Sypris Solutions, Inc. Annual Report 2004

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FY2004 Annual Report · Sypris Solutions, Inc.

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101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222
Phone (502) 329-2000
Fax (502) 329-2050
www.sypris.com

2004 Annual Report

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00 01 02 03 04

Net Revenue
(in millions)

Earnings Per Share

Orders
(in millions)

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Capital Expenditures
(in millions)

Stockholders’ Equity
(in millions)

Market Capitalization
(in millions)

PERFORMANCE 2004

Revenue Soared to New Record: Up 53.8%
Driven by new contract awards in the Industrial Group, revenue increased for the
fifth consecutive year.

Net Income Declined: Down 8.9%
Inefficiencies caused by the unprecedented increase in demand coupled with
supply chain issues had a negative impact.

Earnings Per Share Followed Suit: Down 25.0%
EPS was impacted by the decline in operating income and a 21% increase in the
number of shares outstanding.

Capital Expenditures Increased as Well: Up 148.2%
The investment of $56 million in state-of-the-art capabilities is expected to impact
the Company for years to come.

Total Assets Continued to Grow: Up 62.8%
Total assets increased 63% to $429 million driven by investments in capacity related
to new contracts, additional working capital and higher capital expenditures.

Stockholders’ Equity Continued to Rise: Up 43.3%
Stockholders’ equity increased to $207.4 million, or $11.58 per share, as a result of
a successful stock offering and additional retained earnings.

Orders Posted New Milestones: Up 48.1%
Firm orders with specified shipment dates increased 48% to $476 million for the year
as a result of a 36% increase in the production of commercial vehicles and the award
of new long-term contracts.

Backlog Climbed to Record Levels: Up 25.6%
Backlog climbed to $250 million driven by strong orders and new multi-year contracts.

Revenue per U.S. Employee Continued to Rise: Up 2.7%
This important measure of productivity increased for the fifth consecutive year to
$190,000 per employee.

contracts with corporations and government agencies in the markets for aerospace & defense electronics,

truck components & assemblies, and test & measurement services.

Contents

Sypris at a Glance 20

Common Stock Information 64

Letter to Stockholders 3

Board of Directors 22

Corporate Directory 65

Corporate Officers 6

Financial Summary 24

Company Locations 66

Managing Growth 7

Financial Review 25

Investor Information IBC

On the cover: Victor Leung, Director of International Sales

ROBERT E. GILL Chairman of the Board

JEFFREY T. GILL President & CEO

DEAR FELLOW STOCKHOLDERS:

The year 2004 was a record year for the Company in terms of a
wide variety of financial and operational metrics, with the notable
exceptions of net income and earnings per share.

Investments made during prior years generated

Unfortunately, these wide-ranging achievements were

exceptional results in terms of orders and backlog, with

overshadowed by the impact of a number of supply chain,

new orders increasing 48% to a record $476 million,

capacity and demand-related issues. We will continue to

while backlog climbed 26% to an all-time high of $250

address these challenges with the appropriate sense of

million. And perhaps most importantly, the award of new,

urgency so that the future earnings of Sypris will more

long-term contracts increased 135% to a record $1.5

consistently reflect our expectations for the Company.

billion as a result of new contracts with ArvinMeritor,

We have an excellent platform and increasingly strong

Dana and others. We expect these contracts to make a

position of market leadership. The potential is clearly

meaningful contribution to the financial results of Sypris

significant and our ability to execute effectively will be

for many, many years to come.

the key to the future.

The year was also notable for the record level of

capital that was invested in the Company’s future.

FINANCIAL HIGHLIGHTS
Revenue increased for the fifth consecutive year, rising

We committed $86 million during 2004 to purchase

54% to a record $425 million from $277 million in

additional manufacturing facilities, increase capacity at

2003. The increase was driven by a 172% increase in

existing plants and dramatically improve our future cost

revenue for our Industrial Group, which benefited from

profile. In total, 18 major capital projects were underway

two new supply agreements with Dana, a new contract

at year-end. Once completed, these investments are

with ArvinMeritor and a 36% increase in the production

expected to have a material impact on our ability to

of commercial vehicles during 2004.

respond to the growing needs of our customers in an

efficient and timely manner.

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Net income declined 9% to $7.4 million from the prior

In May of 2004, we invested $14 million in the purchase

people and consists of over 200,000 square feet of

year as a result of cost overruns incurred to increase

of a manufacturing facility located in Kenton, Ohio from

manufacturing space.

manufacturing capacity, higher than expected expenses

ArvinMeritor. The plant specializes in the production of

REMEMBRANCE
In February of 2005, we lost a long-time friend and

member of the Board of Directors when Roger Johnson

for the launch of eight new programs and the impact of

components that are incorporated into the final axle

The investment in the Toluca operation represents an

passed away at the age of 70. Roger was an important

significant manufacturing inefficiencies as the Company

assemblies for trailer manufacturers such as Wabash,

important first step for Sypris in its long-term plan to

contributor to the growth and development of Sypris over

struggled to respond to escalating customer demand

Great Dane, Stoughton, Hyundai, Trailmobile, Dorsey

establish global centers for manufacturing excellence.

the years, and will be missed dearly by all of those who

during a period of frequent material shortages. Earnings

and Utility, among others. The operation also produces

The plant boasts an excellent reputation for quality

came within his considerable reach. Please join us in

per share declined 25% to $0.42 as a result of the

housings that are used in the drive axle assemblies of

and has the proven capability to forge and machine a

remembering his rich, varied and successful life.

decline in net income and a 21% increase in the number
of fully diluted shares outstanding.

commercial vehicles produced by manufacturers such

as Freightliner, International, Mack, PACCAR and Volvo.

The plant employs approximately 300 highly skilled

We strengthened the Company’s long-term capital

people and consists of over 500,000 square feet of

base significantly during the year, with the successful

manufacturing space.

completion of a follow-on equity offering and the private

variety of drive train components, including I-beams,
axle shafts, steer arms, input shafts, pinions and

ring gears. The operation also machines knuckles for
steer axle assemblies. With its attractive cost basis,
reliable workforce, proven manufacturing capability and

THANK YOU
We want to thank our employees, many of whom

are fellow stockholders, for their hard work over this

past year. The many accomplishments of 2004 would

strong management team, the Toluca operation is

not have been possible without their commitment

placement of fixed-rate, long-term debt with an average

The transaction represented a strategic milestone for

expected to be a significant contributor to the future

and dedication to building Sypris into an increasingly

interest rate of 5.4%. As a result, the Company was able

Sypris for several important reasons. To begin with,

growth of Sypris.

successful company.

to support a record level of investment while preserving

the plant is the sole supplier of trailer axle beams

its strong balance sheet.

to ArvinMeritor in North America, where ArvinMeritor

currently commands approximately 60% of the market

INVESTING FOR THE FUTURE
The year was significant in terms of the investments we

for trailer axle assemblies. Secondly, the skill sets and

equipment located in Kenton will provide Sypris with

CONTRACT AWARDS
We are pleased to report that the award of new, long-term

We also want to thank our customers for the opportunity

to serve them. We are dedicated to providing each of

contracts increased 135% to $1.5 billion during the year

these business partners with the right solutions to

compared to the previous record of $639 million in 2003.

improve their competitiveness.

made in the Company’s future. A total of $86 million was

an invaluable base from which to expand with other

Approximately $1.1 billion of the awards were associated

dedicated to acquire strategic manufacturing capacity,

commercial vehicle customers. And finally, with the

with supply agreements for components produced by the

We sincerely appreciate your investment in Sypris

reduce cycle times, improve quality and reduce costs.

addition of the trailer axle components to the Sypris

plants in Kenton and Toluca, while much of the balance

Solutions and encourage you to contact us. We welcome

The dollar value of these investments represented an

portfolio, we now provide product for incorporation

consisted of amendments to existing contracts with

your comments and would be pleased to answer

87% increase from the previous high of $46 million and

into the steer axles, drive axles and trailer axles of

Dana, which were extended through the year 2014.

your questions.

clearly reflected our commitment to become a strategic

commercial vehicle and trailer manufacturers.

supplier in the commercial vehicle market.

Long-term, sole-source contracts serve as the foundation

Sincerely,

Of the total capital invested, $56 million, or 13% of

purchase of a manufacturing campus located in Toluca,

strategic partnerships with a growing number of large

revenue, was committed to upgrade and expand existing

Mexico from Dana. The operation manufactures and

corporations and government agencies. We believe that

In June of 2004, we invested $16 million in the

of our business model and we will continue to pursue

manufacturing capabilities, while $30 million was invested

to acquire manufacturing operations from ArvinMeritor

and Dana. These two transactions were particularly

machines components for use in the steer and drive
axle assemblies of commercial vehicles produced
by companies such as PACCAR, International and

these agreements, which currently cover approximately

80% of the Company’s expected revenue for 2005,

will continue to play an increasingly meaningful role for

Jeffrey T. Gill

Robert E. Gill

noteworthy and deserve additional elaboration.

others. The operation employs approximately 700

Sypris in the future.

President & CEO

Chairman of the Board

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CORPORATE OFFICERS
FROM LEFT:

DAVID D. JOHNSON

JOHN R. MCGEENEY

JAMES G. COCKE

KATHY SMITH BOYD

RICHARD L. DAVIS

ANTHONY C. ALLEN

G. DARRELL ROBERTSON

JOHN M. KRAMER

Managing Growth

Last year we discussed the investments
that were expected to have a significant
impact on the ability of Sypris to grow in the
future. This year we thought you might like
to learn more about what we are doing to
manage that growth.

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We are aggressively recruiting people with exceptional talent.

Jim Staron
Corporate Director of Human Resources

Sypris grew rapidly during 2004, with the addition of new
manufacturing facilities in Morganton, North Carolina,
Kenton, Ohio and Toluca, Mexico. As a result, the number
of employees at Sypris increased by 75% during the year
to over 2,800 people.

Jim and his team of professionals are pushing forward
with new programs to identify and develop our leaders
of tomorrow, as well as installing systems to insure that
their performance and compensation are closely aligned.

The task is clear. Our success in the future will depend
upon the quality of the people we employ today.

We are driving process improvement as a way of life.

Chris Nicolaou
Director of Quality and Six Sigma

Six Sigma Team from left: John Brands, Gwen Humphrey,
Erik Bredal, Alex Caldwell, Chris Nicolaou, Will Townley,
Andrew Kettlewell, JoAnn Daniels

Rapid growth can place a strain on established
organizations, systems and processes. Left untended,
costs and inefficiencies can become pervasive as
managers focus on the new growth-related challenges
affecting the company.

Chris and his organization are charged with training
all Sypris employees in the techniques of Six Sigma.
The objective is simple. We intend to use the proven
techniques of Six Sigma to firmly establish continuous
process improvement as a cultural keystone for Sypris.

We must be unrelenting in our drive to improve
operational efficiency and cost competitiveness as a
way of life.

We are systematically managing risk to reduce unwanted surprises.

John McGeeney
General Counsel and Secretary

Complexity and risk are inherent with growth. Sypris
now operates in 33 locations throughout the U.S. and
Mexico. Issues involving import/export compliance,
environmental regulations and contract law, to name a
few, must be managed proactively.

John is leading our efforts to systematically reduce risk
across the broad base of our business. In the area of
contracts for example, we have a project underway to
store the terms and conditions of all agreements digitally,
the result of which will provide managers with real time
access to these key records.

Risk will never be completely eliminated, but with
prudence and forethought, it can be managed.

During 2004, Sypris secured a strong, well-
established manufacturing base in Mexico with the
purchase of Dana’s operations in Toluca. The plant
forges and machines a wide range of drive train
components for use in commercial vehicles, employs
over 700 people and is QS 9000 certified.

Orlando is directing our drive to install new, state-of-
the-art manufacturing cells to machine a variety of
parts, including axle shafts, knuckles, pinions and
ring gears. Once completed in 2005, Sypris will have
the added capacity and leading-edge capability to
service the growing needs of its customers.

With a world-class operation in Mexico, Sypris has
taken an important first step in its plan to become
a global supplier.

We are developing global capabilities for manufacturing excellence.

Orlando Quant
Project Manager - Machining

Sypris calibrates equipment used to maintain control
tower radar systems at every airport the FAA manages.
We also test electronic components for use in the Space
Shuttle. Speed, reliability and dependability are an
absolute in these instances - the cost of failure is simply
too high.

Derrell and Mike are leading our efforts to utilize software
as a means for automating a number of these processes,
thereby greatly reducing cycle times and improving
our ability to respond on short notice. By embracing
automation, we also greatly reduce the potential for
human error.

Speed, reliability and dependability - it is all about
responding to our customers’ needs.

Derrell James
General Manager, Calibration Division

We are embracing automation to increase responsiveness.

Mike McEntee
General Manager, Test Division

We are investing in advanced technology to boost productivity.

Sammy Nguyen
Manufacturing Engineer

Sypris invested $56 million in advanced manufacturing
technology during 2004, representing an increase of
148% over the previous year’s high. Our philosophy is
simple - combine the best tools with the best people and
you will generate outstanding results.

Sammy is spearheading a project team to dramatically
improve in-process quality and reduce setup times for the
manufacture of full float tubes, components that are used
in the axle assemblies of pickup trucks and full-size vans.

Investing in advanced technology to boost productivity is
one of many initiatives that will enable Sypris to stay at
the forefront of an increasingly competitive marketplace.

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 test & measurement services.

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Market-Focused Businesses

Business Summary

Applications and Uses

Select Customers

Manufacturing Services

Automated forging, machining, induction
hardening, cold extrusion, heat-treating, testing
and fabrication of products, production tooling
and prototypes.

Axle shafts, steer axles, trailer axle beams, carriers, full-
float tubes, ring gears, pinions, knuckles, input shafts,
helical gears, housings 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, Axle Alliance, Cardanes, Dana, John Deere,
Mack Truck, 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.

Manufacturing Services

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.

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.

BAE Systems, Boeing, General Dynamics, Honeywell,
Lockheed Martin, National Security Agency, Northrop
Grumman, Raytheon, U.S. Army and ViaSat.

Engineering Services

Software design services for data and
communications security products and contract
design services.

Products

Encryption devices and real-time network-
centric analog and digital data acquisition and
storage systems.

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.

Calibration and Repair

Calibration, repair and certification of
electrical, electronic, physical and dimensional
test equipment, diagnostic and process control
equipment.

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, Bombardier, Bose, Cutler Hammer
Engineering, Delphi Automotive, FAA, Honeywell, ITT,
Lucent Technologies, Maxtor, Motorola, National Weather
Service, Nokia, Siemens, Spirent, Square D, Terumo
Cardiovascular, Tyco Electronics and TRW Automotive.

Testing

Testing of digital, linear, discrete, passive and
hybrid components, EMI testing, RF devices,
environmental testing, dynamics testing, failure
analysis, NEMA Traffic Systems testing and
transportation testing on products, systems
and subassemblies.

Products

Hall generators, current sensors, autoprobes
and gaussmeters.

Military, semiconductor manufacturing, aerospace,
satellite and launch systems, avionics, medical,
telecommunications and transportation.

Arrow-Zeus, Avnet, BAE Systems, Bose, Eldec, General
Dynamics, GE Ion System, Goodrich, Hamilton-Sundstrand,
Harris, Honeywell, IRobot, L-3, Lockheed Martin, Northrop
Grumman, Raytheon, Sawtek, Suntron, Teledyne and
Zoll Medical.

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.

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BOARD OF DIRECTORS

ROBERT E. GILL
Chairman
of the Board

JEFFREY T. GILL
President & CEO

R. SCOTT GILL
Managing Broker
Coldwell Banker
Residential Brokerage

HENRY F. FRIGON
Private Investor
& Consultant

SIDNEY R.
PETERSEN
Retired Chairman
& CEO
Getty Oil, Inc.

WILLIAM G. FERKO
Vice President
& CFO
Genlyte Group, Inc.

WILLIAM L. HEALEY
President & CEO
Cal Quality
Electronics, Inc.

ROBERT SROKA
Managing Director
Corporate Solutions
Group

ROGER W. JOHNSON
1934-2005

On Feb. 25, 2005, we lost a long-
time friend, advisor and business
associate. Roger Johnson was an
incredibly energetic, intelligent and
accomplished individual who embraced
a love for life, family, business, the arts
and civic responsibility. Roger’s wit
and sense of humor knew no bounds,
nor did his quest for adventure and
knowledge. His accomplishments in
life were many and varied.

During a highly successful business career, he served as the Chief Executive
Officer for a number of institutions, including Western Digital Corporation,
Collectors Universe and YPO International. Roger was a sought-after and active
member of many private and public company boards, including Sypris Solutions.

Roger served as the Administrator of the General Services Administration during
the Clinton Administration and published an insightful book reflecting his years as
a public servant entitled, “It Can Be Fixed! Your Unmanaged Government.” Roger’s
innate ability to cut to the heart of the matter is on clear display, while his call for
common sense and the need for accountability resonate throughout the book.

Roger was active and involved with many a philanthropic activity, including the UC
Irvine Foundation, the Orange County Performing Arts Center, the AIDS Services
Foundation of Orange County and the Pacific Symphony Orchestra. He was an avid
reader, an enthusiastic sportsman, an adoring father and a devoted husband to
Janice, his wife and partner of 48 years. And while his life was certainly full, he
did much to enrich the lives of others.

Roger Johnson’s impact on Sypris will be forever lasting.

Thank you Roger. We will miss you.

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FINANCIAL SUMMARY

FINANCIAL REVIEW

(In thousands, except per share data)

2004(1) (2)

2003

2002

2001(3)(4)

2000(3)(5)

Years ended December 31,

Consolidated Income Statement Data:

Net revenue

Gross profit

Operating income

Net income

Earnings per common share:
Basic
Diluted

Cash dividends declared
per common share

$ 425,402 $ 276,605 $ 273,477 $ 254,640 $ 216,571

52,155

46,012

49,521

43,547

40,313

12,614

14,941

18,956

13,030

5,477

7,407

8,135

11,439

6,367

3,184

$
$

0.43 $
0.42 $

0.57 $
0.56 $

0.87 $
0.84 $

0.65 $
0.63 $

0.33
0.32

0.12 $

0.06 $

— $

—

(In thousands)

2004(1)

2003(2)

2002

2001(4)

2000

December 31,

Consolidated Balance Sheet Data:

Working capital

Total assets

$ 145,139 $ 80,516 $ 77,593 $ 67,325 $ 58,602

428,954

263,495

223,605

211,444

179,122

Long-term debt, net of current portion

110,000

53,000

30,000

80,000

62,500

Total stockholders’ equity

207,436

144,781

137,035

70,120

64,205

(1) On May 3, 2004 and June 30, 2004, respectively, we completed the acquisition of the net assets of ArvinMeritor’s Kenton,
Ohio facility and Dana’s Toluca, Mexico facility and their results of operations and related purchased assets are included from
those dates forward.

(2) On December 31, 2003, we completed the acquisition of the net assets of Dana’s Morganton, North Carolina facility and its

results of operations and related purchased assets are included from that date forward.

(3) On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
which required us to discontinue the amortization of goodwill. Amortization of goodwill decreased earnings per share by $0.08
in the years ended December 31, 2001 and 2000.

(4) On May 31, 2001, we completed the acquisition of the net assets of Dana’s Marion, Ohio facility and its results of operations

and related purchased assets are included from that date forward.

(5) Special charges were recognized in 2000 related to the consolidation of certain operations within the Aerospace & Defense

segment.

Management’s Discussion and Analysis .......................................................... 26

Management’s Responsibility for Financial Statements ...................................... 39

Management’s Report on Internal Control Over Financial Reporting .................. 39

Report of Independent Registered Public Accounting Firm

on Internal Control Over Financial Reporting .................................................... 40

Report of Independent Registered Public Accounting Firm ................................. 41

Consolidated Income Statements .................................................................... 42

Consolidated Balance Sheets ......................................................................... 43

Consolidated Statements of Cash Flows .......................................................... 44

Consolidated Statements of Stockholders’ Equity ............................................ 45

Notes to Consolidated Financial Statements .................................................... 46

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MANAGEMENT’S DISCUSSION AND ANALYSIS

The following discussion of our results of operations and financial condition should be read together with the other
financial information and consolidated financial statements included in this annual report. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results
anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in “Forward-
Looking Statements” and elsewhere in this annual report.

OVERVIEW
We are a diversified provider of outsourced services and specialty products. We perform a wide range of manufacturing,
engineering, design, testing and other technical services, typically under multi-year, sole-source contracts with major
companies and government agencies in the markets for aerospace & defense electronics, truck components & assemblies,
and test & measurement services. Revenue from our three core markets accounted for approximately 96% of our revenue
for the year ended December 31, 2004, while revenue from our outsourced services accounted for approximately 92% of
our revenue. We expect these percentages to increase in the future.

The Company is organized into two business groups, the Industrial Group and the Electronics Group. The Industrial Group
is one reportable business segment, while the Electronics Group includes two reportable business segments, Aerospace
& Defense and Test & Measurement. The Industrial Group is comprised of Sypris Technologies, Inc. and its subsidiaries,
which generates revenue primarily from the sale of manufacturing services to customers in the market for truck components
& assemblies and from the sale of products to the energy and chemical markets. The Aerospace & Defense reportable
segment is comprised of Sypris Data Systems, Inc. and Sypris Electronics, LLC. Revenue from this group is derived primarily
from the sale of manufacturing services, technical services and products to customers in the market for aerospace &
defense electronics. The Test & Measurement reportable segment consists solely of Sypris Test & Measurement, Inc.,
which generates revenue primarily from providing technical services for the calibration, certification and repair of test and
measurement equipment in the U.S. We previously had only two reportable business segments and therefore, segment
information for 2003 and 2002 has been reclassified to be consistent with the current year presentation.

Our objective is to become the leading outsourcing specialist in each of our core markets for aerospace & defense
electronics, truck components & assemblies, and test & measurement services. We have focused our efforts on
establishing long-term relationships with industry leaders who embrace multi-year contractual relationships as a strategic
component of their supply chain management.

Recent Contract Awards. The pursuit of multi-year contractual relationships with industry leaders in each of our core
market segments is a key component of our strategy. We focus primarily on those candidates that will enable us to
consolidate positions of leadership in our existing markets, further develop strategic partnerships with leading companies,
and expand our capability and capacity to increase our value-added service offerings. The quality of these contracts has
enabled us to invest in leading-edge technologies that we believe will serve as an important means for differentiating
ourselves in the future from the competition when it comes to cost, quality, reliability and customer service.

On December 31, 2003, we completed the first phase of a two-phase transaction with Dana in which we entered into a new
eight-year agreement to supply a wide range of drive train components for the light, medium and heavy-duty truck markets
to Dana. In connection with this agreement, we acquired the property, plant, and equipment and certain component
inventories associated with Dana’s manufacturing plant in Morganton, North Carolina for a purchase price of approximately
$22 million. In addition, the parties agreed to a three-year extension of an existing seven-year supply agreement that we
originally entered into on May 31, 2001. In the second phase of the transaction, which closed on June 30, 2004, we
entered into an eight-year agreement with Dana for the supply of forged and machined components for use in the medium
and heavy-duty truck markets. In connection with this agreement, we acquired certain of the property, plant, and equipment
as well as certain component inventories associated with Dana’s manufacturing campus in Toluca, Mexico. During 2004,
we also acquired or entered into agreements to acquire certain production equipment located at other Dana facilities in
the U.S. and amended the terms of our various supply agreements with Dana to extend the expiration date of all supply
agreements to September 2014.

On May 3, 2004, we entered into a series of multi-year contracts with ArvinMeritor to supply trailer axle beams and a variety
of drive train components to ArvinMeritor. The outsourcing arrangement will begin in phases over the next several years,
the first of which began on May 3, 2004. The initial terms of the contracts vary, but in each case represent a long-term,
multi-year commitment to the supply arrangement. As part of the transaction, we acquired certain of the property, plant and

equipment as well as certain component inventories associated with ArvinMeritor’s Kenton, Ohio plant that specializes in
the manufacture of trailer axle beams. In addition, the transaction provided for a five-year extension of an existing five-year
supply agreement that would have expired on December 31, 2004 under which we supply ArvinMeritor with axle shafts for
medium and heavy-duty trucks.

The net revenue from the operations acquired in these transactions was $142.5 million in 2004. The prices
contained in these agreements for our services are fixed for an initial term and generally reduced thereafter in
accordance with schedules contained in the agreements. We believe these price reductions will not materially
affect our profitability. We purchase raw steel and fabricated steel parts for these agreements at the direction
of our customers, with any periodic changes in the price of steel being reflected in the prices we are paid for our
services, such that we neither benefit from nor are directly harmed by any future changes in the price of steel.
The agreements also provide for us to share in the benefits of any cost reduction suggestions that we make that are
accepted by our customers.

Accounting Policies. Our significant accounting policies are described in Note 1 to the consolidated financial statements
included elsewhere in this annual report. We believe our most critical accounting policies include revenue recognition and
cost estimation on certain contracts for which we use percentage of completion methods of accounting, allowance for
doubtful accounts, impairments and reserves for excess, obsolete and scrap inventory, as described immediately below.

The complexity of the estimation process and all issues related to the assumptions, risks and uncertainties inherent with
the application of the percentage of completion methodologies affect the amounts reported in our consolidated financial
statements. A number of internal and external factors affect our cost of sales estimates, including labor rate and efficiency
variances, revised estimates of warranty costs, estimated future material prices and customer specification and testing
requirement changes. If our business conditions were different, or if we used different assumptions in the application
of this and other accounting policies, it is likely that materially different amounts would be reported in our consolidated
financial statements.

Net Revenue. The majority of our outsourced services revenue is derived from manufacturing services contracts under
which we supply products to our customers according to specifications provided under our contracts. We generally recognize
revenue for these outsourced services, as well as our product sales, when we ship the products, at which time title
generally passes to the customer.

Contract revenue in our Aerospace & Defense segment is recognized using the percentage of completion method, generally
using units-of-delivery as the basis to measure progress toward completing the contract. Revenue is recognized on these
contracts when units are delivered to the customer, with unit revenue based upon unit prices as set forth in the applicable
contracts. 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. Revenue under certain other multi-year fixed price contracts is recorded using achievement of
performance milestones or cost-to-cost as the basis to measure progress toward completing the contract. The basis for the
measurement of progress toward completion is applied consistently to contracts with similar performance characteristics.
Amounts representing contract change orders or claims are included in revenue when these costs are reliably estimated
and realization is probable. We recognize all other revenue as product is shipped and title passes, or when the service is
provided to the customer. Our net revenue includes adjustments for estimated product warranty and allowances for returns
by our customers.

Generally, the percentage of completion method based on units of delivery is applied by our Aerospace & Defense segment
for outsourced services provided under multi-year contracts. Approximately 18%, 35% and 44% of total net revenue
was recognized under the percentage of completion method based on units of delivery during 2004, 2003 and 2002,
respectively. Approximately 3% and 5% of total net revenue was recognized under the percentage of completion method
based on milestones or cost-to-cost during 2004 and 2003, respectively. In 2002, substantially all such amounts were
accounted for under the units-of-delivery method.

Cost of Sales. Cost of sales consists primarily of our payments to our suppliers, compensation, payroll taxes and
employee benefits for service and manufacturing personnel, and purchasing and manufacturing overhead costs. The
contracts for which our Aerospace & Defense segment recognizes net revenue under the percentage of completion method
involve the use of estimates for cost of sales. We compare estimated costs to complete an entire contract to total net

26 SYPR

SYPR 27

revenue for the term of the contract to arrive at an estimated gross margin percentage for each contract. Each month, the
estimated gross margin percentage is applied to the cumulative net revenue recognized on the contract to arrive at cost
of sales for the period.

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,
claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These
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
for a contract is reflected in cost of sales in the period in which the change is 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. Additionally, our reserve for excess and obsolete inventory is primarily based upon forecasted
demand for our products and any change to the reserve arising from forecast revisions is reflected in cost of sales in the
period the revision is made.

Allowance for Doubtful Accounts. We establish reserves for uncollectible accounts receivable based on overall receivable
aging levels, a specific evaluation of accounts for customers with known financial difficulties and evaluation of customer
chargebacks, if any. These reserves and corresponding write-offs could significantly increase if our customers experience
deteriorating financial results or in the event we receive a significant chargeback which is deemed uncollectible.

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. It is possible
that the assumptions underlying the impairment analysis will change in such a manner that impairment charges may
occur. We likely would compute a materially different fair value for a business if different assumptions were used or if
circumstances were to change.

At December 31, 2004, net assets of our Test & Measurement segment were $14.0 million, including goodwill of $6.9
million. Our Test & Measurement segment reported an operating loss in 2004 and 2003 of $0.4 million and $0.6 million,
respectively, primarily as a result of decreased product sales, cost and process inefficiencies on certain technical services
provided by this segment and an unfavorable mix of technical service revenue. A new senior management team was
installed in 2003 for this segment and spending for sales, marketing, research and development were increased in 2004
to grow the revenue base and various organizational changes were made to improve the operations. Such investments
yielded increased net revenue and gross margin in 2004 and continued improvements are expected in 2005. If continued
improvement in our Test & Measurement operations is not achieved and profitability deteriorates, we may be required to
record an impairment charge to goodwill for the Test & Measurement segment.

The recoverability of long-lived assets is evaluated if impairment indicators exist. Indicators of impairment include historical
financial performance, operating trends and our future operating plans. If impairment indicators exist, we evaluate the
recoverability of long-lived assets based on forecasted undiscounted cash flows. If an impairment has occurred, the long-
lived asset is written down to its estimated fair value on a discounted basis. The estimation of future cash flows requires
management’s judgment concerning historical performance, forecasted operating results, general market conditions and
industry considerations specific to the assets. There are inherent uncertainties related to these factors and management’s
judgments in applying these factors to the analysis of long-lived asset impairment. It is possible that the assumptions
underlying the impairment analysis will change in such a manner that impairment charges may occur. We likely would compute
a materially different estimate of future cash flows if different assumptions were used or if circumstances were to change.

Reserve for Excess, Obsolete and Scrap Inventory. We record inventory at the lower of cost (generally first-in, first-
out) or market. Because of the stability of product costs in recent years, and the level of gross profit margins on most
products, we have not made any material adjustments to write down inventory to market. However, we do reserve for
excess, obsolete or scrap inventory. These reserves are primarily based upon management’s assessment of the salability

28 SYPR

of the inventory, historical usage of raw materials, historical demand for finished goods, and estimated future usage and
demand. An improper assessment of salability or improper estimate of future usage or demand, or significant changes in
usage or demand could result in significant changes in the reserves and a positive or a negative impact on our results of
operations in the period the change occurs.

RESULTS OF OPERATIONS
The tables presented below, which compare our results of operations from one year to another, present the
results for each year, the change in those results from one year to another in both dollars and percentage
change and the results for each year as a percentage of net revenue. The columns present the following:
• The first two data columns in each table show the absolute results for each year presented.
• The columns entitled “Year Over Year Change” and “Year Over Year Percentage Change” show the change
in results, 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 negative number in both columns.

• 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 amounts are shown in italics.

In addition, as used in these tables, “NM” means “not meaningful.”

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Year Over

Year

Years Ended

December 31,

Year

Change

Percentage

Results as Percentage of

Change

Net Revenue for the Years

Favorable

Ended December 31,

(In thousands, except percentage data)

2004

2003

(Unfavorable)

2004

2003

Net revenue:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

Total net revenue

Cost of sales:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

Total cost of sales

Gross profit:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

Total gross profit

Selling, general and administrative
Research and development
Amortization of intangible assets

$ 260,410

$ 95,872

$ 164,538

171.6 %

61.2 %

34.7 %

119,179
45,813
164,992

141,597
39,136
180,733

(22,418)
6,677
(15,741)

425,402

276,605

148,797

(15.8)
17.1
(8.7)

53.8

28.0
10.8
38.8

51.2
14.1
65.3

100.0

236,690

86,126

(150,564)

(174.8)

99,895
36,662
136,557

112,717
31,750
144,467

12,822
(4,912)
7,910

373,247

230,593

(142,654)

11.4
(15.5)
5.5

(61.9)

23,720

9,746

13,974

143.4

19,284
9,151
28,435

28,880
7,386
36,266

(9,596)
1,765
(7,831)

52,155

46,012

6,143

35,248
3,697
596

26,711
4,166
194

(8,537)
469
(402)

(33.2)
23.9
(21.6)

13.4

(32.0)
11.3
(207.2)

(15.6)

(24.0)
NM

(18.2)

33.5

90.9

83.8
80.0
82.8

87.7

9.1

16.2
20.0
17.2

12.3

8.3
0.9
0.1

3.0

0.5
—

2.5

0.8

89.8

79.6
81.1
79.9

83.4

10.2

20.4
18.9
20.1

16.6

9.7
1.5
—

5.4

0.6
0.1

4.7

1.8

Operating income

12,614

14,941

(2,327)

Interest expense, net
Other (income) expense, net

2,100
(138)

1,693
230

(407)
368

Income before income taxes

10,652

13,018

(2,366)

Income taxes

Net income

3,245

4,883

1,638

$ 7,407

$ 8,135

(728)

(8.9)%

1.7 %

2.9 %

SYPR 29

Backlog. Our backlog increased $50.8 million to $249.8 million at December 31, 2004, on $476.4 million in net
orders in 2004 compared to $321.7 million in 2003. We expect to convert approximately 90% of the backlog at
December 31, 2004 to revenue during 2005.

Backlog for our Industrial Group increased $58.3 million to $131.5 million at December 31, 2004, on $318.7 million in
net orders in 2004 compared to $130.2 million in 2003. We expect to convert substantially all of the Industrial Group’s
backlog at December 31, 2004 to revenue during 2005.

Backlog for our Aerospace & Defense segment decreased $6.0 million to $113.9 million at December 31, 2004, on
$113.3 million in net orders in 2004 compared to $150.6 million in 2003. Backlog for our Test & Measurement segment
decreased $1.5 million to $4.4 million at December 31, 2004, on $44.4 million in net orders in 2004 compared to
$40.9 million in 2003. We expect to convert approximately 79% of the Aerospace & Defense backlog and approximately
90% of the Test & Measurement backlog at December 31, 2004 to revenue during 2005.

Net Revenue. The Industrial Group entered into new multi-year contracts on December 31, 2003, May 3, 2004 and
June 30, 2004 and, on each of the respective dates, acquired certain manufacturing assets from its customers in
connection with the new contracts. These contracts include two with Dana for steer axle components, drive axle shafts
and various drive train components for the light, medium and heavy-duty truck markets and one with ArvinMeritor for
trailer axle beams and various drive train components. The new contracts generated outsourced services revenue of
$46.1 million and $142.5 million in the fourth quarter and full year of 2004, respectively. Excluding the new contracts,
the Industrial Group’s net revenue increased $4.1 million and $22.0 million in the fourth quarter and full year periods,
respectively, primarily due to a general increase in demand for medium and heavy-duty trucks. Net revenue is expected
to show comparable period increases during 2005 due to the three new contracts, additional business opportunities
with existing customers and anticipated growth in the medium and heavy-duty truck markets.

The Aerospace & Defense segment derives its revenue from manufacturing services, other outsourced services and
product sales. Manufacturing services revenue accounted for approximately 75% and 70% of total Aerospace & Defense
segment revenue in 2004 and 2003, respectively. Manufacturing services revenue decreased $9.9 million in 2004
primarily due to reduced program funding for federal government agencies, delayed shipments and contracts completed
during 2003. The delayed shipments arose during the second quarter and are currently expected to be shipped early
in 2005. During the fourth quarter of 2004, manufacturing services revenue was $29.9 million or 33% of the full year,
primarily due to increased volume on certain large programs. Manufacturing services in the first half of 2005 are
expected to return to levels consistent with the comparable 2004 period. Other outsourced services revenue and product
sales decreased $0.7 million and $11.8 million in 2004, respectively. The decrease in product sales is primarily due to
reduced government funding for our customer’s programs, which is not expected to increase significantly during 2005.

The Test & Measurement segment derives its revenue from technical services and product sales. Technical services
revenue accounted for approximately 87% and 86% of total Test & Measurement revenue in 2004 and 2003, respectively.
Technical services revenue and products sales increased $6.3 million and $0.4 million in 2004 and 2003, respectively.
The increase in technical services revenue was primarily due to a large contract with a prime government contractor
for testing services performed during 2004, growth from calibration services provided under certain national customer
accounts in 2004 and the full-year impact of two calibration operations acquired during the second half of 2003.

Gross Profit. The Industrial Group’s gross profit increased $14.0 million in 2004 primarily due to the revenue growth
from new contracts. Gross profit contributed by the new contracts was partially offset by manufacturing inefficiencies
associated with disruptions in raw material and key components and capacity limitations associated with the increased
demand. The disruptions to production schedules related to the timely and dependable receipt of steel and components
were present throughout 2004; however, during the fourth quarter the Industrial Group’s gross margin declined to 3.6%
and resulted in full year gross margin of 9.1% as compared to 10.2% in 2003. The factors impacting gross profit in the
fourth quarter included excessive overtime to meet fluctuating customer demand, loss of days worked to conduct three
physical inventories, cost overruns on a variety of new manufacturing cells, higher than expected training costs on new
programs and increased charges to reflect the growing nature and complexity of the business. An inventory adjustment
of $1.8 million was recorded in the fourth quarter comprised primarily of a last-in, first-out adjustment and production
scrap. Also, labor and absorption variances of approximately $1.5 million related to manufacturing inefficiencies were

recognized and excess supply, tooling and freight costs totaling approximately $0.9 million were incurred in the fourth
quarter. We expect that steel supply disruptions, manufacturing inefficiencies related to the start-up of new programs,
the installation of new manufacturing equipment and process development for the new manufacturing cells will continue
to negatively impact gross profit through the first half of 2005. Even with these production issues, the overall increase
in sales volume attributable to the new contracts and the anticipated growth in the truck market is expected to continue
to result in comparable period gross profit increases throughout 2005.

The Aerospace & Defense segment’s gross profit decreased $9.6 million in 2004 primarily due to lower margins
associated with the decrease in product revenue. Product revenue declined 60% for the fourth quarter and 38% for the
full year which resulted in a corresponding decrease in gross profit of $4.0 million and $7.3 million for the fourth quarter
and full year periods, respectively. The declines are primarily volume related, although competitive pricing pressure also
began to impact profit margins during the second half of 2004. Manufacturing and other outsourced services gross
profit decreased $2.3 million or 15% in 2004, primarily due to a revenue decrease of 10% and an inventory write-off of
$0.7 million in the fourth quarter related to a terminated contract. Gross margin for the Aerospace & Defense segment
was 16.2% in 2004 as compared to 20.4% in 2003. The decrease in gross margin resulted primarily from the lower
volume and related margins for product sales and the lower volume for manufacturing services.

The Test & Measurement segment’s gross profit increased $1.8 million in 2004 primarily due to the increase in technical
services revenue. Gross margin for the Test & Measurement segment was 20.0% in 2004 as compared to 18.9% in
2003. The increase in gross margin resulted primarily from the higher volume for testing and calibration services and
lower costs for products achieved through outsourcing certain product subassemblies.

Selling, General and Administrative. Selling, general and administrative expense increased $8.5 million in 2004
and decreased as a percentage of net revenue to 8.3% in 2004 from 9.7% in 2003. The Industrial Group’s selling,
general and administrative expense accounted for $5.4 million of the increase, primarily due to higher administrative
costs related to additional infrastructure to support the new contracts in the Industrial Group and the overall growth
of the business. The Test & Measurement segment also increased selling expense to support the national account
opportunities for its calibration services.

Research and Development. Research and development costs decreased $0.5 million in 2004 due to the completion
of the first release of Silver Phoenix, a new data system product line within our Aerospace & Defense segment. The
majority of research and development costs during 2004 were related to future releases of this product.

Amortization of Intangible Assets. Amortization of intangible assets increased in 2004 primarily due to certain
identifiable intangible assets acquired in connection with the new Industrial Group contracts.

Interest Expense, Net.
Interest expense increased in 2004 due to an increase in our weighted average debt
outstanding partially offset by a decrease in our weighted average interest rate. Our weighted average debt outstanding
increased to $51.5 million during 2004 from $31.1 million during 2003. The increase in debt primarily related to the
Industrial Group’s acquisitions, working capital for the acquired operations, and capital expenditures to increase capacity
and automation. Net proceeds totaling $55.7 million from our public stock offering in March and April 2004 were used
primarily to reduce debt and partially offset the increase in debt otherwise incurred. The weighted average interest rate
decreased to 4.8% in 2004 from 5.4% in 2003. Our interest rate decreased effective with the July 2003 expiration of
interest rate swap agreements with higher than market interest rates. Our effective interest rate is expected to increase
in 2005 due to the issuance of senior notes totaling $55.0 million in June and August 2004 at a weighted average fixed
interest rate of 5.4% and expected increased market rates under our credit agreement.

Income Taxes. Our effective income tax rate was 30.5% in 2004 as compared to 37.5% for 2003. An examination
by the Internal Revenue Service of our federal income tax returns for certain prior years was completed during the third
quarter of 2004 and a favorable adjustment of $434,000 to income tax expense was recorded in the third quarter as
the additional tax assessment was less than the estimated liability previously recorded. Additionally, our effective tax
rate on foreign operations in 2004 was approximately 29%, which reflects the lower statutory tax rate for Mexico. Our
effective tax rate for 2005 is expected to be within a range of 35% to 38%.

30 SYPR

SYPR 31

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Year Over

Year

Years Ended

December 31,

Year

Change

Percentage

Results as Percentage of

Change

Net Revenue for the Years

Favorable

Ended December 31,

(In thousands, except percentage data)

2003

2002

(Unfavorable)

2003

2002

$ 95,872

$ 86,915

$ 8,957

10.3 %

34.7 %

31.8 %

141,597
39,136
180,733

146,491
40,071
186,562

(4,894)
(935)
(5,829)

(3.3)
(2.3)
(3.1)

1.1

51.2
14.1
65.3

53.6
14.7
68.2

100.0

Total net revenue

276,605

273,477

3,128

Net revenue:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

Cost of sales:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

86,126

75,190

(10,936)

(14.5)

89.8

112,717
31,750
144,467

117,370
31,396
148,766

4,653
(354)
4,299

Total cost of sales

230,593

223,956

(6,637)

Gross profit:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

9,746

11,725

(1,979)

28,880
7,386
36,266

29,121
8,675
37,796

(241)
(1,289)
(1,530)

Total gross profit

46,012

49,521

(3,509)

Selling, general and administrative
Research and development
Amortization of intangible assets

26,711
4,166
194

27,114
3,354
97

403
(812)
(97)

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
(389)

38.3
NM

Income before income taxes

13,018

16,373

(3,355)

(20.5)

Income taxes

Net income

4,883

4,934

1.0

$ 8,135

$ 11,439

(3,304)

(28.9)%

2.9 %

Backlog. Our backlog increased $44.8 million to $199.0 million at December 31, 2003, on $321.7 million in net
orders in 2003 compared to $265.8 million in 2002.

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.

Backlog for our Aerospace & Defense segment increased $8.6 million to $120.0 million at December 31, 2003, on
$150.6 million in net orders in 2003 compared to $145.7 million in 2002. Backlog for our Test & Measurement segment
increased $1.8 million to $5.8 million at December 31, 2003, on $40.9 million in net orders in 2003 compared to
$38.1 million in 2002.

4.0
(1.1)
2.9

(3.0)

(16.9)

(0.8)
(14.9)
(4.0)

(7.1)

1.5
(24.2)
(100.0)

79.6
81.1
79.9

83.4

10.2

20.4
18.9
20.1

16.6

9.7
1.5
—

5.4

0.6
0.1

4.7

1.8

86.5

80.1
78.4
79.7

81.9

13.5

19.9
21.6
20.3

18.1

9.9
1.3
—

6.9

1.0
(0.1)

6.0

1.8

4.2 %

Net Revenue. Net revenue in the Industrial Group increased $9.0 million in 2003 primarily 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.

Net revenue in the Aerospace & Defense segment decreased $4.9 million in 2003 primarily due to lower revenue from
manufacturing services. 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
$3.0 million in 2003 due to an increase in engineering services. Net revenue from product sales increased $2.4 million
in 2003 driven by higher quantities of data systems products, which benefited from higher spending by intelligence
agencies.

Net revenue in the Test & Measurement segment decreased $0.9 million in 2003 primarily due to a $1.8 million
decrease in product sales. Net revenue from technical services increased $0.9 million in 2003 primarily due to an
increase in calibration services.

Gross Profit. 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 million as compared to the third quarter of 2002. During the third quarter of 2003, productivity for
the Industrial Group decreased primarily as a result of the Northeast electricity blackout in August 2003 and lower sales
quantities to Visteon and Dana. These lower sales quantities were driven by Visteon’s longer than normal annual plant
shutdown and Dana’s rebalancing of inventory levels in anticipation of a potential labor-related work stoppage.

Our Aerospace & Defense segment experienced lower gross profit from manufacturing 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 product sales was
higher due to the mix of higher value products and programs.

Gross profit for our Test & Measurement segment decreased primarily due to the lower volume in product sales.
Gross profit from technical services also decreased due to a less profitable mix of business for calibration and testing
services.

Selling, General and Administrative. Selling, general and administrative expense decreased $0.4 million in 2003 and
decreased as a percentage of net revenue to 9.7% from 9.9% in 2002. We controlled our spending on selling, general
and administrative in consideration of the 1.1% increase in net revenue from 2002 to 2003.

Research and Development. The increase in research and development costs is driven by development of a new data
system product line within our Aerospace & Defense segment. We expect to complete the development of these products
in 2004, and sold limited quantities in 2003.

Amortization of Intangible Assets. Amortization of intangible assets increased in 2003 primarily due to certain
identifiable intangible assets acquired during 2003.

Interest expense decreased in 2003 due to the repayment of debt and a lower weighted
Interest Expense, Net.
average interest rate. We used proceeds from our 2002 stock offering to repay $52.5 million of our outstanding debt,
reducing our weighted average debt outstanding to $31.1 million during 2003 from $49.8 million during 2002. The
weighted average interest rate decreased to 5.4% in 2003 from 5.8% in 2002 due to the July 2003 expiration of interest
rate swap rate agreements with higher than market interest rates.

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.

32 SYPR

SYPR 33

QUARTERLY RESULTS
The following table presents our unaudited condensed consolidated statements of income data for each of the eight
quarters in the two-year period ended December 31, 2004. We have prepared this data on the same basis as our
audited consolidated financial statements and, in our opinion, include all normal recurring adjustments necessary
for a fair presentation of this information. You should read these unaudited quarterly results in conjunction with our
consolidated financial statements and related notes included elsewhere in this annual report. The consolidated results
of operations for any quarter are not necessarily indicative of the results to be expected for any subsequent period.

(In thousands, except per share data)

First

Second

Third

Fourth

First

Second

Third

Fourth

2004

2003

Net revenue:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

$ 48,451 $ 58,222 $ 78,429 $ 75,308 $ 23,226 $ 25,077 $ 22,430 $ 25,139

29,572
11,353
40,925

25,793
11,881
37,674

28,350
11,678
40,028

35,464
10,901
46,365

26,121
9,568
35,689

35,751
9,793
45,544

37,174
9,294
46,468

42,551
10,481
53,032

Total net revenue

89,376

95,896

118,457

121,673

58,915

70,621

68,898

78,171

Cost of sales:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

41,875

52,686

69,569

72,560

20,574

21,759

21,025

22,768

24,110
8,914
33,024

21,002
9,212
30,214

23,899
9,302
33,201

30,884
9,234
40,118

20,738
7,652
28,390

28,049
7,772
35,821

30,759
7,545
38,304

33,171
8,781
41,952

Total cost of sales

74,899

82,900

102,770

112,678

48,964

57,580

59,329

64,720

Gross profit:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

6,576

5,536

8,860

2,748

2,652

3,318

1,405

2,371

5,462
2,439
7,901

4,791
2,669
7,460

4,451
2,376
6,827

4,580
1,667
6,247

5,383
1,916
7,299

7,702
2,021
9,723

6,415
1,749
8,164

9,380
1,700
11,080

Total gross profit

14,477

12,996

15,687

8,995

9,951

13,041

9,569

13,451

Selling, general and administrative
Research and development
Amortization of intangible assets

8,158
524
126

8,628
875
140

8,915
1,084
145

9,547
1,214
185

6,149
1,022
21

7,036
1,066
21

6,925
1,030
67

6,601
1,048
85

Operating income (loss)

5,669

3,353

5,543

(1,951)

2,759

4,918

1,547

5,717

Interest expense, net
Other (income) expense, net

288
(58)

227
(48)

646
15

939
(47)

486
67

547
85

384
65

276
13

Income (loss) before income taxes

5,439

3,174

4,882

(2,843)

2,206

4,286

1,098

5,428

Income tax expense (benefit)

2,040

1,190

1,395

(1,380)

827

1,607

412

2,037

Net income (loss)

$ 3,399 $ 1,984 $ 3,487 $ (1,463) $ 1,379 $ 2,679 $

686 $ 3,391

Earnings (loss) per common share:
Basic
Diluted

Shares used in computing earnings
(loss) per common share:
Basic
Diluted

$
$

0.23 $
0.22 $

0.11 $
0.11 $

0.19 $
0.19 $

(0.08) $
(0.08) $

0.10 $
0.10 $

0.19 $
0.19 $

0.05 $
0.05 $

0.24
0.23

14,791
15,593

17,827
18,552

17,889
18,306

17,916
17,916

14,184
14,407

14,213
14,430

14,241
14,799

14,267
14,868

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Net cash used in operating activities was $27.4 million in 2004 as compared to net cash provided by operating activities
of $27.3 million in 2003. The use of cash in operating activities in 2004 was primarily due to increases in accounts
receivable and inventory of $61.0 million and $28.5 million, respectively. The acquired operations of the Industrial Group
accounted for $51.8 million and $9.5 million of the increase in accounts receivable and inventory, respectively. Although
inventory was acquired with each of these transactions, additional investment was required during 2004 to support
the increase in demand in the truck components & assemblies market across the entire Industrial Group. Accounts
receivable in the Aerospace & Defense segment decreased $3.0 million in 2004, primarily related to decreased product
sales. Inventory in the Aerospace & Defense segment increased $16.3 million in 2004, primarily to support shipments
on two manufacturing services contracts in 2005.

Net cash used in investing activities was $86.1 million in 2004 as compared to $45.8 million in 2003. Capital
expenditures increased to $55.9 million in 2004 from $22.5 million in 2003. Capital expenditures in 2004 for our
Industrial Group were $42.6 million principally comprised of forging, machining, and centralized tooling equipment.
Capital expenditures in 2004 for our Aerospace & Defense and Test & Measurement segments were $8.4 million and
$4.6 million, respectively, principally comprised of manufacturing, assembly and test equipment. Our Industrial Group
invested $29.6 million and $22.3 million in 2004 and 2003, respectively, for the acquisition of net assets related to
the new contracts with Dana and ArvinMeritor. Capital expenditures in 2003 for our Aerospace & Defense and Test &
Measurement segments were $5.7 million and $4.9 million, respectively, and capital expenditures for the Industrial
Group were $11.8 million.

Net cash provided by financing activities was $115.6 million in 2004 as compared to $18.2 million in 2003. We received
net proceeds of $55.3 million for our public stock offering of 3,450,000 shares of common stock that closed in March
and April 2004. Proceeds from the offering were principally used to reduce debt on our revolving credit facility. We issued
senior notes for a total of $55.0 million in June and August 2004 through private placement transactions.

We had total availability for borrowings and letters of credit under the revolving credit facility of $63.0 million at December
31, 2004, which, when combined with our unrestricted cash balance of $14.1 million, provides for total cash and
borrowing capacity of $77.1 million. Maximum borrowings on the revolving credit facility are $125.0 million, subject to a
$15.0 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 credit agreement was amended in March
2005 to revise certain financial covenants. Other terms of the credit agreement remained substantially unchanged.

Our principal commitments at December 31, 2004 consisted of repayments of borrowings under the credit agreement
and senior notes, pension obligations and obligations under operating leases for certain of our real property and
equipment. We also had purchase commitments totaling approximately $24.0 million at December 31, 2004, primarily
for manufacturing equipment. The following table provides information about the payment dates of our debt and
contractual lease obligations at December 31, 2004, excluding current liabilities except for the current portion of long-
term debt:

(In thousands)

Revolving credit facility
Senior notes
Operating leases

Total

2005

2006

2007

2008

2009

2010 &

Thereafter

7,000
—
7,370

—
—
6,256

—
—
5,078

$ 55,000
7,500
4,329

—
—
3,309

—
47,500
3,898

$ 14,370

6,256

5,078

$ 68,829

3,309

$ 51,398

34 SYPR

SYPR 35

At December 31, 2004, we also had approximately $4.9 million of federal net operating loss carryforwards available to
offset future federal taxable income. Such carryforwards will increase future cash flows, if utilized, and reflect income
tax losses incurred which will expire on December 31, 2024.

We believe that sufficient resources will be available to satisfy our cash requirements for at least the next
twelve months. Cash requirements for periods beyond the next twelve months depend on our profitability, 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
On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards
(“SFAS”) No. 123R, “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based
Compensation.” SFAS No. 123R supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.”

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB
No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS No. 123R’s fair value method could have a significant impact on our results of
operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123R
cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.
However, had we adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our
consolidated financial statements. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods
after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on,
among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior
periods for such excess tax deductions were $0.6 million, $0.2 million, and $0.4 million in 2004, 2003 and 2002,
respectively. On March 1, 2005, the Board of Directors approved a resolution to accelerate the vesting for “underwater”
options as of March 11, 2005 in order to reduce future compensation expense related to outstanding options. After
amendment of each underlying option agreement, compensation expense to be recognized in the income statement over
the next seven years will be reduced by approximately $1.2 million.

FORWARD-LOOKING STATEMENTS
This annual report, and our other oral or written communications, may contain “forward-looking” statements. These
statements may include our expectations or projections about the future of our industries, business strategies,
potential acquisitions or financial results and our views about developments beyond our control including domestic or
global economic conditions, trends and market developments. These statements are based on management’s views
and assumptions at the time originally made and we undertake no obligation to update these statements, even if,
for example they remain available on our website after those views and assumptions have changed. There can be no
assurance that our expectations, projections or views will come to pass, and you should not place undue reliance on
these forward-looking statements.

A number of significant factors could materially affect our specific business operations, and cause our performance to
differ materially from any future results projected or implied by our prior statements. Many of these factors are identified
in connection with the more specific descriptions contained throughout this report. Other factors which could also
materially affect such future results include:

• Disruptions in the timely supply or availability of raw materials such as steel and component parts, and changes
to the demands of our customers’ schedules for finished goods, could delay, increase the cost or otherwise
impair our ability to efficiently manage production schedules, adversely affecting our revenues, expenses or
earnings;

• Increases in the cost of raw materials such as steel or component parts could increase our working capital
committed to such materials and parts, work in process and finished goods, and could cause delays in payment
from, or other difficulties for, our customers who are impacted by such costs;

• The cost, efficiency and yield of our operations, including changes in product mix and any associated variances
in our profit margins; cost and inefficiencies associated with increasing our manufacturing capacity and launching
new programs; our ability to successfully reduce the causes, amounts and costs related to the scrap levels
in our production processes, our ability to achieve expected annual savings or other synergies from past and
future business combinations; inventory risks due to shifts in market demand, obsolescence, price erosion of
raw material or component parts, shrinkage, or other factors affecting our inventory valuations; or our ability
to successfully manage growth, contraction or competitive pressures in our primary markets, including the
commercial vehicle or aerospace & defense electronics markets, or in the domestic or global economies;

• Our discovery of, or failure to discover, material issues during due diligence investigations of acquisition targets,
either before closing with regard to potential risks of the acquired operations, or, after closing with regard to
the timely discovery of breaches of representations or warranties, or of certain indemnified environmental
conditions;

• The failure to agree on the final terms of any 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;

• Access to capital on favorable terms as needed for our operations or growth, including changes in the costs or
supply of debt, equity capital, or insurance coverages, whether resulting from adverse changes in our operations,
our financial results, the risk profile of our businesses, our credit ratings, any actual or alleged breach of our debt
covenants, insurance conditions or similar agreements, or any adverse regulatory developments;

• Our concentrated reliance on major customers, suppliers or programs, including any changes, delays, or
cancellations by the government or other customers which impact our major programs, or any revisions in the
timing of shipments, prices or the estimated costs related to our major contracts;

• The Company’s dependence on its current management and our ability to successfully recruit and retain qualified
employees as needed to manage our businesses in a changing business environment, including during rapid
changes in the size, complexity or skills required of our workforce; labor disputes or other deteriorations in our
labor relations; or changes in the cost of providing pension and other employee benefits, including changes in
health care costs, investment returns on plan assets, and discount rates used to calculate pension and related
liabilities, which could lead to increased costs or disruptions of operations in any of our business units;

• The risks inherent in operating abroad, including foreign currency exchange rates, adverse regulatory

developments, and miscommunications or errors due to inaccurate foreign language translations;

• The risk of changes in or adverse actions under applicable law or in our regulatory authorizations, licenses,
security clearances, or other legal rights to operate our businesses, manage our work force or import and
export goods and services as needed; the risk of litigation, including litigation with respect to customer, creditor,
stockholder, environmental or asbestos-related matters, customer or supplier claims, or stockholders; or the risk
of other adverse regulatory actions, compliance costs or other governmental sanctions;

36 SYPR

SYPR 37

• The risks relating to war and future terrorist activities or political uncertainties which could change the timing
and availability of funding for the aerospace & defense electronics markets that we serve or impact the cost or
feasibility of doing business domestically or abroad;

• Disruptions or cost increases of utilities such as electricity, natural gas or water, the occurrence of natural
disasters, casualties, or our failure to anticipate or to adequately insure against other risks and uncertainties
present in our businesses including unknown or unidentified risks; and

• Other factors included in our filings with the Securities and Exchange Commission.

This list of factors that may affect our future performance or the accuracy of our forward-looking statements is illustrative,
but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of
their inherent uncertainty.

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 (1.25% at December 31, 2004)
based upon our leverage ratio. An increase in interest rates of 100 basis points would result in additional interest
expense approximating $620,000 on an annualized basis, based upon our debt outstanding at December 31, 2004.
Fluctuations in foreign currency exchange rates have historically had little impact on our earnings, fair values or cash
flows, 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; however, there can be no assurances that the growth in our
Industrial Group’s business combined with significant increases in the costs of steel will not adversely affect our
working capital requirements and our associated interest costs, which could also increase the sensitivity of our results
to changes in interest rates.

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

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 U.S. generally accepted accounting
principles. The financial statements include amounts based on management’s best estimates and judgments. Financial
information included elsewhere in this annual report is consistent with these financial statements.

We maintain a system of internal control designed to provide reasonable assurance that transactions are executed
in accordance with proper authorization and are appropriately recorded in order to permit preparation of financial
statements in conformity with generally accepted accounting principles, and that assets are adequately safeguarded
and accountability for assets is maintained. Although no cost-effective internal control system will prevent all errors and
irregularities, we believe our controls provide reasonable assurance that the financial statements are reliable and that
our assets are reasonably safeguarded. Internal controls and procedures are periodically reviewed and revised, when
appropriate, due to changing circumstances and requirements.

To ensure the effective administration of internal control, we carefully select and train our employees, maintain and
disseminate written policies and procedures, provide appropriate communication channels and foster an environment
conducive to the effective functioning of controls. We have adopted a Code of Business Conduct that requires
all employees, including officers and senior level executives, to adhere to the highest standards of personal and
professional integrity.

The Audit and Finance Committee of the Board of Directors is composed entirely of outside directors, including one of
whom the Board of Directors has deemed to be a financial expert. The Audit and Finance Committee members meet the
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
registered public accounting firm 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.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Sypris Solutions, Inc. is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control
system was designed to provide reasonable assurance to Sypris management and its Board of Directors regarding the
preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can only provide reasonable assurance with respect to the accuracy of financial statement
preparation and presentation.

Under the supervision and with participation of our management, including the Chief Executive Officer and Chief Financial
Officer, we assessed the effectiveness of Sypris Solutions, Inc.’s internal control over financial reporting as of December
31, 2004, with the exception of the operations acquired during 2004 in Kenton, Ohio and Toluca, Mexico, which together
constituted 19% and 2% of total and net assets, respectively, as of December 31, 2004 and 16% and 52% of net revenue
and net income, respectively, for the year then ended. In making our assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based
on our assessment, we concluded that as of December 31, 2004, Sypris’ internal control over financial reporting is
effective based on these criteria.

Ernst & Young LLP, our independent auditors and a registered public accounting firm, has issued an attestation report
on our assessment of Sypris Solutions Inc.’s internal control over financial reporting.

38 SYPR

SYPR 39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Sypris Solutions, Inc.

We have audited management’s assessment, included in the accompanying Report of Management on Internal Control
over Financial Reporting, that Sypris Solutions, Inc. maintained effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Sypris Solutions, Inc.’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and
an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the
internal controls of the operations acquired in 2004 in Kenton, Ohio and Toluca, Mexico, which are included in the 2004
consolidated financial statements of Sypris Solutions, Inc. and together constituted 19% and 2% of total and net assets,
respectively, as of December 31, 2004 and 16% and 52% of net revenue and net income, respectively, for the year then
ended. Our audit of internal control over financial reporting of Sypris Solutions, Inc. also did not include an evaluation
of the internal control over financial reporting of the operations acquired in 2004 in Kenton, Ohio and Toluca, Mexico.

In our opinion, management’s assessment that Sypris Solutions, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our
opinion, Sypris Solutions, Inc. maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2004, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the 2004 consolidated financial statements of Sypris Solutions, Inc. and our report dated February 8, 2005
expressed an unqualified opinion thereon.

Louisville, Kentucky
February 8, 2005

40 SYPR

We have audited the accompanying consolidated balance sheets of Sypris Solutions, Inc. as of December 31, 2004 and
2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Sypris Solutions, Inc. at December 31, 2004 and 2003, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of Sypris Solutions, Inc.’s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 8, 2005 expressed an unqualified opinion
thereon.

Louisville, Kentucky
February 8, 2005

SYPR 41

CONSOLIDATED INCOME STATEMENTS

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

2004

2003

2002

(In thousands, except share data)

Years ended December 31,

$ 389,717
35,685

$ 230,632
45,973

$ 229,629
43,848

425,402

276,605

273,477

349,756
23,491

203,080
27,513

195,576
28,380

ASSETS

Current assets:
Cash and cash equivalents
Accounts receivable, net

Inventory, net

Other current assets

Total current assets

373,247

230,593

223,956

Property, plant and equipment, net

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 (income) expense, net

Income tax expense

Net income

Earnings per common share:
Basic
Diluted

Shares used in computing earnings per common share:
Basic
Diluted

52,155

46,012

49,521

35,248
3,697
596

26,711
4,166
194

27,114
3,354
97

12,614

14,941

18,956

2,100
(138)

1,693
230

2,742
(159)

3,245

4,883

4,934

$
$

0.43
0.42

$
$

0.57
0.56

$
$

0.87
0.84

17,119
17,745

14,237
14,653

13,117
13,664

The accompanying notes are an integral part of the consolidated financial statements.

Income before income taxes

10,652

13,018

16,373

7,407

$ 8,135

$ 11,439

Total current liabilities

Goodwill

Other assets

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable
Accrued liabilities
Current portion of long-term debt

Long-term debt

Other liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity:
Preferred stock, par value $0.01 per share, 975,150 and 981,600 shares

authorized in 2004 and 2003, respectively; no shares issued

Series A preferred stock, par value $0.01 per share, 24,850 and 18,400 shares

authorized in 2004 and 2003, respectively; no shares issued

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; 17,920,500

and 14,283,323 shares issued and outstanding in 2004 and 2003, respectively

Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss

Total stockholders’ equity

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of the consolidated financial statements.

December 31,

2004

2003

$ 14,060
104,637
94,252
21,566

$ 12,019
45,484
61,932
11,370

234,515

130,805

166,940

106,683

14,277

13,222

11,730

$ 428,954

$ 263,495

$ 61,778
20,378
7,000

$ 29,598
17,491
3,200

89,156

50,289

110,000

53,000

22,362

15,425

221,518

118,714

—

179
140,898
68,724
(2,365)

143
83,541
63,443
(2,346)

207,436

144,781

$ 428,954

$ 263,495

42 SYPR

SYPR 43

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash (used in)

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,

2004

2003

2002

7,407

$ 8,135

$ 11,439

19,066
3,692
1,520
1,842
252
(929)

(60,995)
(28,495)
(7,196)
33,947
2,479

12,831
6,009
832
191
846
(586)

11,386
3,684
727
231
339
(7,451)

(7,724)
6,219
(2,427)
3,154
(205)

1,576
(4,559)
(863)
(1,010)
(1,898)

Net cash (used in) provided by operating activities

(27,410)

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

(55,900)
47
(29,648)
(640)

(22,521)
175
(23,300)
(171)

(19,747)
211
—
(662)

Net cash used in investing activities

(86,141)

(45,817)

(20,198)

Cash flows from financing activities:
Net increase (decrease) in debt under revolving credit agreements
Proceeds from issuance of senior notes
Cash dividends paid
Proceeds from issuance of common stock

5,800
55,000
(2,023)
56,815

19,200
—
(1,709)
667

(50,500)
—
(424)

56,692

Net cash provided by financing activities

115,592

18,158

Net increase (decrease) in cash and cash equivalents

2,041

(384)

5,768

(829)

Cash and cash equivalents at beginning of year

12,019

12,403

13,232

Cash and cash equivalents at end of year

$ 14,060

$ 12,019

$ 12,403

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share and per share data)

Amount

Common Stock

Accumulated

Other

Additional

Paid-In

Capital

Comprehensive

Total

Retained

Earnings

Income

(Loss)

Stockholders’

Equity

Balance at January 1, 2002
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 Stock Purchase Plan
Exercise of stock options
Stock option tax benefit
Retire unvested restricted shares

9,898,675 $

—

—
—
4,100,000

37,695
123,983
—
(2,276)

99 $ 25,490
—
—

$ 46,427 $
11,439

(1,896) $ 70,120
11,439

—

—
—
41

1
1
—
—

—

—
—
55,615

11,439
(849)
—

335
758
377
—

—
—
—
—

(873)

(803)
—
—

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
—

—

8,135

—

—
—

353
456
157

—

8,135
(1,709)

—
—
—

—

349

353
—

—
—
—

8,135

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

Net income
Adjustment in minimum pension liability,
net of tax of $405
Foreign currency translation

—

—
—

Comprehensive income (loss)
Cash dividends, $0.12 per common share
Issuance of common shares
Issuance of shares under
Employee Stock Purchase Plan
Exercise of stock options
Stock option tax benefit

—
—
3,450,000

48,537
138,640
—

—

—
—

—
—
35

—
1
—

—

7,407

—

7,407

—
—

(637)
618

—
—
55,220

7,407
(2,126)
—

(19)
—
—

7,388
(2,126)
55,255

499
1,086
552

—
—
—

499
1,087
552

Balance at December 31, 2004

17,920,500 $

179 $ 140,898

$ 68,724 $

(2,365) $ 207,436

The accompanying notes are an integral part of the consolidated financial statements.

44 SYPR

SYPR 45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Consolidation Policy
The accompanying consolidated financial statements include the accounts of Sypris Solutions, Inc. and its wholly-owned
subsidiaries (collectively, “Sypris” or the “Company”) and have been prepared by the Company in accordance with the
rules and regulations of the Securities and Exchange Commission. The Company’s operations are domiciled in the U.S.
and Mexico and serve a wide variety of domestic and foreign customers. 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 test & measurement services.

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 shorter
of their economic life or 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
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 Company tested goodwill of $14,277,000 for impairment as of December 31, 2004 and
2003 determining that no impairment loss was necessary. As of December 31, 2004 and 2003, the carrying value
of goodwill for the Aerospace & Defense and the Test & Measurement segments was $6,900,000 and $6,937,000,
respectively, and the carrying value of goodwill for the Industrial Group was $440,000.

Long-lived Assets
When indicators of impairment exist, the Company evaluates long-lived assets for impairment and assesses their
recoverability based upon anticipated undiscounted future cash flows. If facts and circumstances lead the Company’s
management to believe that the carrying value of one of its assets is impaired, the Company will write down the long-
lived asset to its estimated fair value.

Revenue Recognition
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 $90,018,000,
$111,341,000 and $120,424,000 for the years ended December 31, 2004, 2003 and 2002, respectively. In 2004
and 2003, approximately 85% and 88%, respectively, of such amount was accounted for based on units of delivery and
approximately 15% and 12%, respectively, was accounted for based on milestones or cost-to-cost. In 2002, 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. Related shipping
and handling costs, if any, are included in costs of sales.

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 and Mexico. 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

46 SYPR

SYPR 47

expectations. Approximately 73% and 43% of accounts receivable outstanding at December 31, 2004 and 2003,
respectively 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
$38,975,000, $49,143,000 and $44,185,000 during the years ended December 31, 2004, 2003 and 2002,
respectively. The Company’s other largest customers for the year ended December 31, 2004 were Dana Corporation
(“Dana”) and ArvinMeritor, Inc. (“ArvinMeritor”), which represented approximately 36% and 15%, respectively, of the
Company’s total net revenue. Dana and Raytheon Company (“Raytheon”) were the Company’s largest customers for the
years ended December 31, 2003 and 2002. Net revenue from Dana for 2003 and 2002 was approximately 15% and
19%, respectively, while Raytheon was approximately 14% in both years. No other single customer accounted for more
than 10% of the Company’s total net revenue for the years ended December 31, 2004, 2003 or 2002.

Foreign Currency Translation
The functional currency for the Company’s Mexican subsidiary is the Mexican peso. Earnings are translated into U.S.
dollars using the monthly average exchange rates, while balance sheet accounts are translated using year end exchange
rates. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss) as a
separate component of stockholders’ equity.

Stock Based Compensation
Stock options are granted under various stock compensation programs to employees and independent directors
(see Note 12). The Company accounts for stock option grants in accordance with Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees.” For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information is
as follows:

(In thousands, except per share data)

2004

2003

2002

Years ended December 31,

Net income
Pro forma stock-based compensation expense, net of tax

Pro forma net income

Pro forma earnings per common share:
Basic
Diluted

7,407
1,277

$ 8,135
1,624

$ 11,439
1,591

6,130

$ 6,511

9,848

$
$

0.36
0.35

$
$

0.46
0.44

$
$

0.75
0.72

Derivative Financial Instruments
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 8). All
changes in the fair value, net of income tax, were recognized in other comprehensive income (loss) on the consolidated
statements of stockholders’ equity. All such interest rate swap agreements expired in July 2003.

Collective Bargaining Agreements
Approximately 1,316 or 46% of the Company’s employees, all of which are in the Industrial Group, are covered
by collective bargaining agreements. Employees covered by collective bargaining agreements expiring in one year
approximates 250 or 9% of the Company’s workforce.

Adoption of Recently Issued Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share-Based Payment,”
which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes APB No.
25, and amends SFAS No. 95, “Statement of Cash Flows.”

48 SYPR

Accordingly, the adoption of SFAS No. 123R’s fair value method could have a significant impact on our results of operations,
although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123R cannot be
predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we
adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No.
123 as described in the disclosure of pro forma net income and earnings per share (see “Stock Based Compensation”
above). SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to
be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While
the Company cannot estimate what those amounts will be in the future (because they depend on, among other things,
when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess
tax deductions were $552,000, $157,000, and $377,000 in 2004, 2003 and 2002, respectively.

Reclassifications
Certain amounts in the Company’s 2002 and 2003 consolidated financial statements have been reclassified to conform
to the 2004 presentation.

NOTE 2. ACQUISITIONS
On June 30, 2004, the Company acquired certain assets and liabilities of a plant located in Toluca, Mexico from Dana that
expanded the Company’s manufacturing capabilities in steer axles, drive axle shafts and various drive train components.
The transaction was accounted for as a purchase, in which the purchase price of $16,486,000 was initially allocated
based on the fair values of the assets and liabilities acquired. The purchase price includes approximately $900,000 to be
paid to Dana in 2005 related to a post-closing adjustment to Dana’s net book value of the acquired assets. The results
of operations of the acquired business were included in the consolidated financial statements beginning July 1, 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 based on final costs and appraisals:

(In thousands)

Current assets
Property, plant and equipment
Supply agreements

Total assets acquired
Current liabilities assumed

Net assets acquired

$
2,385
14,462
500

17,347
(861)

$ 16,486

On May 3, 2004, the Company acquired certain assets and liabilities of a plant located in Kenton, Ohio from ArvinMeritor
that expanded the Company’s manufacturing capabilities in trailer axle beams and various drive train components. The
transaction was accounted for as a purchase, in which the purchase price of $14,062,000 was initially allocated based
on the fair values of the assets and liabilities acquired. The results of operations of the acquired business were included
in the consolidated financial statements beginning May 4, 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 based on final costs
and appraisals:

(In thousands)

Current assets
Property, plant and equipment
Supply agreements

Total assets acquired
Current liabilities assumed

Net assets acquired

$
3,012
11,103
800

14,915
(853)

$ 14,062

SYPR 49

On December 31, 2003, the Company acquired from Dana certain assets and liabilities of a plant that expanded the
Company’s 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 were included in the consolidated financial statements beginning January 1, 2004. The Company paid Dana
$21,780,000 on the closing date and $517,000 in January 2004. Following are the final fair values of the assets
acquired and liabilities assumed at the date of the acquisition:

(In thousands)

Current assets
Property, plant and equipment
Supply agreements

Total assets acquired
Current liabilities assumed

Net assets acquired

$
4,540
17,746
1,727

24,013
(1,716)

$ 22,297

The preceding amounts include inventory valued under the LIFO method that totaled approximately $12,783,000 and
$11,476,000 at December 31, 2004 and 2003, 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,

2004

2003

$ 5,330
35,261
200,009
25,932

$
2,173
23,420
148,733
15,539

266,532
(99,592)

189,865
(83,182)

$ 166,940

$ 106,683

The estimated fair values of the supply agreements in each of the above acquisitions are accounted for as finite-lived
intangible assets that are being amortized on a straight-line basis over eight and nine year periods in accordance with
the terms of the respective agreements. Additionally, each acquisition above was financed by the Company’s Credit
Agreement (see Note 8).

Depreciation expense totaled approximately $18,470,000, $12,637,000 and $11,280,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. Approximately $818,000 and $3,488,000 was included in accounts
payable for capital expenditures at December 31, 2004 and 2003, respectively.

NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:

(In thousands)

Commercial
U.S. Government

Allowance for doubtful accounts

December 31,

2004

2003

$ 98,608
7,726

$ 39,978
6,100

106,334
(1,697)

46,078
(594)

$ 104,637

$ 45,484

Accounts receivable from the U.S. Government includes amounts due under long-term contracts, all of which are billed
at December 31, 2004 and 2003, of $5,690,000 and $4,508,000, respectively.

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,

2004

2003

$ 33,599
20,791
5,956

$ 22,394
15,854
3,052

43,575
(1,543)
(2,224)
(5,902)

36,569
(9,851)
(940)
(5,146)

$ 94,252

$ 61,932

NOTE 6. OTHER ASSETS
Other assets consists of the following:

(In thousands)

Intangible assets:
Gross carrying value:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

Total gross carrying value

Accumulated amortization:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

Total accumulated amortization

Intangible assets, net

Prepaid benefit cost
Other

December 31,

2004

2003

$ 3,407

2,095

795
720
1,515

4,922

(653)

(308)
(297)
(605)

(1,258)

3,664

4,871
4,687

956
720
1,676

3,771

(337)

(393)
(96)
(489)

(826)

2,945

4,685
4,100

$ 13,222

$ 11,730

Intangible assets consists primarily of long-term supply agreements in the Industrial Group and non-compete and royalty
agreements in both segments of the Electronics Group. The weighted average amortization period for intangible assets
was 8 years and 9 years at December 31, 2004 and 2003, respectively.

50 SYPR

SYPR 51

NOTE 7. ACCRUED LIABILITIES
Accrued liabilities consists of the following:

(In thousands)

Salaries, wages, employment taxes and withholdings
Employee benefit plans
Income, property and other taxes
Other

December 31,

2004

2003

$ 2,480
5,366
4,247
8,285

1,255
6,022
3,199
7,015

$ 20,378

$ 17,491

Included in other accrued liabilities are advance payments, accrued operating expenses, accrued warranty expenses,
accrued interest and other items, none of which exceed 5% of total current liabilities.

NOTE 8. LONG-TERM DEBT
Long-term debt consists of the following:

(In thousands)

Revolving credit facility
Senior Notes

Less current portion

December 31,

2004

2003

$ 62,000
55,000

$ 56,200
—

117,000
(7,000)

56,200
(3,200)

$ 110,000

$ 53,000

On June 10, 2004 and August 19, 2004, the Company issued a total of $55.0 million of senior notes through a private
placement transaction (the “Senior Notes”). The Senior Notes consist of $7.5 million of notes due in 2009 bearing
interest at 4.73%, $27.5 million of notes due in 2009 bearing interest at 5.35% and a $20.0 million note due in 2014
bearing interest at 5.78%. The Senior Notes contain customary affirmative and negative covenants, including financial
covenants requiring the maintenance of a specified leverage ratio and minimum levels of net worth. As of December 31,
2004, the Company was in compliance with all covenants.

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 $63,000,000 at December 31, 2004, which, when combined with
our unrestricted cash balance of $14,060,000, provides for total cash and borrowing capacity of $77,060,000. The
Credit Agreement includes an 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, 2004 and 2003 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, 2004 and 2003.

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, 2004 was 4.7%. The
weighted average interest rates for borrowings during the years ended December 31, 2004, 2003 and 2002 were 4.8%,
5.4% and 5.8% 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
31, 2004, the Company was in compliance with all covenants.

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.

Interest incurred, net of amounts capitalized, during the years ended December 31, 2004, 2003 and 2002 totaled
approximately $2,584,000, $1,729,000 and $2,923,000, respectively. Capitalized interest for the year ended December
31, 2004 approximated $355,000. The Company had no capitalized interest in 2003 or 2002. Interest paid during the
years ended December 31, 2004, 2003 and 2002 totaled approximately $2,328,000, $1,328,000 and $2,763,000,
respectively.

NOTE 9. 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 value for the recently issued Senior Notes approximates the fair value at December 31, 2004. The carrying
amount of debt outstanding at December 31, 2004 and 2003 under the Credit Agreement approximates fair value
because borrowings are for terms of less than six months and have rates that reflect currently available terms and
conditions for similar debt.

NOTE 10. EMPLOYEE BENEFIT PLANS
The Company sponsors noncontributory defined benefit pension plans (the “Pension Plans”) covering certain employees
of the Industrial Group. 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,

2004

2003

2002

124
2,272
480
(2,589)

137
2,265
611
(2,430)

172
2,306
339
(2,329)

287

583

488

52 SYPR

SYPR 53

The following are summaries of the changes in the benefit obligations and plan assets and of the funded status of the
Pension Plans:

(In thousands)

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
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,

2004

2003

$ 37,324
124
2,272
2,226
(1,955)

$ 35,237
137
2,265
1,450
(1,765)

$ 39,991

$ 37,324

$ 32,259
2,984
944
(1,955)

$ 29,480
3,958
586
(1,765)

$ 34,232

$ 32,259

$ 39,991
34,232

$ 37,324
32,259

(5,759)
9,225
206

(5,065)
7,714
365

$ 3,672

3,014

$ 4,871
(5,995)
4,796

4,685
(5,425)
3,754

$ 3,672

3,014

$ 24,272
24,082
18,086

$ 22,304
22,100
16,677

5.75%
4.00
8.25

64%
36

100%

6.25%
4.00
8.25

63%
37

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 2005 ranges from $200,000 to $1,000,000. The expected long-term rates of
return on plan assets for determining net periodic pension cost for 2004 and 2003 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 sponsors a defined contribution plan (the “Defined Contribution Plan”) for substantially all employees
of the Company. The Defined Contribution Plan is intended to meet the requirements of Section 401(k) of the
Internal Revenue Code. The Defined Contribution Plan allows the Company to match participant contributions and
provides discretionary contributions. Contributions to the Defined Contribution Plan in 2004, 2003 and 2002 totaled
approximately $3,238,000, $2,737,000 and $2,267,000, 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 1,850, 1,325 and 1,300 at December 31, 2004,
2003 and 2002, 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 2004, 2003 and 2002, the Company
charged approximately $10,640,000, $7,223,000 and $6,677,000, respectively, to operations related to reinsurance
premiums, medical claims incurred and estimated, and administrative costs for the Medical Plans. Claims paid during
2004, 2003 and 2002 did not exceed the aggregate limits.

NOTE 11. 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, 2004 are as follows:

(In thousands)

2005
2006
2007
2008
2009
2010 and thereafter

7,370
6,256
5,078
4,329
3,309
3,898

$ 30,240

Rent expense for the years ended December 31, 2004, 2003 and 2002 totaled approximately $7,427,000, $7,485,000
and $7,387,000, 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 $689,000 and $835,000 as of December 31, 2004 and 2003,
respectively. Future minimum annual lease commitments related to these leases are included in the above schedule.

As of December 31, 2004, the Company had outstanding purchase commitments of approximately $24.0 million
primarily for the acquisition of manufacturing equipment and inventory.

The Company bears insurance risk as a member of a group captive insurance entity for certain general liability automobile
and workers’ compensation insurance programs and a self-insured employee health program. The Company records
estimated liabilities for its insurance programs based on information provided by the third-party plan administrators,
historical claims experience, expected costs of claims incurred but not paid, and expected costs to settle unpaid claims.
The Company monitors its estimated insurance-related liabilities on a quarterly basis. As facts change, it may become
necessary to make adjustments that could be material to the Company’s results of operations and financial condition.
The Company believes that its present insurance coverage and level of accrued liabilities are adequate.

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.

54 SYPR

SYPR 55

NOTE 12. STOCK OPTION AND PURCHASE PLANS
The Company has certain stock compensation plans under which options to purchase common stock may be granted to
officers, key employees and non-employee directors. Options may be granted at not less than the market price on the
date of grant. Options are exercisable in whole or in part up to two years after the date of grant and ending ten years
after the date of grant. The following table summarizes option activity for the three years ended December 31, 2004:

Balance at January 1, 2002
Granted
Exercised
Forfeited

Balance at December 31, 2002
Granted
Exercised
Forfeited

Balance at December 31, 2003
Granted
Exercised
Forfeited

Balance at December 31, 2004

Exercise

Price Range

Weighted

Average

Exercise

Price

$ 1.72
9.95
1.72
6.25

- $ 31.00
19.00
-
10.50
-
16.03
-

7.61
14.32
6.23
9.39

1.72
6.88
1.72
3.36

3.88
11.95
3.88
5.94

-
-
-
-

31.00
16.10
10.50
16.03

31.00
21.54
13.50
31.00

8.83
8.78
5.04
9.17

8.96
17.68
7.65
9.70

1,846,960
362,391
(127,561)
(144,425)

1,937,365
690,811
(104,730)
(178,061)

2,345,385
154,280
(144,660)
(138,438)

2,216,567

$ 3.88

- $ 25.52

9.60

The following table summarizes certain weighted average data for options outstanding and currently exercisable at
December 31, 2004:

Exercise Price Range

$3.88 - $6.00
$6.01 - $8.00
$8.01 - $10.00
$10.01 - $16.00
$16.01 - $26.00

Total

Outstanding

Weighted Average

182,389
551,056
812,780
465,265
205,077

Exercise

Price

5.03
6.89
8.72
12.34
18.25

Remaining

Contractual

Life

4.4
4.0
5.0
5.3
7.0

Exercisable

Weighted

Average

Exercise

Price

4.89
7.10
9.20
11.88
18.86

128,264
291,901
341,915
141,871
97,747

2,216,567

9.60

5.0

1,001,698

9.36

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
of common stock were granted during 2003. The Company did not grant Performance Options in 2004 or 2002.
Performance Options to purchase 17,500 shares, 28,000 shares and 49,000 shares of common stock were forfeited
in 2004, 2003 and 2002, respectively. One targeted price level of the Performance Options was achieved in 2004
and 2002, resulting in determination of the exercise price and beginning of the vesting period for options to purchase
14,500 and 52,000 shares of common stock, respectively. Performance Options for which the targeted price level has
not been achieved totaled 371,000 shares, 403,000 shares and 315,000 shares at December 31, 2004, 2003 and
2002, respectively, and are excluded from disclosures of options outstanding.

During 2004, the 1994 equity plan expired and was replaced with the 2004 equity plan. A total of 3,000,000 shares of
common stock were reserved for issuance under the 2004 equity plan while 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, 2004 and 2003 was
2,987,000 and 1,375,011, respectively.

The Company applies APB No. 25 and related interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS No. 123, “Accounting for Stock-Based
Compensation,” requires use of option valuation models that were not developed for use in valuing employee stock
options. Under APB No. 25, when the exercise price of the Company’s employee stock options is at least equal to the
market price of the underlying stock on the date of grant, no compensation expense is recognized.

Pro forma information regarding net income and 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 2004, 2003 and 2002 were estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average assumptions:

Expected life (years)
Expected volatility
Risk-free interest rates
Expected dividend yield

Years ended December 31,

2004

6.8
55.5%
3.76%
0.70%

2003

7.0

75.0%
3.69%
0.95%

2002

7.0
74.8%
3.83%
1.09%

The Company estimated the volatility rate for 2003 and prior based on similar companies’ volatility rates due to the lack
of volume in the Company’s common stock. Effective January 1, 2004, the Company estimated the expected volatility
rate based on the Company’s historical stock price, as the Company determined that its historical prices provided a more
reliable estimate of volatility. The weighted average Black-Scholes value of options granted under the stock option plans
during 2004, 2003 and 2002 was $9.76, $5.76 and $9.39 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 reliable single measure of the fair value of its employee stock options.

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. At December 31, 2004 and
2003, there were 75,512 shares and 121,049 shares, respectively, available for purchase under the plan. During 2004,
2003 and 2002, a total of 48,357 shares, 38,160 shares and 37,695 shares, respectively, were issued under the plan.
The stock purchase plan was terminated effective January 31, 2005.

NOTE 13. STOCKHOLDERS’ EQUITY
On March 17, 2004, the Company completed a public stock offering of 3,000,000 shares of its common stock, and, on
April 8, 2004, an additional 450,000 shares were issued through the exercise of an over-allotment option. The shares
were sold at $17.00 per share and generated proceeds, after underwriting discounts and expenses, of approximately
$55,255,000. Proceeds from the offering were primarily used to repay debt.

56 SYPR

SYPR 57

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.

As of December 31, 2004, 24,850 shares of the Company’s preferred stock were designated as Series A Preferred
Stock in connection with the adoption of the stockholder rights plan. There are no shares of Series A Preferred Stock
currently 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 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 $2,983,000, $2,346,000 and $2,350,000 at December 31, 2004, 2003 and 2002, respectively.
Cumulative foreign currency translation gains recorded in other comprehensive income (loss) totaled $618,000 at
December 31, 2004. Cumulative losses recorded in other comprehensive income (loss) for the aggregate fair market
value of all swap agreements, net of tax, totaled $349,000 at December 31, 2002.

NOTE 14. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Accordingly,
deferred income taxes have been provided for temporary differences between the recognition of revenue and expenses
for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported
amounts in the consolidated financial statements.

The components of income before taxes are as follows:

The components of income tax (benefit) expense are as follows:

(In thousands)

Current:
Federal
State
Foreign

Total current income tax (benefit) expense

Deferred:
Federal
State
Foreign

Total deferred income tax expense

Years ended December 31,

2004

2003

2002

(742)
33
262

(447)

(847)
(279)
—

(1,126)

2,424
519
749

3,692

4,938
1,071
—

6,009

1,184
66
—

1,250

3,427
257
—

3,684

3,245

$ 4,883

4,934

The Company files a consolidated federal income tax return which includes all domestic subsidiaries. Income taxes
paid during 2004, 2003 and 2002 totaled approximately $4,188,000, $2,250,000 and $3,656,000, respectively. The
Company received approximately $2,555,000, $1,760,000 and $208,000 in federal income tax refunds during 2004,
2003 and 2002, respectively.

At December 31, 2004, the Company had approximately $4,876,000 of federal net operating loss carryforwards
available to offset federal taxable income. Such carryforwards reflect income tax losses incurred which will expire on
December 31, 2024.

At December 31, 2004, the Company had approximately $9,614,000 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

2,591
560
5,999
464

9,614

The following is a reconciliation of income tax expense to that computed by applying the federal statutory rate of 34%
to income before income taxes:

Years ended December 31,

2004

2003

2002

7,139
3,513

$ 13,018
—

$ 16,373
—

$ 10,652

$ 13,018

$ 16,373

(In thousands)

Federal tax at the statutory rate
State income taxes, net of federal tax benefit
Effect of tax rates of foreign subsidiaires
Research and development tax credit
Change in estimate for federal tax contingencies
Change in valuation allowance for deferred tax asset
Other

(In thousands)

Domestic
Foreign

58 SYPR

Years ended December 31,

2004

2003

2002

3,622
432
(183)
(464)
(434)
—
272

$ 4,426
522
—
(146)
—
—
81

5,567
646
—
(330)
—
(677)
(272)

3,245

$ 4,883

4,934

SYPR 59

NOTE 16. SEGMENT INFORMATION
The Company is organized into two business groups, the Industrial Group and the Electronics Group. The Industrial
Group is one reportable business segment, while the Electronics Group includes two reportable business segments,
Aerospace & Defense and Test & Measurement. The segments are each managed separately because of the distinctions
between the products, services, markets, customers, technologies, and workforce skills of the segments. 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. The
Aerospace & Defense reportable segment provides manufacturing and technical services as an outsourced service
provider and manufactures complex data storage systems. The Test & Measurement reportable segment provides a
wide range of technical services for a diversified customer base as an outsourced service provider and manufactures
magnetic instruments, current sensors, and other electronic products. Revenue derived from outsourced services for the
Industrial Group accounted for 59%, 31% and 29% of total net revenue in 2004, 2003 and 2002, respectively. Revenue
derived from outsourced services for the Aerospace & Defense reportable segment accounted for 24%, 40% and 43%
of total net revenue in 2004, 2003 and 2002, respectively. Revenue derived from outsourced services for the Test &
Measurement reportable segment accounted for 10%, 12% and 12% of total net revenue in 2004, 2003 and 2002,
respectively. There was no intersegment net revenue recognized for all years presented. The Company previously had
only two reportable business segments and therefore, segment information for 2003 and 2002 has been reclassified to
be consistent with the current year presentation.

Deferred income tax assets and liabilities are as follows:

(In thousands)

Deferred tax assets:
Compensation and benefit accruals

Inventory valuation

Federal and state net operating loss carryforwards
Contract provisions
Accounts receivable allowance
Other

Total deferred tax assets

Deferred tax liabilities:
Depreciation
Foreign inventory valuation and other provisions
Defined benefit pension plan
Contract provisions
Other

Total deferred tax liabilities

Net deferred tax liability

December 31,

2004

2003

730
1,916
2,439
287
661
212

6,245

(15,105)
(749)
(269)
—
—

747
1,201
560
—
226
—

2,734

(8,652)
—
(231)
(240)
(200)

(16,123)

(9,323)

(9,878)

(6,589)

Management believes it is more likely than not that the Company’s future earnings will be sufficient to ensure the
realization of deferred tax assets for federal and state purposes.

The Company, because it intends to indefinitely reinvest foreign earnings outside the U.S., has not provided an estimate
for any U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries ($2,502,000 at December 31,
2004) that might be payable if these earnings were repatriated. However, the Company believes that U.S. foreign tax
credits would, for the most part, eliminate any additional U.S. tax.

NOTE 15. 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)

2004

2003

2002

Years ended December 31,

Shares outstanding:
Weighted average shares outstanding
Effect of dilutive employee stock options

Adjusted weighted average shares outstanding

and assumed conversions

17,119
626

14,237
416

13,117
547

17,745

14,653

13,664

Net income applicable to common stock

7,407

$ 8,135

$ 11,439

Earnings per common share:
Basic
Diluted

$
$

0.43
0.42

$
$

0.57
0.56

$
$

0.87
0.84

60 SYPR

SYPR 61

NOTE 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is an analysis of certain items in the consolidated income statements by quarter for the years ended
December 31, 2004 and 2003:

(In thousands, except per share data)

First

Second

Third

Fourth

First

Second

Third

Fourth

2004

2003

Net revenue
Gross profit
Operating income (loss)
Net income (loss)
Earnings (loss) per common share:
Basic
Diluted
Cash dividends declared
per common share

$ 89,376 $ 95,896 $ 118,457 $ 121,673 $ 58,915 $ 70,621 $ 68,898 $ 78,171
9,569 13,451
14,477 12,996 15,687
5,717
1,547
5,543
3,391
686
3,487

9,951 13,041
4,918
2,759
2,679
1,379

8,995
(1,951)
(1,463)

5,669
3,399

3,353
1,984

$
$

0.23 $
0.22 $

0.11 $
0.11 $

0.19 $
0.19 $

(0.08) $
(0.08) $

0.10 $
0.10 $

0.19 $
0.19 $

0.05 $
0.05 $

0.24
0.23

0.03 $

0.03

The following table presents financial information for the reportable segments of the Company:

(In thousands)

Net revenue from unaffiliated customers:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

Gross profit:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

Operating income (loss):

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

General, corporate and other

Total assets:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

General, corporate and other

Depreciation and amortization:

Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

General, corporate and other

Capital expenditures:
Industrial Group

Aerospace & Defense
Test & Measurement

Electronics Group

General, corporate and other

Years ended December 31,

2004

2003

2002

$ 260,410

$ 95,872

$ 86,915

119,179
45,813
164,992

141,597
39,136
180,733

146,491
40,071
186,562

$ 425,402

$ 276,605

$ 273,477

$ 23,720

$ 9,746

$ 11,725

19,284
9,151
28,435

28,880
7,386
36,266

27,316
10,480
37,796

$ 52,155

$ 46,012

$ 49,521

$ 15,120

$ 6,895

8,210

3,597
(431)
3,166

12,636
(574)
12,062

13,302
1,145
14,447

(5,672)

(4,016)

(3,701)

$ 12,614

$ 14,941

$ 18,956

$ 268,004

$ 121,429

$ 90,781

101,344
33,537
134,881

88,306
33,254
121,560

86,681
27,624
114,305

26,069

20,506

18,519

$ 428,954

$ 263,495

$ 223,605

$ 10,151

$ 5,425

4,224

5,061
3,553
8,614

301

4,502
2,632
7,134

272

4,587
2,298
6,885

277

$ 19,066

$ 12,831

$ 11,386

$ 42,634

$ 11,790

$ 12,009

8,399
4,601
13,000

5,683
4,938
10,621

266

110

4,557
2,961
7,518

220

$ 55,900

$ 22,521

$ 19,747

The Company’s export sales from the U.S. totaled $37,318,000, $22,250,000 and $25,437,000 in 2004, 2003
and 2002, respectively. Approximately $26,481,000 of net revenue in 2004 and $24,278,000 of long lived assets at
December 31, 2004 relate to the Company’s international operations.

62 SYPR

SYPR 63

COMMON STOCK INFORMATION

CORPORATE DIRECTORY

Our common stock is traded on the Nasdaq National Market under the symbol “SYPR.” The following table sets forth, for
the periods indicated, the high and low closing sale prices per share of our common stock as reported by the Nasdaq
National Market.

Year ended December 31, 2003:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Year ended December 31, 2004:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$ 11.25
10.75
16.61
17.55

$ 21.90
21.17
14.23
16.81

6.88
7.50
10.25
12.78

17.00
17.25
11.08
12.98

As of February 28, 2005, there were 1,229 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.

Board of Directors

Corporate Officers

Subsidiary Officers

ROBERT E. GILL (1†)
Chairman of the Board

ROBERT E. GILL (5)
Chairman of the Board

JEFFREY T. GILL (5)
President & CEO

DAVID D. JOHNSON (5)
Vice President & CFO

RICHARD L. DAVIS (5)
Senior Vice President

ANTHONY C. ALLEN (5)
Vice President & Treasurer

JOHN R. MCGEENEY (5)
General Counsel
& Secretary

JEFFREY T. GILL (1)
President & CEO

R. SCOTT GILL (1)
Managing Broker
Coldwell Banker
Residential Brokerage

WILLIAM G. FERKO (3, 4)
Vice President & CFO
Genlyte Group, Inc.

HENRY F. FRIGON (1, 2†, 4)
Private Investor & Consultant

WILLIAM L. HEALEY (4†)
President & CEO
Cal Quality Electronics, Inc.

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.

MARK N. CAIN
Vice President of Human Resources
Sypris Technologies, Inc.

JAMES G. COCKE (5)
Vice President; President & CEO
Sypris Electronics, LLC

JOHN M. KRAMER (5)
Group Vice President;
President & CEO
Sypris Technologies, Inc.

DAVID L. MONACO
Vice President of Finance
Sypris Electronics, LLC

G. DARRELL ROBERTSON (5)
Vice President; President & CEO
Sypris Data Systems, Inc.

JON Q. SHELLHAAS
Vice President of Finance
Sypris Technologies, Inc.

EDMUND R. STUCZYNSKI
Vice President of Operations
Sypris Electronics, LLC

NORMAN E. ZELESKY
Vice President
Sypris Technologies, Inc.

64 SYPR

SYPR 65

COMPANY LOCATIONS

INVESTOR INFORMATION

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 Data Systems
Subsidiary Headquarters
160 E. Via Verde
San Dimas, CA 91773
Phone: (909) 962-9400

Sypris Test & Measurement
16340 Roscoe Boulevard
Suite 100
Van Nuys, CA 91406
Phone: (818) 830-9111

Sypris Test & Measurement
615 N. Mary Avenue
Sunnyvale, CA 94085
Phone: (408) 720-0006

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

OHIO
Sypris Technologies
13267 State Route 68 South
Kenton, OH 43326
Phone: (419) 674-4051

Sypris Data Systems
2460 N. Courtney Parkway
Suite 107
Merritt Island, FL 32953
Phone: (321) 449-9243

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, Inc.
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 Data Systems
9020 Junction Drive
Suite 3
Annapolis Junction, MD 20701
Phone: (301) 470-0110

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
2500 Main Street, Suite 2
Sayreville, NJ 08872
Phone: (732) 721-6116

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

Sypris Technologies
1550 Marion Agosta Road
Marion, OH 43302
Phone: (740) 383-2111

Sypris Test & Measurement
950 Keynote Circle
Brooklyn Heights, OH 44131
Phone: (216) 741-7040

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

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

MEXICO
Sypris Technologies
Alberto Einstein No. 401
Zona Industrial
Toluca, Mexico C.P. 50071
Phone: (52) (722) 279-3906

66 SYPR

SYPRIS ON NASDAQ
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

INDEPENDENT REGISTERED
PUBLIC ACCOUTING FIRM
Ernst & Young LLP
400 West Market Street
Suite 2100
Louisville, KY 40202
Phone: (502) 585-1400
Fax: (502) 584-4221

CORPORATE COUNSEL
Wyatt, Tarrant & Combs, LLP
500 West Jefferson Street
Suite 2800
Louisville, KY 40202
Phone: (502) 589-5235
Fax: (502) 589-0309

CORPORATE ADDRESS
Sypris Solutions, Inc.
101 Bullitt Lane
Suite 450
Louisville, KY 40222
Phone: (502) 329-2000
Fax: (502) 329-2050

ANNUAL MEETING
The Annual Meeting of Stockholders will be
held on Tuesday, April 26, 2005, at 10:00 a.m.
at 101 Bullitt Lane, Lower Level Seminar
Room, Louisville, Kentucky.

FOR MORE INFORMATION
To learn more about Sypris Solutions, Inc.,
visit our site on the World Wide Web at
www.sypris.com.

INVESTOR MATERIALS
The Sypris Web page – www.sypris.com – is your
entry point for a vast array of information about
Sypris, including its products, financial information,
real-time stock quotes, links to each of its subsidiary
operations, 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, Law and
Compliance,
101 Bullitt Lane, Suite 450, Louisville, KY 40222.

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 36 of this annual report.

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101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222
Phone (502) 329-2000
Fax (502) 329-2050
www.sypris.com

2004 Annual Report