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Sypris Solutions Inc. has reported financial results for its second quarter ended July 2, 2017. Sypris Solutions continued to make important progress on several strategic initiatives to regain revenue momentum and better align its cost structure, while diversifying the company’s book of business, both in terms of customers and markets. Many of those steps have been completed or are nearing completion. As a result, the company is positioned to achieve a growing and more stable revenue base, along with higher gross profit and a return to profitable operations.
Revenue for Sypris Solutions increased by 16.8% sequentially to $21.2 million for the quarter, while gross margin expanded to 7.5% from a loss of 3.8% in the first quarter of 2017. Revenue for Sypris Electronics increased by 32.5% sequentially for the second quarter of 2017, while gross margin increased to 18.1% from 1.8% for the first quarter. Revenue for Sypris Technologies increased by 10.2% sequentially for the quarter, while gross margin expanded to 2.1% from a loss of 6.2% in the first quarter of 2017.
Selling, general and administrative expense was reduced by 31.8% when compared to the prior-year period, reflecting the positive impact of the company’s previously announced $26.3 million, two-year cost improvement target.
Subsequent to quarter end, the company announced the receipt of multiple contract awards from Harris Corp. to manufacture a variety of mission-critical electronic assemblies for U.S. Military and Space programs.
As a result of recent contract awards in both business units, the company expects to benefit from $20.7 million of new sales in 2018 and $24.8 million of new sales in 2019.
Sypris raised its revenue guidance for the second half of 2017 to $42.0-$44.0 million and confirmed its margin outlook, with gross margin of 15% to 17% and EBITDA margin of 7%–9%, reflecting the benefit of the substantial completion of the company’s cost improvement initiatives, increased sales and improved revenue mix during the second half of 2017.
“We are pleased to announce that all major actions have now been completed as of August with regard to our two-year, $26.3 million cost improvement target, which is composed of an $11.8 million reduction in the cost of sales, a $9 million reduction of SG&A and a $5.5 million reduction of interest and debt-related charges for 2018 when compared to 2016 actual results,” commented Jeffrey T. Gill, president and chief executive officer. “Our original objective was to have completed this program by the end of May, but as the date neared, we made the decision to build additional inventory and rebuild equipment to further protect customer deliveries, both of which required additional time.”
“We expect that the progress made last year and during the first half of 2017 will enable the Company’s operations to return to profitability by the second half of 2017,” Gill said. “The company’s total manufacturing overhead costs are being reduced, our underperforming and underutilized assets are being divested, significant liquidity has been created and important new business continues to be secured, the most recent of which included the award of four new contracts with Harris Corporation.”
He added, “As a result of our transitional efforts to exit or dispose of the Broadway Plant, together with our sale of the CSS business in 2016, the elimination of commercial debt and our other cost reduction initiatives, we have streamlined our cost structure significantly and have significantly improved the Company’s competitiveness.”
Transition Plan Status Update
The transition of the Broadway operations is moving forward, with substantial completion scheduled for the end of August. Sypris remains focused on achieving its cost targets and exceeding customer expectations, which has resulted in favorable operating metrics for the period as compared to its plan. The Broadway transition is expected to result in a lower fixed overhead structure along with lower selling, general and administrative expenses, which will improve the overall cost profile of the Company.
The lower cost profile combined with a more favorable revenue mix is expected to drive an increase in overall margin performance going forward. The company expects margins to reach 15-17% of revenue for the second half of 2017, which is nearly a 50% increase as compared to 2014 when we had significantly higher customer volume and market concentration.
New Program Awards
“The company’s commitment to cost, quality and on-time delivery continues to drive significant new business opportunities within both of our segments,” stated Gill. “During the past 12 months, the award of new, multi-year programs has been very positive. We now expect revenue from new programs of $15.8 million for 2018, of which $3.4 million was recently awarded, and $12.9 million for 2019, with an average term of more than four years. In addition, follow-on business for future builds of these programs is expected to contribute revenue of $4.9 million for 2018 and $11.9 million for 2019, resulting in expected total new revenue of $20.7 million and $24.8 million in 2018 and 2019, respectively.”
“The new program awards are balanced across customers, markets and products and provide a solid multi-year foundation for growth. The new awards fit within our existing capacity with only incremental capital needs.”
Second Quarter Results
The company reported revenue of $21.2 million for the second quarter compared to $23.5 million for the prior-year period. The company's net loss continued to narrow, declining to $3.1 million, or $0.15 per share, from a loss of $5.2 million, or $0.26 per share, for the prior-year comparable period. The results for the quarter ended July 2, 2017, include severance and relocation costs of $0.9 million related to the Broadway transition.
For the six months ended July 2, 2017, Sypris reported revenue of $39.4 million compared to $50.4 million for the first half of 2016. The company reported a net loss for the six months ended July 2, 2017, of $6.5 million, or $0.32 per share, as compared to a net loss of $10.3 million, or $0.52 per share in the prior-year comparable period. Results for the six months ended July 2, 2017, include net gains of $2.5 million related to the sale of idle assets partially offset by severance, relocation and other costs of $1.9 million. Results for the six months ended July 3, 2016, include a gain of $2.4 million related to a sale-leaseback transaction recognized during the period partially offset by severance costs of $0.5 million. Additionally, results for the three and six months ended July 3, 2016 included the CSS operations sold in August 2016.
Revenue for Sypris Technologies was $14.1 million in the second quarter compared to $14.8 million for the prior-year period, primarily reflecting the conclusion of a customer contract partially offset by increased sales of oil and gas products. Gross profit for the quarter was $0.3 million, or 2.1% of revenue, compared to a loss of $0.3 million, or 1.8% of revenue, for the same period in 2016. On a sequential basis, gross margin increased to 2.1% from a loss of 6.2% in the first quarter of 2017.
Revenue for Sypris Electronics was $7.2 million in the second quarter of 2017 as compared to $8.7 million for the prior-year period, reflecting the impact of the sale of the CSS business. Revenue from the CSS business was included in results of operations in 2016 until the time of sale, since the sale was not classified as a discontinued operation in our consolidated financial statements. Gross profit for the quarter was $1.3 million compared to $1 million for the prior-year period, primarily reflecting a favorable mix in sales of higher-margin products on programs that began ramping in the second quarter, partially offset by an overall decrease in volumes as a result of the CSS sale. On a sequential basis, gross margin in the second quarter increased to 18.1% from 1.8% in the first quarter.
Commenting on the future, Gill added, “The combination of significant cost savings, improved revenue mix and the elimination of high-cost commercial debt, among other items, is expected to have a positive, material impact on the company’s financial performance in 2017. The second half of the year is expected to benefit from significantly lower fixed overhead and production costs at Sypris Technologies, as well as from the elimination of severance and other expenses.”
“As a result, we expect gross margin to increase to 15%–17% of revenue for the second half of the year. Selling, general and administrative expense is expected to fall to 15%–16% during the second half of the year. We are raising our expected revenue outlook for the second half of 2017, which is now expected to range from $42–$44 million. EBITDA is expected to be 7%–9% of revenue for the second half of 2017. We expect to see further meaningful improvements in gross margin, SG&A as a percent of revenue and EBITDA in 2018, as the Company’s financial statements reflect the full-year impact of the 2017 cost saving initiatives.”
Sypris Solutions is a diversified provider of truck components, oil and gas pipeline components and aerospace and defense electronics. The Company performs a wide range of manufacturing services, often under multi-year, sole-source contracts with corporations and government agencies. For more information about Sypris Solutions, visit its Web site at www.sypris.com.