UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934. For the fiscal year ended December 31, 2001.
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934. For the transition period from ________ to ________.
Commission file number 0-24020
SYPRIS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1321992
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222
(Address of principal executive offices, including zip code)
(502) 329-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's common stock held by
non-affiliates on January 28, 2002 (based upon the average of the high and low
prices of the registrant's common stock reported for such date on the Nasdaq
National Market), was $21,783,828. As of January 28, 2002, the registrant had
9,904,375 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Stockholders to be held May 7, 2002 are
incorporated by reference into Part III to the extent described therein.
Table of Contents
Page
Part I
Item 1. Business .. .............................................................................. 1
Item 2. Properties ............................................................................... 10
Item 3. Legal Proceedings ........................................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 12
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................ 13
Item 6. Selected Financial Data .................................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ............................... 21
Item 8. Financial Statements and Supplementary Data .............................................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 44
Part III
Item 10. Directors and Executive Officers of the Registrant ....................................... 44
Item 11. Executive Compensation ................................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................... 44
Item 13. Certain Relationships and Related Transactions ........................................... 44
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................... 45
Signature Page ............................................................................................. 48
Schedule II - Valuation and Qualifying Accounts ............................................................ 49
PART I
Item 1. Business
General
Sypris Solutions is a diversified provider of outsourced services and
specialty products. We perform a wide range of manufacturing, engineering,
design, testing and other technical services, typically under multi-year,
sole-source contracts with major companies and government agencies in the
markets for aerospace & defense electronics, truck components & assemblies, and
for users of test & measurement equipment. Outsourced services accounted for
approximately 82% of our revenue during the year ended December 31, 2001 and we
expect this percentage to increase in the future.
We focus on those markets where we have the expertise, qualifications and
leadership position to sustain a competitive advantage. We dedicate our
resources to support the needs of industry leaders who embrace multi-year
contractual relationships as a strategic component of their supply chain
management. The quality of these contracts, many of which are sole-source by
part number and are for terms of up to seven years, enable us to invest in
leading-edge technologies to help our customers remain competitive. The
productivity, flexibility and economies of scale that result become an important
means for differentiating ourselves from the competition when it comes to cost,
quality, reliability and customer service.
Aerospace & Defense Electronics. We are an established supplier of
manufacturing services for the production of complex circuit cards, high-level
assemblies and subsystems. We have long-term relationships with many of the
leading aerospace & defense contractors, including Boeing Company, Honeywell
International, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation
and Raytheon Company. We manufacture these complex electronic assemblies under
multi-year contracts for the missile guidance systems of the AMRAAM, BAT,
Brimstone and HARM missile programs, and for the main color display systems for
the cockpit of the AH-64 Apache Longbow attack helicopter. We also have a
long-term relationship with the National Security Agency to design and build
secure communications equipment and write encryption software.
Truck Components & Assemblies. We are the principal supplier of
manufacturing services for the forging and machining of medium and heavy-duty
truck axles in North America. We produce these axles under multi-year,
sole-source contracts with ArvinMeritor, Inc. and Dana Corporation, the two
primary providers of drive train assemblies for use by the leading truck
manufacturers in the world, including Freightliner LLC, Mack Trucks, Inc.,
Navistar International Corporation, PACCAR, Inc., and Volvo Truck Corporation.
Test & Measurement Services. We provide technical services for the
calibration, certification and repair of test & measurement equipment in the
U.S. We have a multi-year, sole-source contract with the Federal Aviation
Administration to calibrate and certify the equipment that is used to maintain
the radar systems and directional beacons at over 400 airports in the U.S., the
Caribbean and the South Pacific. We have a multi-year, sole-source contract with
the National Weather Service to calibrate the equipment that is used to maintain
the NEXRAD Doppler radar systems at each of its 132 advanced warning weather
service radar stations in 45 states, the Caribbean and Guam. We also have a
multi-year contract with AT&T Corporation to provide calibration and
certification services at over 600 of its central and field switching locations.
We report net revenue and cost of sales in two segments, the Electronics
Group and the Industrial Group. Revenue from our Electronics Group is derived
primarily from the sale of electronics manufacturing and technical services to
customers in the aerospace & defense electronics market, as well as from
customers who require test & measurement services. Our Electronics Group also
derives a portion of its revenue from the sale of products, systems and
components. Revenue from our Industrial Group is derived primarily from the sale
of industrial manufacturing services to customers in the truck components &
assemblies market. Our Industrial Group also derives a portion of its revenue
from the sale of products to customers primarily for use in the oil & gas
market.
1
Industry Overview
We believe the trend toward outsourcing is accelerating across a wide range
of industries and markets as outsourcing specialists assume a strategic role in
the supply chain of companies of all types and sizes. According to The
Outsourcing Institute, a professional association, and Dun & Bradstreet,
expenditures on outsourcing in the U.S. increased 23% per year from less than
$150 billion in 1996 to over $340 billion in 2000. We expect the growth in
outsourcing expenditures to continue increasing at a rate far higher than the
expansion in the overall economy.
We believe the trend toward outsourcing is increasing because outsourcing
frequently represents a more efficient, lower cost means for manufacturing a
product or delivering a service when compared to more vertically integrated
alternatives. The rate of acceptance of the outsourcing model, however, varies
widely among industries and markets, and even among companies within the same
industry or market. Industry leaders in each of our core markets are
increasingly embracing the use of outsourcing specialists as a strategic means
to reduce excess capacity, lower costs, improve quality and increase balance
sheet productivity. While the facts and circumstances vary by industry, we
believe the following benefits of outsourcing are driving this trend.
Reduced Total Operating Costs and Invested Capital. Outsourcing specialists
are able to produce products and/or deliver services at a reduced total cost
relative to that of their customers because of the ability to allocate the
expense for a given set of fixed capacity, including assets, people and support
systems, across multiple customers with diversified needs. In turn, the
outsourcing specialists can achieve higher utilization of their resources and
achieve greater productivity, flexibility and economies of scale.
Access to Advanced Manufacturing Capabilities and Processes and Increased
Productivity. The ability to use a fixed set of production assets for a number
of customers enables outsourcing specialists to invest in the latest technology
as a means to further improve productivity, quality and cycle times. The
magnitude of these investments can be prohibitive absent the volume and
reliability of future orders associated with having a broad array of customers
for the use of those assets.
Focus on Core Competencies. Companies are under intense competitive
pressure to constantly rationalize their operations, invest in and strengthen
areas in which they can add the greatest value to their customers and divest or
outsource areas in which they add lesser value. By utilizing the services of
outsourcing specialists, these companies can react more quickly to changing
market conditions and allocate valuable capital and other resources to core
activities, such as research and development, sales and marketing or product
integration.
Improved Supply Chain Management. We believe that the trend in outsourcing
favors specialists who have the financial, managerial and capital resources to
assume an increasingly greater role in the management of the supply chain for
the customer. By utilizing fewer more capable suppliers, companies are able to
greatly simplify the infrastructure required to manage these suppliers, thereby
reducing their costs and improving margins.
Our Markets
Aerospace & Defense Electronics. According to Electronic Trend Publications
and New Venture Research, the total aerospace & defense electronics market in
North America is expected to grow from $33.6 billion in 2001 to $43.9 billion in
2005. In addition, these sources estimate that within the aerospace & defense
electronics market, the trend toward outsourcing will increase at a rate that is
higher than the underlying growth of the market. Accordingly, they estimate that
the outsourcing of services will grow from $1.4 billion in 2000 to $7.9 billion
in 2005, representing a compound annual growth rate of approximately 40%.
The nature of providing outsourced manufacturing services to the aerospace
& defense electronics industry differs substantially from the traditional
commercial outsourced manufacturing services industry. The cost of failure can
be extremely high, the manufacturing requirements are typically complex and
products are produced in relatively small quantities. Companies that provide
these manufacturing services are required to maintain and adhere to a number of
strict certifications, security clearances and traceability standards that are
often quite comprehensive.
The consolidation of defense contractors over the past decade has added to
the increased demand for outsourcing specialists. The consolidated companies,
some of which have developed highly leveraged balance sheets as a result of
mergers and acquisitions, have been motivated to seek new ways to raise margins,
increase profitability
2
and enhance cash flow. Accordingly, outsourcing specialists, such as Sypris,
have been successful in building new relationships with companies that
previously relied more on internal resources. We believe this trend will
continue and that our extensive experience, clearances, certifications and
qualifications in the manufacturing of aerospace & defense electronics will
serve to differentiate us from many of the more traditional outsource suppliers.
As part of President George W. Bush's plan to strengthen the national
defense, the Bush Administration passed a $343 billion fiscal 2002 defense
budget which represented a 10% increase over the fiscal 2001 defense budget
submitted by the previous administration. Additionally, the Bush Administration
is expected to propose a fiscal 2003 defense budget of approximately $391
billion, reflecting a 14.0% increase over the fiscal 2002 budget. We believe
that we are well positioned to take advantage of the additional outsourcing
activity that may come from the prime contractors that are awarded contracts
related to these increased defense appropriations and expenditures.
Truck Components & Assemblies. The truck components & assemblies market
consists of the original equipment manufacturers, or OEMs, such as
DaimlerChrysler Corporation, Ford Motor Company, Freightliner, General Motors
Corporation, Mack, Navistar, PACCAR and Volvo, and a deep and extensive supply
chain of companies of all types and sizes that are classified into different
levels or tiers. Tier I companies represent the primary suppliers to the OEMs
and include firms such as ArvinMeritor, Dana, Delphi Automotive Systems
Corporation, Eaton Corporation, TRW Inc. and Visteon Corporation, among others.
Many of the Tier I companies are confronted with excess capacity, high hourly
wage rates, rich benefit packages and aging capital equipment. Below this group
of companies reside numerous suppliers who either supply the OEMs directly or
supply the Tier I companies. In all segments of the truck components &
assemblies market, however, suppliers are under intense competitive pressure to
improve product quality and to reduce capital expenditures, production costs and
inventory levels.
In an attempt to gain a competitive advantage, many OEMs have been reducing
the number of suppliers they utilize. These manufacturers are choosing stronger
relationships with fewer suppliers who are capable of investing to support their
operations. In response to this trend, many suppliers have combined with others
to gain the critical mass required to support these needs. As a result, the
number of Tier I suppliers is being reduced, but in many cases the aggregate
production capacity of these companies has yet to be addressed. We believe as
Tier I suppliers seek to eliminate excess capacity, they will increasingly
choose outsourcing as a means to enhance their financial performance and as a
result, companies such as Sypris will be presented with new business and
acquisition opportunities.
Test & Measurement Services. The widespread adoption of the International
Organization for Standardization (ISO) and Quality Standards (QS), among others,
has been underway for many years. A critical component of basic manufacturing
discipline and these quality programs is the periodic calibration and
certification of the test & measurement equipment that is used to measure
process performance. The investment in this equipment and the skills required to
support the calibration and certification process has historically been
performed offsite by the manufacturers of the equipment, or onsite by internal
operations, even though the productive use of the assets and people is difficult
to justify since equipment is often certified on an annual, or in some cases,
biannual basis.
We believe that test & measurement services will be increasingly outsourced
to independent specialists who can use the manpower and equipment across a
diversified base of customers, reduce investment requirements and improve
profitability on a national scale.
3
Our Business Strategy
Our objective is to increase our leadership position in each of our core
markets. We intend to serve our customers and achieve this objective by
continuing to:
Concentrate on our Core Markets. We will continue to focus on those markets
where we have the expertise, qualifications and leadership position to sustain a
competitive advantage. We have been an established supplier of manufacturing and
technical services to major aerospace & defense companies and agencies of the
U.S. Government for over 35 years. We are the principal supplier of medium and
heavy-duty truck axles in North America, and we are the sole provider of
calibration, certification and repair services for equipment used by the Federal
Aviation Administration to maintain the radar systems and directional beacons at
each of the airports it serves in the U.S., the Caribbean and the South Pacific.
Dedicate our Resources to Support Strategic Partnerships. We will continue
to dedicate our resources to support the needs of industry leaders who embrace
multi-year contractual relationships as a strategic component of their supply
chain management and have the potential for long-term growth. We prefer
contracts that are sole-source by part number so we can work closely with the
customer to the mutual benefit of both parties. In recent years, we have entered
into multi-year manufacturing services agreements with Boeing, Honeywell and
Raytheon. We have also announced the award of sole-source supply agreements with
ArvinMeritor and Dana that run through 2004 and 2008, respectively. We believe
additional growth opportunities exist with these and other customers.
Invest to Increase the Competitiveness of our Partners. We will continue to
invest in advanced manufacturing and process technologies to reduce the cost of
the services we provide for our customers on an ongoing basis. During 1999, we
launched a $35 million capital investment program to expand and automate the
services we provide to our customers in the truck components & assemblies
market. The automation substantially increased our output per man hour and
enabled us to offer our customers reduced pricing that helped them to remain
competitive on a global scale. Our ability to leverage this capability across a
number of customers in the future will further improve our capacity utilization,
absorption of overhead and reduce our manufacturing costs.
Grow Through the Addition of New Value-Added Services. We will continue to
grow through the addition of new value-added capabilities that enable us to
provide a more complete solution by improving quality and reducing product cost,
inventory levels and cycle times for our customers. We have recently added new,
state-of-the-art machining capabilities to the range of services we have to
offer our customers in the truck components & assemblies market. The integration
of these new activities with our existing operations will enable us to reduce
labor and shipping costs and minimize cycle times for our customers.
ArvinMeritor has entered into contracts for these new services, which we believe
may provide us with significant additional opportunities for growth in the
future.
Target Strategic Acquisitions to Solidify our Market Leadership. We will
continue to pursue strategic acquisitions that consolidate our position of
leadership in our core markets, create or strengthen our relationships with
leading companies and expand our range of value-added services. Since 1985, we
have completed the purchase of 18 operations from companies such as Allegheny
International, Inc., Alliant Techsystems, Inc., Dana, Honeywell, Lucent
Technologies, Inc., Philips Electronics North America Corporation and Sumitomo
Corporation. We believe that there will be an increasing number of opportunities
to solidify our positions of market leadership through the purchase of operating
assets from our customers and others in our core markets in the future.
We believe that the number and duration of our strategic relationships
enable us to invest in our business with greater certainty and with less risk
than others who do not benefit from the type of longer term contractual
commitments we receive from many of our major customers. The investments we make
in support of these contracts provide us with the productivity, flexibility,
technological edge and economies of scale that we believe will help to
differentiate us from the competition in the future when it comes to cost,
quality, reliability and customer service.
4
Our Services and Products
We are a diversified provider of outsourced services and specialty
products. Our services consist of manufacturing, technical and other services
and products that are delivered as part of our customers' overall supply chain
management. The information below is representative of the types of products we
manufacture, services we provide and the customers and industries for which we
provide such products or services.
Aerospace & Defense Electronics:
Boeing.......................... Complex circuit cards for the Brimstone missile guidance systems.
Honeywell....................... Complex circuit cards for cockpit avionics systems of the Apache
attack helicopter.
Lockheed Martin................. Space electronics for the space shuttle and the international space
station.
National Security Agency........ Secure communications equipment, recording systems and encryption software.
Northrop Grumman................ Complex circuit cards for the BAT (brilliant anti-tank) missile guidance systems.
Raytheon........................ Complex circuit cards and high level assemblies for use in satellite
communications systems, the AMRAAM (advanced, medium-range, air-to-air missile)
and HARM (high-speed, anti-radiation missile) missile guidance systems, and secure
tactical communication systems.
Truck Components & Assemblies:
ArvinMeritor.................... Axle shafts for medium and heavy-duty trucks.
Dana............................ Axle shafts, pinions and ring gears for medium and heavy-duty trucks.
Test & Measurement Services:
AT&T............................ Calibration and certification services at over 600 central and field
switching stations.
Federal Aviation Administration. Calibration and certification services at over 400 airports.
National Weather Service........ Calibration and certification services for all 132 early warning weather radar stations.
Products:
Bombardier Inc. ................ Electrical current sensors for traction motors on airport shuttles, Amtrak
and the New York City subway.
Snap-on Incorporated............ Magnetic probes to test engine diagnostics at Sears and AutoZone.
Manufacturing Services
Our manufacturing services typically involve the fabrication or assembly of
a product or subassembly according to specifications provided by our customers.
We purchase raw materials or components from both independent suppliers and from
our customers in connection with performing our manufacturing services.
Our manufacturing capabilities are enhanced by advanced quality and
manufacturing techniques, lean manufacturing, just-in-time procurement and
continuous flow manufacturing, statistical process control, total quality
management, stringent and real-time engineering change control routines and
total cycle time reduction techniques.
5
Electronics Manufacturing Services. We provide our customers with a broad
variety of solutions, from low-volume prototype assembly to high-volume turnkey
manufacturing. We employ a multi-disciplined engineering team that provides
comprehensive manufacturing and design support to customers. The manufacturing
solutions we offer include design conversion and enhancement, materials
procurement, system assembly, testing and final system configuration.
Our manufacturing services contracts for the aerospace & defense
electronics market are generally sole-source by part number. Where we are the
sole-source provider by part number, we are the exclusive provider to our
customer of certain products for the duration of the manufacturing contract.
Industrial Manufacturing Services. We provide our customers with a wide
range of capabilities, including automated forging, extruding, machining,
induction hardening, heat-treating and testing services to meet the exacting
requirements of our customers. We also design and fabricate production tooling,
manufacture prototype products and provide other value-added services for our
customers.
Our manufacturing services contracts for the truck components & assemblies
markets are generally sole-source by part number. Part numbers may be specified
for inclusion in a single model or a range of models. Where we are the
sole-source provider by part number, we are the exclusive provider to our
customer of the specific parts and for any replacements for these parts that may
result from a design or model change for the duration of the manufacturing
contract.
Technical Services
Test & Measurement Services. We calibrate, repair and certify the test &
measurement equipment that is used to maintain wireless communication equipment,
control tower radar and direction beacons, NEXRAD Doppler advanced warning
weather service radar systems, digital oscilloscopes, microwave equipment and
fiber optic measuring equipment, among others. The applications cover the
maintenance of cellular communications systems, air traffic control systems,
broadband telecommunication systems and quality certification programs in
manufacturing operations.
Component Testing Services. We perform a wide-range of testing services on
a contract basis, including radio frequency, microwave and mixed signal
component testing, environmental testing, dynamics testing and failure analysis,
among others. These services are typically performed for components that will be
incorporated into final assemblies that require a high level of reliability,
such as aerospace and satellite systems.
Engineering Services. We utilize our advanced engineering service
capabilities to provide our customers with complete systems solutions that
exceed the scope of most manufacturing service companies. We believe that our
ability to provide these services, including software development, design
services, prototype development, product re-engineering, feature enhancement,
product ruggedization, cost reduction, product miniaturization, and
electro-magnetic interference and shielding, is instrumental in moving new
products to market quickly and consistently. Our engineers perform work on a
contract basis for a number of customers, including those requiring a high level
of security clearance.
Products
In addition to our outsourced services, we provide some of our customers
with specialized products for end-to-end solutions. With the growth of our
services business, our product business has increasingly become a smaller
portion of our overall net revenue. We expect this trend to continue in the
future.
Data Systems. We design and manufacture digital and analog recorders,
multiplexers, storage systems and touch screen control software to collect data
from intelligence networks, performance data from missile tests, biological data
from space flights, sonar data from submarines and flight test data from
aircraft.
Encryption Devices. We design and manufacture trunk encryption devices that
provide military and intelligence agencies with the ability to transmit voice
and data over normal transmission lines with high levels of security.
6
Magnetics. We design and manufacture current sensors, Hall-effect
generators, auto probes and gaussmeters for current measurement applications in
homes, locomotives, mass transit systems, elevators, automotive diagnostic
systems and laboratory diagnostic systems.
Specialty. We design and manufacture high-pressure closures, transition
joints and insulated joints for use in pipeline and chemical systems.
Our Customers
Our customers include large, established companies and agencies of the
federal government. We provide some customers with a combination of outsourced
services and products, while other customers may be in a single category of our
service or product offering. Our five largest customers in 2001, which accounted
for 46% of net revenue, were ArvinMeritor, Dana, Honeywell, Lockheed Martin and
Raytheon. Our five largest customers in 2000, which accounted for 39% of net
revenue, were ArvinMeritor, Honeywell, Lockheed Martin, Northrop Grumman and
Raytheon. Our five largest customers in 1999, which accounted for 29% of net
revenue, were ArvinMeritor, Honeywell, IBM, Lockheed Martin and Raytheon.
For the year ended December 31, 2001, Raytheon represented approximately
21% of our net revenue, the U.S. Government and Government Agencies, including
the National Security Agency, collectively represented approximately 16% of our
net revenue and Honeywell represented approximately 11% of our net revenue. Dana
represented approximately 6% of our net revenue in 2001, although this only
reflects our period of ownership of the Marion operation from the acquisition
date on May 31, 2001.
Sales and Business Development
Our principal sources of new business originate from the expansion of
existing relationships, referrals and direct sales through senior management,
direct sales personnel, domestic and international sales representatives,
distributors and market specialists. We supplement these selling efforts with a
variety of sales literature, advertising in numerous trade media and
participation in trade shows. We also utilize engineering specialists
extensively to facilitate the sales process by working with potential customers
to reduce the cost of the service they need. Our specialists achieve this
objective by working with the customer to improve their product's design for
ease of manufacturing, reducing the amount of set up time or material that may
be required to produce the product, or by developing software that can automate
the test and/or certification process. The award of contracts or programs can be
a lengthy process, which in some circumstances can extend well beyond 12 months.
Our objective is to increase the value of the services we provide to the
customer on an annual basis beyond the contractual terms that may be contained
in a supply agreement. To achieve this objective, we commit to the customer that
we will continuously look for ways to reduce the cost, improve the quality,
reduce the cycle time and improve the life span of the products and/or services
we supply the customer. Our ability to deliver on this commitment over time is
expected to have a significant impact on customer satisfaction, loyalty and
follow-on business.
Backlog
Our order backlog at December 31, 2001 was $162.3 million as compared to
order backlog at December 31, 2000 of $160.8 million. Backlog for the
Electronics Group and the Industrial Group at December 31, 2001 was $118.5
million and $43.8 million, respectively. Backlog for the Electronics Group and
the Industrial Group at December 31, 2000 was $143.2 million and $17.6 million,
respectively. Backlog consists of firm purchase orders with scheduled delivery
dates and quantities. Total backlog at December 31, 2001 included $131.0 million
for orders that are expected to be filled within 12 months. Our backlog has
varied from quarter to quarter and may vary significantly in the future as a
result of the timing of significant new orders and/or shipments, order
cancellations, material availability and other factors.
7
Competition
The outsourced manufacturing services markets that we serve are highly
competitive and we compete against numerous domestic companies in addition to
the internal capabilities of some of our customers. In the aerospace & defense
electronics market, we compete primarily against LaBarge, Inc., Primus
Technologies Corporation, SMTEK International, Inc., Sparton Corporation and
Teledyne Technologies Incorporated. In the truck components & assemblies market,
we compete primarily against companies such as Mid-West Forge, Inc., Spencer
Forge and Machine, Inc. and Traxle Manufacturing, Inc. In the test & measurement
services market, we compete primarily against SIMCO Electronics, Transmation,
Inc. and a variety of small, local, independent laboratories. We may face new
competitors in the future as the outsourcing industry evolves and existing or
start-up companies develop capabilities similar to ours.
We believe that the principal competitive factors in our markets include
the availability of capacity, technological capability, flexibility and
timeliness in responding to design and schedule changes, price, quality,
delivery and financial strength. Although we believe that we generally compete
favorably with respect to each of these factors, some of our competitors are
larger and have greater financial and operating resources than we do. Some of
our competitors have greater geographic breadth and range of services than we
do. We also face competition from manufacturing operations of our current and
potential customers, who continually evaluate the relative benefits of internal
manufacturing compared to outsourcing. We believe our competitive position to be
good and the barriers to entry to be high in the markets we serve.
Suppliers
We attempt to utilize standard parts, components and materials that are
available from multiple vendors. However, certain components and materials used
in our manufacturing services are currently available only from single sources,
and other components and materials are available from only a limited number of
sources. Despite the risks associated with purchasing from single sources or
from a limited number of sources, we have made the strategic decision to select
single source or limited source suppliers in order to obtain lower pricing,
receive more timely delivery and maintain quality control. In cases where
unanticipated customer demand or supply shortages occur, we attempt to arrange
for alternative sources of supply, where available, or defer planned production
to meet the anticipated availability of the critical component or material.
However, there can be no assurance that supply interruptions will not slow
production, delay shipments to our customers or increase costs in the future,
any of which could adversely affect our financial results.
Steel is a major component of our cost of sales and net revenue for the
truck components & assemblies business. We purchase the majority of our steel
for use in this business at the direction of our customers, with any periodic
changes in the price of steel being reflected in the prices we are paid for our
services, such that we neither benefit from nor are harmed by any future changes
in the price of steel. We believe that we have adequate sources for the supply
of raw materials for our manufacturing needs. Our raw materials, including
steel, are available within the geographic regions of our operating facilities
from numerous qualified sources in quantities sufficient for our needs.
Research and Development
Our research and development activities are mainly related to our product
lines that serve the aerospace & defense electronics markets. Most of the
expenditures related to our outsourced services are for process improvements and
are not reflected in research and development expense. Accordingly, our research
and development expense represents a relatively small percentage of our net
revenue. We invested $3.1 million, $3.6 million and $6.4 million in research and
development in 2001, 2000 and 1999, respectively. We also utilize our research
and development capability to develop processes and technologies for the benefit
of our customers.
8
Patents, Trademarks and Licenses
We own and are licensed under a number of patents and trademarks that we
believe are sufficient for our operations. Our business as a whole is not
materially dependent upon any one patent, trademark, license or technologically
related group of patents or licenses.
We regard our manufacturing processes and certain designs as proprietary
trade secrets and confidential information. We rely largely upon a combination
of trade secret laws, non-disclosure agreements with customers, suppliers and
consultants, and our internal security systems, confidentiality procedures and
employee confidentiality agreements to maintain the trade secrecy of our designs
and manufacturing processes.
Government Regulation
Our operations are subject to compliance with regulatory requirements of
federal, state and local authorities, including regulations concerning labor
relations, health and safety matters and protection of the environment. While
compliance with applicable regulations has not adversely affected our operations
in the past, there can be no assurance that we will continue to be in compliance
in the future or that these regulations will not change. Current costs of
compliance are not material to us.
We must comply with detailed government procurement and contracting
regulations and with U.S. Government security regulations, certain of which
carry substantial penalty provisions for nonperformance or misrepresentation in
the course of negotiations. Our failure to comply with our government
procurement, contracting or security obligations could result in penalties or
our suspension from government contracting, which would have a material adverse
effect on our results of operations.
We are required to maintain a U.S. Government security clearance at several
of our locations. This clearance could be suspended or revoked if we were found
not to be in compliance with applicable security regulations. Any such
revocation or suspension would delay our delivery of products to customers.
Although we have adopted policies directed at ensuring our compliance with
applicable regulations and there have been no suspensions or revocations at any
of our facilities, there can be no assurance that the approved status of our
facilities will continue without interruption.
We are also subject to comprehensive and changing federal, state and local
environmental requirements, including those governing discharges to the air and
water, the handling and disposal of solid and hazardous wastes and the
remediation of contamination associated with releases of hazardous substances.
We use hazardous substances in our operations and as is the case with
manufacturers in general, if a release of hazardous substances occurs on or from
our properties, we may be held liable and may be required to pay the cost of
remedying the condition. The amount of any resulting liability could be
material.
Employees
As of December 31, 2001, we had a total of approximately 1,650 employees,
1,105 engaged in manufacturing, 60 engaged in sales and marketing, 180 engaged
in engineering and 305 engaged in administration. Approximately 600 of our
employees are covered by collective bargaining agreements with various unions
that expire on various dates through 2006. We generally consider our
relationship with employees to be good. On occasion we may be subject to strikes
or labor contract interruptions, however, none has had a material impact on our
operations. In October 2001, we experienced a strike by approximately 115 of our
303 Teamsters union employees at our Tampa, Florida facility, resulting in the
subsequent replacement of the striking workers. Although we believe overall that
our relations with our labor unions are positive, there can be no assurance that
present and future issues with our unions will be resolved favorably or that we
will not experience a work stoppage, which could adversely affect our results of
operations.
9
Item 2. Properties
Our principal manufacturing services operations are engaged in electronics
manufacturing services for our aerospace & defense customers and industrial
manufacturing services for our truck components & assemblies customers.
The following chart indicates the significant facilities that we own or
lease, the location and size of each such facility and the manufacturing
certifications that each facility possesses or is in process of obtaining. The
facilities listed below (other than the corporate office) are used principally
as manufacturing facilities. Substantially all of our assets secure borrowings
under our credit facility.
- --------------------------------------------------------------------------------------------------------------------
Own or Lease Approximate
Location Market Served (Expiration) Square Feet Certifications
- --------------------------------------------------------------------------------------------------------------------
Corporate Office:
- --------------------------------------------------------------------------------------------------------------------
Louisville, Kentucky Lease (2008) 9,000
- --------------------------------------------------------------------------------------------------------------------
Manufacturing Facilities:
- --------------------------------------------------------------------------------------------------------------------
Louisville, Kentucky Truck Components & Own 467,000 ISO 9002
Assemblies QS 9000
ISO 9001*
- --------------------------------------------------------------------------------------------------------------------
Tampa, Florida Aerospace & Lease (2007) 308,000 ISO 9001
Defense Electronics AS 9000
NHB5300.4
MIL-Q-9858A
MIL-STD-2000A
MIL-STD 45662
MIL-STD 801D
- --------------------------------------------------------------------------------------------------------------------
Marion, Ohio Truck Components & Own 255,000 QS 9000*
Assemblies
- --------------------------------------------------------------------------------------------------------------------
Orlando, Florida Test & Measurement Own 62,000 ISO 9001
Services ISO 9002
ISO 17025/Guide 25
MIL-STD 750
MIL-STD 883
MIL-STD 202
MIL-STD 810
- --------------------------------------------------------------------------------------------------------------------
Littleton, Colorado Aerospace & Lease (2002) 57,000 ISO 9001
Defense Electronics
- --------------------------------------------------------------------------------------------------------------------
Monrovia, California Aerospace & Lease (2004) 35,000 ISO 9001
Defense Electronics
- --------------------------------------------------------------------------------------------------------------------
* Certification in process.
In addition, we lease space in 21 other facilities primarily utilized to
provide technical services, all of which are located in the United States. We
also own 13 ISO-certified mobile calibration units and one ISO-certified
transportable field calibration unit that are utilized to provide test &
measurement services at customer locations throughout the U.S., the Caribbean
and the South Pacific. We believe that our facilities and equipment are in good
condition and reasonably suited and adequate for our current needs.
10
Below is a listing and description of the various manufacturing
certifications or specifications that we utilize at our facilities.
Certification/Specification Description
- --------------------------- -----------
ISO 9001..................... A certification process comprised of 20 quality system requirements to ensure quality in the areas
of design, development, production, installation and servicing of products.
ISO 9002..................... A certification process similar to the ISO 9001 requirements, but it applies principally to
manufacturing services as opposed to engineering services.
AS 9000...................... A quality management system developed by the aerospace industry to measure supplier conformance with
basic common acceptable aerospace quality requirements.
QS 9000...................... A certification process developed by the nation's major automakers that focuses on continuous
improvement, defect reduction, variation reduction and elimination of waste.
ISO 17025/Guide 25........... A certification process commonly referred to as A2LA, which sets out general provisions that a
laboratory must address to carry out specific calibrations or tests and provides laboratories with
direction for the development of a fundamental quality management system.
NHB5300.4.................... A specification for space programs designated by the National Aeronautics and Space Administration.
MIL.......................... A specification that signifies specific functions or processes that are conducted in compliance with
military specifications, such as a quality program, high-reliability soldering, calibration and
metrology, and environmental testing.
Item 3. Legal Proceedings
We are involved from time to time in litigation and other legal or
environmental proceedings incidental to our business. Ongoing legal or
environmental proceedings include the following:
Legal Proceedings. Our Sypris Technologies subsidiary, formerly Tube Turns
Technologies, Inc., is a co-defendant in two lawsuits arising out of an
explosion at a coker plant owned by Exxon Mobil Corporation located in Baton
Rouge, Louisiana. In each of these lawsuits, it is alleged that a carbon steel
pipe elbow that we manufactured was improperly installed and, the failure of
which caused the explosion. One of the actions was brought by Exxon Mobil in
1994 in state district court in Louisiana and claims damages for destruction of
the plant, which Exxon Mobil estimates exceed one hundred million dollars. We
are a co-defendant in this action with the fabricator who built the pipeline
into which the elbow was incorporated and with the general contractor for the
plant. The second action is a class action suit also filed in 1994 in federal
court in Louisiana on behalf of the residents living around the plant and claims
unspecified damages. We are a co-defendant in this action with Exxon Mobil, the
contractor and the fabricator. In both actions, we maintain that the carbon
steel pipe elbow at issue was appropriately marked as carbon steel and was
improperly installed, without our knowledge, by the fabricator and general
contractor in circumstances that required the use of a chromium steel elbow.
Although we believe these defenses to be meritorious, there can be no assurance
that we will not be found liable for some or all of the alleged damages. If we
were to be found liable and the damages exceeded available insurance coverage,
the impact could materially and adversely affect our financial condition and
results of operations.
Environmental Proceedings. We are involved from time to time in
environmental proceedings relating to properties owned or operated by us. The
following is a summary of the environmental proceedings currently pending with
respect to our facilities:
. Our Marion, Ohio facility is subject to soil and groundwater
contamination involving petroleum compounds, semi-volatile and
volatile organic compounds, certain metals, PCBs and other
contaminants, some of which exceed the State of Ohio voluntary action
program standards applicable to the site. We continue to test and
assess this site to determine the extent of this contamination by the
11
prior owners of the facility. Under our purchase agreement for this
facility, Dana has agreed to indemnify us for environmental conditions
which existed on the site as of closing, provided we notify Dana of
the existence of such matters by December 31, 2002.
. A leased facility we formerly occupied in Tampa, Florida is currently
subject to remediation activities related to ground water
contamination involving methylene chloride and other volatile organic
compounds which occurred prior to our use of the facility. The
contamination extends beyond the boundaries of the facility. In
December 1986, Honeywell, a prior operator of the facility, entered
into a consent order with the Florida Department of Environmental
Regulation under which Honeywell agreed to take corrective actions to
remediate the contamination, the full scope of which have not yet been
determined. We purchased the assets of a business formerly located on
this leased site and operated that business from 1993 until December
1994. Philips Electronics, the seller, has agreed to indemnify us with
respect to environmental matters arising from groundwater
contamination at the site.
. In December 1992, we acquired certain business assets located at a
facility in Littleton, Colorado. Certain chlorinated solvents disposed
of on the site by Honeywell, a previous owner of the business, have
contaminated the ground water at and around the site. Alliant
Techsystems, from which we acquired the facility, operates a
remediation system approved by the State of Colorado and has also
entered into a consent order with the EPA providing for additional
investigation at the site. Alliant Techsystems has agreed to indemnify
us with respect to these matters.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2001.
12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our common stock is traded on the Nasdaq National Market under the
symbol "SYPR." The following table sets forth, for the periods indicated, the
high and low closing sale prices per share of our common stock as reported by
the Nasdaq National Market.
High Low
------- ------
Year ended December 31, 2000:
First Quarter ............................ $11.000 $8.875
Second Quarter ........................... $10.750 $8.625
Third Quarter ............................ $10.625 $8.625
Fourth Quarter ........................... $ 8.750 $6.188
Year ended December 31, 2001:
First Quarter ............................ $ 8.000 $4.000
Second Quarter ........................... $ 8.220 $3.750
Third Quarter ............................ $10.550 $7.500
Fourth Quarter ........................... $13.460 $9.800
As of January 28, 2002, there were 982 holders of record of our common
stock.
We have never declared or paid cash dividends on our common stock and do
not plan to pay any cash dividends in the near future. Our current policy is to
retain all earnings to finance future growth.
13
Item 6. Selected Financial Data
The following selected historical consolidated financial data should be
read in conjunction with the consolidated financial statements and the related
notes thereto in Item 8, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 and other financial information
included elsewhere in this Form 10-K.
Years ended December 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 (1) 1997 (1,2)
----------- ----------- ----------- ----------- -----------
(in thousands, except for per share data)
Income Statement Data:
Net revenue............................. $ 254,640 $ 216,571 $ 202,130 $ 211,625 $ 217,355
Gross profit............................ 43,547 40,313 44,949 47,923 32,135
Operating income........................ 13,030 5,477 14,166 12,851 1,785
Income from continuing operations....... 6,367 3,184 9,556 7,446 1,527
Discontinued operations, net of tax..... -- -- -- -- 3,817
Net income.............................. 6,367 3,184 9,556 7,446 5,344
Per share data:
Income from continuing operations:
Basic.............................. $ 0.65 $ 0.33 $ 1.00 $ 0.79 $ 0.09
Diluted............................ $ 0.63 $ 0.32 $ 0.97 $ 0.76 $ 0.09
Net income:
Basic.............................. $ 0.65 $ 0.33 $ 1.00 $ 0.79 $ 0.50
Diluted............................ $ 0.63 $ 0.32 $ 0.97 $ 0.76 $ 0.48
December 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997 (1)
----------- ----------- ----------- ----------- -----------
(in thousands)
Balance Sheet Data:
Working capital......................... $ 67,325 $ 58,602 $ 53,705 $ 32,121 $ 35,123
Total assets............................ 211,444 179,122 148,564 121,119 120,608
Total debt.............................. 87,500 65,000 54,400 28,583 31,340
Total stockholders' equity.............. 70,120 64,205 60,820 49,359 27,728
- ---------------
(1) For periods ended prior to March 30, 1998:
. The consolidated financial statements of our predecessor are included
in the presentation of selected consolidated financial data as our
predecessor was deemed to be the acquirer for accounting purposes in
our reorganization.
. The computation of net income per share has been adjusted to exclude
the minority interests reflected in the historical financial
statements of our predecessor.
. Shares used in computing per share amounts reflect our one-for-four
reverse stock split that occurred on March 30, 1998, and include the
outstanding shares of our common stock as of March 30, 1998 and the
dilution associated with common stock options issued prior to that
date.
(2) For the year ended December 31, 1997:
. Our consolidated financial statements included certain Latin American
operations which were sold on June 30, 1997. After reflecting pro
forma adjustments related to the Latin American operations, our net
revenue for 1997 was $200,424,000 and our net income was $5,014,000.
. The results of operations of our real estate segment are presented as
discontinued operations in our consolidated financial statements. The
divestiture of all operations related to our real estate segment was
completed in March 1997.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our results of operations and financial
condition should be read together with the other financial information and
consolidated financial statements included in this Form 10-K. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results anticipated in the
forward-looking statements as a result of a variety of factors, including those
discussed in our filings with the Securities and Exchange Commission.
As of January 1, 2002, we changed the name of our four major operating
subsidiaries as part of a comprehensive branding initiative. The new names of
our four subsidiaries are Sypris Data Systems, Inc., formerly Metrum-Datatape,
Inc.; Sypris Electronics, LLC, formerly Group Technologies Corporation; Sypris
Technologies, Inc., formerly Tube Turns Technologies, Inc.; and Sypris Test &
Measurement, Inc., formerly Bell Technologies, Inc.
Our significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this Form 10-K. We
believe our most critical accounting policies include revenue recognition and
cost estimation on certain contracts for which we use a percentage of
completion, units of delivery method of accounting. This accounting method is
applied by our Electronics Group for outsourced services provided under
multi-year contracts with aerospace & defense customers. Approximately 53%, 49%
and 45% of total net revenue was recognized under the percentage of completion,
units of delivery method of accounting during 2001, 2000 and 1999, respectively.
Revenue is recognized on these contracts when units are delivered to the
customer, with unit revenue derived based upon the total contract revenue and
total units to be delivered over the life of the contract. The corresponding
recognition of cost of sales for the delivered units is based upon our estimates
of costs to be incurred for the total contract. Under this approach, we compare
estimated costs to complete an entire contract to total net revenue for the term
of the contract to arrive at an estimated gross margin percentage for each
contract. Each month, the estimated gross margin percentage is applied to the
cumulative net revenue recognized on the contract to arrive at cost of sales for
the period. Management reviews these estimates monthly and the effect of any
change in the estimated gross margin percentage for a contract is reflected in
cost of sales in the period in which the change is known. Such changes to these
estimates have not been material to our quarterly results of operations during
the three year period ended December 31, 2001. If increases in projected
costs-to-complete are sufficient to create a loss contract, the entire estimated
loss is charged to operations in the period the loss first becomes known.
Additionally, our reserve for excess and obsolete inventory is primarily based
upon forecasted demand for our products and any change to the reserve arising
from forecast revisions is reflected in cost of sales in the period the revision
is made.
The complexity of the estimation process and all issues related to the
assumptions, risks and uncertainties inherent with the application of the
percentage of completion, units of delivery method of accounting affect the
amounts reported in our financial statements. A number of internal and external
factors affect our cost of sales estimates, including labor rate and efficiency
variances, revised estimates of warranty costs, estimated future material prices
and customer specification and testing requirement changes. If our business
conditions were different, or if we used different assumptions in the
application of this and other accounting policies, it is likely that materially
different amounts would be reported in our financial statements.
15
Results of Operations
The following table sets forth certain data from the Company's consolidated
income statements for the years ended December 31, 2001, 2000 and 1999,
expressed as a percentage of net revenue:
Years ended December 31,
------------------------------------
2001 2000 1999
---------- --------- ----------
Net revenue:
Electronics Group.................. 81.4% 84.1% 81.6%
Industrial Group................... 18.6 15.9 18.4
---------- --------- ----------
Total net revenue.................. 100.0 100.0 100.0
Cost of sales........................ 82.9 81.4 77.8
---------- --------- ----------
Gross profit......................... 17.1 18.6 22.2
Selling, general and administrative.. 10.3 12.4 11.5
Research and development............. 1.2 1.6 3.2
Amortization of intangible assets.... 0.5 0.7 0.5
Special charges...................... -- 1.4 --
---------- --------- ----------
Operating income..................... 5.1% 2.5% 7.0%
========== ========= ==========
Net income........................... 2.5% 1.5 4.7%
========== ========= ==========
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Revenue. Net revenue was $254.6 million in 2001, an increase of $38.0
million, or 17.6%, from $216.6 million in 2000. Backlog at December 31, 2001 was
$162.3 million, an increase of $1.5 million from $160.8 million at December 31,
2000. Backlog for our Electronics Group and Industrial Group at December 31,
2001 was $118.5 million and $43.8 million, respectively.
Net revenue for our Electronics Group in 2001 was $207.3 million, an
increase of $25.2 million, or 13.8%, from $182.1 million in 2000. The increase
in net revenue was primarily from contracts with aerospace & defense customers
for manufacturing services, which generated an increase of $28.7 million in 2001
over the prior year. Other outsourced services accounted for an increase in net
revenue of $0.5 million during 2001. Product sales accounted for a decrease in
net revenue of $4.0 million during 2001, primarily due to reduced sales
quantities for data systems products.
Net revenue for our Industrial Group in 2001 was $47.3 million, an increase
of $12.8 million, or 37.5%, from $34.5 million in 2000. During May 2001, we
acquired certain manufacturing assets and inventory from Dana for approximately
$11.5 million in cash. The assets are used to produce fully machined, heavy-duty
truck axle shafts and other drive train components for integration into
subassemblies produced for leading truck manufacturers. This business generated
outsourced services revenue of $17.7 million during 2001. Excluding the
acquisition, the Industrial Group's net revenue declined $4.9 million in 2001
from the prior year. The decrease in net revenue was primarily due to a decline
in outsourced services provided to customers in the heavy-duty truck market.
Unfavorable market conditions that arose during the second half of 2000 for
heavy-duty truck production resulted in an industry-wide market decrease of
approximately 40% by the second half of 2001 and reduced the volume of axles we
supplied to that market. We expect demand in the heavy-duty truck market to
remain weak during 2002; however, further significant declines in demand are not
anticipated. During 2002, we expect to ramp-up production for new and certain
existing customers on additional forging and machining equipment we installed
during 2001. The increased production volume from these opportunities, combined
with the full year impact of the acquisition from Dana, is expected to result in
higher revenue for our Industrial Group in 2002 as compared to 2001.
Gross Profit. Gross profit in 2001 was $43.5 million, an increase of $3.2
million, or 8.0%, from $40.3 million in 2000. Gross margin in 2001 declined to
17.1% from 18.6% in 2000.
Gross profit for our Electronics Group in 2001 was $37.4 million, an
increase of $1.1 million, or 3.1%, from $36.3 million in 2000. The increase in
manufacturing services revenue generated an increase in gross profit of $3.8
million, while gross profit from other outsourced services decreased $0.6
million. Gross margin in 2001 declined to 18.0% from 19.9% in 2000.
Manufacturing services comprised approximately 59% of our Electronics
16
Group's revenue in 2001 as compared to approximately 51% in 2000. Gross margin
from manufacturing services improved slightly over the prior year; however,
since gross margin on manufacturing services is lower than other outsourced
services, the change in revenue mix contributed to the decrease in gross margin.
Another factor in the gross margin decline was a slight decrease in gross margin
on other outsourced services, primarily due to adverse economic conditions
impacting demand and pricing for certain services provided to our customers.
Gross profit from product sales decreased $2.1 million during 2001, primarily
due to reduced demand for certain product offerings.
Gross profit for our Industrial Group in 2001 was $6.1 million, an increase
of $2.1 million or 52.5% from $4.0 million in 2000. Excluding the acquisition
from Dana, gross profit declined $0.9 million in 2001 primarily due to the
downturn of the heavy-duty truck market. The reduction in demand and
corresponding impact on shipments occurred as our organizational infrastructure
to support future growth plans was being developed. The increased cost structure
associated with the additional people and systems required to meet future
contractual requirements and the underabsorption of overhead due to the volume
decline resulted in a decline in our gross margin, excluding the impact of the
operation acquired from Dana, to 10.6% in 2001, as compared to 11.7% for the
prior year. Gross margin for our Industrial Group during 2001 including the
operation acquired from Dana was 13.0%.
Selling, General and Administrative. Selling, general and administrative
expense in 2001 was $26.1 million, or 10.3% of net revenue, as compared to $26.9
million, or 12.4% of net revenue in 2000. Although net revenue increased 17.6%
from 2000 to 2001 and the acquisition from Dana added approximately $1.0 million
to selling, general and administrative expense during 2001, our total selling,
general and administrative spending decreased by $0.8 million, or 2.8%. The
decline in selling, general and administrative expense was primarily
attributable to decreased selling expenses and commissions related to lower
product sales for our Electronics Group, decreased marketing costs and cost
reductions in both our Electronics Group and Industrial Group in response to the
general weakness in the U.S. economy.
Research and Development. Research and development expense in 2001 was $3.1
million, or 1.2% of net revenue, as compared to $3.6 million, or 1.6% of net
revenue in 2000. The decrease in research and development expense was
attributable to our Electronics Group, and was related to the quantity and
timing of new product releases for the data systems product lines and the
increased utilization of strategic alliances with suppliers for product
development.
Amortization of Intangible Assets. Amortization of intangible assets in
2001 was $1.3 million, a decrease of $0.1 million, or 7.5% compared to $1.4
million in 2000.
Special Charges. Special charges of $2.9 million were recognized during
2000 for activities related to the consolidation of certain operations within
our Electronics Group. The consolidation activities were completed in 2000 and
no such charges were recognized in 2001.
Interest Expense, Net. Interest expense in 2001 was $4.1 million, an
increase of $0.1 million, or 1.9%, from $4.0 million in 2000. Interest expense
attributable to increased borrowings during 2001 was offset by a reduction in
interest rates and the capitalization of interest incurred on our Industrial
Group's capital expenditure program. Our weighted average debt outstanding
increased to approximately $74.5 million during 2001 from approximately $58.7
million in 2000. This increase reflected the $11.5 million acquisition from Dana
made by our Industrial Group in May 2001 and capital expenditures during 2000
and 2001 to support new business opportunities. The weighted average interest
rate in 2001 was approximately 7.1% as compared to approximately 8.3% for the
prior year. Capitalized interest in 2001 was $1.8 million as compared to $0.9
million in 2000.
Income Taxes. Income tax expense was $2.9 million in 2001 as compared to an
income tax benefit of $1.4 million in 2000. The effective tax rate in 2001 was
31.4%. The effective tax rate for 2001 and the income tax benefit in 2000
reflect research and development tax credits, foreign sales corporation tax
benefits and a reduction in the Company's valuation allowance on deferred tax
assets. The reduction in the valuation allowance for 2001 and 2000 was $0.3
million and $3.0 million, respectively.
17
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Revenue. Net revenue was $216.6 million in 2000, an increase of $14.5
million, or 7.1%, from $202.1 million in 1999. Backlog at December 31, 2000 was
$160.8 million, an increase of $33.8 million from $127.0 million at December 31,
1999. Backlog for our Electronics Group and Industrial Group at December 31,
2000 was $143.2 million and $17.6 million, respectively.
Net revenue for our Electronics Group in 2000 was $182.1 million, an
increase of $17.2 million or 10.4% from $164.9 million in 1999. The increase in
net revenue was generated primarily from new contracts for manufacturing
services and the expansion of calibration services resulting from the
acquisition from Lucent. Production on several new manufacturing service
contracts, mainly with aerospace & defense customers, began to ramp-up during
2000, generating a $16.2 million increase in revenue. The acquired calibration
business added a fleet of mobile calibration labs to the Electronics Group's
service capabilities and accounted for an $8.4 million increase in revenue
during 2000. The increase in service revenue was partially offset by a $6.5
million decrease in product revenue, primarily due to reduced sales quantities
for the Electronics Group's data systems products, which began to decline in
1999 and continued to decline throughout 2000. The reduced level of demand
reflects an overall market decline and increased competition. Other outsourced
services and product sales accounted for a net $0.9 million decrease in net
revenue during 2000.
Net revenue for our Industrial Group was $34.5 million, a decrease of $2.7
million, or 7.3%, from $37.2 million in 1999. The decrease in net revenue was
primarily due to a decline in outsourced services provided to customers in the
heavy-duty truck market. Market conditions in North America for heavy-duty truck
production were negatively impacted by oil prices, interest rates and an excess
inventory of new and used trucks, resulting in an overall market decrease of
approximately 40%. This reduced the volume of forged truck axles provided under
manufacturing service agreements and accounted for a $4.0 million decrease in
net revenue, the majority of which occurred during the second half of 2000.
Revenue derived from manufacturing services in other markets increased by $0.5
million and fabricated product sales increased by $0.8 million. During 1999 and
2000, our Industrial Group invested approximately $22.6 million to expand its
forging capacity and add new machining capabilities.
Gross Profit. Gross profit in 2000 was $40.3 million, a decrease of $4.6
million, or 10.3%, from $44.9 million in 1999. Gross margin in 2000 was 18.6% of
net revenue, as compared to 22.2% of net revenue in 1999.
Gross profit for our Electronics Group in 2000 was $36.3 million, or 19.9%
of net revenue, as compared to $37.9 million, or 23.0% of net revenue in 1999.
The $1.6 million decrease in gross profit in 2000 was primarily due to volume
reductions and increased costs on data systems products and increased costs on
manufacturing service contracts. Volume declines for data systems products,
related underabsorbed overhead costs and manufacturing inefficiencies arising
from the transfer of production following the consolidation of two facilities
during the first half of 2000 contributed to a $5.0 million decline in gross
profit. This reduction was substantially offset by increased gross profit from
the growth in the manufacturing and calibration service revenue. The additional
volume generated increased gross profit of $4.4 million which was offset by
increased costs of $1.0 million associated with the following three primary
factors. First, shortages and extended lead times for the purchase of certain
electronic components resulted in manufacturing inefficiencies due to the
unpredictability of scheduling receipts of allocated components from vendors.
Second, the number of new program start-ups increased substantially during 2000
as compared to the prior year. Manufacturing inefficiencies on new programs
generally result in lower gross margins during the start-up phase and margins
typically improve as the programs mature. Third, additional costs incurred to
make the necessary investments in people, equipment and processes to support the
record level of backlog also reduced gross profit in 2000.
Gross profit for our Industrial Group in 2000 was $4.0 million, or 11.7% of
net revenue, as compared to $7.0 million, or 19.0% of net revenue in 1999. The
$3.0 million decrease in gross profit was primarily due to the downturn of the
heavy-duty truck market. The reduction in demand and corresponding impact on
shipments occurred as the organizational infrastructure to support future growth
plans was being developed. The increased cost structure associated with the
additional people and systems required to meet future contractual requirements
and the underabsorption of overhead due to the volume decline resulted in low
gross margin levels, particularly during the second half of 2000.
18
Selling, General and Administrative. Selling, general and administrative
expense in 2000 was $26.9 million, or 12.4% of net revenue, as compared to $23.4
million, or 11.5% of net revenue in 1999. The increase in selling, general and
administrative expense was attributable primarily to our Electronics Group,
which reported an increase of $2.9 million. Investments in the organizational
infrastructure as discussed above also include certain selling, general and
administrative expenses, the majority of which were within our Electronics
Group. Selling expenses incurred for marketing and bid and proposal activities
during 2000 exceeded prior year amounts and were a contributing factor to the
increased orders and net revenue in 2000.
Research and Development. Research and development expense in 2000 was $3.6
million, or 1.6% of net revenue, as compared to $6.4 million, or 3.2% of net
revenue in 1999. This decrease was attributable to our Electronics Group, and
relates to the quantity and timing of new product releases for the data systems
product lines and the utilization of strategic alliances with suppliers for
product development.
Amortization of Intangible Assets. Amortization of intangible assets in
2000 was $1.4 million, an increase of $0.4 million, or 45.6% compared to $1.0
million in 1999. This increase resulted from the amortization of goodwill
recorded in connection with the acquisition from Lucent.
Special Charges. Special charges of $2.9 million were recognized during
2000 for activities related to the consolidation of certain operations within
our Electronics Group. Operations for the data systems product lines have been
conducted at two facilities since the November 1997 acquisition that expanded
this business. Although several consolidation actions were implemented
immediately following this acquisition, management identified potential cost
savings in 2000 that could be realized through the elimination of redundant
manufacturing operations and staffing of functional areas between the two
facilities. The consolidation activities were substantially completed during the
first nine months of 2000. The special charges incurred for these activities
include workforce reductions, facilities rearrangement and relocation expenses,
and employment costs related to the transfer of production.
Interest Expense, Net. Interest expense in 2000 was $4.0 million, an
increase of $2.3 million, or 133%, from $1.7 million in 1999. The increase in
interest expense was primarily due to an increase in the weighted average debt
outstanding coupled with an increase in interest rates. Our weighted average
debt outstanding more than doubled to approximately $58.7 million in 2000 from
approximately $28.4 million in 1999. This increase resulted primarily from the
acquisition from Lucent, working capital funding related to the increase in
revenue and order backlog and capital expenditures during 1999 and 2000 to
support new business opportunities. The weighted average interest rate for 2000
was approximately 8.3% as compared to approximately 6.1% for the prior year. The
year-to-year rate change includes an increase in the margin paid on outstanding
borrowings of approximately 100 basis points under the terms of the Company's
credit agreement.
Income Taxes. An income tax benefit of approximately $1.4 million was
recognized during 2000 as compared to income tax expense of $3.1 million during
1999. The tax benefit during 2000 was primarily due to a $3.0 million reduction
in our valuation allowance on deferred tax assets. Certain issues related to our
consolidated federal taxable income were resolved during 2000, which gave rise
to the elimination of the valuation allowance for deferred tax assets related to
federal income tax temporary differences. We also recognized a tax benefit
during 2000 of approximately $0.3 million for research and development tax
credits. The provision for income taxes in 1999 included a reduction in the
valuation allowance on deferred tax assets of $1.9 million and a benefit for
research and development tax credits of $0.6 million.
Liquidity, Capital Resources and Financial Condition
Net cash provided by operating activities was $8.5 million in 2001, as
compared to $8.1 million in 2000. Accounts receivable increased by $8.5 million,
primarily due to increased revenue and the acquisition from Dana completed in
May 2001. Inventory increased by $3.5 million, excluding the fair value of
inventory acquired in the Dana transaction. Accounts payable increased $3.6
million, excluding the impact of open accounts payable at each year-end related
to capital expenditures. The increases in inventory and accounts payable are
primarily attributable to the revenue increase in our business.
Net cash used in investing activities was $32.9 million in 2001 as compared
to $14.9 million for the prior year. The increase was primarily attributable to
the $11.5 million acquisition from Dana. Capital expenditures for our
Electronics Group and Industrial Group totaled $7.9 million and $19.5 million,
respectively, in 2001. Capital
19
expenditures for our Electronics Group were principally comprised of
manufacturing, assembly and test equipment. Our Industrial Group's capital
expenditures included new forging and machining equipment to increase and expand
the range of production capabilities. Our Industrial Group invested $19.5
million, $15.5 million and $7.1 million during 2001, 2000 and 1999,
respectively, in facilities, equipment and systems to support our growth in the
truck components & assemblies market. We substantially completed the investments
for this growth during 2001, which provides us with the capacity to serve the
requirements of our existing multi-year contracts with ArvinMeritor and Dana and
allows us the opportunity to undertake similarly large contracts from new
customers. We completed sale and leaseback transactions with members of our bank
group during each of the last two years for certain machinery and equipment.
Proceeds from the sale of these assets in 2001 and 2000 were $5.4 million and
$9.3 million, respectively. We entered into operating leases for the related
assets for periods ranging from five to nine years. We also received $1.4
million in 2001 for the sale of certain assets by the Electronics Group.
Net cash provided by financing activities was $23.0 million during 2001 as
compared to $11.1 million during the prior year. Our outstanding debt increased
$22.5 million during 2001, primarily to fund the acquisition from Dana and
capital expenditures.
We had total availability for borrowings and letters of credit under the
revolving credit facility of $12.5 million at December 31, 2001, which, when
combined with the cash balance of $13.2 million, provides for total cash and
borrowing capacity of $25.7 million. Maximum borrowings on the revolving credit
facility are $100.0 million, subject to a $15.0 million limit for letters of
credit. Borrowings under the revolving credit facility may be used to finance
working capital requirements, acquisitions and for general corporate purposes,
including capital expenditures. Most acquisitions require the approval of our
bank group.
Our principal commitments at December 31, 2001 consisted of repayments of
borrowings under the credit agreement and obligations under operating leases for
certain of our real property and equipment. We also had purchase commitments
totaling approximately $5.0 million at December 31, 2001, primarily for
manufacturing equipment. During 2001 and 2000, we financed approximately $26.3
million of machinery and equipment through operating leases with our bank group.
Our minimum commitments on operating leases with initial or remaining terms
greater than one year, including all real and personal property leases, total
$7.0 million for 2002, $22.0 million for 2003 through 2006, and $9.2 million for
2007 and thereafter.
We believe that sufficient resources will be available to satisfy our cash
requirements for at least the next twelve months. Cash requirements for periods
beyond the next twelve months depend on our profitability, ability to manage
working capital requirements and rate of growth. If we make significant
acquisitions or if working capital and capital expenditure requirements exceed
expected levels during the next twelve months or in subsequent periods, we may
require additional external sources of capital. There can be no assurance that
any additional required financing will be available through bank borrowings,
debt or equity financings or otherwise, or that if such financing is available,
it will be available on terms acceptable to us. If adequate funds are not
available on acceptable terms, our business, results of operations and financial
condition could be adversely affected.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually for impairment. Separable intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, we will apply the new accounting rules beginning
January 1, 2002. We will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002. We
currently do not expect any significant loss as a result of the impairment
tests. We will be required to test the value of our goodwill at least annually.
These tests will involve estimates related to the fair market value of the
business with which the goodwill is associated. We anticipate that substantially
all amortization of intangible assets as a charge to earnings will be eliminated
beginning January 1, 2002.
20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
On July 26, 2001, we entered into interest rate swap agreements with a
syndicate of banks that effectively convert a portion of our variable rate debt
to a fixed rate basis through July 2003. We entered into interest rate swap
agreements as a means to reduce the impact of interest rate changes on future
interest expense. Approximately 34% ($30.0 million) of our outstanding debt was
covered under the interest rate swap agreements at December 31, 2001. We are
exposed to financial market risks, including changes in interest rates and
foreign currency exchange rates. Excluding the borrowings included in the
interest rate swap agreements, all other borrowings under our credit agreement
bear interest at a variable rate based on the prime rate, the London Interbank
Offered Rate, or certain alternative short-term rates, plus a margin (2.0% at
December 31, 2001) based upon our leverage ratio. An increase in interest rates
of 100 basis points would result in additional interest expense of approximately
$0.6 million on an annualized basis, based upon our debt outstanding at December
31, 2001. The vast majority of our transactions are denominated in U.S. dollars;
as such, fluctuations in foreign currency exchange rates have historically had
little impact on us. Inflation has not been a significant factor in our
operations in any of the periods presented, and it is not expected to affect
operations in the future.
21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SYPRIS SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ............................................. 23
Consolidated Income Statements ............................................. 24
Consolidated Balance Sheets ................................................ 25
Consolidated Statements of Cash Flows ...................................... 26
Consolidated Statements of Stockholders' Equity ............................ 27
Notes to Consolidated Financial Statements ................................. 28
22
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Sypris Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Sypris
Solutions, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sypris Solutions, Inc. at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Louisville, Kentucky
January 28, 2002
23
SYPRIS SOLUTIONS, INC.
CONSOLIDATED INCOME STATEMENTS
(in thousands, except for per share data)
Years ended December 31,
------------------------------------------
2001 2000 1999
----------- ----------- -----------
Net revenue:
Outsourced services ............................................. $ 209,874 $ 168,216 $ 150,139
Products ........................................................ 44,766 48,355 51,991
----------- ----------- -----------
Total net revenue ............................................. 254,640 216,571 202,130
Cost of sales:
Outsourced services ............................................. 181,818 145,059 127,153
Products ........................................................ 29,275 31,199 30,028
----------- ----------- -----------
Total cost of sales ........................................... 211,093 176,258 157,181
----------- ----------- -----------
Gross profit .................................................. 43,547 40,313 44,949
Selling, general and administrative ................................ 26,134 26,881 23,388
Research and development ........................................... 3,054 3,574 6,409
Amortization of intangible assets .................................. 1,329 1,436 986
Special charges .................................................... -- 2,945 --
----------- ----------- -----------
Operating income .............................................. 13,030 5,477 14,166
Interest expense, net .............................................. 4,111 4,035 1,730
Other income, net .................................................. (358) (344) (219)
----------- ----------- -----------
Income before income taxes .................................... 9,277 1,786 12,655
Income tax expense (benefit) ....................................... 2,910 (1,398) 3,099
----------- ----------- -----------
Net income .................................................... $ 6,367 $ 3,184 $ 9,556
=========== =========== ===========
Net income per common share:
Basic ......................................................... $ 0.65 $ 0.33 $ 1.00
Diluted ....................................................... $ 0.63 $ 0.32 $ 0.97
Shares used in computing per common share amounts:
Basic ......................................................... 9,828 9,671 9,515
Diluted ....................................................... 10,028 9,964 9,861
The accompanying notes are an integral part
of the consolidated financial statements.
24
SYPRIS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
December 31,
---------------------------
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 13,232 $ 14,674
Accounts receivable, net ...................................................... 39,758 31,896
Inventory, net ................................................................ 60,574 51,055
Other current assets .......................................................... 7,991 7,695
----------- -----------
Total current assets ........................................................ 121,555 105,320
Property, plant and equipment, net ............................................... 70,452 54,317
Intangible assets, net ........................................................... 15,926 17,154
Other assets ..................................................................... 3,511 2,331
----------- -----------
$ 211,444 $ 179,122
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 26,828 $ 25,670
Accrued liabilities ........................................................... 19,902 18,548
Current portion of long-term debt ............................................. 7,500 2,500
----------- -----------
Total current liabilities ................................................... 54,230 46,718
Long-term debt ................................................................... 80,000 62,500
Other liabilities ................................................................ 7,094 5,699
----------- -----------
Total liabilities ........................................................... 141,324 114,917
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares
authorized; no shares issued ................................................ -- --
Common stock, non-voting, par value $.01 per share, 10,000,000
shares authorized; no shares issued ......................................... -- --
Common stock, par value $.01 per share, 20,000,000 shares authorized;
9,898,675 and 9,709,669 shares issued and outstanding in 2001
and 2000, respectively ...................................................... 99 97
Additional paid-in capital .................................................... 25,490 24,401
Retained earnings ............................................................. 46,427 40,060
Accumulated other comprehensive income (loss) ................................. (1,896) (353)
----------- -----------
Total stockholders' equity .................................................. 70,120 64,205
----------- -----------
$ 211,444 $ 179,122
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
25
SYPRIS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
----------------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income ...................................................... $ 6,367 $ 3,184 $ 9,556
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................. 9,856 9,351 7,582
Deferred income taxes ......................................... 479 (2,478) (645)
Provision for excess and obsolete inventory ................... 432 453 446
Provision for doubtful accounts ............................... 122 18 (129)
Other noncash charges ......................................... 59 202 133
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable ........................................... (8,474) (8,121) 2,619
Inventory ..................................................... (3,519) (2,046) (11,277)
Other current assets .......................................... (416) (344) (1,704)
Accounts payable .............................................. 3,648 9,274 (1,997)
Accrued and other liabilities ................................. (83) (1,361) (6,652)
--------- --------- ---------
Net cash provided by (used in) operating activities ......... 8,471 8,132 (2,068)
Cash flows from investing activities:
Capital expenditures ............................................ (27,623) (23,886) (14,443)
Proceeds from sale of assets .................................... 6,816 9,292 14
Purchase of the net assets of acquired entities ................. (11,486) -- (11,642)
Changes in nonoperating assets and liabilities .................. (650) (351) (343)
--------- --------- ---------
Net cash used in investing activities ....................... (32,943) (14,945) (26,414)
Cash flows from financing activities:
Net increase in debt under revolving credit agreements .......... 22,500 10,600 28,280
Payments on long-term debt ...................................... -- -- (2,463)
Proceeds from issuance of common stock .......................... 530 481 684
--------- --------- ---------
Net cash provided by financing activities ................... 23,030 11,081 26,501
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ............... (1,442) 4,268 (1,981)
Cash and cash equivalents at beginning of year ..................... 14,674 10,406 12,387
--------- --------- ---------
Cash and cash equivalents at end of year ........................... $ 13,232 $ 14,674 $ 10,406
========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
26
SYPRIS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except for share data)
Accumulated
Other
Common Stock Additional Comprehensive Total
-------------------- Paid-In Retained Income Stockholders'
Shares Amount Capital Earnings (Loss) Equity
--------- ------ ---------- -------- ------------- -------------
Balance at January 1, 1999 ............... 9,450,593 $ 95 $ 23,238 $ 27,320 $ (1,294) $ 49,359
Net income ............................... -- -- -- 9,556 -- 9,556
Adjustment in minimum pension liability .. -- -- -- -- 1,221 1,221
--------- ------ ---------- -------- ------------- -------------
Comprehensive income ..................... -- -- -- 9,556 1,221 10,777
Issuance of shares under Employee
Stock Purchase Plan .................... 15,600 -- 99 -- -- 99
Exercise of stock options ................ 123,021 1 584 -- -- 585
--------- ------ ---------- -------- ------------- -------------
Balance at December 31, 1999 ............. 9,589,214 96 23,921 36,876 (73) 60,820
Net income ............................... -- -- -- 3,184 -- 3,184
Adjustment in minimum pension liability .. -- -- -- -- (280) (280)
--------- ------ ---------- -------- ------------- -------------
Comprehensive income (loss) .............. -- -- -- 3,184 (280) 2,904
Issuance of shares under Employee
Stock Purchase Plan .................... 35,290 -- 273 -- -- 273
Exercise of stock options ................ 85,165 1 207 -- -- 208
--------- ------ ---------- -------- ------------- -------------
Balance at December 31, 2000 ............. 9,709,669 97 24,401 40,060 (353) 64,205
Net income ............................... -- -- -- 6,367 -- 6,367
Adjustment in minimum pension
liability, net of tax of $828 .......... -- -- -- -- (1,124) (1,124)
Change in fair value of interest rate
swap agreements, net of tax of $309 .... -- -- -- -- (419) (419)
--------- ------ ---------- -------- ------------- -------------
Comprehensive income (loss) .............. -- -- -- 6,367 (1,543) 4,824
Issuance of shares under Employee
Stock Purchase Plan .................... 52,206 1 256 -- -- 257
Exercise of stock options ................ 136,800 1 833 -- -- 834
--------- ------ ---------- -------- ------------- -------------
Balance at December 31, 2001 ............. 9,898,675 $ 99 $ 25,490 $ 46,427 $ (1,896) $ 70,120
========= ====== ========== ======== ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
27
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(1) Organization and Significant Accounting Policies
Consolidation Policy
The accompanying consolidated financial statements include the
accounts of Sypris Solutions, Inc. and its wholly-owned subsidiaries
(collectively, "Sypris" or the "Company"). All significant intercompany accounts
and transactions have been eliminated.
Nature of Business
Sypris is a diversified provider of outsourced services and specialty
products. The Company performs a wide range of manufacturing, engineering,
design, testing and other technical services, typically under multi-year,
sole-source contracts with major companies and government agencies in the
markets for aerospace & defense electronics, truck components & assemblies, and
for users of test & measurement equipment.
As of January 1, 2002, the Company changed the name of its four major
operating subsidiaries as part of a comprehensive branding initiative. The new
names of the four subsidiaries are Sypris Data Systems, Inc., formerly
Metrum-Datatape, Inc.; Sypris Electronics, LLC, formerly Group Technologies
Corporation; Sypris Technologies, Inc., formerly Tube Turns Technologies, Inc.;
and Sypris Test & Measurement, Inc., formerly Bell Technologies, Inc.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Inventory
Contract inventory is stated at actual production costs, reduced by
the cost of units for which revenue has been recognized. Gross contract
inventory is considered work in process. Progress payments under long-term
contracts are specified in the contracts as a percentage of cost and are
liquidated as contract items are completed and shipped. Other inventory is
stated at the lower of cost or market. The first-in, first-out method was used
for determining the cost of inventory excluding contract inventory and certain
other inventory, which was determined using the last-in, first-out method (see
Note 5). The Company's reserve for excess and obsolete inventory is primarily
based upon forecasted demand for its product sales, and any change to the
reserve arising from forecast revisions is reflected in cost of sales in the
period the revision is made.
Property, Plant and Equipment
Property, plant and equipment is stated on the basis of cost.
Depreciation of property, plant and equipment is generally computed using the
straight-line method over their estimated economic lives. For land improvements,
buildings and building improvements, the estimated economic life is generally 40
years. Estimated economic lives range from three to fifteen years for machinery,
equipment, furniture and fixtures. Leasehold improvements are amortized over the
respective lease term using the straight-line method. Expenditures for
maintenance, repairs and renewals of minor items are expensed as incurred. Major
renewals and improvements are capitalized.
28
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Interest cost is capitalized for qualifying assets during the period
in which the asset is being installed and prepared for its intended use.
Capitalized interest cost is amortized on the same basis as the related
depreciation. Capitalized interest for the years ended December 31, 2001 and
2000 was $1,763,000 and $910,000, respectively.
Intangible Assets
Costs in excess of net assets of businesses acquired ("goodwill"),
patents, product drawings and similar intangible assets are amortized over their
estimated economic lives. Goodwill is being amortized over a period of fifteen
years (see Notes 2 and 7). Other intangible assets are being amortized over
periods ranging from five to fifteen years, using the straight-line method.
Impairment of Long-lived Assets
The Company evaluates long-lived assets, including goodwill, for
impairment and assesses their recoverability based upon anticipated future cash
flows. If facts and circumstances lead the Company's management to believe that
the cost of one of its assets may be impaired, the Company will evaluate the
extent to which that cost is recoverable by comparing the future undiscounted
cash flows estimated to be associated with that asset to the asset's carrying
amount and write down that carrying amount to market value, or discounted cash
flow value, to the extent necessary.
Revenue Recognition
A portion of the Company's business is conducted under long-term,
fixed-price contracts with aerospace and defense companies and agencies of the
U.S. Government. Contract revenue is included in the consolidated income
statements as units are completed and shipped using the units of delivery,
percentage of completion method of accounting. The costs attributed to contract
revenue are based upon the estimated average costs of all units to be shipped.
The cumulative average costs of units shipped to date are adjusted through
current operations as estimates of future costs to complete change (see
"Contract Accounting" below).
Revenue recognized under the percentage of completion method of
accounting totaled $134,478,000, $105,535,000 and $90,819,000 for the years
ended December 31, 2001, 2000 and 1999, respectively. Substantially all such
amounts were accounted for under the units of delivery method. All other revenue
is recognized as product is shipped and title passes, or when services are
rendered.
Contract Accounting
For long-term contracts, the Company capitalizes in inventory direct
material, direct labor and factory overhead as incurred. The Company also
capitalizes certain general and administrative costs for estimating and bidding
on contracts awarded (of which approximately $210,000 remained in inventory at
December 31, 2001 and 2000). Selling costs are expensed as incurred. Costs to
complete long-term contracts are estimated on a monthly basis. Estimated margins
at completion are applied to cumulative contract revenue to arrive at costs
charged to operations.
Accounting for long-term contracts under the percentage of completion
method involves substantial estimation processes, including determining the
estimated cost to complete a contract. As contracts may require performance over
several accounting periods, formal detailed cost-to-complete estimates are
performed and updated monthly via performance reports. Management's estimates of
costs-to-complete change due to internal and external factors, such as labor
rate and efficiency variances, revised estimates of warranty costs, estimated
future material prices and customer specification and testing requirement
changes. Changes in estimated costs are reflected in gross profit in the period
in which they are known. If increases in projected costs-to-complete are
sufficient to create a loss contract, the entire estimated loss is charged to
operations in the period the loss first becomes known.
29
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Product Warranty Costs
The provision for estimated warranty costs is recorded at the time of
sale and periodically adjusted to reflect actual experience. The accrued
liability for warranty costs is included in the caption "Accrued liabilities" in
the accompanying consolidated balance sheets.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist of accounts receivable. The Company's
customer base consists of various departments or agencies of the U.S.
Government, aerospace and defense companies under contract with the U.S.
Government and a number of customers in diverse industries across geographic
areas. The Company performs periodic credit evaluations of its customers'
financial condition and does not require collateral on its commercial accounts
receivable. Credit losses are provided for in the financial statements and
consistently have been within management's expectations. Approximately 41% of
accounts receivable outstanding at December 31, 2001 are due from three of the
Company's largest customers.
The Company recognized revenue from contracts with the U.S. Government
and its agencies of approximately $40,046,000, $45,467,000 and $53,244,000
during the years ended December 31, 2001, 2000 and 1999, respectively. The
Company's largest customers for the year ended December 31, 2001 were Raytheon
Company and Honeywell International, Inc., which represented approximately 21%
and 11%, respectively, of the Company's total net revenue. For the year ended
December 31, 2000, the Company's largest customer was Raytheon Company, which
represented approximately 15% of the Company's total net revenue. No other
single customer accounted for more than 10% of the Company's total net revenue
for the years ended December 31, 2001, 2000 or 1999.
Stock Based Compensation
Stock options are granted under various stock compensation programs to
employees and independent directors (see Note 13). The Company accounts for
stock option grants in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25").
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and issued its amendments,
Statements No. 137 and 138, in June 1999 and June 2000, respectively. SFAS No.
133 requires the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value must be recognized currently in earnings.
Adoption of Recently Issued Accounting Standard
In June 2001, the Financial Accounting Standards Board issued SFAS
No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets." Under the new rules, goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. The amortization provisions of SFAS No.
142 apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company will apply the new accounting rules beginning January 1, 2002. The
Company will perform the first of the required impairment tests of goodwill and
indefinite lived
30
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
intangible assets as of January 1, 2002. The Company currently does not expect
any significant loss as a result of the impairment tests. The Company will be
required to test the value of its goodwill at least annually. These tests will
involve estimates related to the fair market value of the business with which
the goodwill is associated. The Company anticipates that substantially all
amortization of intangible assets as a charge to earnings will be eliminated
beginning January 1, 2002.
(2) Acquisitions and Mergers
On May 31, 2001, the Company acquired certain assets and liabilities
of the Marion Forge plant from Dana Corporation. The business produces fully
machined, heavy-duty truck axle shafts and other drive components for
integration into subassemblies and is included with Sypris Technologies in the
Industrial Group. The transaction was accounted for as a purchase, in which the
purchase price of $11,500,000 was allocated based on the fair values of the
assets and liabilities acquired. The results of operations of the acquired
business have been included in the consolidated financial statements since the
acquisition date. The acquisition was financed by the Company's Credit
Agreement.
During 1999, the Company completed two transactions in which it
acquired the assets of the related businesses. The transactions were accounted
for as purchases, in which the combined purchase price of $11,642,000 was
allocated based on the fair values of assets acquired, with the excess amount
allocated to goodwill, which totaled $6,607,000. The results of operations of
the acquired businesses have been included in the consolidated financial
statements since the respective acquisition dates. The acquisitions were
financed by the Company's Credit Agreement.
(3) Special Charges
Special charges of $2,945,000 were recognized during the year ended
December 31, 2000 for activities related to the consolidation of certain
operations within the Electronics Group. The special charges incurred and paid
during 2000 include workforce reductions, related severance and other benefit
costs of $1,211,000, facilities rearrangement and relocation costs of $480,000,
and employment costs related to the transfer of production of $1,254,000. The
workforce reductions resulted in the termination of 48 employees involved in
manufacturing, engineering, sales and administrative activities during 2000.
(4) Accounts Receivable
Accounts receivable consists of the following:
December 31,
-------------------
2001 2000
------- -------
(in thousands)
Commercial............................. $34,658 $26,262
U.S. Government........................ 5,875 6,313
------- -------
40,533 32,575
Allowance for doubtful accounts........ (775) (679)
------- -------
$39,758 $31,896
======= =======
Accounts receivable from the U.S. Government includes amounts due
under long-term contracts, all of which are billed at December 31, 2001 and
2000, of $2,939,000 and $4,864,000, respectively.
31
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(5) Inventory
Inventory consists of the following:
December 31,
-----------------------
2001 2000
------- -------
(in thousands)
Raw materials......................................................... $19,003 $13,567
Work in process....................................................... 9,661 8,388
Finished goods........................................................ 5,450 1,632
Costs relating to long-term contracts and programs, net of amounts
attributed to revenue recognized to date............................. 37,908 45,542
Progress payments related to long-term contracts and programs......... (6,540) (14,011)
LIFO reserve.......................................................... (987) (1,059)
Reserve for excess and obsolete inventory............................. (3,921) (3,004)
------- ------
$60,574 $51,055
======= =======
The preceding amounts include inventory valued under the last-in,
first-out ("LIFO") method totaling $9,141,000 and $5,365,000 at December 31,
2001 and 2000, respectively. In the aggregate, these costs are less than market
value.
(6) Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
-----------------------
2001 2000
------- -------
(in thousands)
Land and land improvements........................................... $ 1,436 $ 1,032
Buildings and building improvements.................................. 17,837 14,979
Machinery, equipment, furniture and fixtures......................... 96,674 77,901
Construction in progress............................................. 19,858 18,561
------- --------
135,805 112,473
Accumulated depreciation............................................. (65,353) (58,156)
------- --------
$70,452 $ 54,317
======= ========
Depreciation expense totaled $8,468,000, $7,906,000 and $6,526,000 for
the years ended December 31, 2001, 2000 and 1999, respectively. At December 31,
2001, $2,782,000 and $612,000 was included in accounts payable and accrued
liabilities, respectively, for capital expenditures. At December 31, 2000,
$5,372,000 and $2,093,000 was included in accounts payable and accrued
liabilities, respectively, for capital expenditures.
32
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(7) Intangible Assets
Intangible assets consists of the following:
December 31,
--------------------------
2001 2000
---------- -----------
(in thousands)
Costs in excess of net assets of businesses acquired .............. $ 18,423 $ 18,423
Other ............................................................. 3,212 3,102
---------- -----------
21,635 21,525
Accumulated amortization .......................................... (5,709) (4,371)
---------- -----------
$ 15,926 $ 17,154
========== ===========
Amortization expense totaled $1,388,000, $1,445,000
and $1,056,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
(8) Accrued Liabilities
Accrued liabilities consists of the following:
December 31,
--------------------------
2001 2000
---------- -----------
(in thousands)
Employee benefit plan accruals ..................................... $ 6,308 $ 4,770
Salaries, wages and incentives ..................................... 3,925 2,921
Other .............................................................. 9,669 10,857
---------- -----------
$ 19,902 $ 18,548
========== ===========
Included in other accrued liabilities are employee payroll deductions,
advance payments, accrued operating expenses, accrued warranty expenses, accrued
interest and other items, none of which exceed 5% of total current liabilities.
(9) Long-Term Debt
The Company has a credit agreement with a syndicate of banks (the
"Credit Agreement") that was entered into in October 1999 and amended as of
November 2000 and February 2001. The Credit Agreement provides for a revolving
credit facility with an aggregate commitment of $100,000,000 through January
2005. Under the terms of the Credit Agreement, interest rates are determined at
the time of borrowing and are based on the London Interbank Offered Rate plus a
margin of 1.0% to 3.25%; or the greater of the prime rate or the federal funds
rate plus 0.5%, plus a margin up to 0.75%. The Company also pays a fee of 0.2%
to 0.5% on the unused portion of the aggregate commitment. The margins applied
to the respective interest rates and the commitment fee are adjusted quarterly
and are based on the Company's ratio of funded debt to earnings before interest,
taxes, depreciation and amortization. The weighted average interest rate for
outstanding borrowings at December 31, 2001 was 5.2%. The weighted average
interest rates for borrowings during the years ended December 31, 2001 and 2000
were 7.4% and 8.5%, respectively. Current maturities of long-term debt at
December 31, 2001 and 2000 represent amounts due under a short-term borrowing
arrangement included in the Credit Agreement. Standby letters of credit up to a
maximum of $15,000,000 may be issued under the Credit Agreement and no amounts
were outstanding at December 31, 2001 and 2000.
The Credit Agreement contains customary affirmative and negative
covenants, including financial covenants requiring the maintenance of specified
fixed charge and leverage ratios and minimum levels of net worth. The Credit
Agreement is secured by substantially all assets of the Company, including but
not limited to accounts
33
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
receivable, inventory, equipment and real estate, and is also guaranteed by the
subsidiaries of the Company. The asset collateralization requirement may be
eliminated after June 2002 in the event the Company achieves certain financial
ratios and remains in compliance with all covenants.
On July 26, 2001, the Company entered into interest rate swap
agreements with three banks that effectively convert a portion of its floating
rate debt to a fixed rate basis for a period of two years, thus reducing the
impact of interest rate changes on future interest expense. The swap agreements
have a combined notional amount of $30,000,000 whereby the Company pays a fixed
rate of interest of 4.52% and receives a variable 30-day LIBOR rate. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense in the consolidated income
statement. The aggregate fair market value of all interest rate swap agreements
was approximately $728,000 at December 31, 2001 and was included in other
liabilities on the consolidated balance sheet with an offset to other
comprehensive income.
Interest incurred during the years ended December 31, 2001, 2000 and
1999 totaled $5,784,000, $5,116,000 and $1,725,000, respectively. Interest paid
during the years ended December 31, 2001, 2000 and 1999 totaled $5,623,000,
$5,063,000 and $1,629,000, respectively.
(10) Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities
are reflected in the consolidated financial statements at their carrying amount
which approximates fair value because of the short-term maturity of those
instruments. The carrying amount of debt outstanding at December 31, 2001 and
2000 under the Credit Agreement approximates fair value because borrowings are
for terms less than six months and have rates that reflect currently available
terms and conditions for similar debt. The Company uses interest rate swap
agreements (see Note 9) to minimize its exposure to fluctuations in interest
rates for a portion of the debt. The fair value of the swap agreements is
recognized in the consolidated financial statements.
(11) Employee Benefit Plans
The Company sponsors noncontributory defined benefit pension plans
(the "Pension Plans") covering certain employees of Sypris Technologies,
including certain employees of the operation acquired from Dana in May 2001. The
Pension Plans covering salaried and management employees provide pension
benefits that are based on the employees' highest five-year average compensation
within ten years before retirement. The Pension Plans covering hourly employees
and union members generally provide benefits at stated amounts for each year of
service. The Company's funding policy is to make the minimum annual
contributions required by the applicable regulations. The Pension Plans' assets
are primarily invested in equity securities and fixed income securities. The
Company recorded increases of $1,952,000 and $280,000 in 2001 and 2000,
respectively to its minimum pension liability, and a decrease of $1,221,000 in
1999.
The following table details the components of pension expense:
Years ended December 31,
------------------------------------------
2001 2000 1999
----------- ---------- -----------
(in thousands)
Service cost ....................................... $ 358 $ 180 $ 181
Interest cost on projected benefit obligation ...... 1,939 1,409 1,283
Net amortizations and deferrals .................... 247 222 165
Expected return on plan assets ..................... (1,961) (1,338) (1,091)
----------- ---------- -----------
$ 583 $ 473 $ 538
=========== ========== ===========
34
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following are summaries of the changes in the benefit obligations
and plan assets and of the funded status of the Pension Plans:
December 31,
--------------------------
2001 2000
---------- -----------
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ........................ $ 19,096 $ 17,859
Benefit obligation assumed in acquisition ...................... 11,547 --
Service cost ................................................... 358 180
Interest cost .................................................. 1,939 1,409
Plan amendments ................................................ -- 798
Actuarial loss ................................................. 463 131
Benefits paid .................................................. (1,420) (1,281)
---------- ----------
Benefit obligation at end of year .............................. $ 31,983 $ 19,096
========== ==========
Change in plan assets:
Fair value of plan assets at beginning of year ................. $ 15,156 $ 14,329
Fair value of plan assets acquired in acquisition .............. 10,547 --
Actual return on plan assets ................................... (158) 927
Company contributions .......................................... 754 1,181
Benefits paid .................................................. (1,420) (1,281)
---------- ----------
Fair value of plan assets at end of year ....................... $ 24,789 $ 15,156
========== ==========
Funded status of the plans:
Benefit obligation at end of year .............................. $ 31,983 $ 19,096
Fair value of plan assets at end of year ....................... 24,789 15,156
---------- -----------
Funded status of plan (underfunded) ............................ (7,194) (3,940)
Unrecognized actuarial loss (gain) ............................. 2,339 (260)
Unrecognized prior service cost ................................ 903 1,166
---------- -----------
Net liability recognized ....................................... $ (3,952) $ (3,034)
=========== ===========
Balance sheet liabilities (assets):
Accrued benefit liability ...................................... $ 7,160 $ 4,510
Intangible asset ............................................... (903) (1,123)
Accumulated other comprehensive income (loss) .................. (2,305) (353)
---------- -----------
Net amount recognized .......................................... $ 3,952 $ 3,034
========== ===========
Assumptions at year end:
Discount rate used in determining present values ............... 7.50% 8.00%
Rate of compensation increase .................................. 4.00% 4.25%
Expected long-term rate of return on plan assets ............... 9.50% 9.50%
The Company sponsors a defined contribution plan (the "Defined
Contribution Plan") for substantially all employees of the Company. The Defined
Contribution Plan is intended to meet the requirements of Section 401(k) of the
Internal Revenue Code. The Defined Contribution Plan allows the Company to match
participant contributions and provides discretionary contributions.
Contributions to the Defined Contribution Plan in 2001, 2000 and 1999 totaled
$1,933,000, $2,278,000 and $2,052,000, respectively.
During 1999, the Company had partially self-insured medical plans (the
"Medical Plans") covering certain employees. Beginning January 1, 2000, the
Company expanded the coverage to cover substantially all employees. The number
of employees participating in the Medical Plans was approximately 1,350 and
1,300 at December 31, 2001 and 2000, respectively, as compared to approximately
600 at December 31, 1999. The Medical Plans limit the
35
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Company's annual obligations to fund claims to specified amounts per participant
and in the aggregate. The Company is adequately insured for amounts in excess of
these limits. Employees are responsible for payment of a portion of the
premiums. During 2001, 2000 and 1999, the Company charged $5,890,000, $4,456,000
and $2,802,000, respectively, to operations related to reinsurance premiums,
medical claims incurred and estimated, and administrative costs for the Medical
Plans. Claims paid during 2001, 2000 and 1999 did not exceed the aggregate
limits.
(12) Commitments and Contingencies
The Company leases certain of its real property and certain equipment,
vehicles and computer hardware under operating leases with terms ranging from
month-to-month to ten years and which contain various renewal and rent
escalation clauses. Future minimum annual lease commitments (in thousands) under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 2001 are as follows:
2002 .................................................... $ 6,980
2003 .................................................... 6,365
2004 .................................................... 5,643
2005 .................................................... 5,288
2006 .................................................... 4,716
2007 and thereafter ..................................... 9,194
-----------
$ 38,186
===========
Rent expense for the years ended December 31, 2001, 2000 and 1999
totaled $5,550,000, $3,650,000 and $3,858,000, respectively.
The Company entered into agreements for the sale and leaseback of
certain specific manufacturing and testing equipment during 2001 and 2000. The
terms of the operating leases range from five to nine years and the Company has
the option to purchase the equipment at the expiration of the respective lease
at a fixed price based upon the equipment's estimated residual value. Lease
payments on these operating leases are guaranteed by the Company. Proceeds from
the sale and leaseback transactions during 2001 and 2000 were $5,420,000 and
$9,251,000, respectively, and the transactions resulted in a deferred loss for
the years ended December 31, 2001 and 2000 of $787,000 and $351,000,
respectively, that will be amortized over the term of the respective leases.
Future minimum annual lease commitments related to these leases are included in
the above schedule.
As of December 31, 2001, the Company had outstanding purchase
commitments of approximately $5,045,000, primarily for the acquisition of
manufacturing equipment.
The Company's Sypris Technologies subsidiary is a co-defendant in two
lawsuits arising out of an explosion at a coker plant owned by Exxon Mobil
Corporation located in Baton Rouge, Louisiana. In each of these lawsuits, it is
alleged that a carbon steel pipe elbow that Sypris Technologies manufactured was
improperly installed and the failure of which caused the explosion. One of the
actions was brought by Exxon Mobil in 1994 in state district court in Louisiana
and claims damages for destruction of the plant, which Exxon Mobil estimates
exceed one hundred million dollars. Sypris Technologies is a co-defendant in
this action with the fabricator who built the pipeline into which the elbow was
incorporated and with the general contractor for the plant. The second action is
a class action suit also filed in 1994 in federal court in Louisiana on behalf
of the residents living around the plant and claims unspecified damages. Sypris
Technologies is a co-defendant in this action with Exxon Mobil, the contractor
and the fabricator. In both actions, we maintain that the carbon steel pipe
elbow at issue was appropriately marked as carbon steel and was improperly
installed, without Sypris Technologies' knowledge, by the fabricator and general
contractor in circumstances that required the use of a chromium steel elbow.
Although the Company believe these defenses to be meritorious, there can be no
assurance that the Company will not be found liable for some or all of the
alleged
36
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
damages. If the Company was to be found liable and the damages exceeded
available insurance coverage, the impact could materially and adversely affect
the Company's financial condition and results of operations.
The Company is involved in certain litigation and contract issues
arising in the normal course of business. While the outcome of these matters
cannot, at this time, be predicted in light of the uncertainties inherent
therein, management does not expect that these matters will have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
(13) Stock Option and Purchase Plans
The Company has certain stock compensation plans under which options
to purchase common stock may be granted to officers, key employees and
non-employee directors. Options may be granted at not less than the market price
on the date of grant. Options are exercisable in whole or in part up to two
years after the date of grant and ending ten years after the date of grant. The
following table summarizes option activity for the three years ended December
31, 2001:
Weighted
Average
Exercise Exercise
Shares Price Range Price
---------- ------------------ ---------
Balance at January 1, 1999 ......................... 1,228,388 $ 1.72 - 31.00 $ 6.35
Granted ............................................ 226,352 5.94 - 9.63 7.75
Exercised .......................................... (123,021) 2.76 - 6.68 4.75
Forfeited .......................................... (19,259) 2.96 - 11.00 8.26
----------- ------------------ ---------
Balance at December 31, 1999 ....................... 1,312,460 1.72 - 31.00 6.71
Granted ............................................ 518,746 6.56 - 10.50 9.52
Exercised .......................................... (114,246) 2.76 - 8.75 4.08
Forfeited .......................................... (163,223) 4.24 - 10.50 7.20
----------- ------------------ ---------
Balance at December 31, 2000 ....................... 1,553,737 1.72 - 31.00 7.79
Granted ............................................ 632,819 3.88 - 13.27 6.15
Exercised .......................................... (164,616) 1.72 - 8.75 3.06
Forfeited .......................................... (174,980) 6.25 - 11.76 8.21
----------- ------------------ ---------
Balance at December 31, 2001 ....................... 1,846,960 $ 1.72 - 31.00 $ 7.61
=========== ================== =========
The following table summarizes certain weighted average data for
options outstanding and currently exercisable at December 31, 2001:
Outstanding Exercisable
----------------------------------- ----------------------
Weighted Average
--------------------- Weighted
Remaining Average
Exercise Contractual Exercise
Exercise Price Range Shares Price Life Shares Price
-------------------- ----------- -------- -------- ----------- ---------
$1.72 ............................ 63,721 $ 1.72 1.9 63,721 $ 1.72
$2.76 - $4.12 .................... 34,364 3.82 4.8 34,364 3.82
$4.24 - $6.25 .................... 648,123 5.81 7.1 139,148 4.93
$6.56 - $10.00 ................... 905,634 8.59 5.9 464,334 8.66
$10.06 - $15.76 .................. 181,011 10.92 6.1 28,661 12.62
$16.12 - $23.00 .................. 10,003 18.16 4.4 10,003 18.16
$25.52 - $31.00 .................. 4,104 28.86 3.2 4,104 28.86
----------- -------- -------- ----------- ---------
Total ....................... 1,846,960 $ 7.61 6.2 744,335 $ 7.54
=========== ======== ======== =========== =========
37
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company's stock compensation program also provides for the grant
of performance-based stock options to key employees. The terms and conditions of
the performance-based option grants provide for the determination of the
exercise price and the beginning of the vesting period to occur when the fair
market value of the Company's common stock achieves certain targeted price
levels. Performance-based options to purchase 56,000 shares, 108,000 shares and
16,000 shares of common stock were granted during 2001, 2000 and 1999,
respectively. Performance-based options to purchase 32,000 shares and 112,000
shares of common stock were forfeited in 2001 and 2000, respectively. None of
the targeted price levels of the performance-based options were achieved during
2001, 2000 or 1999 and, accordingly, these options are excluded from disclosures
of options outstanding at December 31, 2001, 2000 and 1999.
The aggregate number of shares of common stock reserved for issuance
under the Company's stock compensation programs as of December 31, 2001 and 2000
was 3,000,000. The aggregate number of shares available for future grant as of
December 31, 2001 and 2000 was 380,227 and 899,566, respectively. Shares
available for future grant at December 31, 2001 include 226,212 shares of common
stock related to stock options that may be subject to future grant under certain
of the Company's incentive plans based upon the achievement of certain
financial targets and individual performance objectives and action by the
Company's Board of Directors.
The Company applies APB 25 and related interpretations in accounting
for its employee stock options because, as discussed below, the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options is at least equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and net income per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The fair
value for options granted by the Company during 2001, 2000 and 1999 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
Years ended December 31,
------------------------------------------
2001 2000 1999
----------- ---------- -----------
Expected life (years) ............................... 8 8 6
Expected volatility ................................. 75.20% 70.30% 75.50%
Risk-free interest rates ............................ 4.93% 4.98% 6.30%
Expected dividend yield ............................. -- -- --
The weighted average Black-Scholes value of options granted under the
stock option plans during 2001, 2000 and 1999 was $4.71, $7.05 and $5.50 per
share, respectively.
38
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
Years ended December 31,
------------------------------------------
2001 2000 1999
----------- ---------- -----------
(in thousands, except for per share data)
Pro forma net income ............................. $ 4,977 $ 2,086 $ 8,533
=========== ========= =========
Pro forma net income per common share:
Basic ....................................... $ 0.51 $ 0.22 $ 0.90
Diluted ..................................... $ 0.50 $ 0.21 $ 0.87
The Company has a stock purchase plan that provides substantially all
employees who have satisfied the eligibility requirements the opportunity to
purchase shares of the Company's common stock on a compensation deduction basis.
The purchase price is the lower of 85% of the fair market value of the common
stock on the first or last business day of the purchase period. Payroll
deductions may not exceed $6,000 for any six-month cycle. The stock purchase
plan expires January 31, 2006. At December 31, 2001 and 2000, there were 196,904
shares and 249,110 shares, respectively, available for purchase under the plan.
During 2001 and 2000, a total of 52,206 shares and 35,290 shares, respectively,
were issued under the plan.
(14) Stockholder Rights Plan
On October 23, 2001, the Company's board of directors approved a
stockholder rights plan. Under the plan, each stockholder of record as of
November 7, 2001 will automatically receive a distribution of one right for each
outstanding share of common stock held. Each right entitles the holder to
purchase one one-thousandth of a share of a new series of preferred stock at an
exercise price of $63.00. The rights will trade along with, and not separately
from, the shares of common stock unless they become exercisable. If any person
or group acquires or makes a tender offer for 15% or more of the common stock of
the Company (except in transactions approved by the Company's board of directors
in advance) the rights become exercisable, and they will separate, become
tradable, and entitle stockholders, other than such person or group, to acquire,
at the exercise price, preferred stock with a market value equal to twice the
exercise price. If the Company is acquired in a merger or other business
combination with such person or group, or if 50% of its earning power or assets
are sold to such person or group, each right will entitle its holder, other than
such person or group, to acquire, at the exercise price, shares of the acquiring
company's common stock with a market value of twice the exercise price. The
rights will expire on October 23, 2011, unless redeemed or exchanged earlier by
the Company, and will be represented by existing common stock certificates until
they become exercisable.
39
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(15) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Accordingly, deferred income taxes have been
provided for temporary differences between the recognition of revenue and
expenses for financial and income tax reporting purposes and between the tax
basis of assets and liabilities and their reported amounts in the financial
statements.
The components of income tax expense (benefit) is as follows:
Years ended December 31,
------------------------------------------
2001 2000 1999
----------- ---------- -----------
(in thousands)
Current:
Federal ........................................... $ 2,161 $ 969 $ 3,386
State ............................................. 255 102 320
Other ............................................. 15 9 38
----------- ---------- -----------
2,431 1,080 3,744
Deferred:
Federal ........................................... 706 (2,351) (630)
State ............................................. (227) (127) (15)
----------- ---------- -----------
479 (2,478) (645)
----------- ---------- -----------
$ 2,910 $ (1,398) $ 3,099
=========== ========== ===========
The Company files a consolidated federal income tax return which
includes all subsidiaries. Income taxes paid during 2001, 2000 and 1999 totaled
$1,962,000, $1,347,000 and $2,136,000, respectively. During 2001 and 2000, the
Company received $2,108,000 and $2,102,000 in federal income tax refunds,
respectively.
At December 31, 2001, the Company had $17,771,000 of state net
operating loss carryforwards available to offset future taxable income. Such
carryforwards reflect income tax losses incurred which will expire on December
31 of the following years (in thousands):
2008 ............................................ $ 2,386
2009 ............................................ 8,362
2010 ............................................ 560
2011 ............................................ 5,999
2017 ............................................ 464
-----------
$ 17,771
40
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a reconciliation of income tax expense (benefit) to
that computed by applying the federal statutory rate of 34% to income before
income taxes:
Years ended December 31,
-------------------------------------
2001 2000 1999
------ ------ --------
(in thousands)
Federal tax at the statutory rate......................... $3,154 $ 607 $ 4,303
State income taxes, net of federal tax benefit............ 238 153 236
Change in valuation allowance for deferred tax asset...... (300) (3,008) (1,891)
Research and development tax credit....................... (338) (262) (544)
Non-deductible expenses................................... 262 240 135
Other..................................................... (106) 872 860
------ ------- -------
$2,910 $(1,398) $ 3,099
====== ======= =======
Deferred income tax assets and liabilities are as follows:
December 31,
----------------------
2001 2000
------ -------
(in thousands)
Deferred tax assets:
Compensation and benefit accruals....................................... $ 1,287 $ 1,108
Inventory valuation..................................................... 728 673
State net operating loss carryforwards.................................. 977 977
Contract provisions..................................................... 517 796
Accounts receivable allowance........................................... 290 255
Defined benefit pension plan............................................ 1,451 995
Interest rate swap agreements........................................... 309 --
Other................................................................... 303 327
------- -------
5,862 5,131
Valuation allowance..................................................... (677) (977)
------- -------
5,185 4,154
Deferred tax liabilities:
Depreciation............................................................ (2,354) (1,981)
------- -------
Net deferred tax asset $ 2,831 $ 2,173
======= =======
The valuation allowance for deferred tax assets decreased by $300,000,
$3,008,000 and $1,891,000 in 2001, 2000 and 1999, respectively. At December 31,
2001, the valuation allowance of $677,000 relates to state tax net operating
loss ("NOL") carryforwards. Management believes it is more likely than not that
the Company's future earnings will be sufficient to ensure the realization of
deferred tax assets for federal and state purposes, excluding the portion of the
state NOL carryforward for which utilization within the carryforward period is
uncertain.
41
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(16) Net Income Per Common Share
Basic income per common share is calculated by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted income per common share is calculated by
using the weighted average number of common shares outstanding adjusted to
include the potentially dilutive effect of outstanding stock options.
The following table presents information necessary to calculate net income
per common share:
Years ended December 31,
---------------------------------------
2001 2000 1999
-------- -------- --------
(in thousands, except for per share data)
Shares outstanding:
Weighted average shares outstanding................. $ 9,828 $ 9,671 $ 9,515
Effect of dilutive employee stock options........... 200 293 346
-------- -------- --------
Adjusted weighted average shares outstanding
and assumed conversions........................... 10,028 9,964 9,861
======== ======== ========
Net income applicable to common stock................. $ 6,367 $ 3,184 $ 9,556
======== ======== ========
Net income per common share:
Basic.............................................. $ 0.65 $ 0.33 $ 1.00
======== ======== ========
Diluted............................................ $ 0.63 $ 0.32 $ 0.97
======== ======== ========
(17) Segment Information
The Company's operations are conducted in two reportable business segments:
the Electronics Group and the Industrial Group. The segments are each managed
separately because of the distinctions between the products, services, markets,
customers, technologies and workforce skills of the segments. The Electronics
Group provides a wide range of manufacturing and technical services for a
diversified customer base as an outsourced service provider. The Electronics
Group also manufactures complex data storage systems, magnetic instruments,
current sensors and other electronic products. The Industrial Group provides
manufacturing services for a variety of customers that outsource forged and
finished steel components and subassemblies. The Industrial Group also
manufactures high-pressure closures and other fabricated products. Revenue
derived from outsourced services for the Electronics Group accounted for 67%,
65% and 59% of total net revenue in 2001, 2000 and 1999, respectively. Revenue
derived from outsourced services for the Industrial Group accounted for 15%, 12%
and 15% of total net revenue in 2001, 2000 and 1999, respectively. There was no
intersegment net revenue recognized for all years presented. The following table
presents financial information for the reportable segments of the Company:
Years ended December 31,
---------------------------------------
2001 2000 1999
-------- -------- --------
(in thousands, except for per share data)
Net revenue from unaffiliated customers:
Electronics Group.................................. $207,282 $182,126 $164,963
Industrial Group................................... 47,358 34,445 37,167
-------- -------- --------
$254,640 $216,571 $202,130
======== ======== ========
Gross profit:
Electronics Group.................................. $ 37,385 $ 36,272 $ 37,873
Industrial Group................................... 6,162 4,041 7,076
-------- -------- --------
$ 43,547 $ 40,313 $ 44,949
======== ======== ========
42
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended December 31,
------------------------------------------
2001 2000 1999
----------- ---------- -----------
(in thousands)
Operating income:
Electronics Group .............................. $ 12,903 $ 6,935 $ 12,005
Industrial Group ............................... 3,563 1,648 4,930
General, corporate and other ................... (3,436) (3,106) (2,769)
----------- ---------- -----------
$ 13,030 $ 5,477 $ 14,166
=========== ========== ===========
Total assets:
Electronics Group .............................. $ 121,228 $ 124,523 $ 106,229
Industrial Group ............................... 73,820 37,851 26,714
General, corporate and other ................... 16,396 16,748 15,621
----------- ---------- -----------
$ 211,444 $ 179,122 $ 148,564
=========== ========== ===========
Depreciation and amortization:
Electronics Group .............................. $ 7,951 $ 8,037 $ 6,551
Industrial Group ............................... 1,694 1,109 902
General, corporate and other ................... 211 205 129
----------- ---------- -----------
$ 9,856 $ 9,351 $ 7,582
=========== ========== ===========
Capital expenditures:
Electronics Group .............................. $ 7,917 $ 7,971 $ 6,327
Industrial Group ............................... 19,547 15,546 7,134
General, corporate and other ................... 159 369 982
----------- ---------- -----------
$ 27,623 $ 23,886 $ 14,443
=========== ========== ===========
The Company attributes net revenue to countries based upon the location of
its operations. Export sales from the United States totaled $23,890,000,
$25,250,000 and $30,061,000 in 2001, 2000 and 1999, respectively.
(18) Quarterly Financial Information (Unaudited)
The following is an analysis of certain items in the consolidated income
statements by quarter for the years ended December 31, 2001 and 2000:
2001 2000
------------------------------------------ ------------------------------------------
First Second Third Fourth First Second Third Fourth
--------- --------- --------- --------- --------- --------- --------- ---------
(in thousands, except for per share data)
Net revenue ............ $ 58,035 $ 63,152 $ 65,228 $ 68,225 $ 50,697 $ 52,118 $ 53,887 $ 59,869
Gross profit ........... 10,164 10,914 11,063 11,406 10,754 11,353 9,090 9,116
Operating income ....... 2,577 2,912 3,501 4,040 1,182 2,739 707 849
Net income ............. 1,019 1,209 1,760 2,379 179 1,368 90 1,547
Net income per
common share:
Basic ............... $ 0.10 $ 0.12 $ 0.18 $ 0.24 $ 0.02 $ 0.14 $ 0.01 $ 0.16
Diluted ............. $ 0.10 $ 0.12 $ 0.18 $ 0.23 $ 0.02 $ 0.14 $ 0.01 $ 0.16
43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference from
sections of the Company's Proxy Statement titled "Section 16(a) Beneficial
Ownership Reporting Compliance," "Election of Directors," and "Executive
Officers, " which Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to instruction G(3) of the General Instructions to Form
10-K.
Item 11. Executive Compensation
The information required herein is incorporated by reference from
sections of the Company's Proxy Statement titled "Election of Directors - Board
of Directors and Committees of the Board," "Compensation of Directors, "
"Compensation Committee Report," "Compensation Committee Interlocks and Insider
Participation," "Performance Graph, " "Executive Compensation, " and "Employment
Contracts and Termination, Severance and Change of Control Arrangements," which
Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to instruction G(3) of the General Instructions to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference from the
section of the Company's Proxy Statement titled "Security Ownership of Certain
Beneficial Owners and Management," which Proxy Statement will be filed with the
Securities and Exchange Commission pursuant to instruction G(3) of the General
Instructions to Form 10-K.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from the
section of the Company's Proxy Statement titled "Certain Relationships and
Related Transactions," which Proxy Statement will be filed with the Securities
and Exchange Commission pursuant to instruction G(3) of the General Instructions
to Form 10-K.
44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The financial statements as set forth under Item 8 of this report on
Form 10-K are included.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other consolidated financial statement schedules have been omitted
because the required information is shown in the consolidated financial
statements or notes thereto or they are not applicable.
3. Exhibits
Exhibit
Number Description
------ -----------
2 Fourth Amended and Restated Agreement and Plan of Reorganization dated February 5, 1998 by
and among Group Financial Partners, Inc., Group Technologies Corporation, Bell Technologies,
Inc. and Tube Turns Technologies, Inc. (incorporated by reference to Appendix A to the
Prospectus included in the Company's Registration Statement on Form S-4/A filed February 12,
1998 (No. 333-20299)).
3.1 Certificate of Incorporation of the Company (incorporated by reference to Appendix H to the
Prospectus included in the Company's Registration Statement on Form S-4/A filed February 12,
1998 (No. 333-20299)).
3.2 Bylaws of the Company (incorporated by reference to Appendix I to the Prospectus included
in the Company's Registration Statement on Form S-4/A filed February 12, 1998 (No. 333-20299)).
4.1 Specimen common stock certificate (incorporated by reference to Exhibit 4.1
to the Company's Form 10-K for the fiscal year ended December 31, 1998 filed on March 5, 1999).
4.2 Rights Agreement dated as of October 23, 2001 between the Company and LaSalle Bank National
Association, as Rights Agent, including as Exhibit A the Form of Certificate of Designation
and as Exhibit B the Form of Right Certificate (incorporated by reference to Exhibit 4.1 to
the Company's Form 8-K filed on October 23, 2001 (Commission File No. 000-24020)).
10.1 Purchase and Sale Agreement among Honeywell Inc., Defense Communications Products Corporation
(prior name of Group Technologies Corporation) and Group Financial Partners, Inc. dated May 21, 1989
(incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1
filed May 18, 1994 (Registration No. 33-76326)).
10.2 Purchase and Sale Agreement among Alliant Techsystems Inc., MAC Acquisition I, Inc. and Group
Technologies Corporation dated December 31, 1992 (incorporated by reference to Exhibit 10.16
to the Company's Registration Statement on Form S-1 filed May 18, 1994 (Registration No. 33-76326)).
10.3 Purchase and Sale Agreement among Philips Electronic North America Corporation and Group
Technologies Corporation dated June 25, 1993 (incorporated by reference to Exhibit 10.17 to
the Company's Registration Statement on Form S-1 filed May 18, 1994 (Registration No. 33-76326).
10.4 Stock and Asset Purchase and Sale Agreement among Group Technologies Corporation, Group
Technologies Mexican Holding Company, SCI Systems, Inc., SCI Systems de Mexico S.A. de C.V.
and SCI Holdings, Inc. dated June 30, 1997 (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K filed on July 15, 1997 (Commission File No. 000-24020)).
45
Exhibit
Number Description
------- -----------
10.5 Asset Purchase Agreement among Datatape Incorporated, Delta Tango, Inc., Metrum-D, Inc., Impactdata, Inc. and
M. Stuart Millar dated November 12, 1997 (incorporated by reference to Exhibit 2.11 to the Company's Form 10-Q for the
quarterly period ended June 28, 1998 filed on August 4, 1998 (Commission File No. 000-24020)).
10.6 1999 Amended and Restated Loan Agreement between Bank One, Kentucky, NA, Sypris Solutions, Inc., Bell Technologies,
Inc., Tube Turns Technologies, Inc., Group Technologies Corporation and Metrum-Datatape, Inc. dated October 27, 1999
(incorporated by reference to Exhibit 10.1 to the Company's Form 10-K for the fiscal year ended December 31, 1999
filed on February 25, 2000 (Commission File No. 000-24020)).
10.6.1 2000A Amendment to Loan Documents between Bank One, Kentucky, NA, Sypris Solutions, Inc., Bell Technologies, Inc.,
Tube Turns Technologies, Inc., Group Technologies Corporation and Metrum-Datatape, Inc. dated November 9, 2000
(incorporated by reference to Exhibit 10.6.1 to the Company's Form 10-K for the fiscal year ended December 31, 2000
filed on March 2, 2001 (Commission File No. 000-24020)).
10.6.2 2001A Amendment to Loan Documents between Bank One, Kentucky, NA, Sypris Solutions, Inc., Bell Technologies, Inc.,
Tube Turns Technologies, Inc., Group Technologies Corporation and Metrum-Datatape, Inc. dated February 15, 2001
(incorporated by reference to Exhibit 10.6.2 to the Company's Form 10-Q for the quarterly period ended April 1, 2001
filed on April 30, 2001 (Commission File No. 000-24020)).
10.6.3 2002A Amendment to Loan Documents between Bank One, Kentucky, NA, Sypris Solutions, Inc., Sypris Test & Measurement,
Inc., Sypris Technologies, Inc., Sypris Electronics, LLC, Sypris Data Systems, Inc. and Sypris Technologies Marion,
LLC dated December 21, 2001.
10.7 Lease between John Hancock Mutual Life Insurance Company and Honeywell, Inc. dated April 27, 1979; related Notice of
Assignment from John Hancock Mutual Life Insurance Company to Sweetwell Industrial Associates, L.P., dated July 10,
1986; related Assignment and Assumption of Lease between Honeywell, Inc. and Defense Communications Products
Corporation (prior name of Group Technologies Corporation) dated May 21, 1989; and related Amendment I to Lease
Agreement between Sweetwell Industries Associates, L.P. and Group Technologies Corporation dated October 25, 1991,
regarding Tampa industrial park property (incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 filed May 18, 1994 (Registration No. 33-76326)).
10.7.1 Agreement related to Fourth Renewal of Lease between Sweetwell Industries Associates, L.P. and Group Technologies
Corporation dated November 1, 2000, regarding Tampa industrial park property (incorporated by reference to Exhibit
10.8.1 to the Company's Form 10-K for the fiscal year ended December 31, 2000 filed on March 2, 2001 (Commission File
No. 000-24020)).
10.8 Lease between Metrum-Datatape, Inc. (assignee of Metrum, Inc.) and Alliant Techsystems, Inc. dated March 29, 1993 and
amended July 29, 1993, May 2, 1994, November 14, 1995, December 4, 1996 and February 12, 1998 regarding 4800 East Dry
Creek Road Property (incorporated by reference to Exhibit 10.25 to the Company's Form 10-Q for the quarterly period
ended June 28, 1998 filed on August 4, 1998 (Commission File No. 000-24020)).
10.8.1 Sublease between Pharmacia & Upjohn Company and Metrum-D, Inc. dated November 14, 1997 (incorporated by reference to
Exhibit 10.26 to the Company's Form 10-Q for the quarterly period ended June 28, 1998 filed on August 4, 1998
(Commission File No. 000-24020)).
10.8.2 Amendment of Sublease between Pharmacia & Upjohn Company and Metrum-Datatape, Inc. dated August 6, 1998 (incorporated
by reference to Exhibit 10.10.1 to the Company's Form 10-K for the fiscal year ended December 31, 2000 filed on
March 2, 2001 (Commission File No. 000-24020)).
10.9* Sypris Solutions, Inc. Stock Option Plan, Restated effective December 17, 1996, dated January 22, 1990 (incorporated
by reference to Exhibit 10.22.2 to the Company's Form 10-K for the fiscal year ended December 31, 1996 filed on
March 31, 1997 (Commission File No. 000-24020)).
46
Exhibit
Number Description
------- -----------
10.10* Sypris Solutions, Inc. 1994 Stock Option Plan for Key Employees as Amended and Restated effective July 1, 1998, dated
October 27, 1994 (incorporated by reference to Exhibit 4 to the Company's Form S-8 filed on September 2, 1998
(Registration No. 333-62781)).
10.11* Sypris Solutions, Inc. Share Performance Program For Stock Option Grants dated July 1, 1998 (incorporated by reference
to Exhibit 10.28 to the Company's Form 10-Q for the quarterly period ended June 28, 1998 filed on August 4, 1998
(Commission File No. 000-24020)).
10.12* Sypris Solutions, Inc. Independent Directors' Stock Option Plan as Amended and Restated effective February 23, 1999,
dated October 27, 1994 (incorporated by reference to Exhibit 10.10 to the Company's Form 10-K for the fiscal year
ended December 31, 1998 filed on March 5, 1999 (Commission File No. 000-24020)).
10.13* Sypris Solutions, Inc. Independent Directors Compensation Program Amended and Restated on April 28, 1998, dated
September 1, 1995 (incorporated by reference to Exhibit 10.16 to the Company's Form 10-Q for the quarterly period
ended June 28, 1998 filed on August 4, 1998 (Commission File No. 000-24020)).
10.14* Sypris Solutions, Inc. Profit Sharing Bonus Plan, effective as of January 3, 2000 (incorporated by reference to
Exhibit 10.16 to the Company's Form 10-K for the fiscal year ended December 31, 2000 filed on March 2, 2001
(Commission File No. 000-24020)).
10.15* Group Technologies Corporation Profit Sharing Bonus Plan, effective as of January 3, 2000 (incorporated by reference
to Exhibit 10.17 to the Company's Form 10-K for the fiscal year ended December 31, 2000 filed on March 2, 2001
(Commission File No. 000-24020)).
10.16* Tube Turns Technologies, Inc. Profit Sharing Bonus Plan, effective as of January 3, 2000 (incorporated by reference to
Exhibit 10.18 to the Company's Form 10-K for the fiscal year ended December 31, 2000 filed on March 2, 2001
(Commission File No. 000-24020)).
10.17* Sypris Solutions, Inc. Executive Bonus Plan, effective as of January 2, 2001 (incorporated by reference to
Exhibit 10.19 to the Company's Form 10-K for the fiscal year ended December 31, 2000 filed on March 2, 2001
(Commission File No. 000-24020)).
10.18* Employment Agreement by and between Metrum-Datatape, Inc. and G. Darrell Robertson dated February 28, 2000
(incorporated by reference to Exhibit 10.20 to the Company's Form 10-K for the fiscal year ended December 31, 2000
filed on March 2, 2001 (Commission File No. 000-24020)).
10.19 Asset Purchase Agreement dated April 6, 2001 by and between Tube Turns Technologies, Inc. and Dana Corporation as
amended by a First Amendment dated May 4, 2001 and as amended by a Second Amendment on May 15, 2001 (incorporated by
reference to Exhibit 2.1 to the Company's Form 10-Q for the quarterly period ended June 30, 2001 filed on July 30,
2001 (Commission File No. 000-24020)).
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
Form 8-K dated and filed by the Company on October 23, 2001, which
reported the adoption of a stockholder rights plan, the terms and conditions of
the rights, and the initial issuance of the rights to stockholders of record as
of November 7, 2001.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
January 31, 2002.
SYPRIS SOLUTIONS, INC.
(Registrant)
/s/ Jeffrey T. Gill
--------------------------------------------
(Jeffrey T. Gill)
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on January 31, 2002:
/s/ Robert E. Gill Chairman of the Board
- --------------------------------------------
(Robert E. Gill)
/s/ Jeffrey T. Gill President, Chief Executive Officer and Director
- --------------------------------------------
(Jeffrey T. Gill)
/s/ David D. Johnson Vice President and Chief Financial Officer
- -------------------------------------------- (Principal Financial Officer)
(David D. Johnson)
/s/ Anthony C. Allen Vice President and Controller
- -------------------------------------------- (Principal Accounting Officer)
(Anthony C. Allen)
/s/ Henry F. Frigon Director
- --------------------------------------------
(Henry F. Frigon)
/s/ R. Scott Gill Director
- --------------------------------------------
(R. Scott Gill)
/s/ William L. Healey Director
- --------------------------------------------
(William L. Healey)
/s/ Roger W. Johnson Director
- --------------------------------------------
(Roger W. Johnson)
/s/ Sidney R. Petersen Director
- --------------------------------------------
(Sidney R. Petersen)
/s/ Robert Sroka Director
- --------------------------------------------
(Robert Sroka)
48
SCHEDULE II
SYPRIS SOLUTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
----------- ----------- ---------- ---------- ----------
(in thousands)
Allowance for doubtful accounts:
Year ended December 31, 2001 ............ $ 679 $ 122 $ -- $ (26)(1) $ 775
=========== =========== ========== ========= =========
Year ended December 31, 2000 ............ $ 670 $ 18 $ -- $ (9)(1) $ 679
=========== =========== ========== ========= =========
Year ended December 31, 1999 ............ $ 836 $ (129) $ -- $ (37)(1) $ 670
=========== =========== ========== ========= =========
Reserve for inactive, obsolete and
unsalable inventory:
Year ended December 31, 2001 ............ $ 3,004 $ 432 $ 500(4) $ (15)(2) $ 3,921
=========== =========== ========== ========= =========
Year ended December 31, 2000 ............ $ 2,669 $ 453 $ -- $ (118)(2) $ 3,004
=========== =========== ========== ========= =========
Year ended December 31, 1999 ............ $ 4,024 $ 446 $ -- $ (1,801)(3) $ 2,669
=========== =========== ========== ========= =========
(1) Uncollectible accounts written off.
(2) Inactive, obsolete and unsalable inventory written off.
(3) Includes $180,000 for inactive, obsolete and unsalable inventory written
off and a $1,621,000 reclassification to costs relating to long-term
contracts to conform to the presentation for the year ended December 31,
2000.
(4) Excess and obsolete reserve assumed in acquisition.
49