company's financial results from continuing operations reflected these strong improvements, with income climbing 22% to exceed $10 million while earnings increased 16% to $0.50 per diluted share, up from 43% -- $0.43 per diluted share in 2011. In March of 2012, the company's Board of Directors voted to reinstate the cash dividend of its common stock at an annual rate of $0.08 per diluted share, which approximated a 2% yield based upon the share price at that time. In June of 2012, the company was added to the Russell 2000 index as part of the annual reconstitution of the index, thereby increasing the company's visibility with investors and institutions that rely upon the Russell indices as part of their investment strategy. And in July of last year, Bob Lentz was selected to our Board of Directors. Bob is currently the President of Cyber Securities Strategies and is the former Deputy Assistant Secretary of Defense for cyber, identity and information assurance. The year was certainly not without its challenges, however. The North American production of heavy-duty trucks declined by 26% from the second quarter to the fourth quarter of 2012, resulting in a $45 million reduction in second half revenue from customers in our Industrial Group. In our Aerospace & Defense segment, budgetary and funding uncertainties with the U.S. Department of Defense impacted the flow and timing of orders, the result of which affected shipments form quarter-to-quarter during the year. And finally, the financial results for the second half of the year reflected both the impact of an unfavorable arbitration settlement and a noncash charge related to increased uncertainties associated with sequestration. Yet despite these challenges, the company's ability to increase margins during the year in both businesses served as important testimony to the underlying strength and nature of the advancements that have been made and continue to be made in both business segments. Now let's take a moment to review each of our business segments beginning with our Aerospace & Defense business on Slide 5. Revenue declined 11% to $56 million through the year, reflecting the impact of DoD budgetary issues mentioned a moment ago. More importantly, however, gross profit jumps 62% to $13 million, as a result of improved product mix, up from $8 million in 2011, while gross margin almost doubled to 23%, up from 12.7% in 2011. The business was successful with its effort to increase product sales internationally and thereby reduce its dependency on U.S. DoD purchases. The arms services of Australia, New Zealand, Japan and India were important customers during the year, and with the recent approval to sell certain of our products to NATO countries, we expect to add additional new international customers during the coming year. Initiatives to expand our electronic manufacturing services business made important headway during 2012, with the business successfully passing the extensive qualification testing requirements of several new customers. As a result, we believe that the business is well-positioned for new contract awards during 2013. With the close of 2012, we celebrated the completion of our first Cyber Range for a U.S. government customer. During the year, we also received extensive interest from agencies located in the U.S., Korea, Singapore and Japan, among others. And perhaps most interesting of all, we made important progress during the year in advancing some of our R&D investments to the point where they are now actively being considered for customer-funded product development. If successful, this would represent a very important step forward in terms of validating their future commercial potential. As we look to the future on Slide 6, we expect the flow and timing of orders and therefore, quarterly shipments to be quite dynamic during 2013 as the company's deal with the fallout associated with the U.S. DoD funding issues and the uncertainties arising from sequestration. As we mentioned during prior calls, a number of companies, including Lockheed Martin and Northrop Grumman, have already announced the major realignments of their organizations. Against this backdrop, we will continue to leverage our established position and 48 years of expertise in cryptographic key management to increase our international product sales and market penetration in Australia, New Zealand, Japan, India and now, NATO countries. We see additional growth potential for Electronics Design and Manufacturing Services for space and deep-sea applications, where the cost of failure is simply unacceptable. We expect that new programs with ITT, Tyco, L-3, Lockheed Martin and Northrop Grumman, will serve as the solid foundation for the future expansion of this business. We will also pursue synergistic acquisitions, especially electronic manufacturers that compete in these "high cost of failure" markets with the objective of further accelerating our penetration with new and existing customers. We will continue to partner with leading universities, such as Produce Serious [ph] and Carnegie Mellon's CyLab, to develop new patented technologies for emerging applications, such as our project for the Department of Energy to secure the Smart Grid. As we have discussed in the past, with the increased attention now being paid to advance cyber threats, the opportunity to provide customers with the tools to defend their systems from attack is expanding rapidly. We believe that our experience configuring secure systems and networks has placed us in a unique position to provide Cyber Range product and service offerings to fill critical security training gaps for domestic and international customers. In short, we have a lot going on, and with the short-term government funding issues making it all the more interesting, but we remain optimistic about the long-term prospects for this business. Now let's take a quick look at our Industrial Group, beginning with Slide 7, where revenue increased 5% during the year to $286 million, despite the 27% sequential falloff in sales during the second half of 2012 mentioned earlier. Gross profit increased 13% to $31 million, up from $27 million in 2011, while gross margin increased by 80 basis points to 10.8%, up from 10% in 2011. EBITDA for the year reached $35 million or 12.2% of revenue. The year 2012 was notable for a number of important accomplishments. We experienced a 27% increase in global sales to oil, gas and petrochemical customers who use our products in a variety of transmission, processing and recovery facilities. We engaged Toyota to accelerate the deployment of Lean tools in our factories through the introduction of the Toyota production system, with the objective of further improving our processes and eliminating inefficiencies, thereby increasing our competitiveness and margins. We continue to invest in advanced manufacturing capabilities to improve quality and reliability; we do cytokines and ensure responsiveness. We also increased our investment in product engineering to reduce the weight and improve the manufacturability of our customers' products. And finally, we continue to evaluate opportunities to expand our presence in new geographical markets through the acquisition of or joint venturing with companies that have an established leadership position in their local markets. Turning to Slide 8. The outlook for the main markets served by our Industrial Group appear to be shaping up fairly positively for 2013. The commercial vehicle market, which has been the subject of much discussion of late, has strengthened since the fourth quarter of last year, with orders placed in December, January and February supporting higher rates of production. The first model of year 2014 trucks, which are expected to be much more fuel-efficient, will begin to ship in March of this year and may serve as the basis for the firming outlook. And finally, the long-term fundamentals continue to improve for housing and automotive demand, both of which bode well for the future of the commercial vehicle industry. It is also worth noting that it appears that many of our customers placed an emphasis on reducing inventories during the fourth quarter of last year. The situation has since been rebalanced. The demand for light trucks and trailers remains solid at attractive levels, while the market for agriculture products and off highway equipment remains stable. We are looking forward to another year of profitable growth from our natural gas, oil and petrochemical markets, where global demand for our highly engineered closures and slated joints and other specialty piping components continues to be quite strong. And we expect to benefit, during the year, from increased shipments to customers in Brazil and Mexico as these new programs ramp-up to full volume during the year. During 2013, you can expect that we will continue to focus our efforts on 3 key strategic initiatives

[Brian A. Lutes:]

Great. Thanks, Jeff. Good morning, everyone. I'd like to discuss with you the highlights of our fourth quarter and full year 2012 financial results. Let me begin with our consolidated fourth quarter results and ask you to advance to Slide 10. You'll see here Q4 consolidated revenue totaled $67.5 million. This was down $16.1 million or about 19%, primarily attributed to the reduction that we saw take hold in the second half with respect to commercial vehicle demand. In terms of gross profit, we came in at generating $8.6 million, this despite the 19% sales decline. As a result, gross margin of 12.8% or a 240-basis-point expansion from 10.4% in Q4 of 2011 was achieved. As Jeff mentioned earlier, really both segments did just a great job in terms of executing in the second half, particularly in the fourth quarter and continue the focus of managing volatility with proper cost containment. And in very important metric, earnings per share from continuing operations came in at a $0.04 loss versus $0.07 positive in Q4 of 2011 and was negatively impacted by approximately $0.08 as a result of a write off of a pre-contract charge related to one of our A&D programs. If we shift our attention now to the consolidated results, let me ask you to please advance to Slide 11. Our 2012 full year consolidated revenue came in at $341.6 million. This is up $6 million from 2011, again, impacted by the decline we saw in the second half of the year, as well as some slowing of orders within our Aerospace & Defense segment and its direct impact on revenue. Despite these headwinds and the impact on revenue, again, the story here is all about margin expansion. In that regard, margins expanded considerably as a result of the execution and the new business development platforms you heard Jeff mention. Gross profit increased 24% to $44 million, and this reflected overall a gross margin expansion of 230 basis points, up to 12.8%. Finally, for the full consolidated 2012 earnings per share for continuing operations did increased $0.07 to $0.50, despite the market challenges and the onetime write-off of the pre-contract cost I just mentioned. Let me shift gears now and talk briefly about each of the segments. Our Aerospace & Defense segment, headquartered in Tampa, Florida. Let's start on the left side. As we look at the revenue profile, the revenue did increase 5.4% to $12 million for the quarter. This is up from $11.4 million for the prior year period and was driven in part by product sales and manufacturing services within our severe environment channel you heard Jeff mention earlier. Shifting to full year revenue. We did come in with a slight decrease of 11%, down to $56 million in part for a couple of reasons

[Operator:]

[Operator Instructions] And your first question, we'll hear from Jim Ricchiuti with Needham & Company.

[James Ricchiuti:]

I wonder if you guys would be able to break out the international component of the business last year? And if you can, can you give us any color in terms of how that might break out for industrial and electronics?

[Jeffrey T. Gill:]

Jim, we don't have those numbers at our fingertips, but my guess is that Brian and Tony could work on that and get back to you afterwards.

[James Ricchiuti:]

Okay. Jeff, but -- I guess what I'm -- where I'm going with this is, it sounds like you're talking more and more about opportunities overseas. Is that going to be a bigger part of the business going forward? Is it going to be more meaningful in 2013?

[Jeffrey T. Gill:]

Yes. We expect it to be more meaningful in 2013, Jim. It is growing in importance for us, particularly as we look at finding more stable sources of business for the Aerospace & Defense space.

[James Ricchiuti:]

And then along those same lines, you're talking more about opportunities, I think, in the oil and gas market. Is that -- how meaningful is it right now in terms of the revenues for the Industrial business?

[Jeffrey T. Gill:]

Well, it's growing fairly rapidly. You saw it was 27% growth this past year. We expect to have double-digit growth again this year. And I would say, as much as anything, it's the profit contribution coming from that segment of the business, which is probably more meaningful than the top line.

[James Ricchiuti:]

Got it, okay. Brian, the charge, can you elaborate on that? Where did that hit in the P&L? Just...

[Brian A. Lutes:]

Sure. That hit in G&A. It was a $1.7 million charge in Q4. $1.1 million of that, Jim, was incurred in 2011. And the balance of approximately $600,000 was incurred during 2012.

[James Ricchiuti:]

Okay. In the quarter?

[Brian A. Lutes:]

Yes. In Q4, in G&A.

[James Ricchiuti:]

Got it. So if we think about SG&A or the G&A component going forward, it should be coming down, it sounds like.

[Brian A. Lutes:]

Well, I would look at our G&A run rate based on a sequential view, particularly through Q1, Q2 and Q3 because the flip-side of this is, is that we true up employee benefits and health care. We had some things that offset that in the fourth quarter. So a good run rate is based on where we're at on a sequential basis from Q1, Q2, Q3 and Q4.

[James Ricchiuti:]

Okay. Now this is a little bit, I guess, more difficult to answer, just in light of all the uncertainty around sequestration. It sounds like you're at least planning for a pretty challenging first half in the A&D business. Is that safe to say?

[Jeffrey T. Gill:]

Yes.

[James Ricchiuti:]

Then the question is, and Jeff, I don't know if you can answer this. Do you think the business could be -- has the potential to be up for the year?

[Jeffrey T. Gill:]

Jim, I think the thing that's safe to say at this moment is the lack of visibility is very pervasive. And so I think the best thing to do is you look at 2013 and just to be conservative. And if we can surprise, that's going to be great.

[James Ricchiuti:]

Okay. And then I have one final question. I'd jump in the queue -- back in the queue. The rebalancing that you alluded to for in -- that appears to be taking place in the inventories in the industrial business, can you get some sense as to the magnitude of that, that you might be seeing in the quarter?

[Jeffrey T. Gill:]

Well, that's a tough thing to answer. What we can tell you is that we believe that the rebound from Q4 has been stronger than what the, let's call it, the published production numbers would otherwise indicate.

[Operator:]

[Operator Instructions] And there are no further questions. We will take a follow-up from Jim Ricchiuti with Needham & Company.

[James Ricchiuti:]

On backlog, I was wondering if there's any color you could provide in terms of how the -- how your backlog looks entering in the year? Any flavor in terms of bookings, book-to-bill, for instance, in the Industrial business?

[Jeffrey T. Gill:]

In the Industrial business, Jim, we don't track backlog. So -- but it is, as I mentioned just a moment ago, is we are seeing strength coming out of the fourth quarter that is probably, safe to say, stronger than what the production numbers would otherwise indicate.

[James Ricchiuti:]

Jeff, is there any reason to think that the Industrial business wouldn't be up this year, just in light of some of the demand you're beginning to see, the recovery agenda, as you think about the maybe some of the conversations you've had with some of your customers?

[Jeffrey T. Gill:]

I think everybody's cautiously optimistic. But if you -- as we listened to our customers and read the reports of different things, basically, what people are saying is they expect 2013 to be, in effect, a mirror image, if you will, of 2012. So in other words, the back half of the year of 2013, kind of trending towards the strength of what was the first half of 2012.

[Operator:]

And there are no further questions at this time.

[Jeffrey T. Gill:]

Okay. Well, Thank you, Rochelle. And Brian, Tony and I would like to thank everyone for joining us this morning. We welcome your continued interest and, of course, your questions about our business. So thank you, and have a great day.

[Operator:]

And that will conclude today's call. We thank you for your participation.