Sypris Solutions, Inc. (SYPR) Q1 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Sypris Solutions Incorporated 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, Jennifer, and good morning, everyone. Brian Lutes, Tony Allen and I would like to welcome you to this call, the purpose of which is to review the trends reflected in the company's financial results for the first quarter of 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. In compliance with Regulation G, you can access our website at sypris.com to review the definitions of any non-GAAP financial measures that may be discussed during this call. With these qualifications in mind, we'd now like to proceed with the business discussion. Please advance to Slide 3. I will lead you through the first half of our presentation this morning, starting with an overview of the highlights for the quarter, to be followed by a brief discussion of each of our 2 business segments. Brian will then provide you with a more detailed review of our financial results for the quarter. Now let's begin with the overview on Slide 4. We're pleased to report that the company continued to make important progress during the quarter. Revenue increased 27.2% to $96.5 million during the period, up from $75.8 million in the first quarter of 2011, and up 15.4% sequentially from the fourth quarter of last year. Gross profit rose 53.6% to $12.5 million, up from $8.1 million in the first quarter of last year, while gross margin expanded to 13% of revenue, up from 10.7% for the prior year quarter. Net income improved to $5.3 million or $0.27 per diluted share, up from $2.1 million or $0.10 per diluted share for the first quarter of 2011. Net cash increased to $13.2 million, up $17.1 million from the year earlier net debt position of $3.9 million. Profit conversion on incremental revenue growth for our Industrial Group exceeded 20% on a year-over-year basis and 16% sequentially, reflecting the positive impact of our continuous improvement activities. And finally, orders in our Aerospace & Defense business increased 30% year-over-year, following a 23% year-over-year increase in the fourth quarter of last year. So all in, a good start for the first quarter of 2012. Turning to Slide 5, let's review the highlights for the quarter for our Aerospace & Defense business. Revenue for the quarter was $13.9 million compared to the $16.3 million for the prior year period, but up 23% sequentially from $11.4 million in the fourth quarter of 2011. Gross margin was 18.6% compared to 18.5% for the prior year period and up significantly from 4.5% we reported in the fourth quarter of last year. R&D investments continued during the quarter, albeit at a lower level than in recent periods, with a full year outlook still expected to be in the range of 5% to 6% of revenue. Quoting activity for our engineering design and manufacturing services continued to increase as a result of our expanding relationships with Lockheed Martin, Northrop Grumman, L-3, ITT and others. Sypris served as the lead or prime for a team consisting of Lockheed Martin, Moog, Purdue, MIT and ACS on a response submitted to DARPA for research funding to develop a means for securing weapons platforms from cyber physical threats. And we entered into a new alliance with BlackRidge Technology to provide the next generation of network defense technology for government customers. We are targeting the first product offering to be available in late 2012. Now taking a look to the future, please advance to Slide 6. As we mentioned during our last call, we are planning for sequential revenue and profit growth for this business as we move through 2012. Cyber range test beds [ph] and related training services are receiving a great deal of interest from countries in Southeast Asia and in the Middle East. We received certification as a Trusted Source manufacturer by the U.S. government, which further consolidates our high insurance pedigree for key EDMS customers such as Lockheed Martin, Northrop Grumman, BAE and others. We are making important progress with the development of an agile key management system for the Department of Energy to be used in the protection of the Smart Grid from potential cyber attacks. And we believe that the upcoming rationalization of defense spending will result in more opportunities for products that offer common platforms and lead to a reallocation of resources into cyber defense and modernization efforts to extend the life of currently deployed equipment. Now turning to Slide 7. Let's take a look at the highlights of our Industrial Group. Revenue increased 38.6% to $82.5 million, up from $59.6 million for the prior year period, reflecting continued organic growth and industry expansion. Gross profit increased 93.3% to $9.9 million from $5.1 million in the first quarter of 2011, reflecting a 20.9% rate of profit conversion on incremental revenue growth. Gross margin expanded to 12% of revenue, up from 8.6% for the prior year period and up from 11.4% sequentially, reflecting higher sales, operating efficiencies and productivity improvements. Investments in preventive maintenance, equipment repair and training continued to pay dividends as key metrics for equipment uptime, quality, on-time delivery and inventory turns exceeded expectations. We made substantial progress with new investments in additional capacity that when completed in 2012, will help to ensure that we continue to meet the needs of our growing customer base smoothly and effectively. And finally, quoting activity for new business remained brisk with the opportunity to layer in additional organic growth for 2013 and beyond. Let's advance to Slide 8 and take a quick look at the outlook for this business. The environment for commercial vehicles and trailers in North America remains positive with improving economic fundamentals intact. We believe that the recent slowdown in order rates for heavy-duty vehicles actually reflects a healthy market and perhaps one that is more sustainable over the long-term. The demand for medium-duty vehicles continues to slowly improve with an outlook for sustained growth over the next several years as both residential and commercial construction begin to expand from depressed levels. The demand for trailers remains healthy, supported by tight capacity, new government regulation and a positive rate structure. The independent research house, FTR, recently updated its 5-year forecast with the production of heavy-duty trucks expected to expand from 275,000 units in 2012 to 300,000 units in 2016 with medium-duty growing from 155,000 units in 2012 to 233,000 units in 2016 and trailer production forecasted to remain substantially at current levels of roughly plus or minus 245,000 units per year throughout the forecast period. And finally, new business secured during 2011 is expected to support above market growth during 2012 as new program launches and production assets come online. With that, I'd like to turn the balance of our presentation over to Brian Lutes.

Great. Thanks, Jeff. Good morning, everyone. I'd like to discuss with you the highlights of our first quarter financial results for both segments. I'm not -- I'll discuss not only the results in the context of the prior year that were important, highlight some of our sequential progress as well. To follow along, I'd ask you to advance to Slide 9. For the first quarter, consolidated revenue was $96.5 million. This is up $20.7 million or 27% from the prior year period, as market conditions for commercial vehicles and trailers continued their ongoing strength and drove revenue growth of 39% within our Industrial Group segment. Gross profit for the quarter was $12.5 million. This is up $4.4 million or 54% from the prior year period and driven by the positive conversion on the incremental sales in our Industrial segment and certainly enabled by the vastly improved supply chain cost structure, as well as sustained production efficiencies across our manufacturing sites. For the quarter, EBITDA came in at $9.7 million. This is up $2.4 million or 32% from the prior year period. And finally, earnings per diluted share improved to $0.27 from $0.10 or this was an increase of $0.17 from the prior year period and certainly provides a basis for continued optimism and our ability to drive sustained profitability on a go forward basis. Let me talk about our consolidated results in the context of the sequential view and ask you to advance to Slide 10. Revenue improved $12.9 million or 15% from the fourth quarter and this reflected revenue growth in both of our segments. The gross profit improved $3.8 million or 44% and this was driven by the industrial group's conversion on increased sales, as well as A&D's improvement from what was a difficult fourth quarter. As a result, our sequential improvement yielded a 13% gross margin for the quarter and this was up from 10.4% in the fourth quarter of 2011. EBITDA, as well, improved $5.1 million from the fourth quarter driven by our Industrial Group's continuing performance. We did recognize the gain of $2.6 million from the sale of certain idle assets within our Industrial Group. And finally, increased revenue and favorable mix in our A&D segment contributed to the improvement. And finally, as I mentioned, earnings per share, diluted share improved $0.20 from the prior quarter to $0.27, again reflecting increased profitability in both of the segments. In terms of our Aerospace & Defense segment, if you advance to Slide 11, the revenue in this segment was $13.9 million for the quarter, compared to $16.3 million in the prior year period and largely attributable to the completion of certain electronic manufacturing and service programs that did not repeat. As we've discussed over the past several calls, our revenue outlook was affected by the budgetary and funding uncertainty within the U.S. Department of Defense; however, we have taken the steps necessary to cope with the uncertainty, and as a result, despite the $2.4 million decrease in revenue, our gross margin essentially was flat on a year-over-year basis coming in at 18.6%, and certainly attributable to the teams' efforts in driving further continuous improvement initiatives in containing discretionary cost. Finally, EBITDA decreased $400,000 from the prior year period and of course, attributable to the lower revenue. On the sequential view, some improvement worth noting. If you advance to Slide 12, you'll see that revenue improved $2.6 million or 23% from the fourth quarter. This was in part reflecting the resumed shipments previously delayed in the fourth quarter that we spoke about earlier during our last call. Gross profit improved $2.1 million on a sequential basis on these increased revenues and we did see some favorable mix in our shipments. And finally, as a result of the increase in revenue in favorable mix, EBITDA did improve $2.7 million sequentially to $176,000. If we shift our attention over to our Industrial segment, on a consolidated basis on Slide 13, again, as we note, the revenue came in at $82.5 million compared to $59.6 million from the prior year period. This is about a 39% increase, reflecting not only increased volumes across the medium and large commercial vehicle markets but organic growth as well from some of our niche energy products. Gross profit for the quarter was $9.9 million compared to $5.1 million or 93% higher than the prior year period. Again, driven by the profit conversion you see happening on a sequential basis on these increased revenues from favorable product mix and certainly, sustained operational efficiencies as a result of the extensive readiness planning programs and several manufacturing line rebuilds executed over the past couple of years.. Finally, EBITDA performance for the quarter was $12 million or $3.2 million higher from the prior year period as a result of the strength of, again, the profit conversion on the incremental revenues and the income of $2.6 million resulting from the sale of certain idle assets I mentioned previously. In the context of looking at our Industrial segment on a sequential basis, if you advance to Slide 14, again, you'll see the strength of this segment. Our revenue improved $10.3 million or 14% from the fourth quarter, reflecting increased volumes across the commercial vehicle markets and certainly organic growth, as I referred to in some of the niche energy products that we make. Gross profit increased $1.7 million or 21% on a sequential basis. This rate of profit growth exceeded our revenue growth, reflecting not only the increased -- or the benefit of increased revenue and product mix, but once again the continued leverage of our cost structure that we presently had in place. Finally, EBITDA improved $2.8 million or 31%. Again, driven by the volume production efficiencies, I mentioned the liquidation of the idle assets and this was partially offset by unfavorable foreign currency exchange translation adjustments as well. I think it's important to conclude, relative to our Industrial Group, that our manufacturing facilities and their teams remain acutely focused on managing the market driven increases in demand and driving continuous improvement in key operational areas, such as inventory turns, quality and on-time delivery. These efforts, and I think the results of our Q1, on a year-over-year basis as well as a sequential view, provides us with continued optimism in terms of the strength of the market as well as our ability to meet the demands of our customers. And then finally, let me conclude with some of the highlights. While you've heard Jeff mentioned a number of things for both segments, let me conclude with Slide 15 on things that we believe are the most important aspects as we are now into Q2. But relative to our Q1 accomplishments, revenue increased 27.2%, while gross profit rose 53.6% from the prior year period, reflecting the strong conversion on the incremental revenue and certainly enabled by the cost structure and sustained operational performance. On that note, Industrial Group gross profit increased 93% from the prior year quarter on a 38.6% increase in revenue, while gross margins expanded to 12% from 8.6%. It's important to note that these results are driven in part by the market upturn, as well as the radical actions we undertook to improve the cost structure and our effort to make sure that every facility had a well-thought-out actionable readiness plan to successfully meet the customers' need in an upturn. Things like volume, quality, on-time delivery are important, but what's equally important is that we do it profitably. That's what different in our Industrial Group versus the last market upturn. With respect our Aerospace & Defense segment, gross margin came in at 18.6%. As I mentioned, this is essentially flat with the prior year quarter but does reflect a sequential improvement from the 4.5% that resulted in the fourth quarter of 2011. Earnings increased to $0.27 per diluted share, up from $0.10 per diluted share for the prior year period. As you heard Jeff mention, order activity in the commercial vehicle market has continued to expand and we expect it to drive strong year-over-year, double-digit growth for our Industrial Group segment. Within our Aerospace & Defense segment, quoting activity for our engineering design and manufacturing services or EDMS continued to increase as a result of our expanding relationships with Lockheed Martin, Northrop Grumman, L-3, ITT as well as others. And finally, and of great importance, we believe, to our employees, our suppliers, our customers and our shareholders, Sypris remains well positioned and our team is focused on delivering improved operational and financial results as we progress through the year and forward. At this time, this concludes the highlights of our first quarter 2012 results. And at this time, we'll open it up for questions by turning the call back over to Jennifer.

[Operator Instructions] And we'll go to Jim Ricchiuti with Needham & Company.

A few questions on both businesses. Maybe we can start off with the Industrial business. Jeff, when you talk about above market growth, I'm not completely clear right now on what the growth looks like for Class 8 and trailer. It looks like FTR may have reset a little bit lower versus say, a few months ago. What's the latest for 2012 in terms of the year-over-year?

Let me take just a look here.

And then Brian, maybe while Jeff's doing that, I'm struggling a little bit with the R&D level. When you say R&D getting, I believe you said back to 5% to 6% of revenues, that's of the A&D group revenues.

Yes, it is.

Okay. Okay. But even with that, you're looking for a pretty good step up in R&D. Does that start in Q2?

We see it resuming in Q2, Jim. We did a reset in Q1, which is very typical in the programs with the customers that we're underway with. And we see that simply as a step ramp in, beginning in Q2.

Got it. And maybe just continuing on that part of the business, is it fair to say that even with the -- what looked like a nice sequential improvement over Q4 revenue wise, that it still would be challenging for the business overall to be up year-over-year in the A&D? Or has the booking strength been better than expected, where you might show some improvement year-over-year? It sounds like you're going to continue to see sequential improvement both in revenues and profitability.

Well, what we're seeing, Jim, really is that as we talked about the order activity in Q1, that it's a progressive recovery, and we would also see revenue commensurate with that on a go forward basis. But in terms of the revenue growth, I think it's hard for us to align a number right now in terms of the unknown or the uncertainty we've been talking about the last few quarters.

Got it. And Jeff, if you don't have your hands on that data, that's fine. I can circle back to you off-line.

Jim, FTR's forecasting an 8% year-over-year increase.

And that's in heavy-duty?

That's in heavy.

Got it. When you guys cited -- it looks like there has been a little bit of a slowdown in order rates in the market, in the truck market. Have you begun to see that? How does that impact you? When do you begin to see that in your bookings? And how does that affect the year overall for you?

Well, at the moment, things remain quite positive. And I think that when people refer to the slowdown, they're talking about primarily the February, March, April type numbers and those numbers were running well ahead of the forecast for the year. And so when we look at it, Jim, we look at 2 things. One is we keep an eye on our order boards to make sure that we're running at the right rate, and so far that hasn't been a problem. And secondly is that we were successful layering in enough new business in 2011 and that we believe that we'll continue to outperform the market in 2012. And if I were to look at the sequential growth that we incurred in the Industrial Group Q4 to Q1, we expanded it a little over 14% on that basis. Whereas, if I look at the production of commercial vehicles for example, 5 through 8, depending upon which source you use, they're expanding in the neighborhood of 4% plus or minus sequentially. And if we look at trailers, trailers depending on the source, are expanding at 4% to 5% type thing sequentially. So clearly, the new business that we've been able to secure, as well as the strength of our energy markets, is helping us to drive above market performance.

When you say, Jeff, the strength of the energy markets, has that been a meaningful part of that revenue for Q1?

It has -- I wouldn't say it's meaningful in terms of percentage, Jim, but it's a very profitable part of our business. And the demand that's going on with new pipelines and offshore drilling and these types of things is fueling this business in a very positive way.

And one other question and I'll jump back into the queue is, looking at the Industrial business, because the revenues came in so much stronger, at least, than I was looking for, how should we maybe think about Q2? Clearly, you'll show nice growth presumably year-over-year, but it would appear that you got off to such a strong start from a shipment standpoint in Q1 that it might be challenging to be up in Q2 sequentially.

Yes, I think we're going to be in roughly the same range.

[Operator Instructions] It appears there are no further questions at this time.

Okay. Well, thank you Jennifer. And on behalf of Brian and Tony, we would like to thank you for joining us for the call this morning. We welcome your continued interest and of course your questions about our business. So thank you and have a great day.

That does conclude today's conference. Thank you for your participation.