Q3 2022 Sypris Solutions Inc Earnings Call
Yeah.
Good day and welcome to the Cypress Solutions, Inc Conference call.
Today's call is being recorded.
At this time for opening remarks, I would like to turn the call over to the President and Chief Executive Officer, Mr. Jeffrey Gill.
Please go ahead Sir.
Thank you Anthony and good morning, everyone rich.
Rich Davis and I would like to welcome it to this call. The purpose of which is to review the company's financial results for the third quarter of 2022.
For those of you have access to our Powerpoint presentation. This morning, please advance to slide two 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 Cypress Dot com.
To review the definitions of any non-GAAP financial measures that may be discussed during this call.
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 an update on the outlook for each of our primary markets.
Rich 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 four.
The headline for our business continues to be the strength of new order flow and contract awards for our manufacturing and engineering services from customers, serving the defense and secured communications markets.
Orders for Cypress electronics increased 75% during the quarter compared to the same period in 2021.
Driving firm backlog up in excess of $100 million, representing a 99% increase over the prior year period, and an 86% increase year to date.
This strong performance follows an equally impressive second quarter during which orders for this segment of our business increased 524% year over year and 240% year to date.
The balance of our business also continued to show important strength with orders for our proprietary energy products rising 33% during the period driving backlog up 15% year over year.
Up 84% year to date.
This performance followed a 13% increase in orders during the second quarter of this year.
Demand from all Trane commercial vehicle and specialty automotive customers remains solid as it has been all year.
The OEM supply chain constraints, serving as the main limitation on higher levels of production.
The strength of new business awards across our company resulted in a 61% increase in consolidated orders for the period pushing.
Pushing backlog up 92% year over year.
This growing trend of new order generation follows the 360% increase we reported for the second quarter of this year.
The outlook for the balance of the year continues to remain positive.
We're optimistic that we will continue to benefit from the underlying strength in several of our markets.
Our challenge has been and continues to be the impact of supply chain shortages and late deliveries.
As many of you may recall last quarter, we reported that our gross margin was negatively impacted as we worked to adjust production schedules to accommodate changing material deliveries among other items.
At the time, we mentioned that we expect these issues to be substantially behind us within the next few months.
Much much important progress has been made but in the interim the impact of these disruptions on revenue and gross profit for the quarter with significant resulting in a material shortfall to planned shipments for the period.
We now expect much of these delayed shipments to be recovered in the fourth quarter. The result of which should support the highest level of revenue. The company has reported in many years subject of course to no further surprises.
Turning now to slide five we have issued several important announcements during both during and immediately following the quarter.
More specifically.
In September we announced the receipt of an award for specialty high pressure closures for use in the Permian Highway expansion project.
The project will provide an outlet for increased natural gas production from the Permian Basin.
To growing market areas, along the Gulf coast, including New LNG facilities that will be in service in the next few years.
The project is expected to increase the capacity of the Permian Highway pipeline by approximately 550 million cubic feet per day.
According to news releases the expansion cannot come at a better time and is expected to foster future natural gas production growth in West, Texas and provides several LNG facilities, along the Texas Gulf Coast, where the more affordable reliable supply.
The project is also expected to alleviate transportation constraints out of the Permian basin and support a growing domestic and global energy demand.
The project is close to the in service in late 2023.
Cypress has agreed to manufacture and supply its tube turns branded specialty high pressured tools some threat enclosures for use on the filtration systems protecting the compressor stations of the project.
These closures will range in size from 12 inches to 70 inches in diameter and <unk>.
Wave from an estimated 250 pounds up to as much as 20000 pounds each.
Shipments under this award are expected to be completed by year end.
In September we also announced the acquisition of intellectual property rights for the rapid opening closure lag from pipeline engineering and supply of the United Kingdom.
The purchase of the IP provides cypress with the exclusive right to manufacture and sell the product line to end users globally.
Including those in the oil and gas petrochemical and industrial markets.
Under the agreement we will also have the capability to supply of spare parts and provide field service for any installation that contains the product lines.
The transaction combined certain of the flow assurance products.
With over 50 years of installed base with.
With the tube turns branded products from Cyprus, which has been producing and selling highly engineered competing products globally.
For over 60 years.
The acquisition of the product line as highly synergistic.
As expected to expand our market presence in Europe , Asia, and the Middle East.
In early October we announced that we had entered into an amendment to an existing multi year supply agreement.
To include the production of electronic power logic assemblies for a large mission critical Navy program.
The amended contract, including options now provides for the purchases up to $77 million of assemblies from Cypress over the term of the agreement.
Representing a 39, 5% increase in potential volume when compared to the original base contract announced earlier this year.
In conjunction with the Amendment. We also received releases for the first year of production.
With shipments scheduled to begin in 2023.
The modules to be produced by Cypress will be integrated into an electronic warfare improvement program for the U S. Navy.
According to new sources, the upgrade will provide the capability to actively jam incoming missiles that threaten or ship.
Q decoys and adapt quickly to evolving threats.
The improvements to the electronic attack portion will provide integrated countermeasures against radiofrequency guided threats.
According to the Navy.
The U S Naval Institute reported that the systems capability for non kinetic electronic attack options can be further deployed an additional critical areas.
From advanced communications to more payroll waveforms, the multi function applications of this system will provide enhanced mission capabilities to the U S. Navy fleet, while presenting opportunities for future reductions in cost size weight and power.
And in November we announced that we received a follow on award from the U S. Dod Prime contractor to manufacturing test embedded circuit card assemblies that will perform certain of the cryptographic functions for the army key management system.
The 8-K M's says a fielded system that consists of three subsystems.
Local communications security management software the LCM S Automd.
Automated communications engineering software, the Acs and the simple kilo device.
Under the umbrella of our nation's electronic key management system.
The Atms provides tactical units and sustaining basis with an organic key generation capability and an efficient secure electronic key distribution means.
The CMS workstation provides automated key generation distribution and communication security accounting.
The Acs, which is the frequent management portion of the AK MFS has been designated by the military communications electronics forward as.
As the joint standards for use by all services and the development of frequency management cryptographic net planning and signal operation instructions generation.
The embedded circuit card assemblies to be produced by Cypress will perform the cryptographic functions for our Ruggedized portable handheld simple kilo device that will be used to securely receive store and transfer data between compatible cryptographic and communications.
Equipment.
The device incorporates features that provide for the streamlined management of communications security key electronic protection of data and signal operation instructions.
Production is expected to begin in 2023.
These recent contracts are representative of the high cost of failure applications for switch cypress as well no.
We expect the momentum of new contract wins to continue and we remain very optimistic about the potential for future program and revenue growth as we move forward.
Now, let's advance to slide six to review the outlook for each of our major markets.
According to <unk> research the production of class eight heavy vehicles is expected to increased 17, 5% in 2022 before softening somewhat in 2023 as the economy cycle staff.
There are many factors that are having a positive influence on demand for transportation.
Pent up demand from the period of the pandemic.
Manufacturing prosperity carrier profitability and the acceleration of the transition to E. Commerce are combining to drive demand for freight to high levels.
Shortages of semiconductor chips.
And other key components are serving to hold back even higher levels of production.
The current outlook for 2023 is for demand has softened somewhat during the second half of the year, resulting in a four 7% year over year reduction when compared to 2022.
And any of it we anticipate that new programs planned for 2023.
Slide revenue support for any softening that may occur in the broader market.
Turning now to slide seven the market for the transportation end use natural gas as key for Cypress to be followed by the market for the transportation and processing of crude oil.
U S natural gas prices have increased significantly over the past year.
<unk> prices rising to $7 88 per million Btu up from $5 16 at this time last year.
Oil prices have also increased over the past year with the price of West, Texas Intermediate up 7% from September of 2021.
Brent is up 13% for the same period.
The current outlook for oil prices to remain in the range of 80 to $90 per barrel for the remainder of the year.
Although the outlook for the energy market is somewhat uncertain.
Our backlog through September of this year is up 84% year to date, which is perhaps a positive sign of things to come.
As you'll see from the chart on slide eight the long term market for defense spending remains positive and within the overall budgetary allocations spending for technology upgrades on strategic platforms continues to be a very high priority.
Our backlog of future business exceeds $100 million of 99% year over year and up to 86% year to date with firm orders now extending into 2025.
We're very pleased with the level of new business momentum and we are optimistic that this important trend will continue going forward.
During our previous calls when we discuss the changes that have taken place in our market mix over the past several years.
Turning now to slide nine please note that revenues forecast to increased 20% to 25% for 2023 with shipments to our customers in defense related market is expected to rise to 42% of sales in 2023 upper.
Up from an estimated 30% of sales for 2022.
We believe that additional opportunity exists to further diversify our business and we will continue to aggressively pursue this outcome.
Now, let's turn to slide 10 for a brief summary.
Our backlog grows dramatically during the period rising 92% year over year and 86% year to date.
Selecting the impact of a 61% increase in orders year over year during the third quarter.
Defense spending is rising our backlog for this segment is now exceeds $100 million up 99% year over year, and 86% year to date and the outlook for further strategic investment in this sector appears to be strengthening on a global basis.
The energy sector should benefit from our current global issues with the potential for increased capacity investments to support the export of LNG from North America to Europe and.
In other locations rising in priority.
Our recent contract awards are expected to provide further support for top line growth going forward, while we remain optimistic about the potential for yet additional contract wins and successes.
We have issued our initial outlook for 2023 with the top line expected to increase 20% to 25% year over year.
We now expect gross margin to accrete 150 to 200 basis points for 2023, when compared to our current outlook, while cash flow from operations is forecast to remain strong supported by earnings growth and working capital improvements.
Our backlog is strong so our focus must and will be on execution.
You almost daily supply chain trials will continue and there will be surprises and most assuredly challenges.
But this is always the case.
Quite simply we are really looking forward to the task of building the business profitably during the balance of this year and beyond.
Turning now to slide 11, Rich Davis will lead you through the balance of our presentation. This morning, rich thanks, Jeff and good.
Morning, everyone I would like to discuss with you some of the highlights of our third quarter financial results.
Please advance to slide 12.
Q3, consolidated revenue was $25 2 million a decrease of 500000 or one 9% from the third quarter of last year, driven mainly by a material Miss to forecast revenue due to supply chain challenges.
Consolidated gross profit was $2 million for the quarter, a decrease of 55% from the prior year as gross margin was off 770 basis points at seven 8% for Q3.
Margins dropped to the revenue Miss.
An unfavorable mix shift and inflationary cost pressures.
Revenue for Cypress technologies increased one 8% to $17 million for the quarter, but gross margin was six 3% down 630 basis points from the prior year due to lower shipments of higher value added automotive components and raw material price increases pass through to the customer without markup.
Production in the class eight market at the OEM level continues to be impacted by supply chain constraints unrelated to the availability of the drive axle shafts and other components we manufacture.
This has in turn reduced our shipment volume as our customers adjust their inventory levels to align with demand from the Oems.
Current forecast for class a demand this year indicate a 17, 5% increase over 2021 and class eight backlog currently stretches into 2023.
Recent orders and quote activity for energy products are improving and we expect revenue will increase in Q4 from these products.
Yeah.
On the cost side, we are also experiencing some of the inflationary pressures that are being felt across the economy.
Prices of consumable supplies and tooling of increased as have utility rates.
We have programs focused on identifying opportunities to reduce our supply consumption and we are working with our vendors on cost effective solutions to control spend in this area.
We also incurred additional cost during the year to support new programs and the forecasted demand in the commercial vehicle market over the balance of 2022 and 2023.
The price of steel has increased over the prior year and certain of our contract terms provide for sales price adjustments to pass the increase cost onto our customers.
This material price adjustment is based on market prices and flows through as additional revenue and cost of goods sold while the impact of the steel price adjustments does not have a direct impact to our gross profit the adjustments do reduce our gross margin percentage.
Our engineering and product development teams also have initiatives underway to reduce steel consumption in both our forging and machining processes to improve our margins and deliver cost savings to our customers.
Revenue for Cypress Electronics was $8 2 million in Q3, a decrease of eight 7% from the prior year and gross margin. What is was at 11% a decrease of 980 basis points from the prior year.
The decrease in revenue was primarily due to supply chain shortages and disruptions, which caused a material reduction in forecast shipments for the quarter primarily on several large programs. These programs are part of our record backlog that we currently enjoy and with some improved material availability recovering in those shipments is expected to.
Tributes significantly to our top line in Q4 and continuing into 2023.
We expect to be ramping up on an advanced version of an assembly for a large defense electronics program in Q4, while production for communication customers remains at a steady pace.
We continue to expand our workforce in Q3 at Cypress electronics to support the rising backlog.
We're not limited by a material availability. This expansion has been successful and will serve to increase capacity for the expected increase in volume in Q4 and into 2023.
With improved material availability the increased production in Q4 required to meet the expanded shipment schedule is also expected to significantly improve our manufacturing overhead absorption.
As we increased production and transitioned from limited rate to full build rate on programs our margin rates typically improve during the life of the program as labor productivity improves and engineering resource requirements and rework declines.
As programs mature, we also have the opportunity to reduce material costs by working together with our suppliers and customers to qualify components that lower our cost per unit.
Operating income for Q3 was a $1 $6 million loss compared to a $1 million income for the prior year due mainly to the missing forecast shipments for the quarter.
We expect a rebound in shipments in Q4 should flow through to improved operating income.
Our operations teams are focused on execution and meeting our objectives for customer service and cost.
The record backlog in place also provides a solid foundation to support this growth into 2023. Please.
Please advance to slide 13.
Yeah.
Year to date consolidated revenue was $80 4 million, an increase of $8 8 million or 12, 2% from the prior year.
Both segments contributed to the year over year revenue growth.
Year to date consolidated gross profit increased one 6% to $10 3 million gross margin decreased year over year by 130 basis points to 12, 8% on unfavorable mix.
Year to date revenue for Cypress technologies increased 10, 8% to $52 1 million.
And gross profit increased nine 4% to $6 3 million.
Gross margin decreased.
10 basis points to 12, 2% for the period.
Year to date revenue mix for Cypress technologies was unfavorable compared to the prior year due to increased revenue from material price pass through adjustments, which increased revenue without increasing gross profit.
Driving a decrease in gross margin.
Year to date revenue for Cypress Electronics was $28 3 million, an increase of 15% from the prior year, while gross profit increased 9% decreased 9% to $3 9 million.
Gross margin declined 360 basis points to 13, 9%.
The comparison of year to date revenue and gross margin from site for Cypress electronics reflects the material availability challenges, we faced during Q3 of 2022 and unfavorable mix compared to the prior year.
Our year to date operating loss was 400000, a decrease of $1 2 million from the 800000 in operating income reported for the same period a year ago.
The comparison of year to date net income highlights the $3 $6 million benefit recognized in 2021 for the forgiveness of the PPP loan.
Please advance to slide 14.
On this slide we show our trend of consolidated gross margin for 2021, along with the performance expected for 2022 and 2023.
The outlook for 2022 is reduced by 100 basis points from the prior year on production inefficiencies and unfavorable mix, while the outlook for 2023 is up by 180 basis points on the strength of the volume increases required by our record backlog.
We expect gross margin to improve during Q4 as we recover shipments delayed in Q3 due to supply chain challenges.
We want to again recognize the efforts of all of our teammates involved in securing the orders received in the first nine months of this year to push our backlog to a record level and we are excited about the opportunity. This provides to improve our margins and profitably grow our business. The contract awards demonstrate the trust and confidence are.
Customers have in our business and we look forward to continuing to meet and exceed their expectations.
We will also continue our efforts to diversify our markets served and our customer base to deliver more value added service and deliver more value add services to our customers.
Which we believe can further provide upside to our current margin levels.
These advisors advanced to slide 15.
For a quick summary of our comments.
A key highlight for the quarter and the year was the significant increase in orders and backlog in both segments.
Cypress electronic.
Electronics orders were up $15 4 million for Q3, and $74 7 million year to date up 75% and 79.
6% respectively.
Creasing its backlog to $104 million.
Cypress technologies energy products orders were $5 8 million for Q3 up 33, 5% over the prior year period.
The outlook for Cypress technologies remains favorable as the current forecast for class eight production in 2022 shows a 17.
5% increase from last year with a slight reduction in 2023 expected to be offset by expansions of certain programs with existing customers.
Cypress technologies has purchased the intellectual property rights to the rapid and rapid opening closer lineup a competitor.
Each expands its energy products presence in Europe , Asia, and the Middle East.
We expect both segments will generate double digit year over year topline growth in Q4, this year with both quarterly revenue and gross margin significantly increasing sequentially in Q4.
Based on our record backlog and momentum in orders, we expect continued revenue growth of 20% to 25%.
And a 150 to 200 basis point improvement in gross margin in 2023.
Thank you for your continued support and interest in our business now I'd like to turn it over to Jeff for closing remarks.
Thank you rich wed like to thank you for joining us on this call. This morning.
We are looking forward to another year of double digit growth in 2023, expanding margins and increased profitability and.
I am. Please note. We certainly appreciate your continued interest in our business. Thank you have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.