Sypris Solutions
Annual Report 2000

Plain-text annual report

S I R P Y S Providing Customers with Solutions S y p r i s S o l u t i o n s R e p o r t 2 0 0 0 A n n u a l Sypris Annual 2000 Sypris Annual 2000 Sypris Solutions is a diversified provider of technology-based outsource services and specialized industrial products. The Company performs a wide range of manufacturing and technical services, typically under long-term contract with major corporations. We also manufacture and sell complex data storage systems, magnetic instruments, current sensors and a variety of other industrial products. Our mission is to become the leading supply chain partner in each of our technically sophisticated niche markets. Contents 2 Letter to Shareholders 4 Solutions for our Customers 16 Solutions at a Glance 18 Management’s Discussion and Analysis 23 Financial Statements and Notes 40 Report of Independent Accountants 41 Selected Financial Data 42 Corporate Directory 43 Company Locations 44 Common Stock Information 45 Investor Information Financial Highlights Years ended December 31 (in thousands, except for per share data) Income Statement Data: Net revenue Gross profit Operating income Net income Per Share Data: Net income: Basic Diluted December 31 (in thousands) Balance Sheet Data: Working capital Total assets Total debt Total shareholders’ equity 2000 1999 1998 1997 $ $ $ $ 216,571 40,313 5,477 3,184 0.33 0.32 2000 58,602 179,122 65,000 64,205 $ 202,130 44,949 14,166 9,556 $ $ $ 1.00 0.97 1999 53,705 148,564 54,400 60,820 $ 211,625 47,923 12,851 7,446 $ $ $ 0.79 0.76 1998 32,121 121,119 28,583 49,359 $ 217,355 32,135 1,785 5,344 $ $ $ 0.50 0.48 1997 35,123 120,608 31,340 27,728 See accompanying Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. Net Revenue (in millions) Diluted Earnings Per Share Order Backlog (in millions) Capital Investment (in millions) Book Value Per Share $217 $212 $217 $202 $0.97 $0.76 $0.48 $0.32 $127 $106 $87 $161 $23.9 $6.44 $6.17 $5.04 $14.4 $2.82 $5.7 $5.8 97 98 99 00 97 98 99 00 97 98 99 00 97 98 99 00 97 98 99 00 Sypris Annual Report 2000 1 We began the year 2000 in terrific shape. Record backlog and strong earnings combined with a number of significant new business development opportunities to support a very positive outlook for the coming year. The trend toward outsourcing continued to grow and spread across a progressively wider range of industries. An increasing number of original equipment manufacturers embraced the use of supply chain specialists to increase flexibility, reduce costs and improve responsiveness to the needs of their customers. By all measures, Sypris was well positioned to benefit from these factors during 2000, since approximately 80 percent of our revenue is derived from providing some form of manufacturing or technical service to others. Unfortunately, this was not to be the case. Shortages in the supply of electronic components, the steep decline in the production of heavy-duty trucks and higher-than-planned consolidation costs and related production inefficiencies in our data systems business had a material effect on the Company’s financial performance for the year. The impact of these events was further magnified by the need to increase our investment in people, systems and technology to support upcoming contractual commitments. Program logic control engineers, automated equipment, a variety of robotics, and advanced planning and scheduling systems had to be secured and installed to meet the future production requirements of these new agreements despite the negative effect on short-term earnings. As a result, while revenue increased 7 percent to $217 million from $202 million for the prior year, earnings declined to $0.32 per share from $0.97 per share in 1999. The decline in earnings would have been more pronounced had it not been for the recognition of certain tax credits and the reduction of a deferred tax valuation allowance. We are pleased to report, however, that we were much more successful in a number of other areas, the result of which has been to strengthen the Company for the future. To begin with, the growth of the Company’s backlog accelerated during 2000, increasing 27 percent to a record $161 million from $127 million in 1999. The double-digit increase was driven primarily by the continued growth in demand for our manufacturing services. Shareholders’ equity increased to $64 million from $61 million at year-end 1999 and book value per share increased to $6.43 from $6.17 at the end of 1999. Capital investment increased substantially during the year, reaching almost $24 million, as the Company invested in the advanced technology and production capability required to meet the needs of newly awarded long-term manufacturing agreements. Shipments associated with much of this investment are not expected to begin until late 2001, but once at full production, are expected to contribute in a meaningful way to both revenue and earnings. During the year, Sypris was awarded a number of important long-term manufacturing and service agreements, including the following: " A five-year agreement with ArvinMeritor to forge and machine heavy-duty truck axles. Estimated contract value: $120 million. " Five new contracts with Raytheon to provide circuit card assemblies for a variety of programs. Estimated contract value: $24 million. " A multi-year agreement with Boeing to supply circuit card assemblies for use in the Brimstone missile guidance system. Estimated contract value: $23 million. " A two-year agreement with Eldec to supply fully tested integrated circuits for use in commercial avionics power supplies. Estimated contract value: $5 million. fellow shareholders " A contract with Northrop Grumman to supply electronic circuit boards for use in certain smart weapons. Estimated contract value: $3 million. " Two contracts with Litton to supply circuit card assemblies for use in portable, lightweight laser rangefinders and integrated guidance systems. Estimated contract value: $3 million. " An agreement with Honeywell to provide circuit card assemblies for use in the digital flight control computers of F-16 jet fighters. Estimated contract value: $2 million. The successful pursuit of multi-year, sole source agreements is an important part of our strategy to increase the reliability of our Company’s future financial results. The award of these and other similar agreements represents a significant milestone in these ongoing efforts. During the year, we also entered into an agreement with i2 Technologies to install finite capacity planning and advanced scheduling systems at certain of our manufacturing operations. We believe this investment will further enhance our ability to offer our customers state-of-the-art manufacturing services. The pursuit of synergistic acquisitions remains a key component of our strategy to build a larger, stronger business. At the close of 1999, we announced the completion of the purchase of the Mobile Calibration and Repair Service division of Lucent Technologies. We are pleased to report that the integration of the division has gone extremely well and its performance has exceeded our expectations. As we look to the future, we expect the near-term financial results of the Company will continue to reflect the effects of the component parts shortage and the downturn in the heavy-duty truck market. Higher component costs, production inefficiencies and expenses related to the under absorption of overhead are expected to continue to place pressure on margins and earnings. Longer-term, however, we believe the pressures from these external events will abate and our proven success in booking long-term agreements, combined with the results of our significant investment in people, systems and technology, will bear fruit in the form of vastly improved financial results. In the very near future, we will be changing the name of our subsidiaries to incorporate the Sypris brand name and logo. Bell Technologies will become Sypris Test & Measurement, Group Technologies will become Sypris Electronics, Metrum-Datatape will become Sypris Data Systems and Tube Turns will become Sypris Technologies. We believe that the use of the Sypris name by all subsidiaries will improve our brand recognition with customers, suppliers, employees and investors. The change is expected to be complete by January 2002. In closing, we want to thank our employees for their dedication and hard work over this past year. The achievements of 2000 would not have been possible without their commitment. We also want to thank our customers for the opportunity to serve them. We are dedicated to providing each of them with an ever-increasing competitive advantage. We sincerely appreciate your investment in Sypris Solutions and encourage you to contact us. We would be pleased to answer your questions and look forward to your comments. Jeffrey T. Gill President & CEO Robert E. Gill Chairman 2 Sypris Annual Report 2000 Sypris Annual Report 2000 3 Business has never been more competitive. Sypris Solutions is here to help. Global over-capacity, rapid technological change, record low unemployment, intense international competition and unforgiving capital markets have combined to place unrelenting pressure on margins. And along comes the Internet. The Web is turning established business models upside down, creating tremendous uncertainty at a time when decisiveness has never been of greater importance. Our job is to provide customers with solutions to succeed in this rapidly changing business environment. How? By investing in leading edge production capacity to provide them with a competitive advantage. By supporting their needs for service, even in the most remote of locations. By applying advanced technology to drive down the cost, increase the capability and extend the life of their existing systems. And by becoming an integral partner, one that consistently and reliably addresses their mission-critical needs. Over the next several pages, the leaders of our business will illustrate some of the ways in which we are providing customers with solutions. 4 Sypris Annual Report 2000 Sypris Annual Report 2000 5 We believe that competitive advantage should be measured in terms of cost, quality, speed and flexibility. schedules quickly and efficiently to meet the increasingly dynamic needs of our customers. At Sypris, we are committed to making the investments required to improve the competitive advantage of each of our customers. These investments can take many forms, but our recent commitment to support two of our major customers serves as an excellent illustration. The productive utilization of the new equipment is not scheduled to begin until the second half of 2001, but the importance of our willingness to invest in technology, people and systems in support of their needs has not been lost on our customers. For example: Sypris has been a major provider of truck axles for years through its Tube Turns Technologies subsidiary. The operation was efficient and competitive, but with our customers facing increasingly intense competition in the automotive parts industry, they needed our help. We stepped up to the plate early in the year 2000. In return for long-term manufacturing agreements, we committed to invest approximately $45 million to create one of the most advanced forging and machining operations for the production of truck axles in North America. The equipment list was long and extensive. We invested in the addition of 24 new robots, three new automated forging presses, two new cold extrusion presses, four new induction heating units, three new in-line shear systems and two new fully automated machining cells. We invested in the professionals who were necessary to expand our technical expertise and capability. Machining engineers, program logic control engineers, forging engineers, and metallurgists were hired from around the country to complement this state-of-the-art operation. And we invested in finite capacity planning and scheduling systems from i2 Technologies to provide us with the ability to plan, control and change production " The new equipment is expected to increase produc- tivity by a factor of 2 to 1 for some operations to as much as 7 to 1 for the finish machining of axles. The resulting cost-savings are expected to be substantial. " The equipment and the cells are highly flexible and can be reconfigured quickly, therefore reducing set up times and the cost associated with the changeover of production for new parts. " The location of forging and machining operations at a single site is expected to lower the total cost of the product further by reducing transportation and handling charges, cycle times and working capital. " Our technical experts have collaborated with our customers to identify process changes that are expected to reduce the material content and improve the yields on a number of their products. When fully operational later in 2001, our customers will reap the competitive advantage associated with these new capabilities and will no longer be reliant upon or have to support older, less efficient technology. Perhaps just as importantly, these new capabilities can be leveraged for the benefit of future customers as well. This is just one example of our commitment to grow with and invest in the support of our customers. By providing each of them with a distinct competitive advantage in terms of cost, quality, speed and flexibility, we believe that Sypris can and will continue to prosper for many years to come. Jack Kramer President and CEO Tube Turns Technologies How are we investing to create a competitive advantage for our customers? 6 Sypris Annual Report 2000 Sypris Annual Report 2000 7 Some customers have mission-critical charters that take them to the far reaches of the globe. For customers such as these, the ability to meet their service requirements on a cost-effective, timely basis takes on an added dimension. The National Weather Service, the Federal Aviation Administration and AT&T represent three such customers. The National Weather Service operates 119 advanced warning weather service radar stations in 45 states, the Caribbean and Guam. Many of these stations are located on isolated mountaintops, such as Francis Peak, Utah and contain equipment of immense sophistica- tion, including NEXRAD and Doppler radar systems. The National Weather Service needs an economical means for making certain that the test and measurement equipment of its field technicians is correctly calibrated and certified without having to remove the equipment from the field. The risk associated with missing a potential storm warning is simply unacceptable. Sypris satisfies this need through its Bell Technologies subsidiary. Bell operates the most advanced fleet of self-contained, temperature controlled, ISO certified mobile calibration laboratories in the country. Through our investment in these mobile labs, we are able to service the needs of the National Weather Service at its remote locations without having to remove mission- critical equipment from the field. The Federal Aviation Administration has a similar set of unique requirements. The FAA operates flight control radar systems at over 400 airports in the United States, the Caribbean and the South Pacific. The challenge is to calibrate and certify the accuracy of the test and measurement equipment that is used to maintain the air traffic and control tower radar and directional beacons at each of these airports, whether they are located in Southern California, the Alaskan tundra, the Kansas plains, or the island of Samoa. We meet this challenge through the use of our mobile calibration service capabilities and as a result, the FAA is spared the need to invest in redundant test, measurement and diagnostic equipment at each of these 400 locations. The explosive growth in telecommunications, data and wireless networks has been well documented, but how do companies such as AT&T keep up with the maintenance requirements of these systems? The answer is through the use of services provided by Sypris Solutions. We fulfill the calibration requirements of AT&T at over 600 of its central and field switching stations located in the United States and overseas, as well as the needs of many of its domestic cellular transmission stations. In addition to our fleet of 15 mobile calibration laboratories, Sypris operates 17 separate calibration and repair laboratories located throughout the United States, manages the on-site service requirements for customers such as Bose, Square-D and Delphi, and maintains its own independent primary standards lab that is traceable to the National Institute of Standards and Technology. We are committed to do whatever is necessary to meet the service needs of our customers on a cost-effective basis. By using our unique fleet of advanced mobile calibration laboratories, we are able to meet the mission-critical readiness requirements of our customers - even in some of the most remote regions of the world. H. L. Singer President and CEO Bell Technologies What are we doing to support the unique service needs of our customers? 8 Sypris Annual Report 2000 Sypris Annual Report 2000 9 We are currently developing a family of high data rate products based upon commercially available technology for use by our missile and aircraft test range customers. These products will be able to be incorporated with their existing proprietary systems, regardless of manufacturer, and will be able to store analog and digital information in a digital format. The potential benefits to our customers are significant. They will be able to convert all existing tape libraries into digital formats, thereby saving money on maintenance and storage. They will be able to share all existing and future data over networks and they will be able to parse the data for analysis, thereby saving precious time. They will be able to keep their existing systems in place and will be able to upgrade easily and inexpensively in the future. Our customers in the intelligence field face similar issues with regard to life cycle costs and they too will benefit greatly from the ability to store, analyze and share data as a result of its having been digitized economically. For these customers, however, we are leveraging this advanced technology to satisfy their requirements for data rates well in excess of 1 Giga bit per second. The cost savings are expected to be significant when compared to existing proprietary solutions. We believe that the ability to extend the life and increase the capability of our customers’ existing investments in data systems will be crucial to their future success. By doing so with commercially available technology, we are able to provide them with cost-effective, open solutions that can be implemented quickly, efficiently and with minimal interruption to existing service. Technology plays an increasingly important role in our society today and its applications can take many forms. But technology, especially proprietary technology, can also create unnecessary roadblocks that result in prohibitive service and migration costs. Our customers in the intelligence, missile and aircraft test range markets are being confronted with just such a situation. These customers have invested heavily over the years in expensive, proprietary systems to gather, analyze and store highly sensitive data. The challenges with these systems today are numerous. The life cycle costs (maintenance, parts and spares) are extremely high, the speed at which the systems record data is falling behind current transfer rates, gaining access to stored data is expensive and time consuming, and data cannot be shared on networks or between systems of different manufacturers. Sypris has been a leader in the development and maintenance of advanced data acquisition and storage systems for over 40 years through our Metrum-Datatape subsidiary. Our products, systems and software are used to gather sonar data from submarines, test data from aircraft, biological data from space flights, performance data from missiles and a variety of data from intelligence networks. We are guided by three principles in our development of technologically advanced solutions for use by our customers: " Best of Breed. The solution must incorporate components, peripherals and software that reflect the best technology available, regardless of manufacturer. " Open and Flexible. The solution must utilize a common platform and be interoperable, available in a variety of configurations and easily upgradeable. " Ease of Implementation. The solution must be able to be installed or implemented quickly and efficiently with minimal interruption to existing service, while meeting ever-increasing demands for faster data rates. G. Darrell Robertson President and CEO Metrum-Datatape How are we using technology to benefit our customers? 10 Sypris Annual Report 2000 Sypris Annual Report 2000 11 The needs of our aerospace, defense and national security customers are unique in that the price of failure can often involve great expense, human life or both. Reliability therefore is of paramount importance. What does it take to become an integral partner with a company or agency that participates in these markets? Quite simply, it requires the ability to consistently deliver a product or service as contracted and within the prescribed framework of rigorous procedures, extensive testing, exacting documentation and tight security. At Sypris, we have a 35-year history of consistently meeting the demanding requirements of these customers through our Group Technologies subsidiary. We understand the needs of and have the certifications required to meet the restrictions imposed by these frameworks, including those required by such diverse agencies as NASA and the National Security Agency. Our customers include Boeing, Honeywell, Lam Research, Litton, Lockheed Martin, Northrop Grumman and Raytheon. We currently manufacture complex circuit cards and high level assemblies for use in a variety of applications, including satellite communications systems, missile guidance systems, commercial avionics, ruggedized hand-held computers and secure communications products. For example, the circuit card assemblies that are used in missile guidance systems must undergo rigorous environmental testing to insure that they will not fail under circumstances involving extreme temperature, humidity, vibration, altitude and nuclear survivability. The components in these applications must be able to withstand an environment that is up to ten times the severity experienced by that of a jet fighter. We make the electronics for the special cameras that are used on Space Shuttle missions and we supply the electronic assemblies that are used in the exacting environments of semiconductor processing equipment. We employ 124 engineers, close to half of whom are dedicated solely to the development of advanced encryption software for use in national security applications. In many instances, special security access is required for these professionals to accomplish this mission-critical task. We have designed and currently manufacture a line of secure voice and data encryption devices that deliver the highest technically available solutions for network security. The National Security Agency has endorsed the use of these products, but only by companies and agencies that have the appropriate level of security clearance. We are using our certified computer security analysts to participate in the development of a patternless intrusion detection system for use in network security. If successful, such a system will provide an administrator with a computerized view of the network and the ability to move around visually through the network to detect an intrusion. The additional application of signature protocol will even enable the name of the intruder to be identified. The potential costs associated with the failure of a satellite, the avionics of a commercial aircraft or the guidance system of a tactical air-to-air missile are extremely high, as are the costs associated with a breach of network security. The process of developing, manufacturing and delivering reliable components, subassemblies and software for use in these applications is absolutely essential. James G. Cocke President and CEO Group Technologies What are we doing to become an integral partner with our customers? 12 Sypris Annual Report 2000 Sypris Annual Report 2000 13 Richard L. Davis Senior Vice President Anthony C. Allen Vice President & Controller David D. Johnson Vice President & CFO How are we using solutions The word solution is defined as the act or process of solving a problem. We believe that our long-term success is and will continue to be dependent upon our ability to help solve the problems and issues faced by our customers in a manner that improves their chances of success. Quickly, efficiently and cost effectively. There are a number of other initiatives we have underway that will have a direct impact on our ability to deliver increasingly effective solutions for our customers in the future. We are in the process of establishing a customer Web site that will enable our calibration and repair customers to verify equipment records, manage assets, schedule repairs, pay bills and maintain certification records on-line. The site, when completed during 2001, will greatly improve the efficiency and reduce the cost associated with the management and certification of our customers’ equipment. We are in the process of developing and implementing Web-based systems that will enable us to increase the efficiency and reduce the cost of doing business, including the processing of schedules, purchase orders, invoices and payments. And while doing all of the above, we will not lose sight of the basics. We must and will become ever more responsive and flexible to the needs of our customers, including the capability to deliver products and services more cost-effectively, in a shorter period of time and with the high degree of reliability that our customers require. We are committed to creating an ever-increasing competitive advantage for our customers. If we continue to do so with a single-minded focus on the development of solutions, we are confident that Sypris will remain successful for many years to come. to drive our future growth? 14 Sypris Annual Report 2000 Sypris Annual Report 2000 15 S I R P Y S Solutions at a Glance Manufacturing Services Technical Services Products Electronic Calibration and Repair Data Systems Integrated design and engineering services, component selection, sourcing and procurement, automated assembly, design and implementation of product testing, systems assembly, and repair and warranty services. APPLICATIONS AND USES Electronic assemblies and subsystems for use in missile guidance systems, commercial avionics, satellite communications systems, ruggedized hand-held computers, semiconductor processing equipment, and secure communications networks and products. SELECT CUSTOMERS BAE, Boeing, FBI, Honeywell, Lam Research, Litton Industries, Lockheed Martin, National Security Agency, Northrop Grumman, Raytheon, Rockwell and U.S. Army. Wireless communication test equipment, control tower radar and direction beacon test equipment, digital oscilloscopes, microwave equipment and fiber optic measuring equipment. APPLICATIONS AND USES Maintenance of cellular communications systems, air traffic control systems, broadband telecommunication systems and quality certification programs in manufacturing operations. SELECT CUSTOMERS AT&T, Bose, Delphi Automotive, FAA, Intel, Lucent Technologies, National Weather Service, Raytheon and Square-D. Component Testing RF, microwave and mixed signal component testing, environmental testing, dynamics testing and failure analysis. Digital and analog recorders, multiplexers, storage systems and touch screen control software. APPLICATIONS AND USES Collection of sonar data from submarines, test data from aircraft, biological data from space flights, performance data from missiles and voice data from intelligence networks. SELECT CUSTOMERS Government of Israel, Johnson Space Center, Lockheed Martin, National Security Agency, Raytheon, U.S. Air Force, and U.S. Navy. Magnetics Hall generators, current sensors, autoprobes and gaussmeters. APPLICATIONS AND USES Industrial Automated forging, machining, induction hardening, cold extrusion and heat treating services. APPLICATIONS AND USES Semiconductor manufacturing, aerospace and satellite systems. Current measurement applications in locomotives, mass transit systems, elevators, automotive diagnostic systems and laboratory diagnostic systems. APPLICATIONS AND USES Heavy-duty truck axles, light-duty truck and automotive axles, jet engine shafts and construction vehicle components. SELECT CUSTOMERS SELECT CUSTOMERS Boeing, EFTC, Eldec, Honeywell, Lockheed Martin, NASA, Raytheon and Texas Instruments. Adtranz, Agilent, Artesyn, Bombardier, General Motors, Genie, IBM, Lockheed Martin, Miltope, Snap-on and Toyo. SELECT CUSTOMERS Engineering Services Specialty ArvinMeritor, Caterpillar, John Deere, Pratt & Whitney and Teledyne Technologies. Encryption software design services and contract design services. High-pressure closures, transition joints and insulated joints. APPLICATIONS AND USES APPLICATIONS AND USES Network and communications security. Pipeline and chemical systems in the energy and chemical industries. SELECT CUSTOMERS National Security Agency and U.S. Army. SELECT CUSTOMERS Chevron, Exxon and Shell Oil. Financial Review 18 Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 Consolidated Income Statements 25 Consolidated Balance Sheets 26 Consolidated Statements of Cash Flows 27 Consolidated Statements of Shareholders’ Equity 28 Notes to Consolidated Financial Statements 40 Report of Independent Auditors 41 Financial Summary 16 Sypris Annual Report 2000 Sypris Annual Report 2000 17 Management’s Discussion and Analysis The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. Results of Operations The following table sets forth certain data from the Company’s consolidated income statements for the years ended December 31, 2000, 1999 and 1998, expressed as a percentage of net revenue: Years ended December 31 Net revenue Cost of sales Gross profit Selling, general and administrative expense Research and development Amortization of intangible assets Special charges Operating income Net income 2000 100.0% 81.4% 18.6% 12.4% 1.6% 0.7% 1.4% 2.5% 1.5% 1999 100.0% 77.8% 22.2% 11.5% 3.2% 0.5% — 7.0% 4.7% 1998 100.0% 77.4% 22.6% 13.3% 2.8% 0.4% — 6.1% 3.5% Year Ended December 31, 2000 Compared to Year Ended acquired calibration business added a fleet of mobile December 31, 1999 Net revenue totaled $216.6 million in 2000, an increase of $14.5 million, or 7.1%, from $202.1 million in 1999. The Electronics Group’s net revenue in 2000 was $182.1 million, an increase of $17.2 million or 10.4% from $164.9 million in 1999. The Industrial Group’s net revenue in 2000 was $34.5 million, a decrease of $2.7 million, or 7.3%, from $37.2 million in 1999. The Company’s book- to-bill ratio during 2000 was 1.15 to 1, resulting in an increase in backlog of $33.8 million to $160.8 million at December 31, 2000. Backlog for the Electronics Group and the Industrial Group at December 31, 2000 was $143.2 million and $17.6 million, respectively. The Electronics Group’s $17.2 million increase in net revenue was generated primarily from new contracts for manufacturing services and the expansion of calibration services resulting from an acquisition completed in the fourth quarter of 1999. Production on several new manufacturing service contracts, mainly with defense and aerospace customers, began to ramp-up during 2000, generating a $16.2 million increase in revenue. The majority of the Electronics Group’s backlog consists of manufacturing service contracts and shipments on these contracts are expected to increase during 2001. The 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 due to reduced sales quantities for certain product offerings. Demand for the Electronics Group’s data storage products began to decline in 1999 and continued to decline throughout 2000. The reduced level of demand reflects an overall market decline and increased competition arising from technological advancements in the market. Market conditions for data storage products are expected to stabilize during 2001 and sales volumes are expected to approximate the levels of 2000. Other outsource services and product sales for the Electronics Group accounted for a net $0.9 million decrease in net revenue during 2000. The Industrial Group’s $2.7 million decrease in net revenue was primarily due to a decline in outsource 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 S I R P Y S of 2001. for each segment. agreements by the Industrial Group and accounted for a $4.0 million decrease in net revenue, the majority of which occurred during the second half of 2000. The Company expects demand in the heavy-duty truck market to remain weak during 2001, however, further significant declines in demand are not anticipated. Revenue derived from manufacturing services in other markets served by the Industrial Group increased by $0.5 million and fabricated product sales increased by $0.8 million. During 1999 and 2000, the Industrial Group invested approximately $22.6 million to expand its forging capacity and add new machining capabilities. The Industrial Group expects to invest approximately $24 million during 2001 to complete this capital program. Manufacturing service agreements are in place or are being negotiated for substantially all of the additional capacity. The Industrial Group expects to begin production on certain new machining equipment in the second quarter of 2001, with the majority of new production anticipated to begin in the fourth quarter Gross profit totaled $40.3 million in 2000, or 18.6% of net revenue, as compared to $44.9 million, or 22.2% of net revenue in 1999. The Electronics Group’s gross profit 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 Industrial Group’s gross profit 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 factors impacting gross profit are discussed immediately below Management’s Discussion and Analysis million unfavorable cost variance 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. Component supply levels were low throughout 2000, however, the availability of certain components began to improve during the fourth quarter. While management believes that a sufficient supply of components will be available to enable it to substantially meet its customer delivery schedules for the next twelve months, the Company’s results of operations or financial position could be negatively impacted by these component market conditions. 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. And 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. Management expects the factors affecting gross profit in 2000 will begin to lessen during the first half of 2001, as manufacturing efficiency improves on new programs and shipments on contracts in backlog begin to accelerate. The Industrial Group’s $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 The Electronics Group’s $1.6 million decrease in gross profit in 2000 was primarily due to unfavorable organizational infrastructure to support future growth plans was being developed. The increased cost structure volume and cost variances on data storage products associated with the additional people and systems and unfavorable cost variances on manufacturing required to meet future contractual requirements and the service contracts. Volume declines for data storage underabsorption of overhead due to the volume decline products, related underabsorbed overhead costs and resulted in low gross margin levels, particularly during manufacturing inefficiencies arising from the transfer of the second half of 2000. The Company expects gross production following the consolidation of two facilities profit will continue to be adversely effected as the truck during the first half of 2000 contributed to a $5.0 million market demand is not expected to increase during 2001. decline in gross profit. This reduction was substantially Selling, general and administrative expense in 2000 offset by increased gross profit from the growth in the was $26.9 million, or 12.4% of net revenue, as compared manufacturing and calibration service revenue. The to $23.4 million, or 11.5% of net revenue in 1999. The additional volume generated increased gross profit of increase in selling, general and administrative expense $4.4 million, however, this increase was offset by a $1.0 was attributable primarily to the Electronics Group, 18 Sypris Annual Report 2000 Sypris Annual Report 2000 19 Management’s Discussion and Analysis which reported an increase of $2.9 million. Investments than doubled to approximately $58.7 million in 2000 from by the Company in organizational infrastructure as approximately $28.4 million in 1999. This increase discussed above also include certain selling, general and resulted primarily from the December 1999 acquisition administrative expenses, the majority of which are within by the Electronics Group, working capital funding related the Electronics Group. Selling expenses incurred for to the increase in revenue and order backlog and capital marketing and bid and proposal activities during 2000 expenditures during 1999 and 2000 to support the exceeded prior year amounts and were a contributing Company’s new business opportunities. The weighted factor to the increased orders and net revenue in 2000. average interest rate for 2000 was approximately 8.3% as Research and development expense in 2000 was compared to approximately 6.1% for the prior year. The $3.6 million, or 1.6% of net revenue, as compared to year-to-year rate change includes an increase in the $6.4 million, or 3.2% of net revenue in 1999. This margin paid on outstanding borrowings of approximately decrease was attributable to the Electronics Group, and 100 basis points under the terms of the Company’s credit relates to the quantity and timing of new product agreement with a syndicate of banks (the “Credit releases for the data acquisition, storage and analysis Agreement”), as amended in October 1999 and product lines and the utilization of strategic alliances with November 2000. suppliers for product development. An income tax benefit of approximately $1.4 million Amortization of intangible assets in 2000 was $1.4 was recognized during 2000 as compared to income tax million, an increase of $0.4 million, or 45.6% compared to expense of $3.1 million during 1999. The tax benefit $1.0 million in 1999. This increase resulted from the during 2000 was primarily due to a $3.0 million reduction amortization of goodwill recorded in connection with the in the Company’s valuation allowance on deferred December 1999 calibration business acquisition by the tax assets. Certain issues related to the Company’s Electronics Group. consolidated federal taxable income were resolved Special charges of $2.9 million were recognized during 2000, which gave rise to the elimination of the during 2000 for activities related to the consolidation of valuation allowance for deferred tax assets related certain operations within the Electronics Group. to federal income tax temporary differences. The Operations for the Electronics Group’s data acquisition, Company also recognized a tax benefit during 2000 of storage and analysis product lines have been conducted approximately $0.3 million for research and development at two facilities since the November 1997 acquisition that tax credits. The provision for income taxes in 1999 expanded this business. Although several consolidation included a reduction in the valuation allowance on actions were implemented immediately following this deferred tax assets of $1.9 million and a benefit for acquisition, management identified potential cost savings research and development tax credits of $0.6 million. 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 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. The Company’s weighted average debt outstanding more Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 S I R P Y S Net revenue totaled $202.1 million in 1999, a decrease of $9.5 million, or 4.5%, from $211.6 million in 1998. Net revenue for the Electronics Group in 1999 was $164.9 million, a decrease of $9.5 million or 5.4% from $174.4 million in 1998 and net revenue for the Industrial Group in 1999 was $37.2 million, unchanged from 1998. The $9.5 million decrease in the Electronics Group’s net revenue for 1999 was primarily a result of reduced demand for certain product offerings. During the fourth quarter of 1999, a portion of the government program funding related to these products was delayed due to the timing of the federal budget approval process and certain other program spending was suspended prior to year- end due to year 2000 concerns. The decrease in net revenue for product sales in the fourth quarter of 1999 was offset by an increase in net revenue for manufacturing services, which experienced increased sales volume during the second half of 1999. The Electronics Group’s net revenue for the first half of 1999 was $15.8 million below the first half of 1998. However, net revenue increased in the third and fourth quarters of 1999 by $1.3 million and $5.0 million, respectively, over the comparative prior year quarters. The growth that occurred during the second half of 1999 was primarily the result of management’s business development efforts in manufacturing services that began during 1998, specifically the transition from low-margin contracts to new business opportunities aimed at improving profitability. The Electronics Group’s backlog increased from $76.7 million to $95.2 million to $107.7 million at December 31, 1997, 1998 and 1999, respectively. The backlog at December 31, 1999 also consisted of higher margin contracts than those in place during 1998. The Industrial Group continued to increase shipments of truck axles during 1999, thereby offsetting declines in other forged product lines provided to customers in the aerospace industry and foreign markets of the oil and gas industry. Gross profit totaled $44.9 million in 1999, a decrease of $3.0 million, or 6.3%, from $47.9 million in 1998. Gross profit for the Electronics Group was $37.9 million in 1999, a decrease of $3.5 million, or 8.5%, from $41.4 million in Management’s Discussion and Analysis 1998 and gross profit for the Industrial Group was $7.0 million in 1999, an increase of $0.5 million, or 8.5%, from $6.5 million in 1998. The $3.5 million decrease in the Electronics Group’s gross profit is comprised of a $4.7 million decrease primarily due to the decline in product sales described above, which was partially offset by a $1.2 million increase primarily due to the improved performance of manufacturing services. Operational and financial control improvements over manufacturing services reflects management’s actions to improve profitability by focusing on specific manufacturing and service opportunities in which the Company offers value-added solutions under a competitive cost structure. Additionally, the Electronics Group’s revenue mix for 1999 as compared to 1998 consisted of a higher percentage of manufacturing services revenue and a lower percentage of product sales, primarily due to revenue mix changes during the fourth quarter of 1999. Since the margins on manufacturing services are typically lower than product sales, the Electronics Group’s gross profit percentage decreased to 23.0% in 1999 from 23.7% in 1998. The $0.5 million increase in the Industrial Group’s gross profit was primarily due to manufacturing efficiencies in the production of forged truck axles and the increased capacity utilization and cost reductions on certain programs. The productivity and utilization improvements resulted in an increase in the Industrial Group’s gross profit percentage to 19.0% in 1999 from 17.5% in 1998. Selling, general and administrative expense totaled $23.4 million in 1999, a decrease of $4.8 million, or 17.1%, from $28.2 million in 1998. The consolidation of certain functional activities was the primary cause of the decrease in the year-to-year comparison. Workforce reductions in certain operations associated with the decrease in revenue and a strategic decision to align costs with the revenue base resulted in a decrease of approximately $0.5 million. Other contributing factors included a reduction in selling expense attributable to the decrease in net revenue and adjustments to the Company’s estimated liability for the sale of certain 20 Sypris Annual Report 2000 Sypris Annual Report 2000 21 Management’s Discussion and Analysis assets of the Electronics Group in June 1997, for which respectively, commensurate with the growth in the a final settlement agreement was reached during the Electronics Group’s service revenue. The increase in second quarter of 1999. Also included in 1998 were legal, accounts receivable also reflects the low volume of accounting and other professional fees and other costs shipments immediately prior to December 31, 1999, totaling approximately $0.4 million associated with the principally related to Year 2000 issues and related Reorganization which were nonrecurring. concerns by customers. During 2000, inventory increased Research and development expense totaled by $4.2 million in the Electronics Group and decreased $6.4 million in 1999, an increase of $0.5 million, or 7.9%, by $2.2 million in the Industrial Group. The increase in from $5.9 million in 1998. This increase was generated the Electronics Group’s inventory was primarily by the Electronics Group, and reflected management’s attributable to start-up programs for manufacturing continued support and investment in the data services, electronic component shortages and expected acquisition, storage and analysis product lines. shipments on certain contracts scheduled in the first half Amortization of intangible assets totaled $1.0 million of 2001. The decrease in the Industrial Group’s inventory in 1999 and in 1998. The amortization was primarily was primarily due to reduced demand in the heavy-duty attributable to goodwill recorded in connection with truck market. the Reorganization. Net cash used in investing activities was $14.9 million Interest expense totaled $1.7 million in 1999, an for 2000 as compared to $26.4 million for 1999. The increase of $0.4 million, from $1.3 million in 1998. Company had increased levels of capital expenditures Average outstanding debt for 1999 exceeded 1998 in 2000 in both the Electronics Group and the Industrial primarily due to working capital investments and capital Group, which totaled $8.0 million and $15.5 million, expenditures. The weighted average interest rate was respectively. Capital expenditures for the Electronics higher in 1999 than in 1998 due to increased rates and a Group were principally comprised of facilities pricing adjustment on the refinancing completed early in improvements and manufacturing, assembly and test the fourth quarter of 1999. equipment. The Industrial Group’s capital expenditures The provision for income taxes totaled $3.1 million in included facilities improvements and new forging and 1999, a decrease of $1.2 million, from $4.3 million in 1998. machining equipment to increase and expand the range The Company’s effective tax rate in 1999 was 24.5% as of production capabilities. During 2000, the Company also compared to 36.7% in 1998. During the fourth quarter of sold certain manufacturing equipment and concurrently 1999, the Company recognized a tax benefit of leased the equipment back under operating lease approximately $0.6 million related to a claim for research agreements with terms ranging from five to nine years. and development credits attributable to prior years. The Proceeds from the sale and leaseback of the related provision for income taxes during 1999 also reflected a reduction in the valuation allowance on deferred tax assets assets totaled $9.3 million. During 1999, the Company completed the acquisition of the assets of two businesses of $1.9 million as compared to $0.9 million in 1998. for an aggregate purchase price of $11.6 million. Liquidity, Capital Resources and Financial Condition Net cash provided by operating activities was $8.1 million for 2000 as compared to net cash used in operating activities of $2.1 million for 1999. Operating results for 2000 accounted for $10.7 million of cash flow, which was partially offset by a $2.6 million investment in working capital. Accounts receivable and accounts payable increased by $8.1 million and $9.3 million, Net cash provided by financing activities was $11.1 million during 2000 as compared to $26.5 million during 1999. The Company’s debt outstanding under its Credit Agreement increased $10.6 million during 2000, primarily to fund capital expenditures. The Company’s net borrowings increased $25.8 million during 1999 primarily to fund two acquisitions and capital expenditures. Under the terms of the Credit Agreement between the Company and its lenders, the Company had total availability for borrowings and letters of credit under its S I R P Y S revolving credit facility of $35.0 million at December 31, 2000, which, when combined with the cash balance of $14.7 million, provides for total cash and borrowing capacity of $49.7 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 Credit Agreement may be used to finance working capital requirements, eligible acquisitions as defined in the Credit Agreement and for general corporate purposes, including capital expenditures. The Credit Agreement contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified ratios and minimum levels of net worth. The terms of the Credit Agreement were last amended as of February 2001 to modify certain financial ratios and include collateral security, with substantially all other terms and conditions of the Credit Agreement remaining in effect as set forth in the original document. As a result of the February 2001 amendment, the Company was in compliance with all covenants associated with the Credit Agreement as of December 31, 2000 and expects to remain in compliance for the remaining term of the Credit Agreement. The Company’s principal commitments at December 31, 2000 consisted of repayments of borrowings under the Credit Agreement and obligations under operating leases for certain of its real property and equipment. The Company also had purchase commitments for manufacturing equipment totaling approximately $11.4 million at December 31, 2000. The Company believes sufficient resources will be available to satisfy the Company’s cash requirements for at least the next twelve months. Cash requirements for periods beyond the next twelve months depend on the Company’s profitability, its ability to manage working capital requirements and its rate of growth. If the Company’s working capital and capital expenditure requirements exceed expected levels during 2001 or in the foreseeable future, it may require additional external sources of capital. Market Risk The Company had no holdings of derivative financial or commodity instruments at December 31, 2000. The Company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. All borrowings under the Company’s Credit Agreement bear interest at a variable rate based on the prime rate, the London Interbank Offered Rate, or certain alternative short-term rates. 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 the Company’s debt outstanding at December 31, 2000. Substantially all of the Company’s business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have never had a significant impact on the Company, and they are not expected to in the foreseeable future. 22 Sypris Annual Report 2000 Sypris Annual Report 2000 23 Consolidated Income Statements Years ended December 31 (in thousands, except for per share data) NET REVENUE Outsource services Products Total net revenue COST OF SALES Outsource services Products Total cost of sales Gross profit Selling, general and administrative expense Research and development Amortization of intangible assets Special charges Operating income Interest expense, net Other income, net Income before income taxes Income tax (benefit) expense Net income Net income per common share: Basic Diluted Shares used in computing per common share amounts: Basic Diluted 2000 1999 1998 $ 168,216 48,355 $ 150,139 51,991 $ 146,706 64,919 216,571 202,130 211,625 145,059 31,199 176,258 40,313 26,881 3,574 1,436 2,945 5,477 4,035 (344) 1,786 (1,398) 3,184 0.33 0.32 9,671 9,964 $ $ $ 127,153 30,028 157,181 44,949 23,388 6,409 986 — 14,166 1,730 (219) 126,894 36,808 163,702 47,923 28,169 5,940 963 — 12,851 1,298 (204) 12,655 11,757 $ $ $ 3,099 9,556 1.00 0.97 9,515 9,861 $ $ $ 4,311 7,446 0.79 0.76 9,438 9,793 Cash and cash equivalents Accounts receivable, net Inventory, net Other current assets Total current assets Property, plant and equipment, net (in thousands, except for share data) December 31 ASSETS Current assets: S I R P Y S Long-term debt Other liabilities Current liabilities: Other assets Total assets Intangible assets, net Total liabilities Commitments and contingencies Accounts payable Accrued liabilities Current portion of long-term debt Total current liabilities LIABILITIES AND SHAREHOLDERS’ EQUITY SHAREHOLDERS’ EQUITY Preferred stock, no par value, 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; 9,709,669 and 9,589,214 shares issued and outstanding in 2000 and 1999, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity — — 97 24,401 40,060 (353) 64,205 The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 24 Sypris Annual Report 2000 Sypris Annual Report 2000 25 Total liabilities and shareholders’ equity $ 179,122 $ 148,564 Consolidated Balance Sheets 2000 1999 $ 14,674 31,896 51,055 7,695 105,320 54,317 17,154 2,331 $ 10,406 23,793 49,462 4,279 87,940 40,192 18,038 2,394 $ 179,122 $ 148,564 $ $ 25,670 18,548 2,500 46,718 62,500 5,699 114,917 11,022 17,813 5,400 34,235 49,000 4,509 87,744 — — 96 23,921 36,876 (73) 60,820 Consolidated Statements of Cash Flows Years ended December 31 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Deferred income taxes Provision for excess and obsolete inventory Provision for doubtful accounts Other noncash charges (credits) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Inventory Other assets Accounts payable Accrued and other liabilities Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures Proceeds from sale of assets Purchase of the net assets of acquired entities Changes in nonoperating assets and liabilities Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Net increase in debt under revolving credit agreements Payments on long-term debt Proceeds from issuance of common stock Payments for redemption of common stock in subsidiaries, net Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 2000 1999 1998 $ 3,184 $ 9,556 $ 7,446 9,351 (2,478) 453 18 202 (8,121) (2,046) (344) 9,274 (1,361) 8,132 (23,886) 9,292 — (351) (14,945) 10,600 — 481 — 11,081 4,268 10,406 7,582 (645) 446 (129) 133 2,619 (11,277) (1,704) (1,997) (6,652) 6,909 989 851 135 (258) 1,727 4,245 (1,138) (1,855) (8,081) (2,068) 10,970 (14,443) 14 (11,642) (343) (26,414) 28,280 (2,463) 684 — 26,501 (1,981) 12,387 (5,845) 380 — (364) (5,829) 720 (3,284) 40 (66) (2,590) 2,551 9,836 (in thousands, except for share data) Balance at January 1, 1998 Net income Adjustment in minimum pension liability Comprehensive income (loss) Issuance of shares for conversion of GFP no par value common stock to Sypris $.01 par value common stock Issuance of shares for conversion of redeemable common stock to Sypris $.01 par value common stock Issuance of shares for acquisition of minority interests in subsidiaries Excess of fair value of common stock issued over net assets acquired S I R P Y S Purchase Plan Exercise of stock options Exercise of stock options BALANCE AT DECEMBER 31, 1998 Net income Adjustment in minimum pension liability Comprehensive income Issuance of shares under Employee Stock BALANCE AT DECEMBER 31, 1999 Net income Adjustment in minimum pension liability Comprehensive income (loss) Issuance of shares under Employee Stock Purchase Plan Exercise of stock options 205,074 893,822 — 9,688 9,450,593 — — — 15,600 123,021 9,589,214 — — — 35,290 85,165 Cash and cash equivalents at end of year $ 14,674 $ 10,406 $ 12,387 BALANCE AT DECEMBER 31, 2000 9,709,669 $ Consolidated Statements of Shareholders’ Equity Common Stock Amount Shares Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity 314,196 $ 7,892 $ — $ 19,836 $ — $ 27,728 — — — — — — — — — 7,446 — 7,446 — (1,294) (1,294) 7,446 (1,294) 6,152 8,027,813 (7,808) 7,808 — 38 — — — — — — — — — 701 3,569 11,169 40 661 3,560 11,169 40 23,238 27,320 (1,294) 49,359 — — — 99 584 9,556 — 9,556 — — — 1,221 1,221 — — 9,556 1,221 10,777 99 585 23,921 36,876 (73) 60,820 — — — 273 207 3,184 — 3,184 — — — (280) (280) — — 3,184 (280) 2,904 273 208 $ 24,401 $ 40,060 $ (353) $ 64,205 2 9 — — 95 — — — — 1 96 — — — — 1 97 The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 26 Sypris Annual Report 2000 Sypris Annual Report 2000 27 Notes to Consolidated Financial Statements Note 1. Organization and Significant Accounting Policies 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). CONSOLIDATION POLICY The accompanying consolidated financial statements include the accounts of Sypris Solutions, Inc. and its wholly-owned subsidiaries (collectively, “Sypris” or the “Company”), Bell Technologies, Inc. (“Bell”), Group Technologies Corporation (“GroupTech”), Metrum- Datatape, Inc. (“Metrum-Datatape”), and Tube Turns Technologies, Inc. (“Tube Turns”). All significant intercompany accounts and transactions have been eliminated. NATURE OF BUSINESS Sypris is a diversified provider of technology-based outsource services and specialized industrial products. The Company performs a wide range of manufacturing and technical services, typically under long-term contracts with major manufacturers. The Company also manufactures and sells complex data storage systems, magnetic instruments, current sensors, high-pressure closures and a variety of other industrial products. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the 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 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 twelve 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. 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 year ended December 31, 2000 was $910,000. 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. S I R P Y S 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 is 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 $105,535,000, $90,819,000 and $56,867,000 for the years ended December 31, 2000, 1999 and 1998, 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, 2000 and 1999). 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 Notes to Consolidated Financial Statements 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. Provisions for losses on firm fixed-priced contracts totaled $1,701,000, $807,000 and $907,000 in 2000, 1999 and 1998, respectively. 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. At December 31, 2000, the Company did not have significant credit risk concentrations. 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. The Company recognized revenue from contracts with the U.S. Government and its agencies of approximately $45,467,000, $53,244,000 and $47,178,000 during the years ended December 31, 2000, 1999 and 1998, respectively. The Company’s single largest customer for the year ended December 31, 2000 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, 2000, 1999 or 1998. 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”). 28 Sypris Annual Report 2000 Sypris Annual Report 2000 29 Notes to Consolidated Financial Statements ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 was subsequently amended by two other statements and is required to be adopted in years beginning after June 15, 2000. Because of the Company’s minimal use of derivatives, SFAS 133 did not have a material impact on the Company’s consolidated financial statements when it was adopted by the Company effective January 1, 2001. The Reorganization was accounted for as a downstream merger, in which the merger of GFP and GroupTech was accounted for as a purchase of the minority interests of GroupTech. The issuance of shares in exchange for the redeemable common stock held by the Bell and Tube Turns minority shareholders was accounted for as a purchase, and accordingly, the excess of the fair value of the common stock issued over the fair market value of the proportional share of the net assets of Bell and Tube Turns was allocated to the assets and liabilities of Bell and Tube Turns and the excess was allocated to goodwill, which totaled $6,118,000. RECLASSIFICATIONS Certain amounts in the Company’s 1999 and 1998 consolidated financial statements have been reclassified to conform with the 2000 presentation. Note 2. Acquisitions and Mergers 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 (see Note 9). Sypris was organized in 1997 and began business on March 30, 1998 with the completion of the merger of Group Financial Partners, Inc. (“GFP”) and two of its subsidiaries, Bell and Tube Turns, with and into GroupTech, a Nasdaq-traded company in which GFP owned an approximate 80% interest. Effective immediately thereafter, GroupTech was merged with and into Sypris. As a result of these and other transactions (collectively referred to herein as the “Reorganization”), Sypris became the holding company for Bell, GroupTech, Tube Turns and Metrum-Datatape, a wholly-owned subsidiary of GFP prior to the Reorganization, and succeeded to the listing of GroupTech on the Nasdaq Stock Market under the new symbol SYPR. Note 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. Note 4. Accounts Receivable Accounts receivable consists of the following (in thousands): December 31 Commercial U.S. Government Allowance for doubtful accounts 2000 $ 26,262 6,313 32,575 (679) $ 31,896 1999 $ 18,419 6,044 24,463 (670) $ 23,793 Accounts receivable from the U.S. Government includes amounts due under long-term contracts, all of which are billed at December 31, 2000 and 1999, of $4,864,000 and $4,282,000, respectively. and programs Note 5. Inventory S I R P Y S Accumulated depreciation Inventory consists of the following (in thousands): December 31 Raw materials Work in process Finished goods Costs relating to long-term contracts and programs, net of amounts attributed to revenue recognized to date Progress payments related to long-term contracts LIFO reserve Reserve for excess and obsolete inventory 45,542 29,637 (14,011) (1,059) (3,004) $ 51,055 (1,038) (430) (2,669) $ 49,462 The preceding amounts include inventory valued under the last-in, first-out (“LIFO”) method totaling $5,365,000 and $7,582,000 at December 31, 2000 and 1999, respectively, which approximates replacement cost. Note 6. Property, Plant and Equipment Property, plant and equipment consists of the following (in thousands): December 31 Land and land improvements Buildings and building improvements Machinery, equipment, furniture and fixtures Construction in progress $ 2000 1,032 14,979 77,901 18,561 112,473 (58,156) $ 54,317 $ 1999 1,024 13,392 70,173 6,327 90,916 (50,724) $ 40,192 Depreciation expense totaled $7,906,000, $6,526,000 and $5,934,000 for the years ended December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, $5,372,000 and $2,093,000 was included in accounts payable and accrued liabilities, respectively, for capital expenditures. Notes to Consolidated Financial Statements Note 7. Intangible Assets Intangible assets consists of the following (in thousands): 2000 $ 13,567 8,388 1,632 1999 $ 12,640 9,649 1,673 December 31 Costs in excess of net assets of businesses acquired Other Accumulated amortization 2000 1999 $ 18,418 3,107 21,525 (4,371) $ 17,154 $ 18,462 2,954 21,416 (3,378) $ 18,038 Amortization expense totaled $1,445,000, $1,056,000 and $975,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Note 8. Accrued Liabilities Accrued liabilities consists of the following (in thousands): December 31 Employee benefit plan accruals Salaries, wages and incentives Other $ 2000 4,770 2,921 10,857 $ 18,548 $ 1999 5,007 3,694 9,112 $ 17,813 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. Note 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 30 Sypris Annual Report 2000 Sypris Annual Report 2000 31 Notes to Consolidated Financial Statements of funded debt to earnings before interest, taxes, depreciation and amortization. The weighted average interest rate for outstanding borrowings at December 31, 2000 was 9.3%. The effective average interest rates for borrowings during the years ended December 31, 2000 and 1999 were 8.3% and 6.1%, respectively. Current maturities of long-term debt at December 31, 2000 and 1999 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, 2000 and 1999. 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 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. The Credit Agreement was last amended as of February 2001 to modify certain financial ratios and include collateral security, with substantially all other terms and conditions of the Credit Agreement remaining in effect as set forth in the original document. As a result of the February 2001 amendment, the Company was in compliance with all covenants associated with the Credit Agreement as of December 31, 2000 and expects to remain in compliance for the remaining term of the Credit Agreement. Note 10. Fair Value of Financial Instruments Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the 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, 2000 and 1999 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. Note 11. Employee Benefit Plans The Company sponsors noncontributory defined benefit pension plans (the “Pension Plans”) covering certain employees of Tube Turns. 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 a decrease of $280,000 and an increase of $1,221,000 to its minimum pension liability during 2000 and 1999, respectively. No tax effect was recorded related to these adjustments. The following table details the components of pension expense (in thousands): Years ended December 31 2000 1999 1998 Service cost benefits earned Interest incurred during the years ended December during the period $ 180 $ 181 $ 163 31, 2000, 1999 and 1998 totaled $5,260,000, $1,725,000 and $1,645,000, respectively. Interest paid during the years ended December 31, 2000, 1999 and 1998 totaled $5,063,000, $1,629,000 and $1,664,000, respectively. Interest cost of projected benefit obligation Net amortizations and deferrals Actual return on plan assets 1,409 (189) (927) 473 1,283 554 (1,480) 538 $ 1,312 474 (1,321) 628 $ $ The following are summaries of the changes in the benefit obligations and plan assets and of the funded status of the Pension Plans (in thousands): Benefit obligation at beginning of year Service cost Interest cost Plan amendments Actuarial loss (gain) Benefits paid Benefit obligation at end of year December 31 Change in benefit obligation: S I R P Y S Funded status of the plans: Assumptions at year end: Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Company contributions Benefits paid Fair value of plan assets at end of year Benefit obligation at end of year Fair value of plan assets at end of year Funded status of plan (underfunded) Unrecognized actuarial gain Unrecognized prior service cost Net liability recognized Balance sheet liabilities (assets): Accrued benefit liability Intangible asset Accumulated other comprehensive income (loss) Net amount recognized Discount rate used in determining present values Rate of compensation increase Expected long-term rate of return on plan assets 2000 1999 $ 17,859 180 1,409 798 131 (1,281) $ 19,096 $ 19,185 181 1,283 — (1,549) (1,241) $ 17,859 $ 14,329 927 1,181 (1,281) $ 15,156 $ 13,146 1,480 944 (1,241) $ 14,329 $ 19,096 15,156 (3,940) (260) 1,166 $ (3,034) $ 17,859 14,329 (3,530) (821) 608 $ (3,743) $ $ 4,510 (1,123) (353) 3,034 $ $ 4,379 (563) (73) 3,743 8.00% 4.25% 9.50% 8.00% 4.25% 8.50% 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 as approved by the Company’s Board of Directors. Contributions to the Defined Contribution Plan in 2000, 1999 and 1998 totaled $3,459,000, $2,996,000 and $2,661,000, respectively. During 1999 and 1998, the Company had partially self-insured medical plans (the “Medical Plans”) covering Notes to Consolidated Financial Statements 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 1,300 at December 31, 2000 as compared to approximately 600 at December 31, 1999. The Medical Plans limit the 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 2000, 1999 and 1998, the Company charged $4,456,000, $2,802,000 and $2,407,000, respectively, to operations related to reinsurance premiums, medical claims incurred and estimated, and administrative costs for the Medical Plans. Claims paid during 2000, 1999 and 1998 did not exceed the aggregate limits. Note 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 under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2000 are as follows (in thousands): Years ending December 31 2001 2002 2003 2004 2005 2006 and thereafter $ 5,107 4,686 4,124 3,187 2,781 5,410 $ 25,295 Rent expense for the years ended December 31, 2000, 1999 and 1998 totaled $3,650,000, $3,858,000 and $4,701,000, respectively. The Company entered into agreements for the sale and leaseback of certain specific manufacturing and testing equipment during 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. 32 Sypris Annual Report 2000 Sypris Annual Report 2000 33 Notes to Consolidated Financial Statements Proceeds from the sale and leaseback transactions during 2000 were $9,251,000 and the transactions resulted in a deferred loss of $351,000 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, 2000, the Company had outstanding purchase commitments of approximately $11,416,000, primarily for the acquisition of manufacturing equipment, including certain equipment to be financed under an operating lease agreement that becomes effective when the equipment is placed in service in 2001. Tube Turns is a co-defendant in two separate lawsuits filed in 1993 and 1994, one pending in federal court and one pending in state district court in Louisiana, arising out of an explosion in a coker plant owned by Exxon Corporation located in Baton Rouge, Louisiana. The suits are being defended for Tube Turns by its insurance carrier, and the Company intends to vigorously defend its case. The Company believes that a settlement or related judgment would not result in a material loss to Tube Turns or the Company. More specifically, according to the complaints, Tube Turns is the alleged manufacturer of a carbon steel pipe elbow which failed, causing the explosion which destroyed the coker plant and caused unspecified damages to surrounding property owners. One of the actions was brought by Exxon and claims damages for destruction of the plant, which Exxon estimates exceed one hundred million dollars. In this action, Tube Turns is a co-defendant with the fabricator who built the pipe line in which the elbow was incorporated and with the general contractor for the plant. The second action is a class action suit filed on behalf of the residents living around the plant and claims damages in an amount as yet undetermined. Exxon is a co-defendant with Tube Turns, the contractor and the fabricator in this action. In both actions, Tube Turns maintains that the carbon steel pipe elbow at issue was appropriately marked as carbon steel and was improperly installed, without the knowledge of Tube Turns, by the fabricator and general contractor in a part of the plant requiring a chromium steel elbow. 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. Note 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, 2000: Shares Exercise Price Range Weighted Average Exercise Price 871,987 379,214 (9,688) (13,125) $ 1.72 - 31.00 7.00 - 9.13 2.76 - 4.36 3.52 - 15.76 $ 5.33 8.68 4.16 7.36 1,228,388 226,352 (123,021) (19,259) 1,312,460 518,746 (114,246) (163,223) 1.72 - 31.00 5.94 - 9.63 2.76 - 6.68 2.96 - 11.00 1.72 - 31.00 6.56 - 10.50 2.76 - 8.75 4.24 - 10.50 6.35 7.75 4.75 8.26 6.71 9.52 4.08 7.20 Options assumed pursuant to the Reorganization effective March 30, 1998 Granted Exercised Forfeited Balance at December 31, 1998 Granted Exercised Forfeited Balance at December 31, 1999 Granted Exercised Forfeited Balance at December 31, 2000 1,553,737 $ 1.72 - 31.00 $ 7.79 $ 1.72 $ 10.06 - $ 15.76 $ 6.56 - $ 10.00 $ 4.24 - $ 6.24 $ 2.76 - $ 4.12 Exercise Price Range December 31, 2000: S I R P Y S $ 16.12 - $ 23.00 $ 25.52 - $ 31.00 Total Notes to Consolidated Financial Statements The following table summarizes certain weighted average data for options outstanding and currently exercisable at Outstanding Weighted Weighted Average Remaining Average Contractual Exercise Life Price $ $ 1.72 3.34 4.90 8.46 10.79 18.16 28.86 7.79 1.7 4.2 5.2 6.3 6.6 5.4 4.1 5.7 Exercisable Weighted Average Exercise Price $ 1.72 3.34 4.91 8.41 12.21 18.16 28.86 $ 6.78 Shares 156,648 42,782 99,261 432,514 40,811 10,003 4,104 786,123 Shares 156,648 42,782 118,505 1,015,534 206,161 10,003 4,104 1,553,737 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 108,000 shares, 16,000 shares and 380,000 shares of common stock were granted during 2000, 1999 and 1998, respectively. Performance-based options to purchase 112,000 shares of common stock were forfeited in 2000. None of the targeted price levels of the performance- based options were achieved during 2000, 1999 or 1998 and, accordingly, these options are excluded from disclosures of options outstanding at December 31, 2000, 1999 and 1998. The aggregate number of shares of common stock reserved for issuance under the Company’s stock compensation programs as of December 31, 2000 was 3,000,000. The aggregate number of shares available for future grant as of December 31, 2000 was 899,566. 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 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 2000, 1999 and 1998 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: Years ended December 31 2000 1999 1998 Expected life (years) Expected volatility Risk-free interest rates Expected dividend yield 6 70.30% 4.98% — 6 6 75.50% 94.20% 5.68% 6.30% — — The weighted average Black-Scholes value of options granted under the stock option plans during 2000, 1999 and 1998 was $7.05, $5.50 and $6.91, respectively. 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 34 Sypris Annual Report 2000 Sypris Annual Report 2000 35 Notes to Consolidated Financial Statements 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 (in thousands, except for per share data): Years ended December 31 2000 1999 1998 Pro forma net income Pro forma net income per common share: Basic Diluted $ 2,086 $ 8,533 $ 5,989 $ $ 0.22 0.21 $ $ 0.90 0.87 $ $ 0.63 0.61 Effective February 1, 1999, the Company adopted a stock purchase plan to provide 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, 2000 and 1999, there were 249,110 shares and 284,400 shares, respectively, available for purchase under the plan. During 2000 and 1999, a total of 35,290 shares and 15,600 shares, respectively, were issued under the plan. Note 14. 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 (benefit) expense is as follows (in thousands): Years ended December 31 2000 1999 1998 Current: Federal State Other Deferred: Federal State $ 969 102 9 1,080 (2,351) (127) (2,478) $ (1,398) $ $ 3,386 320 38 3,744 (630) (15) (645) 3,099 $ $ 2,844 441 37 3,322 1,011 (22) 989 4,311 The Company files a consolidated federal income tax return which includes all subsidiaries. Income taxes paid during 2000, 1999 and 1998 totaled $1,347,000, $2,136,000 and $5,329,000, respectively. During 2000, the Company received $2,102,000 in federal income tax refunds. At December 31, 2000, 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): December 31 2008 2009 2010 2011 2017 $ 2,386 8,362 560 5,999 464 $ 17,771 The following is a reconciliation of income tax (benefit) expense to that computed by applying the federal statutory rate of 34% to income before income taxes (in thousands): Years ended December 31 2000 1999 1998 Federal tax at the statutory rate State income taxes, net of federal $ 607 $ 4,303 $ 3,997 tax benefit 153 236 291 Change in valuation allowance for deferred tax asset Research and development tax credit Non-deductible expenses Other (3,008) (262) 240 872 $ (1,398) (1,891) (544) 135 860 3,099 $ (882) — 166 739 4,311 $ Deferred income tax assets and liabilities are as $ 2000 1999 1,108 673 977 796 255 995 327 5,131 (977) 4,154 $ 992 969 977 577 250 985 424 5,174 (3,985) 1,189 (1,981) 2,173 $ (1,494) (305) $ Compensation and benefit accruals Inventory valuation State net operating loss carryforwards Contract provisions Accounts receivable allowance Defined benefit pension plan Other follows (in thousands): December 31 Deferred tax assets: S I R P Y S Deferred tax liabilities: Valuation allowance Depreciation Net deferred tax asset (liability) The valuation allowance for deferred tax assets decreased by $3,008,000, $1,891,000 and $882,000 in 2000, 1999 and 1998, respectively. The majority of the decrease in the valuation allowance in 2000 was recorded during the fourth quarter to reflect adjustments to the Company’s effective tax rate based upon income before income taxes as reported for the fourth quarter and year ended December 31, 2000. At December 31, 2000, the valuation allowance of $977,000 relates to state tax net operating loss (“NOL”) carryforwards. The utilization of the state NOL carryforwards is uncertain because it is unlikely the losses will be utilized within the carryforward periods prescribed by the applicable taxing jurisdiction based upon the Company’s current filing status. 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 state NOL carryforward. Notes to Consolidated Financial Statements Note 15. 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. For the period prior to the Reorganization on March 30, 1998, shares used in computing basic and diluted income per common share include the outstanding shares of Sypris common stock as of that date and the dilution associated with common stock options issued prior to that date. The following table presents information necessary to calculate net income per common share (in thousands, except for per share data): Years ended December 31 2000 1999 1998 Shares outstanding: Weighted average shares outstanding 9,671 9,515 9,438 Effect of dilutive employee stock options Adjusted weighted average shares outstanding and assumed conversions 293 346 355 9,964 9,861 9,793 Net income applicable to common stock $ 3,184 $ 9,556 $ 7,446 Net income per common share: Basic Diluted $ $ 0.33 0.32 $ $ 1.00 0.97 $ $ 0.79 0.76 36 Sypris Annual Report 2000 Sypris Annual Report 2000 37 Notes to Consolidated Financial Statements Note 17. 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, 2000 and 1999 (in thousands, except for per share data): 2000 1999 First $ 50,697 Second 52,118 $ Third $ 53,887 Fourth 59,869 $ First Second Third Fourth $ 44,898 $ 49,331 $ 48,291 $ 59,610 10,754 1,182 179 11,353 2,739 1,368 9,090 707 90 9,116 849 1,547 9,720 2,432 1,533 11,734 3,704 2,459 12,041 4,364 2,763 11,454 3,666 2,801 $ $ 0.02 0.02 $ $ 0.14 0.14 $ $ 0.01 0.01 $ $ 0.16 0.16 $ $ 0.16 0.16 $ $ 0.26 0.25 $ $ 0.29 0.28 $ $ 0.29 0.28 Net income per common share: Basic Net income Gross profit Net revenue Operating income S I R P Y S Diluted Notes to Consolidated Financial Statements Note 16. 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 outsource 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 outsource services in 2000 for the Electronics Group and the Industrial Group accounted for 66% and 12% of total net revenue, 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 (in thousands): Years ended December 31 Net revenue from unaffiliated customers: 2000 1999 1998 Electronics Group Industrial Group Gross profit: Electronics Group Industrial Group Operating income: Electronics Group Industrial Group General, corporate and other Total assets: Electronics Group Industrial Group General, corporate and other Depreciation and amortization: Electronics Group Industrial Group General, corporate and other Capital expenditures: Electronics Group Industrial Group General, corporate and other $ $ $ $ $ $ $ $ $ $ $ $ 182,126 34,445 216,571 36,272 4,041 40,313 6,935 1,648 (3,106) 5,477 124,523 37,851 16,748 179,122 8,037 1,109 205 9,351 7,971 15,546 369 23,886 $ $ $ $ $ $ $ $ $ $ $ $ 164,963 37,167 202,130 37,873 7,076 44,949 12,005 4,930 (2,769) 14,166 106,229 26,714 15,621 148,564 6,551 902 129 7,582 6,327 7,134 982 14,443 $ $ $ $ $ $ $ $ $ $ $ $ 174,396 37,229 211,625 41,400 6,523 47,923 11,207 4,329 (2,685) 12,851 90,174 18,905 12,040 121,119 5,933 825 151 6,909 4,598 1,185 62 5,845 The Company attributes net revenue to countries based upon the location of its operations. Export sales from the United States totaled $25,250,000, $30,061,000 and $25,551,000 in 2000, 1999 and 1998, respectively. 38 Sypris Annual Report 2000 Sypris Annual Report 2000 39 Report of Independent Auditors Board of Directors and Shareholders Sypris Solutions, Inc. We have audited the accompanying consolidated balance sheets of Sypris Solutions, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Louisville, Kentucky February 16, 2001 (in thousands, except for per share data) INCOME STATEMENT DATA Gross profit Net revenue Years ended December 31 Operating income S I R P Y S Basic Diluted Net income (loss): PER SHARE DATA Working capital Basic Diluted Total assets Net income (in thousands) December 31 BALANCE SHEET DATA Total debt Income (loss) from continuing operations Discontinued operations, net of tax Income (loss) from continuing operations: Financial Summary 2000 1999 1998 1997 1996 $ 216,571 $ 202,130 $ 211,625 $ 217,355 $ 308,598 40,313 44,949 47,923 32,135 30,383 5,477 3,184 — 14,166 12,851 9,556 7,446 — — 3,184 9,556 7,446 1,785 1,527 3,817 5,344 513 (2,536) 3,457 921 $ $ $ $ 0.33 0.32 0.33 0.32 $ $ $ $ 1.00 0.97 1.00 0.97 $ $ $ $ 0.79 0.76 0.79 0.76 $ $ $ $ 0.09 0.09 0.50 0.48 $ $ $ $ (0.45) (0.43) (0.08) (0.08) 2000 1999 1998 1997 1996 $ 58,602 $ 53,705 $ 32,121 $ 35,123 $ 6,337 179,122 148,564 121,119 120,608 132,960 65,000 54,400 28,583 31,340 46,597 Total shareholders’ equity 64,205 60,820 49,359 27,728 22,384 40 Sypris Annual Report 2000 Sypris Annual Report 2000 41 See accompanying Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. Corporate Directory Board of Directors Corporate Officers Subsidiary Officers ROBERT E. GILL (1†) Chairman of the Board ROBERT E. GILL (5) Chairman of the Board JEFFREY T. GILL (1) President & CEO JEFFREY T. GILL (5) President & CEO DAVID D. JOHNSON (5) Vice President, CFO & Treasurer RICHARD L. DAVIS (5) Senior Vice President & Secretary ANTHONY C. ALLEN (5) Vice President, Controller & Assistant Secretary HENRY F. FRIGON (1,2†) Chairman CARSTAR, Inc. R. SCOTT GILL (1) Associate Koenig & Strey, Inc. WILLIAM L. HEALEY (2,3) Private Investor & Consultant ROGER W. JOHNSON (3†,4) Private Investor, Consultant & Educator SIDNEY R. PETERSEN (2,4†) Retired Chairman & CEO Getty Oil, Inc. ROBERT SROKA (3,4) Managing Partner Lighthouse Holdings, LLC (1) Member of Executive Committee (2) Member of Compensation Committee (3) Member of Audit and Finance Committee (4) Member of Nominating and Governance Committee (5) Executive Officer † Committee Chairman CYNTHIA Y. BELAK Vice President of Finance Metrum-Datatape Inc. JAMES G. COCKE (5) Vice President; President & CEO Group Technologies Corporation STEPHEN W. ISLAS Vice President Metrum-Datatape Inc. STUART W. JONES Vice President of Finance Bell Technologies Inc. JOHN M. KRAMER (5) Vice President; President & CEO Tube Turns Technologies Inc. RAYMOND E. MINTER Vice President of Business Development Group Technologies Corporation G. DARRELL ROBERTSON (5) Vice President; President & CEO Metrum-Datatape Inc. HENRY L. SINGER II (5) Vice President; President & CEO Bell Technologies Inc. NORMAN E. ZELESKY Vice President of Finance Tube Turns Technologies Inc. ALABAMA Metrum-Datatape Inc. 3322 S. Memorial Pky. Huntsville, AL 35801 Phone: (256) 881-2231 ARIZONA Bell Technologies Inc. 2320 West Peoria Ave. Building D-133 Phoenix, AZ 85029 Phone: (602) 395-5900 S I R P Y S CALIFORNIA Bell Technologies Inc. 440 N. Bernardo Ave. Mountain View, CA 94043 Phone: (650) 969-5500 Metrum-Datatape Inc. Corporate Headquarters 605 East Huntington Dr. Monrovia, CA 91016 Phone: (626) 358-9500 Bell Technologies Inc. 2102 Ringwood Ave. San Jose, CA 95131 Phone: (408) 954-8050 Bell Technologies Inc. 16340 Roscoe Blvd., Suite 100 Van Nuys, CA 91406 Phone: (818) 830-9111 COLORADO Metrum-Datatape Inc. 4800 East Dry Creek Road Littleton, CO 80122 Phone: (303) 773-4700 Bell Technologies Inc. 4800 East Dry Creek Road Littleton, CO 80122 Phone: (303) 773-4616 FLORIDA Bell Technologies Inc. Corporate Headquarters 6120 Hanging Moss Road Orlando, FL 32807 Phone: (407) 678-6900 Company Locations SOUTH CAROLINA Bell Technologies Inc. c/o Square D 8821 Garners Ferry Road Columbia, SC 29209 Phone: (803) 695-7874 Bell Technologies Inc. c/o Bose Facility 2000 Carolina Pines Drive Blythewood, SC 29016 Phone: (803) 714-8397 TENNESSEE Bell Technologies Inc. 305 Seaboard Lane, Suite 318 Franklin, TN 37067 Phone: (615) 771-2421 TEXAS Bell Technologies Inc. 906 Trinity Drive, Suite H Mission, TX 78572 Phone: (956) 585-6566 Bell Technologies Inc. 258 East Arapaho, Suite 150 Richardson, TX 75081 Phone: (972) 231-4443 Metrum-Datatape Inc. 5500-B Will Ruth Drive El Paso, TX 79924 Phone: (915) 757-2547 Tube Turns Technologies Inc. 9801 Westheimer Drive Suite 302 Houston, TX 77042 Phone: (713) 917-6878 Group Technologies Corporation Corporate Headquarters 10901 Malcolm McKinley Dr. Tampa, FL 33612 Phone: (813) 972-6000 Metrum-Datatape Inc. 8 Eighth Street Shalimar, FL 32579 Phone: (850) 651-5158 GEORGIA Bell Technologies Inc. 1000 Cobb Place Blvd. Building 200, Suite 240 Kennesaw, GA 30144 Phone: (770) 795-8092 ILLINOIS Bell Technologies Inc. 2055 Army Trail Road Suite 108 Addison, IL 60101 Phone: (630) 620-5800 KENTUCKY Sypris Solutions Inc. Corporate Headquarters 101 Bullitt Lane, Suite 450 Louisville, KY 40222 Phone: (502) 329-2000 Tube Turns Technologies Inc. Corporate Headquarters 2820 West Broadway Louisville, KY 40211 Phone: (502) 774-6011 MARYLAND Bell Technologies Inc. 1321A Mercedes Drive Hanover, MD 21076 Phone: (410) 850-5056 Metrum-Datatape Inc. 9020 Junction Drive Annapolis Junction, MD 20701 Phone: (301) 470-0110 MASSACHUSETTS Bell Technologies Inc. 53 Second Avenue Burlington, MA 01803 Phone: (781) 272-9050 Bell Technologies Inc. 34 Simarano Drive Marlborough, MA 01752 Phone: (508) 786-9633 MICHIGAN Bell Technologies Inc. 24301 Catherine Industrial Road Suite 116 Novi, MI 48375 Phone: (248) 305-5200 NEW JERSEY Bell Technologies Inc. 650 Liberty Avenue Union, NJ 07083 Phone: (908) 688-9779 Bell Technologies Inc. 1133 Route 23 South Wayne, NJ 07470 Phone: (973) 628-1363 NEW YORK Bell Technologies Inc. c/o Delphi Harrison 200 Upper Mountain Road Building 6, Plant Q Lockport, NY 14094 Phone: (716) 438-4584 OHIO Bell Technologies Inc. 925 Keynote Circle Brooklyn Heights, OH 44131 Phone: (216) 741-7040 Bell Technologies Inc. 3162 Presidential Drive Fairborn, OH 45234 Phone: (937) 427-3444 PENNSYLVANIA Bell Technologies Inc. 389 Wolf Camp Road Fair Hope, PA 15538 Phone: (814) 267-5408 42 Sypris Annual Report 2000 Sypris Annual Report 2000 43 Common Stock Information The Company’s common stock is traded on The Nasdaq Stock Market under the symbol “SYPR.” The following table sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported by The Nasdaq Stock Market. Year ended December 31, 1999: First Quarter Second Quarter Third Quarter Fourth Quarter Year ended December 31, 2000: First Quarter Second Quarter Third Quarter Fourth Quarter High 8.250 $ $ 9.750 $ 11.000 $ 10.250 $ 11.000 $ 10.750 $ 10.625 8.750 $ Low 6.375 6.875 9.000 8.625 8.875 8.625 8.625 6.188 $ $ $ $ $ $ $ $ As of February 5, 2001, there were 1,014 holders of record of the Company’s common stock. The Company has historically not declared or paid any cash dividend on its common stock. The Company presently intends to retain all of its earnings for the future operation and growth of its business and does not intend to pay cash dividends in the foreseeable future. The payment of cash dividends in the future will be dependent upon the Company’s results of operations, earnings, capital requirements, contractual restrictions and other factors considered relevant by the Board of Directors. 44 Sypris Annual Report 2000 Investor Information CORPORATE ADDRESS Sypris Solutions Inc. 101 Bullitt Lane Suite 450 Louisville, KY 40222 Phone: (502) 329-2000 Fax: (502) 329-2050 ANNUAL MEETING The Annual Meeting of Shareholders will be held on Tuesday, May 1, 2001, at 10:00 a.m. at 101 Bullitt Lane, Lower Level Seminar Room, Louisville, Kentucky. FOR MORE INFORMATION To learn more about Sypris Solutions Inc., visit our site on the World Wide Web at www.sypris.com. FORWARD LOOKING STATEMENTS This document contains various forward-looking statements. Statements in this document that are not historical are forward-looking statements. Such statements are subject to various risks and uncertainties that could cause actual results to vary materially from those stated. Such risks and uncertainties include: economic conditions in various regions, product and price competition, raw material prices, technology changes, patent issues, litigation results, legal and regulatory developments and other risks and uncertainties described in documents filed with the Securities and Exchange Commission. INVESTOR MATERIALS The Sypris Web page – www.sypris.com – is your entry point for a vast array of information about Sypris, including its products, financial information, real-time stock quotes, links to each of its subsidiary operations and other useful information. For investor information, including additional annual reports, 10-Ks, 10- Qs or any other financial literature, please contact Carroll A. Dunavent at (502) 329-2000. SYPRIS ON NASDAQ The Common Stock of Sypris trades on The Nasdaq Stock Market under the symbol SYPR. TRANSFER AGENT First Chicago Trust Company of New York, a division of Equiserve P.O. Box 2500 Jersey City, NJ 07303 Phone: (800) 317-4445 Fax: (201) 222-4151 www.equiserve.com INDEPENDENT AUDITORS Ernst & Young LLP 400 West Market Street Suite 2100 Louisville, KY 40202 Phone: (502) 585-1400 Fax: (502) 584-4221 CORPORATE COUNSEL Wyatt, Tarrant & Combs PNC Plaza, 28th Floor Louisville, KY 40202 Phone: (502) 589-5235 Fax: (502) 589-0309 SYPRIS S O L U T I O N S 101 BULLITT LANE, SUITE 450 LOUISVILLE, KENTUCKY 40222 Phone: (502) 329-2000 Fax: (502) 329-2050 www.sypris.com 

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