Sypris Solutions
Annual Report 2001

Plain-text annual report

Annual Report 2001 Leadership 101 BULLITT LANE, SUITE 450 LOUISVILLE, KENTUCKY 40222 Phone: (502) 329-2000 Fax: (502) 329-2050 www.sypris.com 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 stockholders’ equity 2001 2000 1999 $ 254,640 43,547 13,030 6,367 $ $ $ 0.65 0.63 2001 67,325 211,444 87,500 70,120 $ 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 $255 $217 $202 300 250 200 150 100 50 0 99 00 01 Net Revenue (in millions) 30 25 20 15 10 5 0 $27.6 $23.9 $14.4 99 00 01 16 14 12 10 8 6 4 2 0 $14.2 $13.0 $5.5 99 00 01 Operating Income (in millions) $0.97 $0.63 $0.32 1.20 1.00 0.80 0.60 0.40 0.20 0.00 99 00 01 Diluted Earnings Per Share 180 160 140 120 100 80 60 40 20 0 $161 $162 $127 $13.02 $9.00 $6.87 14 12 10 8 6 4 2 0 99 00 01 99 00 01 Capital Investment (in millions) Order Backlog (in millions) Closing Stock Price (per share) Contents Letter to Stockholders 2 Market Leadership 6 Aerospace and Defense Electronics 8 Truck Components and Assemblies 12 Test and Measurement Services 16 Our People 20 Sypris at a Glance 24 M a n a g e m e n t ’s Discussion and Analysis 2 6 Financial Statements and Notes 3 2 Report of Independent Auditors 4 8 Financial Summary 4 9 Corporate Directory 5 0 Company Locations 5 1 Common Stock Information 5 2 Investor Information 5 3 Sypris Solutions is a diversified provider of outsourced services and specialty products. We perfo rm a wide range of manu fa c t u ri n g , e n g i n e e ring, design, testing and other technical serv i c e s, typically under mu l t i - ye a r, sole-source contracts with major corp o ra t i o n s and gove rnment agencies. We are fo c u s e d on three core marke t s : aerospace and defense electronics, tru ck components and assembl i e s, and test and measurement serv i c e s. Our mission is to become the leading supply chain partner in each of our core marke t s. Revenue Mix Markets 18% Products 18% Technical Services 64% Manufacturing Services 12% Other 13% Truck Components & Assemblies 15% Test & M e a s u r e m e n t Services 60% Aerospace & Defense Electronics Sypris Annual Report 2001 1 Fellow Stockholders We are pleased to report that 2001 marked a year of accomplishment for Sypris Solutions JeffreyT. Gill, President & CEO Robert E.Gill, Chairman (standing) Improved Financial Results. m a nu fa c t u ring assets from Dana, provides for Sypris to R eve nue for the year increased almost 18% to supply manu fa c t u ring services for the forging and $255 million from $217 million in 2000.The increase machining of medium and heavy-duty dri ve train was dri ven by gr owth in demand for the Company ’s components for use in assemblies sold to the leading m a nu fa c t u ring serv i c e s. Roughly 70% of the t ru ck manu facturers in the wo rld, including Fr e i g h t l i n e r, i m p r ovement came from higher shipments of electronic M a ck, Nav i s t a r, PACCAR and Vo l vo. a s s e m blies to the Company ’s aerospace and defe n s e c u s t o m e r s, while the balance was pri m a rily deri ve d from a new contract with Dana Corp o ra t i o n . The agreement runs through 2008 and has an estimated value of $300 million over the term of the c o n t ract, based upon current market vo l u m e s.The O p e rating income increased 138% to $13 million c o n t ract is significant for two ve ry important reasons as a result of improved operating leve rage and stri c t in addition to the dollar value and length of the cost containment, while earnings per share increased c o m m i t m e n t . 97% to $0.63 from $0.32 in 2000. S t o ck h o l d e r ’s equity increased to $70 million and book value per share reached $6.99 by year end. First, with the advent of the Dana contract, Sypri s is now the principal supplier of medium and heav y - d u t y t ru ck axle shafts in North America, since we also supply The price of the Company ’s stock reflected the the needs of Arv i n M e ri t o r, the other pri m a ry supplier of strength of this financial perfo rm a n c e, increasing 89% d ri ve train assemblies in this marke t . The length and to $13.02 per share by the end of December.We we r e nature of the Dana and Arv i n M e ritor contracts will pleased with these results, especially in light of the e n a ble us to continue to invest to support these two challenging economic environment that chara c t e ri ze d i m p o rtant customers for years to come. most of 2001. Second, the contract marks the addition of Dana Key Contract Awards. as a new customer for Sypri s. Dana has long been The year was notable for our continued success in r e c o g n i zed as one of the premier automotive and tru ck booking new contra c t s, including important mu l t i - ye a r component suppliers in the wo rld, with approx i m a t e l y a greements with Honey well, the National Securi t y 300 plants in 34 countri e s.We believe that we can be A g e n c y, the National Weather Service and Ray t h e o n . of significant service to Dana and will wo rk hard to Company improved its position of leadership in each In late May, we also signed a seve n - ye a r, sole-source f u rther develop this new relationship. of its core mar kets, we entered into a number of key a greement with Dana to supply all of its requirements In Fe b ru a ry 2002, we announced that Sypris had been awarded a new manu fa c t u ring services contra c t to produce light axle shafts for Visteon Corp o ra t i o n , across a number of very important fronts. Revenue long-term contracts and we continued to increase our for certain components in North Ameri c a . and earnings posted solid double-digit increases, the investment in the future. The Dana contract, which was part of a larger t ransaction that included the purchase of certain 2/3 Sypris Annual Report 2001 (standing) Anthony C. Allen, G. Darrell Robertson, David D. Johnson, Henry L. Singer II (seated) John M. Kramer, Richard L. Davis,James G. Cocke In addition, we also inve s t e d Our customer, the National Security Agency, is and repair services for equipment used by the FAA to $11.5 million in the purchase of currently evaluating the potential deployment of this maintain its radar systems and directional beacons at m a nu fa c t u ring assets from Dana in technology for use by our armed serv i c e s. each of the airp o rts it serves in the U. S., the Cari bb e a n conjunction with the new supply a greement mentioned above. T h e t ransaction added va l u a ble fo r g i n g and machining capacity, increased our range of value-added serv i c e s and added significant depth and va l u a ble ex p e rience to our management team. D u ring 2001, we began the installation of sophisticated materi a l t ra cking capabilities and adva n c e d scheduling systems at certain of our manu fa c t u ri n g o p e ra t i o n s.We expect these installations to be complete and operational during the first half of 2002, the result of which should further enhance our ability to o f fer our customers advanced manu fa c t u ring solutions. which represents an important new segment of the m a rket for us. Under the terms of the agreement, we will initially support V i s t e o n ’s requirements to supply Ford Motor C o m p a ny with dri ve train assemblies for the F-150 pickup tru ck, the Ford Expedition and the Lincoln Navigator sport utility ve h i c l e s. Beginning in Ja nu a ry 2004, we will supply light axle shafts for the Providing Customers with Solutions. One Name, One Company. and the South Pa c i f i c . Last ye a r, we announced plans to change the We would not be able to build upon these positions name of our four major subsidiaries to incorp o rate the of strength were it not for the dedication, strength, S y p ris brand name and logo.The purpose of the name c r e a t i v i t y, commitment and leadership of our employe e s. change was to improve brand recognition with common We are pleased to have the opportunity to recognize a customers and suppliers, as well as with employe e s number of these leaders this year on the cover and and inve s t o r s. t h r o u g h o u t this annual report . We truly believe that our As a result of the dedicated effo rt of a small group of employe e s, we are pleased to announce that e m p l oyees really do make a difference and we are thri l l e d to be able to showcase some of their accomplishments. e f fe c t i ve Ja nu a ry 2002, Bell Technologies has become Thank You. S y p ris Test & Measurement, Group Technologies has In closing, we want to thank our employees fo r become Sypris Electronics, Metrum-Datatape has their dedication and hard wo rk over this past ye a r. T h e become Sypris Data Systems and Tube Tu rns has a c h i evements of 2001 would not have been possibl e become Sypris Te c h n o l o g i e s. without their commitment.We also want to thank our The Importance of Leadership. Our mission is to become the leading supply chain p a rtner in each of our core marke t s.We want to do so customers for the opportunity to serve them.We are dedicated to providing each of them with solutions to i m p r ove their competitiveness in the marke t p l a c e. Ford F-250, F-350 and Ranger series pickup tru ck s, and the Mustang GT as we l l . The contract has an estimated value of $100 million over the term of the a greement and runs through 2006. Our job is to provide customers with solutions to because we believe the result will generate superi o r We sincerely appreciate your investment in Sypri s succeed in a rapidly changing and increasingly r e t u rns for the Company ’s stockholders and will create Solutions and encourage you to contact us.We wo u l d c o m p e t i t i ve business env i r o n m e n t . D u ring the ye a r, a positive, dynamic and gr ow t h - o riented culture for be pleased to answer your questions and look fo r wa r d we completed the installation of new, state-of-the-art our employe e s. to your comments. Investing for the Future. machining capabilities.The integration of these new D u ring the ye a r, we maintained our steadfast activities with our existing operations will enable us to commitment to the future by increasing capital inve s t- reduce labor and shipping costs, and minimize cycle ment 16% to almost $28 million from $24 million in times for our customers. We believe we are off to a good start . We have been a leading supplier of manu fa c t u ring and technical s e rvices to major aerospace and defense companies and agencies of the U. S. G ove rnment for over 35 2 0 0 0 . The inve s t m e n t s, which were pri m a rily made to s u p p o rt the requirements of new contra c t s, should begin to contri bute to reve nue and earnings during 2002. We also developed a data encryption notebook ye a r s, we are the principle supplier of medium and that delivers the most advanced, technically ava i l a bl e h e avy-duty tru ck axle shafts in North America, and solution for security in field communications products. we are the sole supplier of calibration, certification Jeffrey T. Gill President & CEO Robert E. Gill Chairman 4/5 Sypris Annual Report 2001 Market leadership and people hold the keys to a future of consequence. The ability to achieve results of significance in today ’s intensely competitive wo rld without a position of leadership is all but impossibl e. At Sypri s, we have leading positions in each of our core markets and the highly qualified, motivated employe e s that are essential to build upon these positions of marke t s t r e n g t h . In our view, the combination of these two vital elements represents the key to a successful future, one of significant consequence. Aerospace and Defense Electronics. We have been a leading supplier of manu fa c t u ri n g s e rvices and data storage systems to major aerospace and d e fense companies and agencies of the U. S. G ove rn m e n t for over 35 ye a r s.Our customers include Boeing, Honey we l l , L o ckheed Martin, Northrop Grumman and Ray t h e o n . We m a nu facture complex circuit cards, high-level assembl i e s and subsystems for applications where performance, precision and reliability are critical, such as missile guidance systems, avionics and satellite commu n i c a t i o n s s y s t e m s.We also have a long-term relationship with the National Security Agency to design and build secure c o m munications equipment, data acquisition and stora g e s y s t e m s, and to write encryption softwa r e. Truck Components and Assemblies. We are the leading supplier of manu fa c t u ring serv i c e s for the forging and machining of medium and heav y - d u t y t ru ck axle shafts in North Ameri c a . We provide these serv i c e s under mu l t i - ye a r, sole-source contracts with Arv i n M e ri t o r and Dana, the two pri m a ry providers of dri ve train a s s e m blies for the leading tru ck manu facturers in the wo rl d , including Fr e i g h t l i n e r, Mack, Nav i s t a r, PACCAR and Vo l vo. We also have a mu l t i - year contract to produce light axle shafts for Visteon to support its requirements to supply Fo r d Motor Company with dri ve train assemblies for the F-150, F-250, F-350 and Ranger series pickup tru ck s, the Expedition, the Lincoln Navigator and the Mustang GT. Test and Measurement Services. We are a leading provider of technical services for the c a l i b ration, certification and repair of test and measurement equipment in the U. S.Our customers include AT & T, Bose, Lucent, Siemens and T RW, which utilize these services to ensure their equipment is maintained in accordance with c e rtain quality assurance standards.We are also the sole p r ovider of these services for instruments used by the FAA to maintain the radar systems and directional beacons at ove r 400 airp o rts in the U. S., Cari bbean and the South Pa c i f i c, and for equipment used by the National Weather Service to maintain the NEXRAD Doppler radar systems at each of its 132 advanced wa rning weather service radar stations. Our People. We have smart, ex p e rienced, hard-wo rking employe e s who have assumed leadership roles in all areas of our business and who are dedicated to providing our customers with solutions to increase their competitive n e s s.Without the commitment, creativity and persistence of these individuals, S y p ris would not have a future of significant consequence. In the truest sense of the word, these leaders represent our finest and most cherished asset. 6/7 Sypris Annual Report 2001 Aerospace and Defense Electronics Where performance, precision and reliability are critical. We are a leading supplier of manufacturing services for the production of complex circuit cards for use in missile guidance systems, avionics and satellite communications systems. 8/9 Sypris Annual Report 2001 Aerospace and Defense Electronics Where performance, precision and reliability are critical. Opportunity: The market for Aerospace and Defense Electronics is expected to increase 30% by 2005. According to Electronic Trend Publ i c a t i o n s a n d N ew Venture Research, the total aero- space and defense electronics market in Nort h A m e rica is expected to gr ow from $33.6 billion in 2001 to $43.9 billion in 2005. In addition, these sources estimate that the outsourcing of m a nu fa c t u ring and technical services in this m a rket will gr ow from $1.4 billion in 2000 to $7.9 billion in 2005. The number of suppliers that are qualified to participate in this gr owth, howeve r, is limited by the special nature and requirements of the wo rk . The cost of failure can be extremely high, the manu fa c t u ring requirements are typically c o m p l ex and the electronic assemblies are produced in relatively small quantities. Companies that provide these manu fa c t u ri n g and technical services are required to maintain and adhere to a number of strict cert i f i c a t i o n s, s e c u rity clearances and traceability standards that are often quite comprehensive. We believe that we are uniquely positioned to take advantage of this trend.We have l o n g - t e rm, well established relationships with m a ny of the leading aerospace and defe n s e c o n t ra c t o r s, including Boeing, Honey we l l , L o ckheed Martin, Northrop Grumman and R ay t h e o n . We currently manu facture complex circuit card assemblies under mu l t i - year c o n t racts for the missile guidance systems of the AMRAAM, BAT, Brimstone and HARM missile progra m s, and for the main color display systems of the AH-64 Apache Longbow a t t a ck helicopter.We also have a 37-ye a r - o l d relationship with the National Security Agency to design and build secure commu n i c a t i o n equipment, data acquisition and storage s y s t e m s, and to write encryption softwa r e. We believe that our ex t e n s i ve ex p e ri e n c e, c l e a ra n c e s, cert i f i c a t i o n s, qualifications and relationships with the leading aerospace and d e fense companies and agencies of the U. S. G ove rnment will continue to serve us well and d i f ferentiate Sypris from many of the more t raditional outsource suppliers. 10/11 Sypris Annual Report 2001 $43.9 $33.2 50 40 30 20 10 0 00 05 Aerospace/Defense Electronics (in billions) 10 8 6 4 2 0 $7.9 $1.4 00 05 Aerospace/Defense Outsourcing (in billions) We are the leading supplier of manufacturing services for the production of medium and heavy-duty tru ck axle shafts in North America. Truck Components and Assemblies Helping customers compete on a global scale. 12/13 Sypris Annual Report 2001 500 400 300 200 100 0 467 472 408 322 331 00 01 02 03 04 Medium and Heavy-Duty Truck Production (in thousands of units) Truck Components and Assemblies Helping customers compete on a global scale. Opportunity: The production of medium and heavy-duty trucks is forecast to increase 23% in 2003. According to Ameri c a ’s Commercial Tra n s p o rtation Publ i c a t i o n s, the Nort h A m e rican production of medium and heav y - duty tru cks is expected to increase slightly to approximately 331,000 units in 2002, as compared to levels reported in 2001. Production is forecast to increase 23% to 408,000 units in 2003 and then increase a f u rther 16% to 472,000 units in 2004. In addition, Dana estimates the production of medium and heavy-duty tru cks could reach 500,000 units by 2005. We are well positioned to benefit from a ny increase in the production of medium and heavy-duty tru cks in North Ameri c a . Our contracts with Arv i n M e ritor and Dana, the two pri m a ry providers of dri ve train a s s e m blies to the leading tru ck manu fa c t u r e r s in the wo rld, run through 2004 and 2008, r e s p e c t i ve l y. In addition, we believe that a significant o p p o rtunity exists to increase our bu s i n e s s with existing customers, as well as with many of the other leading automotive and tru ck component suppliers. M a ny of these large companies are confronted with excess capacity and aging capital equipment, the impact of which is further magnified by the intensely competitive nature of the bu s i n e s s. As a result, the market remains under intense pressure to reduce capital ex p e n d i t u r e s, production costs and inve n t o ry leve l s. We believe that as these companies seek to address these issues, they will increasingly select strong outsourcing p a rt n e r s, such as Sypri s, as a means to enhance their financial perfo rm a n c e, increase their return on assets and improve the c o m p e t i t i veness of their offe ri n g s. 14/15 Sypris Annual Report 2001 Test and Measurement Services Meeting mission-critical charters in the most remote of locations. We are a leading supplier of technical services for the calibration, certification and repair of test and measurement equipment in the U.S. 16/17 Sypris Annual Report 2001 180 160 140 120 100 80 60 40 20 0 176 150 122 86 97 98 99 00 ISO Certifications (in thousands) Test and Measurement Services Meeting mission-critical charters in the most remote of locations. Opportunity: ISO certifications have increased at an average rate of 27% per year since 1997. The widespread adoption of ISO quality standards and processes has been under way for many years and has led to a surging demand for highly reliable test and m e a s u r e m e n t equipment.The periodic verification of the accuracy of these i n s t ruments is a critical component of any ISO certification process. The investment in the people and equipment required to support the calibra t i o n and certification process has historically been p e r fo rmed offsite by the manu facturers of the equipment, or onsite by internal opera t i o n s, even though the productive use of the assets and people is difficult to justify since c e rtain instruments are only certified on an a n nual basis. which can use the manpower and equipment across a diversified base of customers, reduce investment requirements and improve profitability on a national scale. To support such customer requirements, we have an ex t e n s i ve fleet of ISO-cert i f i e d mobile calibration labora t o ries that service our customers in the U. S., the Cari bbean and the South Pa c i f i c . We operate 17 separate c a l i b ration, certification and repair labora t o ri e s that are located throughout the U. S., and we manage the onsite service requirements fo r companies such as Bose, Square D and D e l p h i . We also maintain our own independent p ri m a ry standards lab that is tra c e a ble to the National Institute of Standards and Te c h n o l o g y. We believe that these and other test and measurement services will increasingly be outsourced to specialists, such as Sypri s, We believe we are in a strong position to benefit from this trend and to expand our position of leadership in this marke t . 18/19 Sypris Annual Report 2001 Our People Dedicated to providing our customers with solutions. We have smart, experienced, hard-working leaders in all areas of our business who represent the future of Sypris. 1/21 Sypris Annual Report 2001 Our People Dedicated to providing our customers with solutions. Opportunity: Press on. Nothing in the world can take the place of persistence. The fine people featured on the cover and throughout this annual report represent the type of individuals that one would expect to find at S y p ris - dedicated, ex p e rienced, hard-wo rking and focused on results. In short, they are leaders in pursuit of consequence. The stories of the five individuals illustrated to the right are symbolic of the effo rts of many of our employees throughout the Company. Please join us in thanking each and eve ry one of our e m p l oyees for their dedication, contri bution and commitment to the future of Sypri s. 22/23 Sypris Annual Report 2001 Pat Byron With degrees in physics and mechanical engineering, and with over a decade’s experience in operations and engineering with Honeywell’s Space Systems Division, Pat joined Sypris in early 2001 as Director of Operations for Sypris Electronics. The timing could not have been better. Our operations in Tampa, which provide critical manufacturing s e rvices for most of the leading aerospace and defense companies, was confronted with a number of operating issues as the business struggled with component shortages, tight delivery schedules, cost growth and fraying nerves. Fortunately, Pat knew just what to do. Pat moved out onto the factory floor and never left it. She oversaw vast improvements in productivity and manufacturing output through the use of Six Sigma and other tools. With her hands-on, team-oriented approach, delivery schedules became current, customer satisfaction soared and employee morale topped the charts. Gene DesJardin Gene joined Sypris Data Systems in 2000 after serving in a va riety of manu fa c t u ring engineering and quality roles over the past 25 years. His vast experience and important affiliations with the Society of Manufacturing Engineering and American Society of Quality made him an ideal candidate to lead the ISO certification efforts at this subsidiar y. Sypris Data Systems, which specializes in the design and manufacture of high-performance data recording and storage systems for use by intelligence, space and military agencies around the globe, needed Gene’s help, for without the ISO certification, the business was at risk of losing some of its vaunted credibility for superior quality with the international community. Thanks to Gene and the entire Sypris Data Systems team, the Company was awarded its ISO 9001 certification in January 2002 after the completion of a highly concentrated year-long process. The outstanding reputation of the business has been preserved and our customers now have the additional surety that each of our products is designed, documented and produced in conformity with the highest of international standards for quality. Carroll Dunavent Carroll has been the Director of Legal and Corporate Services for Sypris since its inception as a publicly-traded company in 1998. With responsibility for our compliance prog rams, stockholder and equity programs, corporate communications and o versight of the Company’s intellectual property, among other items, you might think that Carroll’s plate was fairly full.Not so. With time running short, Carroll agreed to step in and lead a team of professionals from throughout Sypris who were tasked with a major branding challenge: to change the name of each of our four major subsidiaries to adopt the Sypris name and logo, and to do so while avoiding potentially harmful confusion with customers, employees, suppliers and local communities. No easy task. The group worked long hours, addressed divergent views and dealt with a variety of difficult local issues head on.The project expanded into the redesign and consolidation of five separate and distinct Web sites to insure that each of the Company’s constituents would receive a clear and consistent message. It came down to the final wire, but they were remarkably successful. Scott Patterson Scott has been with the Company for 16 years and has responsibility for production, engineering, quality, production control, purchasing, maintenance and facilities for the Louisville forging operation of Sypris Te c h n o l o g i e s.With degrees in mechanical e n g i n e e ring and aviation technology to go along with his commercial pilot license, Scott was the ideal choice to captain one of the Company’s most important projects in years. The mission was daunting. Scott and his team had less than 24 months to design, purchase and install manu fa c t u ring cells that would enable the Company to produce axle shafts for the light, medium and heavy-duty tru ck markets at speeds that were four to f i ve times faster than the Company ’s current production ra t e s. T h e C o m p a ny ’s future success depended upon it. Scott and his team wo rked mira c l e s, and sometimes around the c l o ck, to make it happen, but happen it did.As a result of their hard wo rk and dedication, we can now offer our customers state-of-the-art m a nu fa c t u ring solutions that are cost-competitive on a global scale at a time when our customers need it most.To d ay. Dr. Mike Pietrantonio Dr. Mike has served as the Staff Scientist for Sypris Test & Measurement since 1997, after having completed a distinguished 15-year career with Spar Aerospace of Canada, where he and others were involved with the design of the maneuvering arm of the Space Shuttle. Little did he know that NASA would soon need his help again. The Kennedy Space Center was concerned about a major issue involving the Space Shuttle Program that had been stumping NASA scientists and engineers for some time. In an attempt to solve the p r o blem, NASA invited a dozen or so scientists, including D r. M i ke, to a conference to see if they could help. Fortunately, the answer was yes. Not only did Dr. Mike isolate the problem, but after consulting with the manufacturer of the part, United Space Alliance, Dr. Mike also devised the corrective action required for the successful production of the component. As a result of his fine work, Space Shuttle launches were able to continue as planned, a valuable customer was provided with a much-needed solution and we now h ave an important business relationship with United Space Alliance. Financial Review M a n a g e m e n t ’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Income Statements Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Stockholders’ Equity Notes to Consolidated Financial Statements Report of Independent Auditors Financial Summary 26 32 33 34 35 36 48 49 Sypris At A Glance Manufacturing Services Technical Services Products Electronic Calibration and Repair Data Systems Integrated design and engineering services, component selection, sourcing and procure- ment, automated assembly, design and implementation of product testing, systems assembly, and repair and warranty services. Wireless communication test equipment, control tower radar and directional beacon test equipment, digital oscilloscopes, microwave equipment and fiber optic measuring equipment. APPLICATIONS AND USES 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, Lockheed Martin, National Security Agency, Northrop Grumman, Raytheon and U.S. Army. Industrial Automated forging, machining, induction hardening, cold extrusion and heat treating services. APPLICATIONS AND USES Light, medium and heavy-duty truck axle shafts, jet engine shafts and construction vehicle components. SELECT CUSTOMERS ArvinMeritor, Caterpillar, Dana, John Deere, Pratt & Whitney, Teledyne Technologies and Visteon. 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, Honeywell, Intel, Lucent Technologies, National Weather Service, Raytheon, Square D and TRW. Component Testing RF, microwave and mixed signal component testing, environmental testing, dynamics testing and failure analysis. APPLICATIONS AND USES Semiconductor manufacturing, aerospace and satellite systems. SELECT CUSTOMERS Boeing, EFTC, Eldec, Honeywell, Lockheed Martin, NASA, Raytheon and Texas Instruments. Engineering Services Encryption software design services and contract design services. APPLICATIONS AND USES Network and communications security. 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 Current measurement applications in locomotives, mass transit systems, elevators, automotive diagnostic systems and laboratory diagnostic systems. SELECT CUSTOMERS Agilent, Artesyn, Bombardier, General Motors, Genie, IBM, Lockheed Martin, Miltope, Snap-on and Toyo. Specialty High-pressure closures, transition joints and insulated joints. APPLICATIONS AND USES Pipeline and chemical systems in the energy and chemical industries. SELECT CUSTOMERS SELECT CUSTOMERS National Security Agency and U.S. Army. Chevron, ExxonMobil and Shell Oil. 24/25 Sypris Annual Report 2001 M a n a g e m e n t ’s Discussion and Analysis M a n a g e m e n t ’s Discussion and Analysis The following discussion of our results of operations and financial condition should be read together with the consolidated financial statements and notes thereto. This discussion contains forw a rd-looking statements that involve risks and uncertainties. Our actual results could diff e r materially from the results anticipated in the forw a rd - l o o k i n g statements as a result of a variety of factors, including those discussed in our filings with the Securities and Exchange C o m m i s s i o n . As of January 1, 2002, we changed the name of our four major operating subsidiaries as part of a compre h e n s i v e branding initiative. The new names of our four subsidiaries a re: Sypris Data Systems, Inc., formerly Metru m - D a t a t a p e , Inc.; Sypris Electronics, LLC, formerly Group Te c h n o l o g i e s Corporation; Sypris Technologies, Inc., formerly Tube Tu rn s Technologies, Inc.; and Sypris Test & Measurement, Inc., f o rmerly Bell Technologies, Inc. Our significant accounting policies are described in Note 1 to the consolidated financial statements. We believe our most critical accounting policies include re v e n u e recognition and cost estimation on certain contracts for which we use a percentage of completion, units of delivery method of accounting. This accounting method is applied by our Electronics Group for outsourced services pro v i d e d under multi-year contracts with aerospace & defense customers. Approximately 53%, 49% and 45% of total net revenue was recognized under the percentage of completion, units of delivery method of accounting during 2001, 2000 and 1999, re s p e c t i v e l y. Revenue is recognized on these contracts when units a re delivered to the customer, with unit revenue based upon unit prices as set forth in the applicable contracts. The c o rresponding recognition of cost of sales for the delivere d units is based upon our estimates of costs to be incurred for Results of Operations the total contract. Under this approach, we compare estimated costs to complete an entire contract to total net revenue for the term of the contract to arrive at an estimated g ross margin percentage for each contract. Each month, the estimated gross margin percentage is applied to the cumulative net revenue recognized on the contract to arr i v e at cost of sales for the period. Management reviews these estimates monthly and the effect of any change in the estimated gross margin percentage for a contract is re f l e c t e d in cost of sales in the period in which the change is known. Such changes to these estimates have not been material to our quarterly results of operations during the three year period ended December 31, 2001. If increases in pro j e c t e d costs-to-complete are sufficient to create a loss contract, the e n t i re estimated loss is charged to operations in the period the loss first becomes known. Additionally, our re s e rve for excess and obsolete inventory is primarily based upon f o recasted demand for our products and any change to the re s e rve arising from forecast revisions is reflected in cost of sales in the period the revision is made. The complexity of the estimation process and all issues related to the assumptions, risks and uncertainties inhere n t with the application of the percentage of completion, units of d e l i v e ry method of accounting affect the amounts re p o rt e d in our financial statements. A number of internal and e x t e rnal factors affect our cost of sales estimates, including labor rate and efficiency variances, revised estimates of w a rranty costs, estimated future material prices and customer specification and testing re q u i rement changes. If our business conditions were diff e rent, or if we used d i ff e rent assumptions in the application of this and other accounting policies, it is likely that materially diff e re n t amounts would be re p o rted in our financial statements. The following table sets forth certain data from our consolidated income statements for the years ended December 31, 2001, 2000 and 1999, expressed as a percentage of net re v e n u e : Years ended December 31, Net revenue: Electronics Group Industrial Group Total net revenue Cost of sales Gross profit Selling, general and administrative Research and development Amortization of intangible assets Special charges Operating income Net income 26/27 Sypris Annual Report 2001 2001 81.4% 18.6 100.0 82.9 17.1 10.3 1.2 0.5 — 5.1% 2.5% 2000 84.1% 15.9 100.0 81.4 18.6 12.4 1.6 0.7 1.4 2.5% 1.5% 1999 81.6% 18.4 100.0 77.8 22.2 11.5 3.2 0.5 — 7.0% 4.7% Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Net Revenue. Net revenue was $254.6 million in 2001, an i n c rease of $38.0 million, or 17.6%, from $216.6 million in 2000. Backlog at December 31, 2001 was $162.3 million, an i n c rease of $1.5 million from $160.8 million at December 31, 2000. Backlog for our Electronics Group and Industrial G roup at December 31, 2001 was $118.5 million and $ 4 3 . 8 million, re s p e c t i v e l y. Net revenue for our Electronics Group in 2001 was $ 2 0 7 . 3 million, an increase of $25.2 million, or 13.8%, f rom $182.1 million in 2000. The increase in net re v e n u e was primarily from contracts with aerospace & defense customers for manufacturing services, which generated an increase of $28.7 million in 2001 over the prior year. Other outsourced services accounted for an increase in net revenue of $0.5 million during 2001. Product sales accounted for a decrease in net revenue of $4.0 m i l l i o n during 2001, primarily due to reduced sales quantities for data systems pro d u c t s . Net revenue for our Industrial Group in 2001 was $ 4 7 . 3 million, an increase of $12.8 million, or 37.5%, fro m $ 3 4 . 5 million in 2000. During May 2001, we acquire d c e rtain manufacturing assets and inventory from Dana for a p p roximately $11.5 million in cash. The assets are used to produce fully machined, heavy-duty truck axle shafts and other drive train components for integration into subassemblies produced for leading truck manufacture r s . This business generated outsourced services revenue of $ 1 7 . 7 million during 2001. Excluding the acquisition, the Industrial Gro u p ’s net revenue declined $4.9 million in 2001 f rom the prior year. The decrease in net revenue was primarily due to a decline in outsourced services pro v i d e d to customers in the heavy-duty truck market. Unfavorable market conditions that arose during the second half of 2000 for heavy-duty truck production resulted in an i n d u s t ry-wide market decrease of approximately 44% fro m 1999 to 2001 and reduced the volume of axles we supplied to that market. We expect demand in the heavy-duty tru c k market to remain weak during 2002; however, furt h e r significant declines in demand are not anticipated. During 2002, we expect to ramp-up production for new and cert a i n existing customers on additional forging and machining equipment we installed during 2001. The incre a s e d p roduction volume from these opportunities, combined with the full year impact of the acquisition from Dana, is expected to result in higher revenue for our Industrial G roup in 2002 as compared to 2001. G ross Pro f i t . G ross profit in 2001 was $43.5 million, an increase of $3.2 million, or 8.0%, from $40.3 million in 2000. Gross margin in 2001 declined to 17.1% from 18.6% in 2000. G ross profit for our Electronics Group in 2001 was $ 3 7 . 4 million, an increase of $1.1 million, or 3.1%, fro m $ 3 6 . 3 million in 2000. The increase in manufacturing s e rvices revenue generated an increase in gross profit of $ 3 . 8 million, while gross profit from other outsourc e d s e rvices decreased $0.6 million. Gross margin in 2001 declined to 18.0% from 19.9% in 2000. Manufacturing s e rvices comprised approximately 59% of our Electro n i c s G ro u p ’s revenue in 2001 as compared to appro x i m a t e l y 51% in 2000. Gross margin from manufacturing serv i c e s i m p roved slightly over the prior year; however, since g ross margin on manufacturing services is lower than other outsourced services, the change in revenue mix contributed to the decrease in gross margin. Another factor in the gross margin decline was a slight decrease in gro s s m a rgin on other outsourced services, primarily due to adverse economic conditions impacting demand and pricing for certain services provided to our customers. G ross profit from product sales decreased $2.1 m i l l i o n during 2001, primarily due to reduced demand for cert a i n p roduct off e r i n g s . G ross profit for our Industrial Group in 2001 was $ 6 . 1 million, an increase of $2.1 million or 52.5% fro m $ 4 . 0 million in 2000. Excluding the acquisition from Dana, gross profit declined $0.9 million in 2001 primarily due to the downturn of the heavy-duty truck market. The reduction in demand and corresponding impact on shipments occurred as our organizational infrastru c t u re to support future growth plans was being developed. The i n c reased cost stru c t u re associated with the additional people and systems re q u i red to meet future contractual re q u i rements and the underabsorption of overhead due to the volume decline resulted in a decline in our gro s s m a rgin, excluding the impact of the operation acquire d f rom Dana, to 10.6% in 2001, as compared to 11.7% for the prior year. Gross margin for our Industrial Gro u p during 2001 including the operation acquired from Dana was 13.0%. Selling, General and Administrative. Selling, general and administrative expense in 2001 was $26.1 million, or 10.3% of net revenue, as compared to $26.9 million, or 12.4% of net revenue in 2000. Although net re v e n u e i n c reased 17.6% from 2000 to 2001 and the acquisition f rom Dana added approximately $1.0 million to selling, general and administrative expense during 2001, our total selling, general and administrative spending decreased by M a n a g e m e n t ’s Discussion and Analysis M a n a g e m e n t ’s Discussion and Analysis $0.8 million, or 2.8%. The decline in selling, general and administrative expense was primarily attributable to d e c reased selling expenses and commissions related to lower product sales for our Electronics Group, decre a s e d marketing costs and cost reductions in both our Electro n i c s G roup and Industrial Group in response to the general weakness in the U.S. economy. R e s e a rch and Development. R e s e a rch and development expense in 2001 was $3.1 million, or 1.2% of net revenue, as compared to $3.6 million, or 1.6% of net revenue in 2000. The decrease in re s e a rch and development expense was attributable to our Electro n i c s G roup, and was related to the quantity and timing of new p roduct releases for the data systems product lines and the i n c reased utilization of strategic alliances with suppliers for p roduct development. A m o rtization of Intangible Assets. A m o rtization of intangible assets in 2001 was $1.3 million, a decrease of $ 0 . 1 million, or 7.5% compared to $1.4 million in 2000. Special Charg e s . Special charges of $2.9 million w e re recognized during 2000 for activities related to the consolidation of certain operations within our Electro n i c s G roup. The consolidation activities were completed in 2000 and no such charges were recognized in 2001. I n t e rest Expense, Net. I n t e rest expense in 2001 was $ 4 . 1 million, an increase of $0.1 million, or 1.9%, fro m $ 4 . 0 million in 2000. Interest expense attributable to i n c reased borrowings during 2001 was offset by a reduction in interest rates and the capitalization of intere s t i n c u rred on our Industrial Gro u p ’s capital expenditure p rogram. Our weighted average debt outstanding i n c reased to approximately $74.5 million during 2001 fro m a p p roximately $58.7 million in 2000. This increase re f l e c t e d the $11.5 million acquisition from Dana made by our Industrial Group in May 2001 and capital expenditure s during 2000 and 2001 to support new business o p p o rtunities. The weighted average interest rate in 2001 was approximately 7.1% as compared to appro x i m a t e l y 8.3% for the prior year. Capitalized interest in 2001 was $ 1 . 8 million as compared to $0.9 million in 2000, and is expected to be insignificant in 2002 as the related capital p rojects have been substantially completed as of December 31, 2001. Income Ta x e s . Income tax expense was $2.9 million in 2001 as compared to an income tax benefit of $1.4 million in 2000. The effective tax rate in 2001 was 31.4%. The e ffective tax rate for 2001 and the income tax benefit in 2000 reflect re s e a rch and development tax credits, fore i g n sales corporation tax benefits and a reduction in the C o m p a n y ’s valuation allowance on deferred tax assets. The reduction in the valuation allowance for 2001 and 2000 was $0.3 million and $3.0 million, re s p e c t i v e l y. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Net Revenue. Net revenue was $216.6 million in 2000, an i n c rease of $14.5 million, or 7.1%, from $202.1 million in 1999. Backlog at December 31, 2000 was $160.8 million, an i n c rease of $33.8 million from $127.0 million at December 31, 1999. Backlog for our Electronics Group and Industrial G roup at December 31, 2000 was $143.2 million and $ 1 7 . 6 million, re s p e c t i v e l y. Net revenue for our Electronics Group in 2000 was $ 1 8 2 . 1 million, an increase of $17.2 million or 10.4% fro m $ 1 6 4 . 9 million in 1999. The increase in net revenue was generated primarily from new contracts for manufacturing s e rvices and the expansion of calibration services re s u l t i n g f rom the acquisition from Lucent. Production on several new manufacturing service contracts, mainly with a e rospace & defense customers, began to ramp-up during 2000, generating a $16.2 million increase in revenue. The a c q u i red calibration business added a fleet of mobile calibration labs to the Electronics Gro u p ’s serv i c e capabilities and accounted for an $8.4 million increase in revenue during 2000. The increase in service re v e n u e was partially offset by a $6.5 million decrease in pro d u c t revenue, primarily due to reduced sales quantities for the E l e c t ronics Gro u p ’s data systems products, which began to decline in 1999 and continued to decline throughout 2000. The reduced level of demand reflects an overall market decline and increased competition. Other outsourc e d s e rvices and product sales accounted for a net $0.9 m i l l i o n d e c rease in net revenue during 2000. Net revenue for our Industrial Group was $34.5 m i l l i o n , a decrease of $2.7 million, or 7.3%, from $37.2 million in 1999. The decrease in net revenue was primarily due to a decline in outsourced services provided to customers in the heavy-duty truck market. Market conditions in Nort h America for heavy-duty truck production were negatively impacted by oil prices, interest rates and an excess i n v e n t o ry 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 s e rvice agreements and accounted for a $4.0 m i l l i o n d e c rease in net revenue, the majority of which occurre d during the second half of 2000. Revenue derived fro m manufacturing services in other markets increased by 28/29 Sypris Annual Report 2001 $ 0 . 5 million and fabricated product sales increased by $ 0 . 8 million. During 1999 and 2000, our Industrial Gro u p invested approximately $22.6 million to expand its forg i n g capacity and add new machining capabilities. G ross Pro f i t . G ross profit in 2000 was $40.3 million, a d e c rease of $4.6 million, or 10.3%, from $44.9 million in 1999. Gross margin in 2000 was 18.6% of net revenue, as c o m p a red to 22.2% of net revenue in 1999. G ross profit for our Electronics Group in 2000 was $ 3 6 . 3 million, or 19.9% of net revenue, as compared to $ 3 7 . 9 million, or 23.0% of net revenue in 1999. The $ 1 . 6 million decrease in gross profit in 2000 was primarily due to volume reductions and increased costs on data systems products and increased costs on manufacturing s e rvice contracts. Volume declines for data systems p roducts, related underabsorbed overhead costs and manufacturing inefficiencies arising from the transfer of p roduction following the consolidation of two facilities during the first half of 2000 contributed to a $5.0 m i l l i o n decline in gross profit. This reduction was substantially o ffset by increased gross profit from the growth in the manufacturing and calibration service revenue. The additional volume generated increased gross profit of $ 4 . 4 million which was offset by increased costs of $ 1 . 0 million associated with the following three primary factors. First, shortages and extended lead times for the p u rchase of certain electronic components resulted in manufacturing inefficiencies due to the unpredictability of scheduling receipts of allocated components from vendors. Second, the number of new program start-ups incre a s e d 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 . T h i rd, additional costs incurred to make the necessary investments in people, equipment and processes to s u p p o rt the re c o rd level of backlog also reduced gro s s p rofit in 2000. G ross profit for our Industrial Group in 2000 was $ 4 . 0 million, or 11.7% of net revenue, as compared to $ 7 . 0 million, or 19.0% of net revenue in 1999. The $ 3 . 0 million decrease in gross profit was primarily due to the downturn of the heavy-duty truck market. The reduction in demand and corresponding impact on shipments occurred as the organizational infrastru c t u re to support future growth plans was being developed. The i n c reased cost stru c t u re associated with the additional people and systems re q u i red to meet future contractual re q u i rements and the underabsorption of overhead due to the volume decline resulted in low gross margin levels, p a rticularly during the second half of 2000. Selling, General and Administrative. Selling, general and administrative expense in 2000 was $26.9 million, or 12.4% of net revenue, as compared to $23.4 million, or 11.5% of net revenue in 1999. The increase in selling, general and administrative expense was attributable primarily to our Electronics Group, which re p o rted an i n c rease of $2.9 million. Investments in the org a n i z a t i o n a l i n f r a s t ru c t u re as discussed above also include cert a i n selling, general and administrative expenses, the majority of which were within our Electronics Group. Selling expenses incurred for marketing and bid and pro p o s a l activities during 2000 exceeded prior year amounts and w e re a contributing factor to the increased orders and net revenue in 2000. R e s e a rch and Development. R e s e a rch and development expense in 2000 was $3.6 million, or 1.6% of net revenue, as compared to $6.4 million, or 3.2% of net revenue in 1999. This decrease was attributable to our E l e c t ronics Group, and relates to the quantity and timing of new product releases for the data systems product lines and the utilization of strategic alliances with suppliers for p roduct development. A m o rtization of Intangible Assets. A m o rtization of intangible assets in 2000 was $1.4 million, an increase of $ 0 . 4 million, or 45.6% compared to $1.0 million in 1999. This increase resulted from the amortization of goodwill re c o rded in connection with the acquisition from Lucent. Special Charg e s . Special charges of $2.9 million were recognized during 2000 for activities related to the consolidation of certain operations within our Electro n i c s G roup. Operations for the data systems product lines have been conducted at two facilities since the November 1997 acquisition that expanded this business. Although several consolidation actions were implemented immediately following this acquisition, management identified potential cost savings in 2000 that could be realized through the elimination of redundant manufacturing operations and s t a ffing of functional areas between the two facilities. The consolidation activities were substantially completed during the first nine months of 2000. The special charg e s i n c u rred for these activities include workforce re d u c t i o n s , facilities re a rrangement and relocation expenses, and employment costs related to the transfer of pro d u c t i o n . I n t e rest Expense, Net. I n t e rest expense in 2000 was $ 4 . 0 million, an increase of $2.3 million, or 133%, fro m $ 1 . 7 million in 1999. The increase in interest expense was primarily due to an increase in the weighted average debt M a n a g e m e n t ’s Discussion and Analysis M a n a g e m e n t ’s Discussion and Analysis outstanding coupled with an increase in interest rates. Our weighted average debt outstanding more than doubled to a p p roximately $58.7 million in 2000 from appro x i m a t e l y $ 2 8 . 4 million in 1999. This increase resulted primarily fro m the acquisition from Lucent, working capital funding related to the increase in revenue and order backlog and capital expenditures during 1999 and 2000 to support new business opportunities. The weighted average interest rate for 2000 was approximately 8.3% as compared to a p p roximately 6.1% for the prior year. The year-to-year rate change includes an increase in the margin paid on outstanding borrowings of approximately 100 basis points under the terms of the Company’s credit agre e m e n t . Income Ta x e s . An income tax benefit of appro x i m a t e l y $ 1 . 4 million was recognized during 2000 as compared to income tax expense of $3.1 million during 1999. The tax benefit during 2000 was primarily due to a $3.0 m i l l i o n reduction in our valuation allowance on deferred tax assets. Certain issues related to our consolidated federal taxable income were resolved during 2000, which gave rise to the elimination of the valuation allowance for d e f e rred tax assets related to federal income tax temporary d i ff e rences. We also recognized a tax benefit during 2000 of approximately $0.3 million for re s e a rch and development tax credits. The provision for income taxes in 1999 included a reduction in the valuation allowance on deferred tax assets of $1.9 million and a benefit for re s e a rch and development tax credits of $0.6 m i l l i o n . Liquidity, Capital Resources and Financial Condition Net cash provided by operating activities was $8.5 m i l l i o n in 2001, as compared to $8.1 million in 2000. Accounts receivable increased by $8.5 million, primarily due to i n c reased revenue and the acquisition from Dana completed in May 2001. Inventory increased by $ 3 . 5 million, excluding the fair value of inventory acquire d in the Dana transaction. Accounts payable increased $3.6 million, excluding the impact of open accounts payable at each year-end related to capital expenditures. The i n c reases in inventory and accounts payable are primarily attributable to the revenue increase in our business. Net cash used in investing activities was $32.9 m i l l i o n in 2001 as compared to $14.9 million for the prior year. The increase was primarily attributable to the $11.5 million acquisition from Dana. Capital expenditures for our E l e c t ronics Group and Industrial Group totaled $7.9 m i l l i o n and $19.5 million, re s p e c t i v e l y, in 2001. Capital e x p e n d i t u res for our Electronics Group were principally comprised of manufacturing, assembly and test equipment. Our Industrial Gro u p ’s capital expenditure s included new forging and machining equipment to i n c rease and expand the range of production capabilities. Our Industrial Group invested $19.5 million, $15.5 m i l l i o n and $7.1 million during 2001, 2000 and 1999, re s p e c t i v e l y, in facilities, equipment and systems to support our curre n t and anticipated growth in the truck components & assemblies market. We substantially completed the investments for this growth during 2001, which pro v i d e s us with the capacity to serve the re q u i rements of our existing multi-year contracts with ArvinMeritor and Dana and allows us the opportunity to undertake additional larg e contracts from new customers. We completed sale and leaseback transactions with members of our bank gro u p during each of the last two years for certain machinery and equipment. Proceeds from the sale of these assets in 2001 and 2000 were $5.4 million and $9.3 million, re s p e c t i v e l y. We entered into operating leases for the related assets for periods ranging from five to nine years. We also re c e i v e d $1.4 million in 2001 for the sale of certain assets by the E l e c t ronics Gro u p . Net cash provided by financing activities was $ 2 3 . 0 million during 2001 as compared to $11.1 m i l l i o n during the prior year. Our outstanding debt incre a s e d $ 2 2 . 5 million during 2001 to $87.5 million, primarily to fund the acquisition from Dana and capital expenditure s . We had total availability for borrowings and letters of c redit under the revolving credit facility of $12.5 million at December 31, 2001, which, when combined with our u n restricted cash balance of $13.2 million, provided for total cash and borrowing capacity of $25.7 m i l l i o n . Maximum borrowings on the revolving credit facility are $ 1 0 0 . 0 million, subject to a $15.0 million limit for letters of credit. Borrowings under the revolving credit facility may be used to finance working capital re q u i re m e n t s , acquisitions and for general corporate purposes, including capital expenditures. Most acquisitions re q u i re the a p p roval of our bank gro u p . Our credit agreement contains customary aff i rm a t i v e and negative covenants, including financial covenants requiring the maintenance of specified fixed charge and leverage ratios and minimum levels of net worth. At December 31, 2001, we were in compliance with these covenants and retained earnings of $15.4 million were u n restricted. The credit agreement is secured by substantially all of our assets, including but not limited 30/31 Sypris Annual Report 2001 to goodwill and intangible assets acquired prior to July 1, 2001, we will apply the new accounting rules beginning J a n u a ry 1, 2002. We will perf o rm the first of the re q u i re d i m p a i rment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. We currently do not expect any significant loss as a result of the impairment tests. We will be re q u i red to test the value of our goodwill at least a n n u a l l y. These tests will involve estimates related to the fair market value of the business with which the goodwill is associated. We anticipate that substantially all a m o rtization of intangible assets as a charge to earn i n g s will be eliminated beginning January 1, 2002. Quantitative and Qualitative Disclosures about Market Risk On July 26, 2001, we entered into interest rate swap a g reements with a syndicate of banks that eff e c t i v e l y c o n v e rt a portion of our variable rate debt to a fixed rate of 4.52%, excluding our applicable margin, through July 2003. We entered into interest rate swap agreements as a means to reduce the impact of interest rate changes on future i n t e rest expense. Approximately 34% ($30.0 million) of our outstanding debt was covered under the interest rate swap a g reements at December 31, 2001. We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. Excluding the b o rrowings included in the interest rate swap agre e m e n t s , all other borrowings under our credit agreement bear i n t e rest at a variable rate based on the prime rate, the London Interbank Off e red Rate, or certain alternative s h o rt - t e rm rates, plus a margin (2.0% at December 31, 2001) based upon our leverage ratio. An increase in i n t e rest rates of 100 basis points would result in additional i n t e rest expense of approximately $0.6 million on an annualized basis, based upon our debt outstanding at December 31, 2001. The vast majority of our transactions a re denominated in U.S. dollars. As such, fluctuations in f o reign currency exchange rates have historically had little impact on us. Inflation has not been a significant factor in our operations in any of the periods presented and it is not expected to affect operations in the future . to accounts receivable, inventory, equipment and re a l estate, and is also guaranteed by our subsidiaries. The asset collateralization re q u i rement may be eliminated after June 2002 in the event we achieve certain financial ratios and remain in compliance with all covenants. Our principal commitments at December 31, 2001 consisted of repayments of borrowings under the cre d i t a g reement and obligations under operating leases for c e rtain of our real pro p e rty and equipment. We also had p u rchase commitments totaling approximately $5.0 m i l l i o n at December 31, 2001, primarily for manufacturing equipment. During 2001 and 2000, we financed a p p roximately $26.3 million of machinery and equipment t h rough operating leases with our bank group. Our minimum commitments on operating leases with initial or remaining terms greater than one year, including all re a l and personal pro p e rty leases, total $7.0 million for 2002, $22.0 million for 2003 through 2006, and $9.2 million for 2007 and there a f t e r. We believe that sufficient re s o u rces will be available to satisfy our cash re q u i rements for at least the next twelve months. Cash re q u i rements for periods beyond the next twelve months depend on our pro f i t a b i l i t y, ability to manage working capital re q u i rements and rate of gro w t h . If we make significant acquisitions or if working capital and capital expenditure re q u i rements exceed expected levels during the next twelve months or in subsequent periods, we may re q u i re additional external sources of capital. T h e re can be no assurance that any additional re q u i re d financing will be available through bank borrowings, debt or equity financings or otherwise, or that if such financing is available, it will be available on terms acceptable to us. If adequate funds are not available on acceptable terms, our business, results of operations and financial condition could be adversely aff e c t e d . Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard s ( “ S FAS”) No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets.” Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amort i z a t i o n p rovisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With re s p e c t Consolidated Income Statements Consolidated Balance Sheets Years ended December 31, (in thousands, except for per share data) NET REVENUE Outsourced services Products Total net revenue COST OF SALES Outsourced services Products Total cost of sales Gross profit Selling, general and administrative Research and development Amortization of intangible assets Special charges Operating income Interest expense, net Other income, net Income before income taxes Income tax expense (benefit) Net income Net income per common share: Basic Diluted Shares used in computing per common share amounts: Basic Diluted 2001 2000 1999 $ 209,874 44,766 $ 168,216 48,355 $ 150,139 51,991 254,640 216,571 202,130 181,818 29,275 145,059 31,199 127,153 30,028 211,093 176,258 157,181 43,547 26,134 3,054 1,329 — 13,030 4,111 (358) 9,277 2,910 40,313 26,881 3,574 1,436 2,945 5,477 4,035 (344) 1,786 (1,398) 44,949 23,388 6,409 986 — 14,166 1,730 (219) 12,655 3,099 $ 6,367 $ 3,184 $ 9,556 $ $ 0.65 0.63 $ $ 0.33 0.32 $ $ 1.00 0.97 9,828 10,028 9,671 9,964 9,515 9,861 December 31, (in thousands, except for share data) ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Inventory, net Other current assets Total current assets Property, plant and equipment, net Intangible assets, net Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued liabilities Current portion of long-term debt Total current liabilities Long-term debt Other liabilities Total liabilities Commitments and contingencies STOCKHOLDERS’ EQUITY Preferred stock, par value $.01 per share, 989,000 shares authorized; no shares issued Series A Preferred stock, par value $.01 per share, 11,000 shares authorized; no shares issued Common stock, non-voting, par value $.01 per share, 10,000,000 shares authorized; no shares issued Common stock, par value $.01 per share, 20,000,000 shares authorized; 9,898,675 and 9,709,669 shares issued and outstanding in 2001 and 2000, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total stockholders’ equity 2001 2000 $ 13,232 39,758 60,574 7,991 $ 14,674 31,896 51,055 7,695 121,555 105,320 70,452 15,926 3,511 54,317 17,154 2,331 $ 211,444 $ 179,122 $ 26,828 19,902 7,500 54,230 80,000 7,094 $ 25,670 18,548 2,500 46,718 62,500 5,699 141,324 114,917 — — — 99 25,490 46,427 (1,896) 70,120 — — — 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. 32/33 Sypris Annual Report 2001 Total liabilities and stockholders’ equity $ 211,444 $ 179,122 Consolidated Statements of Cash Flow s 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 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Inventory Other current 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 $ 6,367 $ 3,184 $ 9,556 9,856 479 432 122 59 (8,474) (3,519) (416) 3,648 (83) 8,471 (27,623) 6,816 (11,486) (650) 9,351 (2,478) 453 18 202 (8,121) (2,046) (344) 9,274 (1,361) 8,132 (23,886) 9,292 — (351) 7,582 (645) 446 (129) 133 2,619 (11,277) (1,704) (1,997) (6,652) (2,068) (14,443) 14 (11,642) (343) Net cash used in investing activities (32,943) (14,945) (26,414) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in debt under revolving credit agreements Payments on long-term debt Proceeds from issuance of common stock Net cash provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year 22,500 — 530 23,030 (1,442) 14,674 10,600 — 481 11,081 4,268 10,406 28,280 (2,463) 684 26,501 (1,981) 12,387 Cash and cash equivalents at end of year $ 13,232 $ 14,674 $ 10,406 2001 2000 1999 (in thousands, except for share data) Consolidated Statements of Stock h o l d e r s ’ E q u i t y Common Stock A m o u n t S h a r e s A d d i t i o n a l P a i d - I n C a p i t a l R e t a i n e d E a r n i n g s A c c u m u l a t e d O t h e r C o m p r e h e n s i v e I n c o m e ( L o s s ) To t a l S t o c k h o l d e r s ’ E q u i t y Balance at January 1, 1999 9,450,593 $ 95 $ 23,238 $ 27,320 $ (1,294) $ 49,359 Net income Adjustment in minimum pension liability Comprehensive income Issuance of shares under Employee Stock Purchase Plan Exercise of stock options — — — 15,600 123,021 BALANCE AT DECEMBER 31, 1999 9,589,214 Net income Adjustment in minimum pension liability Comprehensive income (loss) Issuance of shares under Employee Stock Purchase Plan Exercise of stock options — — — 35,290 85,165 BALANCE AT DECEMBER 31, 2000 9,709,669 Net income Adjustment in minimum pension liability, net of tax of $828 Change in fair value of interest rate swap agreements, net of tax of $309 Comprehensive income (loss) Issuance of shares under Employee Stock Purchase Plan Exercise of stock options — — — — 52,206 136,800 — — — — 1 96 — — — — 1 97 — — — — 1 1 — — — 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 — — — — 256 833 6,367 — 6,367 — (1,124) (1,124) — 6,367 (419) (1,543) (419) 4,824 — — — — 257 834 BALANCE AT DECEMBER 31, 2001 9,898,675 $ 99 $ 25,490 $ 46,427 $ (1,896) $ 70,120 The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 34/35 Sypris Annual Report 2001 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Note 1. Organization and Significant Accounting Policies Consolidation Policy The accompanying consolidated financial statements include the accounts of Sypris Solutions, Inc. and its wholly-owned subsidiaries (collectively, “Sypris” or the “Company”). All significant intercompany accounts and transactions have been eliminated. The first-in, first-out method was used for determining the cost of inventory excluding contract inventory and cert a i n other inventory, which was determined using the last-in, first-out method (see Note 5). The Company’s re s e rve for excess and obsolete inventory is primarily based upon f o recasted demand for its product sales, and any change to the re s e rve arising from forecast revisions is reflected in cost of sales in the period the revision is made. N a t u re of Business Sypris is a diversified provider of outsourced services and specialty products. The Company perf o rms a wide range of manufacturing, engineering, design, testing and other technical services, typically under multi-year, sole-sourc e contracts with major companies and government agencies in the markets for aerospace & defense electronics, tru c k components & assemblies, and for users of test & m e a s u rement equipment. As of January 1, 2002, the Company changed the name of its four major operating subsidiaries as part of a c o m p rehensive branding initiative. The new names of the four subsidiaries are: Sypris Data Systems, Inc., form e r l y M e t rum-Datatape, Inc.; Sypris Electronics, LLC, form e r l y G roup Technologies Corporation; Sypris Technologies, Inc., f o rmerly Tube Tu rns Technologies, Inc.; and Sypris Test & M e a s u rement, Inc., formerly Bell Technologies, Inc. Use of Estimates The preparation of the consolidated financial statements in c o n f o rmity with generally accepted accounting principles re q u i res management to make estimates and assumptions that affect the amounts re p o rted in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. I n v e n t o ry 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 p rocess. Pro g ress 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. P ro p e rt y, Plant and Equipment P ro p e rt y, plant and equipment is stated on the basis of cost. Depreciation of pro p e rt y, plant and equipment is generally computed using the straight-line method over their estimated economic lives. For land impro v e m e n t s , buildings and building improvements, the estimated economic life is generally 40 years. Estimated economic lives range from three to fifteen years for machinery, equipment, furn i t u re and fixtures. Leasehold i m p rovements are amortized over the respective lease t e rm using the straight-line method. Expenditures for maintenance, repairs and renewals of minor items are expensed as incurred. Major renewals and impro v e m e n t s a re capitalized. I n t e rest cost is capitalized for qualifying assets during the period in which the asset is being installed and p re p a red for its intended use. Capitalized interest cost is a m o rtized on the same basis as the related depre c i a t i o n . Capitalized interest for the years ended December 31, 2001 and 2000 was $1,763,000 and $910,000, re s p e c t i v e l y. Intangible Assets Costs in excess of net assets of businesses acquire d (“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 a re being amortized over periods ranging from five to fifteen years, using the straight-line method. I m p a i rment of Long-lived Assets The Company evaluates long-lived assets, including goodwill, for impairment and assesses their re c o v e r a b i l i t y based upon anticipated future cash flows. If facts and c i rcumstances 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 a s s e t ’s carrying amount and write down that carry i n g 36/37 Sypris Annual Report 2001 amount to market value, or discounted cash flow value, to the extent necessary. s u fficient to create a loss contract, the entire estimated loss is charged to operations in the period the loss first becomes known. Revenue Recognition A portion of the Company’s business is conducted under l o n g - t e rm, fixed-price contracts with aerospace and defense companies and agencies of the U.S. G o v e rn m e n t . Contract revenue is included in the consolidated income statements as units are completed and shipped using the units of delivery, percentage of completion method of accounting. The costs attributed to contract revenue are based upon the estimated average costs of all units to be shipped. The cumulative average costs of units shipped to date are adjusted through current operations as estimates of future costs to complete change (see “Contract Accounting” below). Revenue recognized under the percentage of completion method of accounting totaled $134,478,000, $105,535,000 and $90,819,000 for the years ended December 31, 2001, 2000 and 1999, re s p e c t i v e l y. 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 s e rvices are re n d e re d . Contract Accounting For long-term contracts, the Company capitalizes in i n v e n t o ry direct material, direct labor and factory overh e a d as incurred. The Company also capitalizes certain general and administrative costs for estimating and bidding on contracts awarded (of which approximately $210,000 remained in inventory at December 31, 2001 and 2000). Selling costs are expensed as incurred. Costs to complete l o n g - t e rm 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 p e rcentage of completion method involves substantial estimation processes, including determining the estimated cost to complete a contract. As contracts may re q u i re p e rf o rmance over several accounting periods, form a l detailed cost-to-complete estimates are perf o rmed and updated monthly via perf o rmance re p o rts. Management’s estimates of costs-to-complete change due to internal and e x t e rnal factors, such as labor rate and eff i c i e n c y variances, revised estimates of warranty costs, estimated f u t u re material prices and customer specification and testing re q u i rement changes. Changes in estimated costs a re reflected in gross profit in the period in which they are known. If increases in projected costs-to-complete are P roduct Wa rranty Costs The provision for estimated warranty costs is re c o rded 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 . G o v e rnment, aerospace and defense companies under contract with the U.S. G o v e rnment and a number of customers in diverse industries across geographic are a s . The Company perf o rms periodic credit evaluations of its customers’ financial condition and does not re q u i re collateral on its commercial accounts receivable. Cre d i t losses are provided for in the financial statements and consistently have been within management’s expectations. A p p roximately 41% of accounts receivable outstanding at December 31, 2001 are due from three of the Company’s l a rgest customers. The Company recognized revenue from contracts with the U.S. G o v e rnment and its agencies of a p p roximately $40,046,000, $45,467,000 and $53,244,000 during the years ended December 31, 2001, 2000 and 1999, re s p e c t i v e l y. The Company’s largest customers for the year ended December 31, 2001 were Raytheon Company and Honeywell International, Inc., which re p re s e n t e d a p p roximately 21% and 11%, re s p e c t i v e l y, of the C o m p a n y ’s total net revenue. For the year ended December 31, 2000, the Company’s largest customer was Raytheon Company, which re p resented appro x i m a t e l y 15% of the Company’s total net revenue. No other single customer accounted for more than 10% of the Company’s total net revenue for the years ended December 31, 2001, 2000 or 1999. Stock Based Compensation Stock options are granted under various stock compensation programs to employees and independent d i rectors (see Note 13). The Company accounts for stock option grants in accordance with Accounting Principles B o a rd Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 2 5 ” ) . Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Derivative Financial Instru m e n t s In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard s ( “ S FAS”) No. 133, “Accounting for Derivative Instru m e n t s and Hedging Activities” and issued its amendments, Statements No. 137 and 138, in June 1999 and June 2000, re s p e c t i v e l y. SFAS No. 133 re q u i res the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments t h rough earnings or recognized in other compre h e n s i v e income until the hedged item is recognized in earn i n g s . The ineffective portion of a derivative’s change in fair value must be recognized currently in earn i n g s . Adoption of Recently Issued Accounting Standard In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets.” Under the new rules, goodwill and indefinite lived intangible assets a re no longer amortized but are reviewed annually for i m p a i rment. Separable intangible assets that are not deemed to have an indefinite life will continue to be a m o rtized over their useful lives. The amort i z a t i o n p rovisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With re s p e c t to goodwill and intangible assets acquired prior to July 1, 2001, the Company will apply the new accounting ru l e s beginning January 1, 2002. The Company will perf o rm the first of the re q u i red impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company currently does not expect any significant loss as a result of the impairment tests. The Company will be re q u i red to test the value of its goodwill at least annually. These tests will involve estimates related to the fair market value of the business with which the goodwill is associated. The Company anticipates that substantially all a m o rtization of intangible assets as a charge to earn i n g s will be eliminated beginning January 1, 2002. Note 2. Acquisitions subassemblies and is included with Sypris Technologies in the Industrial Group. The transaction was accounted for as a purchase, in which the purchase price of $11,500,000 was allocated based on the fair values of the assets and liabilities acquired. The results of operations of the acquired business have been included in the consolidated financial statements since the acquisition date. The acquisition was financed by the C o m p a n y ’s Credit Agre e m e n t . 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 Agre e m e n t . 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 Electro n i c s G roup. The special charges incurred and paid during 2000 include workforce reductions, related severance and other benefit costs of $1,211,000, facilities re a rrangement and relocation costs of $480,000, and employment costs related to the transfer of production of $1,254,000. The w o r k f o rce 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, C o m m e rc i a l U.S. Govern m e n t Allowance for doubtful accounts 2 0 0 1 $ 3 4 , 6 5 8 5 , 8 7 5 4 0 , 5 3 3 ( 7 7 5 ) $ 3 9 , 7 5 8 2 0 0 0 $ 2 6 , 2 6 2 6 , 3 1 3 3 2 , 5 7 5 ( 6 7 9 ) $ 3 1 , 8 9 6 On May 31, 2001, the Company acquired certain assets and liabilities of the Marion Forge plant from Dana Corporation. The business produces fully machined, heavy-duty tru c k axle shafts and other drive components for integration into Accounts receivable from the U.S. Govern m e n t includes amounts due under long-term contracts, all of which are billed at December 31, 2001 and 2000, of $2,939,000 and $4,864,000, re s p e c t i v e l y. 38/39 Sypris Annual Report 2001 Note 5. Inventory Note 7. Intangible Assets I n v e n t o ry consists of the following (in thousands): Intangible assets consists of the following (in thousands): 2 0 0 1 $ 1 9 , 0 0 3 9 , 6 6 1 5 , 4 5 0 2 0 0 0 $ 1 3 , 5 6 7 8 , 3 8 8 1 , 6 3 2 December 31, Costs in excess of net assets of businesses acquire d O t h e r Accumulated amort i z a t i o n 2 0 0 1 2 0 0 0 $ 1 8 , 4 2 3 3 , 2 1 2 2 1 , 6 3 5 ( 5 , 7 0 9 ) $ 1 5 , 9 2 6 $ 1 8 , 4 2 3 3 , 1 0 2 2 1 , 5 2 5 ( 4 , 3 7 1 ) $ 1 7 , 1 5 4 December 31, Raw materials Work in pro c e s s Finished goods Costs relating to long-term contracts and p rograms, net of amounts attributed to revenue recognized to date P ro g ress payments related to long-term contracts and pro g r a m s LIFO re s e rv e R e s e rve for excess and obsolete inventory 3 7 , 9 0 8 4 5 , 5 4 2 ( 6 , 5 4 0 ) ( 9 8 7 ) ( 3 , 9 2 1 ) $ 6 0 , 5 7 4 ( 1 4 , 0 1 1 ) ( 1 , 0 5 9 ) ( 3 , 0 0 4 ) $ 5 1 , 0 5 5 The preceding amounts include inventory valued under the last-in, first-out (“LIFO”) method totaling $9,141,000 and $5,365,000 at December 31, 2001 and 2000, re s p e c t i v e l y. In the aggregate, these costs are less than market value. Note 6. Property, Plant and Equipment P ro p e rt y, plant and equipment consists of the following (in thousands): December 31, Land and land impro v e m e n t s Buildings and building impro v e m e n t s M a c h i n e ry, equipment, furn i t u re and fixture s C o n s t ruction in pro g re s s Accumulated depre c i a t i o n $ 2 0 0 1 1 , 4 3 6 1 7 , 8 3 7 9 6 , 6 7 4 1 9 , 8 5 8 1 3 5 , 8 0 5 ( 6 5 , 3 5 3 ) $ 7 0 , 4 5 2 $ 2 0 0 0 1 , 0 3 2 1 4 , 9 7 9 7 7 , 9 0 1 1 8 , 5 6 1 1 1 2 , 4 7 3 ( 5 8 , 1 5 6 ) $ 5 4 , 3 1 7 D e p reciation expense totaled $8,468,000, $7,906,000 and $6,526,000 for the years ended December 31, 2001, 2000 and 1999, re s p e c t i v e l y. At December 31, 2001, $2,782,000 and $612,000 were included in accounts payable and accrued liabilities, re s p e c t i v e l y, for capital e x p e n d i t u res. At December 31, 2000, $5,372,000 and $2,093,000 were included in accounts payable and accru e d liabilities, re s p e c t i v e l y, for capital expenditure s . A m o rtization expense totaled $1,388,000, $1,445,000 and $1,056,000 for the years ended December 31, 2001, 2000 and 1999, re s p e c t i v e l y. Note 8. Accrued Liabilities A c c rued liabilities consists of the following (in thousands): December 31, Employee benefit plan accru a l s Salaries, wages and incentives O t h e r 2 0 0 1 $ 6 , 3 0 8 3 , 9 2 5 9 , 6 6 9 $ 1 9 , 9 0 2 2 0 0 0 $ 4 , 7 7 0 2 , 9 2 1 1 0 , 8 5 7 $ 1 8 , 5 4 8 Included in other accrued liabilities are employee p a y roll deductions, advance payments, accrued operating expenses, accrued warranty expenses, accrued intere s t and other items, none of which exceed 5% of total curre n t l i a b i l i t i e s . 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 F e b ru a ry 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 O ff e red Rate plus a margin of 1.0% to 3.25%; or the gre a t e r of the prime rate or the federal funds rate plus 0.5%, plus a m a rgin up to 0.75%. The Company also pays a fee of 0.2% to 0.5% on the unused portion of the aggre g a t e commitment. The margins applied to the re s p e c t i v e i n t e rest rates and the commitment fee are adjusted q u a rterly and are based on the Company’s ratio of funded debt to earnings before interest, taxes, depreciation and a m o rtization. The weighted average interest rate for outstanding borrowings at December 31, 2001 was 5.2%. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements The weighted average interest rates for borrowings during the years ended December 31, 2001 and 2000 were 7.4% and 8.5%, re s p e c t i v e l y. Current maturities of long-term debt at December 31, 2001 and 2000 re p resent amounts due under a short - t e rm borrowing arrangement included in the Credit Agreement. Standby letters of credit up to a maximum of $15,000,000 may be issued under the Cre d i t A g reement and no amounts were outstanding at December 31, 2001 and 2000. The Credit Agreement contains customary aff i rm a t i v e and negative covenants, including financial covenants requiring the maintenance of specified fixed charge and leverage ratios and minimum levels of net worth. At December 31, 2001, the Company was in compliance with these covenants and retained earnings of $15.4 million w e re unrestricted. 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 re q u i rement may be eliminated after June 2002 in the event the Company achieves certain financial ratios and remains in compliance with all covenants. On July 26, 2001, the Company entered into intere s t rate swap agreements with three banks that eff e c t i v e l y c o n v e rt a portion of its floating rate debt to a fixed rate basis for a period of two years, thus reducing the impact of interest rate changes on future interest expense. The swap agreements have a combined notional amount of $30,000,000 whereby the Company pays a fixed rate of i n t e rest of 4.52% and receives a variable 30-day LIBOR rate. The diff e rential to be paid or received is accrued as intere s t rates change and recognized as an adjustment to intere s t expense in the consolidated income statement. The a g g regate fair market value of all interest rate swap a g reements was approximately $728,000 at December 31, 2001 and was included in other liabilities on the consolidated balance sheet with an offset to other c o m p rehensive income. I n t e rest incurred during the years ended December 31, 2001, 2000 and 1999 totaled $5,784,000, $5,116,000 and $1,725,000, re s p e c t i v e l y. Interest paid during the years ended December 31, 2001, 2000 and 1999 totaled $5,623,000, $5,063,000 and $1,629,000, re s p e c t i v e l y. Note 10. Fair Value of Financial Instruments Cash, accounts receivable, accounts payable and accru e d liabilities are reflected in the consolidated financial statements at their carrying amount which appro x i m a t e s fair value because of the short - t e rm maturity of those i n s t ruments. The carrying amount of debt outstanding at December 31, 2001 and 2000 under the Credit Agre e m e n t a p p roximates fair value because borrowings are for term s less than six months and have rates that reflect curre n t l y available terms and conditions for similar debt. The Company uses interest rate swap agreements (see Note 9) to minimize its exposure to fluctuations in interest rates for a portion of the debt. The fair value of the swap a g reements is recognized in the consolidated financial s t a t e m e n t s . Note 11. Employee Benefit Plans The Company sponsors noncontributory defined benefit pension plans (the “Pension Plans”) covering cert a i n employees of Sypris Technologies, including cert a i n employees of the operation acquired from Dana in M a y 2001. The Pension Plans covering salaried and management employees provide pension benefits that a re based on the employee’s highest five-year average compensation within ten years before re t i rement. 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 re q u i red by the applicable regulations. The Pension Plans’ assets are primarily invested in equity securities and fixed income securities. The Company re c o rded increases of $1,952,000 and $280,000 in 2001 and 2000, respectively to its m i n i m u m pension liability, and a decrease of $1,221,000 in 1999. The following table details the components of pension expense (in thousands): Years ended December 31, S e rvice cost I n t e rest cost on projected benefit obligation Net amortizations and deferr a l s Expected re t u rn on plan assets 2 0 0 1 3 5 8 2 0 0 0 1 8 0 $ 1 9 9 9 1 8 1 $ 1 , 9 3 9 2 4 7 ( 1 , 9 6 1 ) 5 8 3 1 , 4 0 9 2 2 2 ( 1 , 3 3 8 ) 4 7 3 $ 1 , 2 8 3 1 6 5 ( 1 , 0 9 1 ) 5 3 8 $ $ $ 40/41 Sypris Annual Report 2001 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): December 31, Change in benefit obligation: Benefit obligation at beginning of year Benefit obligation assumed in acquisition S e rvice cost I n t e rest cost Plan amendments Actuarial loss Benefits paid Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Fair value of plan assets acquired in acquisition Actual re t u rn on plan assets Company contributions Benefits paid Fair value of plan assets at end of year Funded status of the plans: 2 0 0 1 2 0 0 0 $ 1 9 , 0 9 6 $ 1 7 , 8 5 9 1 1 , 5 4 7 3 5 8 1 , 9 3 9 — 4 6 3 ( 1 , 4 2 0 ) $ 3 1 , 9 8 3 — 1 8 0 1 , 4 0 9 7 9 8 1 3 1 ( 1 , 2 8 1 ) $ 1 9 , 0 9 6 $ 1 5 , 1 5 6 $ 1 4 , 3 2 9 1 0 , 5 4 7 ( 1 5 8 ) 7 5 4 ( 1 , 4 2 0 ) — 9 2 7 1 , 1 8 1 ( 1 , 2 8 1 ) $ 2 4 , 7 8 9 $ 1 5 , 1 5 6 Benefit obligation at end of year Fair value of plan assets at end of year Funded status of plan (underf u n d e d ) U n recognized actuarial loss (gain) U n recognized prior service cost Net liability re c o g n i z e d $ 3 1 , 9 8 3 2 4 , 7 8 9 ( 7 , 1 9 4 ) 2 , 3 3 9 9 0 3 $ ( 3 , 9 5 2 ) $ 1 9 , 0 9 6 1 5 , 1 5 6 ( 3 , 9 4 0 ) ( 2 6 0 ) 1 , 1 6 6 $ ( 3 , 0 3 4 ) Balance sheet liabilities (assets): A c c rued benefit liability Intangible asset Accumulated other comprehensive income (loss) Net amount re c o g n i z e d $ 7 , 1 6 0 ( 9 0 3 ) $ 4 , 5 1 0 ( 1 , 1 2 3 ) ( 2 , 3 0 5 ) $ 3 , 9 5 2 ( 3 5 3 ) $ 3 , 0 3 4 Assumptions at year end: Discount rate used in d e t e rmining present values Rate of compensation incre a s e Expected long-term rate of re t u rn on plan assets 7 . 5 0 % 4 . 0 0 % 8 . 0 0 % 4 . 2 5 % 9 . 5 0 % 9 . 5 0 % 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 re q u i rements of Section 401(k) of the Internal Revenue Code. The Defined Contribution Plan allows the Company to match p a rticipant contributions and provides discre t i o n a ry contributions. Contributions to the Defined Contribution Plan in 2001, 2000 and 1999 totaled $1,933,000, $2,278,000 and $2,052,000, re s p e c t i v e l y. During 1999, the Company had partially self-insure d medical plans (the “Medical Plans”) covering cert a i n employees. Beginning January 1, 2000, the Company expanded the coverage to cover substantially all employees. The number of employees participating in the Medical Plans was approximately 1,350 and 1,300 at December 31, 2001 and 2000, re s p e c t i v e l y, 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 a g g regate. The Company is adequately insured for amounts in excess of these limits. Employees are responsible for payment of a portion of the pre m i u m s . During 2001, 2000 and 1999, the Company charg e d $5,890,000, $4,456,000 and $2,802,000, re s p e c t i v e l y, to operations related to reinsurance premiums, medical claims incurred and estimated, and administrative costs for the Medical Plans. Claims paid during 2001, 2000 and 1999 did not exceed the aggregate limits. Note 12. Commitments and Contingencies The Company leases certain of its real pro p e rty and c e rtain equipment, vehicles and computer hard w a re under operating leases with terms ranging from month-to-month to ten years and which contain various renewal and re n t escalation clauses. Future minimum annual lease commitments (in thousands) under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2001 are as f o l l o w s : Years ending December 31, 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2007 and there a f t e r $ 6 , 9 8 0 6 , 3 6 5 5 , 6 4 3 5 , 2 8 8 4 , 7 1 6 9 , 1 9 4 $ 3 8 , 1 8 6 Rent expense for the years ended December 31, 2001, 2000 and 1999 totaled $5,550,000, $3,650,000 and $3,858,000, re s p e c t i v e l y. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements materially and adversely affect the Company’s financial condition and results of operations. The Company is involved in certain litigation and contract issues arising in the normal course of business. While the outcome of these matters cannot, at this time, be predicted in light of the uncertainties inherent there i n , 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 dire c t o r s . Options may be granted at not less than the market price on the date of grant. Options are exercisable in whole or in p a rt up to two years after the date of grant and ending ten years after the date of grant. The following table summarizes option activity for the three years ended December 31, 2001: Shares 1,228,388 226,352 (123,021) (19,259) 1,312,460 518,746 (114,246) (163,223) 1,553,737 632,819 (164,616) (174,980) Exercise Price Range $ 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 1.72 - 31.00 3.88- 13.27 1.72- 8.75 6.25- 11.76 Weighted Average Exercise Price $ 6.35 7.75 4.75 8.26 6.71 9.52 4.08 7.20 7.79 6.15 3.06 8.21 Balance at January 1, 1999 Granted Exercised Forfeited Balance at December 31, 1999 Granted Exercised Forfeited Balance at December 31, 2000 Granted Exercised Forfeited Balance at December 31, 2001 1,846,960 $ 1.72- 31.00 $ 7.61 The Company entered into agreements for the sale and leaseback of certain specific manufacturing and testing equipment during 2001 and 2000. The terms of the operating leases range from five to nine years and the Company has the option to purchase the equipment at the expiration of the respective lease at a fixed price based upon the equipment’s estimated residual value. Lease payments on these operating leases are guaranteed by the Company. Proceeds from the sale and leaseback transactions during 2001 and 2000 were $5,420,000 and $9,251,000, re s p e c t i v e l y, and the transactions resulted in a d e f e rred loss for the years ended December 31, 2001 and 2000 of $787,000 and $351,000, re s p e c t i v e l y, that will be a m o rtized over the term of the respective leases. Future minimum annual lease commitments related to these leases are included in the above schedule. As of December 31, 2001, the Company had outstanding purchase commitments of appro x i m a t e l y $5,045,000, primarily for the acquisition of manufacturing e q u i p m e n t . The Company’s Sypris Technologies subsidiary is a co-defendant in two lawsuits arising out of an explosion at a coker plant owned by Exxon Mobil Corporation located in Baton Rouge, Louisiana. In each of these lawsuits, it is alleged that a carbon steel pipe elbow that Sypris Technologies manufactured was improperly installed and the failure of which caused the explosion. One of the actions was brought by Exxon Mobil in 1994 in state district court in Louisiana and claims damages for d e s t ruction of the plant, which Exxon Mobil estimates exceed one hundre d million dollars. Sypris Technologies is a co-defendant in this action with the fabricator who built the pipeline into which the elbow was incorporated and with the general contractor for the plant. The second action is a class action suit also filed in 1994 in federal court in Louisiana on behalf of the residents living around the plant and claims unspecified damages. Sypris Technologies is a co-defendant in this action with Exxon Mobil, the contractor and the fabricator. In both actions, the Company maintains that the carbon steel pipe elbow at issue was a p p ropriately marked as carbon steel and was impro p e r l y installed, without Sypris Technologies’ knowledge, by the fabricator and general contractor in circumstances that re q u i red the use of a chromium steel elbow. Although the Company believes these defenses to be meritorious, there can be no assurance that the Company will not be found liable for some or all of the alleged damages. If the Company were to be found liable and the damages exceeded available insurance coverage, the impact could 42/43 Sypris Annual Report 2001 The following table summarizes certain weighted average data for options outstanding and currently exercisable at December 31, 2001: Exercise Price Range $ 1.72 $ 2.76 - $ 4.12 $ 4.24 - $ 6.25 $ 6.56 - $10.00 $10.06 - $15.76 $16.12 - $23.00 $25.52 - $31.00 Total Weighted Average Exercise Price $ 1.72 3.82 5.81 8.59 10.92 18.16 28.86 Shares 63,721 34,364 648,123 905,634 181,011 10,003 4,104 1,846,960 $ 7.61 Outstanding Weighted Average Remaining Contractual Life 1.9 4.8 7.1 5.9 6.1 4.4 3.2 6.2 Exercisable Weighted Average Exercise Price $ 1.72 3.82 4.93 8.66 12.62 18.16 28.86 $ 7.54 Shares 63,721 34,364 139,148 464,334 28,661 10,003 4,104 744,335 The Company’s stock compensation program also p rovides for the grant of perf o rmance-based stock options to key employees. The terms and conditions of the perf o rmance-based option grants provide for the d e t e rmination 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 targ e t e d price levels. Perf o rmance-based options to purc h a s e 56,000 shares, 108,000 shares and 16,000 shares of common stock were granted during 2001, 2000 and 1999, re s p e c t i v e l y. Perf o rmance-based options to purc h a s e 32,000 shares and 112,000 shares of common stock were f o rfeited in 2001 and 2000, re s p e c t i v e l y. None of the t a rgeted price levels of the perf o rmance-based options w e re achieved during 2001, 2000 or 1999 and, accord i n g l y, these options are excluded from disclosures of options outstanding at December 31, 2001, 2000 and 1999. The aggregate number of shares of common stock re s e rved for issuance under the Company’s stock compensation programs as of December 31, 2001 and 2000 was 3,000,000. The aggregate number of share s available for future grant as of December 31, 2001 and 2000 was 380,227 and 899,566, re s p e c t i v e l y. Share s available for future grant at December 31, 2001 include 226,212 shares of common stock related to stock options that may be subject to future grant under certain of the C o m p a n y ’s incentive plans based upon the achievement of c e rtain financial targets and individual perf o rm a n c e objectives and action by the Company’s Board of Dire c t o r s . The Company applies APB 25 and related interpre t a- tions in accounting for its employee stock options because, as discussed below, the alternative fair value accounting p rovided for under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFA S 123”), re q u i res use of option valuation models that were not developed for use in valuing employee stock options. Under APB 2 5 , when the exercise price of the Company’s employee stock options is at least equal to the market price of the underlying stock on the date of grant, no compensation expense is re c o g n i z e d . P ro forma information re g a rding net income and net income per share is re q u i red by SFA S 123, and has been d e t e rmined as if the Company had accounted for its employee stock options under the fair value method of S FA S 123. The fair value for options granted by the Company during 2001, 2000 and 1999 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: Years ended December 31 Expected life (years) Expected volatility R i s k - f ree interest rates Expected dividend yield 2 0 0 1 8 7 5 . 2 0 % 4 . 9 3 % — 2 0 0 0 8 7 0 . 3 0 % 4 . 9 8 % — 1 9 9 9 6 7 5 . 5 0 % 6 . 3 0 % — The weighted average Black-Scholes value of options granted under the stock option plans during 2001, 2000 and 1999 was $4.71, $7.05 and $5.50 per share, re s p e c t i v e l y. 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 re q u i re the input of highly subjective assumptions including the Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements expected stock price volatility. Because the Company’s employee stock options have characteristics significantly d i ff e rent from those of traded options, and because changes in the subjective input assumptions can materially a ffect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single m e a s u re 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 form a i n f o rmation is as follows (in thousands, except for per s h a re data): Years ended December 31, P ro forma net income P ro forma net income per common share : B a s i c D i l u t e d 2 0 0 1 $ 4 , 9 7 7 2 0 0 0 $ 2 , 0 8 6 1 9 9 9 $ 8 , 5 3 3 $ 0 . 5 1 $ 0 . 5 0 $ 0 . 2 2 $ 0 . 2 1 $ $ 0 . 9 0 0 . 8 7 The Company has a stock purchase plan that pro v i d e s substantially all employees who have satisfied the eligibility re q u i rements the opportunity to purchase share s 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. Payro l l deductions may not exceed $6,000 for any six-month cycle. The stock purchase plan expires January 31, 2006. At December 31, 2001 and 2000, there were 196,904 share s and 249,110 shares, re s p e c t i v e l y, available for purc h a s e under the plan. During 2001 and 2000, a total of 52,206 s h a res and 35,290 shares, re s p e c t i v e l y, were issued under the plan. Note 14. Stockholder Rights Plan Note 15. Income Taxes On October 23, 2001, the Company’s board of dire c t o r s a p p roved a stockholder rights plan. Under the plan, each stockholder of re c o rd as of November 7, 2001 will automatically receive a distribution of one right for each outstanding share of common stock held. Each right entitles the holder to purchase one one-thousandth of a s h a re of a new series of pre f e rred stock at an exercise price of $63.00. The rights will trade along with, and not separately from, the shares of common stock unless they become exercisable. If any person or group acquires or makes a tender offer for 15% or more of the common stock of the Company (except in transactions approved by the Company’s board of directors in advance) the rights become exercisable, and they will separate, become tradable, and entitle stockholders, other than such person or group, to acquire, at the exercise price, pre f e rred stock with a market value equal to twice the exercise price. If the Company is acquired in a merger or other business combination with such person or group, or if 50% of its e a rning power or assets are sold to such person or gro u p , each right will entitle its holder, other than such person or g roup, to acquire, at the exercise price, shares of the acquiring company’s common stock with a market value of twice the exercise price. The rights will expire on October 23, 2011, unless redeemed or exchanged earlier by the C o m p a n y, and will be re p resented by existing common stock certificates until they become exerc i s a b l e . As of December 31, 2001, 11,000 shares of the C o m p a n y ’s pre f e rred stock were designated as Series A P re f e rred Stock in connection with the adoption of the stockholder rights plan. There are no shares of Series A P re f e rred Stock currently outstanding. The holders of Series A Pre f e rred Stock will have voting rights, be entitled to receive dividends based on a defined formula and have c e rtain rights in the event of the Company’s dissolution. The shares of Series A Pre f e rred Stock shall not be redeemable. However, the Company may purchase share s of Series A Pre f e rred Stock in the open market or pursuant to an offer to a holder or holders. The Company accounts for income taxes in accord a n c e with SFAS No. 109, “Accounting for Income Ta x e s . ” A c c o rd i n g l y, deferred income taxes have been provided for t e m p o r a ry diff e rences between the recognition of re v e n u e and expenses for financial and income tax re p o rt i n g purposes and between the tax basis of assets and liabilities and their re p o rted amounts in the financial statements. The components of income tax expense (benefit) is as follows (in thousands): Years ended December 31, C u rre n t : F e d e r a l S t a t e O t h e r D e f e rre d : F e d e r a l S t a t e 2 0 0 1 2 0 0 0 1 9 9 9 $ 2 , 1 6 1 2 5 5 1 5 2 , 4 3 1 $ 9 6 9 1 0 2 9 1 , 0 8 0 7 0 6 ( 2 2 7 ) 4 7 9 $ 2 , 9 1 0 ( 2 , 3 5 1 ) ( 1 2 7 ) ( 2 , 4 7 8 ) $ ( 1 , 3 9 8 ) $ 3 , 3 8 6 3 2 0 3 8 3 , 7 4 4 ( 6 3 0 ) ( 1 5 ) ( 6 4 5 ) $ 3 , 0 9 9 The Company files a consolidated federal income tax re t u rn which includes all subsidiaries. Income taxes paid during 2001, 2000 and 1999 totaled $1,962,000, $1,347,000 and $2,136,000, re s p e c t i v e l y. During 2001 and 2000, the Company received $2,108,000 and $2,102,000 in federal income tax refunds, re s p e c t i v e l y. At December 31, 2001, the Company had $17,771,000 of state net operating loss carry f o rw a rds available to off s e t f u t u re taxable income. Such carry f o rw a rds reflect income tax losses incurred which will expire on December 31 of the following years (in thousands): December 31, 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 7 $ 2 , 3 8 6 8 , 3 6 2 5 6 0 5 , 9 9 9 4 6 4 $ 1 7 , 7 7 1 The following is a reconciliation of income tax expense (benefit) to that computed by applying the federal statutory rate of 34% to income before income taxes (in thousands): Years ended December 31, Federal tax at the statutory rate State income taxes, net of federal 2 0 0 1 $ 3 , 1 5 4 2 0 0 0 6 0 7 $ 1 9 9 9 $ 4 , 3 0 3 tax benefit 2 3 8 1 5 3 2 3 6 Change in valuation allowance for d e f e rred tax asset R e s e a rch and development tax cre d i t Non-deductible expenses O t h e r ( 3 0 0 ) ( 3 , 0 0 8 ) ( 1 , 8 9 1 ) ( 3 3 8 ) 2 6 2 ( 1 0 6 ) $ 2 , 9 1 0 ( 2 6 2 ) 2 4 0 8 7 2 $ ( 1 , 3 9 8 ) ( 5 4 4 ) 1 3 5 8 6 0 $ 3 , 0 9 9 D e f e rred income tax assets and liabilities are as follows (in thousands): December 31, D e f e rred tax assets: Compensation and benefit accru a l s I n v e n t o ry valuation State net operating loss carry f o rw a rd s Contract pro v i s i o n s Accounts receivable allowance Defined benefit pension plan I n t e rest rate swap agre e m e n t s O t h e r Valuation allowance D e f e rred tax liabilities: D e p re c i a t i o n Net deferred tax asset 2 0 0 1 2 0 0 0 $ 1 , 2 8 7 7 2 8 9 7 7 5 1 7 2 9 0 1 , 4 5 1 3 0 9 3 0 3 5 , 8 6 2 ( 6 7 7 ) 5 , 1 8 5 $ 1 , 1 0 8 6 7 3 9 7 7 7 9 6 2 5 5 9 9 5 — 3 2 7 5 , 1 3 1 ( 9 7 7 ) 4 , 1 5 4 ( 2 , 3 5 4 ) $ 2 , 8 3 1 ( 1 , 9 8 1 ) $ 2 , 1 7 3 The valuation allowance for deferred tax assets d e c reased by $300,000, $3,008,000 and $1,891,000 in 2001, 2000 and 1999, re s p e c t i v e l y. At December 31, 2001, the valuation allowance of $677,000 relates to state tax net operating loss (“NOL”) carry f o rw a rds. Management believes it is more likely than not that the Company’s f u t u re earnings will be sufficient to ensure the realization of deferred tax assets for federal and state purposes, excluding the portion of the state NOL carry f o rw a rd for which utilization within the carry f o rw a rd period is uncert a i n . 44/45 Sypris Annual Report 2001 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Note 18. Quarterly Financial Information (Unaudited) The following is an analysis of certain items in the consolidated income statements by quarter for the years ended December 31, 2001 and 2000 (in thousands, except for per share data): Net revenue Gross profit Operating income Net income Net income per common share: Basic Diluted First Second Third Fourth First Second Third Fourth 2001 2000 $ 58,035 10,164 2,577 1,019 $ 63,152 10,914 2,912 1,209 $ 65,228 11,063 3,501 1,760 $ 68,225 11,406 4,040 2,379 $ 50,697 10,754 1,182 179 $ 52,118 11,353 2,739 1,368 $ 53,887 9,090 707 90 $ 59,869 9,116 849 1,547 $ $ 0.10 0.10 $ $ 0.12 0.12 $ $ 0.18 0.18 $ $ 0.24 0.23 $ $ 0.02 0.02 $ $ 0.14 0.14 $ $ 0.01 0.01 $ $ 0.16 0.16 2 0 0 2 9 3 3 4 6 Operating income: Note 16. Net Income Per Common Share Basic income per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted income per common share is calculated by using the weighted average number of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options. The following table presents information necessary to calculate net income per common share (in thousands, except for per share data): Years ended December 31, S h a res outstanding: Weighted average shares o u t s t a n d i n g E ffect of dilutive employee stock options Adjusted weighted average s h a res outstanding and assumed conversions Net income applicable to common stock 2 0 0 1 2 0 0 0 1 9 9 9 9 , 8 2 8 9 , 6 7 1 9 , 5 1 5 1 0 , 0 2 8 9 , 9 6 4 9 , 8 6 1 $ 6 , 3 6 7 $ 3 , 1 8 4 $ 9 , 5 5 6 Net income per common share : B a s i c D i l u t e d $ $ 0 . 6 5 0 . 6 3 $ $ 0 . 3 3 0 . 3 2 $ $ 1 . 0 0 0 . 9 7 Note 17. Segment Information The Company’s operations are conducted in two re p o rt a b l e business segments: the Electronics Group and the Industrial Group. The segments are each managed separately because of the distinctions between the p roducts, services, markets, customers, technologies and w o r k f o rce skills of the segments. The Electronics Gro u p p rovides a wide range of manufacturing and technical s e rvices for a diversified customer base as an outsourc e d s e rvice pro v i d e r. The Electronics Group also manufacture s complex data storage systems, magnetic instru m e n t s , c u rrent 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 Gro u p also manufactures high-pre s s u re closures and other fabricated products. Revenue derived from outsourced services for the E l e c t ronics Group accounted for 67%, 65% and 59% of total net revenue in 2001, 2000 and 1999, re s p e c t i v e l y. Revenue 46/47 Sypris Annual Report 2001 derived from outsourced services for the Industrial Gro u p accounted for 15%, 12% and 15% of total net revenue in 2001, 2000 and 1999, re s p e c t i v e l y. There was no intersegment net revenue recognized for all years pre s e n t e d . The following table presents financial information for the re p o rtable segments of the Company (in thousands): Years ended December 31, Net revenue from unaffiliated customers: Electronics Group Industrial Group Gross profit: Electronics Group Industrial Group 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 2001 2000 1999 $ 207,282 47,358 $ 254,640 $ 182,126 34,445 $ 216,571 $ 164,963 37,167 $ 202,130 $ $ $ $ 37,385 6,162 43,547 12,903 3,563 (3,436) 13,030 $ $ $ $ 36,272 4,041 40,313 6,935 1,648 (3,106) 5,477 $ $ $ $ 37,873 7,076 44,949 12,005 4,930 (2,769) 14,166 $ 121,228 73,820 $ 124,523 37,851 $ 106,229 26,714 16,396 $ 211,444 16,748 $ 179,122 15,621 $ 148,564 $ $ $ $ 7,951 1,694 211 9,856 7,917 19,547 159 27,623 $ $ $ $ 8,037 1,109 205 9,351 7,971 15,546 369 23,886 $ $ $ $ 6,551 902 129 7,582 6,327 7,134 982 14,443 The Company attributes net revenue to countries based upon the location of its operations. Export sales f rom the United States totaled $23,890,000, $25,250,000 and $30,061,000 in 2001, 2000 and 1999, re s p e c t i v e l y. R e p o rt of Independent Au d i t o r s B o a rd of Directors and Stockholders Sypris Solutions, Inc. We have audited the accompanying consolidated balance sheets of Sypris Solutions, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the t h ree years in the period ended December 31, 2001. 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 s t a n d a rds re q u i re that we plan and perf o rm 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 re f e rred to above present fairly, in all material respects, the consolidated financial position of Sypris Solutions, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Louisville, Kentucky J a n u a ry 28, 2002 Income from continuing operations 6,367 3,184 9,556 7,446 Discontinued operations, net of tax — — — — 6,367 3,184 9,556 7,446 1,785 1,527 3,817 5,344 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 Income from continuing operations: Basic Diluted Net income: Basic Diluted December 31, (in thousands) BALANCE SHEET DATA Working capital Total assets Total debt Financial Summary 2001 2 0 0 0 1 9 9 9 1 9 9 8 1 9 9 7 $ 254,640 $ 216,571 $ 202,130 $ 211,625 $ 217,355 43,547 40,313 44,949 47,923 32,135 13,030 5,477 14,166 12,851 $ $ $ $ 0.65 0.63 0.65 0.63 $ $ $ $ 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 2001 1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6 $ 67,325 $ 58,602 $ 53,705 $ 32,121 $ 35,123 211,444 179,122 148,564 121,119 120,608 87,500 65,000 54,400 28,583 31,340 Total stockholders’ equity 70,120 64,205 60,820 49,359 27,728 48/49 Sypris Annual Report 2001 See accompanying Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. C o rp o rate Directory C o m p a ny Locations Board of Directors Corporate Officers Subsidiary Officers ROBERT E. GILL (5) C h a i rman of the Board 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 ROBERT E. GILL (1†) C h a i rman of the Board JEFFREY T. GILL (1) President & CEO HENRY F. FRIGON (1,2†) C h a i rman C A R S TAR, Inc. R. SCOTT GILL (1) Managing Broke r Koenig & Strey GMAC Real Estate WILLIAM L. HEALEY (2,3) P ri vate Investor & Consultant ROGER W. JOHNSON (3†,4) C h a i rman & CEO Collectors Unive r s e, Inc. SIDNEY R. PETERSEN (2,4†) Retired Chairman & CEO Getty Oil, Inc. ROBERT SROKA (3,4) Managing Pa rt n e r 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 50/51 Sypris Annual Report 2001 CYNTHIA Y. BELAK Vice President of Finance Sypris Data Systems, Inc. JAMES G.COCKE (5) Vice President; President & CEO Sypris Electronics, LLC STUART W. JONES Vice President of Finance Sypris Test & Measurement, Inc. JOHN M. KRAMER (5) Vice President; President & CEO Sypris Technologies, Inc. RAYMOND E. MINTER Vice President of Programs Sypris Electronics, LLC DAVID L. MONACO Vice President of Finance Sypris Electronics, LLC G. DARRELL ROBERTSON (5) Vice President; President & CEO Sypris Data Systems, Inc. HENRY L. SINGER II (5) Vice President; President & CEO Sypris Test & Measurement, Inc. EDMUND R. STUCZYNSKI Vice President of Operations Sypris Electronics, LLC NORMAN E.ZELESKY Vice President of Finance Sypris Technologies, Inc. SOUTH CAROLINA Sypris Test & Measurement c/o Square D 8821 Garners Ferry Road Columbia, SC 29209 Phone: (803) 695-7874 Sypris Test & Measurement c/o Bose Facility 2000 Carolina Pines Drive Blythewood, SC 29016 Phone: (803) 714-8397 TENNESSEE Sypris Test & Measurement 305 Seaboard Lane, Suite 318 Franklin, TN 37067 Phone: (615) 771-2421 TEXAS Sypris Test & Measurement 906 Trinity Drive, Suite H Mission, TX 78572 Phone: (956) 585-6566 Sypris Test & Measurement 258 East Arapaho, Suite 150 Richardson, TX 75081 Phone: (972) 231-4443 Sypris Data Systems 5500-B Will Ruth Drive El Paso, TX 79924 Phone: (915) 757-2547 Sypris Technologies 9801 Westheimer Drive Suite 302 Houston, TX 77042 Phone: (713) 917-6878 ALABAMA Sypris Data Systems 3322 S. Memorial Parkway Huntsville, AL 35801 Phone: (256) 881-2231 ARIZONA Sypris Test & Measurement 2320 West Peoria Av e . Building D-133 Phoenix, AZ 85029 Phone: (602) 395-5900 CALIFORNIA Sypris Test & Measurement 2102 Ringwood Av e . San Jose, CA 95131 Phone: (408) 954-8050 Sypris Test & Measurement 16340 Roscoe Blvd., Suite 100 Van Nuys, CA 91406 Phone: (818) 830-9111 Sypris Data Systems S u b s i d i a ry Headquarters 605 East Huntington Dr. Monrovia, CA 91016 Phone: (626) 358-9500 COLORADO Sypris Data Systems 4800 East Dry Creek Road Littleton, CO 80122 Phone: (303) 773-4700 Sypris Test & Measurement 4800 East Dry Creek Road Littleton, CO 80122 Phone: (303) 773-4616 FLORIDA Sypris Test & Measurement S u b s i d i a ry Headquarters 6120 Hanging Moss Road Orlando, FL 32807 Phone: (407) 678-6900 Sypris Electronics S u b s i d i a ry Headquarters 10901 North McKinley Dr. Tampa, FL 33612 Phone: (813) 972-6000 Sypris Data Systems 8 Eighth Street S h a l i m a r, FL 32579 Phone: (850) 651-5158 GEORGIA Sypris Test & Measurement 1000 Cobb Place Blvd. Building 200, Suite 240 K e n n e s a w, GA 30144 Phone: (770) 795-8092 ILLINOIS Sypris Test & Measurement 2055 Army Trail Rd., 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 Sypris Technologies S u b s i d i a ry Headquarters 2820 West Broadway Louisville, KY 40211 Phone: (502) 774-6011 Sypris Technologies Tube Turns Division 2612 Howard Street Louisville, KY 40211 Phone: (502) 774-6011 MARYLAND Sypris Test & Measurement 1321A Mercedes Drive H a n o v e r, MD 21076 Phone: (410) 850-5056 Sypris Data Systems 9020 Junction Drive Annapolis Junction, MD 20701 Phone: (301) 470-0110 MASSACHUSETTS Sypris Test & Measurement 53 Second Av e n u e Burlington, MA 01803 Phone: (781) 272-9050 Sypris Test & Measurement 34 Simarano Drive Marlborough, MA 01752 Phone: (508) 786-9633 MICHIGAN Sypris Test & Measurement 24301 Catherine Industrial Road Suite 116 Novi, MI 48375 Phone: (248) 305-5200 NEW JERSEY Sypris Test & Measurement 650 Liberty Av e n u e Union, NJ 07083 Phone: (908) 688-9779 Sypris Test & Measurement 1133 Route 23 South Wayne, NJ 07470 Phone: (973) 628-1363 NEW YORK Sypris Test & Measurement c/o Delphi Harrison 200 Upper Mountain Road Building 6, Plant Q Lockport, NY 14094 Phone: (716) 438-4584 OHIO Sypris Technologies 1550 Marion-Agosta Road Marion, OH 43301 Phone: (740) 383-2111 Sypris Test & Measurement 925 Keynote Circ l e Brooklyn Heights, OH 44131 Phone: (216) 741-7040 Sypris Test & Measurement 3162 Presidential Drive Fairborn, OH 45234 Phone: (937) 427-3444 PENNSYLVANIA Sypris Test & Measurement 389 Wolf Camp Road Fair Hope, PA 15538 Phone: (814) 267-5408 Common Stock Info rm a t i o n Our common stock is traded on the Nasdaq National Market under the symbol “SYPR.” The following table sets fort h , for the periods indicated, the high and low closing sale prices per share of our common stock as re p o rted by the Nasdaq National Market. Year ended December 31, 2000: First Quarter Second Quarter Third Quarter Fourth Quarter Year ended December 31, 2001: First Quarter Second Quarter Third Quarter Fourth Quarter High $11.00 10.75 10.63 8.75 $ 8.00 8.22 10.55 13.46 Low $ 8.88 8.63 8.63 6.19 $ 4.00 3.75 7.50 9.80 As of January 28, 2002, there were 982 holders of re c o rd of our common stock. We have never declared or paid cash dividends on our common stock and do not plan to pay any cash dividends in the near future. Our current policy is to retain all earnings to finance future gro w t h . Investor Information CORPORATE ADDRESS S y p ris Solutions, Inc. 101 Bullitt Lane Suite 450 L o u i s v i l l e, KY 40222 P h o n e : (502) 329-2000 Fa x : (502) 329-2050 ANNUAL MEETING The Annual Meeting of Stockholders will be held on Tu e s d ay, May 7, 2002, at 10:00 a . m . at 101 Bullitt Lane, Lower Leve l Seminar Room, Louisville, Ke n t u ck y. FOR MORE INFORMATION To learn more about Sypris Solutions, Inc., visit our site on the Wo rld Wide Web at w w w. s y p ri s. c o m . INVESTOR MATERIALS The Sypris Web page – www. s y p ri s.com – is your entry point for a vast array of i n fo rmation about Sypri s, including its p r o d u c t s, financial info rmation, real-time s t o ck quotes, links to each of its s u b s i d i a ry operations and other useful i n fo rm a t i o n . For investor info rmation, including additional annual report s, 10-Ks, 10-Qs or any other financial litera t u r e, please contact Carroll A. D u n avent, Director of Legal and Corp o rate Serv i c e s, 101 Bullitt L a n e, Suite 450, Louisville, KY 40222. 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. SYPRIS ON NASDAQ The common stock of Sypris trades on the Nasdaq National Market under the symbol SYPR. TRANSFER AGENT E q u i S e rve Trust Company, N. A . P. O. B ox 2500 J e r s ey City, NJ 07303 P h o n e : (800) 317-4445 Fa x : (201) 222-4151 w w w. e q u i s e rve. c o m INDEPENDENT AUDITORS E rnst & Young LLP 400 West Market Street Suite 2100 L o u i s v i l l e, KY 40202 P h o n e : (502) 585-1400 Fa x : (502) 584-4221 CORPORATE COUNSEL Wyatt, Ta r rant & Combs, LLP 2800 PNC Plaza L o u i s v i l l e, KY 40202 P h o n e : (502) 589-5235 Fa x : (502) 589-0309 On the cover Pages 20 and 21 52 Sypris Annual Report 2001 (from left) Audrey Dupree, Pat Byron, Sharon Retterer, David Mochizuki, Scott Patterson, Kathy Whitley, Lori Thierjung, Vince Novo, Sam Johnson, Jim Harrer, Carroll Dunavent, Abraham Ali (from left) Bill Elderkin, Vinh Tran, Linda Wilson, Chris Vermejan, Shirley McIntyre, David Rohrer, Rick Belinsky, Paul Savoie, Gene DesJardin, Terry Ward, Joyce Martin, Leila Castellanos, Shawn Farley, Dr. Mike Pietrantonio 

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