Sypris Solutions Inc (SYPR) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to this Sypris Solutions, Inc.

conference call.

Today's conference is being recorded.

At this time, for opening remarks, I would like to turn the call over to President and Chief Executive Officer Mr.

Jeffrey Gill.

Please go ahead, sir.

Thank you 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 fourth quarter and full year 2008.

For those of you who have access to our PowerPoint presentation this morning, please advance to slide 2 now.

We always begin these calls with a note that some of what we might discuss here today may include projections and other forward-looking statements.

No assurance can be given that these projections and statements will be achieved, and actual results could differ materially from those projected as a result of several factors.

These factors are included in the Company's filings with the Securities and Exchange Commission.

And in compliance with Regulation G, you can access our website at sypris.com to review the definitions of any non-GAAP financial measures that may be discussed during the call.

With these qualifications in mind, we would 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 a brief overview of 2008, to be followed by an update of our strategic restructuring initiatives and some perspective on each of our three business segments.

Brian will then provide you with a more detailed review of our financial results for the quarter and year.

Now let's turn to the next page.

Let me begin by stating the obvious.

The fourth quarter was a very challenging period for the Company, especially for our Industrial Group.

The rapid contraction of the economy impacted the truck and automotive sectors, with a disproportionate amount of the decline occurring in the fourth quarter of 2008.

Continued growth in our Electronics Group helped to offset the effects, limiting the impact to a 9% year-over-year decline.

Some key items of note for the quarter -- in our industrial side, our management team responded aggressively to right-size the workforce as the order board fell during the quarter.

In sharp contrast to this, our Aerospace & Defense orders were up 37% for the quarter, which was consistent with our expectations.

During the period, we ramped up new production for the Bradley Fighting Vehicle and achieved full production levels on new classified secure communications program which has been underway for some time.

Our Test & Measurement segment continued to grow during the quarter, marking the eighth consecutive quarter of comparable period growth, which enabled our Electronics Group as a whole to expand to 50% of our portfolio of revenue, which was up from 43% in the fourth quarter of 2007.

During the quarter, we successfully exited a contract with Ford Motor, reducing our automotive exposure to less than 3% of consolidated sales.

This was a big but necessary event for us and eliminates an otherwise continuing source of risk going forward.

On page 5, we continue to make important progress in the execution of our strategic restructuring initiatives.

We began the relocation of production from two plants in Ohio, with plans to consolidate much of the work in North Carolina.

During the quarter, we incurred $45 million of restructuring charges to reflect asset impairments, contract terminations, severance costs, environmental costs, etc.

And I think it's important to note that against this $45 million charge, we incurred roughly $1.9 million of cash usage associated with this restructuring, which was less than our original expectation.

During the quarter, we also incurred $67 million of noncash charges to impair the value of certain marketable securities.

It continues to be our belief that these securities are vastly undervalued and are reflecting the current state of the automotive and truck markets.

And it's our intent to continue to hold these securities until such time that they can be liquidated at a fair and reasonable value.

And finally, during the quarter we put plans in place to address 2009, which we expect to be every bit as challenging as 2008.

And I can tell you that if things change, we will respond early and aggressively and make changes to our plans, as you would expect.

So all in all, both the quarter and the year were certainly challenging, but not without important progress being made.

Now let's take just a moment to update you on the state of our restructuring initiatives.

We have discussed these with you in the past, but on page 6, you will remember that we had four primary objectives, that being to eliminate unnecessary waste, to reduce fixed overhead, to accelerate where possible integration efficiencies, and to eliminate any roadblocks that may be in the way of achieving our consolidation savings.

The key components of our plan included the consolidation of three facilities into existing Sypris locations, the use of lean tools to drive operating efficiencies, the cost reduction of certain high-volume products, and a focus on quality to reduce scrap and rework.

On page 7, you'll see that we're making great progress and that the team, led by Sergio Carvalho, is executing with a sense of urgency and purpose.

The transfer of work and the completion of collective bargaining discussions are ahead of schedule, providing us with the confidence that these plants will be closed this year, in advance of plan.

We expect to complete a series of lean project and operational improvements by the end of the third quarter, thereby placing us in a position to reap the benefits as early as the fourth quarter of this year.

The product costing objective is complete and, I am pleased to say, successful.

And finally, our initiatives to reduce scrap and rework are well underway, with expectations of completion by year end.

On page 8, you'll see that we are on plan in our implementation budget with regard to capital investment.

You may recall that the original plans called for $6 million of capital to be spent in the restructuring plan over a period of three years.

Currently, we plan to spend $3 million during 2009.

With regard to the three-year $16 million of cash expenses to be incurred in the restructuring, I am pleased to report that, at least at this time, we have a positive variance with regard to these key items, primarily because the team has shown a great deal of resourcefulness in how we're approaching this restructuring.

It is our plan to update you with regard to these numbers after the first quarter of this year.

But quite frankly, the potential savings to plan are significant.

In the area of noncash charges, these things are substantially complete, and we took the charges in the fourth quarter of 2008.

We still have a couple things under review in the area of PP&E, but quite frankly, we don't believe these to be material.

We believe that this process, which was led by Brian and others, was extremely comprehensive and thorough and, quite frankly, that they really did a nice job in performing this work.

So with regard to our restructuring and the budget associated with restructuring, our outlook remains positive to plan.

And we have some material savings that are possible.

In summary, the expected results have been outlined on page 9.

First and foremost, we will close three plants and reduce the total square footage by roughly 830,000 square feet during 2009.

In our Industrial Group, this means that we will have a 40% reduction in rooftops and overhead, and expect to generate a 20% reduction in the average cost of direct labor.

We will achieve net headcount reductions of close to 12.5% of the domestic workforce, and that's without regard to changes in employment that may reflect fluctuations in volume.

During this process, we do not expect to lose any market share or top line.

And the cost competitiveness of our business model will be increased significantly as a result of these actions.

We expect the restructuring costs to be funded substantially by our internal cash flow, and if I am correct about our progress that we talked about a minute ago with regard to the restructuring costs, that should be helped even further as we go forward.

And as we complete these things this year, we fully expect at least 75% of the benefits to be realized as early as 2010.

The bottom line -- we're currently ahead of plan in terms of both execution and cost.

Now let's advance to slide 10 for a brief review of our business segments.

Let's start with our Industrial Group.

As we look at 2009, the market conditions clearly remain extremely challenging.

The economy and the credit crisis are impacting demand for commercial vehicles and trailers, as you might expect.

And as a result, we're seeing a great deal of volatility and variability in the forecast for both of these items.

This table is meant to show that the current outlook assumes production bottoms in the first quarter of 2009, to be followed by sequential increases of 7.7%, 32.5% and 10.4%, respectively, as we move through the balance of 2009.

It's also important to note, however, that in a volatile environment like we have today, is that we should look at the recent forecast accuracy.

And when you do, it provides you with at least some sense of a reason to be cautious.

More specifically, in the bottom of this table, you'll see that what we have done is we have provided the numbers for the Class 8 outlook, and the first of these tables provide the outlook as was provided back in October for the first quarter of 2009.

And in October, the outlook for the first quarter was for the production of 53,000 Class 8 vehicles, and as we get to the end of this first quarter, it's looking like the actual production will be closer to 28,000 vehicles, reflecting roughly a 46% decline from that October forecast.

When we look at the December outlook for Q2, the outlook in December was for 41,000 vehicles to be produced in 2Q, but when you go to February and you look at the February outlook, that number has been reduced by roughly 31% or so.

So as we look at these numbers, I think what's important to do is to say that everybody is trying to forecast as well as possible, but there is a great deal of volatility out there.

Our sense is that the bottom of the cycle may be nearing, but we may be a quarter or two away from the bottom.

Our plans for managing in this type of environment are very specific.

Please advance to slide 11.

First and foremost, our team is focused on the closure of the two plants in the industrial side, which, as I mentioned a moment ago, reflects 40% of the rooftops in this side of our business.

In addition, the team continues to manage material deliveries closely to ensure that our inventory remains in alignment with production.

We continue to reduce work days and periodically combine with shutdowns so that we can retain our talented workforce.

We continue to drive continuous improvement activities so that we're improving the efficiency, even at lower volumes of work.

But many of these items are tactical.

And we all know that over the longer term, the important thing is to get our fixed costs down.

And the way that we're doing this is to get these plants closed.

And we believe that once we're finished with these plant closures, that will have a dramatic impact on the breakeven point of our business, which will position us to return to profitability in the future.

Longer term, the outlook for heavy vehicles looks positive.

The current forecast is for an increase of 32% in 2010 and 43% in 2011, albeit these increases are coming off of what are significantly low levels.

When this occurs, we expect to benefit from the operational leverage that is associated not only with the increased volume, but with the reduction of our breakeven point as a result of the plant closures and increased operational efficiencies.

And finally, before leaving this segment of the business, I would like to say that, to all of you out there, that our management team is doing a terrific job under extremely challenging circumstances, and all of us want to thank them for their continued efforts.

It's not easy work.

Now let's turn to the Electronics Group, where the story continues to be positive.

On slide 12, you'll see that the market conditions there are positive, and we expect the opportunities to increase across the board.

When we look back over the past year and recognize how turbulent it has been for our economy on the whole, the performance of both our Aerospace & Defense and our Test & Measurement segments is worth noting.

The Electronics Group as a whole increased to 41% of revenue in 2008 compared to 36% in 2007 and 27% in 2006.

Aerospace & Defense continued to make positive strides under the leadership of John Walsh.

During the year, we registered an 8% increase in engineering services, a 52% increase in sales of the classified secure communications product, a 121% increase in sales for some satellite-based electronic assemblies.

Lean initiatives continued to attack costs and drive improved efficiencies.

And the consolidation and integration of our Data Systems subsidiary continued on plan.

And perhaps most important of all, our business activity in this segment is increasing.

As we look to the outlook for 2009 on the next slide, we expect to realize growth for several key programs during 2009, including the Apache helicopter; the F-16 Fighting Falcon; Cobra Judy, which is a ship-based radar missile detection suite; Viper, which is a multi-band infrared missile defense laser; the Bradley Fighting Vehicle, which I'd mentioned earlier, where we provide electronics for the [turret] management control system; and we expect in the second half of this year to introduce yet another new classified secure communications device.

As many of you may recall, we exited several programs during 2008, which did not, in our view, have a good long-term fit for the business.

And we took the charges related to those contract terminations during the year.

The programs that I just mentioned will effectively replace this terminated volume, but with work that we believe will be good for the business over the long term.

We remain optimistic with regard to our incursions into biometric applications for some of our existing secure communications products, and for participation in the emerging cyberspace initiative, which, if we're successful in each of these areas, will provide some important support for 2010 and beyond.

Now let's turn the page and finish up with our Test & Measurement segment.

Kathy Boyd and her team had another positive year in 2008.

We experienced year-over-year increases in sales for all lines of our business within the segment, and we were pleased to extend our contract with the FAA out an additional five years into 2013.

We had the opportunity to expand our calibration services operation into Guadalajara, Mexico, and we were awarded new contracts, some of which were from companies such as EFJohnson, Honeywell, Northrop Grumman, Raytheon and SAIC, among others.

We experienced a 34% increase in instrument sales that are used in the maintenance of military vehicles, and we started the development of a wireless alternative to this product that is expected to receive strong demand as we go forward.

During 2008, we completed the development of and submitted a patent for a device to be embedded in medical diagnostic equipment, which we're very excited about.

And for 2009, we plan to expand our on-site calibration services, introduce a new line of wireless products, and develop a new sensor for alternative energy programs, which provides us with the confidence the Test & Measurement segment will continue its record of quarterly growth throughout the coming year.

In summary, then, for our Electronics Group the outlook remains positive for both segments, with a number of exciting projects underway.

It is now my pleasure to turn the balance of our presentation over to Brian Lutes.

Brian?

Great.

Thank you, Jeff.

Good morning, everyone.

I'd like to cover with you three areas briefly today -- first, our Q4 and full-year 2008 financial results, briefly outline for you the various special charges we incurred to reposition the Company that you heard Jeff talk about, and finally highlight for you some of the operational improvements we're realizing through lean and Six Sigma.

At this time, please advance to slide 15.

For Q4, overall revenue was $94.5 million, or down 9% or $9.1 million from the prior-year period as depressed market conditions for light trucks, commercial vehicles and trailers continued its downward decline for the second consecutive quarter of 2008.

Consolidated revenues by operating segment were as follows.

For our Industrial Group, revenues declined $11.6 million or almost 20% from the prior-year fourth quarter, to $47.3 million and reflected a decline of over 30% versus our first-half Q1-Q2 revenue run rate, again, substantiating the challenges Jeff discussed with you earlier.

For our Electronics Group, revenues were essentially immune to the instability brought on during the fourth-quarter financial crisis and increased $2.4 million, or nearly 6%, versus the prior-year 2007 period to a total of $47.3 million.

Again, this increase was due largely to increased shipments of our next-generation link encryption products and increased sales in calibration and component screening.

One important highlight to share with you as well for our Electronics Group is that orders increased 37% versus the prior fourth-year quarter.

Gross profit for the fourth quarter was $1.7 million or almost $8 million lower than the prior-year fourth quarter, reflecting largely the revenue deterioration we experienced within our Industrial Group.

Our Industrial Group's gross profit for the fourth quarter was negative at approximately $1.7 million, or representing a $5.5 million decline versus the prior-year fourth quarter.

SG&A for the fourth quarter was down just over $800,000, representing lower spend in healthcare-related costs.

R&D was up very slightly from the prior year.

For the fourth quarter, we incurred a $9.4 million operating loss before special charges and noncash impairments compared to an operating loss of $2.1 million for the fourth-quarter 2007 period.

Within this slide, we've outlined the net loss for you as a result of the special charges and noncash impairments we incurred, especially during the fourth quarter.

Please advance to slide 16.

For the full year, revenue was $411.3 million, down 5.6% or $25 million -- or almost $25 million from the prior year.

Our Industrial Group revenues decreased $34.9 million or essentially 13% to $244.2 million.

Again, the depressed market conditions for heavy and light trucks and commercial vehicles have contributed to volume-related reductions in net revenue of approximately $19 million, whereby volume declines for trailer axles alone were down $23.7 million from 2007 levels.

Partially offsetting the volume change was an increase in steel prices, which is passed through to customers under certain contracts and resulted in an increase of about $19 million in terms of the revenue line.

Our Electronics Group, comprised of our Aerospace & Defense and Test & Measurement businesses, realized a $10.3 million or 6.6% increase in revenue to $167.1 million.

For A&D, segment revenue increased $7.4 million or 7.1% to $112 million, primarily due to increased sales of link encryption products we discussed earlier.

Offsetting this was a reduction in sales of certain data recording products of about $5.2 million during the year.

As Jeff mentioned, Kathy Boyd and her team in our Test & Measurement segment increased revenue almost $3 million or just under 6% to $55.2 million as a result of increased volumes of our magnetic meters, as well as an increase in calibration services, rounded out by just under a $1 million increase in component screening and product test revenue.

For the full year, 2008 gross profit declined $7.6 million or just over 19% to $32.2 million, and gross profit performance was as follows.

The Industrial Group's gross profit decreased $6.8 million to $10.8 million in 2008.

Again, the significant decrease in sales volumes and related loss of fixed overhead absorption, combined with higher utilities of over $1 million, resulted in a reduction in this gross profit of approximately $12.5 million.

The Industrial Group also realized a decline in gross profit of about $2.5 million as a result of lower revenue resulting from contractual settlements and favorable pricing as compared to the prior year.

Decreases in gross profit were partially offset by about $8 million as a result of the various productivity improvements made throughout the year, and many of which Jeff has discussed.

Moving on to our Aerospace & Defense segment, its gross profit decreased $1.7 million to $7.4 million in 2008.

Gross profit as a percentage of revenue decreased 2% from the prior-year period to 6.6%, but attributable to two key areas -- a higher mix of lower-margin services and product sales as compared to the prior year, and significant new program costs related to Cobra Judy, the Bradley Fighting Vehicle and other classified programs, in addition to higher material costs.

Again, the Test & Measurement segment's gross profit increased $800,000 in 2008, primarily due to increased revenues, and gross profit as a percentage of revenue of 25.3% was relatively consistent with what we had in 2007.

Overall, SG&A expense increased about $900,000 on a consolidated basis as a percentage of net revenue of 10.1% in 2008 from 9.3% in 2007, again related to compensation costs, recruiting costs, as well as some other benefit-related costs.

R&D expense costs increased about $1.4 million, resulting primarily to new product development efforts that Jeff discussed in our Aerospace & Defense segment.

Please advance to slide 17 at this time.

In December, we announced a restructuring program which included the closure of the Industrial Group's Kenton facility, the consolidation of Sypris Electronics and Sypris Data Systems into a single business unit of the A&D business, and the likely closure at that time of another US-based industrial location.

The purpose of the restructuring, as Jeff has outlined, was to reduce fixed costs, accelerate integration efficiencies and improve the operating earnings on a sustained basis, especially in light of this environment.

These specific costs will be outlined in detail within our Note 3 of the consolidated financial statements included in our Form 10-K today.

However, let me discuss briefly the charges.

For 2008, we recorded a restructuring charge of $45.1 million or $2.45 per share related to the previous discussed initiatives.

This included -- which is included in nonrecurring expense in the consolidated statement of operations.

These types of charges included noncash impairments and other special charges of about $36.5 million for deferred contract costs, asset and inventory-related impairments; severance and benefit-related costs, just under $3 million; contract termination costs that we discussed as John Walsh positions the business with emerging programs that have higher gross margins and that are clearly linked to the new administration; and finally, about $3 million, or just under, for asset retirement obligations and other expenses.

It's very important to note that $37 million of these recognized charges were noncash.

Finally, we recorded a $66.8 million noncash impairment charge during the fourth quarter related to the Company's shares and Dana's common stock, and that it's important to also recognize that future increases or decreases will be recorded through other comprehensive income until the securities are sold or unless future declines are also deemed other than temporary, as we've discussed in prior calls.

At this time, please advance to slide 18.

As Jeff discussed, we have undertaken comprehensive restructuring activities about the Company.

So, too, are we expending extensive time and effort on improving operational capabilities and productivity through the use of lean and Six Sigma.

Sergio de Carvalho, our Industrial Group President, is challenging our conventional inventory practices by working more closely with our customer requirements and dramatically improving downstream conversion through productivity enhancements.

In addition, as Jeff discussed with you, John Walsh, our Aerospace & Defense Group President, has reduced his overall manufacturing footprint by 50% and yet improved on-time delivery by over 80%.

This reconfiguration, including the savings associated with integrating our Sypris Data Systems within A&D, will enable us to compete more effectively, win more programs without the need for additional CapEx investment.

In addition, we are reducing inventory and improving overall productivity by eliminating redundancy and unnecessary overhead.

While revenues have declined, and some improvements are attributable to this, the real fact is we've been able to drive real improvements in our inventory turns from around 5 a year ago to greater than 7.5 at the end of 2008, or about a 45% improvement.

In addition, in this tough environment, we manage customer exposure closely.

Our past-dues at 12/31 were 17% on a consolidated basis.

However, our greater than 30 days past due are less than 5%, reinforcing our efforts in customer focus in this tough economy are working.

Finally, we've reduced overall headcount through the efforts we've discussed with you today, and as a result, we have reduced our total headcount by 13% in 2008 and expect that through our ongoing restructuring activities that we will realize most likely another 10% reduction on this 12/31/2008 number by the end of 2009.

This concludes the brief financial overview.

And at this time, we would be happy to answer any questions that you might have.

(Operator Instructions).

Jim Ricchiuti.

I wonder if you could give us a sense going forward, or let's say in early 2010, when you begin to realize the benefits of the restructuring in the industrial business, what the quarterly breakeven might look like from a revenue standpoint for that business.

Jim, it's our estimate at this time -- and this is Jeff, by the way -- that the breakeven would be somewhere in the range of where we are today, maybe a little bit higher.

And that depends upon mix and a number of different things, but that would be our expectation.

And, Jeff, as we think about 2010, as you think you can get the bulk of these savings realized in the early part of the year, are there certain milestones that you need to see for the second half of the year to get there?

Should we, for instance, see that kind of a quarterly breakeven level in Q2 of next year?

I think it will be sooner, Jim.

The key element in the industrial side has to do with the closure of the two facilities.

And we believe we're ahead of schedule on that.

We have a great deal of confidence that there will be no residual drag from those closures going into 2010.

So by the time we get to the first quarter of next year, our costs should be structured to reflect what we're trying to do.

Okay.

Brian, I'm just curious.

The gross margin for the quarter, there was -- I believe it looks like some onetime items that may have hit as well in that -- in cost of goods.

What was the gross margin ex some of those charges?

Some of those charges just included things like severance.

He's asking what it was without them.

Jim, rather than Brian trying to -- let us get back to you on that.

Okay, that's fair enough.

And Jeff, last question.

Just as we look at the electronics business, the defense business is performing quite well.

You saw very good order strength.

And I wonder if you can comment, first, where the order strength is coming from.

And then second question, more broadly, as we look at the outlook for this business in 2010, clearly there's going to be more scrutiny on defense expenditures.

Your comment -- I think you guys made a comment that you feel the new programs are linked more to the new administration.

But is there -- what's your confidence level that this portion of the business holds up from an order standpoint next year?

We have a high degree of confidence that the progress that we're making on that front will continue.

What we fully expect is for the administration to disengage from some of the actions in Iraq and perhaps Afghanistan.

And what history will show is that when we pull back from engagements abroad is that the defense and the armed services agencies focus on lessons learned and product enhancements and improvements.

And we believe a lot of those things will take place in terms of electronics.

And so we actually think that this benefit will -- this segment of our business will continue to benefit rather than feeling a contraction.

Okay.

And then just with respect to the order strength in the quarter, where was that coming from on the defense side?

It was pretty much across the board, both in terms of our product side and in terms of our circuit card assembly.

(Operator Instructions).

Tom Carpenter, Hilliard Lyons.

Sounds like the team has been pretty busy.

Are you racking up the frequent-flier miles?

That's right.

When we spoke last time and you guys mentioned the $25 million in savings, I believe you said about $20 million is for cost of goods sold and the rest in operating expenses.

Is that still the target?

That's still the target.

And you believe in the second quarter of next year that the COGS will be fully realized?

Well, Tom, our plan is that they will be realized sooner than that.

Yes, I think the important thing, as Jeff mentioned, with this environment, things that you traditionally have done monthly we're doing daily and weekly to make sure we do the best that we can to stay ahead of the tough environment.

But I think, based on where we're at on the restructuring activities and what Sergio's team has done in parallel to, A., managing the restructuring, but B., also making sure that he responds to the economic turmoil, we should realize those in 2010.

Okay.

That's good.

I saw on one of the charts you guys -- or slides put up, maybe like 95% of the restructuring charges are there for the move.

So we should expect some charges here and there throughout the year?

Yes, that's correct, Tom.

There's an increment -- I think overall we were looking at -- we've estimated around $54 million total in nonrecurring charges, of which $45 million we incurred in 2008.

Now, our objective on this certainly is to manage these costs and manage them prudently in light of the tough economy and managing the restructuring of milestones.

Okay.

Of that remainder, can you give us an idea of how much of the charges might be cash versus noncash?

Well, of the remainder, there would not be any cash.

Okay.

Maybe that's good news.

Tom, there's probably -- when you look at the relocation of some of the equipment, there will be cash charges -- just to recant that, there's probably just under $3 million that will be related to moves of equipment as we move the Kenton and Marion numbers.

Okay.

That's what I was kind of looking for.

Your all's cash has stayed fairly steady over the past year that long-term debt has gone up.

Can you give us an update on your covenants, and what the availability is (technical difficulty)?

Yes, Tom.

I think it's important what we had discussed in the prior quarter.

We have amended our credit agreement, so we are in good position there.

With respect to liquidity, we feel like we have sufficient liquidity to manage.

We stress-test it in case the volumes decline.

And based on the efforts we have undertaken, we feel like we have sufficient liquidity.

Okay, because just going here -- so the $50 million revolver expires in October of this year.

Is that correct?

That's correct.

However, we have amended -- our intent is that we will -- that we have amended that agreement.

And that will extend a new maturity beyond that date.

Okay.

And that's going to be in the K?

Yes, it will be.

Just maybe a little hint there -- did it go out more than one year?

No, it went out beyond 2009.

Well, let's mark that down as good news.

So you mentioned on the call that you do have full production on the classified --

That's correct.

-- secure electronics communication equipment.

Is that both programs?

Well, it's on the primary program that we've been trying to get to full production.

So yes.

So you guys -- in the years past, you guys had two electronics programs you were trying to ramp.

We had two.

At the moment, everything we have is up at full production.

Okay, that's good news.

When will you achieve full profits for those programs?

We expect to start realizing the benefit as we move through this year.

Okay.

Maybe third quarter; good.

And just a final question, and then I'll jump back in the queue.

I read about some other Test & Measurement businesses feeling the effects of the downturn.

You guys -- clearly that's been the crown jewel of Sypris Solutions the past couple of years, has been T&M, and you guys have a little bit different business than some of the bigger test and measurement outfits.

As you look out into '09, do you see any impact on the top line or profitability?

I know you guys have some new initiatives that look like they can continue topline growth, but what about the profit side?

Are you seeing any margin pressure on contracts?

Well, we always -- you have to be cost competitive.

And that's a fundamental rule.

But as we look through 2009, Tom, we expect this business to perform better in 2009 than it did in 2008.

So we're very optimistic about what Kathy and her team have done, not only to create the proper cost structure, but also the initiatives that they've put in place in terms of new contracts and things of this nature that will support these expectations.

Okay.

Excellent.

Best of luck over the next quarter.

Jim Ricchiuti, Needham & Company.

Gross margins in the electronics business, any sense as to where you see those going as we go through the year?

Are you going to be benefiting from the ramp in the new programs?

Some sense as to where they might go.

Just a second.

Brian is referencing material.

Yes, Jim, I'm sorry.

I've got a lot of materials here just in the backup.

I think on the gross margin, we're seeing that we'll head towards 20%.

That would be a target of greater than 20% of what we're seeing for the full-year forecast.

Brian, just so I'm clear, so do you mean that you anticipate exiting the year for the defense, that portion of the electronics business, at a 20% gross margin?

We would ramp up, as John began, and is executing the startups of key program, or program launches in Q1.

That offsets some of the gains in Q3 and Q4, so we would probably end the year just in the below-20% range.

Okay.

And any color you can give on where we might see debt levels as we end the year and maybe the early part of next year?

Any targets in mind?

I'm sorry, Jim, could you repeat --

Sure.

Jeff, I'm just trying to get a sense of how we should think about debt going forward.

As we go through the year, do you see debt levels changing much toward the latter part of the year and also toward the early part of next year?

When we look at where we are currently, Jim, we expect to show some usage during the current quarter.

And that's reflective of the timing of both the shutdowns of our customers in December of last year, as well as the timing of shipments coming out of our Aerospace & Defense segment during this quarter.

And then we see that turning positive as we move through the balance of the year.

And we expect to see positive cash flow as we move into 2010 as well.

Okay.

And then a last question on the industrial business.

As we -- as you begin to see a recovery, hopefully toward the early part of next year, in builds, what kind of -- from your conversations that you're having with customers, is there any concern on your part that as we begin to see that recovery that there might be some pricing concessions, any kind of contracts that are coming up that could potentially offset some of the savings that you're planning for?

Our major contracts mature in 2013 and 2014.

So we should be in good shape.

Okay.

Terrific.

Thank you.

And it appears we have no further questions in the queue at this time.

Okay.

Well, thank you, everyone.

Brian and Tony and I would like to thank you for joining us this morning.

We welcome your continued interest and, of course, your questions about our business.

Thank you, and have a good day.