Q4 2019 Earnings Call
[music].
Good day.
Today like risk solutions conference call.
Todays call is being recorded at this time.
Opening remarks, I would like to turn the call over to President and Chief Executive Officer, Mr. Jeffrey Gill.
Please go ahead Sir.
[noise], Thank you and good morning, everyone.
Joining me on and I'd like to working into this call. The purpose of which is to review the Companys financial results for the fourth quarter and full year 2019.
For those of you have access to our Powerpoint presentation. This morning, please advance to slide two now.
We always begin these calls with the note that some of what we might discussed here today may include projections and other forward looking statements.
No assurance can be given that these projections and statements will be achieved an actual results could differ materially from those projected as result of several factors.
These factors are included in the company's filings with the Securities Exchange Commission.
And in compliance and regulation G. You can access our website cypress stock comp 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 through the first half of our presentation. This morning, starting with an overview of the highlights for the quarter to be followed by update on the outlook each of our primary markets.
Tony will then provide you with a more detailed review of our financial results for the quarter and year.
Before we begin on slide four however, I'd like to take just a moment to discuss our current environment.
Especially in light of the recent public and private activities being taken to address Seo BD 19 virus and the potential impact these actions on Cyprus.
Let me getting with the statement that we do not as of this state.
And then employees or their family members, we have contracted the virus.
We have taken a number steps to ensure safe working environment.
Many of which include best practices recommended by the center for disease control Osha and others.
We have onsite medical professionals at our largest campus.
To both be of service to our employees ended check in the incoming visitors before admitting them into our facilities.
Travel has been limited spacing has been increased gathering sizes have been reduced.
Hi, gene 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 Cyprus.
We're also providing special consideration for any specific employee who happens to be of an age or with underlying respiratory pulmonary or others such conditions.
Otherwise place the individually substantial risk should he or she contracts the virus.
We're closely monitoring the situation on both our customers and our suppliers on a daily basis.
As of this state we have not seen an interruption in demand or of supply.
But environment is certainly dynamic and circumstances may change rapidly.
In the interim 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 four.
The fourth quarter 2019 reflected the continued advancement of our operating performance with both business units posting substantial improvements in gross margin.
The consolidated result was 660 basis point increase in gross margin year over year, and a 200 basis point improvement in gross margins sequentially.
The substantial amassed an improved performance was however significantly short of our objectives for the quarter.
Driven by $3.5 million short form revenue for the period.
The topline Miss was incurred by both business units.
Order boards for Sypris technologies declined in December reflecting both the softening of demand from commercial vehicle customers.
And the decision by certain customers to place a hold up further shipments long before year end.
Sypris electronics was impacted by component shortages book customer induced in Cyprus caused.
As well as the availability of test equipment.
And as you would expect the delay in shipments have that further impact of increasing our investment in working capital at year end beyond planned levels.
As we look forward into 2020.
January and February performance for both business units has been consistent with our expectations, which represents a significant improvement in gross margin on both a year over year and on a sequential basis.
Our teams are working hard and making significant progress.
Simply hoped at the virus does not have a material impact on these efforts.
From a business development standpoint, we continue to experience a great deal of activity for Sypris technologies and Sypris electronics.
During the quarter Sypris technologies announced the award of long term contracts to reduce components for annual dual clutch sports car transmission.
And for the transmission of the leading altering vehicle.
Both of these programs are expected to be a full run rates early in the second quarter. This year.
These contract awards are important both in terms of their anticipated contribution to the company's future financial performance as well as to our efforts to further diversify our customer product and market portfolios.
At Sypris Electronics, we announced new contract awards from Collins Aerospace to manufacturing test.
Tronic assemblies for the power management, and environmental control and life support systems of the deep space or Ryan spacecraft program.
And subsequent to year end, we announced the award of a new contract from the systems to manufacturing test electronic power supply modules.
Our large mission critical new military program.
Production for both of these customers is expected to commence during 2020.
Turning now to slide five North American demand for heavy duty trucks reached an all time high during the past couple of years, driven by strong trade growth tight capacity.
In an expanding economy.
Looking forward customer demand is forecast to return to historical norms in 2020.
Which if accurate will result in an estimated 25% year over year reduction demand for class eight trucks.
In past years, such reduction would have been expected to have a material impact on the revenue profit of our business.
But as of today, we believe that recent contract awards in the automotive Eightv commercial vehicle and industrial markets will materially offset the reduction in revenue associated with the class eight cycle.
Furthermore, the substantial costs that we incurred during 2019 to develop to up and launch. These programs is not expected to carry over into 2020.
Thereby contributing to further margin expansion when compared to the prior years performance.
In recent months the benchmark price for crude oil has declined significantly.
Result of which has raised the number questions with regard to the near term outlook for this sector.
Within the broad energy market. However, the conversion of power generation to natural gas.
As rossa construction of pipelines and LNG terminals to support export activities continues to be a source of strength for sypris on both the domestic and international front.
Cod spending also continues to remain solid with us military spending expanding especially with regard to key long term strategic programs that are expected to run for many many years.
Turning to slide six as we discussed during our prior call. These positive market conditions when combined with recent contract awards and lower cost profiles provides us with a solid base for 2020.
Subject of course to the yet to be seen impact of coded 19 and the economy.
The ramp up of new programs are expected to further mitigate the softness in the convert commercial vehicle market.
While the reduction of new program launch costs is expected to contribute to margin expansion on a year over year basis.
Our performance to start to new year has been positive inline with our expectations, but we have yet to feel the potential impact of cobot 19.
If and when we do we will respond quickly and decisively to adjust our business to any material change and outlook.
We will also 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 this clearly going to be an interesting.
Turning now to slide seven Tony Allen will lead you through the balance of our presentation. This morning Tony.
Thanks, Jeff and good morning, everyone.
I will be discussing with use some of the highlights of our fourth quarter and full year financial results.
Please advance to side eight.
Q4, consolidated revenue was 21.6 million a decrease of 9.7% from the fourth quarter last year.
Although revenue declined Q4 consolidated gross profit increased 1.3 million or 92.7% over the prior year period.
Zero point, fourmillion or 16.4% sequentially.
Consolidated gross margin was 12.5 per cent for the fourth quarter up 660 basis points from a year ago, and 200 basis points sequentially from Q3.
Revenue for Sypris technologies decreased 14% to 13 million from 15.1 million a year ago. However, gross profit was down only a $150000 and gross margin improved 110 basis points to 15.4% in Q4.
As Jeff noted earlier, we began to experience order board reductions for commercial vehicle products during the fourth quarter.
Additionally, with the way the holidays fell in December certain of our customers took the opportunity to stop production. During the last two weeks of the year and to rebalance inventory levels, which reduced our production and shipments in December.
During the first two months of 2020, we saw the commercial vehicle market demand ticked back up following the holiday shutdown and we increased production on our new automotive and altering vehicle programs.
Offsetting the commercial market vehicle market decline in Q4 was increased revenue from our energy products and early low volume production on a new programs just mentioned.
Energy product shipments increased about 8.8% year over year and 11.6% sequentially.
Gross margin for Sypris technologies was 15.4% in.
In Q4, an increase of 110 basis points from a year ago, Although revenue was down just over 2 million for the comparable periods.
The year over year improvement in gross margin for technologies reflects the operational improvements made throughout the year, which are driving improvements in our internal operating metrics and flowing into our financial results.
Revenue for Sypris electronics was 8.6 million in Q4.
A decrease of 2.4% from the prior year, while gross profit improved 1.5 million to 0.7 million, resulting in gross margin of 8.2% for the quarter.
Although margin improved on both a year over year and sequential basis, our team continued to battle material availability challenges on certain programs.
Certain component shortages were attributable to customer furnish parts and others relate to vendor source parts that remain in short supply.
However, we were to blame for one of the material shortage issues late in the quarter.
The shortage stemmed from a system upgrade that changed the replacement ordering process for certain components.
Although our supply chain team detected and corrected the issue within a reasonable time component lead time pushed receipts into 2020.
Our consolidated asked DNA expense was 3.5 million for Q4, an increase of approximately 300000 on both the sequential and year over year basis as adjusted for the legal settlement last year.
As you May recall, the Q4 2018 results included a $1.9 million benefit from the favorable resolution of a legal fees dispute for fees incurred in prior periods.
The increase in Q4, SDMA was primarily due to higher medical claim expense as we experienced a spike in the number of claims and average claim value, particularly during December.
Higher claim expenses not uncommon during Q4 as many participants have met their full year deductible and or out of pocket Max but the incurred value in Q4 Q4 exceeded averages from prior periods.
We are disappointed with the consolidated loss of nearly a million dollars for Q4.
However, we remain committed.
To improving the profitability of the company in the coming year.
Please advance to side nine.
Consolidated revenue for 2019 was 87.9 million, which was flat with our prior year revenue.
Consolidated gross profit was 9.9 million, an increase of 2.3 million or 30.5% over the prior year and gross margin was 11.2%.
For 260 basis points above 2018.
For the full year Sypris technologies revenue increased by 1.9 million or 3.1% to $61.7 million, while gross profit increased three 2.3 million or 30.1% over 2018.
Sypris technologies gross margin for 2019 was 15.9% an increase of 330 basis points from the prior year.
Coming into 2019, Sypris technologies targeted a number of cost reduction initiatives and the margin improvement reflects our success in the categories of supply spend and utilities in particular.
Management focus and controls over consumable tooling and other variables supply spanned resulted in a year over year 360 basis point reduction and supply expense as a percent of revenue.
Additionally, avoiding production on certain high electrical consumption machinery during peak rate periods, and our Toluca facility drove a year over year 80 basis point reduction and utility expense as a percent of revenue.
The combined effect of these two initiatives alone generated nearly $2 million of year over year cost reductions.
These improvements were partially offset by pre production and ramp up costs on new programs being launch as we continue to diversify our markets and customer base.
We estimate that approximately a million dollars and incremental cost labor inefficiencies incurred in 2019 will not repeat in 2020 as these new programs move from start up to full rate production.
Revenue for Sypris electronics decreased 6.9% to 26.2 million from 28.2 million into prior year as we were not able to overcome the low shipment levels for Q1 2019.
We have the backlog in place to support them more consistent revenue run rate as we enter 2020.
And we are proactively managing production among our programs in the near term as we continue to anticipate supply chain supply change challenges will rise in the ordinary course of business.
Consolidated SGN a expense for 2019 was 13.7 million or 15.6% as compared to 12.4 million or 14.1% for 2018, excluding the impact of the legal fee settlement in the prior year.
Our consolidated operating loss for 2019 was 4.3 million, which was an improvement of 1.9 million over 2018, excluding the legal fee settlement.
Please advance to side 10, and I'll offer a few takeaways.
Consolidated revenue for Q4 was 21.7 million a decrease of 2.9% sequentially as the commercial vehicle market began to adjust downward during the period and certain customers rebalanced inventory levels as they shut down for the holiday season.
Gross profit for Q4 moved in a positive direction, increasing 1.3 million over the prior year and 0.4 million sequentially.
Gross margin for the quarter was 12.5% an increase of 660 basis points over the prior year period.
For the full year consolidated revenue was flat gross profit increased 2.3 million to 9.9 million.
Consolidated gross margin improved 260 basis points year over year to 11.2% for 2019.
[noise] Sypris technologies reported a dip in Q4 revenues due to the market dynamics just discussed however, full year revenue increased 3.1% over 2018.
More notable advancements for Sypris technologies are reflected in gross profit, which increased 2.3 million year over year, and gross margin, which increased 330 basis points to 15.9% for 2019.
Although revenue for Sypris electronics improved sequentially from Q3, and gross profit increase we fell short of meeting the profitability gains we expected for this segment.
The driving factor again related to material issues and although we are facing fewer issues. Those we encountered unfavorably impacted our results in Q4.
On the positive side the backlog in place for Sypris electronics supports our expectation for a more consistent revenue run rate in 2020, accompanied by improved margin performance.
And performance and financial results of both segments in the first two months or 2020 show sequential improvement from Q4 and are in line with a 2020 outlook. We last provided on our earnings call in November.
The extent and duration of the impacts that covert 19 may have on our business are not known at this time.
And like the rest of the World. This is something we are monitoring minute two minute and we'll take every action possible to protect the health of our employees 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 John Route to answer any questions you might have for us. So thank you.
Thank you.
I would like to ask a question Keith signaled by pressing Star and then one on your telephone keypad.
You are using a speaker phone keep make sure. Your mute function is turned also allow your signal to reach our equipment.
Once again it is there and then one to ask the question.
We can take our first question some Jim recruiting of Needham and company. Please go ahead. Your line is open.
Hi, Thank you good morning.
Good morning.
Good to hear guys that.
Your employees and tally are.
I have not been impacted thus far.
What what do you.
What are you seeing in the Toluca area or have there been.
Cases that have begun to crop up.
And in general what.
I would assume that just steps you're taking.
In your facilities not just in Mexico, but in the U.S. is also driving up costs as well and how much of an impact do you think that's going to be additional impact on gross margins for some of these.
Steps you've had to take.
Jim This is Jeff.
Into Luca we have not seen.
Any impact to Covidien seed yet.
And we're not familiar with any outreach in the area in fact, it seems to be.
Relatively quiet compared to the U.S.
Sure that will change as time goes five it.
Up to this point, we've been very very fortunate.
The steps that that we've been taking our.
Primarily ones of Education review personal responsibility all the spacing limited supplier visits limited travel those types of things.
We've increased the cleaning the hygiene separated tables in the cafeteria.
We're in the process of setting up the secure web sites. So that all the communications that we're making with our employees regularly can be accessed from home.
By spouses and other family numbers.
We're setting up hotlines, where.
Employees or their families can can call in with suggestions or questions or.
Just switched to discuss.
Proper behavior or or.
Different things of that nature, So all of the things that we've been doing.
To secure the workplace and just as importantly, too.
Hello.
Please adjust their habits when they're not at work.
Really have been.
Not investment type things.
So okay.
Even with our other plants.
We have some people working from home with those are typically.
Engineering technical type people, who can work from home be just as effective.
And the spacing that we have in our plants is viewed as being very positive by the professionals and therefore, reducing the risk so.
And until it.
Until we see a material change in potential volume.
We don't anticipate that these activities will have.
At negative impact.
Okay.
Got it and then as we look at forecasts for the.
Heavy vehicle market, 25% decline.
Yes, given what we're anticipating lease the hit that.
The U.S. katami appears to be taking in the June quarter that seems.
And seems conservative and I'm, just wondering what you're hearing of late.
I assume that 25% number that kind of decline in class eight.
Could you could be worse and I'm wondering what.
You have a different business in that area now, but certainly that's going to pose a bigger headwind isn't it.
Well certainly the coded 19.
Spiral is creating a great deal of uncertainty for everybody.
As of today, our order boards.
The commercial vehicle side of the business every mold constant.
But in two weeks that could could change in side I think you point of.
Is there the potential for near term reductions from our current.
Run rate I'd say the probability is yeah.
Certainly is.
And longer term, we'll just have to see how it plays.
And then that that internal component issue or material issue that you.
Scott.
Any easier way to size that from a revenue standpoint or.
Gross margin hit that you might have taken from that in the electronics business.
I don't someone specific program that issue and in particular.
Acted one specific program.
And.
I would estimate that the margin revenue margin impact of that.
It would have a.
Haven't quantified exactly as a pro forma what does the with and without but I would I would say that.
Something under a million dollars in topline.
Would have been.
The difference.
It's it's surprising update you still and I am hearing this from some other companies that there are some still some component shortages. What specifically are we talking about are these kind of unique type components for your defense customers.
They are the typically the the of the US specific sourced items that we can't you know where where our ability to.
To move that to other suppliers are just substitute components and is extremely limited if not impossible wind and in those cases it requires a customer approvals. So it's not the the general market.
Items components that were seeing right.
Right now and it's really.
More isolated.
And then it has been in the past.
Got it defense business, the electronics business sounds like you're assuming it's going to be a little bit more from a revenue standpoint spread a little bit more evenly and it passes. So it's it's often been very back end loaded is that.
Is that the way you're viewing the business going into the year.
It is as we you know as we.
Built our plan for the year and.
Even our more recent forecast again absent any impact of Coburn 19.
The way that our backlog is structured today.
The launch date of programs into flow of those programs through the year.
It does.
Provide us with a more stable run rate.
For 2019, which is you know good for many reasons so.
We'll be it was always there'll be soon given take.
As things go you know day to day week to week since some programs may shift from period to period, but the good thing is we have a little more.
Volume across different programs to play with.
To help those.
To help to help offset items.
As they develop.
Got it thank you.
Hi, good we can take our next question from Joel Ken Hill of the Jamison Company. Please go ahead. Your line is open.
Hey, good morning, Jacking, Tony Thanks for the call.
Hey, Joe and morning.
So I.
I want to switch a little bit away from kind of the fundamentals.
We're kind of facing again, and we keep getting to this the Nasdaq.
De listing warning.
And I'm interested what it would take a for you guys to see a and indication that you would want to buyback stock if there's any.
He.
Anything that you're looking at whether from a valuation standpoint or from a financial metrics <unk> balance sheet metrics.
Well I think all those things are.
Option, Joel and you bring up a good point and.
We will do whatever we can obviously too.
Oh boy, having a problem with NASDAQ and the coded 19 activity recently probably makes that.
Yet another challenge, but it certainly has our attention and we're looking at all the potential levers and and options that we have.
Okay.
And.
It does that mean that there have I mean is this something that you guys will discuss.
Actively I mean, given that werent were down at such a a remarkably low level on the stock now.
Right.
Well, we were certainly reviewing these things internally, we don't have anything at this point to talk about externally.
And counting on that and that you mentioned that 2020 out like you you've affirmed and would you just remind me again what.
Do you guys are looking at on topline in that regard.
Well, what we what we've said Joe this morning is that.
We provided an outlook in November.
And that our performance in the first two months of the year has has been tracking to that outlook.
Where we've stopped short is providing an outlook for.
An updated outlook for 2020 in light of Cobot 19.
We're just not be.
Not be something that we're prepared to do this morning.
Okay too many uncertainties that are that are floating around as you might imagine.
Sure Yeah, absolutely absolutely.
Okay and you.
No.
Is there way that you guys can kind of bring.
It seems like there's been obviously, there's been a lot of transition in the business, but and previously you know it's been heavily in heavy in aerospace and defense, but really in the and the heavy trucking is there any you can kind of tied together what it is that you're doing when it's now you know whether its undersea or in space or or.
Oil and gas what does it.
So just purely enclosures are you know is there something that kind of more broadly pulls together what with the core businesses at this point, particularly on the ASCII type.
Okay sure.
You know what we've targeted is we've done about our diversification Joel is to to try to be segments, where.
Their unique requirements, where there's a high cost of failure.
Where there's a high engineering content.
And that type of thing is a way of.
Distinguishing ourselves from more of a commodity type Claire and so when you look at the closures, we do in the energy feel than particularly for natural gas transmission and that type of thing some of these closures.
Our.
70 to 80 inches in diameter and way up to 34000 pounds of piece.
And there.
Going into large natural gas fields in places like has expand and.
In other places around the world.
On the electronic side, whether it's Steve C.
Whether it's there Ryan space craft for deep space.
These types of applications all have a very very high cost of failure and so the electronics that we we build for them tend to be in smaller quantities, but much higher price.
And I think that is a distinguishing factor in the in the what used to be basically our commercial vehicle segment.
We've now moved into.
Much higher precision.
Transmission components and doing that both for.
The new dual clutch transmission, that's going into sports car as well as the components for.
Despite the all terrain vehicles, and so more value add.
So materials lot smaller component of the overall content and.
Really working to distinguish ourselves. So that's the theme that that's kind of running through our business at the moment.
Okay understood that's helpful.
I don't have any other questions. Thank you guys.
Okay. Thank you.
Thank you. It appears there no further questions in the telephone Q, Mr. Again, I'll pass it back to you for any additional clothing, our additional remain.
Okay. Thank you very much and Tony and I would like to thank you for joining us for this call.
We welcome your continued interest and of course should questions about our business that can have a great day.
Ladies and gentlemen, Nice concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
[music].
[music].
Good day.
To that like risk solutions conference call.
Todays call is being recorded this time.
For opening remarks, I'd like to turn the call over at the President and Chief Executive Officer Mr. Jeffrey Gill. Please go ahead Sir.
[noise] like you and good morning, everyone.
Tony Allen and I'd like to walk into the school purpose switches to review the Companys financial results for the fourth quarter and for year 2019 [laughter].
For those of you have access to our Powerpoint presentation. This morning.
As a dance to slide two now.
We always begin these calls for the note some of what we like Skus here today may include projections and other forward looking statements.
No assurance can be given that these projections and statements will be achieved an actual results could differ materially from those projected as result of several factors.
These factors are included in the company's filings with the Securities Exchange Commission.
And in compliance regulation G. You can access our website Cypress dot com to review the definitions are going to non-GAAP financial measures that may be discussed during this call.
Well these qualifications mine, we'd now like to proceed with the business discussion.
Please advance to slide three.
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 and here.
Before we begin on slide four however, I'd like to take just a moment to discuss our current environment.
Especially in light of the recent public and private activity, it's being taken to address so you'll be 19 virus and the potential impact these actions on cibers.
Let me getting what the statement that we do not as of this state.
And then employees or their family members, we have contracted the virus.
We have taken a number steps to ensure safe working environment.
Many of which include best practices recommended by the center for disease control.
Sure and others.
We have onsite medical professionals at our largest campus.
To both be of service to our employees and the check any income he visitors before admitting them into our facilities.
Travelers been limited spacing has been increased gathering sizes have been reduced.
Hi, gene has been and continues to be emphasized.
Work and at home.
We're providing employees with regular updates well requesting their feedback from 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 the confines of Cyprus.
We're also providing special consideration for any specific employee who happens to be at an age.
Underlying respiratory pulmonary or others such conditions.
Otherwise place the individually substantial risk should he or she contracts the virus.
We're closely monitoring the situation, both our customers and our suppliers on a daily basis.
This state we have not seen an interruption on demand or supply.
But the market environment is certainly dynamic and circumstances may change rapidly.
In the interim we will continue to focus on beating 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 four.
The fourth quarter of 2019 reflected the continued advancement of our operating performance with both business units posting substantial improvements in gross margin.
The consolidated result was 660 basis points increase in gross margin year over year, and a 200 basis point improvement in gross margins sequentially.
The substantial investment and performance was however, significantly short of our objectives for the quarter.
Driven by $3.5 million shortfall on revenue for the period.
The topline Miss was incurred by both business units.
Order boards for Sypris technologies declined in December.
Flexing, both the softening of demand from commercial vehicle customers and the decision by certain customers to place a hold up further shipments long before year end.
Sypris electronics was impacted by component shortages, but customer induced cypress cars.
As well as the availability of test equipment.
And as you would expect the delay in shipments at the further impact of increasing our investment in working capital at year end beyond planned levels.
As we look forward into 2020.
January and February performance for both business units has been consistent with our expectations, which represents a significant improvement in gross margin on both a year over year and on a sequential basis.
Our teams are working hard and making significant progress.
Simply hope that the virus does not have a material impact on these efforts.
From a business development standpoint, we continue to experience a great deal of activity, both Sypris technologies and Sypris electronics.
During the quarter Sypris technologies announced the award of long term contracts to reduce components for our new ODU watch sports car transmission.
And for the transmission in the leading altering the.
Both of these programs are expected to be a full run rates early in the second quarter. This year.
This contract awards are important both in terms of their anticipated contribution to the company's future financial performance as well as to our efforts to further diversify our customer product and market portfolios.
It's Sypris electronics, we announced new contract awards from Collins aerospace to manufacture and test.
Medtronic assemblies for the power management and environmental control.
Life support systems of the deep space Orion spacecraft program.
And subsequent to year end, we announced the award of a new contract from D.A. systems to manufacture and tested electronic power supply modules for a large mission critical military program.
Production for both of these customers is expected to commence during 2020.
Turning now to slide five North American demand for heavy duty trucks reached an all time high during the past couple of years driven by strong create growth tight capacity.
In an expanding economy.
Looking forward customer demand is forecast to return to historical norms in 2020.
Which if accurate will result in an estimated 25% year over year reduction demand for classic trucks.
In past years, such reduction would have been good expected to have a material impact on revenue profit of our business.
As of today, we believe that recent contract awards and automotive.
The commercial vehicle and industrial markets will materially offset the reduction in revenue associated with the class eight cycle.
Furthermore, the substantial costs that we incurred during 2019 to develop to up and launch. These programs is not expected to carry over into 2020.
Thereby contributing to further margin expansion when compared to the prior years performance.
In recent months the benchmark price for crude oil has declined significantly.
The result of which has raised the number questions with regard to the near term outlook for the sector.
Within the broad energy markets. However, the conversion of power generation to natural gas.
As was the construction of pipelines in LNG terminals to support export activities continues to be a source of strength for sypris on both the domestic and international front.
The spending also continues to remain solid with us military spending expanding especially with regard to key long term strategic programs that are expected to run for many many years.
Turning to slide six as we discussed during our prior call is positive market conditions. When combined with recent contract awards at lower cost profiles provides us with a solid base for 2020.
Subject of course to the yet to be seen impact of coated nineteenone economy.
The ramp up of new programs are expected to further mitigate the softness in the convert commercial vehicle market.
While the reduction of new program launch costs is expected to contribute to margin expansion on a year over year basis.
Our performance to start to new year has been positive inline with our expectations.
But we have yet to feel the potential impact recorded 19.
If and when we do we will respond quickly and decisively to adjust our business to any material change and outlook.
We will also 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.
It is clearly going to be an interesting.
Turning now to slide seven Tony I'll lead you through the balance of our presentation. This morning Tony.
Thanks, Jeff and good morning, everyone.
I will be discussing with you some of the highlights of our fourth quarter full year financial results.
Please advance to side eight.
Q4, consolidated revenue was 21.6 million a decrease of 9.7% from the fourth quarter last year.
Although revenue declined Q4 consolidated gross profit increased 1.3 million or 92.7% over the prior year period.
0.4 million or 16.4% sequentially.
Consolidated gross margin was 12.5 per cent for the fourth quarter up 660 basis points from a year ago, and 200 basis points sequentially from Q3.
Revenue for Sypris technologies decreased 14% to 13 million from 15.1 million a year ago. However, gross profit was down only $150000 and gross margin improved 110 basis points to 15.4% in Q4.
As Jeff noted earlier, we began to experience order board reductions for commercial vehicle products during the fourth quarter.
Additionally, with the way the holidays fell in December.
Certain of our customers took the opportunity to stop production during the last two weeks of the year and to rebalance inventory levels, which reduced our production and shipments in December.
During the first two months of 2020, we saw the commercial vehicle market demand tick back up following the holiday shutdown and we increased production on our new automotive and altering vehicle programs.
Offsetting the commercial market vehicle market decline in Q4 was increased revenue from our energy products and early low volume production on a new programs just mentioned.
Energy product shipments increased about 8.8% year over year and 11.6% sequentially.
Gross margin for Sypris technologies was 15.4% in.
In Q4, an increase of 110 basis points from a year ago, Although revenue was down just over 2 million for the comparable periods.
The year over year improvement in gross margin for technologies reflects the operational improvements made throughout the year, which are driving improvements in our internal operating metrics and flowing into our financial results.
Revenue for Sypris electronics was 8.6 million in Q4.
A decrease of 2.4% from the prior year, while gross profit improved 1.5 million to zero point Sevenmillion, resulting in gross margin of 8.2% for the quarter.
Although margin improved on both a year over year and sequential basis, our team continued to battle material availability challenges on certain programs.
Certain component shortages were attributable to customer furnish parts and others relate to vendor source parts that remain at short supply.
However, we were to blame for one of the material shortage issues late in the quarter.
The shortage stemmed from a system upgrade that change the replacement ordering process for certain components.
Although our supply chain team detected and corrected the issue within a reasonable time the component lead time pushed receipts into 2020.
Our consolidated SGN a expense was 3.5 million for Q4, an increase of approximately 300000 on both the sequential and year over year basis as adjusted for the legal settlement last year.
As you May recall, the Q4 2018 results included a $1.9 million benefit from the favorable resolution of a legal fee dispute for fees incurred in prior periods.
The increase in Q4, SDMA was primarily due to higher medical claim expense as we experienced a spike in the number of claims and average claim value, particularly during December.
Higher claim expenses not uncommon during Q4 as many participants have met their full year deductible and or out of pocket Max but the incurred value in Q4 Q4 exceeded averages from prior periods.
We are disappointed with the consolidated loss of nearly a million dollars for Q4.
However, we remain committed.
To improving the profitability of the company in the coming year.
Please advance to side nine.
Consolidated revenue for 2019 was 87.9 million, which was flat with our prior year revenue.
Consolidated gross profit was 9.9 million, an increase of 2.3 million or 30.5% over the prior year gross margin was 11.2%.
Or 260 basis points above 28 team.
For the full year Sypris technologies revenue increased by 1.9 million or 3.1% to $61.7 million, while gross profit increased 32.3 million or 30.1% over 2018.
Sypris technologies gross margin for 2019 was 15.9%.
An increase of 330 basis points from the prior year.
Coming into 2019, Sypris technologies targeted a number of cost reduction initiatives and the margin improvement reflects our success in the categories of supply spend and utilities in particular.
Management focus and controls over consumable tooling and other variables supplies spanned resulted in a year over year 360 basis point reduction and supply expense as a percent of revenue.
Additionally, avoiding production on certain high electrical consumption machinery during peak rate periods at our Toluca facility drove a year over year 80 basis point reduction and utility expense as a percent of revenue.
The combined effect of these two initiatives alone generated nearly $2 million of year over year cost reductions.
These improvements were partially offset by pre production and ramp up costs on new programs being launch as we continue to diversify our markets and customer base.
We estimate that approximately $1 million and incremental cost and labor inefficiencies incurred in 2019 will not repeat in 2020 as these new programs move from start up to full rate production.
Revenue for Sypris electronics decreased 6.9% to 26.2 million from 28.2 million in the prior year.
As we were not able to overcome the low shipment levels for Q1 of 2019.
We have the backlog in place to support a more consistent revenue run rate as we enter 2020.
And we are proactively managing production among our programs in the near term as we continue to anticipate supply chain tied changed challenges will arise in the ordinary course of business.
Consolidated SGN expense for 2019 was 13.7 million or 15.6% as compared to 12.4 million or 14.1% for 2018, excluding the impact of the legal settlement in the prior year.
Our consolidated operating loss for 2019 was 4.3 million, which was an improvement of 1.9 million over 2018, excluding legal fee settlement.
Okay.
Please advance to slide 10, and I'll offer a few takeaways.
Consolidated revenue for Q4 was 21.7 million a decrease of 2.9% sequentially as the commercial vehicle market began to adjust downward during the period and certain customers rebalanced inventory levels as they shut down for the holiday season.
Gross profit for Q4 moved in a positive direction, increasing 1.3 million over the prior year as 0.4 million sequentially.
Gross margin for the quarter was 12.5% an increase of 660 basis points over the prior year period.
For the full year consolidated revenue was flat at gross profit increased 2.3 million to 9.9 million.
Consolidated gross margin improved 260 basis points year over year to 11.2% for 2019.
Sypris technologies reported a dip in Q4 revenues due to the market dynamics just discussed however, full year revenue increased 3.1% over 2018.
More notable advancements for Sypris technologies are reflected in gross profit, which increased 2.3 million year over year, and gross margin, which increased 330 basis points to 15.9% for 2019.
Although revenue for Sypris electronics improved sequentially from Q3, and gross profit increase we fell short of meeting the profitability gains we expected for this segment.
Driving factor again related to material issues and although we are facing fewer issues dose we encountered unfavorably impacted our results in Q4.
The positive side the backlog in place for Sypris electronics supports our expectation for a more consistent revenue run rate in 2020, accompanied by improved margin performance.
And performance and financial results of both segments in the first two months a 2020 show sequential improvement from Q4 and are in line with the 2020 outlook. We last provided on our earnings call in November.
The extent and duration of the impacts that cobot 19 may have on our business are not known at this time.
And like the rest of the World. This is something we are monitoring minute to minute and we'll take every action possible to protect the health of our employees 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 John Route to answer any questions you might have for us.
Thank you.
Thank you.
You'd like to ask your question Keith Signode by pressing Star and then one on your telephone keypad.
Using a speaker phone keep make sure. Your mute function is turned off what are your signal to reach our equipment.
Once again in this there and then one to ask the question.
We can take our first question from Jim Ricchiuti of Needham and company. Please go ahead. Your line is open.
Hi, Thank you good morning.
Good morning.
Good to hear guys that.
Your employees and Sally our Havent had not been impacted thus far.
While these.
What are you seeing in the Toluca area or have there been.
Cases that have begun to crop up.
And in general what.
I would assume that just steps you're taking.
In your facilities not just in Mexico, but in the US is also driving costs as well and how much of an impact do you think thats going to be additional impact on gross margins for some of these.
Steps you've had to take.
Jim This is Jeff.
Into Luca we have not seen.
Any impact to covert seed yet.
And we're not familiar with any outreach in the area in fact, it seems to be.
Relatively quiet compared to the us Im sure that will change as time goes five it.
Up to this point, we've been very very fortunate.
The steps that we've been taking our.
Primarily ones of Education review personal responsibility the spacing limited supplier visits limited travel those types of things.
We've increased the cleaning the hygiene separated tables in the cafeteria.
We're in the process.
Setting up the secure web sites, so that all of the communications that we're making with our employees regularly can be accessed from home.
By spouses and other family numbers.
We're setting up hotlines, where.
Employees or their families Ken.
Ken Korean with.
Suggestions or questions or.
Just switched to discuss.
Shopper behavior or or.
Different things of that nature, So all of the things that we've been doing.
To secure the workplace and just as importantly, too.
Hello employees adjust their habits, when they're not at work.
Really have been.
Not investment type things and so okay.
Even with our other plants.
We have some people working from home with those are typically.
Engineering technical type people, who can work from home would be just as effective.
And the spacing that we have in our plants.
It is being very positive by the professionals and therefore, reducing the risk so.
And.
Until it.
Until we see a material change in potential volume.
We don't anticipate that these activities will have.
As negative impacts.
Yes.
Got it and then as we look at forecasts for the.
Heavy vehicle market, 25% decline.
Yes, given what we're anticipating lease the hit that.
The us economy appears to be taking in the June quarter that seems.
And seems conservative and I'm, just wondering what you're hearing of late.
Soon that 25% number that kind of decline in class eight.
Could you could be worse and I'm wondering what.
You have a different business in that area now, but certainly that's going to pose a bigger headwinds isn't it.
Well certainly in the coated 19.
Spiral.
Is creating a great deal of uncertainty for everybody.
As of today, our order boards.
Commercial vehicle side of the business every mold constant.
But in two weeks stack that could change in sight I think you point.
Is there the potential for near term reductions from our current.
Run rate I'd say the probability is yeah.
He is.
And longer term, we'll just have to see how it plays.
Right and that that.
That internal component issue or material issue that you.
Scott.
Tony is airway this size that from a revenue standpoint or.
Gross margin hit that you might have taken some that in the electronics business.
Someone specific program.
That issue and in particular.
Affected one specific program.
And.
I would estimate that the margin revenue margin impact of that.
It would have.
Quantified exactly.
Pro forma what.
With and without but I would I would say that.
Something under a million dollars in top line.
Would have been.
The difference.
It's it's surprising.
Still and I am hearing this from some other companies that there are some still some component shortages. What specifically are we talking about our these kind of unique type components for your defense customers.
They are that typically the the the dose.
Specific sourced items that we can't where where our ability to.
To move that to other suppliers are just substitute components and is extremely limited if not impossible.
And in those cases, it requires customer approvals. So it's not the the general market.
Items components that were seeing right.
Right now and it's really.
More isolated.
And then it has been in the past.
Got it defense business, the electronics business sounds like you're assuming it's going to be a little bit more to our revenue standpoint spreads a little bit more evenly in a passes so it's it's often been very back end loaded is that.
Is that the way you're viewing the business going into the year.
It is as we as we.
Built our plan for the year and.
Even our more recent forecast again absent any impact of Cowen 19.
The way that our backlog is structured today.
The launch date of programs into flow of those programs through the year.
Does.
Provide us with a more stable run rate.
For 2019, which is.
Good for many reasons.
So.
There will be as always there'll be some given take as things go day to day week to week since some programs may shift from period to period, but the good thing is we have a little more.
Volume across different programs to play with.
To help those.
To help offset.
Offset items.
As they develop.
Got it thank you.
Target we can take our next question from Joel can have the Jamison company. Please go ahead. Your line is open.
Hey, good morning, injecting Tony Thanks for the call.
Hey, Joe and morning.
So.
Hi.
I want to switch a little bit away some kind of the fundamentals.
Yeah, we're kind of facing again I mean, we keep getting to this the Nasdaq.
Delisting learning.
I am interested what it would take.
For you guys to see a indication that you would want to buyback stock at there is any.
Okay.
Anything that you're looking at whether from a valuation standpoint or from a financial metrics.
She metrics.
Well I think all those things are.
Option, Joel and you bring up a good point and.
We will do whatever we can obviously too.
Royd, having a problem with NASDAQ and the Covidien 18 activity recently, probably makes that.
Yet another challenge, but it certainly has our attention and we're looking at all the potential levers and and options that we have.
Okay.
And.
It does that mean that there has I mean is this something that you guys will discuss.
Actively and given that we're down at such a remarkably low level in the stock now.
Right.
Well, we were certainly reviewing these things internally, we don't have anything at this point to talk about externally.
Tony on the on that you mentioned that 2020 outlook, you've affirmed and would you just remind me again what.
You guys are looking at on topline in that regard.
Well, what we what we've said Joe this morning is that.
We provided an outlook in November.
And that our performance in the first two months of the year has has been tracking to that outlook.
Where we've stopped short is providing an outlook for.
An updated outlook for 2020.
In light of Cobot 19.
We're just not be.
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Not be something that we're prepared to do this morning.
Okay too many uncertainties that are that are floating around as you might imagine.
Sure, Yes, absolutely absolutely.
Okay and.
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Is there way that you guys can kind of brain.
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It seems like there's been obviously, there's been a lot of transition in the business, but in previously.
It's been heavily in heavy in aerospace and defense, but really in the in the heavy trucking is there maybe you can kind of tied together what it is that you're doing when it's now whether its undersea or in space or.
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Oil and gas what does it.
Is it just purely enclosures or is there something that kind of more broadly pulls together what with the core businesses at this point, particularly on the ASP.
Okay sure.
What we've targeted as we've done about our diversification Joel is to to try to be segments, where.
Their unique requirements, where there's a high cost of failure.
Where there's a high engineering content.
And that type of thing is a way of.
Distinguishing ourselves from more of a commodity type Claire.
And so when you look at the closures, we do in the energy feel than particularly for natural gas transmission and that type of thing.
Some of these closures.
Our.
70 to 80 inches in diameter and way up to 34000 pounds apiece.
And they're going into large natural gas fields in places like has expand them.
And other places around the world.
On the electronics side.
Whether its deep sea.
Whether it's there Ryan space craft for deep space.
These types of applications all have a very very high cost of failure and so the electronics that we we built for them tend to be in smaller quantities, but much higher price.
And that is a distinguishing factor in.
In the what used to be basically our commercial vehicle segment.
We've now moved into.
Much higher precision.
Transmission components and doing that both or.
The new dual clutch transmissions, that's going into sports car as well as the components for.
The altering vehicle and so more value add.
So materials will have smaller component of the overall content and.
Really working distinguish ourselves so that's the theme that.
Kind of running through our business at the moment.
Okay understood that's helpful.
I don't have any other questions. Thank you guys.
Okay. Thanks Gil.
Thank you. It appears there no further questions in the telephone Q, Mr. Again positive by few for any additional clothing, our additional Orlando.
Okay. Thank you very much and Tony and I would like to thank you for joining us for this call.
We welcome your continued interest in a push of questions about our business that can have a great day.
Ladies and gentlemen, nice conclude today's conference call. Thank you for your participation you may now disconnect.