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Sypris Solutions Inc. (NASDAQ:SYPR)

Q4 2013 Results Earnings Conference Call

March 11, 2014 9:00 AM ET

Executives

Jeffrey Gill - President and CEO

Brian Lutes - Chief Financial Officer

Anthony Allen - Vice President and Treasurer

Analysts

Jim Ricchiuti - Needham & Company

Tristan Thomas - Sidoti

Operator

Good day. And welcome to the Sypris Solutions Incorporated Conference Call. Today's call is being recorded. At this time for opening remarks, I would like to turn the conference over to President and Chief Executive Officer, Mr. Jeffrey Gill. Please go ahead, sir.

Jeffrey Gill

Thank you, Divona, and good morning, everyone. Brian Lutes 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 2013.

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

We always begin these calls with a note 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 included in the company's filings with the Securities and Exchange Commission. And in compliance with Regulation G, you can access our website sypris.com to review the definitions of any non-GAAP financial measures that maybe 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 to the first half of our presentation this morning, starting with an overview of the highlights for the year, to be followed be a brief discussion of each of our two business segments. Brian will then provide you with a more detailed review of our financial results for the quarter and year.

Now, let's begin with the overview on slide four. The financial results for 2013 reflected the challenges faced by our aerospace and defense segment during the year, offsetting the continued strong operational performance by our industrial segment.

Revenue, gross profit and operating income all declined when compared to the prior year period, while earnings fell to a loss of $0.51 per share driven large part by the impairment of goodwill during the year, which accounted for $0.36 per share or 70% of the loss.

The year was not without its bright spots, however, with cash flow generated from operations approximating breakeven. We continue to make investments in research and development, and capital equipment to support our future operations. Our balance sheet remains in great shape and will serve as an important assets as we look to diversify and grow the business profitably going forward.

Our investments and process improvements and the initial results from our partnering with Toyota are beginning to pay real dividends in terms of increasing manufacturing efficiencies and improving equipment uptime, while simultaneously reducing cycle times and scraps.

The impact on the company's financial performance was real and elastic with the annualized savings exceeding $3 million during our first full year of implementation. During 2014, we plan to further increase Toyota’s involvement in our operations, expanding our joint activities into our specialty components manufacturing operations, where the continued growth of oil, gas and petrochemical market is beginning to place pressure on our production capacity.

In an event, we remained optimistic that the company will realize substantial additional benefits as we continue to implement the TPS tools and culture throughout our organization during the coming years.

In this regard, we were also pleased to announce the election of Gary Convis to our Board of Directors in late 2013. Many of you may already be familiar with Gary and his highly profile careers, the first non-Japanese Chairman of TMMK and his subsequent career at Dana, where Gary variously served as CEO, Vice Chairman and finally, as an advisor to the company. Gary has a wealth of knowledge and experience that should help us to further accelerate our TPS journey and the cultural makeover of our company.

As we close out 2013 and look to the future, you can rest assure that we are focused on improving the company's financial results without having to rely upon return of A&D funding pre-sequestration levels.

A number of initiatives are underway in both segments that are expected to lead to improve cost performance and operating efficiencies during the coming year. As a result, we are optimistic that we are now turning the corner and that the company will return to profitability in 2014.

Turning now to slide five, during the last couple of quarters we have mentioned that the impact of sequestration and other DoD funding related issues have turned out to be more far reaching than we had ever imagined.

Plant shipments were delayed while funding for product purchases were moved out of the fiscal year. Approvals were withheld and in one case, several long-standing commercial satellite programs were in-sourced by our customer.

Against this backdrop, we made the decision to accelerate our investment in research and development with the objective of increasing the probability of early customer adaption of one or more of our new growth platforms. The wisdom of this decision is just now coming to bear.

In late 2013, we were successful in securing customer funding to complete the development of SYPHER, a field programmable gate array that will serve as the encryption core for future secure communications products.

We have two additional programs that are currently under review for potential customer funding, one which is called SiO2Metrics, which is a breakthrough technology that utilizes unique characteristics in the silicon wafer for identity authentication rather than software-based identification. The potential for this technology is quite intriguing for a couple of reasons.

To start with, it eliminates the need to authenticate and store end-user passcodes thereby making identity authentication more easily scalable. The potential applications are numerous ranging from use in electrical meters to large-scale networks, to automobile, electronics systems.

It becomes even more interesting however, when the SiO2Metrics technology is combined with our cipher encrypted processors, which is also in the chipset that is exponentially less vulnerable to cyber attack. As I mentioned a moment ago, we are currently under review by several customers to fund the integration of SiO2Metric Technology into an existing application.

We believe that it should take an estimated 18 months to complete this work. In the short term, any customer funding would serve to reduce expenses currently being incurred by Sypris. In the long term, however, if successful, the potential would appear to be significant.

We will certainly keep you apprised of our progress as we move forward. Another technology platform that benefited from continued investment in 2013 was the Sypris Cyber Range, which is now in Version 3.1. The range has been developed into a critical platform for organizations to train their personnel to expertly identify, prioritize and respond to the inevitable breach from today's increasingly complex cyber attacks.

On Slide 6, you will see that we recently reached an agreement in principle with our teaming partner to supply the Sypris Cyber Range as part of a broader package of services to a foreign nation state and that the momentum continues to build internationally. The sales discussion is now exceeding $25 million of potential business.

2013 also closed out on a positive note for EMS sales to customers with applications in severe environments, including the Northrop Grumman, ITT and Goodrich. Business activity continue to grow in this area during the year, thereby positioning this business for further potential expansion in 2014.

Turning to Slide 7, we expect the impact of sequestration and other DOD funding related issues to continue to affect our business until such time as new programs, products and cyber-related services achieve sufficient traction to offset the issues described a moment ago. As we discussed, we are making important progress with our efforts to secure additional customer funding for specific research and development opportunities.

If successful, these funds will help us to accelerate the introduction of these new promising technologies into the market place and will reduce the expense being incurred on our financial statements. We will continue to focus on EDMS sales for end-used applications that exhibit a high cost of failure and therefore require the unique pedigree, certifications and traceability standards that have long been an important part of our heritage.

And we will pursue synergistic acquisitions as a means to both supplement our existing capabilities and to accelerate replacement of revenue that has been lost or delayed to the issues we mentioned earlier.

Now let’s take a quick look at our industrial, beginning on Slide 8. Revenue decreased 3% to $276 million from the prior year reflecting a 9% reduction in heavy-duty truck production offset by increased shipments on recent program wins and growth in non-commercial vehicle markets.

Gross profit for the year increased 2% to $32 million, reflecting a 70-basis point improvement in gross margin. The increase in gross margin to 11.5% despite the slight decline in sales, provides ample testimony to the impact of the investments made in process improvement and TPS during the year, as well as a growing mix of shipments to new markets.

The strength of this segments performance during 2013 is evident in a wide range of metrics. EBITDA of $32 million was just under 12% of sales while free cash flow increased 46% from the prior year to $16 million.

Return on net assets was 40% which is impressive and important I might add for a capital intensive business. 2013 experienced the continued expansion of our shipments to customers serving the global natural gas, oil and petrochemical markets where demand for the company's branded closures, choice and other products continue to be quite positive.

Turning now to Slide 9, the segment continued to form at world-class levels in terms of custom performance with quality and delivery metrics for the year reaching all-time best. We continue to make investments during the year in production technology and product engineer, resulting in patent applications for new drive train component designs that are expected to reduce the weight of certain parts by as much as 16% when compared to current customer designs.

We hope to introduce these parts to the marketplace later this year. The potential benefits are meaningful in terms of material savings for the customer and weight savings for the end-user who would benefit from fuel savings and/or greater load capacity. We look to add these products and test in the very near term and will be looking forward to the results.

With all the operational progresses been made in recent years, it should be of no surprise that are quoting activity for new business with both existing customers and with new potential customers is quite active.

The potential aggregate contract value of these discussions currently ranges from $85 million to $110 million per year and could impact the business, if successful, as early as 2015. And finally we continue to evaluate opportunities during the year to expand our footprint and diversify our markets to joint ventures with and/or acquisitions of companies in North America and in developing markets.

Turning now on Slide 10, the outlooks for the markets served by our industrial group appear to be shaping up fairly positively for the coming year. The commercial vehicle market for Class 8 trucks remains stable with the components that produce freight still fairly solid.

Orders from fleets have been exceptionally strong recently with December through February orders aggregating in excess of 95,000 units representing the highest 90-day order period in eight years.

Should this order rate continue into March and April, schedules will adeptly be increased relatively soon. Demand for Class 4 through 7 medium-duty trucks continues to recover along with the housing markets, while the outlooks for our light truck and trailer markets as well as for off-highway and agricultural markets also appear to be in good shape for the coming year.

We are looking forward to another year of profitable probable growth from our natural gas, oil and petrochemical markets, where global demand for our highly-engineered closures, insulated joints and other specialty piping components continues to be quite strong as I mentioned a moment ago

For 2014, you can expect that we will continue to focus our efforts on three key strategic initiatives -- investing to increase productivity and efficiency, driving process improvements to use the TPS techniques to reduce cycle times and increase reliability, and selectively pursuing strategic opportunistic to expand our customer and market share, to leverage our fixed costs and organizational capabilities. In summary then, we believe that the company is well-positioned for a better year.

Turning now to Slide 11, Brian will lead you through the balance of our presentation this morning.

Brian Lutes

Great. Thanks, Jeff. Good morning everyone. I'd like to discuss with you some of the highlights of our fourth quarter and full year 2013 financial results. I’ll start at the consolidated level and then touch briefly on both of the segments.

So if you will, on Slide 12, let me begin with our Q4 results. Consolidated revenues totaled $73.9 million. This was up about $6.4 million or 10%, driven by a 15% increase year-over-year within our industrial segment. We generated $6.4 million of gross profit. This was down $2.2 million from the prior year quarter, really a result of changed product mix and much lower revenue in our A&D segment. I'll touch on the details of that momentarily.

When you look at gross margin, this came in at 8.6%. This was down from the prior year period of 12.8%, but stabilized in great part by the strength of the industrial segment, which, its margins expanded 120 basis points over the prior year period. EPS came in at breakeven or zero versus a loss of $0.05 in Q4 of 2012. And as a result of the $2.4 million non-cash tax benefit you heard, Jeff mentioned earlier, although partially offset by the A&D challenges that we talked about.

For the consolidated 2014 results on Slide 13, you'll see the consolidated revenues totaled $310.7 million. This was down about $31 million or 9% from 2012, driven mostly by our A&D segment, which experienced a year-over-year decline of about 38% and a modest 3% decline in revenues for our Industrial Group versus the prior year.

Gross profit decreased $13.7 million to $13.1 million, again driven mostly by the challenges you've heard Jeff mentioned with respect to our A&D segment. Full year gross margin came in at 9.7%. This was down 12.8%, or down from the 12.8% a year ago, despite a 7 basis points year-over-year expansion that we saw in our Industrial Group.

For the full year, the earnings per share came in at a loss of $0.51 per share, driven in large part by the $6.9 million non-cash impairment of goodwill that we took earlier in the year. It accounted for $0.36 per share and that was of course, partially offset by a $2.4 million non-tax or non-cash income tax benefit.

Moving on to our segment results, let me begin with aerospace and defense. A&Ds revenue decreased 17% to $10 million for the quarter. This was down from $12 million for the prior year period, driven largely by the order timing and customer imposed delays on one of our product lines. Their full year revenue decreased 38% to $34.6 million due to the completion of certain manufacturing, as well as engineering services programs last year and the impact of the defense related spending delays.

On the right side of the page with respect to gross margin, you'll see the A&D Q4 gross margin came in at a negative 8.8%, obviously impacted by much lower year-over-year revenue and changing product mix, particularly product sales that we spoke about in the fourth quarter last year to international customers that did not repeat. Full year 2013 gross margin was also impacted and resulted in a negative gross margin for the year of 4.6%. This was versus 23% in 2012.

Moving on to our industrial segment, Slide 15, we’ll start at the left. You will see the Industrial Group’s fourth quarter revenue came in at $63.9 million. This was up $8.4 million from the prior year quarter. Full year 2013 revenue decreased 3% from the prior year period, as a result, principally of lower demand in our first half versus the prior first half a year ago. This was about a $20 million or 12% lower difference.

On a positive note, we did see continued momentum within our global oil and gas markets as demand for the closure products did remained very strong. If you shift over to the right side of the page on the gross margin side, again gross margin for our Industrial Group expanded 120 basis points on a revenue increase of 15%.

For the full year, gross margins expanded 70 basis points, despite a 3% year-over-year decrease in revenue and this obviously is reflective of the benefit of things you've heard us talk about, continuous improvement in the completion of our first full year deploying TPS tools and methodologies in our Industrial segment.

Let me now wrap up with a brief summary if you will, and with particular emphasis on how we see 2014. You will see on slide 16, for some time now you’ve heard us discuss the U.S. defense industry dynamics, their impact on our A&D segment. From where we sit today, they are not likely to change in the near term, but we remain focused on the things that we’re in are control.

First, we do have several new customer programs that were successfully onboarded throughout 2013 and the funnel of prospects remain very, very promising. As you’ve heard Jeff mentioned, we are committed to leveraging our high assurance technology and fit to grow our position in the Cyber Security segment.

Within our Industrial segment, obviously a tale of two cities as we talked about earlier in 2013, it continues to perform so strong for us and what’s better is, there are further improvements in 2014 that are expected. The commercial vehicle demand within Class 5 through 8 is expected to be up over 9%. Trailer demand is expected to also strengthen through 2014.

We’ve continued to talk about our journey with EPS as well as many other initiatives that are underway that are expected to drive continued margin expansion through manufacturing efficiencies. And finally, demand within our -- within the oil and gas markets remain very, very strong, positioning the Industrial Group for yet another solid year.

Finally, as we’ve mentioned for quite some time, our strong balance sheet remains a real strength for us. It enables us and has continued to enable us to focus on opportunities that will diversify and grow earnings and cash flow. These are things that come from expansion of existing programs with existing customers, new programs with new customers. And finally, as Jeff has spoken to earlier in the year, we continue to view a number of synergistic acquisitions.

Finally, within our Aerospace and Defense segment, it’s allowed us to remain committed to reinvigorating the product portfolio through diversification, and clearly an objective of reducing our dependency on government funding, which will continue to pose challenges for the industry at large.

This concludes our call for today. And at this time, I would like to turn it back over to Divona so that Jeff, Tony and I can answer any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti - Needham & Company

Good morning.

Jeffrey Gill

Good morning, Jim.

Brian Lutes

Good morning.

Jim Ricchiuti - Needham & Company

Wondering how we should think about the aerospace and defense business in 2014. Just given the current spending environment with the U.S. government, should we think of it as a flat year with potentially some growth depending on the timing of some of these new customer programs?

Brian Lutes

Jim, I think, clearly, as we come out on the decline from last year, we’re working hard. We see the funnel building, particularly with the existing new customers that we brought on board. We think we have good visibility to those programs and additional upside opportunity in 2014. Clearly the things that we are funding and the win of a Cyber Range is significant momentum for us, and we believe that there is momentum that we can benefit by as we progress throughout the year. But it’s still choppy waters out there as you know.

Jim Ricchiuti - Needham & Company

Yes, okay. And so it will boil down do you think to the timing of some of the new programs, whether they…

Brian Lutes

Yes. I think that’s the way to look at it, particularly as you had heard Jeff talk about one of the -- our largest technology programs and the time spend or duration of that commencing to completion of approximate 18 months. So clearly, there is timing involved and the programs that we’re funding from a technology perspective, those that we are pursuing from an engineering funded programs, meaning programs that we’re actively hunting for that are funded through the government for key programs, certainly linked closely to cyber, the cyber space and certainly something clearly important to us is the core that we still have in our Aerospace and Defense segment, that being our electronic manufacturing services side of the business as well as continuing to drive opportunities for our secure communication handheld devices.

Jim Ricchiuti - Needham & Company

Okay, thanks. It’s helpful. I had a couple of questions on the industrial business. First off, I was wondering if it’s possible for you to size the oil and gas petrochemical revenues in 2013. It sounds like it’s become more meaningful as part of the business.

Brian Lutes

It’s becoming more meaningful, but it’s really an extension of our -- what we maybe defined as our black magic, the machining and the forging, and these are highly engineering closures. So we really look at the company. This is just another facility performing products or building products for oil and gas exploration. So we really haven’t broken it out, Jim.

Jim Ricchiuti - Needham & Company

But the business was up presumably from 2012 and you think it will be up again in 2014 this part of the business?

Brian Lutes

We do, yes, we do and really it's a source of diversification for us from what you see our traditional customers being on the commercial or the component manufacturing side.

Jim Ricchiuti - Needham & Company

And the growth rate that you cited, the industry growth rate in the commercial truck market. I think I've asked this before, how does that -- how consistent is that with what you're hearing from your customers in terms of build rates and clearly, February was a strong orders month?

Brian Lutes

Yeah. February was strong as you heard Jeff mentioned. We see the commercial truck Class 5 through 8 being forecasted somewhere up north of 9%. Our order force fluctuating at different times Jim, but a true norm force at least in the time that I've been with Sypris is, it tends to work itself out and mere fairly closely ACT, FTR data. So we feel confident about the outlook.

Part two of this, for your benefit is, as you’ve heard us talk about the efficiencies we are realizing and obviously, the year-over-year expansion in gross margins within our industrial segment grew things like Lean continues improvement, our first full year with TPS really position us well, because our maintenance and reliability of the equipment is far stronger today than it's ever been and therefore, the objective is really steel as the source and balancing that with the efficiency and overall upside conversion as we convert on higher revenue. So at least from where we sit today the prospects for 2014 for Paul and the team, and our industrial segment appear to be very, very strong.

Jim Ricchiuti - Needham & Company

Okay. And last question just again with respect to industrial, it sounds like you might be seeing some tightness in capacity and so do you plan to bring on some internal -- some capacity internally or potentially look at some acquisitions and I'm wondering how that the timing of that might look as we look at over 2014?

Brian Lutes

Our core within our industrial segment, we at this juncture and based on the visibility we have today, we don't see any constraints with capacity. Obviously, as we resize the company coming out of the economic crisis, we feel that we can manage upside conversion very successfully as demonstrated in the first and second quarters of 2012, when that business was running at about an $83 million quarterly run rate in Q1, Q2, where I think you’ve heard, Jeff mentioned, as we continue to experience upside demand for our engineered specialty closures for oil, gas exploration, we are taking steps there to make sure that we're able to meet demand.

Jim Ricchiuti - Needham & Company

Got it. Thanks for clarifying that, Brian.

Brian Lutes

Certainly.

Operator

And we'll go next to Tristan Thomas with Sidoti.

Tristan Thomas - Sidoti

Yeah. Good morning.

Jeffrey Gill

Good morning.

Brian Lutes

Good morning.

Tristan Thomas - Sidoti

First question kind of following on to Jim's question regarding industrial. Obviously since October order numbers have been fantastic? Do you think that's going to come back to us, maybe starting in second half of the year as we kind of return to more normalized order pattern?

Jeffrey Gill

Well, clearly, with 95,000 orders placed in the last three months or 380,000 units annualized outlook, its got to come back down. What we noticed yesterday is that ACT increased its outlook both for the year and for the outlook forward. So we’ll see, Tristan, its -- if it continues at this pace, production schedules are going to have to be adjusted.

Tristan Thomas - Sidoti

Okay. And then what specifically are you seeing in the housing market, I know there are kind of consensus seems to be maybe 2% to 3% growth, I don’t know, I am curious what you and some of your customer are saying?

Jeffrey Gill

Yeah. I think that's right in the area. And two other big things that affect commercial vehicle production particularly in the lighter weight trucks are both housing and believe it not automobile production because you need to transport those carts from the factory. So the outlook for automobile production is good for 2014 and housing as well, so that should bode well for commercial vehicle.

Tristan Thomas - Sidoti

Okay. Great. Now jumping back to the electronics for a second, just imagine that some of the -- one of your solid programs was in-sourced, I mean is that really the trend you are seeing with some of the new budgetary situations with the fact that the peoples have lots of money to play with and more people turning to us in their in-house development teams?

Brian Lutes

I think its in two respects, on the electronic manufacturing services side, Tristan, what we are clearly seen is that as the changes were are the turmoil was being fell within the aerospace and defense market. The primes were certainly looking in in-house knowing that overall funding was going down and you have this fixed overhead and how do you best absorb it, you keep work in-house. And therefore that's what it really define as resourcing, bringing it back in-house. So I think that's certainly one area.

The second piece, I think, of your question gets to engineering and solving some of the world’s most complex problems and I think in our aerospace and defense segment, we see opportunities based on our heritage and its linkage to secure communications and encryption and how do we play that into the opportunities before cyber attacks.

You are seeing the primes and others play in those technologies with dedicated engineering teams but we still see opportunities because of some of the strength that we carry with some of our technologies and obviously we are not going down the path alone. We certainly have core strategic partners in place for technology or marrying technologies that we need to make sure we have.

Tristan Thomas - Sidoti

Okay. Great. And then just one final housekeeping question, R&D in the quarter declined pretty, obviously significantly year-over-year. I was just wondering, I would've made the assumption that with all the work you're doing to develop some of these A&D products, so that would've been a little higher?

Brian Lutes

A great question, if you go back to our -- let me recall our Q2 call, we did talk about our decision. As we came into 2013, we did accelerate the R&D spend in our aerospace and defense segment in Q2 of 2000 -- of course of the past year and that gave us the runway to move forward with some of the things that we’ve talked about, including the most recent win with our Cyber Range. So that’s why you saw the R&D profile trend down towards the fourth quarter.

Tristan Thomas - Sidoti

Okay. What do you -- I’m sorry.

Jeffrey Gill

I was going to say, Christian…

Tristan Thomas - Sidoti

Okay.

Jeffrey Gill

You should also expect to see that run in that, somewhat lower rate due to the customer fund.

Brian Lutes

Correct. And I was going to mention…

Tristan Thomas - Sidoti

Okay.

Brian Lutes

Yeah. Go ahead.

Tristan Thomas - Sidoti

I was going to say, Jeff, was regarding 2014, right?

Jeffrey Gill

Yes.

Tristan Thomas - Sidoti

Yeah.

Operator

And we’ll take our next question from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti - Needham & Company

With some of the new programs that you discussed in the introductory remarks, how this new business -- is there anyway that you can give us a sense as to how much of that potentially could convert into revenues in 2014, and there are a few different projects and programs you’ve highlighted?

Jeffrey Gill

Jim, this is Jeff. The one that has the chance to convert to topline and interesting way, this is Sypris Cyber Range. The product is being delivered. We do have active quotations going on around the world on additional systems. So the Cyber Range is the one that would add to topline. With regards to the other programs, the other technologies that we’ve developed or developing, the potential impact there on the P&L in ‘14 is more on the cost side than the revenue side.

Jim Ricchiuti - Needham & Company

Got it. And with respect to the Cyber Range, what has to happen as you go through the first half of the year? Is this something you would see more likely if it’s going to -- contributing in the second half?

Jeffrey Gill

Well, I think, we should see some contribution in the first half. But then, if we’re successful, we would expect momentum to build as we get into the second half.

Jim Ricchiuti - Needham & Company

Okay. Thank you.

Brian Lutes

Yeah.

Operator

(Operator Instructions) And we’ll go to [Justin Putnam] (ph) with Talanta Investment Group.

Unidentified Analyst

Good morning, gentlemen.

Brian Lutes

Good morning.

Jeffrey Gill

Good morning.

Unidentified Analyst

I just want to step back for a second on your A&D business. You mentioned, you had some visibility in your pipeline there. And I was curious to know how that translates into your expectations for the business and I really have two questions about that. One, what level of revenue do you need to kind of get to profitability?

And two, is that increase in revenue going to be driven really primarily from the new product that you’re investing in and that you see in your pipeline?

Brian Lutes

In terms of the breakeven point, let me address both of those Justin. In terms of breakeven point, largely determine it on mix. We really have three spheres to these businesses as we mentioned earlier, the electronic manufacturing services, our ruggedized secure communication devices, and the funded engineering and other bucket, meaning the Cyber Range and what we really defined as the core of focused R&D. When you put all of that together, it’s largely determined upon product mix. That’s the first part of the answer.

As we look forward into 2014 and beyond, you heard Jeff mentioned and just as a follow-up to Jim Ricchiuti’s question, there is a piece of the Cyber Range that we would expect to help in the first half and clearly into the second half of 2014. But we have a number of active quotes with the intent and the belief that we’re going to be successful in selling other Cyber Ranges or Cyber Ranges to other nation states as well as to others, particularly as you see what happened at the end of the year and during the holiday season with Cyber threats. So it’s difficult to answer in the context of where we see our overall mix. But our objective is to return the business to something much greater than positive gross margins with the intent to return the business back to levels two years ago.

Unidentified Analyst

Okay. So given where you are now with level of those sales were in 2013. You believe that there is enough opportunity in your mix just to return to profit or to turn positive on your gross margin basis?

Brian Lutes

That’s what we’re working towards. That is the focus is to optimize the portfolio, the three legs of the stool if you will to return this business to profitability.

Unidentified Analyst

Okay.

Jeffrey Gill

Okay. Good. Well, I appreciate you taking time to ask the questions.

Brian Lutes

Okay. Thank you.

Operator

And it appears there are no further questions at this time.

Jeffrey Gill

Okay. Thank you, Divona. Brian, Tony, and I would like to thank you guys for joining us on the call this morning. We certainly welcome your continued interest and, of course, your questions about our business. Thank you, and have a great day.

Operator

Thank you. This does conclude today's conference. We appreciate your participation.

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