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Notes
to Consolidated Financial Statements
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"), Bell Technologies, Inc.
("Bell"), Group Technologies Corporation ("GroupTech"),
Metrum-Datatape, Inc. ("Metrum-Datatape"), and Tube Turns Technologies,
Inc. ("Tube Turns"). All significant intercompany accounts and
transactions have been eliminated.
Nature of Business
Sypris is a diversified provider of technology-based outsource services
and specialized industrial products. The Company performs a wide range
of manufacturing and technical services, typically under long-term contracts
with major manufacturers. The Company also manufactures and sells complex
data storage systems, magnetic instruments, current sensors, high-pressure
closures and a variety of other industrial products.
Basis of
Presentation
Sypris is a Delaware corporation which was organized in 1997 and began
business on March 30, 1998 with the completion of the merger of Group
Financial Partners, Inc. ("GFP") and two of its subsidiaries,
Bell and Tube Turns, with and into GroupTech, a Nasdaq-traded company
in which GFP owned an approximate 80% interest. Effective immediately
thereafter, GroupTech was merged with and into Sypris, a subsidiary created
to accomplish the reincorporation in Delaware. As a result of these and
other transactions (collectively referred to herein as the "Reorganization"),
Sypris became the holding company for Bell, GroupTech, Tube Turns and
Metrum-Datatape, a wholly-owned subsidiary of GFP prior to the Reorganization,
and succeeded to the listing of GroupTech on the Nasdaq Stock Market under
the new symbol SYPR. In connection with the Reorganization, a one-for-four
reverse stock split was effected for shareholders of record as of March
30, 1998. All references in the financial statements to number of shares
and per share amounts of the Company's common stock have been retroactively
restated to reflect the decreased number of shares outstanding.
The historical financial statements included herein as of and for the
periods ended prior to the Reorganization are the consolidated financial
statements of GFP, since GFP is deemed to be the acquirer for accounting
purposes. The Reorganization was accounted for as a downstream merger,
in which the merger of GFP and GroupTech was accounted for as a purchase
of the minority interests of GroupTech. The issuance of shares in exchange
for the redeemable common stock held by the Bell and Tube Turns minority
shareholders was accounted for as a purchase, and accordingly, the excess
of the fair value of the common stock issued over the fair market value
of the proportional share of the net assets of Bell and Tube Turns was
allocated to the assets and liabilities of Bell and Tube Turns and the
excess was allocated to goodwill, which totaled $6,118,000. Minority interest
accounting was reflected in the historical financial statements of GFP
as of and for the periods prior to the Reorganization based upon the proportionate
share of the equity of GroupTech owned by minority shareholders.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Inventory
Contract inventory is stated at actual production costs, reduced by the
cost of units for which revenue has been recognized. Gross contract inventory
is considered work in process. Progress payments under long-term contracts
are specified in the contracts as a percentage of cost and are liquidated
as contract items are completed and shipped. Other inventory is stated
at the lower of cost or market. The first-in, first-out method was used
for determining the cost of inventory excluding contract inventory and
certain other inventory, which was determined using the last-in, first-out
method (see Note 5).
Property, Plant and Equipment
Property, plant and equipment is stated on the basis of cost. Buildings
and building improvements are depreciated over their estimated economic
lives principally using the straight-line method. Machinery, equipment,
furniture and fixtures are depreciated over their estimated economic lives
principally using the straight-line method. Leasehold improvements are
amortized over the lease term using the straight-line method. Expenditures
for maintenance, repairs and renewals of minor items are expensed as incurred.
Major renewals and improvements are capitalized.
Intangible Assets
Goodwill, patents, non-compete agreements, product drawings and similar
intangible assets are amortized over their estimated economic lives. Currently,
intangible assets are being amortized over periods ranging from five to
fifteen years, using the straight-line method. Goodwill is being amortized
over a period of fifteen years (see Notes 2 and 7).
Impairment of Long-lived Assets
The Company evaluates long-lived assets, including goodwill, for impairment
and assesses their recoverability based upon anticipated future cash flows.
If facts and circumstances lead the Company's management to believe that
the cost of one of its assets may be impaired, the Company will evaluate
the extent to which that cost is recoverable by comparing the future undiscounted
cash flows estimated to be associated with that asset to the asset's carrying
amount and write down that carrying amount to market value or discounted
cash flow value to the extent necessary.
Revenue Recognition
A portion of the Company's business is conducted under long-term, fixed-price
contracts with the U.S. Government and prime contractors with the U.S.
Government. Contract revenue is included in the consolidated statement
of operations as units are completed and shipped using the units of delivery,
percentage of completion method of accounting. The costs attributed to
contract revenue are based upon the estimated average costs of all units
to be shipped. The cumulative average costs of units shipped to date is
adjusted through current operations as estimates of future costs to complete
change (see "Contract Accounting" below).
Revenue
recognized under the percentage of completion method of accounting totaled
$90,819,000, $56,867,000 and $47,887,000 for the years ended December
31, 1999, 1998 and 1997, respectively. Substantially all such amounts
were accounted for under the units of delivery method. All other revenue
is recognized as product is shipped and title passes or when services
are rendered.
Contract Accounting
For long-term contracts, the Company capitalizes in inventory direct material,
direct labor and factory overhead as incurred. The Company also capitalizes
certain general and administrative costs for estimating and bidding on
contracts awarded (of which approximately $210,000 remained in inventory
at December 31, 1999 and 1998). Selling costs are expensed as incurred.
Costs to complete long-term contracts are estimated on a monthly basis.
Estimated margins at completion are applied to cumulative contract revenue
to arrive at costs charged to operations.
Accounting
for long-term contracts under the percentage of completion method involves
substantial estimation processes, including determining the estimated
cost to complete a contract. As contracts may require performance over
several accounting periods, formal detailed cost-to-complete estimates
are performed which are updated monthly via performance reports. Management's
estimates of costs-to-complete change due to internal and external factors
such as labor rate and efficiency variances, revised estimates of warranty
costs, estimated future material prices and customer specification and
testing requirement changes. Changes in estimated costs are reflected
in gross profit in the period in which they are known. If increases in
projected costs-to-complete are sufficient to create a loss contract,
the entire estimated loss is charged to operations in the period the loss
first becomes known. Provisions for losses on firm fixed priced contracts
totaled $807,000, $907,000 and $1,600,000 in 1999, 1998 and 1997, respectively.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk consist of accounts receivable. The Company's customer
base consists of various departments or agencies of the U.S. Government,
prime contractors with the U.S. Government and a number of customers in
diverse industries across geographic areas. At December 31, 1999, the
Company does not have significant credit risk concentrations. The Company
performs periodic credit evaluations of its customers' financial condition
and does not require collateral on its commercial accounts receivable.
Credit losses are provided for in the financial statements and consistently
have been within management's expectations.
The Company
recognized revenue from the U.S. Government and its agencies of approximately
$53,244,000, $47,178,000 and $40,170,000 during the years ended December
31, 1999, 1998 and 1997, respectively. The Company's largest commercial
customer for the year ended December 31, 1997 was IBM, which represented
approximately 10% of the Company's revenue. No other single commercial
customer accounted for more than 10% of the Company's net revenue for
the years ended December 31, 1999, 1998 or 1997.
Stock Based Compensation
Stock options are granted under various stock compensation programs to
employees and independent directors (see Note 13). The Company accounts
for stock option grants in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25").
Reclassifications
Certain amounts in the Company's 1998 and 1997 consolidated financial
statements have been reclassified to conform with the 1999 presentation.
2.
Mergers and Acquisitions
See "Basis
of Presentation" included in Note 1 for a discussion of the Reorganization
on March 30, 1998 that resulted in the formation of Sypris. If the Reorganization
had occurred at the beginning of each year, income before minority interests
and discontinued operations in 1998 and 1997 would have been reduced by
$103,000 and $413,000, respectively.
During
1999, the Company completed two transactions in which it acquired the
assets of the related businesses. The transactions were accounted for
as purchases, in which the combined purchase price of $11,642,000 was
allocated based on the fair values of assets acquired, with the excess
amount allocated to goodwill, which totaled $6,607,000. The results of
operations of the acquired businesses have been included in the consolidated
financial statements since the respective acquisition dates. The acquisitions
were financed by the Company's credit agreement (see Note 9).
On November
14, 1997, the Company acquired substantially all of the assets and assumed
certain liabilities of Datatape Incorporated. The transaction was accounted
for as a purchase, in which the purchase price of $14,400,000 was allocated
based on the fair values of assets acquired and liabilities assumed, with
the excess amount allocated to goodwill, which totaled $4,631,000. The
acquisition was financed by the Company's credit agreement (see Note 9).
3.
Dispositions
On June 30,
1997, the Company sold to SCI Systems, Inc., SCI Systems De Mexico S.A.
de C.V. and SCI Holdings, Inc., (collectively, "SCI"), all of
its investment in the capital stock and/or equity interests of three of
its wholly-owned subsidiaries, Group Technologies S.A. de C.V., Group
Technologies Suprimentos de Informatica Industia E Comercio Ltda. and
Group Technologies Integraoes em Electronica Ltda. (the "Latin American
Operations"). These three subsidiaries comprised all of GroupTech's
operations in Latin America. The Company also sold or assigned to SCI
certain assets principally used in or useful to the operations being sold,
including accounts receivable, inventory, equipment, accounts payable
and equipment leases. The final sales price of the aforementioned assets
totaled approximately $14,400,000 and the assumption by SCI of certain
liabilities. During 1999, the Company repaid $3,614,000 of the initial
sales price paid by SCI in 1997 in accordance with a settlement reached
pursuant to the purchase and sale agreement. The Company recognized a
gain of $3,200,000 in 1997 relative to this disposition.
4. Accounts
Receivable
Accounts
receivable consists of the following:
December 31 1999 1998
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(in thousands)
Commercial $ 18,419 $ 18,789
U.S. Government 6,044 8,330
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24,463 27,119
Allowance for doubtful accounts (670) (836)
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$ 23,793 $ 26,283
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Accounts receivable from the U.S. Government includes amounts due under long-term contracts, all of which are billed
at December 31, 1999 and 1998, of $4,282,000 and $2,203,000, respectively.
5. Inventory
Inventory
consists of the following:
December 31 1999 1998
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(in thousands)
Raw materials $ 12,640 $ 12,308
Work in process 9,649 10,068
Finished goods 1,673 2,085
Costs relating to long-term contracts and programs, net
of amounts attributed to revenue recognized to date 31,258 22,861
Progress payments related to long-term contracts
and programs (1,038) (4,224)
LIFO reserve (430) (609)
Reserve for excess and obsolete inventory (4,290) (4,024)
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$ 49,462 $ 38,465
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The preceding amounts include inventory valued under the last-in, first-out ("LIFO") method totaling $7,582,000 and
$7,020,000 at December 31, 1999 and 1998, respectively, which approximates replacement cost.
6. Property, Plant and Equipment
Property,
plant and equipment consists of the following:
December 31 1999 1998
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(in thousands)
Land and land improvements $ 1,024 $ 991
Buildings and building improvements 13,392 12,395
Machinery, equipment, furniture and fixtures 70,173 57,824
Facilities in progress 6,327 967
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90,916 72,177
Accumulated depreciation (50,724) (44,642)
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$ 40,192 $ 27,535
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Depreciation expense totaled $6,526,000, $5,934,000 and $6,908,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
7. Intangible Assets
Intangible
assets consists of the following:
December 31 1999 1998
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(in thousands)
Costs in excess of net assets of businesses acquired $ 18,462 $ 11,849
Other 2,954 3,034
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21,416 14,883
Accumulated amortization (3,378) (2,383)
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$ 18,038 $ 12,500
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Amortization expense totaled $1,056,000, $975,000 and $491,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
8. Accrued Liabilities
Accrued
liabilities consists of the following:
December 31 1999 1998
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(in thousands)
Employee benefit plan accruals $ 5,007 $ 5,471
Salaries, wages and incentives 3,694 4,179
Sale of business price adjustment - 3,614
Other 9,112 10,387
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$ 17,813 $ 23,651
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Included in other accrued liabilities are employee payroll deductions, advance payments, accrued operating expenses,
accrued warranty expenses, accrued interest and other items, none of which exceed 5% of total current liabilities.
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