PURSUIT (cid:100)(cid:346)e (cid:58)ourne(cid:455) (cid:18)on(cid:415)nue(cid:400)
Dear Fellow Stockholders:
The financial results for 2013 reflect the challenges faced by
our Electronics Group, offsetting the continued strong
operational performance of our Industrial Group. Revenue,
gross profit and operating income declined when compared to
the prior year period, while earnings fell to a loss of $0.51 per
share, driven in large part by the impairment of goodwill, which
accounted for $0.36 per share, or 70% of the loss.
We continue to expand our partnership with Toyota, as
mentioned above, with the goal of even greater cost savings in
the years ahead. We have TPS projects underway at each
facility and are initiating new projects as we continue to
customize and embed TPS into the Sypris culture. We believe
this can be a transformative process for our employees and our
culture.
The year was not without its bright spots, however, with cash
flow generated from operations approximating breakeven. We
continued to make investments in research and development
and capital equipment to support our future operations. Our
balance sheet remains quite strong and will serve as an
important asset as we look to diversify and grow the business
profitably.
Our investments in process improvements, as well as the initial
positive results from our highly productive partnership with
Toyota and the Toyota Production System (TPS), are beginning
to pay dividends in terms of increasing manufacturing
efficiencies and improving equipment uptime, while
simultaneously reducing cycle times and increasing capacity.
The impact on the Company’s financial performance was real
and lasting, with estimated annualized savings exceeding $3
million.
During 2014, we plan to further increase Toyota’s involvement in
our operations, expanding TPS activities into other component
manufacturing cells, where the continued growth of the natural
gas, oil and petrochemical markets is beginning to place
pressure on our production capacity. We remain optimistic that
the Company will realize substantial additional benefits as we
continue to implement the tools and culture of TPS throughout
our organization.
SEGMENTS
Revenue for our Industrial Group decreased 3% from the prior
year to $276 million in 2013, reflecting a 9% reduction in
heavy-duty truck production offset by increased shipments on
new programs and growth in non-commercial vehicle markets.
Gross profit for the year increased 2% to $32 million, however,
reflecting a 70 basis point improvement in gross margin to
11.5%.
The strength of this segment’s performance during 2013 was
evident in a wide range of metrics. EBITDA was $32 million, just
under 12% of sales, while free cash flow was $16 million, a 46%
increase from the prior year. Return on net assets, an important
metric for our capital-intensive business, was 40% in 2013.
Safety comes first at Sypris and the Industrial Group expanded
safety training for each facility by implementing the DuPont
STOP Behavior Safety Program. We will continue to proactively
invest in this important area to protect our employees and strive
to be accident-free.
We are investing to support future growth opportunities for the
Industrial Group, with targeted expenditures in additional
production technologies and product engineering capabilities.
We also filed patent applications for new drivetrain components
that have the potential to reduce the associated product weight
by up to 16%.
We are engaged in several business development activities and
have proposals pending with both existing and new customers
in North and South America for potential volumes in excess of
$100 million annually. We are also evaluating opportunities to
expand through joint ventures in North America and in
developing markets.
Revenue for our Electronics Group was $35 million in 2013,
resulting in a loss at the gross profit line of $1.6 million. The
goodwill associated with the Electronics Group was also
determined to be impaired during 2013, resulting in a non-cash
impairment charge of $6.9 million.
Certain programs of the Electronics Group are directly with the
U.S. Department of Defense and other government agencies, or
with prime contractors for the U.S. government. The U.S
government’s deficit-reduction “sequestration” imposed under
the Budget Control Act in 2013 and other program funding
delays negatively impacted planned shipments during 2013.
We continue to pursue opportunities domestically and with
foreign customers to expand and diversify the Electronic
Group’s customer base. Our business development pipeline is
growing well, as evidenced by our successful onboarding of
several key manufacturing service programs during 2013.
Our investments in critical research and development projects
continue and are successfully advancing our core technologies
to the demonstration stage. Our ability to introduce these
technologies to our customers enabled us to win a key
customer-funded program that began in 2013. We are currently
under consideration for additional customer-funded
development efforts and this will continue to be an important
focus for our business in the future.
2
TM
We successfully demonstrated a proof of concept for a new
SiO Metrics software, which is a breakthrough technology that
utilizes unique characteristics within the silicon wafer for identity
authentication. This product can potentially be combined with
other technologies under development to defend against cyber
attacks and increase the scalability of identity authentication
systems for our customers.
Sypris Solutions Inc. 2013 Annual Report
The momentum behind our Sypris Cyber Range continued to
build during 2013 as business opportunities with foreign
governments increased, leading to an agreement in principle
with our teaming partner to supply the Sypris Cyber Range as
part of a broader package of services to an overseas
nation-state. The Sypris Cyber Range provides the critical
platform that enables organizations to train their personnel to
expertly identify, prioritize and respond to the inevitable
infiltration from today’s increasingly complex cyber threats.
GOING FORWARD
Key areas of focus for this business include securing customer
funding to integrate new, demonstrated technologies; seizing on
the global demand for resilient threat response training through
the Sypris Cyber Range; expanding international sales for
secure communication products; and broadening our electronic
manufacturing service offerings for severe environments.
We are actively exploring external growth opportunities for both
segments of our business, including synergistic acquisitions,
acquiring unique manufacturing assets and forming joint
ventures through our industry relationships.
Our Industrial Group will endeavor to sustain its position as a
leading supplier to the commercial vehicle market in 2014. We
believe our human and capital resources are not only unique,
but also among the best in the industry, and we will continue to
invest to expand both our market share and our customer
relationships.
Lastly, we are pleased to have welcomed Gary L. Convis to our
Board of Directors in November 2013. Among his many prior
accomplishments, Mr. Convis was the former Chairman of the
Board of Toyota Motor Manufacturing Kentucky and Executive
Vice President of Toyota Motor Engineering and Manufacturing
North America. He is an excellent addition to the Sypris team.
Industry forecasts for the Class 5-8 commercial vehicle market
currently predict an increase of 9% in 2014 over the prior year’s
volumes. We also expect growth in the light truck, trailer and oil
and natural gas markets, which may provide opportunities for
our company.
As always, we close with a note of thanks. We appreciate the
dedication and commitment of our fellow employees, many of
whom are also stockholders. We count on their passion for
excellence in all that they do to help Sypris grow and evolve
into an increasingly successful company.
We will seek to further improve profitability for the Industrial
Group through our deployment of TPS and the acceleration of
our lean conversion. Surfacing and solving problems is one of
the important facets of TPS that we will strive to embed into our
culture. We will work closely with our customers to identify
opportunities to reduce or eliminate waste and generate cost
savings for us and for them.
Our Electronics Group remains committed to improving our
portfolio through product and customer diversification. We are
transforming the business to achieve a more balanced mix of
hardware and software solutions to meet the dynamic needs of
our markets.
We also want to thank our customers and stockholders, all of
whom place their trust in Sypris and count on us to meet our
commitments for quality, delivery and performance. We
sincerely appreciate your confidence and encourage you to
contact us. We welcome your comments and would be pleased
to answer your questions.
Sincerely,
Jeffrey T. Gill
President & CEO
Robert E. Gill
Chairman of the Board
* Reconciliation of non-GAAP financial measures is available
following the Form 10-K. Please also refer to the “Risk
Factors” Section of our Form 10-K for a discussion of
relevant risks.
Sypris Solutions Inc. 2013 Annual Report
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
(cid:95)(cid:3)
(cid:134)(cid:3)(cid:3)
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year
ended December 31, 2013.
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the
transition period from ________ to ________.
Commission file number 0-24020
SYPRIS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222
(Address of principal executive
offices, including zip code)
61-1321992
(I.R.S. Employer
Identification No.)
(502) 329-2000
(Registrant’s telephone number,
including area code)
Common Stock, $.01 par value
(Title of each class)
(Name of each exchange on which registered)
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
(cid:134) Yes (cid:95) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
(cid:134) Yes (cid:95) No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. (cid:95) Yes (cid:134) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).(cid:3)(cid:3)(cid:3)(cid:3)(cid:95) Yes (cid:134) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
(cid:134) Non-accelerated filer(cid:3) (cid:95) Smaller reporting company
(cid:134) Large accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:134) Yes (cid:95) No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second
fiscal quarter (June 30, 2013) was $33,905,599.
There were 20,377,418 shares of the registrant’s common stock outstanding as of March 4, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be
held April 29, 2014 are incorporated by reference into Part III to the extent described therein.
(cid:134) Accelerated filer(cid:3)
Table of Contents
Part I
Item 1.
Business .......................................................................................................................................
Item 1A.
Risk Factors .................................................................................................................................
Item 1B.
Unresolved Staff Comments .......................................................................................................
Properties .....................................................................................................................................
Legal Proceedings .......................................................................................................................
Mine Safety Disclosures..............................................................................................................
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities ..................................................................................
Item 6.
Item 7.
Selected Financial Data ...............................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ...
Page
1
8
15
16
17
18
19
20
21
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk .............................................. 31
Item 8.
Item 9.
Financial Statements and Supplementary Data ..........................................................................
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ..
Item 9A.
Controls and Procedures..............................................................................................................
Item 9B.
Other Information ........................................................................................................................
Part III
Item 10.
Directors, Executive Officers and Corporate Governance .........................................................
Item 11.
Executive Compensation .............................................................................................................
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .............................................................................................................
Item 13.
Certain Relationships and Related Transactions and Director Independence ...........................
Item 14.
Principal Accounting Fees and Services .....................................................................................
32
61
61
61
62
62
62
63
63
Part IV
Item 15.
Exhibits and Financial Statement Schedules ..............................................................................
64
Signature Page ...........................................................................................................................................................
67
In this Annual Report on Form 10-K, “Sypris,” “the Company,” “we,” “us” and “our” refer to Sypris Solutions, Inc.
and its subsidiaries and predecessors, collectively. “Sypris Solutions” and “Sypris” are our trademarks. All other
trademarks, servicemarks or trade names referred to in this Annual Report on Form 10-K are the property of their
respective owners.
PART I
Item 1. Business
General
We were formed as a Delaware corporation in 1997. We are a diversified provider of outsourced services
and specialty products. We perform a wide range of manufacturing, engineering, design and other technical
services, typically under sole-source contracts with corporations and government agencies principally in the markets
for industrial manufacturing and aerospace and defense electronics.
We are organized into two business groups, the Industrial Group and the Electronics Group. The Industrial
Group, which is comprised of Sypris Technologies, Inc. and its subsidiaries, generates revenue primarily from the
sale of manufacturing services to customers in the market for truck components and assemblies and from the sale of
products to the energy and chemical markets. The Electronics Group, which is comprised of Sypris Electronics,
LLC and its subsidiary, generates revenue primarily from the sale of manufacturing services, technical services and
products to customers in the market for aerospace and defense electronics.
We focus on those markets where we believe we have the expertise, qualifications and leadership position
to sustain a competitive advantage. We target our resources to support the needs of industry participants that
embrace multi-year contractual relationships as a strategic component of their supply chain management. These
contracts, many of which are sole-source by part number and, historically, have been renewed for terms of up to five
years, enable us to invest in leading-edge processes or technologies to help our customers remain competitive. The
productivity, flexibility and economies of scale that can result offer an important opportunity for differentiating
ourselves from the competition when it comes to cost, quality, reliability and customer service.
Industrial Manufacturing Group (the Industrial Group). Through our Industrial Group, we are a
significant supplier of forged and machined components, serving the commercial vehicle, off highway vehicle, light
truck and energy markets in North America. We produce drive train components including axle shafts, gear sets,
differential cases, steer axle forgings, and other components under sole-source contracts with Meritor, Inc. (Meritor)
and Dana Holding Corporation (Dana), the two primary providers of drive train assemblies for use by the leading
truck manufacturers, including Ford Motor Company (Ford), Freightliner LLC (Freightliner), Mack Trucks, Inc.
(Mack), Navistar International Corporation (Navistar), PACCAR, Inc. (PACCAR) and Volvo Truck Corporation
(Volvo). We also supply Meritor with trailer axle beams for use by the leading trailer manufacturers, including Great
Dane Limited Partnership (Great Dane), Hyundai Motor Company (Hyundai), Stoughton Trailers, LLC (Stoughton),
Utility Trailer Manufacturing Company (Utility) and Wabash National Corporation (Wabash). We support our
customers’ strategies to outsource non-core operations by supplying additional components and providing additional
value added operations for drive train assemblies. Over the past several years, we have implemented a restructuring
plan that has allowed us to adjust our overhead and infrastructure to be in line with current and projected levels of
customer demand and market requirements. The plan has been successful, resulting in significant and permanent
cost reductions that have lowered our operating breakeven level. The plan also included a diversification strategy
which has resulted in the recent addition of long-term agreements with Eaton Corporation (Eaton) and American
Axle & Manufacturing, Inc., under which we supply forgings. We expect to benefit from these actions in the future
as global economic conditions and the strength of the commercial vehicle industry continue to improve.
Aerospace & Defense Electronics Group (the Electronics Group). Our Electronics Group is organized
around two primary business lines: Information Security Solutions (ISS) and Electronic Manufacturing Services
(EMS).
(cid:120)
Information Security Solutions (ISS). Our ISS business provides solutions in cyber security,
secure communications, global electronic key management, Sypris Data Systems branded products,
and product design and development to the U.S. Government, both defense and civilian agencies,
international government agencies, as well as worldwide aerospace and defense prime contractors.
This group has several contracts with the Department of Defense to design and build information
assurance products, including link encryptors, data recording products and electronic key fill devices.
1
(cid:120) Electronic Manufacturing Services (EMS). Our EMS business is focused on circuit card and full
box build manufacturing, dedicated space and high reliability manufacturing, integrated design and
engineering services, systems assembly and integration, design for manufacturability, and design to
specification work. Our customers include large aerospace and defense companies such as Lockheed
Martin Corporation (Lockheed Martin), Northrop Grumman Corporation (Northrop Grumman) and
Exelis Inc. (Exelis).
The industry and business environment of our Electronics Group continues to be shaped by policy and
budget decisions of the U.S. Government, as well as economic conditions. Recent actions of Congress and the
Administration indicate an ongoing emphasis on federal budget deficit reduction. Near-term budget decisions by the
Congress and the Administration may considerably reduce discretionary spending, of which defense constitutes the
majority share. The Budget Control Act of 2011 (the “Budget Control Act”) commits the U.S. Government to
reduce the federal deficit by $1.2 trillion over ten years through a combination of automatic, across-the-board
spending cuts and caps on discretionary spending. The deficit reduction “sequestration” under the Budget Control
Act is split equally between defense and non-defense programs and went into effect on March 1, 2013. However,
the Bipartisan Budget Act of 2013 provided some budget relief, reducing the discretionary sequester (and increasing
funding) for fiscal year 2014 and fiscal year 2015 for both defense and non-defense programs. Unless Congress
passes a similar law providing budget relief beyond fiscal year 2015, the full sequester cuts will go back into effect
for fiscal year 2016. In addition, in February 2014, the Pentagon announced that its budget request for fiscal year
2015 would exceed the sequester caps but would be below the funding in the President’s fiscal year 2014 budget
request. Congress and the Administration continue to debate these long- and short-term funding issues, but
reductions in U.S. military spending could materially adversely affect the results of our Electronics Group. Our
Electronics Group accounted for approximately 11% of net revenue in 2013.
Our Markets
Industrial Group. The industrial manufacturing markets include truck components and assemblies, trailer
components and specialty closures. The truck components and assemblies market consists of the original equipment
manufacturers, or OEMs, including Chrysler Group LLC, Ford, Freightliner, General Motors Company, Mack,
Navistar, PACCAR and Volvo, and an extensive supply chain of companies of all types and sizes that are classified
into different levels or tiers. The trailer market consists of OEMs including Great Dane, Wabash, Utility, Hyundai,
Vanguard and Stoughton. Tier I companies represent the primary suppliers to the OEMs and include Meritor, Dana,
Delphi Automotive LLP, Eaton and Visteon Corporation, among others. Below this group of companies reside
numerous suppliers that either supply the OEMs directly or supply the Tier I companies. In all segments of the truck
components and assemblies and the trailer markets, however, suppliers are under intense competitive pressure to
improve product quality and to reduce capital expenditures, production costs and inventory levels. The specialty
closures market consists primarily of oil and gas pipelines, which are also facing significant pressures to improve
quality, reduce costs and defer capital expenditures.
General economic and industry specific conditions have begun to stabilize, and improvements in the overall
U.S. economy contributed to improved consumer confidence levels in 2013. In North America, production levels
for light, medium and heavy duty trucks have steadily increased over the past four years from a low in the depressed
economic environment of 2008 and early 2009. Subject to the renewals of our supply agreements with Dana and
Meritor, we continue to expect modest growth in production levels within our Industrial Group through 2014 and
2015.
Electronics Group. As noted above, the U.S. Government continues to focus on developing and
implementing spending, tax and other initiatives to reduce the deficit, create jobs and stimulate the economy. This
process and the spending reductions to defense programs has adversely impacted our portfolio of business in this
segment, which is dependent upon discretionary appropriations for defense programs. Although we believe that our
products and programs are well aligned with national defense and other priorities, shifts in domestic and
international spending and tax policy, changes in security, defense and intelligence priorities, the affordability of our
products and services, changes in or preferences for new or different technologies, general economic conditions and
other factors may affect the level of funding for existing or proposed programs. Uncertainty over budget plans and
national security spending may prove challenging for our customers, as well as the defense industry as a whole.
2
Market conditions for our ISS business are expected to be favorable over the long term, given the growing
cyber security and intelligence markets. However, market conditions for our EMS business, dedicated to the
aerospace and defense market, are characterized by a number of obstacles. The nature of providing outsourced
manufacturing services to the aerospace and defense electronics industry differs substantially from the traditional
commercial outsourced electronics manufacturing services industry. The cost of failure can be extremely high, the
manufacturing requirements are typically complex and products are produced in relatively small quantities.
Companies that provide these manufacturing services are required to maintain and adhere to a number of strict and
comprehensive certifications, security clearances and traceability standards. As mentioned above, U.S. Government
and private customer spending levels remain uncertain.
Our Business Strategy
Our objective is to improve our position in each of our core markets by increasing our number of multi-
year contracts with customers and investing in highly automated production capacity to remain competitive on a
global scale. We intend to serve our customers and achieve this objective by continuing to:
Concentrate on our Core Markets. We are a significant supplier of forged and machined components,
serving the commercial vehicle, off highway vehicle, light truck and energy markets in North America. We have
been an established supplier of manufacturing and technical services to major aerospace and defense companies and
agencies of the U.S. Government for over 40 years. We will continue to focus on those markets where we have the
expertise and qualifications to achieve a competitive advantage.
Dedicate our Resources to Support Strategic Partnerships. We will continue to dedicate our resources to
support the needs of industry leaders that embrace multi-year contractual relationships as a strategic component of
their supply chain management and have the potential for long-term growth. We prefer contracts that are sole-
source by part number so we can work closely with the customer to the mutual benefit of both parties. Dana,
Meritor, and Meritor’s Brazilian subsidiary have awarded us with sole-source supply agreements for certain parts
that run through at least 2014, 2015, and 2016 respectively. During 2013, Sypris and Dana executed an amendment
to extend our current sole-source supply agreement until 2020. While Dana has attempted to repudiate this
amendment, we are seeking to enforce the amendment through pending arbitration and litigation proceedings (see
“Risk Factors – Customer contracts may not be renewed on acceptable terms or at all. Our largest customer Dana
has notified us of its intent to terminate our supply relationship.” in Part I, Item 1A. of this Annual Report on Form
10-K). Historically, we entered into multi-year manufacturing services agreements with Lockheed Martin, Northrop
Grumman and Exelis. Our success in establishing outsourcing partnerships with key customers has historically led
to additional contracts, and we believe that if we continue to successfully perform on current contracts, we should
have additional growth opportunities with these and other customers.
Pursue the Strategic Acquisition of Assets. Over the long term, we will continue to target the strategic
acquisition of assets that serve to consolidate our position in our core markets, expand our presence outside the U.S.,
create or strengthen our relationships with leading companies and expand our range of value-added services in
return for multi-year supply agreements. We intend to acquire assets that can be integrated with our core businesses
and that can be used to support other customers, thereby improving asset utilization and achieving greater
productivity, flexibility and economies of scale.
Grow Through the Addition of New Value-Added Services. We hope to grow through the addition of new
value-added manufacturing capabilities and the introduction of additional components in the supply chain that
enable us to provide a more complete solution by improving quality and reducing product cost, inventory levels and
cycle times for our customers. In many instances, we offer a variety of state-of-the-art machining capabilities to our
customers in the industrial manufacturing markets that enable us to reduce labor and shipping costs and minimize
cycle times for our customers over the long-term, providing us with additional growth opportunities in the future.
Successfully migrating from design and manufacturing of complex circuit card assemblies to box builds would
increase product content with our customers and would allow us to be a more significant player in the aerospace and
defense market.
We believe that the number and duration of our strategic relationships enable us to invest in our business
with greater certainty and with less risk than others that do not benefit from the type of longer term contractual
commitments we receive from many of our major customers. The investments we make in support of these
3
contracts are targeted to provide us with the productivity, flexibility, technological edge and economies of scale that
we believe will help to differentiate us from the competition in the future when it comes to cost, quality, reliability
and customer service.
Our Services and Products
We are a diversified provider of outsourced services and specialty products. Our services consist of
manufacturing, technical and other services and products that are delivered as part of our customers’ overall supply
chain management. We provide our customers with services that include software licensing and development,
design services, prototype development, product re-engineering, feature enhancement, product ruggedization, cost
reduction, product miniaturization and electro-magnetic interference and shielding. We also apply our core
technologies to the development and production of our own product line of high assurance security components,
including cryptographic key management programs and data encryption and recording products for our U.S.
Government and defense customers. The information below is representative of the types of products we
manufacture, services we provide and the customers and industries for which we provide such products or services.
Industrial Group:
Dana ...........................................................Drive train components (including axle shafts, differential cases, gear
sets, full float tubes) and steer axle components for use in light,
medium and heavy-duty trucks.
Meritor .......................................................Axle shafts and drive train components for medium and heavy-duty
Eaton ..........................................................Transmission shafts for heavy-duty trucks.
Jamison Products .......................................Specialty closures for oil and gas pipelines.
trucks as well as axle beams for trailers.
Electronics Group:
Northrop Grumman ....................................Circuit card assembly and sub-assembly design and build for electronic
sensors and systems ranging from radar and targeting systems to
tactical ground stations, navigation systems and integrated avionics.
U.S. Government .......................................Secure communications equipment, global key management solutions
and data recording systems.
Lockheed Martin ........................................Complex circuit cards for use in some of the nation’s high priority
Exelis .........................................................Complex circuit cards and subassemblies for use in weapons systems,
targeting and warning systems.
space programs.
Manufacturing Services
Our manufacturing services typically involve the fabrication or assembly of a product or subassembly
according to specifications provided by our customers. We purchase raw materials or components from our
customers and independent suppliers in connection with performing our manufacturing services. We strive to
enhance our manufacturing capabilities by advanced quality and manufacturing techniques, lean manufacturing,
just-in-time procurement and continuous flow manufacturing, six sigma, total quality management, stringent and
real-time engineering change control routines and total cycle time reduction techniques.
Industrial Manufacturing Services. We provide our customers with a wide range of capabilities, including
automated forging, extruding, machining, induction hardening, heat-treating and testing services to meet the
exacting requirements. We also design and fabricate production tooling, manufacture prototype products and
provide other value-added services for our customers. Our manufacturing services contracts for the truck
components and assemblies markets are generally sole-source by part number. Part numbers may be specified for
inclusion in a single model or a range of models. Where we are the sole-source provider by part number, we are the
exclusive provider to our customer of the specific parts and for any replacements for these parts that may result from
a design or model change for the duration of the manufacturing contract.
Electronics Manufacturing Services. We provide our customers with a broad variety of value added
solutions, from low-volume prototype assembly to high-volume turnkey manufacturing. We employ a multi-
4
disciplined engineering team that provides comprehensive manufacturing and design support to customers. The
manufacturing solutions we offer include design conversion and enhancement, process and tooling development,
materials procurement, system assembly, testing and final system configuration. Our manufacturing services
contracts for the aerospace and defense electronics market are generally sole-source by part number.
Products
In addition to our outsourced services, we provide some of our customers with specialized products
including digital and analog data systems and encryption devices used in military applications and specialty closures
and joints used in pipeline and chemical systems. As we look to grow our business, emphasis will be placed on the
funding of new products to broaden our portfolio and meet the needs of our customers.
Our Customers
Our customers include large, established companies and agencies of the federal government. We provide
some customers with a combination of outsourced services and products, while other customers may be in a single
category of our service or product offerings. Our five largest customers in 2013 were Dana, Meritor, Sistemas
Corporation (Sistemas), Northrop Grumman and Eaton, which in the aggregate accounted for 81% of net revenue.
Our five largest customers in 2012 were Dana, Meritor, Sistemas, the Australian government and Eaton, which in
the aggregate accounted for 79% of net revenue. In 2013, Dana and Meritor represented approximately 58% and
15% of our net revenue, respectively. In 2012, Dana and Meritor represented approximately 55% and 15% of our
net revenue, respectively. In addition, U.S. governmental agencies accounted for 3% and 6% of net revenue in 2013
and 2012, respectively.
Geographic Areas and Currency Fluctuations
We are located in the U.S., Mexico, Denmark and the U.K. Our Mexican subsidiaries and affiliates are a
part of our Industrial Group and manufacture and sell a number of products similar to those the Industrial Group
produces in the U.S. Our Denmark subsidiary is a sales office and is part of our Electronics Group. Our U.K
subsidiary is a sales office and is part of our Industrial Group. In addition to normal business risks, operations
outside the U.S. may be subject to a greater risk of changing political, economic and social environments, changing
governmental laws and regulations, currency revaluations and market fluctuations. Fluctuations in foreign currency
exchange rates have primarily impacted our earnings only to the extent of remeasurement gains or losses related to
U.S. dollar denominated accounts of our foreign subsidiaries, because the vast majority of our transactions are
denominated in U.S. dollars. For the year ended December 31, 2013, other income, net, included foreign currency
transaction losses of $0.3 million. For 2012, other income, net, included foreign currency transaction losses of
$0.8 million.
Net revenues from Mexican operations were $95.4 million, or 31%, and $100.0 million, or 29%, of our
consolidated net revenues in 2013 and 2012, respectively. In 2013, net income from our Mexican operations was
$7.7 million, as compared to our consolidated loss from continuing operations of $9.9 million. In 2012, net income
from our Mexican operations was $7.5 million, as compared to our consolidated income from continuing operations
of $10.3 million. You can find more information about our regional operating results, including our export sales, in
“Note 20 Segment Information” to our consolidated financial statements included in Item 8 of this Annual Report on
Form 10-K.
Sales and Business Development
Our principal sources of new business originate from the expansion of existing relationships, referrals and
direct sales through senior management, direct sales personnel, domestic and international sales representatives,
distributors and market specialists. We supplement these selling efforts with a variety of sales literature, advertising
in numerous trade media and participating in trade shows. We also utilize engineering specialists extensively to
facilitate the sales process by working with potential customers to reduce the cost of the service they need. Our
specialists achieve this objective by working with the customer to improve their product’s design for ease of
manufacturing or by reducing the amount of set-up time or material that may be required to produce the product.
The award of contracts or programs can be a lengthy process, which in some circumstances can extend well beyond
12 months. Upon occasion, we commit resources to potential contracts or programs that we ultimately do not win.
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Our objective is to increase the value of the services we provide to the customer on an annual basis beyond
the contractual terms that may be contained in a supply agreement. To achieve this objective, we commit to the
customer that we will continuously look for ways to reduce the cost, improve the quality, reduce the cycle time and
improve the life span of the products and/or services we supply the customer. Our ability to deliver on this
commitment over time is expected to have a significant impact on customer satisfaction, loyalty and follow-on
business.
Competition
The markets that we serve are highly competitive, and we compete against numerous domestic companies
in addition to the internal capabilities of some of our customers. In the truck components and assemblies market, we
compete primarily against other component suppliers such as Mid-West Forge, Inc., Spencer Forge and Machine,
Inc. and Traxle, which serve as suppliers to many Tier I and smaller companies. In the aerospace and defense
electronics market, we compete primarily against companies such as Celestica Inc., Jabil Circuit, Inc., LaBarge, Inc.
and Safenet, Inc. We may face new competitors in the future as the outsourcing industry evolves and existing or
start-up companies develop capabilities similar to ours. In addition, we will face new competitors as we attempt to
increase and expand our business.
We believe that the principal competitive factors in our markets include the availability of capacity,
technological capability, flexibility, financial strength and timeliness in responding to design and schedule changes,
price, quality and delivery. Although we believe that we generally compete favorably with respect to each of these
factors, some of our competitors, as compared to us, are larger and have greater financial and operating resources,
greater geographic breadth and range of services, customer bases and brand recognition than we do. We also face
competition from manufacturing operations of our current and potential customers that continually evaluate the
relative benefits of internal manufacturing compared to outsourcing.
Suppliers
For significant portions of our business, we purchase raw materials and component parts from our
customers or from suppliers chosen by our customers, at prices negotiated by our customers. When these suppliers
increase their prices, cause delays in production schedules or fail to meet our customers’ quality standards, our
customers have contractually agreed to reimburse us for the costs associated with such price increases and not to
charge us for costs caused by such delays or quality issues. Accordingly, our risks are largely limited to accurate
inspections of such materials, timely communications and the collection of such reimbursements or charges, along
with any additional costs incurred by us due to delays in, interruptions of, or non-optimal scheduling of production
schedules. However, for a growing part of our business, we arrange our own suppliers and assume the additional
risks of price increases, quality concerns and production delays.
Raw steel and fabricated steel parts are a major component of our cost of sales and net revenue for the truck
components and assemblies business. We purchase a significant portion of our steel for use in this business at the
direction of our customers, with any periodic changes in the price of steel being reflected in the prices we are paid
for our services. Increases in the costs of steel or other supplies can increase our working capital requirements,
scrap expenses and borrowing costs.
There can be no assurance that supply interruptions or price increases will not slow production, delay
shipments to our customers or increase costs in the future, any of which could adversely affect our financial results.
Delays, interruptions or non-optimal scheduling of production related to interruptions in raw materials supplies can
be expected to increase our costs.
Research and Development
Our research and development activities are mainly related to our product lines that serve the aerospace and
defense electronics market. Process improvement expenditures related to our outsourced services are not reflected
in research and development expense. Accordingly, our research and development expense represents a relatively
small percentage of our net revenue. Company-sponsored research and development costs are expensed as incurred.
We invested $3.0 million and $3.8 million in research and development in 2013 and 2012, respectively. Customer-
sponsored research and development costs are incurred under U.S. Government-sponsored contracts and require us
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to provide a product or service meeting certain defined performance or other specifications (such as designs).
Customer-sponsored research and development is accounted for under the milestone method and included in our net
revenue and cost of sales (see Critical Accounting Policies and Estimates in Item 7 of this Annual Report on Form
10-K).
Patents, Trademarks and Licenses
We own or license a number of patents and trademarks, but our business as a whole is not materially
dependent upon any one patent, trademark, license or technologically related group of patents or licenses.
We regard our manufacturing processes and certain designs as proprietary trade secrets and confidential
information. We rely largely upon a combination of trade secret laws, non-disclosure agreements with customers,
suppliers and consultants, and our internal security systems, confidentiality procedures and employee confidentiality
agreements to maintain the trade secrecy of our designs and manufacturing processes.
Government Regulation
Our operations are subject to compliance with regulatory requirements of federal, state and local
authorities, in the U.S., the U.K., Denmark and Mexico, including regulations concerning financial reporting and
controls, labor relations, minimum pension funding levels, export and import matters, health and safety matters and
protection of the environment. While compliance with applicable regulations has not adversely affected our
operations in the past, there can be no assurance that we will continue to be in compliance in the future or that these
regulations will not change or that the costs of compliance will not be material to us.
We must comply with detailed government procurement and contracting regulations and with U.S.
Government security regulations, certain of which carry substantial penalty provisions for nonperformance or
misrepresentation in the course of negotiations. Our failure to comply with our government procurement,
contracting or security obligations could result in penalties or our suspension or debarment from government
contracting, which would have a material adverse effect on our consolidated results of operations.
We are required to maintain U.S. Government security clearances in connection with certain activities of
our Electronics Group. These clearances could be suspended or revoked if we were found not to be in compliance
with applicable security regulations. Any such revocation or suspension would delay our delivery of products to
customers. Although we have adopted policies directed at ensuring our compliance with applicable regulations, and
there have been no suspensions or revocations at our facilities, there can be no assurance that the approved status of
our facilities or personnel will continue without interruption.
We are also subject to comprehensive and changing federal, state and local environmental requirements,
both in the U.S. and in Mexico, including those governing discharges to air and water, the handling and disposal of
solid and hazardous wastes and the remediation of contamination associated with releases of hazardous substances.
We use hazardous substances in our operations and, as is the case with manufacturers in general, if a release of
hazardous substances occurs on or from any properties that we may own or operate, we may be held liable and may
be required to pay the cost of remedying the condition. The amount of any resulting liability could be material.
Employees
As of December 31, 2013, we had a total of 1,181 employees, of which 898 are engaged in manufacturing
and providing our technical services, 17 are engaged in sales and marketing, 118 are engaged in engineering and 148
are engaged in administration. Approximately 500 of our employees are covered by collective bargaining
agreements with various unions that expire on various dates through 2016. Excluding certain Mexico employees
covered under an annually ratified agreement, collective bargaining agreements covering 149 employees expire
within the next 12 months. Although we believe overall that relations with our labor unions are positive, there can
be no assurance that present and future issues with our unions will be resolved favorably, that negotiations will be
successful or that we will not experience a work stoppage, which could adversely affect our consolidated results of
operations.
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Internet Access
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-
K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 are available free of charge through our website (www.sypris.com) as soon as reasonably practicable
after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.
Item 1A. Risk Factors
Risks Related to Our Business and 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, the markets in which we operate, potential acquisitions, contracts with customers, new business
opportunities or financial results and our views about developments beyond our control including government
spending, domestic or global economic conditions, trends and market forces. These statements are based on
management’s views and assumptions at the time originally made, and we undertake no obligation to update these
statements, except as may be required by law. 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 risk 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, including those
described below. Many of these risk factors are also identified in connection with the more specific descriptions
contained throughout this report.
Customers
We need to generate new business revenues supported by a sustainable competitive advantage.
Our businesses generally require a higher level of new business revenues in order to operate profitably.
Unless we can develop and offer new products and services with a sustainable competitive advantage, we may be
unable to maintain the critical mass of capital investments or talented employees that are needed to succeed in our
chosen markets. In the truck components and assemblies markets, our revenues are highly dependent upon the
overall demand for new vehicles. In the aerospace and defense markets, our revenues are highly dependent upon
new product development (especially in our cybersecurity programs), effective marketing and sales activities, the
development of additional profitable capacity (especially in our space engineering programs) and the profitable
management of our legacy products and services.
Customer contracts may not be renewed on acceptable terms or at all. Our largest customer Dana has
notified us of its intent to terminate our supply relationship.
Our two largest customers, Dana and Meritor, have contracts with expiration dates of December 31, 2014
and, for a portion of the Meritor goods, May 2, 2015. In 2013, Dana and Meritor represented approximately 58%
and 15% of our revenues. While we have executed an extension of the Dana contract extending until 2020, Dana is
attempting to repudiate that extension. We may not be able to enforce or renew either or both these agreements on
acceptable terms or at all. The failure to do so or otherwise maintain our current levels of work from both of these
customers would have a material adverse effect on our financial condition and financial performance.
We are in the process of negotiating with Dana to attempt to continue our long-standing relationship as one
of its suppliers. We have also been in litigation over the validity of the amended and restated supply agreement that
Dana and Sypris entered into in July, 2013. The failure to resolve the ongoing dispute with Dana on acceptable
terms, to succeed in enforcing the extended agreement, or to enter into a new or replacement agreement with Dana
on acceptable terms would have a material adverse effect on our financial condition and financial performance.
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Customer contracts could be less profitable than expected.
We generally bear the risk that our contracts could be unprofitable or less profitable than planned, despite
our estimates of revenues and future costs to complete such contracts.
A material portion of our business, historically, has been conducted under multi-year contracts, which
generally include fixed prices or periodic price reductions without minimum purchase requirements. Over time, our
revenues may not cover our increasing operating costs which could adversely impact our results. Our financial
results are at greater risk when we accept contractual responsibility for raw material or component prices, when we
cannot offset price reductions and cost increases with operating efficiencies or other savings, when we must submit
contract bid prices before all key design elements are finalized or when we are subjected to other competitive
pressures which erode our margins. The profitability of our contracts also can be adversely affected by unexpected
start-up costs on new programs, operating inefficiencies, ineffective capital investments, inflationary pressures or
inaccurate forecasts of future unit costs.
In the past, we have signed long-term supply agreements with Dana and Meritor and acquired their
facilities in Morganton, North Carolina and Toluca, Mexico, among other manufacturing assets. Although most of
these acquired facilities have well-established product markets, these customers or their products may not continue
to be successful, product enhancements may not be made in a timely fashion, and any long-term pricing agreements
could generate lower margins than anticipated. If these facilities are required to operate at underutilized levels, it
could materially adversely affect our business, results of operations and financial condition.
Unexpected changes in our customers’ demand levels have harmed our operating results in the past and
could do so in the future. Many of our customers will not commit to firm production or delivery schedules.
Disagreements over pricing, quality, delivery, capacity, exclusivity or trade credit terms could disrupt order
schedules. Orders may also fluctuate due to changing global capacity and demand, new products, changes in market
share, reorganizations or bankruptcies, material shortages, labor disputes or other factors that discourage
outsourcing. These forces could increase, decrease, accelerate, delay or cancel our delivery schedules.
Inaccurate forecasting of our customers’ requirements can disrupt the efficient utilization of our
manufacturing capacity, inventories or workforce. If we lose anticipated revenues, we might not succeed in
redeploying our substantial capital investment and other fixed costs, potentially forcing additional plant closures,
impairments of long-lived and other assets or increased losses. If we receive unanticipated orders or rapid increases
in demand, these incremental volumes could be unprofitable due to the higher costs of operating above our optimal
capacity.
We depend on a few key customers in challenging industries for most of our revenues.
Our five largest customers in 2013 were Dana, Meritor, Sistemas, Northrop Grumman and Eaton,
collectively accounting for 81% of net revenue. Our five largest customers in 2012 were Dana, Meritor, Sistemas,
the Australian government and Eaton, collectively accounting for 79% of net revenue. In addition, U.S.
governmental agencies accounted for 3% and 6% of net revenue in 2013 and 2012, respectively. The truck
components and assemblies industry has experienced credit risk, highly cyclical market demand, labor unrest, rising
steel costs, bankruptcy and other obstacles, while the aerospace and defense electronics industry has experienced
consolidation, increased competition, disruptive new technologies and uncertain funding.
We depend on the continued growth and financial stability of these customers and our core markets, as well
as general economic conditions. Adverse changes affecting these customers, markets or economic conditions could
harm our operating results. The truck components and assemblies market is highly cyclical, due in part to regulatory
deadlines, the availability or scarcity of credit, fluctuations in oil prices and pent-up demand for replacement
vehicles.
Rising costs of steel or component parts could increase our inventory and working capital levels and
present challenges to our customers who seek to pass those costs on to their customers. Many of our customers’
labor disputes, financial difficulties and restructuring needs have created rising uncertainty and risk, which could
increase our costs or impair our business model.
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The aerospace and defense industry is pressured by cyclicality, rapid technological change, shortening
product life cycles, decreasing margins, unpredictable funding levels and government procurement and certification
processes. Our aerospace and defense business faces an aging portfolio of legacy products and services which must
be replenished with new technologies if we are to successfully maintain or expand our market share. Our failure to
address any of these factors, particularly in our secured electronic communications or space engineering programs,
could impair our business model.
There can be no assurance that any of our customers will not default on, delay or dispute payment of, or
seek to reject our outstanding invoices in bankruptcy or otherwise.
Congressional budgetary constraints or reallocations could reduce our government sales.
Our Electronics Group sells manufacturing services and products to a number of U.S. government agencies,
which in the aggregate represented approximately 3% and 6% of our net revenue in 2013 and 2012, respectively.
We also serve as a contractor for large aerospace and defense companies such as Lockheed Martin, Northrop
Grumman and Exelis, typically under federally funded programs, which represented approximately 5% and 4% of
net revenue in 2013 and 2012, respectively.
Our government contracts have many inherent risks that could adversely impact our financial results.
These contracts depend upon the continuing availability of Congressional appropriations. The budget appropriations
process in Congress has at times become highly politicized and unpredictable, including the growing use of
“continuing resolutions” as a temporary approach to the resolution of disputes over funding levels. In addition, the
Budget Control Act commits the U.S. Government to reduce the federal deficit by $1.2 trillion over ten years
through a combination of automatic, across-the-board spending cuts and caps on discretionary spending. This
“sequestration” under the Budget Control Act is split equally between defense and non-defense programs and went
into effect on March 1, 2013. The Bipartisan Budget Act of 2013 provided some budget relief, reducing the
discretionary sequester (and increasing funding) for FY2014 and FY2015 for both defense and non-defense
programs.
The Electronics Group already has been significantly adversely affected by declines in the overall
government defense market due to the effects of sequestration, and may be further affected if funding for programs
in which we participate, either by selling services and products directly to U.S. government agencies or as a
subcontractor to prime contractors such as Lockheed Martin, Northrop Grumman and Excelis, is reduced, delayed or
cancelled. Our ability to obtain new contract awards also could be negatively affected.
Congress and the Administration continue to debate these funding issues, but reductions in U.S. military
spending also could materially adversely affect the results of our Electronics Group, and we expect that certain
military and defense programs will experience delays while the receipt of government approvals remain pending.
Future levels of governmental spending, including delays, declines or reallocations in the funding of certain
programs could adversely affect our financial results, if we are unable to offset these changes with new business or
cost reductions.
Suppliers
Interruptions in the supply of key components could disrupt production.
Some of our manufacturing services or products require one or more components that are available from a
limited number of providers or from sole-source providers. In the past, some of the materials we use, including
steel, certain forgings or castings, capacitors and memory and logic devices, have been subject to industry-wide
shortages or capacity allocations. As a result, suppliers have been forced to allocate available quantities among their
customers, and we have not been able to obtain all of the materials desired. Some of our suppliers have struggled to
implement reliable quality control systems which can negatively impact our operating efficiency and financial
results. In downward business cycles, the tightening of credit markets has threatened the financial viability of an
increasing number of suppliers of key components and raw materials and forced unanticipated shutdowns. Our
inability to reliably obtain these or any other materials when and as needed could slow production or assembly,
delay shipments to our customers, impair the recovery of our fixed costs and increase the costs of recovering to
10
customers’ schedules, including overtime, expedited freight, equipment maintenance, operating inefficiencies,
higher working capital and the obsolescence risks associated with larger buffer inventories. Each of these factors
could adversely affect operating results.
Shortages or increased costs of utilities could harm our business and our customers.
We and our customers depend on a constant supply of electricity and natural gas from utility providers for
the operation of our respective businesses and facilities. In the past, we have experienced power outages which
reduced our ability to deliver products and meet our customers’ demand for those products. If we or our customers
experience future interruptions in service from these providers, our production and/or delivery of products could be
negatively affected. Additionally, due to the heavy consumption of energy in our production process and the
businesses of our customers, if the cost of energy significantly increases, our results of operations and those of our
customers could be negatively impacted.
Execution
Contract terminations or delays could harm our business.
We often provide manufacturing services and products under contracts that contain detailed specifications,
quality standards and other terms. If we are unable to perform in accordance with such terms, our customers might
seek to terminate such contracts, demand price concessions or other financial consideration or downgrade our past
performance rating, an increasingly critical factor in federal procurement competitions. Moreover, many of our
contracts are subject to termination for convenience or upon default. These provisions could provide only limited
recoveries of certain incurred costs or profits on completed work and could impose liability for our customers’ costs
in procuring undelivered items from another source. If any of our significant contracts were to be repudiated,
terminated or not renewed, such as the Dana and Meritor contracts described above, we would lose substantial
revenues, and our operating results as well as prospects for future business opportunities could be adversely
affected. For example, as described above, our supply agreement with Dana represented approximately 58% of our
revenues in 2013, and this agreement currently provides for its expiration on December 31, 2014, unless renewed by
the parties.
We are subject to various audits, reviews and investigations, including private party “whistleblower”
lawsuits, relating to our compliance with federal and state laws. Should our business be charged with wrongdoing,
or determined not to be a “presently responsible contractor,” we could be temporarily suspended or debarred for up
to three or more years from receiving new government contracts or government-approved subcontracts.
We must operate more efficiently, or our results could suffer.
If we are unable to improve the cost, efficiency and yield of our operations, or if our costs increase, our
financial results could suffer. A number of major obstacles could include: the loss of substantial revenues due to a
sluggish economic recovery; inflationary pressures; increased borrowing due to declining sales; changes in
anticipated product mix and the associated variances in our profit margins; efforts to increase our manufacturing
capacity and launch new programs; efforts to migrate, restructure or move business operations from one location to
another; the breakdown of critical machinery or equipment; the need to identify and eliminate our root causes of
scrap; 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; and an inability to successfully manage growth,
contraction or competitive pressures in our primary markets.
Our management or systems could be inadequate to support our existing or future operations, especially as
we downsize our operating staff to reduce expenses in any extended economic downturn. Growth in our business
could require us to invest in additional equipment to improve our efficiency. We may have limited experience or
expertise in installing or operating such equipment, which could negatively impact our ability to deliver products on
time or with acceptable costs. In addition, a material portion of our manufacturing equipment requires significant
maintenance to operate effectively, and we may experience maintenance and repair issues. Our efforts to
restructure, relocate and consolidate a significant number of the operations, especially in our truck component
manufacturing plants, could cause certain of these facilities to operate at underutilized levels, which could materially
11
adversely affect our business, results of operations and financial condition. In our Electronics Group, the risk of
technical failures, nonconformance with customer specifications, an inability to deliver next generation products or
other quality concerns could materially impair our operating results.
Our growth strategies could be ineffective due to the risks associated with further acquisitions.
Our growth strategy has included acquiring complementary businesses. We could fail to identify, finance
or complete suitable acquisitions on acceptable terms and prices. Acquisition efforts entail a number of risks,
including: diversion of management’s attention; difficulties in integrating systems, operations and cultures; potential
loss of key employees and customers of the acquired companies; lack of experience operating in the geographic
market of the acquired business; an increase in our expenses and working capital requirements; risks of entering into
markets or producing products where we have limited or no experience; difficulties in integrating purchased
technologies and products with our technologies and products; our ability to improve productivity and implement
cost reductions; our ability to secure collective bargaining agreements with employees; and exposure to
unanticipated liabilities.
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, could seriously harm our business.
Cyber security risks could negatively affect operations and result in increased costs.
Our Electronics Group, as a U.S. defense contractor, and our Company overall, face cyber security threats,
threats to the physical security of our facilities and employees and terrorist acts, as well as the potential for business
disruptions associated with information technology failures and natural disasters.
We routinely experience cyber security threats, threats to our information technology infrastructure and
attempts to gain access to our sensitive information, as do our customers, suppliers and subcontractors. Prior cyber
attacks directed at us have not had a material impact on our financial results. Due to the evolving nature of these
security threats, however, the impact of any future incident cannot be predicted.
Although we work cooperatively with our customers and our suppliers, subcontractors, and other partners
to seek to minimize the impacts of cyber threats, other security threats or business disruptions, we must rely on the
safeguards put in place by those entities, and those safeguards might not be effective.
The costs related to cyber security or other security threats or disruptions may not be fully insured or
indemnified by other means. Occurrence of any of these events could adversely affect our internal operations, the
services we provide to customers, loss of competitive advantages derived from our research and development
efforts, early obsolescence of our products and services, our future financial results, our reputation or our stock
price.
Competition
Increasing competition could limit or reduce our market share.
We operate in highly competitive environments that include our customers’ internal capabilities. We
believe that the principal competitive factors in our markets include the availability of manufacturing capacity,
technological strength, speed and flexibility in responding to design or schedule changes, price, quality, delivery,
cost management and financial strength. Our earnings could decline if our competitors or customers can provide
comparable speed and quality at a lower cost, or if we fail to adequately invest in the range and quality of
manufacturing services and products our customers require.
Some of our competitors, as compared to us, are larger and have greater financial and organizational
resources, geographic breadth and range of services, customer bases and brand recognition than we do. As a result,
our competitors may respond more quickly to technological changes or customer needs, consume lower fixed and
variable unit costs, negotiate reduced component prices, and obtain better terms for financing growth. If we fail to
compete in any of these areas, we may lose market share and our business could be seriously harmed. There can be
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no assurance that we will not experience increased competition or that we will be able to maintain our profitability if
our competitive environment changes.
Our technologies could become obsolete, reducing our revenues and profitability.
The markets for our products and services are characterized by changing technology and continuing
process development. The future of our business will depend in large part upon the continuing relevance of our
technological capabilities. We could fail to make required capital investments, develop or successfully market
services and products that meet changing customer needs and anticipate or respond to technological changes in a
cost-effective and timely manner. Our inability to successfully launch or sustain new or next generation programs
or product features, especially in accordance with budgets or committed delivery schedules, could materially
adversely affect our financial results. We could encounter competition from new or revised technologies that render
our technologies and equipment less profitable or obsolete in our chosen markets and our operating results may
suffer. In particular, the Company is currently developing new products and pursuing new programs in an attempt
to replenish the Electronics Group’s revenue stream, which has been declining since 2009. However,
commercializing the new products and programs is costly, has been slower than anticipated and is not expected to
result in significant revenue in 2014. The launch of any new products or programs within the Electronics Group
may not be successful.
Access to Capital
An inability to obtain favorable financing could impair our growth.
Our operating results could be materially adversely affected by the costs and availability of debt or equity
financing. Our future liquidity and capital requirements are difficult to predict because they depend on numerous
factors, including the pace at which we grow our business and acquire new facilities or the loss of anticipated
revenues due to the effects of any extended economic downturn. One method we have used to obtain multi-year
supply agreements is to buy a customer’s non-core manufacturing assets and produce products for them. We may
need to raise substantial additional funds in order to pursue this strategy. We cannot be certain that we will be able
to obtain additional financing on favorable terms or at all. Additional equity financing could result in dilution to
existing holders. If additional financing is obtained in the form of debt, the terms of the debt could place restrictions
on our ability to operate or increase the financial risk of our capital structure. Our ability to borrow under our credit
facility (the “Credit Facility”) is conditioned upon our compliance with various financial covenants. We could lose
our access to such financing if we experience adverse changes in our operations, poor financial results, increased
risk profiles of our businesses, declines in our credit ratings, any actual or alleged breach of our debt covenants,
insurance conditions or similar agreements or any adverse regulatory developments. In any extended economic
downturn, we may need to raise capital through the sale of core or non-core assets or businesses, and our inability to
successfully do so could materially adversely impact our operating results or access to sufficient capital.
Any inability to raise additional funds as needed could impair our ability to operate and grow our business.
Such financing could be subject to a number of factors, including market conditions, our operating performance and
investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing
unattractive for us.
We may be unable to comply with the covenants in our Credit Facility.
Our Credit Facility requires us to comply with certain financial covenants regarding cumulative quarterly
fixed charge coverage ratios. The Credit Facility also contains a number of covenants that, among other things, limit
or restrict our ability to dispose of assets, incur additional indebtedness, incur guarantee obligations, engage in sale
and leaseback transactions, prepay other indebtedness, modify organizational documents and certain other
agreements, create restrictions affecting subsidiaries, make dividends and other restricted payments, create liens,
make investments, make acquisitions, engage in mergers, change the nature of our business and engage in certain
transactions with affiliates. No assurances can be given that changing business, regulatory or economic conditions
might not cause the Company to violate one or more covenants which could result in default or acceleration of any
debt under the Credit Facility.
13
Labor Relations
We must attract and retain qualified employees while successfully managing related costs.
Our future success in a changing business environment, including during rapid changes in the size,
complexity or skills required of our workforce, will depend to a large extent upon the efforts and abilities of our
executive, managerial and technical employees. The loss of key employees, especially in a recovering economic
environment, could have a material adverse effect on our operations. Our future success will also require an ability
to attract and retain qualified employees, especially those with engineering or production expertise in our core
business lines. Labor disputes 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 or other requirements to accelerate the level of our pension fund contributions to reduce or
eliminate underfunded liabilities, could lead to increased costs or disruptions of operations in any of our business
units.
Disputes with labor unions could disrupt our business plans.
We currently have collective bargaining agreements covering approximately 500 employees (all of which
are in the Industrial Group), or 42% of total employees. Excluding certain Mexico employees covered under an
annually ratified agreement, collective bargaining agreements covering 149 employees expire within the next 12
months. Certain Mexico employees are covered by an annually ratified collective bargaining agreement. These
employees represent approximately 26% of the Company’s workforce, or 311 employees. We could experience a
work stoppage or other disputes which could disrupt our operations or the operations of our customers and could
harm our operating results.
Regulatory
Environmental, health and safety risks could expose us to potential liability.
We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal
of hazardous chemicals and substances used in our operations. If we fail to comply with present or future
regulations, we could be forced to alter, suspend or discontinue our manufacturing processes and pay substantial
fines or penalties.
Groundwater and other contamination has occurred at certain of our current and former facilities during the
operation of those facilities by their former owners, and this contamination may occur at future facilities we operate
or acquire. There is no assurance that environmental indemnification agreements we have secured from former
owners of these properties will be adequate to protect us from liability.
The Marion, Ohio property formerly owned by Sypris is subject to soil and groundwater contamination
involving petroleum compounds, semi-volatile and volatile organic compounds, certain metals, PCBs and other
contaminants, some of which exceed the state voluntary action program standards applicable to the site. The
property was sold in March 2013 to Whirlpool Corporation (Whirlpool). Whirlpool has indemnified the Company
against the legacy environmental risks on the property.
We previously acquired certain business assets formerly located at a leased facility in Littleton, Colorado,
where chlorinated solvents had been disposed of on site by a prior owner of the business at the site, contaminating
the groundwater at and around the site. The seller of the assets to us is operating a remediation system on the site
approved by the State of Colorado and has entered into a consent order with the EPA providing for additional
investigation at the site. In addition, Sypris has been contractually indemnified by the prior owners of the facility.
Our Morganton, North Carolina facility is subject to soil and groundwater contamination involving
petroleum compounds, certain metals and other contaminants, some of which may exceed the State of North
Carolina standards applicable to the site. The Company is aware of no current litigation, material remediation
claims or other proceedings with respect to this facility.
Our Toluca, Mexico facility is subject to soil and groundwater contamination involving petroleum
compounds and volatile organic compounds, among other concerns. We continue to test and assess this site to
14
determine the extent of any contamination by the prior owners of the facility. Under our purchase agreement for this
facility, Dana has agreed to indemnify us for, among other things, environmental conditions that existed on the site
as of closing and as to which we notified Dana prior to June 30, 2006, subject to certain other conditions involving
Dana’s release of, or continuing right to seek indemnity from, Eaton, from which Dana acquired the property.
The Kenton, Ohio property formerly owned by Sypris is subject to soil and groundwater contamination
involving petroleum compounds, volatile organic compounds, certain metals, PCBs and other contaminants. Under
our purchase agreement for this property, Meritor agreed to indemnify us for, among other things, environmental
conditions that existed on the site as of closing and as to which we notified Meritor prior to May 2, 2006. The
building and real property were sold in January 2012.
Our business is also subject to potential liabilities with respect to health and safety matters. We are
required to comply with federal, state, local and foreign laws and regulations governing the health and safety of our
workforce, and we could be held liable for damages arising out of human exposure to hazardous substances or other
dangerous working conditions. Health and safety laws and regulations are complex and change frequently. As a
result, our future costs to comply with such laws or the liabilities incurred in the event of any violations may
increase significantly.
Adverse regulatory developments or litigation could harm our business.
Our businesses operate in heavily regulated environments. We must successfully manage the risk of
changes in or adverse actions under applicable law or in our regulatory authorizations, licenses and permits,
governmental security clearances or other legal rights to operate our businesses, to manage our work force or to
import and export goods and services as needed. Our business activities expose us to the risks of litigation with
respect to our customers, suppliers, creditors, stockholders or from product liability, environmental or asbestos-
related matters. We also face the risk of other adverse regulatory actions, compliance costs or governmental
sanctions, as well as the costs and risks related to our ongoing efforts to design and implement effective internal
controls.
Other Risks
We face other factors which could seriously disrupt our operations.
Many other risk factors beyond our control could seriously disrupt our operations, including: risks relating
to war, future terrorist activities, computer hacking or other cyber attacks, or political uncertainties; risks relating to
natural disasters or other casualties which could shut down our domestic or foreign facilities, disrupt transportation
of products or supplies, increase the costs under our self insurance program or change the timing and availability of
funding in our aerospace and defense electronics markets; risks inherent in operating abroad, including foreign
currency exchange rates, adverse regulatory developments, and miscommunications or errors due to inaccurate
foreign language translations or currency exchange rates; or our failure to anticipate or to adequately insure against
other risks and uncertainties present in our businesses including unknown or unidentified risks.
Item 1B. Unresolved Staff Comments
None.
15
Item 2. Properties
Our principal manufacturing services operations are engaged in electronics manufacturing services for our
aerospace and defense customers and industrial manufacturing services for our truck components and assemblies
customers. The following chart indicates the significant facilities that we own or lease, the location and size of each
such facility and the manufacturing certifications that each facility possesses. The facilities listed below (other than
the corporate office) are used principally as manufacturing facilities.
Location
Corporate Office:
Segment (Market
Served)
Own or Lease
(Expiration)
Approximate
Square Feet
Certifications
Louisville, Kentucky
Lease (2024)
21,600
Manufacturing and Service Facilities:
Louisville, Kentucky
Industrial Group
Own
450,000
(Truck Components
& Assemblies;
Specialty Closures)
Morganton, North Carolina
Industrial Group
Own
360,000
(Truck Components
& Assemblies)
Tampa, Florida
Electronics Group
Lease (2016)
318,000
(Aerospace &
Defense
Electronics)
QS 9000
TS 16949
TS 16949
ISO 14001
ISO 9001
ISO 14001
AS 9100
NASA-STD-8739
IPC-A-610, Rev D,
Class 3
J-STD-001, Rev D,
Class 3
CMMI Level 3
Toluca, Mexico
Industrial Group
Own
217,000
TS 16949
(Truck Components
& Assemblies)
In addition, we lease space in one other facility in Copenhagen, Denmark, which is utilized as a sales office
for our Electronics Group.
Below is a listing and description of the various manufacturing certifications or specifications that we
utilize at our facilities.
Certification/Specification
Description
AS 9100 ............................ A quality management system developed by the aerospace industry to measure
supplier conformance with basic common acceptable aerospace quality requirements.
IPC-A-610 ........................ A certification process for electronics assembly manufacturing which describes
materials, methods and verification criteria for producing high quality electronic
products. Class 3 specifically includes high performance or performance-on-demand
products where equipment downtime cannot be tolerated, end-use environment may
be uncommonly harsh, and the equipment must function when required.
16
J-STD-001 ........................ A family of voluntary standards of industry-accepted workmanship criteria for
electronic assemblies.
CMMI Level-3 ................. An internationally recognized measure of an organization’s engineering process
maturity.
ISO 9001 .......................... A certification process comprised of quality system requirements to ensure quality in
the areas of design, development, production, installation and servicing of products.
ISO 14001 ........................ A family of voluntary standards and guidance documents defining specific
requirements for an Environmental Management System.
NASA-STD-8739 ............. A specification for space programs designated by the National Aeronautics and
Space Administration.
QS 9000 ............................ A certification process developed by the nation’s major automakers that focuses on
continuous improvement, defect reduction, variation reduction and elimination of
waste.
TS 16949 ……………….A quality certification system developed within the automotive sector. Using ISO
9001:2000 as its foundation, ISO/TS 16949:2002 specifies the quality management
system (QMS) requirements for the design, development, production, installation
and servicing of automotive related products.
Item 3. Legal Proceedings
We are involved from time to time in litigation and other legal or environmental proceedings incidental to
our business. There are currently no material pending legal proceedings to which we are a party. Ongoing
environmental matters include the following:
(cid:120) The Marion, Ohio property formerly owned by Sypris is subject to soil and groundwater contamination
involving petroleum compounds, semi-volatile and volatile organic compounds, certain metals, PCBs
and other contaminants, some of which exceed the State of Ohio voluntary action program standards
applicable to the site. The property was sold in March 2013 to Whirlpool. Whirlpool has indemnified
the Company against the legacy environmental risks on the property.
(cid:120)
In December 1992, we acquired certain business assets formerly located at a leased facility in Littleton,
Colorado. Certain chlorinated solvents disposed of on the site by Honeywell, a previous owner of the
business, have contaminated the groundwater at and around the site. Alliant Techsystems, from which
we acquired the business assets, operates a remediation system approved by the State of Colorado and
has also entered into a consent order with the EPA providing for additional investigation at the site.
Alliant Techsystems has agreed to indemnify us with respect to these matters.
(cid:120) Our Morganton, North Carolina facility is subject to soil and groundwater contamination involving
petroleum compounds, certain metals and other contaminants, some of which exceed the State of North
Carolina notification standards applicable to the site. No litigation or other proceedings are underway
with respect to this site.
(cid:120) Our Toluca, Mexico facility is subject to soil and groundwater contamination involving petroleum
compounds and volatile organic compounds, among other concerns. Under our purchase agreement
for this facility, Dana has agreed to indemnify us for, among other things, environmental conditions
that existed on the site as of closing and as to which we notified Dana prior to June 30, 2006, to the
extent of any indemnification owed to Dana by Eaton or any other matters for which Dana has released
Eaton.
(cid:120) The Kenton, Ohio property formerly owned by Sypris is subject to soil and groundwater contamination
involving petroleum compounds, volatile organic compounds, certain metals, PCBs and other
contaminants. Under our purchase agreement for this facility, Meritor has agreed to indemnify us for,
17
among other things, environmental conditions that existed on the site as of closing and as to which we
notified Meritor prior to May 2, 2006. The building and real property were sold in January 2012, and
the building was subsequently razed by the buyer. Under the terms of the sale agreement, no
warranties relating to the property were made including existing environmental conditions and all
liability has been passed to the buyer.
Item 4. Mine Safety Disclosures
Not applicable.
18
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
We are a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and thus are not
required to provide the performance graph required in paragraph (e) of Item 201 of Regulation S-K.
Our common stock is traded on the NASDAQ Global 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 Global Market.
High
Low
Year ended December 31, 2013:
First Quarter ...................................................................................... $ 4.49
Second Quarter .................................................................................
3.96
3.39
Third Quarter ....................................................................................
3.22
Fourth Quarter ..................................................................................
Year ended December 31, 2012:
First Quarter ...................................................................................... $ 4.25
Second Quarter .................................................................................
6.97
7.56
Third Quarter ....................................................................................
7.28
Fourth Quarter ..................................................................................
$ 3.60
3.06
3.03
2.57
$ 3.77
3.95
5.65
3.58
As of March 4, 2014, there were 735 holders of record of our common stock. The amount of cash
dividends declared per share for each fiscal quarter in 2013 and 2012 is presented in the table below.
Dividends per
Common Share
Year ended December 31, 2013:
First Quarter ...................................................................................... $ 0.02
Second Quarter .................................................................................
0.02
0.02
Third Quarter ....................................................................................
0.02
Fourth Quarter ..................................................................................
Year ended December 31, 2012:
First Quarter ...................................................................................... $ 0.02
Second Quarter .................................................................................
0.02
0.02
Third Quarter ....................................................................................
0.02
Fourth Quarter ..................................................................................
Dividends may be paid on common stock only when, as and if declared by our Board of Directors in its
sole discretion. The Company’s Credit Facility contains restrictions related to dividend payments, as further
described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity”
below.
The following table summarizes our shares of common stock repurchased during the three months ended
December 31, 2013 (dollars in thousands except per share data):
Period
9/30/2013 – 10/27/2013
10/28/2013 – 11/24/2013
11/25/2013 – 12/31/2013
Total
Number
of Shares
Purchased (a)
Average
Price
Paid per
Share
Maximum
as a Part of
that May Yet Be
Total Number of
Shares Purchased Dollar Value of Shares
Publicly Announced Purchased Under the
Plans or Programs Plans or Programs (b)
4,330
— $
8,675 $
4,303
4,303
— $
—
3.16
—
—
10,763
$
$
— $
19
(a) The total number of shares purchased includes shares purchased under the Executive Equity
Repurchase Agreement (described below). The Company also withholds shares from employees to
satisfy either the exercise price of stock options exercised or the statutory withholding tax liability
resulting from the vesting of restricted stock awards. Shares of common stock withheld to satisfy tax
withholding obligations were immediately cancelled.
(b) On December 20, 2011, our Board of Directors approved and we announced an authorization for the
repurchase of up to $5.0 million of our outstanding shares of common stock. The Board also
authorized an Executive Equity Repurchase Agreement whereby management, including officers and
directors, would grant the Company a first right to purchase shares held by such individuals, at current
market prices (calculated as the average of the previous five days’ closing prices), any time a party to
the agreement departed the Company or intended to sell more than 1,500 shares of common stock.
The agreement has a five-year term, subject to earlier termination by the Company, and participation
by each individual is voluntary.
Item 6.
Selected Financial Data
We are a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and thus are not
required to report the selected financial data in Item 301 of Regulation S-K.
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our consolidated results of operations and financial condition should be read
together with the other financial information and consolidated financial statements included in this Annual Report
on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from the results anticipated in the forward-looking statements as a result of a variety
of factors, including those discussed in “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-
K.
Overview
We are a diversified provider of outsourced services and specialty products. We perform a wide range of
manufacturing, engineering, design and other technical services, typically under sole-source contracts with
corporations and government agencies principally in the markets for industrial manufacturing and aerospace and
defense electronics.
We are organized into two business groups, the Industrial Group and the Electronics Group. The Industrial
Group, which is comprised of Sypris Technologies, Inc. and its subsidiaries, generates revenue primarily from the
sale of manufacturing services to customers in the market for truck components and assemblies and from the sale of
products
is comprised of
Sypris Electronics, LLC and its subsidiary, generates revenue primarily from the sale of manufacturing services,
technical services and products to customers in the market for aerospace and defense electronics.
the energy and chemical markets.
The Electronics Group, which
to
We focus on those markets where we have the expertise, qualifications and leadership position to sustain a
competitive advantage. We target our resources to support the needs of industry leaders that embrace multi-year
contractual relationships as a strategic component of their supply chain management. These contracts, many of
which are sole-source by part number and, historically, have been renewed for terms of five years or more, enable us
to invest in leading-edge processes or technologies to help our customers remain competitive. The productivity,
flexibility and economies of scale that can result offer an important opportunity for differentiating ourselves from
our competitors when it comes to cost, quality, reliability and customer service.
Electronics Group Outlook
We continue to face challenges within the Electronics Group, such as the conclusion of several U.S.
Department of Defense programs that the Company supported as a subcontractor, the loss of a key commercial
space customer who decided to begin insourcing programs that had been previously outsourced to the Electronics
Group, the uncertainty in the worldwide macroeconomic climate and its impact on aerospace and defense spending
patterns globally, the emergence of new competitors to our product and service offerings, as well as federal
government spending uncertainties in the U.S.
The Electronics Group’s revenue has declined year-over-year since 2009 primarily due to our inability to
replace the declining demand for certain legacy products and services with competitive new offerings. While we do
not yet have a pipeline of programs or other contract awards to replace these legacy programs in the near term, the
Company is currently developing new products and pursuing new programs to attempt to replenish its revenue
stream within the Electronics Group. The U.S. Government's continued focus on addressing federal budget deficits
and the growing national debt exacerbates this challenging environment for the Electronics Group. In addition, the
Budget Control Act commits the U.S. Government to reduce the federal deficit by $1.2 trillion over ten years
through a combination of automatic, across-the-board spending cuts and caps on discretionary spending. The
deficit-reduction “sequestration” under the Budget Control Act is split equally between defense and non-defense
programs and went into effect on March 1, 2013. However, the Bipartisan Budget Act of 2013 provided some
budget relief, reducing the discretionary sequester (and increasing funding) for fiscal year 2014 and fiscal year 2015
for both defense and non-defense programs. Unless Congress passes a similar law providing budget relief beyond
fiscal year 2015, the full sequester cuts will go back into effect for fiscal year 2016. In addition, in February 2014,
the Pentagon announced that its budget request for fiscal year 2015 would exceed the sequester caps but would be
below the funding in the President’s fiscal year 2014 budget request. Congress and the Administration continue to
debate these long- and short-term funding issues, but reductions in U.S. military spending could materially adversely
21
affect the results of our Electronics Group, and we expect that certain military and defense programs will experience
delays while the receipt of government approvals remain pending.
As a result, the Company expects ongoing uncertainty and the potential for further revenue declines within
this segment for at least the next twelve months. For the longer term, we are continuing to make investments and
evaluate new investments in products and programs to further improve the attractiveness of our business portfolio,
with a specific emphasis on trusted solutions for identity management, cryptographic key distribution and cyber
analytics. There can be no assurance that the Company’s investment in and efforts to introduce new products and
services will result in new business or revenue. In addition, while the Company continues to evaluate and
implement cost reduction measures in this segment, the Company may not be able to reduce its cost structure to
offset the impact of lower revenues. Should revenues decrease further in the coming periods, the Company might be
required to implement further cost reductions or other downsizing measures, which could be costly and adversely
impact our financial performance.
Industrial Group Outlook
General economic and industry specific conditions have begun to stabilize for our Industrial Group, and
improvements in the overall U.S. economy contributed to improved consumer confidence levels in 2013. In North
America, production levels for light, medium and heavy duty trucks have steadily increased over the past four years
from a low in the depressed economic environment of 2008 and 2009. Subject to the renewal status of our supply
contracts with Dana and Meritor, we continue to expect modest growth in production levels within our Industrial
Group through 2014 and 2015, though our Industrial Group’s revenue declined slightly in 2013, as compared with
2012, due to cyclical slowdowns in the industry and minor changes in our customers’ market shares of some
products.
Sypris and Dana have recently signed an amended and restated supply agreement, the binding effect of
which is currently in dispute. Dana has repudiated this agreement and purported to exercise its rights under the prior
agreement to begin exploring alternative supply relationships with third parties, including the right to sign new
supply agreements, authorize tooling expenditures and engage in certain production part approval processes (PPAP)
with respect to the goods currently supplied by Sypris. Sypris disputes Dana’s ability to exercise such rights. In
addition, Dana has notified us that it intends to terminate its supply relationship with us effective
December 31, 2014 and to transition over 2,000 active part numbers, which we currently manufacture for Dana, to
alternative suppliers at the expiration date of the original supply agreement. The failure to resolve this dispute with
Dana on acceptable terms would have a material adverse effect on our financial condition and financial
performance.
In addition, two of the Company’s current agreements with Meritor are due to expire at the end of 2014 and
mid-2015, respectively. The failure to enter into an agreement with Meritor on acceptable terms, or the entry into
agreements for fewer products or reduced volumes or prices would have a material adverse effect on our financial
condition and financial performance.
In 2013, Dana and Meritor represented approximately 58% and 15% of our net revenue, respectively.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements and accompanying notes in conformity with U.S.
generally accepted accounting principles requires that we make estimates and assumptions that affect the amounts
reported. Changes in facts and circumstances could have a significant impact on the resulting estimated amounts
included in our consolidated financial statements. We believe the following critical accounting policies affect our
more complex judgments and estimates. We also have other policies that we consider to be key accounting policies,
such as our policies for revenue recognition in the Industrial Group, including cost of sales; however, these policies
do not meet the definition of critical accounting policies because they do not generally require us to make estimates
or judgments that are difficult or subjective.
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
22
increase if our customers experience deteriorating financial results or in the event we receive a significant
chargeback, which is deemed uncollectible.
Goodwill. Goodwill is tested for impairment annually as of December 31 or more frequently if
impairment indicators arise. If impairment indicators arise, a step one assessment is performed to identify any
possible goodwill impairment in the period in which the indicator is identified. The December 31, 2012 review of
goodwill indicated that goodwill was not impaired. Beginning in March 2013, we noted certain indicators relating
to our Electronics Group reporting unit that were significant enough to conclude that an impairment indicator
existed as of March 31, 2013. Specifically, one key customer within the Electronics Group’s space business
communicated its strategic sourcing decision to begin insourcing programs that had been previously outsourced to
the Electronics Group. Overall, the Electronics Group has been more impacted by declines in the overall
government defense market than originally anticipated as the effects of sequestration have become clearer since its
initial effective date on March 1, 2013. For example, sales of certain data recording products were significantly
reduced due to the impact of sequestration on our customers, and the loss of commercial space business was due in
part to our customer’s efforts to offset unrelated losses of government business due to sequestration. As a result, the
Electronics Group’s short term revenue forecasts were materially affected.
For purposes of the interim goodwill impairment analysis, the Company assesses recoverability using a
discounted cash flow analysis. The analysis is based upon available information regarding expected future cash
flows for each reporting unit, discounted at rates consistent with the cost of capital specific to the reporting unit. A
growth rate is used to calculate the terminal value of the reporting unit and is added to the present value of the
forecasted cash flows. The growth rate is the expected rate at which a reporting unit’s cash flow is projected to
grow beyond the period covered by the long-range plan.
The sum of the calculated fair values of each reporting unit is then reconciled and compared to our total
market capitalization, allowing for a reasonable control premium. If the discounted cash flow analysis yields a fair
value estimate less than the reporting unit’s carrying value, we proceed to step two in considering whether goodwill
may be impaired. In the second step, the implied fair value of the reporting unit’s goodwill is determined by
allocating the reporting unit’s fair value to all of the identified assets and liabilities of the reporting unit. As part of
this process, the Company reviewed the recoverability of the Electronics Group’s short-term and long-term assets
excluding goodwill and concluded that no impairment of these assets was necessary.
The cash flow analysis, discount rate and terminal value all require significant judgment and significantly
influence our evaluation of each reporting unit and its estimated fair value. In selecting these and other assumptions
for each business, we consider historical performance, forecasted operating results, expected changes in product
mix, general market conditions and industry considerations specific to the business. We make significant
assumptions and estimates about the extent and timing of future cash flows, growth rates and discount rates. The
cash flows are estimated over a future period of time, which makes those estimates and assumptions inherently
subject to a high degree of uncertainty.
Key assumptions used to determine the fair value of the Electronics Group included the expected after-tax
cash flows for the period from 2013 to 2017 and a terminal growth rate of 3.0%, which is consistent with historical
expectations. Our analysis also included a comparison of our market capitalization to the estimated fair value for the
entire enterprise. Significant assumptions utilized during the valuation process are impacted by economic conditions
and expectations of management and may change in the future based on period-specific facts and circumstances.
The first step of the impairment test indicated that the estimated fair value for the Electronics Group was
less than its carrying value as of March 31, 2013. We performed step two of the impairment test and determined
that the implied goodwill for the reporting unit was lower than its value as of March 31, 2013. As a result, a non-
cash impairment charge of $6.9 million was recorded during the three months ended March 31, 2013 to impair the
goodwill associated with the Electronics Group reporting unit. The impairment charge has been presented
separately in the consolidated statements of operations and fully impairs the carrying amount of goodwill related to
the Electronics Group. The fair value of the Electronics Group and the assets and liabilities identified in the step
two impairment test were determined using the combination of the income approach and the market approach, which
are Level 3 and Level 2 inputs, respectively.
23
Net Revenue and Cost of Sales. Net revenue of products and services under commercial terms and
conditions are recorded upon delivery and passage of title, or when services are rendered. Related shipping and
handling costs, if any, are included in costs of sales.
Net revenue on fixed-price contracts is recognized as services are performed. Revenue is deferred until all
of the following have occurred (1) there is a contract in place, (2) delivery has occurred, (3) the price is fixed or
determinable, and (4) collectability is reasonably assured. Contract profits are taken into earnings based on actual
cost of sales for units shipped. Amounts representing contract change orders or claims are included in revenue when
such costs are invoiced to the customer.
Periodically the Company enters into research and development contracts with customers related primarily
to key encryption products. When the contracts provide for milestone or other interim payments, the Company will
recognize revenue under the milestone method. The Company had one contract in process during fiscal year 2013
being accounted for under the milestone method. The milestone method requires the Company to deem all
milestone payments within each contract as either substantive or non-substantive. That conclusion is determined
based upon a thorough review of each contract and the Company’s deliverables committed to in each contract. For
substantive milestones, the Company concludes that upon achievement of each milestone, the amount of the
corresponding defined payment is commensurate with the effort required to achieve such milestone or the value of
the delivered item. The payment associated with each milestone relates solely to past performance and is deemed
reasonable upon consideration of the deliverables and the payment terms within the contract. For non-substantive
milestones, including advance payments, the recognition of such payments are pro-rated to the substantive
milestones. Milestones may include, for example, the successful completion of design review or technical review,
the submission and acceptance of technical drawings, delivery of hardware, software, spares, test equipment or
regulatory agency certifications. During fiscal year 2013, revenue recognized through the achievement of multiple
milestones amounted to $0.7 million.
Long-lived asset impairment. We perform periodic impairment analysis on our long-lived amortizable
assets whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable.
When indicators are present, we compare the estimated future undiscounted net cash flows of the operations to
which the assets relate to their carrying amount. If the operations are unable to recover the carrying amount of their
assets, the long-lived assets are written down to their estimated fair value. Fair value is determined based on
discounted cash flows, third party appraisals or other methods that provide appropriate estimates of value. A
considerable amount of management judgment and assumptions are required in performing the impairment test,
principally in determining whether an adverse event or circumstance has triggered the need for an impairment
review.
The Industrial Group performed an asset recoverability test for one of its asset groups totaling
approximately $40.6 million as of December 31, 2013. The Company concluded that the undiscounted sum of
estimated future cash flows exceeded the carrying value for such asset group, and accordingly, no impairment was
recognized. While we believe our judgments and assumptions were reasonable, changes in assumptions underlying
these estimates could result in a material impact to our consolidated financial statements in any given period.
Pension Plan Funded Status. The calculation of pension assets and liabilities involve complex estimation
processes dependent on assumptions developed by us in consultation with our outside advisors such as actuaries.
The assumptions used, including discount rates and return on plan assets, have a significant impact on plan expenses
and obligations. Changes in these rates could significantly impact the actuarially determined amounts recorded in
the consolidated balance sheets. If actual experience differs from expectations, our financial position and results of
operations in future periods could be affected.
A change in the assumed pension discount rate of 100 basis points would result in a change in our pension
obligation as of December 31, 2013 of $3.8 million. A change in the assumed rate of return on plan assets of 100
basis points would result in a $0.4 million change in the estimated 2014 pension expense.
Discount rates are based upon the construction of a theoretical bond portfolio, adjusted according to the
timing of expected cash flows for the future obligations. A yield curve is based on a subset of these fixed income
investments. The projected cash flows are matched to this yield curve and a present value is developed which is
then calibrated to develop a single equivalent discount rate. Pension benefits are funded through deposits with
24
trustees that satisfy, at a minimum, the applicable funding regulations. Expected investment rates of return are
based upon input from the plan’s investment advisors and actuary regarding our expected investment portfolio mix,
historical rates of return on those assets, projected future asset class returns and long-term market conditions and
inflation expectations. We believe that the long-term asset allocation on average will approximate the targeted
allocation, and we regularly review the actual asset allocation to periodically rebalance the investments to the
targeted allocation when appropriate.
Actuarial gains or losses may result from changes in assumptions or when actual experience is different
from that expected. Under applicable standards, those gains and losses are not required to be immediately
recognized as expense, but instead may be deferred as part of accumulated other comprehensive income and
amortized into expense over future periods.
Reserve for Excess, Obsolete and Scrap Inventory. We record inventory at the lower of cost, determined
under the first-in, first-out method, or market, and we reserve for excess, obsolete or scrap inventory. These
reserves are primarily based upon management’s assessment of the salability 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 consolidated results of
operations in the period the change occurs.
Stock-based Compensation. We account for stock-based compensation in accordance with the fair value
recognition provisions using the Black-Scholes option-pricing method, which requires the input of several subjective
assumptions. These assumptions include estimating the length of time employees will retain their vested stock
options before exercising them (expected term), the estimated volatility of our common stock price over the
expected term and the number of options that will ultimately not complete their vesting requirements (forfeitures).
Changes in the subjective assumptions can materially affect the fair value estimate of stock-based compensation and
consequently, the related expense recognized in the consolidated statements of operations.
Income Taxes. We account for income taxes as required by the provisions of ASC 740, Income Taxes,
under which deferred tax assets and liabilities are recognized for the tax effects of temporary differences between
the financial reporting and tax bases of assets and liabilities measured using enacted tax rates.
Management judgment is required in determining income tax expense and the related balance sheet
amounts. In addition, under ASC 740-10, Accounting for Uncertainty in Income Taxes, judgments are required
concerning the ultimate outcome of uncertain income tax positions. Actual income taxes paid may vary from
estimates, depending upon changes in income tax laws, actual results of operations and the final audit of tax returns
by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We believe that our
recorded income tax liabilities adequately provide for the probable outcome of these assessments.
Deferred tax assets are also recorded for operating losses and tax credit carryforwards. However, ASC 740
requires that a valuation allowance be recorded when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. This assessment is largely dependent upon projected near-term profitability
including the effects of tax planning. Deferred tax assets and liabilities are determined separately for each tax
jurisdiction in which we conduct our operations or otherwise incur taxable income or losses. We have recorded
valuation allowances against deferred tax assets in the U.S. and Mexico where realization has been determined to be
uncertain. However, our Mexican operation, which has historically generated taxable income and expects to
continue to be profitable for the foreseeable future, also has certain deferred tax assets that are expected to be
realized and therefore no valuation allowance has been recorded against such assets as of December 31, 2013.
Since future financial results may differ from previous estimates, periodic adjustments to our valuation allowance
may be necessary.
25
Results of Operations
We operate in two segments, the Industrial Group and the Electronics Group. The table presented below
compares our segment and consolidated results of operations from 2013 to 2012. The table presents 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.
(cid:120) The first two columns in each table show the absolute results for each period presented.
(cid:120) 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
period to the next, that change is shown as a positive number in both columns. Conversely, when
expenses increase from one period to the next, that change is shown as a negative number in both
columns.
(cid:120) 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 each
segment’s net revenue. These amounts are shown in italics.
In addition, as used in the table, “NM” means “not meaningful.”
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Year Ended
December 31,
2013
2012
Year Over
Year
Change
Favorable
(Unfavorable)
Year Over
Year
Percentage
Change
Favorable
(Unfavorable)
(in thousands, except percentage data)
Results as Percentage of
Net Revenue for the
Year Ended
December 31,
2013
2012
Net revenue:
Industrial Group .......................................................... $ 276,136 $ 286,046 $ (9,910)
Electronics Group .......................................................
34,578
Total net revenue ...................................................... 310,714
55,558
341,604
(20,980) (37.8)
(9.0)
(30,890)
(3.5)%
88.9%
11.1
100.0
83.7%
16.3
100.0
Cost of sales:
Industrial Group .......................................................... 244,498
Electronics Group .......................................................
36,163
Total cost of sales ..................................................... 280,661
255,065
42,790
297,855
10,567
6,627
17,194
4.1
15.5
5.8
88.5
104.6
90.3
89.2
77.0
87.2
Gross profit (loss):
Industrial Group ..........................................................
Electronics Group .......................................................
Total gross profit .......................................................
31,638
(1,585)
30,053
Selling, general and administrative ...............................
Research and development ...........................................
Amortization of intangible assets ..................................
Impairment of goodwill ................................................
30,464
3,047
30
6,900
30,981
12,768
43,749
30,797
3,816
89
—
657
2.1
(14,353) (112.4)
(13,696) (31.3)
11.5
(4.6)
9.7
333
769
59
1.1
20.2
66.3
(6,900) NM
9.8
1.0
0.0
2.2
Operating (loss) income ................................................
(10,388)
9,047
(19,435)
NM
(3.3)
Interest expense, net ......................................................
(Gain) on sale of marketable securities .........................
Other (income), net .......................................................
(Loss) income from continuing operations before
522
—
(930)
437
(1,850)
(2,055)
(85) (19.5)
(1,850) NM
(1,125) (54.7)
0.2
—
(0.3)
income taxes ...........................................................
(9,980)
12,515
(22,495) NM
(3.2)
Income tax (benefit) expense ........................................
(93)
2,248
2,341
NM
—
(Loss) income from continuing operations ...................
(9,887)
10,267
(20,154) NM
(3.2)
10.8
23.0
12.8
9.0
1.1
0.0
—
2.7
0.1
(0.5)
(0.6)
3.7
0.7
3.0
Loss from discontinued operations, net of tax ..............
—
(7,220)
7,220
NM
—
(2.1)
Net (loss) income .......................................................... $
(9,887) $
3,047 $ (12,934) NM
(3.2)%
0.9%
26
Net Revenue. The Industrial Group derives its revenue from manufacturing services and product sales.
Net revenue in the Industrial Group decreased $9.9 million from the prior year to $276.1 million in 2013. Decreased
volumes for medium and heavy-duty truck components contributed to decreased revenue of approximately
$8.7 million. Additionally, lower volumes for trailer axle beams and for the off-highway business contributed to
lower revenues of $3.9 million and $1.0 million, respectively. Partially offsetting these decreases was an increase in
sales of our specialty closure products of $2.2 million and an increase in light vehicle volumes of $0.3 million.
Additionally, increased steel prices, which are contractually passed through to customers under certain contracts,
contributed to increased revenue of approximately $1.1 million in 2013.
The Electronics Group derives its revenue from product sales and technical outsourced services. Net
revenue in the Electronics Group decreased $21.0 million to $34.6 million in 2013, primarily due to the completion
of certain electronic manufacturing and engineering services programs. The Electronics Group is currently
developing new products and pursuing new programs in an attempt to replenish its revenue stream; however,
commercializing the new products and programs is costly, has been slower than anticipated and is not expected to
result in significant revenue in 2014. Additionally, the Electronics Group’s outlook continues to be negatively
affected by budgetary and funding uncertainty within the U.S. Department of Defense. For information about the
budgetary and funding uncertainty, see “Risk Factors – Congressional budgetary constraints or reallocations could
reduce our government sales” in Part I, Item 1A. of this Annual Report on Form 10-K.
Gross Profit. The Industrial Group’s gross profit increased $0.7 million to $31.6 million in 2013 as
compared to $30.9 million in the prior year. The Industrial Group realized an increase in gross profit of $4.1 million
as a result of productivity improvements and lower project expenses in 2013. Price increases resulted in an increase
in gross profit of $0.4 million over the prior year. Offsetting these increases was a net decrease in sales volumes
across the previously discussed product and service offerings, which resulted in a decrease in gross profit of
approximately $1.4 million, and higher utilities, inflationary items and unfavorable foreign exchange rates, which
resulted in a $2.3 million decrease in gross profit.
The Electronics Group’s gross profit decreased $14.4 million to a loss of $1.6 million in 2013. The
decrease is primarily the result of lower revenues and an unfavorable mix in sales of lower margin products and
services.
Selling, General and Administrative. Selling, general and administrative expense decreased $0.3 million
to $30.5 million in 2013 as compared to $30.8 million in 2012. Selling, general and administrative expense
increased as a percentage of revenue to 9.8% in 2013 from 9.0% in 2012. The decrease in selling, general and
administrative expense for 2013 was due to a $1.1 million write-off of pre-contract costs in 2012 when it was
determined that certain pre-contract costs could no longer be capitalized due to then current market events involving
a specific contract offset by an increase in 2013 in salaries, fringes and legal expenses within our Industrial Group.
Research and Development. Research and development costs were $3.0 million and $3.8 million for the
years ended December 31, 2013 and 2012, respectively, primarily in support of the Electronics Group’s self-funded
product and technology development activities.
Impairment of Goodwill. Goodwill is tested for impairment annually as of December 31 or more frequently
if impairment indicators arise. If impairment indicators arise, a step one assessment is performed to identify any
possible goodwill impairment in the period in which the indicator is identified. The December 31, 2012 review of
goodwill indicated that goodwill was not impaired. Beginning in March 2013, we noted certain indicators relating
to our Electronics Group reporting unit that were significant enough to conclude that an impairment indicator
existed. Specifically, one key customer within the Electronics Group’s space business communicated its strategic
sourcing decision to begin insourcing programs that had been previously outsourced to the Electronics Group.
Overall, the Electronics Group has been more impacted by declines in the overall government defense market than
originally anticipated as the effects of sequestration have become clearer since its initial effective date on
March 1, 2013. For example, sales of certain data recording products were significantly reduced due to the impact
of sequestration on our customers, and the loss of commercial space business was due in part to our customer’s
efforts to offset unrelated losses of government business due to sequestration. Consequently, the Electronics Group’s
short term revenue forecasts were materially affected. As a result of the analysis, the Electronics Group’s goodwill
was deemed to be impaired, resulting in a non-cash impairment charge of $6.9 million for the year ended
December 31, 2013, representing the segment’s entire goodwill balance.
27
Interest Expense, Net.
Interest expense for the year ended December 31, 2013 increased $0.1 million
primarily due to an increase in the weighted average debt outstanding. The weighted average interest rate remained
flat at 2.4% in 2013, while our weighted average debt outstanding increased to $13.2 million during 2013 from
$10.9 million during 2012.
Other (Income), Net. Other (income), net decreased $1.1 million to $0.9 million for 2013 from
$2.1 million in 2012. Other income, net for the year ended December 31, 2013 includes gains of $1.5 million from
the sale of idle assets primarily within the Industrial Group offset by foreign currency transaction losses of
$0.3 million related to the net U.S. dollar denominated monetary asset position of our Mexican subsidiaries for
which the Mexican peso is the functional currency. Other income for the year ended December 31, 2012 includes a
gain of $2.6 million from the sale of idle assets within the Industrial Group, partially offset by foreign currency
related losses of $0.8 million.
Income Taxes. The 2013 income tax provision consists of current tax expense of $1.2 million and a
deferred tax benefit of $1.3 million. The 2012 income tax provision consists of current and deferred tax expense of
$1.4 million and $0.9 million, respectively. The current tax expense in both years is primarily attributable to taxes
paid by our Mexican subsidiaries. The 2013 deferred tax benefit includes a $2.4 million benefit recorded due to the
required intraperiod tax allocation resulting from the loss from continuing operations and other comprehensive
income. Additionally, included in deferred taxes in both years is an increase in the valuation allowance on U.S.
deferred tax assets. Our Mexican subsidiaries recognized a deferred tax benefit in both years related to the recovery
of certain deferred tax assets that were previously reserved for by a valuation allowance.
Discontinued Operations. On October 26, 2009, the Company sold all of the stock of its wholly owned
subsidiary, Sypris Test & Measurement, Inc. (“Sypris Test & Measurement”) for $39.0 million, of which
$3.0 million was deposited in an escrow account in connection with certain customary representations, warranties,
covenants and indemnifications of the Company and was classified as restricted cash on the Company’s
consolidated balance sheets as of December 31, 2011. During 2010, the Company was made aware of a potential
indemnification claim from the purchaser of Sypris Test & Measurement, and the parties engaged in binding
arbitration to resolve the claim. During 2012, the arbitration dispute was settled for $6.5 million, which includes the
counterparty’s legal fees and expenses. Both parties have entered a mutual release of all related potential claims.
This amount was paid in October 2012. The Company also incurred legal expenses of $0.7 million during 2012, in
connection with the claim. These charges are included in loss from discontinued operations, net of tax in the
consolidated statements of operations.
28
Quarterly Results
The following table presents our unaudited condensed consolidated statements of operations data for each
of the eight quarters in the two-year period ended December 31, 2013. The quarterly results are presented on a 13-
week period basis. We have prepared this data on the same basis as our audited consolidated financial statements
and, in our opinion, have included 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 on Form 10-K. The consolidated results of
operations for any quarter are not necessarily indicative of the results to be expected for any subsequent period.
First
Second
Third
Fourth
First
Second
Third
Fourth
2013
2012
(in thousands, except per share data)
7,262
78,411
7,734
82,166
Net revenue:
Industrial Group ..................... $ 71,149 $ 74,432 $ 66,650 $ 63,905 $ 82,522 $ 82,850 $ 65,176 $ 55,498
11,968
9,628
Electronics Group ..................
Total net revenue ....................
67,466
76,278
Cost of sales:
Industrial Group .....................
Electronics Group ..................
Total cost of sales ...................
Gross profit (loss):
Industrial Group .....................
Electronics Group ..................
Total gross profit ....................
Selling, general and
7,253
(873)
6,380
8,858
(522)
8,336
7,417
(156)
7,261
63,039
7,296
70,335
65,574
8,256
73,830
59,233
9,784
69,017
56,652
10,827
67,479
72,600
11,349
83,949
73,944
11,745
85,689
58,602
10,787
69,389
49,919
8,909
58,828
9,922
2,592
12,514
8,906
4,317
13,223
6,574
2,800
9,374
5,579
3,059
8,638
9,954
73,859
13,587
78,763
16,062
98,912
13,941
96,463
(34)
8,110
8,076
7,158
877
7,598
1,419
7,689
547
8,019
204
7,633
1,084
7,871
1,303
administrative ......................
Research and development .......
Amortization of
intangible assets ...................
Impairment of goodwill ............
Operating (loss) income ...........
Interest expense, net .................
(Gain) on sale of marketable
securities ..............................
Other (income) expense, net .....
(Loss) income from continuing
operations, before tax ...........
Income tax expense (benefit) ...
(Loss) income from continuing
operations ............................
Loss from discontinued
operations, net of tax ............
Net (loss) income ..................... $
Basic (loss) income per share:
(Loss) income per share from
continuing operations ......... $
Loss per share from
discontinued operations .....
Net (loss) income per share .. $
Diluted (loss) income per share:
(Loss) income per share from
continuing operations ......... $
Loss per share from
discontinued operations .....
Net (loss) income per share .. $
22
6,900
(6,881)
146
—
(1,195)
8
—
(689)
120
—
(259)
7,595
394
22
—
4,503
117
7,698
1,035
22
—
4,468
105
22
—
635
98
—
—
(975)
124
—
—
(1,843)
132
—
38
—
486
—
(2,074)
(537)
(457)
(1,313)
561
(5,832)
627
(550)
944
(1,137)
858
(2,461)
(2,522)
6,460
949
5,357
343
1289
697
23
—
(559)
117
—
(85)
(591)
259
(6,459)
(1,494)
(1,995)
61
5,511
5,014
592
(850)
—
(6,459) $
—
(1,494) $
—
(1,995) $
—
61 $
(223)
5,288 $
(576)
4,438 $
(6,331)
(5,739) $
(90)
(940)
(0.34) $
(0.08) $
(0.10) $
— $
0.28 $
0.25 $
0.03 $
(0.04)
—
(0.34) $
—
(0.08) $
—
(0.10) $
—
— $
(0.01)
0.27 $
(0.03)
0.22 $
(0.33)
(0.30) $
(0.01)
(0.05)
(0.34) $
(0.08) $
(0.10) $
— $
0.28 $
0.25 $
0.03 $
(0.04)
—
(0.34) $
—
(0.08) $
—
(0.10) $
—
— $
(0.01)
0.27 $
(0.03)
0.22 $
(0.32)
(0.29) $
(0.01)
(0.05)
29
Liquidity and Capital Resources
The Company’s Credit Facility provides potential total availability of up to $50.0 million with an option,
subject to certain conditions, to increase total potential availability to $60.0 million in the future. Loans made under
the Credit Facility will mature and the commitments thereunder will terminate in May 2016. Actual borrowing
availability under the Credit Facility is determined by a monthly borrowing base collateral calculation that is based
on specified percentages of the value of eligible accounts receivable, inventory and machinery and equipment, less
certain reserves and subject to certain other adjustments. Based on that calculation, at December 31, 2013, we had
actual total borrowing availability under the Credit Facility of $32.7 million, of which we had drawn $24.0 million,
leaving $7.9 million available for borrowing, after accounting for the letter of credit. Along with an unrestricted
cash balance of $18.7 million, we had total cash and available borrowing capacity of $26.6 million as of
December 31, 2013. Approximately $3.8 million of the unrestricted cash balance relates to our Mexican
subsidiaries. Standby letters of credit up to a maximum of $5.0 million may be issued under the Credit Facility of
which $0.8 million were issued at December 31, 2013. Obligations under the Credit Facility are guaranteed by all of
our U.S. subsidiaries and are secured by a first priority lien on substantially all domestic assets of the Company.
The Credit Facility contains a number of covenants that, among other things, limit or restrict our ability to
dispose of assets, incur additional indebtedness, incur guarantee obligations, engage in sale and leaseback
transactions, prepay other indebtedness, modify organizational documents and certain other agreements, create
restrictions affecting subsidiaries, pay dividends or make other restricted payments without bank approval, create
liens, make investments, make acquisitions, engage in mergers, change the nature of our business and engage in
certain transactions with affiliates. In addition, if the Company's availability under the Credit Facility falls below
$6.0 million (or $8.0 million for a period of 5 or more consecutive days), the Company must maintain a fixed charge
coverage ratio of at least 1.15 to 1.00.
We also had purchase commitments totaling approximately $6.1 million at December 31, 2013, primarily
for manufacturing equipment and inventory.
There are numerous risks and uncertainties relating to the global economy and the commercial vehicle and
aerospace and defense industries that could materially affect our financial condition, future results of operations and
liquidity. These risks and uncertainties could result in decreased sales, limited access to credit, rising costs,
increased competition, customer or supplier bankruptcies, delays in customer payment terms and acceleration of
supplier payments, growing inventories and failure to meet debt covenants.
Our ability to service our indebtedness will require a significant amount of cash. Our ability to generate
this cash will depend largely on future operations. Based upon our current level of operations and our 2014 business
plan, we expect to be able to meet the financial covenants of our Credit Facility and have sufficient liquidity to
finance our operations for at least the next twelve months. However, changing business, regulatory and economic
conditions may mean that actual results will vary from our forecasts.
Financial Condition
Operating Activities. Net cash used in operating activities was $0.3 million in 2013, as compared to
$4.9 million in 2012. Cash of $1.7 million was used to finance an increase in inventory, primarily to support higher
volumes during the fourth quarter of 2013 within our Industrial Group as compared to the fourth quarter of 2012.
Additionally, increases in accounts payable provided cash of $0.7 million.
Investing Activities. Net cash used in investing activities was $2.8 million in 2013 as compared to
$0.6 million in 2012. Net cash used in investing activities for 2013 included $5.1 million of capital expenditures
partially offset by proceeds of $2.3 million from the sale of idle assets primarily within the Industrial Group. Net
cash used in investing activities in 2012 includes capital expenditures of $7.1 million partially offset by proceeds
from the sale of assets of $4.6 million and $1.9 million from the sale of marketable securities.
Financing Activities. Net cash provided by financing activities was $3.1 million in 2013 as compared to
$6.0 million in 2012. Net cash provided by financing activities in 2013 included $5.0 million in additional
borrowings under the Credit Facility partially offset by $1.2 million in dividend payments and $0.7 million for the
repurchase of stock and minimum statutory tax withholdings on stock-based compensation. Net cash provided by
30
financing activities in 2012 included $9.0 million in additional borrowing under the Credit Facility partially offset
by $1.6 million in dividend payments and $1.4 million for the repurchase of stock and minimum statutory tax
withholdings on stock-based compensation.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources as of December 31, 2013.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements for a full description of recent accounting
pronouncements, including the respective dates of adoption and effects on our results of operations and financial
condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and thus are not
required to provide the quantitative and qualitative disclosures about market risk specified in Item 305 of
Regulation S-K.
31
Item 8.
Financial Statements and Supplementary Data
SYPRIS SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting ...................................................................... 33
Report of Independent Registered Public Accounting Firm ..................................................................................... 34
Consolidated Statements of Operations .................................................................................................................... 35
Consolidated Statements of Comprehensive (Loss) Income .................................................................................... 36
Consolidated Balance Sheets .................................................................................................................................... 37
Consolidated Statements of Cash Flows ................................................................................................................... 38
Consolidated Statements of Stockholders’ Equity .................................................................................................... 39
Notes to Consolidated Financial Statements............................................................................................................. 40
32
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 consolidated 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
consolidated 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, 2013. 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 (1992). Based
on our assessment, we concluded that as of December 31, 2013, 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 audited and
reported on the consolidated financial statements of Sypris Solutions, Inc. The report of Ernst & Young LLP is
contained in this Annual Report on Form 10-K.
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sypris Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Sypris Solutions, Inc. (the Company) as
of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive (loss)
income, stockholders' equity, and cash flows for the years then ended. 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. We were not engaged to perform an audit
of the Company’s internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and 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, 2013 and 2012, and the consolidated
results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
Louisville, Kentucky
March 11, 2014
/s/ ERNST & YOUNG LLP
34
SYPRIS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
Year ended December 31,
2013
2012
Net revenue:
Outsourced services ...................................................................................................... $ 276,471
34,243
Products ........................................................................................................................
$ 289,173
52,431
Total net revenue .......................................................................................................
310,714
341,604
Cost of sales:
Outsourced services ......................................................................................................
Products ........................................................................................................................
252,663
27,998
258,458
39,397
Total cost of sales ......................................................................................................
280,661
297,855
Gross profit ................................................................................................................
30,053
Selling, general and administrative ...................................................................................
Research and development ...............................................................................................
Amortization of intangible assets .....................................................................................
Impairment of goodwill ....................................................................................................
30,464
3,047
30
6,900
Operating (loss) income ............................................................................................
(10,388)
Interest expense, net .........................................................................................................
(Gain) on sale of marketable securities .............................................................................
Other (income), net ...........................................................................................................
522
—
(930)
Loss (income) from continuing operations before income taxes ...............................
(9,980)
Income tax (benefit) expense ............................................................................................
(93)
Loss (income) from continuing operations ...............................................................
(9,887)
43,749
30,797
3,816
89
—
9,047
437
(1,850)
(2,055)
12,515
2,248
10,267
Loss from discontinued operations, net of tax ..................................................................
—
(7,220)
Net loss (income) ....................................................................................................... $
(9,887)
$
3,047
Basic (loss) income per share:
Loss (income) per share from continuing operations ................................................ $
Loss per share from discontinued operations ............................................................
Net (loss) income per share ....................................................................................... $
(0.51)
—
(0.51)
Diluted (loss) income per share:
(Loss) income per share from continuing operations ................................................ $
Loss per share from discontinued operations ............................................................
Net (loss) income per share ....................................................................................... $
(0.51)
—
(0.51)
Cash dividends per common share ................................................................................... $
0.08
$
$
$
$
$
0.51
(0.38)
0.13
0.50
(0.37)
0.13
0.08
The accompanying notes are an integral part of the consolidated financial statements.
35
SYPRIS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
Year ended December 31,
2013
2012
Net (loss) income .............................................................................................................. $
(9,887)
$
3,047
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax of $153 .......................................
Employee benefit related, net of tax of $2,284 .............................................................
Reclassification adjustment for net gain on marketable securities
240
3,588
2,132
161
included in net income ...............................................................................................
—
(1,685)
Other comprehensive income, net of tax ...................................................................
3,828
608
Total comprehensive (loss) income .................................................................................. $
(6,059)
$
3,655
The accompanying notes are an integral part of the consolidated financial statements.
36
SYPRIS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
ASSETS
Current assets:
Cash and cash equivalents ............................................................................................. $
Accounts receivable, net ...............................................................................................
Inventory, net ................................................................................................................
Other current assets .......................................................................................................
Total current assets .......................................................................................................
Property, plant and equipment, net ...................................................................................
Goodwill ...........................................................................................................................
Other assets .......................................................................................................................
December 31,
2013
2012
18,674
38,533
34,422
5,403
97,032
44,683
—
4,568
$
18,664
38,530
33,958
4,946
96,098
53,050
6,900
4,920
Total assets ................................................................................................................ $ 146,283
$ 160,968
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable .......................................................................................................... $
Accrued liabilities .........................................................................................................
Total current liabilities ..............................................................................................
Long-term debt .................................................................................................................
Other liabilities .................................................................................................................
Total liabilities ...........................................................................................................
36,684
23,806
60,490
24,000
5,541
90,031
$
36,267
21,988
58,255
19,000
20,780
98,035
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 975,150 shares authorized; no shares
issued .........................................................................................................................
Series A preferred stock, par value $0.01 per share, 24,850 shares authorized; 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;
20,448,007 shares issued and 20,399,649 outstanding in 2013 and 20,190,116
shares issued and 20,155,268 outstanding in 2012 ....................................................
Additional paid-in capital ..............................................................................................
Retained deficit .............................................................................................................
Accumulated other comprehensive loss ........................................................................
Treasury stock, 48,358 and 34,848 shares in 2013 and 2012, respectively...................
—
—
—
—
—
—
204
150,569
(76,786)
(17,734)
(1)
202
149,576
(65,282)
(21,562)
(1)
Total stockholders’ equity .........................................................................................
56,252
62,933
Total liabilities and stockholders’ equity ................................................................... $ 146,283
$ 160,968
The accompanying notes are an integral part of the consolidated financial statements.
37
SYPRIS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2013
2012
(9,887)
—
(9,887)
$
3,047
(7,220)
10,267
Cash flows from operating activities:
Net (loss) income .......................................................................................................... $
Loss from discontinued operations ...............................................................................
(Loss) income from continuing operations ...................................................................
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization ...................................................................................
Deferred income taxes ...............................................................................................
Gain on sale of marketable securities ........................................................................
Non-cash compensation .............................................................................................
Deferred revenue recognized .....................................................................................
Deferred loan costs recognized ..................................................................................
Write-off of pre-contract costs ..................................................................................
Gain on sale of assets ................................................................................................
Provision for excess and obsolete inventory .............................................................
Goodwill impairment.................................................................................................
Other noncash items ..................................................................................................
Contributions to pension plans ..................................................................................
Changes in operating assets and liabilities:
Accounts receivable .................................................................................................
Inventory ..................................................................................................................
Prepaid expenses and other assets ...........................................................................
Accounts payable .....................................................................................................
Accrued and other liabilities ....................................................................................
Net cash used in operating activities ......................................................................
Cash flows from investing activities:
Capital expenditures ......................................................................................................
Proceeds from sale of marketable securities .................................................................
Proceeds from sale of assets ..........................................................................................
Net cash used in investing activities ......................................................................
Cash flows from financing activities:
Net change in debt under Credit Facility ......................................................................
Common stock repurchases...........................................................................................
Indirect repurchase of shares for minimum statutory tax withholdings ........................
Cash dividends paid ......................................................................................................
Proceeds from issuance of common stock ....................................................................
Net cash provided by financing activities ..............................................................
Net increase in cash and cash equivalents ........................................................................
12,401
(1,286)
—
1,689
(8,000)
78
—
(1,516)
1,251
6,900
565
(663)
(19)
(1,708)
(556)
705
(247)
(293)
(5,053)
—
2,265
(2,788)
5,000
(36)
(657)
(1,216)
—
3,091
10
12,251
871
(1,850)
1,826
(7,892)
78
1,113
(2,590)
928
—
1,209
(1,598)
4,307
(1,191)
(1,350)
(15,193)
(6,106)
(4,920)
(7,082)
1,914
4,595
(573)
9,000
(660)
(750)
(1,607)
1
5,984
491
18,173
Cash and cash equivalents at beginning of year ...............................................................
18,664
Cash and cash equivalents at end of year ......................................................................... $
18,674
$
18,664
The accompanying notes are an integral part of the consolidated financial statements.
38
SYPRIS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except for share data)
Additional Retained Comprehensive
Accumulated
Other
Common Stock
Shares
Amount
Paid-In
Capital
(Deficit)
Earnings
Income
(Loss)
Treasury
Stock
January 1, 2012 balance ....................................
19,995,401 $
201 $ 149,160 $ (66,722)
$ (22,170) $
Net income ........................................................
Reclassification adjustment for net gain on
marketable securities included in net
income ..........................................................
Employee benefit related ..................................
Foreign currency translation adjustment ...........
Comprehensive income .....................................
Cash dividends, $0.08 per common share .........
Common stock repurchases ..............................
Restricted common stock grant .........................
Noncash compensation .....................................
Exercise of stock options ..................................
Treasury stock ...................................................
Retire treasury stock .........................................
—
—
—
—
—
—
(96,868)
305,000
36,000
62,386
(20,000)
(126,651)
—
—
3,047
—
—
—
—
—
—
(1)
3
—
—
—
(1)
—
—
—
—
—
(659)
(3)
1,826
—
—
(748)
—
—
—
3,047
(1,607)
—
—
—
—
—
—
(1,685)
161
2,132
608
—
—
—
—
—
—
—
(1)
—
—
—
—
—
—
—
—
—
—
—
—
December 31, 2012 balance ..............................
20,155,268
202
149,576 (65,282)
(21,562)
(1)
Net loss .............................................................
Employee benefit related, net of tax .................
Foreign currency translation adjustment, net of
tax .................................................................
Comprehensive income .....................................
Cash dividends, $0.08 per common share .........
Common stock repurchases ..............................
Restricted common stock grant .........................
Noncash compensation .....................................
Exercise of stock options ..................................
Treasury stock ...................................................
Retire treasury stock .........................................
—
—
—
—
—
(11,675)
288,000
42,000
97,608
(57,000)
(114,552)
—
—
—
—
—
—
3
—
—
—
(1)
—
—
—
—
—
(36)
(3)
1,689
—
—
(657)
(9,887)
—
—
(9,887)
(1,623)
—
—
6
—
—
—
—
3,588
240
3,828
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
December 31, 2013 balance ..............................
20,339,649 $
204 $ 150,569 $ (76,786)
$ (17,734) $
(1)
The accompanying notes are an integral part of the consolidated financial statements.
39
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(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 United States (U.S.), Mexico, Denmark and the U.K. and serve a wide variety of domestic and
international customers. All 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 and other technical services, typically under sole-source contracts
with corporations and government agencies in the markets for truck components and assemblies and aerospace and
defense electronics. The Company provides such services through its Industrial and Electronics Groups. See Note
20 for additional information regarding our segments.
Use of Estimates
The preparation of the consolidated financial statements and accompanying notes in conformity with U.S.
generally accepted accounting principles requires management to make estimates and assumptions that affect the
amounts reported. Changes in facts and circumstances could have a significant impact on the resulting estimated
amounts included in our consolidated financial statements. Actual results could differ from these estimates.
Fair Value Estimates
The Company estimates fair value of its financial instruments utilizing an established three-level hierarchy.
The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date as follows: Level 1 – Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active
markets. Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other
inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the
financial instruments. Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair
value measurements.
Discontinued Operations
The Company classifies a business component that either has been disposed of or is classified as held for
sale as a discontinued operation if the cash flows of the component have been or will be eliminated from ongoing
operations and the Company will no longer have any significant continuing involvement in the component. The
results of operations related to the discontinued operations are aggregated and presented on one line on the statement
of operations. See Note 2 for additional information regarding discontinued operations.
Cash Equivalents
Cash equivalents include all highly liquid investments with a maturity of three months or less when
purchased.
Inventory
Inventory is stated at the lower of cost or estimated net realizable value. Costs for raw materials, work in
process and finished goods is determined under the first-in, first-out method. Indirect inventories, which include
perishable tooling, repair parts and other materials consumed in the manufacturing process but not incorporated into
finished products are classified as raw materials.
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.
40
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Property, Plant and Equipment
Property, plant and equipment is stated at 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 rebuilds and improvements are
capitalized.
Long-lived Assets
The Company reviews the carrying value of amortizable long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held for sale and held for use is measured by a comparison of the carrying amount of the asset to the undiscounted
future net cash flows expected to be generated by the asset. If facts and circumstances indicate that the carrying
value of an asset or groups of assets, as applicable, is impaired, the long-lived asset or groups of long-lived assets
are written down to their estimated fair value.
The Industrial Group performed an asset recoverability test for one of its asset groups totaling
approximately $40,642,000 as of December 31, 2013. The Company concluded that the undiscounted sum of
estimated future cash flows exceeded the carrying value for such asset group, and accordingly, no impairment was
recognized.
Goodwill
Goodwill is tested for impairment annually as of December 31 or more frequently if impairment indicators
arise. If impairment indicators arise, a step one assessment is performed to identify any possible goodwill
impairment in the period in which the indicator is identified. The December 31, 2012 review of goodwill indicated
that goodwill was not impaired. Beginning in March 2013, we noted certain indicators relating to our Electronics
Group reporting unit that were significant enough to conclude that an impairment indicator existed as of
March 31, 2013. Specifically, one key customer within the Electronics Group’s space business communicated its
strategic sourcing decision to begin insourcing programs that had been previously outsourced to the Electronics
Group. Overall, the Electronics Group has been more impacted by declines in the overall government defense
market than originally anticipated as the effects of sequestration have become clearer since its initial effective date
on March 1, 2013. For example, sales of certain data recording products were significantly reduced due to the
impact of sequestration on our customers, and the loss of commercial space business was due in part to our
customer’s efforts to offset unrelated losses of government business due to sequestration. As a result, the Electronics
Group’s short term revenue forecasts were materially affected.
For purposes of the interim goodwill impairment analysis, the Company assesses recoverability using a
discounted cash flow analysis. The analysis is based upon available information regarding expected future cash
flows for each reporting unit, discounted at rates consistent with the cost of capital specific to the reporting unit. A
growth rate is used to calculate the terminal value of the reporting unit and is added to the present value of the
forecasted cash flows. The growth rate is the expected rate at which a reporting unit’s cash flow is projected to
grow beyond the period covered by the long-range plan.
The sum of the calculated fair values of each reporting unit is then reconciled and compared to our total
market capitalization, allowing for a reasonable control premium. If the discounted cash flow analysis yields a fair
value estimate less than the reporting unit’s carrying value, we proceed to step two in considering whether goodwill
may be impaired. In the second step, the implied fair value of the reporting unit’s goodwill is determined by
allocating the reporting unit’s fair value to all of the identified assets and liabilities of the reporting unit. As part of
this process, the Company reviewed the recoverability of the Electronics Group’s short-term and long-term assets
excluding goodwill and concluded that no impairment of these assets was necessary.
The cash flow analysis, discount rate and terminal value all require significant judgment and significantly
influence our evaluation of each reporting unit and its estimated fair value. In selecting these and other assumptions
41
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
for each business, we consider historical performance, forecasted operating results, expected changes in product
mix, general market conditions and industry considerations specific to the business. We make significant
assumptions and estimates about the extent and timing of future cash flows, growth rates and discount rates. The
cash flows are estimated over a future period of time, which makes those estimates and assumptions inherently
subject to a high degree of uncertainty.
Key assumptions used to determine the fair value of the Electronics Group included the expected after-tax
cash flows for the period from 2013 to 2017 and a terminal growth rate of 3.0%, which is consistent with historical
expectations. Our analysis also included a comparison of our market capitalization to the estimated fair value for the
entire enterprise. Significant assumptions utilized during the valuation process are impacted by economic conditions
and expectations of management and may change in the future based on period-specific facts and circumstances.
The first step of the impairment test indicated that the estimated fair value for the Electronics Group was
less than its carrying value as of March 31, 2013. We performed step two of the impairment test and determined
that the implied goodwill for the reporting unit was lower than its value as of March 31, 2013. As a result, a non-
cash impairment charge of $6,900,000 was recorded during the three months ended March 31, 2013 to impair the
goodwill associated with the Electronics Group reporting unit. The impairment charge has been presented
separately in the consolidated statements of operations and fully impairs the carrying amount of goodwill related to
the Electronics Group. The fair value of the Electronics Group and the assets and liabilities identified in the step
two impairment test were determined using the combination of the income approach and the market approach, which
are Level 3 and Level 2 inputs, respectively.
Pre-contract Costs
Costs incurred on projects as pre-contract costs are deferred as assets in accordance with ASC 605-35-25
when the Company has been requested by the customer to begin work under a new arrangement prior to contract
execution. The Company records pre-contract costs when formal contracts have not yet been executed, and it is
probable that the Company will recover the costs through the issuance of a contract. If we determine it is probable
that we will be awarded the specific anticipated contract, we capitalize the pre-contract costs we incur, excluding
start-up costs which are expensed as incurred. Conversely, if it appears uncertain that we will obtain the contract
within a specified time period, all previously deferred costs are expensed. During December 2012, it was
determined that certain pre-contract costs could no longer be capitalized due to current year market events involving
a specific contract. As a result, the Company wrote-off deferred costs of $1,709,000 associated with the contract to
selling, general and administrative expense in the accompanying consolidated statements of operations for the fiscal
year ended December 31, 2012. There were no capitalized pre-contract costs as of December 31, 2013 or 2012.
Deferred Revenue
Deferred revenue for the Electronics Group is recorded when payments are received in advance for service
agreements and extended warranties on certain products and is amortized into revenue on a straight-line basis over
the contractual term. Deferred revenue for the Industrial Group is generally associated with the Dana settlement and
will be amortized into income on a units-of-production basis over the term of the related supply agreement period.
See Note 4 for information regarding the Dana settlement, and see Notes 10 and 11 for the amount of deferred
revenue included in accrued liabilities and other liabilities.
Income Taxes
The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities
are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in
the consolidated financial statements, using the statutory tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless
it is more likely than not that such assets will be realized.
In the ordinary course of business there is inherent uncertainty in quantifying the Company’s income tax
positions. The Company assesses its income tax positions and records tax benefits for all years subject to
examination based upon management’s evaluation of the facts, circumstances, and information available at the
reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the
42
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon
ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax
positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized
in the financial statements. Where applicable, associated interest has also been recognized.
The Company recognizes liabilities or assets for the deferred tax consequences of temporary differences
between the tax bases of assets or liabilities and their reported amounts in the financial statements in accordance
with ASC 740, Income Taxes. The Company recognizes interest accrued related to unrecognized tax benefits in
income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.
The Company expects to repatriate available non-U.S. cash holdings in 2014 to support management’s
strategic objectives and fund ongoing U.S. operational cash flow requirements; therefore current earnings from non-
U.S. operations are not treated as permanently reinvested. The U.S. income tax recorded in 2013 on these non-U.S.
earnings is expected to be offset by the benefit of a partial release of a valuation allowance on U.S. net operating
loss carryforwards. Should the U.S. valuation allowance be released at some future date, the U.S. tax on foreign
earnings not permanently reinvested may have a material effect on our effective tax rate. For the year ending
December 31, 2013, the Company expects any additional tax expense from non-U.S. withholding and other taxes
expected to be incurred on the repatriation of current earnings will not be material.
Net Revenue and Cost of Sales
Net revenue of products and services under commercial terms and conditions are recorded upon delivery
and passage of title, or when services are rendered. Related shipping and handling costs, if any, are included in costs
of sales.
Net revenue on fixed-price contracts is recognized as services are performed. Revenue is deferred until all
of the following have occurred (1) there is a contract in place, (2) delivery has occurred, (3) the price is fixed or
determinable, and (4) collectability is reasonably assured. Contract profits are taken into earnings based on actual
cost of sales for units shipped. Amounts representing contract change orders or claims are included in revenue when
such costs are invoiced to the customer.
Periodically the Company enters into research and development contracts with customers related primarily
to key inscription products. When the contracts provide for milestone or other interim payments, the Company will
recognize revenue under the milestone method. The Company had one contract in process during fiscal year 2013,
being accounted for under the milestone method. The milestone method requires the Company to deem all
milestone payments within each contract as either substantive or non-substantive. That conclusion is determined
based upon a thorough review of each contract and the Company’s deliverables committed to in each contract. For
substantive milestones, the Company concludes that upon achievement of each milestone, the amount of the
corresponding defined payment is commensurate with the effort required to achieve such milestone or the value of
the delivered item. The payment associated with each milestone relates solely to past performance and is deemed
reasonable upon consideration of the deliverables and the payment terms within the contract. For non-substantive
milestones, including advance payments, the recognition of such payments are pro-rated to the substantive
milestones. Milestones may include, for example, the successful completion of design review or technical review,
the submission and acceptance of technical drawings, delivery of hardware, software, spares, test equipment or
regulatory agency certifications. During fiscal year 2013, revenue recognized through the achievement of multiple
milestones amounted to $675,000.
43
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Product Warranty Costs
The provision for estimated warranty costs is recorded at the time of sale and is periodically adjusted to reflect
actual experience. The Company’s warranty liability, which is included in accrued liabilities in the accompanying
balance sheets, as of December 31, 2013 and 2012, was $1,439,000 and $1,111,000, respectively. The Company’s
warranty expense for the years ended December 31, 2013 and 2012 was $660,000 and $422,000, respectively.
Additionally, the Company sells three and five-year extended warranties for certain link encryption products.
The revenue from the extended warranties is deferred and recognized ratably over the contractual term. As of
December 31, 2013 and 2012, the Company had deferred $1,567,000 and $2,607,000, respectively, related to extended
warranties. At December 31, 2013, $751,000 is included in accrued liabilities and $816,000 is included in other
liabilities in the accompanying balance sheets. At December 31, 2012, $1,085,000 is included in accrued liabilities and
$1,522,000 is included in other liabilities in the accompanying 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 a number of customers in diverse industries across
geographic areas, primarily in North America and Mexico, various departments or agencies of the U.S. Government,
and aerospace and defense companies under contract with the U.S. Government. The Company performs periodic
credit evaluations of its customers’ financial condition and does not require collateral on its commercial accounts
receivable. Credit losses are provided for in the consolidated financial statements and consistently have been within
management’s expectations. Approximately 69% and 65% of accounts receivable outstanding at December 31, 2013
and 2012, respectively, are due from the Company’s two largest customers. More specifically, Dana and Meritor
comprise 47% and 22%, respectively, of December 31, 2013 outstanding accounts receivables. Similar amounts at
December 31, 2012 were 44% and 21%, respectively.
The Industrial Group’s largest customers for the year ended December 31, 2013 were Dana and Meritor,
which represented approximately 58% and 15%, respectively, of the Company’s total net revenue. Dana and Meritor
were also the Company’s largest customers for the year ended December 31, 2012, which represented approximately
55% and 15%, respectively, of the Company’s total net revenue. The Company recognized revenue from contracts
with the U.S. Government and its agencies approximating 3% and 6% of net revenue for the years ended
December 31, 2013 and 2012, respectively. No other single customer accounted for more than 10% of the
Company’s total net revenue for the years ended December 31, 2013 or 2012.
Sypris and Dana have recently signed an amended and restated supply agreement, the binding effect of
which is currently in dispute. Dana has repudiated this agreement and purported to exercise its rights under the prior
agreement to begin exploring alternative supply relationships with third parties, including the right to sign new
supply agreements, authorize tooling expenditures and engage in certain production part approval processes (PPAP)
with respect to the goods currently supplied by Sypris. Sypris disputes Dana’s ability to exercise such rights. In
addition, Dana has notified us that it intends to terminate its supply relationship with us effective
December 31, 2014 and to transition over 2,000 active part numbers, which we currently manufacture for Dana, to
alternative suppliers at the expiration date of the original supply agreement. The failure to resolve this dispute with
Dana on acceptable terms would have a material adverse effect on our financial condition and financial
performance.
In addition, two of the Company’s current agreements with Meritor are due to expire at the end of 2014 and
mid-2015, respectively. The failure to enter into an agreement with Meritor on acceptable terms, or the entry into
agreements for fewer products or reduced volumes or prices would have a material adverse effect on our financial
condition and financial performance.
Foreign Currency Translation
The functional currency for the Company’s Mexican subsidiaries is the Mexican peso. Assets and liabilities
are translated at the period end exchange rate, and income and expense items are translated at the weighted average
exchange rate. The resulting translation adjustments are recorded in comprehensive income (loss) as a separate
44
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
component of stockholders’ equity. Remeasurement gains or losses for U.S. dollar denominated accounts of the
Company’s Mexican subsidiaries are included in other (income), net.
Collective Bargaining Agreements
Approximately 500, or 42% of the Company’s employees, all of which are in the Industrial Group, are
covered by collective bargaining agreements. Excluding certain Mexico employees covered under an annually
ratified agreement, collective bargaining agreements covering 149 employees expire within the next 12 months.
Certain Mexico employees are covered by an annually ratified collective bargaining agreement. These employees
represent approximately 26% of the Company’s workforce, or 311 employees.
Adoption of Recently Issued Accounting Standards
In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income
(Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02),
to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02
requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income
on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be
reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified
in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity
is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those
amounts. The updated guidance is to be applied prospectively, effective January 1, 2013. The adoption of this
update concerns disclosure only and did not have any financial impact on our results of operations or financial
position.
(2)
Discontinued Operations
On October 26, 2009, the Company sold all of the stock of its wholly owned subsidiary, Sypris Test &
Measurement for $39,000,000. During 2010, the Company was made aware of a potential indemnification claim
from the purchaser of Sypris Test & Measurement. The parties engaged in binding arbitration during July 2012 to
resolve the claim, and the arbitration dispute was settled for $6,500,000, which includes the counterparty’s legal fees
and expenses. Both parties entered a mutual release of all related potential claims. This amount was paid in
October 2012. The Company also incurred legal expenses of $720,000 during 2012, in connection with the claim.
These charges are included in loss from discontinued operations, net of tax in the consolidated statements of
operations.
(3)
Other (Income), Net
During the year ended December 31, 2013, the Company recognized net gains of $1,516,000 related to the
disposition of idle assets. Additionally, the Company recognized foreign currency transaction losses of $298,000 for
the year ended December 31, 2013 related to the net U.S. dollar denominated monetary asset position of our
Mexican subsidiaries for which the Mexican peso is the functional currency.
For the year ended
December 31, 2012, the Company recognized net gains of $2,590,000 related to the disposition of idle assets and
foreign currency transaction losses of $777,000. These gains and losses are included in other (income), net on the
consolidated statements of operations.
(4)
Dana Claim
On March 3, 2006, the Company’s largest customer, Dana Corporation (“Dana”) and 40 of its U.S.
subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Southern District of New York. On August 7, 2007, the Company entered into a
comprehensive settlement agreement with Dana (the “Settlement Agreement”) to resolve all outstanding disputes
between the parties, terminate previously approved arbitration payments and replace three existing supply agreements
with a single, revised contract running through 2014. In addition, Dana provided the Company with an allowed general
unsecured non-priority claim in the face amount of $89,000,000 (the “Claim”).
45
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The Claim provided to the Company was agreed to by the Company and Dana as consideration for the
aggregate economic impact of the various elements the two parties were negotiating. After the aggregate Claim value
of $89,900,000 was established, the Company recorded the claim at the estimated fair value of $76,483,000. The
revenues and resulting net income associated with the Company’s continued involvement were deferred and are being
recognized over the remaining period of the Company’s supply agreement with Dana, through December 31, 2014.
For the years ended December 31, 2013 and 2012, the Company recognized revenue of $8,000,000 and $7,892,000,
respectively, related to the Claim.
On August 31, 2011, the Company received 143,966 shares of Dana common stock, representing the final
distribution to be received in conjunction with the settlement. During 2012, the Company sold all of those shares and
recognized a gain of $1,850,000 for the year ended December 31, 2012.
(5)
Accounts Receivable
Accounts receivable consists of the following (in thousands):
Commercial .......................................................................................... $
U.S. Government ..................................................................................
36,245
2,620
$
Allowance for doubtful accounts ..........................................................
38,865
(332)
38,220
620
38,840
(310)
$
38,533
$
38,530
December 31,
2013
2012
Accounts receivable from the U.S. Government includes amounts due under long-term contracts, all of
which are billed at December 31, 2013 and 2012, of $2,620,000 and $620,000 respectively.
(6)
Inventory
Inventory consists of the following (in thousands):
Raw materials ....................................................................................... $
Work in process ....................................................................................
Finished goods......................................................................................
Reserve for excess and obsolete inventory ...........................................
19,372
16,436
5,017
(6,403)
$
20,645
14,198
4,461
(5,346)
$
34,422
$
33,958
December 31,
2013
2012
(7)
Other Current Assets
Other current assets consist of the following (in thousands):
Prepaid expenses .................................................................................. $
Other .....................................................................................................
$
December 31,
2013
2012
1,690
3,713
5,403
$
$
1,216
3,730
4,946
Included in other current assets are deferred taxes for the Company’s Mexican subsidiaries, income taxes
refundable and other items, none of which exceed 5% of total current assets.
46
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(8)
Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
December 31,
2013
2012
Land and land improvements ............................................................... $
Buildings and building improvements ..................................................
Machinery, equipment, furniture and fixtures ......................................
Construction in progress .......................................................................
2,999
26,053
161,207
2,133
$
3,467
25,351
160,356
3,643
192,392
192,817
Accumulated depreciation ....................................................................
(147,709)
(139,767)
$
44,683
$
53,050
Depreciation expense totaled approximately $12,371,000 and $12,162,000 for the years ended
December 31, 2013 and 2012, respectively. In addition, there were capital expenditures of approximately $135,000
and $422,000 included in accounts payable or accrued liabilities at December 31, 2013 and 2012, respectively.
(9)
Other Assets
Other assets consist of the following (in thousands):
Intangible assets:
Gross carrying value:
Industrial Group ............................................................................ $
Electronics Group ..........................................................................
Total gross carrying value ......................................................
Accumulated amortization:
Industrial Group ............................................................................
Electronics Group ..........................................................................
Total accumulated amortization .............................................
Intangible assets, net ..............................................................
Deferred tax assets, net .........................................................................
Other .....................................................................................................
$
December 31,
2013
2012
—
—
—
—
—
—
—
2,401
2,167
4,568
$
$
800
—
800
(770)
—
(770)
30
3,277
1,613
4,920
Intangible assets at December 31, 2012 consisted of a long-term supply agreement in the Industrial Group.
The intangible assets are fully amortized as of December 31, 2013. Deferred tax assets, net relate to the Company’s
Mexico operations and resulted primarily from deferred revenue related to the Dana settlement agreement. Other
assets at December 31, 2013 and 2012 includes unamortized loan costs of approximately $187,000 and $265,000,
respectively.
47
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(10)
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Salaries, wages, employment taxes and withholdings .......................... $
Employee benefit plans ........................................................................
Income, property and other taxes .........................................................
Deferred revenue ..................................................................................
Other .....................................................................................................
$
December 31,
2013
2012
4,696
1,244
532
12,357
4,977
23,806
$
$
3,385
1,121
472
13,357
3,653
21,988
Included in other accrued liabilities are accrued operating expenses, accrued warranty expenses, accrued
interest and other items, none of which exceed 5% of total current liabilities. Deferred revenue at
December 31, 2013 and 2012 includes $8,657,000 and $8,000,000, respectively, related to the Dana settlement.
(11)
Other Liabilities
Other liabilities consist of the following (in thousands):
Deferred revenue .................................................................................. $
Noncurrent pension liability .................................................................
Other .....................................................................................................
$
December 31,
2013
2012
—
4,714
827
5,541
$
$
8,657
10,494
1,629
20,780
Included in other liabilities are accrued long-term warranty expenses and other items, none of which exceed
5% of total liabilities. Deferred revenue at December 31, 2012 is related to the Dana settlement.
(12)
Long-Term Debt
On May 12, 2011, the Company entered into its new Credit Facility providing potential total availability up to
$50,000,000 that supports short-term funding needs and letters of credit. Loans made under the Credit Facility will
mature and the commitments thereunder will terminate in May 2016. The Credit Facility provides for an option,
subject to certain conditions, to increase potential total availability to $60,000,000 in the future. Borrowing
availability under the Credit Facility is determined by a monthly borrowing base collateral calculation that is based
on specified percentages of the value of eligible accounts receivable, inventory and machinery and equipment, less
certain reserves and subject to certain other adjustments.
Based on the above mentioned calculation, at December 31, 2013, the Company had actual total
availability for borrowings and letters of credit under the Credit Facility of $32,691,000, of which we had drawn
$24,000,000, leaving $7,885,000 still available for borrowing, after accounting for the letter of credit. Along with
an unrestricted cash balance of $18,674,000, we had total cash and borrowing capacity of $26,559,000 as of
December 31, 2013. Approximately $3,776,000 of the unrestricted cash balance relates to the Company’s Mexican
subsidiaries. Standby letters of credit up to a maximum of $5,000,000 may be issued under the Credit Facility of
which $806,000 and $999,000 were issued at December 31, 2013 and 2012, respectively.
Obligations under the Credit Facility are guaranteed by all of our U.S. subsidiaries and are secured by a
first priority lien on substantially all domestic assets of the Company.
The Credit Facility contains a number of covenants that, among other things, limit or restrict our ability to
dispose of assets, incur additional indebtedness, incur guarantee obligations, engage in sale and leaseback
transactions, prepay other indebtedness, modify organizational documents and certain other agreements, create
restrictions affecting subsidiaries, make dividends and other restricted payments without bank approval, create liens,
make investments, make acquisitions, engage in mergers, change the nature of our business and engage in certain
48
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
transactions with affiliates. In addition, if the Company’s availability under the Credit Facility falls below
$6,000,000 (or $8,000,000 for a period of five or more consecutive days), the Company must maintain a fixed
charge coverage ratio of at least 1.15 to 1.00. As of December 31, 2013, the Company was in compliance with all
covenants.
The weighted average interest rate for outstanding borrowings at December 31, 2013 was 3.0%. The
weighted average interest rates for borrowings during the years ended December 31, 2013 and 2012 were 2.4% and
2.4%, respectively. Interest incurred during the years ended December 31, 2013 and 2012 totaled approximately
$569,000 and $514,000, respectively. The Company had no capitalized interest in 2013 or 2012. Interest paid during
the years ended December 31, 2013 and 2012 totaled approximately $333,000 and $250,000, respectively.
(13)
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial
statements at their carrying amount which approximates fair value because of the short-term maturity of those
instruments. The carrying amount of debt outstanding at December 31, 2013 under the Credit Facility 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.
(14)
Employee Benefit Plans
The Industrial Group sponsors noncontributory defined benefit pension plans (the Pension Plans) covering
certain of its employees. 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. All of the Company’s pension plans are frozen to new participants and certain plans are frozen to
additional benefit accruals. The Company’s funding policy is to make the minimum annual contributions required
by the applicable regulations. The Pension Plans’ assets are primarily invested in equity securities and fixed income
securities.
The following table details the components of pension (income) expense (in thousands):
Service cost .......................................................................................... $
Interest cost on projected benefit obligation .........................................
Net amortizations and deferrals ............................................................
Expected return on plan assets .............................................................
24
1,652
824
(2,522)
$
25
1,870
842
(2,430)
$
(22)
$
307
Year ended December 31,
2012
2013
The following are summaries of the changes in the benefit obligations and plan assets and of the funded
status of the Pension Plans (in thousands):
December 31,
2013
2012
Change in benefit obligation:
Benefit obligation at beginning of year ............................................ $
Service cost .......................................................................................
Interest cost .......................................................................................
Actuarial (gain) loss ..........................................................................
Benefits paid .....................................................................................
45,561
24
1,652
(3,534)
(3,177)
$
44,144
25
1,870
2,780
(3,258)
Benefit obligation at end of year ...................................................... $
40,526
$
45,561
49
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
December 31,
2013
2012
Change in plan assets:
Fair value of plan assets at beginning of year ................................... $
Actual return on plan assets ..............................................................
Company contributions .....................................................................
Benefits paid .....................................................................................
35,067
4,013
663
(3,177)
$
32,420
4,307
1,598
(3,258)
Fair value of plan assets at end of year ............................................. $
36,566
$
35,067
Underfunded status of the plans ........................................................... $
(3,960)
$
(10,494)
Balance sheet assets (liabilities):
Other assets ....................................................................................... $
Accrued liabilities .............................................................................
Other liabilities .................................................................................
660
—
(4,620)
$
—
—
(10,494)
Net amount recognized ..................................................................... $
(3,960)
$
(10,494)
Pension plans with accumulated benefit obligation in excess of plan
assets:
Projected benefit obligation .............................................................. $
Accumulated benefit obligation ........................................................
Fair value of plan assets ....................................................................
26,773
26,760
22,153
$
45,561
45,543
35,067
Projected benefit obligation and net periodic pension cost
assumptions:
Discount rate .......................................................................................
Rate of compensation increase ...........................................................
Expected long-term rate of return on plan assets ................................
4.65%
4.00
7.50
Weighted average asset allocation:
Equity securities..................................................................................
Debt securities ....................................................................................
46 %
54
Total ....................................................................................................
100 %
3.80 %
4.00
7.75
58 %
42
100 %
The fair values of our pension plan assets as of December 31, 2013, are as follows (in thousands):
Quoted Prices
In Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Asset categories:
Cash and cash equivalents .................................................................. $
Equity investments:
U.S. Large Cap ................................................................................
U.S. Mid Cap ..................................................................................
U.S. Small Cap ................................................................................
World Equity ...................................................................................
Real estate .......................................................................................
Other ...............................................................................................
Fixed income securities ......................................................................
1,047
$
—
9,926
1,552
788
3,152
911
637
8,405
—
—
—
—
—
—
10,148
Total Plan Assets ................................................................................ $
26,418
$
10,148
50
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Investments in our defined benefit plans are stated at fair value. The following valuation methods were
used to value our pension assets:
Equity securities .........................................The fair value of equity securities is determined by either direct or
indirect quoted market prices. When the value of assets held in separate
accounts is not published, the value is based on the underlying
holdings, which are primarily direct quoted market prices on regulated
financial exchanges.
Fixed income securities ..............................The fair value of fixed income securities is determined by either direct
or indirect quoted market prices. When the value of assets held in
separate accounts is not published, the value is based on the underlying
holdings, which are primarily direct quoted market prices on regulated
financial exchanges.
Real estate ..................................................The fair value of investments in real estate is provided by fund
managers. The fund managers value the real estate investments via
independent third party appraisals on a periodic basis. Assumptions
used to revalue the properties are updated every quarter. We believe
this is an appropriate methodology to obtain the fair value of these
assets.
Cash and cash equivalents ..........................The fair value of cash and cash equivalents is set equal to its cost.
The methods described above may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, while we believe the valuation methods are
appropriate and consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a different fair value measurement at the
reporting date.
The Company uses December 31 as the measurement date for the Pension Plans. Total estimated
contributions expected to be paid to the plans during 2014 is $2,700,000, which represents the minimum funding
amounts required by federal law, in addition to funds expected to be required as additional contributions by the
Pension Benefit Guaranty Corp. (PBGC). The expected long-term rates of return on plan assets for determining net
periodic pension cost for 2013 and 2012 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 0-55%, fixed income
securities ranging 35-100% and non-traditional/other of 0%-10% of total investments.
Accumulated other comprehensive loss at December 31, 2013 includes $13,225,000 of unrecognized
actuarial losses that have not yet been recognized in net periodic pension cost: The actuarial loss included in
accumulated other comprehensive loss and expected to be recognized in net periodic pension cost during the fiscal
year ended December 31, 2014 is $551,000.
At December 31, 2013, the benefits expected to be paid in each of the next five fiscal years, and in
aggregate for the five fiscal years thereafter are as follows (in thousands):
2014 ............................................................................................................................... $
2015 ...............................................................................................................................
2016 ...............................................................................................................................
2017 ...............................................................................................................................
2018 ...............................................................................................................................
2019-2023 .....................................................................................................................
3,216
3,209
3,202
3,175
3,124
14,622
$
30,548
51
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The Company sponsors a defined contribution plan (the Defined Contribution Plan) for substantially all
domestic 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 up to 3% and provide discretionary contributions. Contributions to the Defined
Contribution Plan by the Company in 2013 and 2012 totaled approximately $973,000 and $908,000, respectively.
The Company has self-insured medical plans (the Medical Plans) covering substantially all domestic
employees. The number of employees participating in the Medical Plans was approximately 668 and 702 at
December 31, 2013 and 2012, respectively. The Medical Plans limit the Company’s annual obligations to fund
claims to specified amounts per participant. The Company is adequately insured for amounts in excess of these
limits. Employees are responsible for payment of a portion of the premiums. During 2013 and 2012, the Company
charged approximately $3,909,000 and $4,107,000, respectively, to operations related to medical claims incurred
and estimated, reinsurance premiums, and administrative costs for the Medical Plans.
In addition, certain of the Company’s non-U.S. employees are covered by various defined benefit and
defined contribution plans. The Company’s expenses for these plans totaled approximately $247,000 and $200,000
in 2013 and 2012, respectively. The aggregate benefit plan assets and accumulated benefit obligation of these plans
are not significant.
(15)
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, 2013 are as follows (in thousands):
2014 ............................................................................................................................... $
2015 ...............................................................................................................................
2016 ...............................................................................................................................
2017 ...............................................................................................................................
2018 ...............................................................................................................................
2019 and thereafter ........................................................................................................
2,178
2,186
2,206
2,216
2,250
3,206
$
14,242
Rent expense for the years ended December 31, 2013 and 2012 totaled approximately $2,601,000 and
$2,458,000, respectively.
As of December 31, 2013, the Company had outstanding purchase commitments of approximately
$6,062,000 primarily for the acquisition of inventory and manufacturing equipment.
The Company bears insurance risk as a member of a group captive insurance entity for certain general
liability, automobile and workers’ compensation insurance programs, a self-insured worker’s compensation program
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 consolidated 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.
52
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(16)
Stock Option and Purchase Plans
The Company’s stock compensation program provides for the grant of restricted stock (including
performance-based restricted stock), unrestricted stock, stock options and stock appreciation rights. A total of
3,000,000 shares of common stock were reserved for issuance under the 2004 Equity Plan. On May 11, 2010, the
2004 Equity Plan was replaced with the 2010 Sypris Omnibus Plan. A total of 3,655,088 shares of common stock
were registered for issuance under the 2010 Omnibus Plan. Additionally, awards under the 2004 Plan that are
cancelled without having been fully exercised or vested are available again for new awards under the 2010 Omnibus
Plan. The aggregate number of shares available for future grant as of December 31, 2013 and 2012 was 2,020,439
and 2,536,939, respectively.
The 2004 Equity Plan provides for restrictions which lapse after one, two, three or four years for certain
grants or for certain other shares, one-third of the restriction is removed after three, five and seven years,
respectively. The 2010 Omnibus Plan provides for restrictions which lapse after three years. During the restricted
period, which is commensurate with each vesting period, the recipient has the right to receive dividends and voting
rights for the shares. Generally, if a recipient leaves the Company before the end of the restricted period or if
performance requirements, if any, are not met, the shares will be forfeited.
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. Stock option grants under the 2004 Equity Plan include both six and ten year lives
along with graded vesting over three, four and five years of service. Stock option grants under the 2010 Omnibus
Plan include a five year life along with vesting after three years of service.
Compensation expense is measured based on the fair value at the date of grant and is recognized on a
straight-line basis over the vesting period. Fair value for restricted shares is equal to the stock price on the date of
grant, while the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes
option-pricing method. The Company uses historical Company and industry data to estimate the expected price
volatility, the expected option life, the expected forfeiture rate and the expected dividend yield. The risk-free rate is
based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.
The following weighted average assumptions were used to estimate the fair value of options granted using
the Black-Scholes option-pricing model:
Expected life (years) .................................................................................
Expected volatility ....................................................................................
Risk-free interest rates ..............................................................................
Expected dividend yield ...........................................................................
2013
4.0
81.1 %
0.77 %
1.97
2012
4.0
100.3 %
1.01 %
1.62
Year ended December 31,
A summary of the restricted stock activity is as follows:
Nonvested shares at January 1, 2013 ..................................................................
Granted ...........................................................................................................
Vested .............................................................................................................
Forfeited ..........................................................................................................
Number of
Shares
1,066,560
288,000
(318,845)
(57,000)
Weighted
Average
Grant Date
Fair Value
3.81
$
3.96
3.37
3.83
Nonvested shares at December 31, 2013 ............................................................
978,715
$
4.00
The total fair value of shares vested during 2013 and 2012 was $1,344,000 and $1,476,000, respectively.
In conjunction with the vesting of restricted shares and payment of taxes thereon, the Company received into
treasury 114,552 and 126,651 restricted shares, respectively, at an average price of $4.22 and $4.05 per share,
53
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
respectively, the closing market price on the date the restricted stock vested. Such repurchased shares were
immediately cancelled.
The following table summarizes option activity for the year ended December 31, 2013:
Outstanding at January 1, 2013 ........................
Granted .........................................................
Exercised ......................................................
Forfeited ........................................................
Expired..........................................................
Weighted-
average
Remaining
Term
Aggregate
Intrinsic
Value
$
Weighted-
average
Exercise Price
Per Share
3.46
3.93
0.84
3.24
8.08
Number of
Shares
1,053,111
281,500
(208,000)
(19,000)
(32,211)
Outstanding at December 31, 2013 ..................
1,075,400
Exercisable at December 31, 2013 ...................
295,400
$
$
3.95
3.80
2.77
1.09
$ 122,000
$ 110,000
The weighted average grant date fair value based on the Black-Scholes option pricing model for options
granted in the years ended December 31, 2013 and 2012 was $2.08 and $2.56 per share, respectively. There were
208,000 and 110,100 options exercised in 2013 and 2012, respectively. The total intrinsic value of options exercised
was $488,000 and $672,000 during the years ended December 31, 2013 and 2012, respectively.
As of December 31, 2013, there was $2,009,000 of total unrecognized compensation cost, after estimated
forfeitures, related to unvested share-based compensation granted under the plans. That cost is expected to be
recognized over a weighted-average period of 1.0 years. The total fair value of option shares vested was $67,000
and $1,004,000 during the years ended December 31, 2013 and 2012, respectively.
(17)
Stockholders’ Equity
As of December 31, 2013 and 2012, 24,850 shares of the Company’s preferred stock were designated as
Series A Preferred Stock in accordance with the terms of our stockholder rights plan, which expired in October
2011. There are no shares of Series A Preferred Stock currently outstanding, and we have no current plans to issue
any such shares. Any future holders of Series A Preferred Stock, as currently designated, would 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. Any such shares of Series A Preferred Stock would not be redeemable. However, the Company would
be entitled to purchase shares of Series A Preferred Stock in the open market or pursuant to an offer to a holder or
holders.
The holders of our common stock were not entitled to any payment as a result of the expiration of the rights
plan and the rights issued thereunder.
The Company’s accumulated other comprehensive loss consists of employee benefit related adjustments
and foreign currency translation adjustments.
Accumulated other comprehensive loss consisted of the following (in thousands):
Foreign currency translation adjustments ............................................. $
Employee benefit related adjustments, net of tax of $228 – U.S. ........
Employee benefit related adjustments – Mexico ..................................
(4,435)
(12,996)
(303)
$
2013
2012
(4,675)
(16,561)
(326)
Accumulated other comprehensive loss ............................................... $
(17,734)
$
(21,562)
December 31,
54
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(18)
Income Taxes
The Company accounts for income taxes under the liability method. 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 (loss) income from continuing operations before taxes are as follows (in thousands):
Domestic ............................................................................................. $ (19,952)
9,972
Foreign ................................................................................................
$
2,900
9,615
$
(9,980)
$
12,515
The components of income tax (benefit) expense applicable to continuing operations are as follows (in
thousands):
Year ended December 31,
2013
2012
Year ended December 31,
2013
2012
Current:
Federal ................................................................................................ $
State ....................................................................................................
Foreign ................................................................................................
Total current income tax expense ..................................................
Deferred:
Federal ................................................................................................
State ....................................................................................................
Foreign ................................................................................................
Total deferred income tax (benefit) expense .................................
$
—
116
1,077
1,193
(2,061)
(376)
1,151
(1,286)
—
141
1,236
1,377
—
—
871
871
$
(93)
$
2,248
Income tax (benefit) expense for each year is allocated to continuing operations, discontinued operations,
extraordinary items, other comprehensive income, the cumulative effects of accounting changes, and other charges or
credits recorded directly to shareholders’ equity. ASC 740-20-45 Income Taxes, Intraperiod Tax Allocation, Other
Presentation Matters includes an exception to the general principle of intraperiod tax allocations. The codification
source states that the tax effect of pretax income or loss from continuing operations generally should be determined
by a computation that considers only the tax effects of items that are included in continuing operations. The
exception to that incremental approach is that all items (i.e. other comprehensive income, discontinued operations,
etc.) be considered in determining the amount of tax benefit that results from a loss from continuing operations and
that benefit should be allocated to continuing operations. That is, when a company has a current period loss from
continuing operations, management must consider income recorded in other categories in determining the tax benefit
that is allocated to continuing operations. This includes situations in which a company has recorded a full valuation
allowance at the beginning and end of the period, and the overall tax provision for the year is zero. The intraperiod
tax allocation is performed once the overall tax provision has been computed and allocates that provision to various
income statement (continuing operations, discontinued operations), other comprehensive income and balance sheet
captions. While the intraperiod tax allocation does not change the overall tax provision, it results in a gross-up of the
individual components. Additionally, tax jurisdictions must be considered separately; therefore the allocation to the
U.S. and Mexico must be looked at separately.
As the Company experienced a loss from continuing operations in the U.S. for the year ended
December 31, 2013 and other comprehensive income from employee benefit and foreign currency translation
adjustments, the Company has allocated income tax expense against the components of other comprehensive income
in 2013 using a 38.9% effective tax rate. Income tax benefit related to continuing operations for the year ended
55
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
December 31, 2013 includes a benefit of $2,437,000 due to the required intraperiod tax allocation. Conversely, other
comprehensive income for the year ended December 31, 2013 includes income tax expense of $2,437,000.
The Company files a consolidated federal income tax return which includes all domestic subsidiaries. State
income taxes paid in the U.S. during 2013 and 2012 totaled $120,000 and $116,000, respectively. Foreign income
taxes paid during 2013 and 2012 totaled $289,000 and $2,054,000, respectively. There were no foreign refunds
received in 2013 and 2012. There were no federal taxes paid in 2013 and 2012, and there were no federal refunds
received in 2013 and 2012. At December 31, 2013, the Company had $119,869,000 of federal net operating loss
carryforwards available to offset future federal taxable income, which will expire in various amounts from 2024 to
2033.
At December 31, 2013, the Company had $41,883,000 of state net operating loss carryforwards available to
offset future state taxable income, the majority of which relates to Florida. These carryforwards expire in various
amounts from 2018 to 2033.
The following is a reconciliation of income tax (benefit) expense applicable to continuing operations to that
computed by applying the federal statutory rate to (loss) income from continuing operations before income taxes (in
thousands):
Year ended December 31,
2013
2012
Federal tax expense at the statutory rate ............................................... $
Current year permanent differences .....................................................
Goodwill impairment ...........................................................................
State income taxes, net of federal tax impact .......................................
Foreign repatriation, net of foreign tax credits .....................................
Mexican minimum taxes ......................................................................
Effect of tax rates of foreign subsidiaries .............................................
Currency translation effect on temporary differences ..........................
Valuation allowance .............................................................................
Prior year adjustment............................................................................
Other .....................................................................................................
(3,517)
50
1,373
(1,118)
2,768
46
(486)
38
729
22
2
$
1,831
(18)
—
(406)
4,735
1,021
(440)
(882)
(4,444)
852
(1)
$
(93)
$
2,248
ASC 740, Income Taxes, requires that a valuation allowance be established when it is more likely than not
that all or a portion of a deferred tax asset will not be realized. The net cumulative domestic loss for the current and
prior two years represents negative evidence under the provisions of ASC 740 requiring the Company to establish a
valuation allowance against domestic deferred tax assets. Until an appropriate level and characterization of
profitability is attained, the Company expects to continue to maintain a valuation allowance on its net deferred tax
assets related to future U.S. and certain non-U.S. tax benefits.
The gross deferred tax asset for the Company’s Mexican subsidiaries was $3,973,000 and $5,888,000 as of
December 31, 2013 and 2012, respectively. Included in this balance as of December 31, 2012 is a deferred tax asset
associated with the impairment of marketable securities, which was the result of losses recorded for book purposes
on the portion of such marketable securities allocated to the Mexican subsidiaries. A full valuation allowance of
$746,000 was applied to this specific deferred tax asset as of December 31, 2012.
Therefore, the net deferred tax asset balances of $3,973,000 and $5,142,000 at December 31, 2013 and
2012, respectively, are attributable to the Mexican subsidiaries. The Company has been profitable in Mexico in the
past and anticipates continuing profitability in the future.
56
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Deferred income tax assets and liabilities are as follows (in thousands):
December 31,
2013
2012
Deferred tax assets:
Compensation and benefit accruals .................................................... $
Inventory valuation .............................................................................
Federal and state net operating loss carryforwards .............................
Deferred revenue ................................................................................
Accounts receivable allowance ..........................................................
Defined benefit pension plan ..............................................................
Foreign deferred revenue and other provisions ..................................
AMT credits .......................................................................................
Other ...................................................................................................
Domestic valuation allowance ............................................................
Foreign valuation allowance ...............................................................
$
1,905
3,176
44,139
3,180
129
873
3,973
185
1,339
58,899
(49,832)
—
Total deferred tax assets ................................................................
9,067
Deferred tax liabilities:
Foreign subsidiaries – unrepatriated earnings .....................................
Depreciation .......................................................................................
Total deferred tax liabilities ..........................................................
(2,665)
(2,429)
(5,094)
1,521
2,817
43,550
5,461
121
3,554
5,888
185
135
63,232
(48,196)
(746)
14,290
(4,735)
(4,413)
(9,148)
Net deferred tax asset ........................................................................... $
3,973
$
5,142
The ASC Income Tax topic includes guidance for the accounting for uncertainty in income taxes
recognized in an enterprise’s financials. Specifically, the guidance prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The total amount of gross unrecognized tax benefits as of
December 31, 2013 and 2012 was $200,000. There were no changes to the unrecognized tax benefit balance during
the years ended December 31, 2013 and 2012.
If the Company’s positions are sustained by the taxing authority in favor of the Company, the entire
balance at December 31, 2013 would reduce the Company’s effective tax rate. The Company does not expect its
unrecognized tax benefits to change significantly over the next 12 months. The Company recognizes accrued
interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2013 and 2012,
the Company does not have an accrual for the payment of tax-related interest and penalties.
The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign
jurisdictions. The Internal Revenue Service (IRS) is not currently examining the Company’s U.S. income tax
returns for 2009 through 2012, for which the statute has yet to expire. In addition, open tax years related to state and
foreign jurisdictions remain subject to examination.
As of December 31, 2013, the Company has no undistributed earnings of foreign subsidiaries that are
classified as permanently reinvested. The Company expects to repatriate available non-U.S. cash holdings during
2014. The Company will utilize its net operating loss carryforward in the U.S. to offset the taxable income generated
in 2013 in the U.S. as a result of the repatriation and has therefore recognized a deferred income tax benefit equal to
the amount of the U.S deferred tax liability and a corresponding reduction in the deferred tax asset valuation
allowance.
57
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(19)
Earnings (Loss) Per Common Share
The Company computes earnings per share using the two-class method, which is an earnings allocation
formula that determines earnings per share for common stock and participating securities. Restricted stock granted
by the Company is considered a participating security since it contains a non-forfeitable right to dividends.
Our potentially dilutive securities include potential common shares related to our stock options and
restricted stock. Diluted earnings per share considers the impact of potentially dilutive securities except in periods
in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect.
Diluted earnings per share excludes the impact of common shares related to our stock options in periods in which
the option exercise price is greater than the average market price of our common stock for the period. All potential
common shares were excluded from diluted earnings per share for the year ended December 31, 2013 because the
effect of inclusion would be anti-dilutive. There were 532,000 potential common shares excluded from diluted
earnings per share for the year ended December 31, 2012 because the effect of inclusion would be anti-dilutive.
A reconciliation of the weighted average shares outstanding used in the calculation of basic and diluted
earnings (loss) per common share is as follows (in thousands):
Year ended December 31,
2013
2012
(Loss) earnings attributable to stockholders:
(Loss) income from continuing operations as reported ...................................... $
(9,887)
$
10,267
Less distributed and undistributed earnings allocable to restricted
award holders ..............................................................................................
Less dividends declared attributable to restricted award holders ....................
Net (loss) income from continuing operations allocable to common
—
(45)
(429)
(64)
stockholders .................................................................................................
(9,932)
9,774
Loss from discontinued operations, net of tax allocable to common
stockholders ..................................................................................................
—
(7,220)
Net (loss) income allocable to common stockholders ........................................ $
(9,932)
$
2,554
Basic (loss) earnings per common share attributable to stockholders:
Continuing operations ..................................................................................... $
Discontinued operations ..................................................................................
(0.51)
—
Net (loss) income ............................................................................................ $
(0.51)
Diluted (loss) earnings per common share attributable to stockholders:
Continuing operations ..................................................................................... $
Discontinued operations ..................................................................................
(0.51)
—
Net (loss) income ............................................................................................ $
(0.51)
$
$
$
$
0.51
(0.38)
0.13
0.50
(0.37)
0.13
Weighted average shares outstanding – basic .................................................
Weighted average additional shares assuming
conversion of potential common shares ........................................................
Weighted average shares outstanding – diluted ..............................................
19,345
(20)
Segment Information
19,345
19,050
—
365
19,415
The Company is organized into two business groups, the Industrial Group and the Electronics Group. The
segments are each managed separately because of the distinctions between the products, services, markets,
customers, technologies, and workforce skills of the segments. The 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 Electronics Group
provides manufacturing and technical services as an outsourced service provider and manufactures complex data
storage systems. Revenue derived from outsourced services for the Industrial Group accounted for 82% and 78% of
total net revenue in 2013 and 2012, respectively. Revenue derived from outsourced services for the Electronics
58
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Group accounted for 7% and 6% of total net revenue in 2013 and 2012, respectively. There was no intersegment net
revenue recognized for any year presented.
The following table presents financial information for the reportable segments of the Company (in
thousands):
Year ended December 31,
2013
2012
Net revenue from unaffiliated customers:
Industrial Group ................................................................................ $ 276,136
34,578
Electronics Group .............................................................................
$ 286,046
55,558
$ 310,714
$ 341,604
Gross profit (loss):
Industrial Group ................................................................................ $
Electronics Group .............................................................................
31,638
(1,585)
$
30,981
12,768
$
30,053
$
43,749
Operating income (loss):
Industrial Group ................................................................................ $
Electronics Group .............................................................................
General, corporate and other .............................................................
20,021
(21,851)
(8,558)
$
20,270
(2,668)
(8,555)
$
(10,388)
$
9,047
Income (loss) from continuing operations before income taxes:
Industrial Group ................................................................................ $
Electronics Group .............................................................................
General, corporate and other .............................................................
20,985
(21,858)
(9,107)
$
24,237
(2,673)
(9,049)
Depreciation and amortization:
Industrial Group ................................................................................ $
Electronics Group .............................................................................
General, corporate and other .............................................................
11,261
999
141
$
10,831
1,252
168
$
12,401
$
12,251
$
(9,980)
$
12,515
Capital expenditures:
Industrial Group ................................................................................ $
Electronics Group .............................................................................
General, corporate and other .............................................................
$
4,547
444
62
5,053
$
$
5,839
1,139
104
7,082
December 31,
2013
2012
Total assets:
Industrial Group ................................................................................ $ 100,593
29,689
16,001
Electronics Group .............................................................................
General, corporate and other .............................................................
$ 114,268
38,852
7,848
$ 146,283
$ 160,968
Total liabilities:
Industrial Group ................................................................................ $
Electronics Group .............................................................................
General, corporate and other .............................................................
54,232
9,216
26,583
$
66,679
11,063
20,293
$
90,031
$
98,035
59
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The Company’s export sales from the U.S. totaled $45,163,000 and $53,019,000 in 2013 and 2012,
respectively. Approximately $95,392,000 and $100,003,000 of net revenue in 2013 and 2012, respectively, and
$16,656,000 and $18,214,000 of long lived assets at December 31, 2013 and 2012, respectively, and net assets of
$20,779,000 and $26,495,000 at December 31, 2013 and 2012 relate to the Company’s international operations.
(21)
Quarterly Financial Information (Unaudited)
The following is an analysis of certain items in the consolidated statements of operations by quarter for the
years ended December 31, 2013 and 2012:
First
Second
Third
Fourth
First
Second
Third
Fourth
2013
2012
(in thousands, except for per share data)
8,076
(6,881)
Net revenue ........................... $ 78,411 $ 82,166 $ 76,278 $ 73,859 $ 96,463 $ 98,912 $ 78,763 $ 67,466
8,638
7,261
Gross profit ...........................
Operating (loss) income ........
(559)
(975)
Net (loss) income from
continuing operations ........
Net loss from
discontinued operations ....
Net (loss) income .................. $ (6,459) $ (1,494) $ (1,995) $
(576)
(6,331)
4,438 $ (5,739) $
(223)
5,288 $
6,380
(1,843)
8,336
(689)
—
61 $
13,223
4,468
12,514
4,503
(90)
(940)
9,374
635
(1,995)
(6,459)
(1,494)
5,014
5,511
(850)
592
—
—
—
61
Basic (loss) income per share:
(Loss) income per share from
continuing operations ...... $
Loss per share from
discontinued operations ..
Net (loss) income per share $
Diluted (loss) income per share:
Loss (income) per share from
continuing operations ...... $
Loss per share from
discontinued operations ..
Net (loss) income per share $
Cash dividends declared
per common share ............. $
(0.34) $
(0.08) $
(0.10) $
— $
0.28 $
0.25 $
0.03 $
(0.04)
—
(0.34) $
—
(0.08) $
—
(0.10) $
—
— $
(0.01)
0.27 $
(0.03)
0.22 $
(0.33)
(0.30) $
(0.01)
(0.05)
(0.34) $
(0.08) $
(0.10) $
— $
0.28 $
0.25 $
0.03 $
(0.04)
—
(0.34) $
—
(0.08) $
—
(0.10) $
—
— $
(0.01)
0.27 $
(0.03)
0.22 $
(0.32)
(0.29) $
(0.01)
(0.05)
0.02 $
0.02 $
0.02 $
0.02 $
0.02
0.02 $
0.02 $
0.02
60
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s
management, including the President and Chief Executive Officer (the CEO) and the Chief Financial Officer (the
CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on that evaluation, the
Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and
procedures were effective as of the end of the period covered by this report.
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).
Management’s report on internal control over financial reporting is included in Part II, Item 8 of this Annual Report
on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information
None.
61
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required herein is incorporated by reference from sections of the Company’s Proxy
Statement titled “Section 16(a) Beneficial Ownership Reporting Compliance,” “Governance of the Company –
Committees of the Board of Directors,” “Governance of the Company – Audit and Finance Committee,” “Proposal
One, Election of Directors,” and “Executive Officers,” which Proxy Statement will be filed with the Securities and
Exchange Commission pursuant to instruction G(3) of the General Instructions to Form 10-K.
The Company has adopted a Code of Conduct that applies to all of its directors, officers (including its chief
executive officer, chief financial officer, chief accounting officer and any person performing similar functions) and
employees. The Company has made the Code of Conduct, and will make any amendments and waivers thereto,
available on its website at www.sypris.com.
Item 11. Executive Compensation
The information required herein is incorporated by reference from sections of the Company’s Proxy
Statement titled “2013 Director Compensation,” “Governance of the Company,” “Summary Compensation Table,”
and “Outstanding Equity Awards at Fiscal Year-End 2013,” which Proxy Statement will be filed with the Securities
and Exchange Commission pursuant to instruction G(3) of the General Instructions to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required herein is incorporated by reference from the section of the Company’s Proxy
Statement titled “Stock Ownership of Certain Beneficial Owners and Management,” which Proxy Statement will be
filed with the Securities and Exchange Commission pursuant to instruction G(3) of the General Instructions to Form
10-K.
Equity Compensation Plan Information
The following table provides information as of December 31, 2013 with respect to shares of Sypris
common stock that may be issued under our equity compensation plans.
Plan Category
Equity Compensation Plans Approved by
Stockholders ...............................................
Equity Compensation Plans Not Approved
by Stockholders ..........................................
Total ................................................................
Number of Securities
To be Issued Upon
Exercise of
Outstanding Options
(a)
Weighted Average
Exercise Price of
Outstanding
Options (b)
Number of Securities
Remaining Available For
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a)) (c)
1,075,400(1) $
—
1,075,400 $
3.95
—
3.95
2,020,439(2)
—
2,020,439
(1) Consists of (a) 12,311 outstanding options under the 1994 Independent Directors’ Stock Option Plan, which
Plan expired on October 27, 2004, (b) 281,589 outstanding options under the 2004 Equity Plan, (c) and
781,500 outstanding options under the 2010 Omnibus Plan.
(2) Shares remaining available for issuance under the 2010 Omnibus Plan.
62
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required herein is incorporated by reference from the sections of the Company’s Proxy
Statement titled “Governance of the Company – Transactions with Related Persons” and “Governance of the
Company – Independence,” which Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to instruction G(3) of the General Instructions to Form 10-K.
Item 14. Principal Accounting Fees and Services
The information required herein is incorporated by reference from the section of the Company’s Proxy
Statement titled “Relationship with Independent Public Accountants,” which Proxy Statement will be filed with the
Securities and Exchange Commission pursuant to instruction G(3) of the General Instructions to Form 10-K.
63
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Financial Statements
The financial statements as set forth under Item 8 of this Annual Report on Form 10-K are included.
2. Exhibits
Exhibit
Number
3.1
3.2
4.1
10.1
10.2
10.2.1
10.2.2
10.3*
10.4*
Description
Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the
Company’s Form 10-Q for the quarterly period ended June 30, 2004 filed on August 3, 2004
(Commission File No. 000-24020)).
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company’s Form 8-K filed October 31, 2011 (Commission File No. 000-24020)).
Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to the Company’s Form
10-K for the fiscal year ended December 31, 1998 filed on March 5, 1999 (Commission File No. 000-
24020)).
Revolving Credit and Security Agreement between PNC Bank, National Association, Sypris Solutions,
Inc., Sypris Technologies, Inc., Sypris Electronics, LLC, Sypris Data Systems, Inc., Sypris
Technologies Marion, LLC, Sypris Technologies Kenton, Inc. and Sypris Technologies Mexican
Holdings, LLC dated as of May 12, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s
Form 10-Q filed on August 9, 2011 (Commission File No. 000-24020)).
Lease between John Hancock Mutual Life Insurance Company and Honeywell, Inc. dated
April 27, 1979; related Notice of Assignment from John Hancock Mutual Life Insurance Company to
Sweetwell Industrial Associates, L.P., dated July 10, 1986; related Assignment and Assumption of
Lease between Honeywell, Inc. and Defense Communications Products Corporation (prior name of
Group Technologies Corporation) dated May 21, 1989; and related Amendment I to Lease Agreement
between Sweetwell Industries Associates, L.P. and Group Technologies Corporation dated
October 25, 1991, regarding Tampa industrial park property (incorporated by reference to Exhibit 10.2
to the Company’s Registration Statement on Form S-1 filed May 18, 1994 (Registration No. 33-
76326)).
Agreement related to Fifth Renewal of Lease between Sweetwell Industries Associates, L.P. and
Group Technologies Corporation dated October 12, 2006, regarding Tampa industrial park property
(incorporated by reference to Exhibit 10.8.2 to the Company’s Form 10-K for the fiscal year ended
December 31, 2006 filed on March 14, 2007 (Commission File No. 000-24020)).
Agreement related to Sixth Renewal of Lease between Sweetwell Industries Associates, L.P. and
Group Technologies Corporation dated August 13, 2008, regarding Tampa industrial park property
(incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended
September 28, 2008 filed on November 5, 2008 (Commission File No. 000-24020)).
Sypris Solutions, Inc. Independent Directors’ Stock Option Plan as Amended and Restated effective
February 26, 2002 (incorporated by reference to Exhibit 4.5 to the Company’s Form S-8 filed on
May 9, 2002 (Registration No. 333-87882)).
Sypris Solutions, Inc., Directors Compensation Program As Amended and Restated Effective
February 24, 2004 and as amended December 15, 2004, (incorporated by reference to Exhibit 10.1 to
the Company’s Form 8-K filed on December 21, 2004 (Commission File No. 000-24020)).
64
Exhibit
Number
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14
10.15*
10.16
10.17
10.18*
Description
Sypris Solutions, Inc. Directors Compensation Program adopted on September 1, 1995 Amended and
Restated on December 17, 2008 (incorporated by reference to Exhibit 10.17 to the Company’s Form
10-K for the fiscal year ended December 31, 2008 filed on March 31, 2009 (Commission File No. 000-
24020)).
Form of 2009 Sypris Three-Year Bonus Agreement, effective as of May 12, 2009 (incorporated by
reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended July 5, 2009
filed on August 18, 2009 (Commission File No. 000-24020)).
Sypris Solutions, Inc. 2012 Incentive Bonus Plan dated December 20, 2011 (incorporated by reference
to Exhibit 10.1 to the Company’s Form 10-Q filed on May 15, 2012 (Commission File No. 000-
24020)).
2004 Sypris Equity Plan effective as of April 27, 2004 (incorporated by reference to Exhibit 10.1 to the
Company’s Form 10-Q for the quarterly period ended March 31, 2004 filed on April 30, 2004
(Commission File No. 000-24020)).
2010 Sypris Omnibus Plan effective as of May 11, 2010 (incorporated by reference to Exhibit 10.1 to
the Company’s Registration Statement on Form S-8 filed on May 19, 2010 (Commission File No. 333-
166951)).
Amended Executive Long-Term Incentive Program and Alternate Form of Executive Long-Term
Incentive Award Agreements for Grants to Executive Officers and Other Key Employees (incorporated
by reference to Exhibit 10.10 to the Company’s Form 10-Q filed on August 5, 2005 (Commission File
No. 000-24020)).
Amended 2010 Executive Long-Term Incentive Program and Alternate Form of Executive Long-Term
Incentive Award Agreements for Grants to Executive Officers (incorporated by reference to Exhibit
10.1 to the Company’s Form 10-Q filed on May 18, 2010 (Commission File No. 000-24020)).
Form of Employment Agreement between Sypris Solutions, Inc. and participants in the Sypris
Solutions, Inc. Executive Long-Term Incentive Program for 2010 dated March 2, 2010 (incorporated
by reference to Exhibit 10.2 to the Company’s Form 10-Q filed on May 18, 2010 (Commission File
No. 000-24020)).
Form of Employment Agreement between Sypris Solutions, Inc. and participants in the Sypris
Solutions, Inc. Executive Long-Term Incentive Program for 2011 dated March 2, 2011 (incorporated
by reference to Exhibit 10.39 to the Company’s Form 10-K filed on March 15, 2011 (Commission File
No. 000-24020)).
Preliminary Settlement Agreement between Sypris Solutions, Inc, and Dana Corporation (Debtor in
Possession) dated May 10, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-
K filed on May 10, 2006 (Commission File No. 000-24020)).
Form of Standard Terms of Executive Awards Granted Under the 2008 Stock Option Exchange
Program (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 4, 2008
(Commission File No. 000-24020)).
Settlement Agreement with Dana Corporation signed on July 24, 2007 and effective as of
August 7, 2007, replaces redacted copy of Settlement Agreement with Dana Corporation signed on
July 24, 2007 and effective as of August 7, 2007 (incorporated by reference to Exhibit 10.1 to the
Company’s Form 10-Q filed on August 7, 2008 (Commission File No. 000-24020)).
Redacted copy of Supply Agreement with Dana Corporation signed on July 24, 2007 and effective as
of August 7, 2007 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed on
November 2, 2007 (Commission File No. 000-24020)).
Executive Equity Repurchase Agreement dated December 20, 2011 (incorporated by reference to
Exhibit 10.19 to the Company’s Form 10-K filed on March 13, 2012 (Commission File No. 000-
24020)).
65
Exhibit
Number
Description
21
23
Subsidiaries of the Company
Consent of Ernst & Young LLP
31.1
CEO certification pursuant to Section 302 of Sarbanes - Oxley Act of 2002.
31.2
CFO certification pursuant to Section 302 of Sarbanes - Oxley Act of 2002.
32
CEO and CFO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Management contract or compensatory plan or arrangement.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on
March 11, 2014.
SYPRIS SOLUTIONS, INC.
(Registrant)
/s/ Jeffrey T. Gill
(Jeffrey T. Gill)
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities indicated on March 11, 2014:
/s/ Robert E. Gill
(Robert E. Gill)
/s/ Jeffrey T. Gill
(Jeffrey T. Gill)
/s/ Brian A. Lutes
(Brian A. Lutes)
/s/ Rebecca R. Eckert
(Rebecca R. Eckert)
/s/ John F. Brinkley
(John F. Brinkley)
/s/ Gary L. Convis
(Gary L. Convis)
/s/ William G. Ferko
(William G. Ferko)
/s/ R. Scott Gill
(R. Scott Gill)
/s/ William L. Healey
(William L. Healey)
/s/ Robert F. Lentz
(Robert F. Lentz)
/s/ Sidney R. Petersen
(Sidney R. Petersen)
/s/ Robert Sroka
(Robert Sroka)
Chairman of the Board
President, Chief Executive Officer and Director
Vice President and Chief Financial Officer
(Principal Financial Officer)
Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
67
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Use of Non-GAAP Financial Information:
To supplement our consolidated financial statements presented on a GAAP basis, Sypris Solutions, Inc.
uses non-GAAP financial measures. We believe non-GAAP financial measures are appropriate to
enhance an overall understanding of our past financial performance and also our prospects for the future.
These adjustments to our current period GAAP results are made with the intent of providing both
management and investors a more complete understanding of the Company’s underlying operational
results and trends and our marketplace performance. The presentation of this additional information is
not meant to be considered in isolation or as a substitute for financial measures prepared in accordance
with generally accepted accounting principles in the United States.
RECONCILIATION OF FREE CASH FLOW
(in thousands)
Year Ended
December 31, December 31,
Year Ended
2013
2012
(Unaudited)
Consolidated Cash Flow Statement:
Cash flows from operating activities:
Net cash used in operating activities .......................................................................... $
(293)
$
(4,920)
Cash flows from investing activities:
Capital expenditures ......................................................................................................
Proceeds from sale of marketable securities .................................................................
Proceeds from sale of assets ........................................................................................
(5,053)
—
2,265
(7,082)
1,914
4,595
Net cash used in investing activities ..........................................................................
(2,788)
(573)
Cash flows from financing activities:
Net change in debt under Credit Facility........................................................................
Common stock repurchases ..........................................................................................
Indirect repurchase of shares for minimum statutory withholdings ...............................
Cash dividends paid ......................................................................................................
Proceeds from issuance of common stock ....................................................................
5,000
(36)
(657)
(1,216)
—
Net cash provided by financing activities ...................................................................
3,091
Net increase in cash and cash equivalents .......................................................................
10
9,000
(660)
(750)
(1,607)
1
5,984
491
Cash and cash equivalents at beginning of period ............................................................
18,664
18,173
Cash and cash equivalents at end of period ..................................................................... $ 18,674
$ 18,664
Free Cash Flow – Industrial Group:
Cash flows from operating activities:
Industrial Group ............................................................................................................. $ 20,567
(14,060)
Electronics Group ..........................................................................................................
(6,800)
General, corporate and other.........................................................................................
$ 16,775
(5,432)
(16,263)
Net cash used in operating activities .......................................................................... $
(293)
$
(4,920)
Capital expenditures:
Industrial Group ............................................................................................................. $
Electronics Group ..........................................................................................................
General, corporate and other.........................................................................................
(4,547)
(444)
(62)
$
(5,839)
(1,139)
(104)
Capital expenditures .................................................................................................. $
(5,053)
$
(7,082)
Net cash provided by operating activities – Industrial Group ............................................ $ 20,567
(4,547)
Capital expenditures – Industrial Group ............................................................................
$ 16,775
(5,839)
Free cash flow – Industrial Group .................................................................................. $ 16,020
$ 10,936
RECONCILIATION OF EBITDA
(in thousands)
Year Ended
December 31, December 31,
Year Ended
2013
2012
(Unaudited)
Net (loss) income .............................................................................................................. $
Income tax (benefit) expense ............................................................................................
Interest expense, net .........................................................................................................
(9,887)
(93)
522
$
EBIT ...........................................................................................................................
(9,458)
3,047
2,248
437
5,732
Depreciation and amortization...........................................................................................
12,401
12,251
EBITDA ...................................................................................................................... $
2,943
$ 17,983
Net income (loss):
Industrial Group ............................................................................................................. $ 18,774
(21,875)
Electronics Group ..........................................................................................................
(6,786)
General, corporate and other.........................................................................................
$ 22,147
(2,690)
(16,410)
$
(9,887)
$
3,047
Income tax expense (benefit):
Industrial Group ............................................................................................................. $
Electronics Group ..........................................................................................................
General, corporate and other.........................................................................................
2,211
17
(2,321)
$
2,090
17
141
$
(93)
$
2,248
Interest expense, net:
Industrial Group ............................................................................................................. $
Electronics Group ..........................................................................................................
General, corporate and other.........................................................................................
$
(47)
—
569
(74)
—
511
$
522
$
437
Depreciation and amortization:
Industrial Group ............................................................................................................. $ 11,261
999
Electronics Group ..........................................................................................................
141
General, corporate and other.........................................................................................
$ 10,831
1,252
168
$ 12,401
$ 12,251
EBITDA:
Industrial Group ............................................................................................................. $ 32,199
(20,859)
Electronics Group ..........................................................................................................
(8,397)
General, corporate and other.........................................................................................
$ 34,994
(1,421)
(15,590)
$
2,943
$ 17,983
Net revenue:
Industrial Group ............................................................................................................. $ 276,136
34,578
Electronics Group ..........................................................................................................
—
General, corporate and other.........................................................................................
$ 286,046
55,558
—
$ 310,714
$ 341,604
EBITDA as a percentage of revenue – Industrial Group:
Net revenue – Industrial Group ..................................................................................... $ 276,136
32,199
EBITDA – Industrial Group ............................................................................................
$ 286,046
34,994
EBITDA as a percentage of revenue ......................................................................
11.7%
12.2%
RECONCILIATION OF INDUSTRIAL GROUP’S RETURN ON NET ASSETS (RONA)
(in thousands)
Year Ended
December 31, December 31,
Year Ended
2013
2012
(Unaudited)
Net income (loss):
Industrial Group ............................................................................................................. $ 18,774
(21,875)
Electronics Group ..........................................................................................................
(6,786)
General, corporate and other.........................................................................................
$ 22,147
(2,690)
(16,410)
$
(9,887)
$
3,047
Total current assets:
Industrial Group ............................................................................................................. $ 55,809
25,627
Electronics Group ..........................................................................................................
15,596
General, corporate and other.........................................................................................
$ 61,480
27,333
7,285
$ 97,032
$ 96,098
Property, plant and equipment, net:
Industrial Group ............................................................................................................. $ 40,642
3,858
Electronics Group ..........................................................................................................
183
General, corporate and other.........................................................................................
$ 48,372
4,416
262
$ 44,683
$ 53,050
Total current liabilities:
Industrial Group ............................................................................................................. $ 49,529
8,378
Electronics Group ..........................................................................................................
2,583
General, corporate and other.........................................................................................
$ 47,442
9,520
1,293
$ 60,490
$ 58,255
Total net assets – Industrial Group:
Total current assets – Industrial Group ......................................................................... $ 55,809
40,642
Property, plant and equipment, net – Industrial Group ..................................................
(49,529)
Total current liabilities – Industrial Group ......................................................................
$ 61,480
48,372
(47,442)
$ 46,922
$ 62,410
RONA – Industrial Group:
Net income – Industrial Group ....................................................................................... $ 18,774
46,922
Total net assets – Industrial Group ................................................................................
$ 22,147
62,410
RONA .....................................................................................................................
40.0%
35.5%
RECONCILIATION OF GOODWILL IMPAIRMENT PER SHARE
(in thousands, except for per share data)
Year Ended
December 31,
2013
(Unaudited)
Impairment of goodwill............................................................................................................................ $
Weighted average shares outstanding ...................................................................................................
6,900
(6,786)
Goodwill impairment per share ........................................................................................................ $
0.36
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(cid:94)(cid:455)pr(cid:349)s (cid:94)olu(cid:415)ons (cid:47)n(cid:272)(cid:856) 2013 Annual Report
Corporate (cid:24)(cid:349)re(cid:272)tor(cid:455)
(cid:17)oard o(cid:296) (cid:24)(cid:349)re(cid:272)tors
ROBERT E. GILL (4)
Chairman of the Board
JEFFREY T. GILL (4)
President & CEO
R. SCOTT GILL
Private Investor
JOHN F. BRINKLEY (3 , 1)
Retired General Manager
North American Automotive
Operations Export Sales
Ford Motor Company
GARY L. CONVIS (2)
Senior Advisor
Bloom Energy Corporation,
a provider of solid oxide fuel
cell technology
WILLIAM G. FERKO (1, 3)
Senior Vice President
Republic Bank & Trust Company
(cid:28)(cid:454)e(cid:272)u(cid:415)(cid:448)e (cid:75)(cid:312)(cid:272)ers
JOHN R. MCGEENEY
Vice President, General Counsel
and Secretary
WILLIAM L. HEALEY (1 , 2)
Private Investor & Consultant
RICHARD L. DAVIS
Senior Vice President
ROBERT F. LENTZ
President
Cyber Security Strategies, LLC,
a global cyber security consulting firm
SIDNEY R. PETERSEN (2)
Retired Chairman & CEO
Getty Oil, Inc.
ROBERT SROKA (2 , 3)
Partner
Rockland Advisory Group, LLC,
an investment banking firm
ANTHONY C. ALLEN
Vice President, Treasurer and
Assistant Secretary
PAUL G. LAROCHELLE
Vice President, Sypris Solutions,
and President, Sypris Technologies
JOHN J. WALSH
Vice President, Sypris Solutions,
and President, Sypris Electronics
(1) Member of Compensation Committee
(2) Member of Audit and Finance Committee
(3) Member of Nominating and Governance Committee
(4) Executive (cid:50)f(cid:191)cer
Committee Chairman
Corporate Headquarters
Sypris Solutions, Inc.
101 Bullitt Lane
Suite 450
Louisville, KY 40222
Phone: (502) 329-2000
Fax: (502) 329-2036
Annual (cid:68)ee(cid:415)n(cid:336)
The Annual Meeting of Stockholders will be
held on Tuesday, April 29, 2014, at 10:00 a.m.
at 101 Bullitt Lane, Lower Level Seminar
Room, Louisville, Kentucky.
(cid:47)n(cid:448)estor Rela(cid:415)ons
The common stock of Sypris trades on the
NASDAQ Global Market under the symbol SYPR.
The Sypris Form 10-K for fiscal 2013 and other
reports filed with the Securities and Exchange
Commission are available electronically at
www.sypris.com.
Inquiries and requests regarding this annual report
and other stockholder questions should be directed to:
Sypris Solutions, Inc.
Attention: Lynn Boon
101 Bullitt Lane
Suite 450
Louisville, KY 40222
(cid:100)rans(cid:296)er A(cid:336)ent
Computershare
P.O. Box 43078
Providence, RI 02940
Phone: (800) 622-6757
(cid:47)ndependent Re(cid:336)(cid:349)stered
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Ernst & Young LLP
400 West Market Street
Suite 2400
Louisville, KY 40202
Phone: (502) 585-1400
Fax: (502) 584-4221
(cid:94)e(cid:272)ur(cid:349)(cid:415)es Counsel
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004
Phone: (202) 637-5600
Fax: (202) 637-5910
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