Investing in the future
2003 Annual Report
101 Bullitt Lane
Suite 450
Louisville, Kentucky 40222
Phone (502) 329-2000
Fax (502) 329-2050
www.sypris.com
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Net Revenue
(in millions)
Diluted Earnings Per Share
Cash Flow From Operations
(in millions)
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Order Backlog
(in millions)
Revenue Per Employee
(in thousands)
Market Capitalization
(in millions)
Performance 2003
Revenue Continued to Grow: Up 1.1%
Driven by a 10% increase for the Industrial Group, revenue increased for the
fourth consecutive year.
Operating Income Declined: Down 21.2%
Third quarter issues across the business had a negative impact.
Earnings per Share Followed Suit: Down 33.3%
EPS was affected by the decline in operating income, a 25% increase in marginal
tax rates and a 7% increase in diluted shares.
Cash Flow from Operations Soared: Up 100.5%
Cash flow from operations reached a record $27 million.
Market Capitalization Continued to Rise: Up 78.0%
Market capitalization increased to $239 million.
Revenue per Employee Hit a New Record: Up 4.5%
This important measure of productivity increased for the fourth consecutive year
to $185,000 per employee.
Total Long-Term Debt Remained Low: $56 million
Even after spending $46 million in investing activities, total long-term debt
increased by only 19% due to the 100% increase in cash flow from operations.
Total Assets Reached a New Record: $263 million
Total assets increased 17.8%, driven by investments in technology,
capacity and new capabilities.
Orders Reached Record Levels: $322 million
Firm orders with specified shipment dates increased 21% for the year.
Backlog Climbed to Record Heights: $199 million
Backlog climbed 29%, driven by strong orders and new multi-year contracts.
Sypris Solutions is a diversified provider of technology-based outsourced services and specialty
products. We perform a wide range of manufacturing and technical services, typically under multi-year,
sole-source contracts with corporations and government agencies in the markets for aerospace &
defense electronics, truck components & assemblies, and for users of test & measurement equipment.
Contents
Letter to Stockholders 3
Corporate Officers 6
Investing in the Future 7
Sypris at a Glance 22
Board of Directors 24
Financial Summary 26
Financial Review 27
Common Stock Information 58
Corporate Directory 59
Company Locations 60
Investor Information IBC
Letter to Stockholders
FELLOW STOCKHOLDERS:
position of strong financial and operational health, but is
poised as never before to expand and grow profitably in
This past year turned out to be one of the most
the future.
important, exciting and challenging periods in the
20-year history of Sypris. While we were successful in
FINANCIAL RESULTS
continuing to execute our long-term strategy, we were
Revenue increased slightly during 2003, climbing to
challenged by a difficult third quarter. Despite this
$277 million from $273 million for the prior year, thereby
temporary setback, 2003 marked one of the most
marking the fourth consecutive year of top line growth
transformational periods in the Company’s history, one
for the Company. The increase was supported by a 10%
that will have a significant impact on the future of Sypris
increase in revenue from the Industrial Group, which
for some time to come.
benefited from increased shipments to Dana and
2003 was a year that was remarkable for the amount
Visteon despite the difficult market for commercial and
and range of the investments that your company made
light-truck vehicles during the year.
in its future. We invested $46 million during the year in
Operating income decreased 21% to $15 million
new state-of-the-art manufacturing
technologies,
during the year from $19 million for 2002, primarily as a
processes, capabilities and services. We also invested
result of the shortfall we experienced during the third
to advance the introduction of new, leading-edge
quarter of 2003. During this period, the Company
products successfully to market, while continuing to
struggled through effects of the electrical blackout that
devote resources to support the development of our
resulted in plant closures, production delays and
single most important asset – our people.
overtime charges we incurred to meet our customers’
The results were as you might expect. Orders from
schedules. The period was also notable for reduced
customers increased 21% during the year to a record
deliveries to two customers as they rebalanced
$322 million. Firm, shippable backlog increased 29%
inventories as well as the delay of shipments to another
during the year, reaching a record $199 million at year
customer as it completed the redesign of key circuit card
end. And perhaps most importantly, the award of new,
assemblies for a new missile guidance system.
long-term contracts, the life blood of the Company’s
Earnings per share declined 33% to $0.56 from
future, soared 111% to a record $639 million as a result
$0.84 in 2002, reflecting the effects of the third quarter
of new contracts with Dana, Nokia, Motorola, Siemens
on the Company’s profitability, as well as a 25%
and a variety of government agencies tasked with
increase in our marginal tax rate and a 7% increase in
maintaining the security of our nation.
the number of diluted shares outstanding.
We are pleased to highlight some of our people and
Cash flow from operations increased 100% to $27
the investments that we made during 2003 in this year’s
million during 2003 following a 61% increase during
annual report. Please join us in thanking these
2002. This record level of cash flow enabled Sypris to
individuals, as well as their 1,700 fellow employees,
increase capital expenditures 14% to $23 million and
who have been instrumental in building the strength and
invest an additional $23 million to support the capacity
organizational vitality of Sypris. As a result of their hard
requirements and growth opportunities tied to new
work and dedication, your company is not only in a
contracts while incurring only $19 million of debt to do so.
ROBERT E. GILL, Chairman of the Board and JEFFREY T. GILL, President & CEO
3
Sypris Solutions
Net book value continued to increase, rising 6% to
Morganton who is featured on our cover this year and
medium and heavy-duty
trucks,
including
those
expected to approximate $500 million over the term of
$145 million, while the value of the Company’s total
elsewhere in this annual report, we believe that we have
manufactured by Freightliner, Navistar and Paccar. The
the agreements.
assets increased 18% to $263 million from $224 million
made an investment in the future that will benefit the
contract also calls for Sypris to produce certain drive
Should we prove to be successful in closing these
for the prior year. And finally, the market capitalization of
Company for years to come.
train components for use in light trucks manufactured by
two proposed transactions, we will significantly increase
Sypris increased 78% to $239 million from $134 million
We invested in the purchase and installation of new
Ford and General Motors. The agreement runs through
the breadth and depth of our relationship with both
for the prior year, reflecting a positive response by our
automated inventory towers in our plant in Tampa,
2011 and has a projected value of $440 million over the
customers, as well as add vital new production
investors to the announcement of new contract awards
Florida. These towers, which can hold over 13,000 part
term of the contract based upon current market
capabilities to our rapidly growing manufacturing base.
and their expected impact on our future financial results.
numbers, resulted in a vast increase in inventory
INVESTMENTS
accuracy and reduced the amount of square footage
required to house these parts to 5,000 square feet from
conditions.
THE FUTURE
CLOSING
In November of 2003, Sypris celebrated its 20th
During 2003, we committed a record level of capital,
35,000 square feet prior to the purchase of the
The prospect for additional growth in the future
anniversary as a company. While we are proud of our
investing $46 million, or 16% of revenue, for the future
equipment. The project, which was the focus of one of
remains bright, with two contracts currently under letter
longevity, staying power alone is not enough. We want
of your company.
our Six Sigma teams, is an excellent example of the
of intent with Dana and ArvinMeritor. We expect to
to move forward. We want to generate the kind of value
To give you a sense of potential scale and impact of
dedication to continuous improvement that exists
complete these proposed transactions during 2004,
that will delight our stockholders, motivate our
these investments, we dedicated over $8 million to a
throughout your company.
subject to the completion of our due diligence and the
employees and consistently outperform that of our
new machining operation in our plant in Marion, Ohio.
We also invested in a range of products to serve the
satisfaction of certain conditions to closing.
competitors. That is our goal and we are determined to
This cell can handle a wide variety of part numbers,
needs of certain government agencies that are involved
The proposed transaction with Dana involves the
reach it. With your continued support, we are confident
requires only 10 minutes to change over from the
with ensuring our nation’s security. Of particular note is
purchase of a major portion of Dana’s manufacturing
we will.
production of one part number to another, and is
our new, patent-pending Silver Phoenix technology,
campus in Toluca, Mexico and certain production
In closing, we wish to call your attention to the
operated by just four people per shift. The operation is
which incorporates real-time storage area network
equipment located at other Dana plants in the United
outstanding performance of our employees
in
already running 24/7 and is expected to make a material
architecture. When embedded in systems used by
States. In return, we plan to enter into an eight-year
overcoming the many challenges of 2003 and in making
contribution
to
the Company’s productivity and
customers in national security and weapons testing
supply agreement to provide Dana with a variety of
the most of the opportunities that arose during the past
profitability during 2004. In fact, the early results have
applications, it enables users to simultaneously gather,
forged and machined drive train components for use in
twelve months that were both trying and stimulating.
been so positive that we have already placed an order
process and disseminate diverse types of information
medium and heavy-duty trucks. When completed and at
Their performance and dedication enabled us to
for a second cell, which we hope to have up and running
from a variety of sources with unprecedented speed and
full production, the projected value of the contract is
continue operating profitably, to expand our operations
in time to meet the growing needs of our customers in
accuracy. We plan to build upon this architecture in the
expected to approximate $500 million over the term of
efficiently and effectively, and to successfully position
early 2005.
future and believe the number of potential applications
the agreement.
our company for a future that can only be described as
We invested $22 million for the purchase of an
to be highly scalable.
award-winning manufacturing operation located in
Morganton, North Carolina from Dana at year-end. This
CONTRACTS
plant, which features over 100 pieces of CNC controlled
During 2003, we secured a record level of new
The proposed transaction with ArvinMeritor involves
exciting. Please join us in thanking them for doing an
the purchase of its plant in Kenton, Ohio that specializes
outstanding job.
in the manufacture of trailer axle beams. In return, we
plan to enter into a multi-year supply agreement to
machining equipment, boasts a very talented and
contract awards bringing the total estimated value of
provide ArvinMeritor with trailer axle beams and a
/s/ Jeffrey T. Gill
/s/ Robert E. Gill
dedicated workforce, and is expected to serve as a key
these awards to $639 million for the year.
variety of drive train components for use in medium and
President & CEO
Chairman of the Board
manufacturing base from which we plan to serve a
The Dana contract is particularly noteworthy. Under
variety of customers in the commercial and light-truck
this supply agreement, which began in January of 2004,
markets in the future. In fact, with the addition of people
Sypris is providing machining operations for a variety of
like Robert McCracken, a long-time CNC machinist in
drive train components that are produced for use in
heavy-duty trucks. The proposed transaction also
includes the five-year extension of an existing supply
agreement with ArvinMeritor. When completed and at
full production, the projected value of the contracts is
Sypris Solutions
4
5
Sypris Solutions
Corporate Officers
John R. McGeeney, Anthony C. Allen, James G. Cocke, Kathy Smith Boyd, Richard L. Davis, David D. Johnson, G. Darrell Robertson, John M. Kramer
Sypris Solutions
6
During 2003, Sypris invested
$46 million in new
technology, capacity, processes
and capabilities.
The result:
Orders increased 21%
to $322 million.
Backlog increased 29%
to $199 million.
New contract
awards increased 111%
to $639 million.
2003
Investing in the Future
We thought you might like to learn
more about the investments that will
impact Sypris for years to come.
9
Sypris Solutions
People
Our team of encryption software specialists and hardware
engineers developed this technologically advanced secure
host for use by our Armed Forces and certain government
agencies tasked with maintaining our national security.
Technology
Our team designed and installed the most advanced machining cell in the world for
finishing axle shafts for use by medium and heavy-duty truck customers.
Capabilities
Our purchase of the plant in Morganton, North Carolina
added much needed experience and talent to our
manufacturing base. We expect to build on this critical
base for many years to come.
Processes
Six Sigma techniques were applied to develop a solution for storing electronic
components that resulted in vastly improved inventory accuracy and a reduction of
30,000 square feet in storage space.
Products
We developed the high-speed Silver Phoenix architecture to ease the burden
It has the capability to record the entire
of intelligence gathering operations.
Encyclopædia Britannica in less than five one-hundredths of a second.
Services
We offer specialized on-site services for our customers,
including Bose, Delphi and Siemens, using our extensive
knowledge and best practices to manage their instrument
calibration and repair needs at a significant cost savings.
Sypris At A Glance
Sypris Solutions is a diversified provider of technology-based outsourced services and specialty products. We perform a wide
range of manufacturing and technical services, typically under multi-year, sole-source contracts with corporations and
government agencies in the markets for aerospace & defense electronics, truck components & assemblies, and for users of
test & measurement equipment.
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Market-Focused Businesses
Business Summary
Applications and Uses
Select Customers
Manufacturing Services
Engineering Services
Products
Integrated design and engineering services,
component selection, sourcing and
procurement, automated assembly, design and
implementation of product testing, systems
assembly, and repair and warranty services.
Software design services for data and
communications security products and contract
design services.
Encryption devices and real-time network-
centric analog and digital data acquisition and
storage systems.
Electronic assemblies and subsystems for use in military
cockpit control and display systems, missile guidance
systems, commercial avionics, satellite communications
systems, ruggedized hand-held computers, and secure
communications networks and products.
Boeing, Eaton, General Dynamics, Honeywell, L3,
Lockheed Martin, National Security Agency, Northrop
Grumman, Raytheon and U.S. Army.
Secured transmission of voice and data for intelligence and
surveillance applications.
General Services Administration, National Security Agency
and U.S. Army.
Network and communications security, collection and
storage of data for aerospace applications, weapons test and
evaluation, and acquisition of signal data from targets of
interest for the intelligence gathering community.
General Dynamics, Government of Israel, Johnson Space
Center, Lockheed Martin, NASA, National Security Agency,
Northrop Grumman, Raytheon, Titan Corporation, TRW,
U.S. Air Force, U.S. Army and U.S. Navy.
Manufacturing Services
Automated forging, machining, induction
hardening, cold extrusion, heat-treating, testing
and fabrication of products, production tooling
and prototypes.
Axle shafts, steer axles, carriers, full-float tubes, ring gears,
pinions, input shafts, helical gears and other drive train
components for use in light, medium and heavy-duty trucks,
SUVs, pickup trucks and automobiles. Jet engine shafts and
construction vehicle components.
ArvinMeritor, Dana, DaimlerChrysler, John Deere,
Pratt & Whitney and Visteon.
Products
High-pressure closures, transition joints and
insulated joints.
Pipeline and chemical systems in the energy and
chemical industries.
Chevron, ExxonMobil and Shell Oil.
Calibration and Repair
Testing
Products
Calibration, repair and certification of
electrical, electronic, physical and dimensional
test equipment, diagnostic and process control
equipment.
Testing of digital, linear, discrete, passive and
hybrid components, RF devices, environmental
testing, dynamics testing, failure analysis and
transportation testing on products, systems and
subassemblies.
Hall generators, current sensors, autoprobes
and gaussmeters.
Telecommunications systems, air traffic control systems,
electronic component manufacturing, automotive, process
control, weather radar systems, aerospace and defense,
medical equipment manufacturing and power generation
and distribution.
Anadigics, AT&T, Bose, Delphi Automotive, FAA, General
Dynamics, Honeywell, ITT, Lucent Technologies, Maxtor,
Motorola, National Weather Service, Nokia, Siemens,
Spirent, Square D, Tyco Electronics and TRW Automotive.
Military, semiconductor manufacturing, aerospace, satellite
and launch systems, avionics, medical, telecommunications
and transportation.
Arrow-Zeus, BAE Systems, Boeing, Bose, Eldec, General
Dynamics, Goodrich, Hamilton-Sundstrand, Honeywell,
JPL, L-3, Lockheed Martin, NASA, Northrop Grumman,
Raytheon, Sawtek and Suntron.
Current measurement applications in mass transit systems,
elevators, automotive diagnostic systems and laboratory
diagnostic systems. Magnetic measurement of components
used in military, aerospace and medical applications, and for
research and development and quality control.
General Motors, Hamilton-Sundstrand, Lockheed Martin,
Miltope, Snap-on, Toyo, Ithaco and SPX.
Sypris Solutions
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Sypris Solutions
Board of Directors
Robert E. Gill (top photo) has served as Chairman of the Board
of Sypris and its predecessor since 1983, and as President and Chief
Executive Officer of its predecessor from 1983 to 1992. Prior to
1983, Mr. Gill served in a number of senior executive positions,
including Chairman, President and Chief Executive Officer of Armor
Elevator Company, Vice President of A. O. Smith Corporation and
President and Chief Executive Officer of Elevator Electric Company.
Mr. Gill holds a BS degree in Electrical Engineering from the
University of Washington and an MBA from the University of
California at Berkeley. He is Chairman of the Executive Committee.
Robert E. Gill is the father of Jeffrey T. Gill and R. Scott Gill.
Jeffrey T. Gill (bottom photo) has served as President and Chief
Executive Officer of Sypris and its predecessor since 1992, and as
Executive Vice President of its predecessor from 1983 to 1992. Mr.
Gill holds a BS degree in Business Administration from the University
of Southern California and an MBA from Dartmouth College.
A director of Sypris and its predecessor since 1983, Mr. Gill is a
member of the Executive Committee. Jeffrey T. Gill is the son of
Robert E. Gill and the brother of R. Scott Gill.
Henry F. Frigon (top photo) has served as a private investor and
business consultant since 1994. Mr. Frigon served as Chairman of
CARSTAR, a national provider of collision repair services, from 2000
to 2001, and as its President and Chief Executive Officer from 1998
to 2000. Prior to 1994, Mr. Frigon served in a number of senior
executive positions, including Executive Vice President-Corporate
Development and Strategy, and Chief Financial Officer of Hallmark
Cards, and President and Chief Executive Officer of BATUS. A
director of Sypris since 1997 and of Sypris Electronics from 1994
until its merger with Sypris in 1998, Mr. Frigon also serves as a
director of H&R Block, Buckeye Technologies, Dimon, Tuesday
Morning and Packaging Corporation of America. He is Chairman
of the Compensation Committee and a member of the Executive
and Nominating and Governance Committees.
R. Scott Gill (bottom photo) has served as a Managing Broker with
Coldwell Banker Residential Brokerage since 2003. Mr. Gill served as
a Managing Broker and Associate with Koenig & Strey GMAC Real
Estate, a residential real estate firm from 1999 to 2003. Mr. Gill
served as Project Manager for IA Chicago, an architectural design
firm, from 1998 to 1999, as Senior Vice President and Secretary of
Sypris from 1997 to 1998, and as Vice President and Secretary of its
predecessor from 1983 to 1998. A director of Sypris and its
predecessor since 1983, Mr. Gill is a member of the Executive
Committee. R. Scott Gill is the son of Robert E. Gill and the brother
of Jeffrey T. Gill.
William L. Healey (top photo) has served as President and
Chief Executive Officer of Cal Quality Electronics, an electronics
manufacturing company, since 2002. Mr. Healey served as a private
investor and consultant from 1999 to 2002, as Chairman of the
Board of Smartflex Systems, an electronics manufacturing company,
from 1996 to 1999 and as its President and Chief Executive Officer
from 1989 to 1999. Prior to 1989, Mr. Healey served in a number of
senior executive positions with Silicon Systems, including Senior Vice
President of Operations. A director of Sypris since 1997, Mr. Healey
also serves as a director of Microsemi Corporation. He is Chairman
of the Nominating and Governance Committee.
Roger W. Johnson (bottom photo) is currently a private investor,
educator and business consultant. Mr. Johnson served as Chairman of
the Board and Chief Executive Officer of Collectors Universe, a provider
of services to dealers and collectors of high-end collectibles, from 2001
to 2002. Mr. Johnson served as Chief Executive Officer of YPO
International (Young Presidents Organization) from 1998 to 2000 and
as Administrator of the General Services Administration from 1993 to
1996. Prior to 1993, Mr. Johnson served in a number of senior executive
positions, including Chairman of the Board and Chief Executive Officer
of Western Digital Corporation. A director of Sypris since 1997 and of
Sypris Electronics from 1996 until its merger with Sypris in 1998, Mr.
Johnson also serves as a director of the Needham Funds, Insulectro,
Maxtor Corporation and Computer Access Technology Corporation. He
is Chairman of the Audit and Finance Committee and a member of the
Nominating and Governance Committee.
Sidney R. Petersen (top photo) retired as Chairman of the Board
and Chief Executive Officer of Getty Oil in 1984, where he served in
a variety of increasingly responsible management positions since 1955.
A director of Sypris since 1997 and of Sypris Electronics from 1994
until its merger with Sypris in 1998, Mr. Petersen is a member of the
Compensation and Audit and Finance Committees.
Robert Sroka (bottom photo) has served as Managing Director
of Corporate Solutions Group, an investment banking firm, since
December 2003, and as Managing Partner of Lighthouse Partners,
a private investment and business consulting company, since 1998.
Mr. Sroka served as Managing Director of Investment Banking-
Mergers and Acquisitions for J.P. Morgan from 1994 to 1998. Prior
to 1994, Mr. Sroka served in a variety of senior executive positions
with J.P. Morgan, including Vice President-Investment Banking and
Vice President-Corporate Finance. A director of Sypris since 1997,
Mr. Sroka also serves as non-executive Chairman of the Board of
Avado Brands. He is a member of the Compensation and Audit
and Finance Committees.
Sypris Solutions
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25
Sypris Solutions
Financial Summary
Financial Review
(In thousands, except per share data)
2003
2002(1)
2001(2)
2000
1999
Years ended December 31,
Consolidated Income Statement Data:
Net revenue
Gross profit
Operating income
Net income
Earnings per common share:
Basic
Diluted
$ 276,605 $ 273,477 $ 254,640 $ 216,571 $ 202,130
46,012
49,521
43,547
40,313
44,949
14,941
18,956
13,030
5,477
14,166
8,135
11,439
6,367
3,184
9,556
$
$
0.57 $
0.56 $
0.87 $
0.84 $
0.65 $
0.63 $
0.33 $
0.32 $
1.00
0.97
(In thousands)
2003(3)
2002
2001
2000
1999
December 31,
Consolidated Balance Sheet Data:
Working capital
Total assets
$ 80,516 $ 77,593 $ 67,325 $ 58,602 $ 53,705
263,495
223,605
211,444
179,122
148,564
Long-term debt, net of current portion
53,000
30,000
80,000
62,500
49,000
Total stockholders’ equity
144,781
137,035
70,120
64,205
60,820
(1) On January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" which required us to discontinue the amortization of goodwill. See Note 1 of our consolidated financial
statements for the year ended December 31, 2003 included elsewhere in this annual report.
(2) On May 31, 2001, we completed the acquisition of the net assets of Dana’s Marion, Ohio facility and its results of
operations are included from that date forward.
(3) On December 31, 2003, we completed the acquisition of the net assets of Dana’s Morganton, North Carolina facility.
Management’s Discussion and Analysis
28
Report of Management
38
Report of Independent Auditors
39
Consolidated Income Statements
40
Consolidated Balance Sheets
41
Consolidated Statements of Cash Flows
42
Consolidated Statements of Stockholders’ Equity
43
Notes to Consolidated Financial Statements
44
Sypris Solutions
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27
Sypris Solutions
Management’s Discussion and Analysis
The following discussion of our results of operations and financial condition should be read together with the other
As part of the proposed transaction, we plan to acquire ArvinMeritor's Kenton, Ohio plant that specializes in the manufacture
financial information and consolidated financial statements included in this annual report. This discussion contains forward-
of trailer axle beams. In addition, the proposed transaction provides for a five-year extension of an existing five-year supply
looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated
agreement that is otherwise expected to expire on December 31, 2004 under which we supply ArvinMeritor with axle shafts
in the forward-looking statements as a result of a variety of factors, including those discussed in "Forward-Looking
for medium and heavy-duty trucks. Should we complete the proposed transaction with ArvinMeritor successfully, the total
Statements" and elsewhere in this annual report.
outsourcing arrangement is expected to generate approximately $75 million of revenue per year, based upon current market
conditions.
OVERVIEW
The proposed second phase of the Dana transaction and the proposed ArvinMeritor transaction remain subject to due
We are a diversified provider of outsourced services and specialty products. We perform a wide range of manufacturing,
diligence, negotiation and execution of definitive agreements and board approvals among other contingencies, and in the
engineering, design, testing and other technical services, typically under multi-year, sole-source contracts with major
case of ArvinMeritor's Kenton plant, the negotiation and approval of a new union collective bargaining agreement.
companies and government agencies in the markets for aerospace & defense electronics, truck components & assemblies,
The expected revenue from these transactions are based upon current market volumes and neither Dana nor
and for users of test & measurement equipment. Revenue from our three core markets accounted for approximately 94% of
ArvinMeritor have an obligation to purchase a particular level of services under either the recently executed or proposed
our revenue for the year ended December 31, 2003, while revenue from our outsourced services accounted for approximately
contracts and there can be no assurance that the expected revenue will be realized. The prices contained in these
83% of our revenue. We expect these percentages to increase in the future.
agreements for our services are fixed for an initial term and generally reduced thereafter in accordance with schedules
We have four major operating subsidiaries that are grouped into two reportable segments, the Electronics Group and
contained in the agreements. We believe these price reductions will not materially affect our profitability. We purchase raw
the Industrial Group. The Electronics Group is comprised of Sypris Data Systems, Inc., Sypris Electronics, LLC and Sypris
steel and fabricated steel parts for these agreements at the direction of our customers, with any periodic changes in the price
Test & Measurement, Inc. Revenue from this group is derived primarily from the sale of manufacturing services, technical
of steel being reflected in the prices we are paid for our services, such that we neither benefit from nor are harmed by any
services and products to customers in the markets for aerospace & defense electronics and test & measurement services.
future changes in the price of steel. The agreements also provide for us to share in the benefits of any cost reduction
The Industrial Group consists solely of Sypris Technologies, Inc., which generates revenue primarily from the sale of
suggestions that we make that are accepted by our customers.
manufacturing services to customers in the market for truck components & assemblies and from the sale of products to the
Accounting Policies. Our significant accounting policies are described in Note 1 to the consolidated financial
energy and chemical markets.
statements included elsewhere in this annual report. We believe our most critical accounting policies include revenue
Our objective is to become the leading outsourcing specialist in each of our core markets for aerospace & defense
recognition and cost estimation on certain contracts for which we use percentage of completion methods of accounting, as
electronics, truck components & assemblies, and for users of test & measurement equipment. We have focused our efforts
described immediately below.
on establishing long-term relationships with industry leaders who embrace multi-year contractual relationships as a strategic
The complexity of the estimation process and all issues related to the assumptions, risks and uncertainties inherent with
component of their supply chain management.
the application of the percentage of completion methodologies affect the amounts reported in our financial statements. A
Recent Contract Awards. The pursuit of multi-year contractual relationships with industry leaders in each of our core
number of internal and external factors affect our cost of sales estimates, including labor rate and efficiency variances, revised
market segments is a key component of our strategy. We focus primarily on those candidates that will enable us to
estimates of warranty costs, estimated future material prices and customer specification and testing requirement changes. If
consolidate positions of leadership in our existing markets, further develop strategic partnerships with leading companies,
our business conditions were different, or if we used different assumptions in the application of this and other accounting
and expand our capability and capacity to increase our value-added service offerings. The quality of these contracts has
policies, it is likely that materially different amounts would be reported in our financial statements.
enabled us to invest in leading-edge technologies that we believe will serve as an important means for differentiating
Net Revenue. The majority of our outsourced services revenue is derived from manufacturing services contracts under
ourselves in the future from the competition when it comes to cost, quality, reliability and customer service.
which we supply products to our customers according to specifications provided under our contracts. We generally recognize
We recently announced the closing of a transaction with Dana as well as letters of intent for transactions we expect to
revenue for these outsourced services, as well as our product sales, when we ship the products, at which time title generally
close in 2004 with Dana and ArvinMeritor.
passes to the customer.
On December 31, 2003, we completed the first phase of a proposed two-phase transaction with Dana in which we
Contract revenue in our Electronics Group is recognized using the percentage of completion method, generally using
entered into a new eight-year agreement to supply a wide range of drive train components for the light, medium and heavy-
units-of-delivery as the basis to measure progress toward completing the contract. Revenue is recognized on these contracts
duty truck markets to Dana. In connection with this agreement, we acquired the property, plant, and equipment and certain
when units are delivered to the customer, with unit revenue based upon unit prices as set forth in the applicable contracts.
component inventories associated with Dana’s manufacturing plant in Morganton, North Carolina for a purchase price of
The costs attributed to contract revenue are based upon the estimated average costs of all units to be shipped. The
approximately $22 million. In addition, the parties agreed to a three-year extension of an existing seven-year supply
cumulative average costs of units shipped to date are adjusted through current operations as estimates of future costs to
agreement that we originally entered into on May 31, 2001. In the proposed second phase of the transaction, which is
complete change. Revenue under certain other multi-year fixed price contracts is recorded using achievement of performance
evidenced by a letter of intent signed on August 25, 2003, we expect to enter into an eight-year agreement with Dana for the
milestones or cost-to-cost as the basis to measure progress toward completing the contract. The basis for the measurement
supply of forged and machined components for use in the medium and heavy-duty truck markets effective as of the closing,
of progress toward completion is applied consistently to contracts with similar performance characteristics. Amounts
which is expected to occur during 2004. As part of the proposed transaction, we plan to acquire a portion of Dana’s
representing contract change orders or claims are included in revenue when these costs are reliably estimated and realization
manufacturing campus in Toluca, Mexico and certain production equipment located at other Dana facilities in the U.S. The
is probable. We recognize all other revenue as product is shipped and title passes, or when the service is provided to the
first phase of the transaction with Dana is expected to generate approximately $55 to $60 million of revenue per year, or
customer. Our net revenue includes adjustments for estimated product warranty and allowances for returns by our customers.
approximately $440 million over the term of the contract while the three-year contract extension currently represents
Generally, the percentage of completion method based on units of delivery is applied by our Electronics Group for outsourced
approximately $50 million of revenue per year, or $150 million over the new period. Should we complete the second phase
services provided under multi-year contracts with aerospace & defense customers. Approximately 35%, 44% and 53% of total
of the transaction with Dana successfully, the total outsourcing arrangement excluding the contract extension is expected to
net revenue was recognized under the percentage of completion method based on units of delivery during 2003, 2002 and
result in revenue of approximately $130 million per year, based upon current market conditions.
2001, respectively. Approximately 5% of total net revenue was recognized under the percentage of completion method based
On January 13, 2004, we signed a letter of intent with ArvinMeritor to supply trailer axle beams and a variety of drive
on milestones or cost-to-cost during 2003.
train components to ArvinMeritor under a series of multi-year agreements, the first of which is expected to close during 2004,
with the balance scheduled to occur during the next two to three years in accordance with a predetermined transition plan.
Sypris Solutions
28
29
Sypris Solutions
Cost of Sales. Cost of sales consists primarily of our payments to our suppliers, compensation, payroll taxes and
RESULTS OF OPERATIONS
employee benefits for service and manufacturing personnel, and purchasing and manufacturing overhead costs. The
The tables presented below, which compare our results of operations from one year to another, present the results for
contracts for which our Electronics Group recognizes net revenue under the percentage of completion method involve the
each year, the change in those results from one year to another in both dollars and percentage change and the results for
use of estimates for cost of sales. We compare estimated costs to complete an entire contract to total net revenue for the
each year as a percentage of net revenue. The columns present the following:
term of the contract to arrive at an estimated gross margin percentage for each contract. Each month, the estimated gross
• The first two data columns in each table show the absolute results for each year presented.
margin percentage is applied to the cumulative net revenue recognized on the contract to arrive at cost of sales for the period.
• The columns entitled "Year Over Year Change" and "Year Over Year Percentage Change" show the change in results,
These estimates require judgment relative to assessing risks, estimating contract revenues and costs, and making
assumptions for schedule and technical issues. These estimates are complicated and subject to many variables. Contract
costs include material, labor and subcontract costs, as well as an allocation of indirect costs. For contract change orders,
both in dollars and percentages. These two columns show favorable changes as positive and unfavorable changes as
negative. For example, when our net revenue increases from one year to the next, that change is shown as a positive
number in both columns. Conversely, when expenses increase from one year to the next, that change is shown as a
claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These
negative number in both columns.
amounts are only included in contract value when they can be reliably estimated and realization is considered probable.
Management reviews these estimates monthly and the effect of any change in the estimated gross margin percentage
• The last two columns in each table show the results for each period as a percentage of net revenue. In these two
columns, the cost of sales and gross profit for each are given as a percentage of that segment’s net revenue. These
for a contract is reflected in cost of sales in the period in which the change is known. If increases in projected costs-to-
amounts are shown in italics.
complete are sufficient to create a loss contract, the entire estimated loss is charged to operations in the period the loss first
In addition, as used in these tables, "NM" means "not meaningful."
becomes known. Additionally, our reserve for excess and obsolete inventory is primarily based upon forecasted demand for
our products and any change to the reserve arising from forecast revisions is reflected in cost of sales in the period the
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
revision is made.
Impairments. Consistent with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," goodwill is tested at least annually for impairment by calculating the estimated fair value of each business
with which goodwill is associated. The estimated fair value is based on a discounted cash flow analysis that requires judgment
in our evaluation of the business and establishing an appropriate discount rate and terminal value to apply in the calculations.
In selecting these and other assumptions, for each business we consider historical performance, forecasted operating results,
general market conditions and industry considerations specific to the business. We likely would compute a materially different
fair value for a business if different assumptions were used or if circumstances were to change.
We evaluate long-lived assets for impairment and assess their recoverability based upon our estimate of future cash
flows. If facts and circumstances lead us to believe that the cost of one of our assets may be impaired, we will write down
that carrying amount to fair value to the extent necessary. In determining an estimate of future cash flows, we consider
historical performance, forecasted operating results, general market conditions and industry considerations specific to the
assets. We likely would compute a materially different estimate of future cash flows if different assumptions were used or if
circumstances were to change.
Year Over
Year Over
Year
Years Ended
December 31,
Year
Change
Percentage
Results as Percentage of
Change
Net Revenue for the Years
Favorable
Favorable
Ended December 31,
(In thousands, except percentage data)
2003
2002
(Unfavorable)
(Unfavorable)
2003
2002
$ 180,733
95,872
276,605
$ 186,562
86,915
273,477
$
(5,829)
8,957
3,128
(3.1)%
10.3
1.1
65.3%
34.7
100.0
68.2%
31.8
100.0
Net revenue:
Electronics Group
Industrial Group
Total
Cost of sales:
Electronics Group
Industrial Group
Total
Gross profit:
Electronics Group
Industrial Group
Total
Selling, general and administrative
Research and development
Amortization of intangible assets
144,467
86,126
230,593
148,766
75,190
223,956
4,299
(10,936)
(6,637)
36,266
9,746
46,012
26,711
4,166
194
37,796
11,725
49,521
27,114
3,354
97
(1,530)
(1,979)
(3,509)
403
(812)
(97)
2.9
(14.5)
(3.0)
(4.0)
(16.9)
(7.1)
1.5
(24.2)
(100.0)
79.9
89.8
83.4
20.1
10.2
16.6
9.7
1.5
0.0
5.4
0.6
0.1
4.7
1.8
79.7
86.5
81.9
20.3
13.5
18.1
9.9
1.3
0.0
6.9
1.0
(0.1)
6.0
1.8
Operating income
14,941
18,956
(4,015)
(21.2)
Interest expense, net
Other expense (income), net
1,693
230
2,742
(159)
1,049
38.3
(389) NM
Income before income taxes
13,018
16,373
(3,355)
(20.5)
Income taxes
Net income
4,883
4,934
51
1.0
$
8,135
$ 11,439
$
(3,304)
(28.9)%
2.9%
4.2%
Sypris Solutions
30
31
Sypris Solutions
Net Revenue. Our backlog increased $44.8 million to $199.0 million at December 31, 2003, on $321.7 million in net
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
orders in 2003 compared to $265.8 million in 2002. We expect to convert approximately 80% of the backlog at December 31,
2003 to revenue during 2004.
Net revenue decreased in the Electronics Group due to lower revenue from manufacturing services, partially offset by
higher revenue from other outsourced services and product sales. Manufacturing services decreased $10.3 million because
certain contracts with aerospace & defense customers were completed during 2002 which more than offset the revenue
earned from new contract awards in 2003 and increased demand on certain other contracts. Net revenue from other
outsourced services increased $3.9 million in 2003 due to an increase in engineering services. Net revenue from product
sales increased $0.6 million in 2003 driven by higher quantities of data systems products, which benefited from higher
spending by intelligence agencies. Backlog for our Electronics Group increased $10.4 million to $125.8 million at December
31, 2003, on $191.5 million in net orders in 2003 compared to $183.8 million in 2002. We expect to convert approximately
69% of the backlog at December 31, 2003 to revenue during 2004.
Net revenue in the Industrial Group increased due to higher sales of light axle shafts and new components for medium
and heavy-duty trucks. We began full production of light axle shafts under our contract with Visteon during the second quarter
of 2002 so 2003 benefited from the full year effect of this contract. In 2003, we began shipping to Dana additional drive train
components parts for medium and heavy-duty trucks. Backlog for our Industrial Group increased $34.4 million to $73.2 million
at December 31, 2003, on $130.2 million in net orders in 2003 compared to $82.0 million in 2002. Backlog and net orders in
2003 increased primarily due to the Dana contract that closed on December 31, 2003. We expect to convert substantially all
this backlog at December 31, 2003 to revenue during 2004.
Gross Profit. Our Electronics Group experienced lower gross profit from manufacturing services and other outsourced
services, partially offset by higher gross profit from products sales. Gross profit from manufacturing services decreased due
to lower revenue and lower gross margins. Gross margins were lower primarily due to costs recognized during the third
quarter related to warranty costs on an end-of-life program, expenses related to resolving technical problems on a custom
manufacturing program and write-off of program costs related to the termination of an unprofitable contract. Gross profit from
other outsourced services decreased due to lower gross margins in our test & measurement services business. Gross profit
from product sales was higher due to the mix of higher value products and programs.
Gross profit for our Industrial Group decreased due to lower gross margins. Gross margins were lower due to equipment
maintenance and efficiency issues for certain automated equipment and a higher concentration of lower-margin Class 5-7
truck components. The Industrial Group experienced a difficult third quarter in 2003 during which gross profit decreased $2.3
Year Over
Year Over
Year
Years Ended
December 31,
Year
Change
Percentage
Results as Percentage of
Change
Net Revenue for the Years
Favorable
Favorable
Ended December 31,
(In thousands, except percentage data)
2002
2001
(Unfavorable)
(Unfavorable)
2002
2001
Net revenue:
Electronics Group
Industrial Group
Total
Cost of sales:
Electronics Group
Industrial Group
Total
Gross profit:
Electronics Group
Industrial Group
Total
Selling, general and administrative
Research and development
Amortization of intangible assets
Interest expense, net
Other (income) expense, net
Income before income taxes
Income taxes
Net income
$ 186,562
86,915
273,477
$ 207,282
47,358
254,640
$ (20,720)
39,557
18,837
(10.0)%
83.5
7.4
68.2%
31.8
100.0
81.4%
18.6
100.0
148,766
75,190
223,956
169,897
41,196
211,093
21,131
(33,994)
(12,863)
37,796
11,725
49,521
27,114
3,354
97
37,385
6,162
43,547
26,134
3,054
1,329
2,742
(159)
16,373
4,934
4,111
(358)
9,277
2,910
411
5,563
5,974
(980)
(300)
1,232
5,926
1,369
(199)
7,096
12.4
(82.5)
(6.1)
1.1
90.3
13.7
(3.7)
(9.8)
92.7
45.5
33.3
(55.6)
76.5
79.7
86.5
81.9
20.3
13.5
18.1
9.9
1.3
0.0
6.9
1.0
(0.1)
6.0
1.8
82.0
87.0
82.9
18.0
13.0
17.1
10.3
1.2
0.5
5.1
1.6
(0.1)
3.6
1.1
$ 11,439
$
6,367
$
5,072
79.7%
4.2%
2.5%
(2,024)
(69.6)
Operating income
18,956
13,030
million as compared to the third quarter of 2002. During the third quarter of 2003, productivity for the Industrial Group
Net Revenue. Our backlog decreased $8.1 million to $154.2 million at December 31, 2002, on $265.8 million in net
decreased primarily as a result of the Northeast electricity blackout in August 2003 and lower sales quantities to Visteon and
orders in 2002 compared to $242.1 million in 2001.
Dana. These lower sales quantities were driven by Visteon’s longer than normal annual plant shutdown and Dana’s
Net revenue decreased in the Electronics Group due to lower revenue from manufacturing services and other
rebalancing of inventory levels in anticipation of a potential labor-related work stoppage.
outsourced services. Manufacturing services decreased $14.7 million due to lower aerospace & defense shipments during
Selling, General and Administrative. Selling, general and administrative expense decreased $0.4 million in 2003 and
2002 and the completion of a commercial contract in the fourth quarter of 2001. Net revenue from other outsourced services
decreased as a percentage of net revenue to 9.7% from 9.9% in 2002. We controlled our spending on selling, general and
decreased $5.4 million in 2002 due to a 16% decline in revenue for test & measurement services. Weak economic conditions
administrative in consideration of the 1.1% increase in net revenue from 2002 to 2003.
and a slowdown in the telecommunications, semiconductor, and commercial avionics markets negatively affected demand for
Research and Development. The increase in research and development costs is driven by development of a new data
test & measurement services from our customers. Net revenue from product sales decreased $0.6 million in 2002 due to
system product line within our Electronics Group. We expect to complete the development of these products in 2004, and
reduced sales quantities for magnetics products. Backlog for our Electronics Group decreased $3.1 million to $115.4 million
sold limited quantities in 2003.
at December 31, 2002, on $183.8 million in net orders in 2002 compared to $183.5 million in 2001.
Amortization of Intangible Assets. Amortization of intangible assets increased in 2003 primarily due to certain
Net revenue in the Industrial Group increased $39.6 million in 2002 due to the full year effect of the May 2001 contract
identifiable intangible assets acquired during 2003.
with Dana and the addition of a contract with Visteon. The contract with Dana for fully machined, medium and heavy-duty
Interest Expense, Net. Interest expense decreased in 2003 due to the repayment of debt and a lower weighted
truck axle shafts and other drive train components, generated outsourced services revenue totaling $38.1 million in 2002, as
average interest rate. We used proceeds from our 2002 stock offering to repay $52.5 million of our outstanding debt, reducing
compared to $16.5 million in 2001. Under the contract with Visteon we began supplying light axle shafts for pickup trucks and
our weighted average debt outstanding to $31.1 million during 2003 from $49.8 million during 2002. The weighted average
sport utility vehicles during the first quarter of 2002. Backlog for our Industrial Group decreased $5.0 million to $38.8 million
interest rate decreased to 5.4% in 2003 from 5.8% in 2002 due to the July 2003 expiration of interest rate swap rate
at December 31, 2002, on $82.0 million in net orders in 2002 compared to $58.6 million in 2001. Net orders in 2002 increased
agreements with higher than market interest rates.
primarily due to the contracts with Dana and Visteon.
Income Taxes. Our effective income tax rate increased to 37.5% in 2003 from 30.1% for 2002. The lower effective tax
rate in 2002 was primarily due to a reduction in the valuation allowance on deferred tax assets.
Sypris Solutions
32
33
Sypris Solutions
Gross Profit. Gross profit was higher for our Electronics Group driven by higher gross margin as compared to 2001.
QUARTERLY RESULTS
Gross margin increased due to cost reductions, improved manufacturing efficiencies and a more favorable revenue mix in
The following table presents our unaudited condensed consolidated statements of income data for each of the eight
2002 as compared to 2001. Most of the gross margin improvement was offset in gross profit by lower revenue.
quarters in the period ended December 31, 2003. We have prepared this data on the same basis as our audited consolidated
Gross profit for our Industrial Group increased due to revenue growth from contracts with Dana and Visteon. While gross
financial statements and, in our opinion, include all normal recurring adjustments necessary for a fair presentation of this
margin improved in 2002 compared to 2001, we believe start-up costs and manufacturing inefficiencies related to our initial
information. You should read these unaudited quarterly results in conjunction with our consolidated financial statements and
production under the Visteon contract limited the gross profit contribution from this business.
related notes included elsewhere in this annual report. The consolidated results of operations for any quarter are not
Selling, General and Administrative. Selling, general and administrative expense increased in 2002 due to the
necessarily indicative of the results to be expected for any subsequent period.
additional management and administrative infrastructure to support the growth in our Industrial Group, partially offset by
reduced selling expenses in our Electronics Group. During the fourth quarter of 2002, selling, general and administrative
expense was 8.8% of net revenue, primarily due to a reduction in our incentive bonus expense based on performance
measures defined in our incentive plans.
Research and Development. The increase in research and development costs is driven by development of a new data
system product line within our Electronics Group.
Amortization of Intangible Assets. In 2002, we amortized intangible assets other than goodwill and indefinite-lived
intangible assets. We recognized substantially less amortization expense in 2002 because amortization of goodwill and
indefinite-lived intangible assets ceased when we adopted SFAS No. 142 effective January 1, 2002.
Interest Expense, Net. Interest expense decreased in 2002 due to the repayment of debt and a lower weighted
average interest rate. We used proceeds from our stock offering during March and April 2002 to repay $52.5 million of our
outstanding debt, reducing our weighted average debt outstanding to $49.8 million during 2002 from $74.5 million during
2001. The weighted average interest rate decreased to 5.8% in 2002 from 7.4% in 2001. There was no capitalized interest
for 2002 as compared to $1.8 million for 2001.
Income Taxes. Our effective income tax rate decreased to 30.1% in 2002 from 31.4% for 2001. The lower effective tax
rate was due to a reduction in the valuation allowance on deferred tax assets totaling $0.7 million in 2002 compared to $0.3
million in 2001.
(In thousands, except per share data)
First
Second
Third
Fourth
First
Second
Third
Fourth
2003
2002
Net revenue:
Electronics Group
Industrial Group
Total
Cost of sales:
Electronics Group
Industrial Group
Total
Gross profit:
Electronics Group
Industrial Group
Total
Selling, general and administrative
Research and development
Amortization of intangible assets
$ 35,689 $ 45,544 $ 46,468 $ 53,032 $ 44,076 $ 49,297 $ 46,341 $ 46,848
19,830
66,678
25,077
70,621
22,430
68,898
23,226
58,915
24,212
73,509
25,139
78,171
24,416
70,757
18,457
62,533
28,390
20,574
48,964
7,299
2,652
9,951
6,149
1,022
21
35,821
21,759
57,580
9,723
3,318
13,041
7,036
1,066
21
38,304
21,025
59,329
41,952
22,768
64,720
35,388
16,016
51,404
8,164
1,405
9,569
6,925
1,030
67
11,080
2,371
13,451
6,601
1,048
85
8,688
2,441
11,129
6,514
831
51
40,280
20,347
60,627
9,017
3,865
12,882
7,188
932
3
36,111
20,672
56,783
36,987
18,155
55,142
10,230
3,744
13,974
7,522
773
21
9,861
1,675
11,536
5,890
818
22
Operating income
2,759
4,918
1,547
5,717
3,733
4,759
5,658
4,806
Interest expense, net
Other expense (income), net
486
67
547
85
384
65
276
13
1,082
(29)
660
(31)
470
(9)
530
(90)
Income before income taxes
2,206
4,286
1,098
5,428
2,680
4,130
5,197
4,366
Income taxes
Net income
827
1,607
412
2,037
855
1,325
1,663
1,091
$ 1,379 $ 2,679 $
686 $
3,391 $ 1,825 $ 2,805 $
3,534 $ 3,275
Earnings per common share:
Basic
Diluted
Shares used in computing earnings
per common share:
$
$
0.10 $
0.10 $
0.19 $
0.19 $
0.05 $
0.05 $
0.24 $
0.23 $
0.18 $
0.17 $
0.20 $
0.19 $
0.25 $
0.24 $
0.23
0.23
Basic
Diluted
14,184
14,407
14,213
14,430
14,241
14,799
14,267
14,868
10,169
10,742
13,971
14,696
14,121
14,621
14,151
14,478
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Net cash provided by operating activities increased $13.7 million to $27.3 million in 2003. We made contributions to
pension plans totaling $7.5 million in 2002, which included a voluntary contribution totaling $5.7 million, compared to
contributions totaling less than $1.0 million in each of 2003 and 2001. Increases in our working capital resulted in a decrease
in net cash flow totaling $1.0 million, $6.8 million and $8.1 million in 2003, 2002 and 2001, respectively.
Net cash used in investing activities increased $25.6 million to $45.8 million in 2003 driven by net assets acquired
totaling $21.8 million in connection with the Dana Morganton transaction and capital expenditures for our Electronics Group
and Industrial Group totaling $10.6 million and $11.8 million, respectively. Capital expenditures for our Electronics Group were
principally comprised of manufacturing, assembly and test equipment. Our Industrial Group’s capital expenditures included
forging, machining, and centralized tooling equipment in support of our truck components & assemblies operations. Capital
expenditures for the Industrial Group in 2002 and 2001 totaled $12.0 million and $19.5 million, respectively, which included
new forging and machining equipment to increase and expand the range of production capabilities. In 2001, the Industrial
Sypris Solutions
34
35
Sypris Solutions
Group acquired certain assets of Dana’s Marion, Ohio facility for $11.5 million, and received $5.4 million in proceeds from
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142,
sale and leaseback transactions for certain machinery and equipment. Capital expenditures for the Electronics Group in 2002
goodwill and indefinite lived intangible assets are no longer amortized but will be reviewed at least annually for impairment.
and 2001 totaled $7.5 million and $7.9 million, respectively. We also received $1.4 million in 2001 for the sale of certain assets
Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives.
by our Electronics Group.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation
Net cash provided by financing activities increased $12.4 million to $18.2 million in 2003 due to borrowings in connection
of ARB No. 51." This Interpretation explains how to identify variable interest entities and how an enterprise assesses its
with assets acquired for the Dana Morganton transaction, partially offset by $1.7 million in dividends paid. In 2002, we
interests in a variable interest entity to decide whether to consolidate that entity. This Interpretation requires existing
received net proceeds totaling $55.7 million from our public stock offering that was used primarily to reduce debt. In 2001,
unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively
we borrowed $22.5 million, primarily to fund capital expenditures and the acquisition of certain assets from Dana.
disperse risks among the parties involved. We adopted the Interpretation in the fourth quarter 2003 and such adoption did not
We had total availability for borrowings and letters of credit under the revolving credit facility of $68.8 million at
affect our financial statements.
December 31, 2003, which, when combined with our unrestricted cash balance of $12.0 million, provides for total cash and
borrowing capacity of $80.8 million. Maximum borrowings on the revolving credit facility are $125.0 million, subject to a $15.0
FORWARD-LOOKING STATEMENTS
million limit for letters of credit. The credit agreement includes an option to increase the amount of available credit to $150.0
million from $125.0 million, subject to the lead bank’s approval. Borrowings under the revolving credit facility may be used to
finance working capital requirements, acquisitions and for general corporate purposes, including capital expenditures. Most
acquisitions require the approval of our bank group.
Our principal commitments at December 31, 2003 consisted of repayments of borrowings under the credit agreement
and obligations under operating leases for certain of our real property and equipment. We also had purchase commitments
totaling approximately $3.9 million at December 31, 2003, primarily for manufacturing equipment. The following table provides
information about the payment dates of our contractual obligations at December 31, 2003, excluding current liabilities except
for the current portion of long-term debt:
(In thousands)
2004
2005
2006
2007
2008
Thereafter
Revolving credit facility
Operating leases
Total
$
$
3,200
6,428
9,628
$
$
— $
— $
— $
6,489
5,963
5,590
53,000
4,489
6,489
$
5,963
$
5,590
$
57,489
$
$
—
2,947
2,947
2009 &
We believe that, without taking into account the proceeds from this offering, sufficient resources will be available to
satisfy our cash requirements for at least the next twelve months. Cash requirements for periods beyond the next twelve
months depend on our profitability, our ability to manage working capital requirements and our rate of growth. If we make
significant acquisitions or if working capital and capital expenditure requirements exceed expected levels during the next
twelve months or in subsequent periods, we may require additional external sources of capital. There can be no assurance
that any additional required financing will be available through bank borrowings, debt or equity financings or otherwise, or that
if such financing is available, it will be available on terms acceptable to us. If adequate funds are not available on acceptable
terms, our business, results of operations and financial condition could be adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
as amended by SFAS No. 137 and 138. SFAS No. 133, and its subsequent amendments, requires us to recognize all
derivatives on the consolidated balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change
in fair value must be recognized currently in earnings. In 2001, we entered into interest rate swap agreements, which were
deemed to be effective hedges in accordance with SFAS No. 133. These swap agreements expired in July 2003.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations."
SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase
method of accounting. SFAS No. 141 also specifies criteria for the recognition of identifiable intangible assets separately from
goodwill. We applied the provisions of SFAS No. 141 to all business combinations subsequent to the effective date.
This annual report contains forward-looking statements including statements concerning the future of our industries,
product development, business strategy, the possibility of future acquisitions, continued acceptance and growth of our
products and dependence upon significant customers. These statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. These statements
discuss future expectations, contain projections of results of operations or of financial condition or include other forward-
looking information. You should not place undue reliance on these forward-looking statements.
Important factors could cause performance to differ materially from projected results contained in, or based upon, these
statements, including: the discovery of, or failure to discover, material issues during due diligence; the failure to agree on the
final terms of definitive agreements, long-term supply agreements, collective bargaining agreements, or related agreements
or any party’s breach of, or refusal to close the transactions reflected in, those agreements; the ability to successfully manage
growth or contraction in the economy, or the commercial vehicle or electronics markets; access to capital on favorable terms
as needed for operations or growth; the ability to achieve expected annual savings and synergies from past and future
business combinations; competitive factors and price pressures; availability of third party component parts at reasonable
prices; inventory risks due to shifts in market demand and/or price erosion of purchased components; changes in product mix;
program changes, delays, or cancellations by the government or other customers; concentrated reliance on major customers
or suppliers; cost and yield issues associated with the Company’s manufacturing facilities; revisions in estimated costs
related to major contracts; labor relations; risks inherent in operating abroad, including foreign currency exchange rates;
performance of our pension fund portfolios; changes in applicable law or in the Company’s regulatory authorizations, security
clearances, or other legal rights to conduct its business, deal with its work force or export goods and services; adverse
regulatory actions, or other governmental sanctions; risks of litigation, including litigation with respect to environmental or
asbestos-related matters, customer or supplier claims, or stockholders; the effects (including possible increases in the cost
of doing business) resulting from future war and terrorists activities or political uncertainties; natural disasters, casualties,
utility disruptions, or the failure to anticipate unknown risks and uncertainties present in the Company’s businesses;
dependence on current management; as well as other factors included in the Company’s periodic reports filed with the
Securities and Exchange Commission.
In this annual report, we rely on and refer to information and statistics regarding the markets in which we compete. We
obtained this information and these statistics from various third party sources and publications that are not produced for the
purposes of securities offerings or economic analysis. We have not independently verified the data and cannot assure you of
the accuracy of the data we have included.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. All
additional borrowings under our credit agreement bear interest at a variable rate based on the prime rate, the London
Interbank Offered Rate ("LIBOR"), or certain alternative short-term rates, plus a margin (1.0% at December 31, 2003) based
upon our leverage ratio. An increase in interest rates of 100 basis points would result in additional interest expense
approximating $0.6 million on an annualized basis, based upon our debt outstanding at December 31, 2003. Fluctuations in
foreign currency exchange rates have historically had little impact on us because the vast majority of our transactions are
denominated in U.S. dollars. 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 foreseeable future.
Sypris Solutions
36
37
Sypris Solutions
Report of Management
Report of Independent Auditors
The management of Sypris Solutions, Inc. is responsible for the preparation and integrity of the accompanying
consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the
United States. The financial statements include amounts based on management’s best estimates and judgments. Financial
Board of Directors and Stockholders
Sypris Solutions, Inc.
information included elsewhere in this annual report is consistent with these financial statements.
We have audited the accompanying consolidated balance sheets of Sypris Solutions, Inc. as of December 31, 2003 and
We maintain a system of internal control designed to provide reasonable assurance that transactions are executed in
2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in
accordance with proper authorization and are appropriately recorded in order to permit preparation of financial statements in
the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our
conformity with generally accepted accounting principles, and that assets are adequately safeguarded and accountability for
responsibility is to express an opinion on these financial statements based on our audits.
assets is maintained. Although no cost-effective internal control system will prevent all errors and irregularities, we believe
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those
our controls provide reasonable assurance that the financial statements are reliable and that our assets are reasonably
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
safeguarded. Internal controls and procedures are periodically reviewed and revised, when appropriate, due to changing
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
circumstances and requirements.
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
To ensure the effective administration of internal control, we carefully select and train our employees, maintain and
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
disseminate written policies and procedures, provide appropriate communication channels and foster an environment
provide a reasonable basis for our opinion.
conducive to the effective functioning of controls. We have adopted a Code of Business Conduct that requires all employees,
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
including officers and senior level executives, to adhere to the highest standards of personal and professional integrity.
position of Sypris Solutions, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash
The Audit and Finance Committee of the Board of Directors is composed entirely of outside directors, including one of
flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally
whom the Board of Directors has deemed to be a financial expert. The Audit and Finance Committee members meet the
accepted in the United States.
Nasdaq Stock Market standards for independence and operate under a written charter adopted by the Board of Directors.
The Audit and Finance Committee meets periodically with representatives of management and with our independent auditors
to review our financial reporting process and our controls to safeguard assets. Our independent auditors have full and free
access to the Audit and Finance Committee members at all times, without the presence of management, to discuss the
results of their audits, the adequacy of our internal accounting control and the quality of our financial reporting.
Louisville, Kentucky
January 30, 2004
/s/ Jeffrey T. Gill
President & CEO
/s/ David D. Johnson
Vice President, CFO & Treasurer
Sypris Solutions
38
39
Sypris Solutions
Consolidated Income Statements
Consolidated Balance Sheets
(In thousands, except per share data)
2003
2002
2001
(In thousands, except share data)
Years ended December 31,
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
Operating income
Interest expense, net
Other expense (income), net
Income before income taxes
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
$ 230,632
45,973
$ 229,629
43,848
$ 209,874
44,766
276,605
273,477
254,640
203,080
27,513
195,576
28,380
181,818
29,275
230,593
223,956
211,093
46,012
26,711
4,166
194
14,941
1,693
230
13,018
4,883
49,521
27,114
3,354
97
18,956
2,742
(159)
16,373
4,934
$
$
$
8,135
$
11,439
0.57
0.56
$
$
0.87
0.84
$
$
$
43,547
26,134
3,054
1,329
13,030
4,111
(358)
9,277
2,910
6,367
0.65
0.63
Shares used in computing earnings per common share:
Basic
Diluted
14,237
14,653
13,117
13,664
9,828
10,028
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventory, net
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
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:
The accompanying notes are an integral part of the consolidated financial statements.
no shares issued
Preferred stock, par value $0.01 per share, 981,600 shares authorized;
no shares issued
Series A preferred stock, par value $0.01 per share, 18,400 shares authorized;
Common stock, non-voting, par value $0.01 per share, 10,000,000 shares authorized;
no shares issued
Common stock, par value $0.01 per share, 30,000,000 shares authorized; 14,283,323
and 14,158,077 shares issued and outstanding in 2003 and 2002, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of the consolidated financial statements.
December 31,
2003
2002
$ 12,019
45,484
61,932
11,370
$
12,403
37,951
64,443
9,187
130,805
123,984
106,683
14,277
11,730
75,305
14,277
10,039
$ 263,495
$ 223,605
$
$ 29,598
17,491
3,200
50,289
53,000
15,425
118,714
—
—
—
23,356
16,035
7,000
46,391
30,000
10,179
86,570
—
—
—
143
83,541
63,443
(2,346)
142
82,575
57,017
(2,699)
144,781
137,035
$ 263,495
$ 223,605
Sypris Solutions
40
41
Sypris Solutions
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Deferred income taxes
Provision for excess and obsolete inventory
Provision for doubtful accounts
Other noncash charges
Contributions to pension plans
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
Inventory
Other current assets
Accounts payable
Accrued and other liabilities
Years ended December 31,
2003
2002
2001
$
8,135
$
11,439
$
6,367
12,831
6,009
832
191
846
(586)
(7,724)
6,219
(2,427)
3,154
(205)
11,386
3,684
727
231
339
(7,451)
1,576
(4,559)
(863)
(1,010)
(1,898)
9,856
479
432
122
59
(754)
(8,474)
(3,519)
(416)
3,648
671
8,471
Net cash provided by operating activities
27,275
13,601
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of assets
Purchase of net assets of acquired entities
Changes in nonoperating assets and liabilities
(22,521)
175
(23,300)
(171)
(19,747)
211
—
(662)
(27,623)
6,816
(11,486)
(650)
Net cash used in investing activities
(45,817)
(20,198)
(32,943)
Cash flows from financing activities:
Net increase (decrease) in debt under revolving credit agreements
Cash dividends paid
Proceeds from issuance of common stock
Net cash provided by financing activities
Net decrease in cash and cash equivalents
19,200
(1,709)
667
18,158
(384)
(50,500)
(424)
56,692
5,768
(829)
Cash and cash equivalents at beginning of year
12,403
13,232
22,500
—
530
23,030
(1,442)
14,674
Cash and cash equivalents at end of year
$ 12,019
$ 12,403
$
13,232
The accompanying notes are an integral part of the consolidated financial statements.
Accumulated
Other
(In thousands, except share data)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Comprehensive
Total
Retained
Earnings
Income
(Loss)
Stockholders’
Equity
Balance at January 1, 2001
Net income
Adjustment in minimum pension liability,
9,709,669
—
$
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
Stock option tax benefit
—
—
—
52,206
136,800
—
Balance at December 31, 2001
9,898,675
Net income
Adjustment in minimum pension liability,
net of tax of $582
Change in fair value of interest rate swap
agreements, net of tax of $99
Comprehensive income (loss)
—
—
—
—
Cash dividends, $0.06 per common share
Issuance of common shares
Issuance of shares under Employee
—
4,100,000
Stock Purchase Plan
Exercise of stock options
Stock option tax benefit
Retire unvested restricted shares
37,695
123,983
—
(2,276)
97
—
—
—
—
1
1
—
99
—
—
—
—
—
41
1
1
—
—
$ 24,401
—
$ 40,060
6,367
$
(353) $ 64,205
6,367
—
—
—
—
256
566
267
—
(1,124)
(1,124)
—
6,367
(419)
(1,543)
(419)
4,824
—
—
—
—
—
—
257
567
267
25,490
46,427
(1,896)
70,120
—
—
—
—
—
55,615
335
758
377
—
11,439
—
11,439
—
(873)
(873)
—
11,439
(849)
—
—
—
—
—
70
(803)
—
—
—
—
—
—
70
10,636
(849)
55,656
336
759
377
—
Balance at December 31, 2002
14,158,077
142
82,575
57,017
(2,699)
137,035
Net income
Adjustment in minimum pension liability,
net of tax of $2
Change in fair value of interest rate swap
agreements, net of tax of $210
Comprehensive income
Cash dividends, $0.12 per common share
Issuance of shares under Employee
Stock Purchase Plan
Exercise of stock options
Stock option tax benefit
—
—
—
—
—
38,160
87,086
—
—
—
—
—
—
—
1
—
—
—
—
—
—
353
456
157
8,135
—
—
8,135
(1,709)
—
—
—
—
4
349
353
—
—
—
—
8,135
4
349
8,488
(1,709)
353
457
157
Balance at December 31, 2003
14,283,323
$
143
$ 83,541
$ 63,443
$
(2,346) $ 144,781
The accompanying notes are an integral part of the consolidated financial statements.
Sypris Solutions
42
43
Sypris Solutions
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Consolidation Policy
The accompanying consolidated financial statements include the accounts of Sypris Solutions, Inc. and its wholly-
owned subsidiaries (collectively, "Sypris" or the "Company"). All significant intercompany accounts and transactions have
been eliminated.
Nature of Business
Sypris is a diversified provider of outsourced services and specialty products. The Company performs a wide range of
manufacturing, engineering, design, testing, and other technical services, typically under multi-year, sole-source contracts
with corporations and government agencies in the markets for aerospace & defense electronics, truck components &
assemblies, and for users of test & measurement equipment.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in
the U.S. requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash
equivalents.
Inventory
Contract inventory is stated at actual production costs, reduced by the cost of units for which revenue has been
recognized. Gross contract inventory is considered work in process. Progress payments under long-term contracts are
specified in the contracts as a percentage of cost and are liquidated as contract items are completed and shipped. Other
inventory is stated at the lower of cost or market. The first-in, first-out method was used for determining the cost of inventory
excluding contract inventory and certain other inventory, which was determined using the last-in, first-out method ("LIFO")
(see Note 4). The Company’s reserve for excess and obsolete inventory is primarily based upon forecasted demand for its
product sales, and any change to the reserve arising from forecast revisions is reflected in cost of sales in the period the
revision is made.
Property, Plant and Equipment
Property, plant and equipment is stated on the basis of cost. Depreciation of property, plant and equipment is generally
computed using the straight-line method over their estimated economic lives. For land improvements, buildings and building
improvements, the estimated economic life is generally 40 years. Estimated economic lives range from three to fifteen years
for machinery, equipment, furniture and fixtures. Leasehold improvements are amortized over the respective lease term using
the straight-line method. Expenditures for maintenance, repairs and renewals of minor items are expensed as incurred. Major
renewals and improvements are capitalized.
Interest cost is capitalized for qualifying assets during the period in which the asset is being installed and prepared for
its intended use. Capitalized interest cost is amortized on the same basis as the related depreciation.
Goodwill
Beginning in 2002 with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," goodwill is no longer amortized, but instead tested at least annually for impairment. Prior to 2002,
goodwill was amortized using the straight-line method over its estimated period of benefit of 15 years (see "Adoption of
Recently Issued Accounting Standards" below). Goodwill is reported net of accumulated amortization of approximately
$4,146,000 at December 31, 2003 and 2002.
Long-lived Assets
A portion of the Company’s business is conducted under long-term, fixed-price contracts with aerospace & defense
companies and agencies of the U.S. Government. Contract revenue is recognized using the percentage of completion
method, generally using units-of-delivery as the basis to measure progress toward completing the contract. 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 under certain other long-term fixed price contracts is recorded using achievement of
performance milestones or cost-to-cost as the basis to measure progress toward completing the contract. Amounts
representing contract change orders or claims are included in revenue when such costs are reliably estimated and realization
is probable.
Revenue recognized under the percentage of completion method of accounting totaled approximately $111,341,000,
$120,424,000 and $134,478,000 for the years ended December 31, 2003, 2002 and 2001, respectively. In 2003,
approximately 88% of such amount was accounted for based on units of delivery and approximately 12% was accounted for
based on milestones or cost-to-cost. In 2002 and 2001, substantially all such amounts were accounted for under the units-
of-delivery method. All other revenue is recognized as product is shipped and title passes, or when services are rendered.
Contract Accounting
For long-term contracts, the Company capitalizes in inventory direct material, direct labor and factory overhead as
incurred. Selling costs are expensed as incurred. Costs to complete long-term contracts are estimated on a monthly basis.
Estimated margins at completion are applied to cumulative contract revenue to arrive at costs charged to operations.
Accounting for long-term contracts under the percentage of completion method involves substantial estimation
processes, including determining the estimated cost to complete a contract. As contracts may require performance over
several accounting periods, formal detailed cost-to-complete estimates are performed and updated monthly via performance
reports. Management’s estimates of costs-to-complete change due to internal and external factors, such as labor rate and
efficiency variances, revised estimates of warranty costs, estimated future material prices and customer specification and
testing requirement changes. Changes in estimated costs are reflected in gross profit in the period in which they are known.
If increases in projected costs-to-complete are sufficient to create a loss contract, the entire estimated loss is charged to
operations in the period the loss first becomes known.
Product Warranty Costs
The provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual
experience. The accrued liability for warranty costs is included in the caption "Accrued liabilities" in the accompanying
consolidated balance sheets.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist of accounts
receivable. The Company’s customer base consists of various departments or agencies of the U.S. Government, aerospace
& defense companies under contract with the U.S. Government and a number of customers in diverse industries across
geographic areas, primarily in North America. The Company performs periodic credit evaluations of its customers’ financial
condition and does not require collateral on its commercial accounts receivable. Credit losses are provided for in the
consolidated financial statements and consistently have been within management’s expectations. Approximately 43% of
accounts receivable outstanding at December 31, 2003 are due from the Company’s four largest customers.
The Company recognized revenue from contracts with the U.S. Government and its agencies of approximately
$49,143,000, $44,185,000 and $40,046,000 during the years ended December 31, 2003, 2002 and 2001, respectively. The
Company’s largest customers for the year ended December 31, 2003 were Dana Corporation and Raytheon Company, which
represented approximately 15% and 14%, respectively, of the Company’s total net revenue. The Company’s largest
customers for the year ended December 31, 2002 were Raytheon Company and Dana Corporation, which represented
The Company evaluates long-lived assets for impairment and assesses their recoverability based upon anticipated
approximately 19% and 14%, respectively, of the Company’s total net revenue. The Company’s largest customers for the year
future cash flows. If facts and circumstances lead the Company’s management to believe that the cost of one of its assets
ended December 31, 2001 were Raytheon Company and Honeywell International, Inc., which represented approximately
may be impaired, the Company will write down that carrying amount to fair value to the extent necessary.
21% and 11%, respectively, 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, 2003, 2002 or 2001.
Sypris Solutions
44
45
Sypris Solutions
Stock Based Compensation
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation
Stock options are granted under various stock compensation programs to employees and independent directors (see
of Variable Interest Entities, an Interpretation of ARB No. 51." This Interpretation explains how to identify variable interest
Note 11). The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25,
entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity.
"Accounting for Stock Issued to Employees" ("APB 25"). For purposes of pro forma disclosures, the estimated fair value of
This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries
the options is amortized to expense over the options’ vesting period. The Company’s pro forma information is as follows:
if the entities do not effectively disperse risks among parties involved. The Company adopted the Interpretation in the fourth
(In thousands, except per share data)
2003
2002
2001
NOTE 2. ACQUISITIONS
Years ended December 31,
quarter 2003 and such adoption did not effect the financial statements.
Net income
Pro forma stock-based compensation expense, net of tax
Pro forma net income
Pro forma earnings per common share:
Basic
Diluted
Derivative Financial Instruments
$
$
$
$
8,135
$
11,439
1,624
6,511
0.46
0.44
1,591
9,848
0.75
0.72
$
$
$
$
$
$
$
6,367
1,390
4,977
0.51
0.50
In 2001, the Company entered into interest rate swap agreements, which were deemed to be effective hedges in
accordance with SFAS No. 133, "Accounting of Derivative Instruments and Hedging Activities" (see Note 7). All derivatives
on the consolidated balance sheets are reported at fair value and changes in the fair value, net of income tax, were
recognized in other comprehensive income (loss) on the consolidated statements of stockholders’ equity.
Adoption of Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 141 also
specifies criteria for the recognition of identifiable intangible assets separately from goodwill. The Company applied the
provisions of SFAS No. 141 to all business combinations subsequent to the effective date (see Note 2).
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142, goodwill and indefinite lived intangible assets are no longer amortized but will be reviewed at least 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 nonamortization of goodwill has increased the Company’s net income and earnings per share beginning in 2002.
Following are pro forma results assuming goodwill had not been amortized prior to January 1, 2002:
On May 31, 2001, the Company acquired from Dana Corporation certain assets and liabilities of the Marion Forge plant.
The business produces fully machined, medium and heavy-duty truck axle shafts and other drive train components for
integration into subassemblies and is included with Sypris Technologies in the Industrial Group. The transaction was
accounted for as a purchase, in which the purchase price of $11,486,000 was allocated based on the fair values of the assets
and liabilities acquired. The purchase price was allocated primarily to property, plant and equipment. The results of operations
of the acquired business have been included in the consolidated financial statements since the acquisition date. The
acquisition was financed by the Company’s Credit Agreement (see Note 7).
On December 31, 2003, the Company acquired from Dana Corporation certain assets and liabilities of a plant that will
expand Sypris Technologies’ manufacturing capabilities in certain light, medium and heavy-duty truck steer axles and other
drive train components. The transaction was accounted for as a purchase, in which the purchase price of $22,297,000 was
allocated based on the fair values of the assets and liabilities acquired. The results of operations of the acquired business will
be included in the consolidated financial statements beginning January 1, 2004. The acquisition was financed by the
Company’s Credit Agreement (see Note 7). The Company paid Dana $21,780,000 on the closing date and $517,000 in
January 2004. Following are the estimated fair values of the assets acquired and liabilities assumed at the date of the
acquisition, which are subject to refinement:
(In thousands)
Current assets
Property, plant and equipment
Other assets
Total assets acquired
Current liabilities assumed
Net assets acquired
$
4,540
17,746
1,727
24,013
(1,716)
$
22,297
Years ended December 31,
Company will amortize on a straight-line basis over the life of the contract.
Other assets represents the estimated fair value of an eight-year supply agreement with Dana Corporation that the
(In thousands, except per share data)
2003
2002
2001
Reported net income
Adjustment for amortization of goodwill, net of tax
Adjusted net income
Basic earnings per common share as reported
Adjustment for amortization of goodwill, net of tax
Adjusted basic earnings per common share
Diluted earnings per common share as reported
Adjustment for amortization of goodwill, net of tax
Adjusted diluted earnings per common share
$
$
$
$
$
$
8,135
—
8,135
0.57
—
0.57
0.56
—
0.56
$
$
$
$
$
$
11,439
—
11,439
0.87
—
0.87
0.84
—
0.84
$
$
$
$
$
$
6,367
782
7,149
0.65
0.08
0.73
0.63
0.08
0.71
There has been no change to the carrying value of the Company’s goodwill since January 1, 2002. Goodwill, net of
accumulated amortization, at December 31, 2003 for the Electronics Group and the Industrial Group was approximately
$13,837,000 and $440,000, respectively. The Company’s other intangible assets subject to amortization and the related
amortization expense are not material to the Company’s consolidated financial position or results of operations, respectively.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
(In thousands)
Commercial
U.S. Government
Allowance for doubtful accounts
December 31,
2003
2002
$ 39,978
6,100
$
46,078
34,108
4,366
38,474
(594)
(523)
$ 45,484
$
37,951
Accounts receivable from the U.S. Government includes amounts due under long-term contracts, all of which are billed
at December 31, 2003 and 2002, of $4,508,000 and $2,930,000, respectively.
Sypris Solutions
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NOTE 4. INVENTORY
Inventory consists of the following:
(In thousands)
Raw materials
Work in process
Finished goods
Costs relating to long-term contracts and programs,
net of amounts attributed to revenue recognized to date
Progress payments related to long-term contracts and programs
LIFO reserve
Reserve for excess and obsolete inventory
December 31,
2003
2002
$ 22,394
15,854
3,052
$
18,493
14,769
4,588
36,569
(9,851)
(940)
(5,146)
34,778
(2,737)
(1,007)
(4,441)
$ 61,932
$
64,443
option to increase the amount of available credit to $150,000,000, subject to the lead bank’s approval. Current maturities of
long-term debt at December 31, 2003 and 2002 represent amounts due under a short-term borrowing arrangement included
in the Credit Agreement. Standby letters of credit up to a maximum of $15,000,000 may be issued under the Credit
Agreement, and no significant amounts were outstanding at December 31, 2003 and 2002.
Under the terms of the Credit Agreement, interest rates are determined at the time of borrowing and are based on the
London Interbank Offered Rate plus a margin of 1.0% to 2.0%; or the greater of the prime rate or the federal funds rate plus
0.5%, plus a margin up to 0.75%. The Company also pays a fee of 0.20% to 0.25% on the unused portion of the aggregate
commitment. The margins applied to the respective interest rates and the commitment fee are adjusted quarterly and are
based on the Company’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization. The weighted
average interest rate for outstanding borrowings at December 31, 2003 was 2.7%. The weighted average interest rates for
borrowings during the years ended December 31, 2003, 2002 and 2001 were 5.4%, 5.8% and 7.4%, respectively.
The Credit Agreement contains customary affirmative and negative covenants, including financial covenants requiring
the maintenance of specified fixed charge coverage and leverage ratios and minimum levels of net worth. As of December
The preceding amounts include inventory valued under the LIFO method that totaled approximately $11,476,000 and
31, 2003, the Company was in compliance with all covenants.
$12,663,000 at December 31, 2003 and 2002, respectively.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
(In thousands)
Land and land improvements
Buildings and building improvements
Machinery, equipment, furniture and fixtures
Construction in progress
Accumulated depreciation
December 31,
2003
2002
$
2,173
23,420
148,733
15,539
189,865
$
1,736
19,132
119,740
6,201
146,809
(83,182)
(71,504)
$ 106,683
$
75,305
Depreciation expense totaled approximately $12,637,000, $11,280,000 and $8,468,000 for the years ended December
31, 2003, 2002 and 2001, respectively. Approximately $3,488,000 and $494,000 was included in accounts payable for capital
expenditures at December 31, 2003 and 2002, respectively.
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities consists of the following:
(In thousands)
Employee benefit plan accruals
Salaries, wages and incentives
Other
December 31,
2003
2002
$
5,219
1,708
10,564
$
4,585
3,735
7,715
$ 17,491
$
16,035
Included in other accrued liabilities are employee payroll deductions, advance payments, accrued operating expenses,
accrued warranty expenses, accrued interest and other items, none of which exceed 5% of total current liabilities.
NOTE 7. 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 most recently in October 2003. The Credit Agreement provides for a revolving credit facility with
an aggregate commitment of $125,000,000 through October 2008. We had total availability for borrowings and letters of credit
under the revolving credit facility of $68,800,000 at December 31, 2003, which, when combined with our unrestricted cash
balance of $12,019,000, provides for total cash and borrowing capacity of $80,819,000. The credit agreement includes an
On July 26, 2001, the Company entered into interest rate swap agreements with three banks that effectively converted
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 interest expense. The swap agreements, which expired on July 25, 2003, had a combined notional amount of $30,000,000
whereby the Company paid a fixed rate of interest of 4.52% and received a variable 30-day LIBOR rate. The differential paid
or received was accrued as interest rates changed and was recognized as an adjustment to interest expense in the
consolidated income statements. The aggregate fair market value of all interest rate swap agreements was approximately
$559,000 at December 31, 2002, which was included in accrued liabilities on the consolidated balance sheet.
Interest incurred, net of amounts capitalized, during the years ended December 31, 2003, 2002 and 2001 totaled
approximately $1,729,000, $2,923,000 and $4,021,000, respectively. The Company had no capitalized interest in 2003 or
2002. Capitalized interest for the year ended December 31, 2001 was $1,763,000. Interest paid during the years ended
December 31, 2003, 2002 and 2001 totaled approximately $1,328,000, $2,763,000 and $5,623,000, respectively.
NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial
statements at their carrying amount which approximates fair value because of the short-term maturity of those instruments.
The carrying amount of debt outstanding at December 31, 2003 and 2002 under the Credit Agreement approximates fair
value because borrowings are for terms less than six months and have rates that reflect currently available terms and
conditions for similar debt.
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company sponsors noncontributory defined benefit pension plans (the "Pension Plans") covering certain
employees of Sypris Technologies. The Pension Plans covering salaried and management employees provide pension
benefits that are based on the employees’ highest five-year average compensation within ten years before retirement. The
Pension Plans covering hourly employees and union members generally provide benefits at stated amounts for each year of
service. The Company’s funding policy is to make the minimum annual contributions required by the applicable regulations;
however, the Company made a voluntary contribution to the Pension Plans totaling $5,660,000 in 2002. The Pension Plans’
assets are primarily invested in equity securities and fixed income securities. The following table details the components of
pension expense:
(In thousands)
Service cost
Interest cost on projected benefit obligation
Net amortizations and deferrals
Expected return on plan assets
Years ended December 31,
2003
2002
2001
$
137
2,265
611
(2,430)
$
172
2,306
339
(2,329)
$
358
1,939
247
(1,961)
$
583
$
488
$
583
Sypris Solutions
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Sypris Solutions
The following are summaries of the changes in the benefit obligations and plan assets and of the funded status of the
The Company sponsors a defined contribution plan (the "Defined Contribution Plan") for substantially all employees of
Pension Plans:
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Fair value of plan assets at end of year
Funded status of the plans:
Benefit obligation at end of year
Fair value of plan assets at end of year
Funded status of plan (underfunded)
Unrecognized actuarial loss
Unrecognized prior service cost
Net asset recognized
Balance sheet assets (liabilities):
Prepaid benefit cost
Intangible asset
Accrued benefit liability
Accumulated other comprehensive loss
Net amount recognized
Pension plans with accumulated benefit obligation
in excess of plan assets:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Projected benefit obligation and net periodic pension
cost assumptions:
Discount rate
Rate of compensation increase
Expected long-term rate of return on plan assets
Weighted average asset allocation:
Equity securities
Debt securities
Total
December 31,
2003
2002
$ 35,237
137
2,265
1,450
(1,765)
$
31,983
172
2,306
2,394
(1,618)
$ 37,324
$
35,237
$ 29,480
3,958
586
(1,765)
$
24,789
(1,142)
7,451
(1,618)
$ 32,259
$
29,480
$ 37,324
32,259
(5,065)
7,714
365
$
$
3,014
4,685
—
(5,425)
3,754
$
$
$
35,237
29,480
(5,757)
8,074
694
3,011
4,876
36
(5,661)
3,760
$
3,014
$
3,011
$ 22,304
22,100
16,677
$
20,622
20,284
14,627
6.25%
4.00%
8.25%
63%
37%
100%
6.75%
4.00%
8.50%
38%
62%
100%
The Company uses November 30 as the measurement date for the Pension Plans. Total estimated contributions
expected to be paid to the plans during 2004 range from $1,500,000 to $2,000,000. The expected long-term rates of return
on plan assets for determining net periodic pension cost for 2003 and 2002 were chosen by the Company from a best
estimate range determined by applying anticipated long-term returns and long-term volatility for various assets categories to
the target asset allocation of the plan. The target asset allocation of plan assets is equity securities ranging 55-65% and fixed
income securities ranging 35-45% of total investments.
the Company. The Defined Contribution Plan is intended to meet the requirements of Section 401(k) of the Internal Revenue
Code. The Defined Contribution Plan allows the Company to match participant contributions and provides discretionary
contributions. Contributions to the Defined Contribution Plan in 2003, 2002 and 2001 totaled approximately $2,737,000,
$2,267,000 and $1,933,000, respectively.
The Company has self-insured medical plans (the "Medical Plans") covering substantially all employees. The number
of employees participating in the Medical Plans was approximately 1,325, 1,300 and 1,350 at December 31, 2003, 2002 and
2001, respectively. The Medical Plans limit the Company’s annual obligations to fund claims to specified amounts per
participant and in the aggregate. The Company is adequately insured for amounts in excess of these limits. Employees are
responsible for payment of a portion of the premiums. During 2003, 2002 and 2001, the Company charged approximately
$7,223,000, $6,677,000 and $5,890,000, respectively, to operations related to reinsurance premiums, medical claims incurred
and estimated, and administrative costs for the Medical Plans. Claims paid during 2003, 2002 and 2001 did not exceed the
aggregate limits.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its real property and certain equipment, vehicles and computer hardware under
operating leases with terms ranging from month-to-month to ten years and which contain various renewal and rent escalation
clauses. Future minimum annual lease commitments under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 2003 are as follows:
(In thousands)
2004
2005
2006
2007
2008
2009 and thereafter
$
6,428
6,489
5,963
5,590
4,489
2,947
$
31,906
Rent expense for the years ended December 31, 2003, 2002 and 2001 totaled approximately $7,485,000, $7,387,000
and $5,550,000, respectively.
The Company entered into agreements for the sale and leaseback of certain specific manufacturing and testing
equipment during 2001. 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 term 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 were approximately $5,420,000 and the transactions resulted in a deferred loss of
approximately $787,000. Deferred losses on sales and leaseback transactions are amortized on a straight-line basis over the
term of the respective leases. Cumulative deferred losses, including deferred losses incurred prior to 2001, net of
amortization, was approximately $835,000 and $1,039,000 as of December 31, 2003 and 2002, respectively. Future minimum
annual lease commitments related to these leases are included in the above schedule.
As of December 31, 2003, the Company had outstanding purchase commitments of approximately $3,904,000, primarily
for the acquisition of manufacturing equipment.
The Company is involved in certain litigation and contract issues arising in the normal course of business. While the
outcome of these matters cannot, at this time, be predicted in light of the uncertainties inherent therein, management does
not expect that these matters will have a material adverse effect on the consolidated financial position or results of operations
of the Company.
Sypris Solutions
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Sypris Solutions
NOTE 11. STOCK OPTION AND PURCHASE PLANS
The Company applies APB 25 and related interpretations in accounting for its employee stock options because, as
The Company has certain stock compensation plans under which options to purchase common stock may be granted
discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
to officers, key employees and non-employee directors. Options may be granted at not less than the market price on the date
Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options.
of grant. Options are exercisable in whole or in part up to two years after the date of grant and ending ten years after the date
Under APB 25, when the exercise price of the Company’s employee stock options is at least equal to the market price of the
of grant. The following table summarizes option activity for the three years ended December 31, 2003:
underlying stock on the date of grant, no compensation expense is recognized.
Exercise
Price Range
Weighted
Average
Exercise
Price
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been
determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123.
The fair value for options granted by the Company during 2003, 2002 and 2001 were estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average assumptions:
Balance at January 1, 2001
Granted
Exercised
Forfeited
Balance at December 31, 2001
Granted
Exercised
Forfeited
Balance at December 31, 2002
Granted
Exercised
Forfeited
Balance at December 31, 2003
Shares
1,553,737
632,819
(164,616)
(174,980)
1,846,960
362,391
(127,561)
(144,425)
1,937,365
690,811
(104,730)
(178,061)
$ 1.72
3.88
1.72
6.25
- $ 31.00
13.27
-
8.75
-
11.76
-
$
1.72
9.95
1.72
6.25
1.72
6.88
1.72
3.36
-
-
-
-
-
-
-
-
31.00
19.00
10.50
16.03
31.00
16.10
10.50
16.03
7.79
6.15
3.06
8.21
7.61
14.32
6.23
9.39
8.83
8.78
5.04
9.17
8.96
2,345,385
$ 3.88
- $ 31.00
$
The following table summarizes certain weighted average data for options outstanding and currently exercisable at
December 31, 2003:
Exercise Price Range
$3.88 - $5.00
$5.12 - $7.00
$7.37 - $10.00
$10.06 - $15.00
$15.59 - $20.00
$23.00 - $31.00
Total
Outstanding
Weighted Average
Shares
125,120
438,970
1,212,208
466,794
96,805
5,488
Exercise
Price
$
4.63
6.14
8.43
12.19
17.24
27.38
2,345,385
$
8.96
Remaining
Contractual
Life
5.6
5.2
5.7
6.0
7.1
1.3
5.7
Weighted
Average
Exercise
Price
$
4.59
6.19
8.64
10.87
18.13
27.38
Shares
102,870
103,590
520,593
79,069
55,805
5,488
867,415
$
8.80
The Company’s stock compensation program also provides for the grant of performance-based stock options to key
employees ("Performance Options"). The terms and conditions of the Performance Options grants provide for the
determination of the exercise price and the beginning of the vesting period to occur when the fair market value of the
Company’s common stock achieves certain targeted price levels. Performance Options to purchase 116,000 shares and
56,000 shares of common stock were granted during 2003 and 2001, respectively. The Company did not grant Performance
Options in 2002. Performance Options to purchase 28,000 shares, 49,000 shares and 32,000 shares of common stock were
forfeited in 2003, 2002 and 2001, respectively. One targeted price level of the Performance Options was achieved in 2002,
resulting in determination of the exercise price and beginning of the vesting period for options to purchase 52,000 shares of
common stock. Performance Options for which the targeted price level has not been achieved total 403,000 shares, 315,000
shares and 416,000 shares at December 31, 2003, 2002 and 2001, respectively, and are excluded from disclosures of
options outstanding.
The aggregate number of shares of common stock reserved for issuance under the Company’s stock compensation
programs as of December 31, 2003 and 2002 was 4,750,000. The aggregate number of shares available for future grant as
of December 31, 2003 and 2002 was 1,375,011 and 2,013,261, respectively.
Expected life (years)
Expected volatility
Risk-free interest rates
Expected dividend yield
Years ended December 31,
2003
7
75.0%
3.69%
0.95%
2002
7
74.8%
3.83%
1.09%
2001
8
75.2%
4.93%
—
The weighted average Black-Scholes value of options granted under the stock option plans during 2003, 2002 and 2001
was $5.76, $9.39 and $4.71 per share, respectively.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company’s employee stock options have
characteristics significantly different from those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a
The Company has a stock purchase plan that provides substantially all employees who have satisfied the eligibility
requirements the opportunity to purchase shares of the Company’s common stock on a compensation deduction basis. The
purchase price is the lower of 85% of the fair market value of the common stock on the first or last business day of the
purchase period. Payroll deductions may not exceed $6,000 for any six-month cycle. The stock purchase plan expires
January 31, 2006. At December 31, 2003 and 2002, there were 121,049 shares and 159,209 shares, respectively, available
for purchase under the plan. During 2003, 2002 and 2001, a total of 38,160 shares, 37,695 shares and 52,206 shares,
respectively, were issued under the plan.
NOTE 12. STOCKHOLDERS’ EQUITY
On March 26, 2002, the Company completed a public stock offering of 3,600,000 shares of its common stock and, on
April 19, 2002, an additional 500,000 shares were issued through the exercise of an over-allotment option. The shares were
sold at $14.50 per share and generated proceeds, after underwriting discounts and expenses, of approximately $55,656,000.
Proceeds from the offering were primarily used to repay debt. On May 7, 2002, the Company's stockholders approved an
amendment to increase the Company’s authorized common stock from 20,000,000 shares to 30,000,000 shares.
The Company has a stockholder rights plan, under which each stockholder owns one right for each outstanding share
of common stock owned. Each right entitles the holder to purchase one one-thousandth of a share of a new series of preferred
stock at an exercise price of $63.00. The rights trade along with, and not separately from, the shares of common stock unless
they become exercisable. If any person or group acquires or makes a tender offer for 15% or more of the common stock of
the Company (except in transactions approved by the Company’s Board of Directors in advance) the rights become
exercisable, and they will separate, become tradable, and entitle stockholders, other than such person or group, to acquire,
at the exercise price, preferred stock with a market value equal to twice the exercise price. If the Company is acquired in a
merger or other business combination with such person or group, or if 50% of its earning power or assets are sold to such
person or group, each right will entitle its holder, other than such person or group, to acquire, at the exercise price, shares of
the acquiring company’s common stock with a market value of twice the exercise price. The rights will expire on October 23,
2011, unless redeemed or exchanged earlier by the Company, and will be represented by existing common stock certificates
until they become exercisable.
Exercisable
reliable single measure of the fair value of its employee stock options.
Sypris Solutions
52
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Sypris Solutions
As of December 31, 2003, 18,400 shares of the Company’s preferred stock were designated as Series A Preferred
The following is a reconciliation of income tax expense to that computed by applying the federal statutory rate of 34%
Stock in connection with the adoption of the stockholder rights plan. There are no shares of Series A Preferred Stock currently
to income before income taxes:
outstanding. The holders of Series A Preferred Stock will have voting rights, be entitled to receive dividends based on a
defined formula and have certain rights in the event of the Company’s dissolution. The shares of Series A Preferred Stock
(In thousands)
shall not be redeemable. However, the Company may purchase shares of Series A Preferred Stock in the open market or
pursuant to an offer to a holder or holders.
Cumulative losses recorded in other comprehensive income (loss) for adjustments in the minimum pension liability, net
of tax, totaled $2,346,000, $2,350,000 and $1,477,000 at December 31, 2003, 2002 and 2001, respectively. Cumulative
losses recorded in other comprehensive income (loss) for the aggregate fair market value of all swap agreements, net of tax,
totaled $349,000 and $419,000 at December 31, 2002 and 2001, respectively.
NOTE 13. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes."
Accordingly, deferred income taxes have been provided for temporary differences between the recognition of revenue and
expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported
amounts in the financial statements. The components of income tax expense (benefit) are as follows:
(In thousands)
Current:
Federal
State
Deferred:
Federal
State
Years ended December 31,
2003
2002
2001
$
(847)
(279)
$
(1,126)
4,938
1,071
6,009
1,184
66
1,250
3,427
257
3,684
$
2,161
270
2,431
706
(227)
479
Federal tax at the statutory rate
State income taxes, net of federal tax benefit
Change in valuation allowance for deferred tax asset
Research and development tax credit
Other
Deferred income tax assets and liabilities are as follows:
(In thousands)
Deferred tax assets:
Compensation and benefit accruals
Inventory valuation
State net operating loss carryforwards
Contract provisions
Accounts receivable allowance
Interest rate swap agreements
Other
Deferred tax liabilities:
Depreciation
Contract provisions
Defined benefit pension plan
Other
$
4,883
$
4,934
$
2,910
Net deferred tax liability
Years ended December 31,
2003
2002
2001
$
4,426
522
—
(146)
81
$
5,567
646
(677)
(330)
(272)
$
3,154
238
(300)
(338)
156
$
4,883
$
4,934
$
2,910
December 31,
2003
2002
$
747
1,201
560
—
226
—
—
2,734
(8,652)
(240)
(231)
(200)
(9,323)
$
1,190
1,042
689
572
199
210
103
4,005
(4,115)
—
(258)
—
(4,373)
$
(6,589)
$
(368)
The Company files a consolidated federal income tax return which includes all subsidiaries. Income taxes paid during
2003, 2002 and 2001 totaled approximately $2,250,000, $3,656,000 and $1,962,000, respectively. The Company received
The valuation allowance for deferred tax assets decreased by $677,000 and $300,000 in 2002 and 2001, respectively.
Management believes it is more likely than not that the Company’s future earnings will be sufficient to ensure the realization
approximately $1,760,000, $208,000 and $2,108,000 in federal income tax refunds during 2003, 2002 and 2001, respectively.
of deferred tax assets for federal and state purposes.
At December 31, 2003, the Company had approximately $9,862,000 of state net operating loss carryforwards available
to offset future state taxable income. Such carryforwards reflect income tax losses incurred which will expire on December
31 of the following years:
(In thousands)
2009
2010
2011
2017
$
2,839
560
5,999
464
$
9,862
NOTE 14. EARNINGS PER COMMON SHARE
Basic earnings 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 earnings 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 earnings per common share:
(In thousands, except per share data)
2003
2002
2001
Years ended December 31,
Shares outstanding:
Weighted average shares outstanding
Effect of dilutive employee stock options
Adjusted weighted average shares outstanding
and assumed conversions
Net income applicable to common stock
Earnings per common share:
Basic
Diluted
14,237
416
13,117
547
14,653
13,664
8,135
$
11,439
0.57
0.56
$
$
0.87
0.84
$
$
$
9,828
200
10,028
6,367
0.65
0.63
$
$
$
Sypris Solutions
54
55
Sypris Solutions
NOTE 15. SEGMENT INFORMATION
NOTE 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company’s operations are conducted in two reportable business segments: the Electronics Group and the
The following is an analysis of certain items in the consolidated income statements by quarter for the years ended
Industrial Group. The segments are each managed separately because of the distinctions between the products, services,
December 31, 2003 and 2002:
(In thousands, except per share data)
First
Second
Third
Fourth
First
Second
Third
Fourth
2003
2002
Net revenue
Gross profit
Operating income
Net income
Earnings per common share:
Basic
Diluted
Cash dividends declared
per common share
$ 58,915 $ 70,621 $ 68,898 $ 78,171 $ 62,533 $ 73,509 $ 70,757 $ 66,678
11,536
4,806
3,275
13,041
4,918
2,679
13,974
5,658
3,534
13,451
5,717
3,391
12,882
4,759
2,805
11,129
3,733
1,825
9,951
2,759
1,379
9,569
1,547
686
$
$
$
0.10 $
0.10 $
0.19 $
0.19 $
0.05 $
0.05 $
0.24 $
0.23 $
0.18 $
0.17 $
0.20 $
0.19 $
0.25 $
0.24 $
0.23
0.23
0.03 $
0.03 $
0.03 $
0.03 $
— $
— $
0.03 $
0.03
markets, customers, technologies, and workforce skills of the segments. The Electronics Group provides a wide range of
manufacturing and technical services for a diversified customer base as an outsourced service provider. The Electronics
Group also manufactures complex data storage systems, magnetic instruments, current sensors, and other electronic
products. The Industrial Group provides manufacturing services for a variety of customers that outsource forged and finished
steel components and subassemblies. The Industrial Group also manufactures high-pressure closures and other fabricated
products. Revenue derived from outsourced services for the Electronics Group accounted for 52%, 55% and 67% of total net
revenue in 2003, 2002 and 2001, respectively. Revenue derived from outsourced services for the Industrial Group accounted
for 31%, 29% and 15% of total net revenue in 2003, 2002 and 2001, respectively. There was no intersegment net revenue
recognized for all years presented. The following table presents financial information for the reportable segments of the
Company:
(In thousands)
Net revenue from unaffiliated customers:
Electronics Group
Industrial Group
Gross profit:
Electronics Group
Industrial Group
Operating income:
Electronics Group
Industrial Group
General, corporate and other
Total assets:
Electronics Group
Industrial Group
General, corporate and other
Depreciation and amortization:
Electronics Group
Industrial Group
General, corporate and other
Capital expenditures:
Electronics Group
Industrial Group
General, corporate and other
Years ended December 31,
2003
2002
2001
$ 180,733
95,872
$ 186,562
86,915
$ 207,282
47,358
$ 276,605
$ 273,477
$ 254,640
$ 36,266
9,746
$ 37,796
11,725
$
37,385
6,162
$ 46,012
$ 49,521
$
43,547
$ 12,062
6,895
(4,016)
$ 14,447
8,210
(3,701)
$
12,903
3,563
(3,436)
$ 14,941
$ 18,956
$
13,030
$ 121,560
121,429
20,506
$ 114,305
90,781
18,519
$ 121,228
73,820
16,396
$ 263,495
$ 223,605
$ 211,444
$
7,134
5,425
272
$
6,885
4,224
277
$ 12,831
$
11,386
$ 10,621
11,790
110
$
7,518
12,009
220
$
$
$
7,951
1,694
211
9,856
7,917
19,547
159
$ 22,521
$ 19,747
$
27,623
The Company’s export sales from the U.S. totaled $22,250,000, $25,437,000 and $23,890,000 in 2003, 2002 and 2001,
respectively.
Sypris Solutions
56
57
Sypris Solutions
Common Stock Information
Corporate Directory
Our common stock is traded on the Nasdaq National Market under the symbol "SYPR." The following table sets forth,
Board of Directors
Corporate Officers
Subsidiary Officers
for the periods indicated, the high and low closing sale prices per share of our common stock as reported by the Nasdaq
National Market.
Year ended December 31, 2002:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended December 31, 2003:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$
$
16.35
21.35
16.03
12.28
11.25
10.75
16.61
17.55
$
$
12.50
15.30
10.00
9.94
6.88
7.50
10.25
12.78
As of March 3, 2004, there were 1,121 holders of record of our common stock.
On September 22, 2002, our Board of Directors declared an initial quarterly cash dividend of $0.03 per common share
outstanding. Cash dividends of $0.03 per common share have been paid quarterly since the initial dividend was declared in
2002. Dividends may be paid on common stock only when, as and if declared by our Board of Directors in its sole discretion.
ROBERT E. GILL (1†)
Chairman of the Board
ROBERT E. GILL (5)
Chairman of the Board
JEFFREY T. GILL (1)
President & CEO
JEFFREY T. GILL (5)
President & CEO
DAVID D. JOHNSON (5)
Vice President, CFO
& Treasurer
RICHARD L. DAVIS (5)
Senior Vice President
ANTHONY C. ALLEN (5)
Vice President of Finance
& Information Systems
& Assistant Secretary
JOHN R. McGEENEY (5)
General Counsel
& Secretary
HENRY F. FRIGON (1,2†, 4)
Private Investor & Consultant
R. SCOTT GILL (1)
Managing Broker
Coldwell Banker
Residential Brokerage
WILLIAM L. HEALEY (4†)
President & CEO
Cal Quality Electronics, Inc.
ROGER W. JOHNSON (3†, 4)
Private Investor, Educator
& Consultant
SIDNEY R. PETERSEN (2, 3)
Retired Chairman & CEO
Getty Oil, Inc.
ROBERT SROKA (2, 3)
Managing Director
Corporate Solutions Group
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit and Finance Committee
(4) Member of Nominating and Governance Committee
(5) Executive Officer
† Committee Chairman
CYNTHIA Y. BELAK
Vice President of Finance
Sypris Data Systems, Inc.
LAWRENCE J. BERNICKY
Vice President of Finance
Sypris Test & Measurement, Inc.
KATHY SMITH BOYD (5)
Vice President; President & CEO
Sypris Test & Measurement, Inc.
JAMES G. COCKE (5)
Vice President; President & CEO
Sypris Electronics, LLC
JOHN M. KRAMER (5)
Vice President; President & CEO
Sypris Technologies, Inc.
ROBERT G. MARRAH
Vice President of Business
Development
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.
EDMUND R. STUCZYNSKI
Vice President of Operations
Sypris Electronics, LLC
NORMAN E. ZELESKY
Vice President of Finance
Sypris Technologies, Inc.
Sypris Solutions
58
59
Sypris Solutions
Company Locations
Investor Information
Sypris Test & Measurement
3148 Presidential Drive
Fairborn, OH 45234
Phone: (937) 427-3444
SOUTH CAROLINA
Sypris Test & Measurement
c/o Square D
8821 Garners Ferry Road
Hopkins, SC 29061
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
258 East Arapaho
Suite 150
Richardson, TX 75081
Phone: (972) 231-4443
Sypris Data Systems
8500 Dyer Street
Suite 65
El Paso, TX 79904
Phone: (915) 757-2547
ALABAMA
Sypris Data Systems
3322 S. Memorial Parkway
Suite 505
Huntsville, AL 35801
Phone: (256) 881-2231
ARIZONA
Sypris Test & Measurement
2320 West Peoria Avenue
Building D-133
Phoenix, AZ 85029
Phone: (602) 395-5900
CALIFORNIA
Sypris Test & Measurement
2102 Ringwood Avenue
San Jose, CA 95131
Phone: (408) 954-8050
Sypris Test & Measurement
16340 Roscoe Boulevard
Suite 100
Van Nuys, CA 91406
Phone: (818) 830-9111
Sypris Data Systems
Subsidiary Headquarters
160 E. Via Verde
San Dimas, CA 91773
Phone: (909) 962-9400
COLORADO
Sypris Data Systems
7307 S. Revere Parkway
Centennial, CO 80112
Phone: (303) 773-4700
Sypris Test & Measurement
8020 Southpark Circle
Suite 300
Littleton, CO 80120
Phone: (303) 773-4616
FLORIDA
Sypris Test & Measurement
Subsidiary Headquarters
6120 Hanging Moss Road
Orlando, FL 32807
Phone: (407) 678-6900
Sypris Electronics
Subsidiary Headquarters
10901 North McKinley Drive
Tampa, FL 33612
Phone: (813) 972-6000
Sypris Electronics
9020 Junction Drive
Suite 3
Annapolis Junction, MD 20701
Phone: (877) 797-7478
MASSACHUSETTS
Sypris Test & Measurement
53 Second Avenue
Burlington, MA 01803
Phone: (781) 272-9050
Sypris Test & Measurement
257 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 Avenue
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
Lockport, NY 14094
Phone: (716) 438-4584
NORTH CAROLINA
Sypris Technologies
105 Wamsutta Mill Road
Morganton, NC 28655
Phone: (828) 433-4600
OHIO
Sypris Technologies
1550 Marion Agosta Road
Marion, OH 43302
Phone: (740) 383-2111
Sypris Test & Measurement
925 Keynote Circle
Brooklyn Heights, OH 44131
Phone: (216) 741-7040
Sypris Data Systems
2460 N. Courtney Parkway
Suite 107
Merritt Island, FL 32953
Phone: (321) 449-9243
Sypris Data Systems
8 Eighth Street
Shalimar, FL 32579
Phone: (850) 651-5158
GEORGIA
Sypris Test & Measurement
1000 Cobb Place Boulevard
Building 200, Suite 240
Kennesaw, GA 30144
Phone: (770) 795-8092
ILLINOIS
Sypris Test & Measurement
2055 Army Trail Road
Suite 108
Addison, IL 60101
Phone: (630) 620-5800
KENTUCKY
Sypris Solutions
Corporate Headquarters
101 Bullitt Lane
Suite 450
Louisville, KY 40222
Phone: (502) 329-2000
Sypris Technologies
Subsidiary 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
9020 Junction Drive
Suite 3
Annapolis Junction, MD 20701
Phone: (301) 483-9753
Sypris Data Systems
9020 Junction Drive
Suite 3
Annapolis Junction, MD 20701
Phone: (301) 470-0110
Sypris Solutions
60
CORPORATE ADDRESS
SYPRIS ON NASDAQ
Sypris Solutions, Inc.
101 Bullitt Lane
Suite 450
Louisville, KY 40222
Phone: (502) 329-2000
Fax: (502) 329-2050
ANNUAL MEETING
The Annual Meeting of Stockholders will be
held on Tuesday, April 27, 2004, at 10:00 a.m.
at 101 Bullitt Lane, Lower Level Seminar
Room, Louisville, Kentucky.
The common stock of Sypris trades
on the Nasdaq National Market under
the symbol SYPR.
TRANSFER AGENT
LaSalle Bank N.A.
135 South LaSalle Street
Suite 1811
Chicago, IL 60603
Phone: (800) 246-5761
Fax: (312) 904-2236
FOR MORE INFORMATION
To learn more about Sypris Solutions, Inc.,
INDEPENDENT AUDITORS
Ernst & Young LLP
400 West Market Street
visit our site on the World Wide Web at
Suite 2100
www.sypris.com.
Louisville, KY 40202
Phone: (502) 585-1400
Fax: (502) 584-4221
INVESTOR MATERIALS
The Sypris Web page – www.sypris.com – is your
entry point for a vast array of information about
CORPORATE COUNSEL
Sypris, including its products, financial information,
real-time stock quotes, links to each of its subsidiary
operations, corporate governance information and
other useful information.
For investor information, including additional annual
reports, 10-Ks, 10-Qs or any other financial literature,
please contact Carroll A. Dunavent, Director of Legal
and Corporate Services, 101 Bullitt Lane, Suite 450,
Louisville, KY 40222.
Wyatt, Tarrant & Combs, LLP
500 West Jefferson Street
Suite 2800
Louisville, KY 40202
Phone: (502) 589-5235
Fax: (502) 589-0309
FORWARD-LOOKING STATEMENTS
This report includes non-historical or “forward-looking”
statements concerning future events or conditions.
Important risk factors, which could cause actual results to
differ materially from these statements, are set forth on
page 37 of this annual report.
FACES IN THIS REPORT (from left to right)
People
Anthony Jones - Software Engineer, Brenda Pages - Senior Software Engineer
Technology Mark Edington - Maintenance Manager, Tim Gray - Integration Supervisor, Matt Rothhaar - Engineer,
Eva Worstell - Process Manager, Gary Crabtree - Metallurgist, Mark Griffiths - Engineer
Capabilities Robert McCracken - CNC Machinist
Processes
Paul Savoie - Manager Material Control, Carlos Ramirez - Warehouse Employee, Brenda Jackson -
Warehouse Group Leader, Ann Beegle - Warehouse Employee, Jackie Clark - Warehouse Employee,
Karie Willis - Warehouse Employee, Ronda Kappes - Warehouse Employee.
Products
Gary Poole - Principal Engineer
Services
Joe Campione - Atlanta Branch Manager, Karen Parker - Administrative Assistant