The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(
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.) and Mexico 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 truck components, oil and gas pipeline components and aerospace and defense electronics. The Company produces a wide range of manufactured products, often under multi-year, sole-source contracts with corporations and government agencies. The Company offers such products through its
two
business segments, Sypris Technologies, Inc. (“Sypris Technologies”) and Sypris Electronics, LLC (“Sypris Electronics”). Sypris Technologies derives its revenue primarily from the sale of forged, machined, welded and heat-treated steel components primarily for the heavy commercial vehicle and high-pressure energy pipeline applications. Sypris Electronics derives its revenue primarily from circuit card and box build manufacturing, high reliability manufacturing and systems assembly and integration. Most products are built to the customer’s design specifications. The Company also provides engineering design services and repair or inspection services. Additionally, prior to
August 16, 2016,
Sypris Electronics provided certain cybersecurity-related services and data storage products (the “CSS business”) (see Note
4
). See Note
22
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.
Cash Equivalents
and Restricted Cash
Cash equivalents include all highly liquid investments with a maturity of
three
months or less when purchased. Restricted cash includes money held in escrow pursuant to the sale of the CSS business in connection with certain customary representations, warranties, covenants and indemnifications of the Company.
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.
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. Also included in plant and equipment are assets under capital lease, which are stated at the present value of minimum lease payments.
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.
Held for sale
We classify long-lived assets or disposal groups as held for sale in the period: management commits to a plan to sell; the long-lived asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such long-lived assets or disposal groups; an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; the sale is probable within
one
year; the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Long-lived assets and disposal groups classified as held for sale are measured at the lower of their carrying amount or fair value less costs to sell.
Software Development Costs
Software development costs
for Sypris Electronics were expensed as incurred until technological feasibility has been established, at which time those costs were capitalized as intangible assets until the software was implemented into products sold to customers. Capitalized software development costs were amortized on a straight-line basis over the estimated useful life of the software, which was
eighteen
months. Costs incurred to enhance existing software or after the implementation of the software into a product were expensed in the period incurred and included in research and development expense in the consolidated statements of operations. All capitalized software development costs were included in the sale of the CSS business in
2016
(see Note
4
). For the year end
December
31,
2016,
the Company recorded related amortization of
$1,089,000.
Deferred Revenue
Deferred revenue is recorded when payments are received
prior to the shipment of products. When the related products are shipped, the related amount recorded as deferred revenue is recognized as revenue. Deferred revenue is included in accrued liabilities in the accompanying balance sheets.
Stock-based Compensation
The Company
accounts 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) and the estimated volatility of our common stock price over the expected term. Changes in the subjective assumptions can materially affect the fair value estimate of stock-based compensation and consequently, the related expense is recognized in the consolidated statements of operations.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
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. On
December 22, 2017,
the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to
21%
beginning in
2018
(see Note
20
).
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 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.
Net
Revenue
and Cost of Sales
The Company recognizes manufacturing revenue when goods have been shipped to our customer, title has passed, the price to the buyer is fixed or determinable and recoverability is reasonably assured. Generally, there are
no
formal substantive customer acceptance requirements or further obligations. If such requirements or obligations exist, then the Company recognizes the related revenues at the time when such requirements are completed and the obligations are fulfilled. Amounts representing contract change orders or claims are included in net revenue when such costs are invoiced to the customer. Shipping and handling costs charged to our customers are included in net revenue, while the corresponding shipping expenses are included in costs of sales.
The Company also provides
engineering design services and repair or inspection services, which are separate from the manufacturing of a product. Revenue for services is generally recognized when the services are rendered. Additionally, in
2016
and in prior years, the Company provided engineering and cyber analytic services through its CSS business, which was sold on
August 16, 2016 (
see Note
4
). Revenue for engineering and cyber analytic services was generally recognized upon completion of the engineering process or in accordance with milestone billings.
Net revenue from services, including those provided through the Company
’s CSS business prior to its sale in
August 2016,
were less than
10%
of our total revenue for all periods presented, and accordingly, are included in net revenue in the consolidated statements of operations.
The Company previously separately reported revenue as either products revenue for company designed products or as outsourced services revenue, primarily when the design specifications for the manufactured products were provided by our customers. Net revenue and cost of sales in the
2016
consolidated statement of operations have been reclassified to conform to the
2017
presentation.
There is
no
impact on net income or stockholders’ equity as a result of these reclassifications.
Allowance for Doubtful Accounts
An allowance for uncollectible trade receivables is recorded when accounts are deemed uncollectible based on consideration of write-off history, aging analysis, and any specific, known troubled accounts.
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,
2017
and
2016,
was
$666,000
and
$856,000,
respectively. The Company’s warranty expense for the years ended
December
31,
2017
and
2016
was
not
material.
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, 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
30%
of accounts receivable outstanding at
December
31,
2017
is due from
two
customers. More specifically, Sistemas Automotrices de Mexico, S.A. de C. V. (Sistemas) and Northrop Grumman Corporation (Northrop Grumman) comprise
15%
and
15%,
respectively, of
December
31,
2017
outstanding accounts receivables. Approximately
41%
of accounts receivable outstanding at
December
31,
2016
is due from
three
customers. More specifically, Sistemas, Meritor Inc. (Meritor) and Tyco Electronics Subsea Communications LLC (Tyco) comprise
15%,
14%
and
12%,
respectively, of
December
31,
2016
outstanding accounts receivables.
The Company’s largest customers for the year ended
December
31,
2017
were Detroit Diesel, Northrop Grummon and Sistemas, which represented approximately
14%,
13%
and
13%,
respectively, of the Company’s total net revenue. Detroit Diesel and Sistemas are both customers within the Sypris Technologies segment and Northrop Grummon is a customer within the Sypris Electronics segment. Meritor, Sistemas and Detroit Diesel were the Company’s largest customers for the year ended
December
31,
2016,
which represented approximately
19%,
12%
and
10%,
respectively, of the Company’s total net revenue. The Company recognized revenue from contracts with the U.S. Government and its agencies approximating
3%
of net revenue for the year ended
December
31,
2016.
No
other single customer accounted for more than
10%
of the Company’s total net revenue for the years ended
December
31,
2017
or
2016.
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 (loss) income as a separate 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
349,
or
57%
of the Company’s employees, all within Sypris Technologies, were covered by collective bargaining agreements at
December 31, 2017.
Excluding certain Mexico employees covered under an annually ratified agreement, there are
no
collective bargaining agreements expiring within the next
12
months. Certain Mexico employees are covered by an annually ratified collective bargaining agreement. These employees represented approximately
51%
of the Company’s workforce, or
308
employees as of
December
31,
2017.
Recently Issued Accounting Standards
In
2014,
the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014
-
09
- Revenue from Contracts with Customers (Topic
606
), and has subsequently issued ASUs
2015
-
14
– Revenue from Contracts with Customers (Topic
606
): Deferral of the Effective Date,
2016
-
08
- Revenue from Contracts with Customers (Topic
606
): Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),
2016
-
10
- Revenue from Contracts with Customers (Topic
606
): Identifying Performance Obligations and Licensing,
2016
-
12
- Revenue from Contracts with Customers (Topic
606
): Narrow-Scope Improvements and Practical Expedients, and
2016
-
20
- Revenue from Contracts with Customers (Topic
606
): Technical Corrections and Improvements to Topic
606
(collectively, the Revenue Recognition ASUs).
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
The Revenue Recognition ASUs outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and supersede most current revenue recognition guidance, including industry-specific guidance. The guidance is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. This guidance is effective for the Company beginning on
January 1, 2018
and entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. We will adopt this guidance using the modified retrospective approach; under this approach, prior periods will
not
be restated.
We have evaluated each of the
five
steps in the new revenue recognition model, which are as follows:
1
) Identify the contract with the customer;
2
) Identify the performance obligations in the contract;
3
) Determine the transaction price;
4
) Allocate the transaction price to the performance obligations; and
5
) Recognize revenue when (or as) performance obligations are satisfied. Our conclusion is that the determination of what constitutes a contract with our customers (step
1
), our performance obligations under the contract (step
2
), and the determination and allocation of the transaction price (steps
3
and
4
) under the new revenue recognition model will
not
result in significant changes in comparison to the current revenue recognition guidance.
With regard to recognizing revenue when (or as) a performance obligation is satisfied (step
5
),
we have reviewed the language in our contracts with each customer to determine whether the customer obtains control of the goods at a point in time or over time. Under current revenue recognition guidance, we recognize revenue when products are shipped to our customers and title transfers under standard commercial terms or when realizable in accordance with our commercial agreements. Topic
606
provides certain criteria that, if met, require companies to recognize revenue as the product is produced (over time) instead of at a point of time (i.e. upon shipment). The Company has determined that the new standard will change the timing of revenue recognition for a portion of its Sypris Electronics business, whereby revenue will be recognized earlier than under the current accounting rules, as we incur certain costs, as opposed to when units are shipped, although we do
not
expect the effect of the adoption to have a material impact to our consolidated financial statements. This standard will also have an impact to the Company’s balance sheet, primarily related to a reduction in finished goods and work-in-process inventories and an increase in contract assets. Revenue for all other goods will be recognized at a point in time, upon transfer of control of the product to the customer (i.e., effectively
no
change to current accounting).
In
February 2016,
the FASB issued ASU
No.
2016
-
02,
Leases (Topic
842
). The new standard was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This standard affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this update supersedes FASB A
ccounting Standards Codification (“ASC”)
840,
Leases. The amendments in this ASU are effective for fiscal years beginning after
December 15, 2018,
including interim periods within those fiscal years. The Company is currently assessing the impact of adopting this ASU on its consolidated financial statements and related disclosures. We believe the adoption of the standard will likely have a material impact to our Consolidated Balance Sheets for the recognition of certain operating leases as right-of-use assets and lease liabilities. We are in the early process of analyzing our lease portfolio and evaluating systems to comply with the standard’s retrospective adoption requirements.
In
March 2016,
the FASB issued ASU
No.
2016
-
09,
Improvements to Employee Share-Based Payment Accounting (ASU
2016
-
09
) requiring an entity to record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement. ASU
2016
-
09
will also require an entity to elect an accounting policy to either estimate the number of forfeitures or account for forfeitures when they occur. We adopted this ASU effective
January 1, 2017,
and have elected to recognize forfeitures as they occur. The related financial statement impacts of adopting the above aspects of this ASU
were
not
material for the year ended
December
31,
2017,
however, depending on several factors such as the market price of the Company’
s common stock, employee exercise behavior and corporate income tax rates, the excess tax benefits associated with the exercise of stock options and vesting of restricted and performance shares could generate a significant discrete income tax benefit in a particular interim period potentially creating volatility in net income and earnings per share period-to-period and period-over-period. Our plans do
not
permit tax withholdings in excess of the statutory minimums.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
In
August 2016,
the FASB issued ASU
No.
2016
-
15,
Classification of Certain Cash Receipts and Cash Payments (ASU
2016
-
15
). This ASU provides guidance to clarify how certain cash receipts and payments should be presented in the statement of cash flows. The guidance is effective for annual periods beginning after
December 15, 2017,
and interim periods within those annual periods. Early adoption is permitted in any annual or interim period. The updated guidance requires a modified retrospective adoption. This guidance is
not
expected to have a material impact on our consolidated statement of cash flows.
In
October 2016,
the FASB issued guidance that simplifies the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current
U.S. GAAP prohibits the recognition in earnings of current and deferred income taxes for an intra-entity transfer until the asset is sold to an outside party or recovered through use. This amendment simplifies the accounting by requiring entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance, which could impact effective tax rates, becomes effective
January 1, 2018
and requires modified retrospective application. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have
not
yet been issued. This guidance is
not
expected to have a material impact on our consolidated statement of financial position, results of operations or cash flows.
In
November 2016,
the FASB released guidance that addresses the diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance becomes effective
January 1, 2018
and must be applied on a retrospective basis. This guidance will result in a change in presentation of our consolidated statement of cash flows.
In
March 2017,
the FASB issued A
SU
No.
2017
-
07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU
2017
-
07
). The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are
not
presented separately in the income statement. The Company currently classifies all net periodic pension costs within operating costs (as part of cost of sales and selling, general and administrative expense). The update should be applied retrospectively for the presentation of service cost and other components of net pension and post-retirement expense in the income statement, and prospectively for the capitalization of service cost.
The Company will adopt the new guidance effective
January
1,
2018.
Upon adoption, we expect to classify the non-service cost components of net periodic pension expense in other income (expense), net.
In
May 2017,
the FASB issued ASU
No.
2017
-
09,
which is an update to Topic
718,
Compensation - Stock Compensation. The update provides guidance on determining which changes to the terms and conditions of share-based payment awards, including stock options, require an entity to apply modification accounting under Topic
718.
The new standard is effective for fiscal years beginning after
December 15, 2017,
including interim periods within those fiscal years. Early adoption is permitted. The Company does
not
expect the adoption of ASU
2017
-
09
to have a material impact on its consolidated financial statements.
In
February 2018,
the FASB issued ASU
No.
2018
-
02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU
2018
-
02
). Under existing U.S. generally accepted accounting principles, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU
2018
-
02
allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of
2017.
The amendments in this ASU also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after
December 15, 2018,
and interim periods within those fiscal years. Early adoption in any period is permitted. The Company is currently evaluating the timing and impact of adopting ASU
2018
-
02.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
(
2
)
Strategic Actions
The Company completed a number of strategic actions during
2015
and
2016
in response to the nonrenewal of supply agreement
s with certain Tier I automotive customers primarily due to global pricing constraints, the downturn in the commercial vehicle market beginning in the
fourth
quarter of
2015
and other market and economic factors impacting the Company. Strategic actions taken during
2015
and
2016
included: (i) initiation of the Company’s exit from the Broadway Plant (defined below) (see Note
3
), (ii) the CSS Sale (defined below) (see Note
4
), (iii) the Toluca Sale-Leaseback (defined below) (see Note
5
), (iv) the sale of the Company’s manufacturing facility in Morganton, North Carolina in
2015,
(v) the relocation of its Sypris Electronics operation to a new facility (see discussion below), (vi) reductions in workforce at all locations since the beginning of
2015,
and (vii) other reductions in employment costs through reduced work schedules, senior management pay reductions and deferral of merit increases and certain benefit payments. Using a portion of the proceeds generated from the asset sales noted above, the Company paid off all of its most senior secured debt consisting of a “Term Loan” and “Revolving Credit Facility” in
August 2016.
During this period, the Company also received the benefit of cash infusions from Gill Family Capital Management, Inc. (“GFCM”) in the form of secured promissory note obligations totaling
$6,500,000
in principal, originally scheduled to mature in
2019.
The GFCM note was amended during
2017
to, among others things, extend the maturity dates so that the note matures in part in
2021,
2023
and
2025
(see Note
14
).
During
2016,
the Company also initiated the process of qualifying production for certain oil and gas industry components in Mexico that were previously produced solely in the
U.S. Qualification of production for the
first
group of these components was completed for the Mexico facility during
2016.
This capacity reallocation continued in
2017
and the Company expects it will provide the Company with the ability to source components for this market in both the United States and Mexico.
During the
fourth
quarter of
2016,
the Company completed the relocation of its operations for Sypris Electronics to a
50,000
square foot leased facility in Tampa, Florida. Sypris Electronics previously leased a facility also located in Tampa of approximately
300,000
square feet for its operations which also included its
CSS product lines. All manufacturing operations for Sypris Electronics are now performed in the new facility, which has resulted in a significant reduction in rent and related operating expenses effective
January 1, 2017
as compared to
2016.
The Company
has embraced a strategic change in its business by repositioning away from certain of its traditional Tier
1
customers that represent the primary suppliers to the original equipment manufacturers (“OEMs”) in the commercial vehicle markets, while targeting to replace these customers with longer-term relationships, especially among the heavy truck, off-highway and automotive OEMs and others who place a higher value on the Company’s innovation, flexibility and core commitment to lean manufacturing principles. Among the customer programs
not
being renewed was a supply agreement with Meritor, which expired on
January 1, 2017,
which utilized production at the Company’s Louisville, Kentucky automotive and commercial vehicle manufacturing plant (the “Broadway Plant”). The Company similarly has experienced a reduction in certain portions of its business with
. As a result of these decisions, the Company experienced a significant reduction in its commercial vehicle revenues in
2017
(See Note
3
).
(
3
)
Exit and Disposal Activities
On
November 22, 2016,
the Board of Directors of the Company approved moving forward with the exploration of a range of strategic options for the Broadway Plant, including the divestiture of the plant, the transitional reduction in its operations to accommodate lower volumes, the relocation of production to other Company facilities
, as needed, and/or the closure of the plant. Accordingly, management explored various exit or disposal options for the Broadway Plant with the input of our salaried and unionized employees, our customers and others within the industry. On
February 21, 2017,
with the benefit of management’s analysis, the Board of Directors approved a modified exit or disposal plan with respect to the Broadway Plant, which was substantially complete as of the end of
2017.
The Company has relocated certain assets from the Broadway Plant to other manufacturing facilities, as needed, to serve its existing and target customer base and identified underutilized or non-core assets for disposal. Management expects to use a portion of the proceeds from the sale of any underutilized or non-core assets to fund costs incurred in the transfer of any additional equipment from the Broadway Plant. Management will evaluate options for the real estate and any remaining assets in the Broadway Plant in
2018.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
As a result of these initiatives, the Company recorded charges of
$645,000,
or
$0.03
per
diluted share in
2016
and
$2,360,000,
or
$0.12
per share in
2017,
related to the transition of production from the Broadway Plant, which is included in severance, relocation and other costs in the consolidated statement of operations. A summary of the pre-tax charges is as follows (in thousands):
|
|
|
|
|
|
Recognized
|
|
|
Remaining
|
|
|
|
Total
|
|
|
as of
|
|
|
Costs to be
|
|
|
|
Program
|
|
|
December 31, 2017
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit-related costs
|
|
$
|
1,363
|
|
|
$
|
1,363
|
|
|
$
|
0
|
|
Asset impairments
|
|
|
188
|
|
|
|
188
|
|
|
|
0
|
|
Equipment relocation costs
|
|
|
1,536
|
|
|
|
1,424
|
|
|
|
112
|
|
Other
|
|
|
530
|
|
|
|
30
|
|
|
|
500
|
|
|
|
$
|
3,617
|
|
|
$
|
3,005
|
|
|
$
|
612
|
|
Severance and benefit-related costs tied to workforce reductions were recorded in accordance with Accounting Standards Codification (ASC)
420
,
Exit or Disposal Cost Obligations
and ASC
712,
Compensation – Nonretirement
Postemployment Benefits
. Under ASC
420,
one
-time termination benefits that are conditioned on employment through a certain transition period are recognized ratably between the date employees are communicated the details of the
one
-time termination benefit and their final date of service. Accordingly, the Company recorded
$936,000
and
$427,000
in
2017
and
2016,
respectively.
The Company evaluates its long-lived assets for impairment when events or circumstances indicate that the carrying value
may
not
be recoverable in accordance with
ASC
360,
Impairment and Disposal of Long-Lived Asset
. The Company’s strategic decision to transition production from the Broadway Plant led to an
$188,000
non-cash impairment charge in
2016.
The charge was based on the excess of carrying value of certain assets
not
expected to be redeployed over their respective fair value or for assets held for sale, the carrying value exceeded the estimate of fair value less costs to sell. Fair values for these assets were determined based on discounted cash flow analyses. During
2017,
we did
not
recognize any additional non-cash impairment charges relative to our continued exit and disposal activities for our Broadway Plant.
For assets to be redeployed to other Company locations, the Company incurred equipment relocation costs of
$1,
424,000
in
2017
and expects to incur an additional
$112,000
in
2018.
The Company had originally estimated that total relocation costs would be
$2,531,000;
however, the Company determined that it would
not
be desirable to relocate certain equipment, and these assets were later moved to held-for-sale.
A summary of
costs and related reserves for the transition of production from the Broadway Plant at
December 31, 2017
is as follows (in thousands):
|
|
Accrued
|
|
|
|
|
|
|
Cash
|
|
|
Accrued
|
|
|
|
Balance at
|
|
|
|
|
|
|
Payments
|
|
|
Balance at
|
|
|
|
Dec. 31,
|
|
|
2017
|
|
|
or Asset
|
|
|
Dec. 31,
|
|
|
|
2016
|
|
|
Charge
|
|
|
Write-Offs
|
|
|
2017
|
|
Severance and benefit related costs
|
|
$
|
427
|
|
|
$
|
936
|
|
|
$
|
(1,218
|
)
|
|
$
|
145
|
|
Equipment relocation costs
|
|
|
0
|
|
|
|
1,424
|
|
|
|
(1,424
|
)
|
|
|
0
|
|
|
|
$
|
427
|
|
|
$
|
2,360
|
|
|
$
|
(2,642
|
)
|
|
$
|
145
|
|
The Company expects to incur additional pre-tax costs of approximately $
612,000
within Sypris Technologies, which is expected to be all cash expenditures.
As noted above, management expects to use proceeds from the sale of any underutilized or non-core assets to fund costs incurred on the transfer of equipment from the Broadway Plant and the transition of the related production.
The following assets have been segregated and included in assets held for sale in the consolidated balance sheet (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Property, plant and equipment
|
|
$
|
28,874
|
|
|
$
|
6,673
|
|
Accumulated depreciation
|
|
|
(25,976
|
)
|
|
|
(5,841
|
)
|
Property, plant and equipment, net
|
|
$
|
2,898
|
|
|
$
|
832
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
(
4
)
CSS Sale
On
August 16, 2016,
the Company completed the sale of certain assets, intellectual property, contracts and other assets of Sypris Electronics (the “CSS Sale”) comprised principally of
the CSS product lines. The assets were sold for
$42,000,000
in cash consideration,
$1,500,000
of which was released from escrow to the Company during the
third
quarter of
2017
after being held in escrow for
12
months from the sale date in connection with certain customary representations, warranties, covenants and indemnifications of the Company. The Company recognized a net gain of
$31,240,000
on the sale, which was reported in other income, net in the consolidated statement of operations for the year ended
December
31,
2016.
A portion of the proceeds from the CSS Sale was used to pay off the
Company’s most senior, secured debt consisting of a “Term Loan” and a “Revolving Credit Facility.” As a result of the early extinguishment of debt, the Company was required to pay
$1,521,000
in penalties, which is included in loss on extinguishment of debt, and wrote off the remaining amount of deferred loan costs associated with the Term Loan and Revolving Credit Facility, which is included in interest expense, net for the year ended
December
31,
2016.
The retained portion of the Sypris Electronics segment will continue to provide circuit card and full “box build” electronic manufacturing to customers in the aerospace, defense and severe environment markets, among others.
Revenue from the CSS
business for the year ended
December
31,
2016
was
$11,061,000.
While the Company is able to distinguish revenue and contribution margin information related to the CSS business, the Company is
not
able to present meaningful information about the results of operations and cash flows of the CSS business. Therefore, the sale was
not
classified as a discontinued operation.
(
5
)
Toluca Sale-Leaseback
On
March 9, 2016,
Sypris Technologies Mexico, S. de R.L. de C.V. (
the “Seller”), a subsidiary of the Company, concluded its sale of the
24
-acre Toluca property pursuant to an agreement with Promotora y Desarrolladora Pulso Inmobiliario, S.C. (together with its affiliates and assignees, the “Buyer”) for
215,000,000
Mexican Pesos, or approximately
$12,182,000
in U.S. currency. Simultaneously, the Seller and the Buyer entered into a long-term lease of the
9
acres and the buildings needed for the Seller’s ongoing business in Toluca (collectively, the “Toluca Sale-Leaseback”). The Company incurred transaction related expenses of
$1,116,000.
As a result of the Toluca Sale-Leaseback, the Company initially recorded a capital lease of
$3,315,000,
which is included in property plant and equipment. The Company recorded an initial gain on the sale of
$2,370,000
during the
year ended
December 31,
2016,
which is included in other income, net in the consolidated statement of operations, and has a deferred gain of
$4,075,000
as of
December
31,
2017,
which will be recognized over the remainder of the
ten
year lease term. The Company’s base rent, which is denominated in U.S. currency, is
$936,000
annually, adjusted based on annual changes in the U.S. CPI with certain cap conditions.
(
6
)
Other Income, Net
During the year ended
December
31,
2017,
the Company recognized other income of
$1,913,000,
which consisted primarily of a gain of
$2,668,000
related to the gain recorded on the sale of assets within Sypris Technologies. The gain was partially offset by foreign currency related translation losses of
$773,000
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,
2016
includes a gain of
$31,240,000
from the CSS Sale (see Note
4
). Additionally, other income for
2016
includes
$2,370,000
related to the gain recognized on the Toluca Sale-Leaseback completed during the
first
quarter of
2016
(See Note
5
). During the year ended
December
31,
2016,
the Company recognized net foreign currency gains of
$951,000.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
(
7
) Accounts Receivable
Accounts receivable consists of the following
(in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Commercial
|
|
$
|
9,464
|
|
|
$
|
9,228
|
|
U.S. Government
|
|
|
0
|
|
|
|
10
|
|
|
|
|
9,464
|
|
|
|
9,238
|
|
Allowance for doubtful accounts
|
|
|
(147
|
)
|
|
|
(1,228
|
)
|
Net
|
|
$
|
9,317
|
|
|
$
|
8,010
|
|
(
8
) Inventory
Inventory consists of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
10,011
|
|
|
$
|
8,187
|
|
Work in process
|
|
|
7,150
|
|
|
|
6,211
|
|
Finished goods
|
|
|
1,645
|
|
|
|
2,020
|
|
Reserve for excess and obsolete inventory
|
|
|
(1,165
|
)
|
|
|
(1,860
|
)
|
Total
|
|
$
|
17,641
|
|
|
$
|
14,558
|
|
(
9
)
Other Current Assets
Other current assets consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid expenses
|
|
$
|
571
|
|
|
$
|
1,973
|
|
Other
|
|
|
1,432
|
|
|
|
757
|
|
Total
|
|
$
|
2,003
|
|
|
$
|
2,730
|
|
Included in other current assets are income and VAT taxes refundable, tools, spare parts and other items,
none
of which exceed
5%
of total current assets.
(
10
) Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Land and land improvements
|
|
$
|
219
|
|
|
$
|
219
|
|
Buildings and building improvements
|
|
|
11,140
|
|
|
|
10,056
|
|
Machinery, equipment, furniture and fixtures
|
|
|
49,726
|
|
|
|
76,495
|
|
Construction in progress
|
|
|
998
|
|
|
|
646
|
|
|
|
|
62,083
|
|
|
|
87,416
|
|
Accumulated depreciation
|
|
|
(46,509
|
)
|
|
|
(69,473
|
)
|
|
|
$
|
15,574
|
|
|
$
|
17,943
|
|
Depreciation expense, including amortization of assets recorded under capital leases, totaled approximately
$3,884,000
and
$5,199,000
for the years ended
December
31,
2017
and
2016,
respectively. Capital expenditures included in accounts payable or accrued liabilities were
not
material at
December
31,
2017
and
2016,
respectively.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
Included within p
roperty, plant and equipment were assets under capital leases as follows (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Buildings and building improvements
|
|
$
|
2,987
|
|
|
$
|
2,853
|
|
Machinery, equipment, furniture and fixtures
|
|
|
1,277
|
|
|
|
0
|
|
|
|
|
4,264
|
|
|
|
2,853
|
|
Accumulated depreciation
|
|
|
(548
|
)
|
|
|
(238
|
)
|
|
|
$
|
3,716
|
|
|
$
|
2,615
|
|
(
11
) Other Assets
Other assets consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Long term spare parts
|
|
$
|
871
|
|
|
$
|
830
|
|
Long term deposits
|
|
|
578
|
|
|
|
964
|
|
Other
|
|
|
129
|
|
|
|
0
|
|
Total
|
|
$
|
1,578
|
|
|
$
|
1,794
|
|
(
12
)
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Salaries, wages, employment taxes and withholdings
|
|
$
|
1,720
|
|
|
$
|
2,332
|
|
Employee benefit plans
|
|
|
703
|
|
|
|
1,020
|
|
Accrued professional fees
|
|
|
3,596
|
|
|
|
3,493
|
|
Income, property and other taxes
|
|
|
387
|
|
|
|
360
|
|
Deferred revenue
|
|
|
1,273
|
|
|
|
435
|
|
Deferred gain from sale-leaseback
|
|
|
499
|
|
|
|
477
|
|
Exit and disposal activity accruals
|
|
|
145
|
|
|
|
427
|
|
Other
|
|
|
2,007
|
|
|
|
2,277
|
|
Total
|
|
$
|
10,330
|
|
|
$
|
10,821
|
|
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.
(
13
)
Other Liabilities
Other liabilities consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Noncurrent pension liability
|
|
$
|
4,781
|
|
|
$
|
5,474
|
|
Deferred gain from sale leaseback
|
|
|
3,576
|
|
|
|
3,892
|
|
Other
|
|
|
412
|
|
|
|
126
|
|
Total
|
|
$
|
8,769
|
|
|
$
|
9,492
|
|
Included in other liabilities are accrued long-term warranty expenses and other items,
none
of which exceed
5%
of total liabilities.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
(
14
)
Debt
Long-term obligations consists of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Current portion of capital lease obligations
|
|
$
|
829
|
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
|
Long Term:
|
|
|
|
|
|
|
|
|
Note payable
– related party
|
|
$
|
6,500
|
|
|
$
|
6,500
|
|
Capital lease obligations
|
|
|
3,397
|
|
|
|
2,950
|
|
Less unamortized debt issuance and modification costs
|
|
|
(65
|
)
|
|
|
(125
|
)
|
Long term debt and capital lease obligations, net of unamortized debt costs
|
|
$
|
9,832
|
|
|
$
|
9,325
|
|
The weighted average interest rate for outstanding borrowings at
December
31,
2017
and
2016
was
8.0%.
The weighted average interest rates for borrowings during the years ended
December
31,
2017
and
2016
were
8.0%
and
10.4%,
respectively. The Company had
no
capitalized interest in
2017
or
2016.
Interest paid during the years ended
December
31,
2017
and
2016
totaled approximately
$526,000
and
$3,579,000,
respectively.
Note Payable
– Related Party
The Company
has received the benefit of cash infusions from GFCM in the form of secured promissory note obligations totaling
$6,500,000
in principal as of
December
31,
2017
and
2016.
GFCM is an entity controlled by the Company’s chairman, president and chief executive officer, Jeffrey T. Gill and
one
of our directors, R. Scott Gill. GFCM, Jeffrey T. Gill and R. Scott Gill are significant beneficial stockholders of the Company. The promissory note bears interest at a rate of
8.0%
per year until
March 31, 2019
and, thereafter, at the greater of
8.0%
or
500
basis points above the
five
-year Treasury note average during the preceding
90
-day period, in each case, payable.
During the
fourth
quarter of
2017,
the Company amended its secured promissory note with GFCM to, among other things: (i) extend the maturity dates for
$2,500,000
of the obligation to
April
1,
2021,
$2,000,000
to
April 1,
2023
and the balance to
April
1,
2025,
(ii) adjust the interest rate beginning on
April
1,
2019
and on each
April 1
thereafter, to reflect the greater of
8.0%
or
500
basis points above the
five
-year Treasury note average during the previous
90
-day period, (iii) allow for up to an
18
-month deferral of payment for up to
60%
of the interest due on the notes maturing in
April
of
2021
and
2023,
and (iv) provide for a
first
security interest in substantially all assets, including those in Mexico.
Capital Lease Obligation
s
On
March 9, 2016,
the Company completed the sale of its
24
-acre Toluca property for
215,000,000
Mexican Pesos, or approximately
$12,182,000
in U.S. dollars. Simultaneously, the Company entered into a
ten
-year lease of the
9
acres and buildings currently occupied by the Company and needed for its ongoing business in Toluca (see Note
5
). As a result of the Toluca Sale-Leaseback, the Company has a capital lease obligation of
$2,949,000
for the building as of
December
3,
2017.
In
January 2018,
the Company entered into a
36
-month capital lease for
$1,277,000
for new production equipment installed at its Sypris Electronics facility during
2017.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
The future minimum payments for capital lease
s as of
December
31,
2017
are as follows (in thousands):
2018
|
|
$
|
1,214
|
|
2019
|
|
|
927
|
|
2020
|
|
|
881
|
|
2021
|
|
|
580
|
|
2022
|
|
|
548
|
|
Thereafter
|
|
|
1,691
|
|
Total future payments
|
|
|
5,841
|
|
Less: Amount representing interest
|
|
|
(1,615
|
)
|
Present value of future minimum payments
|
|
|
4,226
|
|
Less: Current portion
|
|
|
(829
|
)
|
Long term portion
|
|
$
|
3,397
|
|
(
15
) 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,
2017
approximates fair value, and is based upon a market approach (Level
2
).
(
16
) Employee Benefit Plans
Sypris Technologies 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):
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
6
|
|
|
$
|
6
|
|
Interest cost on projected benefit obligation
|
|
|
1,518
|
|
|
|
1,675
|
|
Net amortization of actuarial loss
|
|
|
693
|
|
|
|
664
|
|
Expected return on plan assets
|
|
|
(1,813
|
)
|
|
|
(1,971
|
)
|
Net periodic benefit cost
|
|
$
|
404
|
|
|
$
|
374
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
39,312
|
|
|
$
|
40,958
|
|
Service cost
|
|
|
6
|
|
|
|
6
|
|
Interest cost
|
|
|
1,518
|
|
|
|
1,675
|
|
Actuarial loss (gain)
|
|
|
1,278
|
|
|
|
(325
|
)
|
Benefits paid
|
|
|
(2,935
|
)
|
|
|
(3,002
|
)
|
Benefit obligation at end of year
|
|
$
|
39,179
|
|
|
$
|
39,312
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
33,838
|
|
|
$
|
35,126
|
|
Actual return on plan assets
|
|
|
3,495
|
|
|
|
1,714
|
|
Company contributions
|
|
|
0
|
|
|
|
0
|
|
Benefits paid
|
|
|
(2,935
|
)
|
|
|
(3,002
|
)
|
Fair value of plan assets at end of year
|
|
$
|
34,398
|
|
|
$
|
33,838
|
|
|
|
|
|
|
|
|
|
|
Underfunded status of the plans
|
|
$
|
(4,781
|
)
|
|
$
|
(5,474
|
)
|
|
|
|
|
|
|
|
|
|
Balance sheet assets (liabilities):
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
(4,781
|
)
|
|
$
|
(5,474
|
)
|
Net amount recognized
|
|
$
|
(4,781
|
)
|
|
$
|
(5,474
|
)
|
|
|
|
|
|
|
|
|
|
Pension plans with accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
26,327
|
|
|
$
|
39,312
|
|
Accumulated benefit obligation
|
|
|
26,327
|
|
|
|
39,309
|
|
Fair value of plan assets
|
|
|
21,539
|
|
|
|
33,838
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation and net periodic pension cost assumptions:
|
|
|
|
|
|
|
|
|
Discount rate
– projected benefit obligation
|
|
|
3.55
|
%
|
|
|
4.05
|
%
|
Discount rate
– net periodic pension cost
|
|
|
4.05
|
|
|
|
4.35
|
|
Rate of compensation increase
|
|
|
4.00
|
|
|
|
4.00
|
|
Expected long-term rate of return on plan assets
|
|
|
5.15
|
–
|
6.30
|
|
|
|
5.40
|
–
|
6.75
|
|
|
|
|
|
|
|
|
|
|
Weighted average asset allocation:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
27
|
%
|
|
|
25
|
%
|
Debt securities
|
|
|
71
|
|
|
|
73
|
|
Other
|
|
|
2
|
|
|
|
2
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
The fair values of our pension plan assets as of
December 31,
2017
are as follows (in thousands):
|
|
|
|
|
|
Significant
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
|
In Active
|
|
|
Observable
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
Asset categories:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,090
|
|
|
$
|
0
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
U.S. Large Cap
|
|
|
5,845
|
|
|
|
0
|
|
U.S. Mid Cap
|
|
|
1,343
|
|
|
|
0
|
|
U.S. Small Cap
|
|
|
795
|
|
|
|
0
|
|
World Equity
|
|
|
1,484
|
|
|
|
0
|
|
Real Estate
|
|
|
473
|
|
|
|
0
|
|
Other
|
|
|
147
|
|
|
|
0
|
|
Fixed income securities
|
|
|
6,462
|
|
|
|
16,759
|
|
Total Plan Assets
|
|
$
|
17,639
|
|
|
$
|
16,759
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
The fair values of our pension plan assets as of
December 31,
2016
are as follows (in thousands):
|
|
|
|
|
|
Significant
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
|
In Active
|
|
|
Observable
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
Asset categories:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,253
|
|
|
$
|
0
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
U.S. Large Cap
|
|
|
6,105
|
|
|
|
0
|
|
U.S. Mid Cap
|
|
|
891
|
|
|
|
0
|
|
U.S. Small Cap
|
|
|
443
|
|
|
|
0
|
|
World Equity
|
|
|
1,095
|
|
|
|
0
|
|
Real Estate
|
|
|
314
|
|
|
|
0
|
|
Other
|
|
|
223
|
|
|
|
0
|
|
Fixed income securities
|
|
|
8,525
|
|
|
|
14,989
|
|
Total Plan Assets
|
|
$
|
18,849
|
|
|
$
|
14,989
|
|
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.
|
|
|
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
the Company believes 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
2018
is
$73,000,
which represents the minimum funding amounts required by federal law. The expected long-term rates of return on plan assets for determining net periodic pension cost for
2017
and
2016
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.
A
ccumulated other comprehensive loss at
December
31,
2017
includes
$14,577,000
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,
2018
is
$671,000.
The actual loss reclassified from accumulated other comprehensive loss for
2017
and
2016
was
$693,000
and
$664,000,
respectively.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
At
December
31,
2017,
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):
2018
|
|
|
2,998
|
|
2019
|
|
|
2,942
|
|
2020
|
|
|
2,873
|
|
2021
|
|
|
2,829
|
|
2022
|
|
|
2,768
|
|
2023
|
-
|
2027
|
|
|
12,719
|
|
Total
|
|
$
|
27,129
|
|
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
2017
and
2016
totaled approximately
$530,000
and
$668,000,
respectively.
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
$20,000
and
$11,000
in
2017
and
2016,
respectively. The aggregate benefit plan assets and accumulated benefit obligation of these plans are
not
significant.
(
17
) Commitments and Contingencies
The Company leases certain of its real property and certain equipment 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,
2017
are as follows (in thousands):
2018
|
|
$
|
1,465
|
|
2019
|
|
|
1,385
|
|
2020
|
|
|
1,317
|
|
2021
|
|
|
1,362
|
|
2022
|
|
|
1,378
|
|
2023 and thereafter
|
|
|
5,074
|
|
Total
|
|
$
|
11,981
|
|
Rent expense for the years ended
December
31,
2017
and
2016
totaled approximately
$1,427,000
and
$2,392,000,
respectively.
As of
December
31,
2017,
the Company had outstanding purchase commitments of approximately
$3,296,000
primarily for the acquisition of inventory.
The Company bears insurance risk
as a member of a group captive insurance entity for certain general liability, automobile and workers’ compensation insurance programs, 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 is involved in certain litigation and contract issues arising in the normal course of business.
While the outcome of these matters cannot, at this time, be predicted in light of the uncertainties inherent therein, management does
not
expect that these matters will have a material adverse effect on the consolidated financial position or results of operations of the Company.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
The Company accounts for
loss contingencies in accordance with U.S. generally accepted accounting principles (GAAP). Estimated loss contingencies are accrued only if the loss is probable and the amount of the loss can be reasonably estimated. With respect to a particular loss contingency, it
may
be probable that a loss has occurred but the estimate of the loss is within a wide range or undeterminable. If the Company deems an amount within the range to be a better estimate than any other amount within the range, that amount will be accrued. However, if
no
amount within the range is a better estimate than any other amount, the minimum amount of the range is accrued.
On
May
3,
2016,
the Company entered into a lease for a manufacturing facility, effective
December
31,
2016.
The Company, Sypris Electronics and the landlord of the previous Tampa facility were involved in litigation over certain terms of the previous lease (see Part II, Item
1,
“Legal Proceedings”). As such, the Company accrued an estimated
$500,000
during the year ended
December 31,
2016,
related to its estimated obligation under the lease and repairs required to be made to the facility. During the year ended
December
31,
2017,
the Company spent
$52,000
in repairs to the facility as part of the dispute. On
April 7, 2017,
the Company entered a settlement agreement, whereby the Company’s net cash outlay was
$448,000
to resolve the disputes and the legal proceeding was dismissed.
The Company has various current and previously-owned facilities subject to a variety of environmental regulations. The Company has received certain indemnifications from either companies previously owning these facilities or from purchasers of those facilities. A
s of
December
31,
2017
and
2016,
no
amounts were accrued for any environmental matters. See “Legal Proceedings” in Part I, Item
3
of this Annual Report on Form
10
-K.
On
December
27,
2017,
the U.S. Department of Labor (the “DOL”) filed a lawsuit alleging that the Company had misinterpreted the language of its Company’s
401
(k) Plans (collectively, the “Plan”). The DOL does
not
appear to dispute that the Company reached such interpretation in good faith and after consulting with independent ERISA counsel. If the DOL’s allegations were upheld by a court, the Company could be required to make additional contributions into the accounts of its Plan participants. The Company regards the DOL’s allegations to be without merit and plans to vigorously litigate the matter.
During the year ended
December
31,
2017,
the Company became aware of a lawsuit involving
one
of Sypris Electronics’ customers and its primary distributor. This customer has informed the Company that, as a result of the lawsuit, the customer
no
longer intends to pursue its current business, and has expressed an intention to transfer this business to a designated successor. The Company holds
$1,034,000
of inventory related specifically to this customer as of
December
31,
2017.
On
December 21, 2017
the Company entered a new supply agreement with the designated successor, which provides for purchases in excess of our inventories on hand and for prices in excess of our cost.
No
assurances can be given that the successor customer will be successful or will comply with the terms of the new agreement, which could adversely affect our ability to recoup any or all of our investment in these inventories. However, given the uncertainties described above,
no
estimate currently can be made of a range of amounts of loss that are reasonably possible should the program with the successor
not
be successful.
(
18
) 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
3,655,088
shares of common stock were registered for issuance under the
2010
Omnibus Plan. On
May 19, 2015,
the
2010
Omnibus Plan was replaced with the
2015
Omnibus Plan. A total of
3,476,021
shares were registered for issuance under the
2015
Omnibus Plan. Additionally, awards under the
2010
Omnibus Plan that are cancelled without having been fully exercised or vested are available again for new awards under the
2015
Omnibus Plan. The aggregate number of shares available for future grant as of
December
31,
2017
and
2016
was
1,314,021
and
1,712,021,
respectively.
The
2010
and
2015
Omnibus Plans provide 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.
Under the plans, t
he Company
may
grant options to purchase common stock 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
2010
and
2015
Omnibus Plans include a
five
year life along with vesting after
three
years of service.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
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 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:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected life (years)
|
|
|
4.0
|
|
|
|
4.0
|
|
Expected volatility
|
|
|
51.2
|
%
|
|
|
52.0
|
%
|
Risk-free interest rates
|
|
|
1.91
|
%
|
|
|
1.42
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
A summary of the restricted
stock activity is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Nonvested shares at January 1, 2017
|
|
|
1,165,000
|
|
|
$
|
1.49
|
|
Granted
|
|
|
199,000
|
|
|
|
1.06
|
|
Vested
|
|
|
(296,000
|
)
|
|
|
2.26
|
|
Forfeited
|
|
|
(39,000
|
)
|
|
|
1.15
|
|
Nonvested shares at December 31, 2017
|
|
|
1,029,000
|
|
|
$
|
1.20
|
|
The total fair value of shares vested during
2017
and
2016
was
$408,000
and
$536,000,
respectively.
The following table summarizes option activity for the year ended
December 31,
2017:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Term
|
|
|
Value
|
|
Outstanding at January 1, 2017
|
|
|
1,908,250
|
|
|
$
|
2.07
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
272,500
|
|
|
|
1.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(45,000
|
)
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(314,750
|
)
|
|
|
3.49
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
1,821,000
|
|
|
$
|
1.70
|
|
|
|
2.28
|
|
|
$
|
444,000
|
|
Exercisable at December 31, 2017
|
|
|
523,200
|
|
|
$
|
2.99
|
|
|
|
0.99
|
|
|
$
|
34,000
|
|
The weighted average grant date fair value based on the Black-Scholes option pricing model for options granted in the year
s ended
December
31,
2017
and
2016
was
$0.45
and
$0.38
per share, respectively. There were
no
options exercised in
2017
or
2016.
As of
December
31,
2017,
there was
$746,000
of total unrecognized compensation cost related to unvested share-based compensation granted under the plans. That cost is expected to be recognized over a weighted-average period of
1.1
years. The total fair value of option shares vested during the years ended
December
31,
2017
and
2016
was
not
material.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
(
19
) Stockholders’ Equity
As of
December
31,
2017
and
2016,
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 there are
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):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Foreign currency translation adjustments, net of tax
|
|
$
|
(10,915
|
)
|
|
$
|
(11,334
|
)
|
Employee benefit related adjustments
– U.S, net of tax.
|
|
|
(14,748
|
)
|
|
|
(15,445
|
)
|
Employee benefit related adjustments
– Mexico, net of tax
|
|
|
112
|
|
|
|
181
|
|
Accumulated other comprehensive loss
|
|
$
|
(25,551
|
)
|
|
$
|
(26,598
|
)
|
Changes in each component of a
ccumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Defined
|
|
|
Other
|
|
|
|
Currency
|
|
|
Benefit
|
|
|
Comprehensive
|
|
|
|
Translation
|
|
|
Plans
|
|
|
Loss
|
|
Balance at January 1, 2016
|
|
$
|
(9,554
|
)
|
|
$
|
(16,206
|
)
|
|
$
|
(25,760
|
)
|
Currency translation adjustments
|
|
|
(1,780
|
)
|
|
|
0
|
|
|
|
(1,780
|
)
|
Net actuarial gain for the year
|
|
|
0
|
|
|
|
164
|
|
|
|
164
|
|
Amortization for the year
|
|
|
0
|
|
|
|
778
|
|
|
|
778
|
|
Balance at December 31, 2016
|
|
|
(11,334
|
)
|
|
|
(15,264
|
)
|
|
|
(26,598
|
)
|
Currency translation adjustments
|
|
|
419
|
|
|
|
0
|
|
|
|
419
|
|
Net actuarial gain for the year
|
|
|
0
|
|
|
|
205
|
|
|
|
205
|
|
Amortization for the year
|
|
|
0
|
|
|
|
423
|
|
|
|
423
|
|
Balance at December 31, 2017
|
|
$
|
(10,915
|
)
|
|
$
|
(14,636
|
)
|
|
$
|
(25,551
|
)
|
(
20
) 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.
On
December 22, 2017,
the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of
2017
(the "Tax Act"). The Tax Act significantly modifies the U.S. corporate income tax system by, among other things, reducing the federal income tax rate from
35%
to
21%,
limiting certain deductions, including limiting the deductibility of interest expense to
30%
of U.S. Earnings Before Interest, Taxes, Depreciation and Amortization, imposing a mandatory
one
-time deemed repatriation tax on accumulated foreign earnings and creating a territorial tax system that changes the manner in which future foreign earnings are subject to U.S. tax.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
The components of income (loss) before taxes are as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Domestic
|
|
$
|
(7,328
|
)
|
|
$
|
5,375
|
|
Foreign
|
|
|
(4,112
|
)
|
|
|
969
|
|
Total
|
|
$
|
(11,440
|
)
|
|
$
|
6,344
|
|
The components of income tax (benefit) expense are as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(184
|
)
|
|
$
|
0
|
|
State
|
|
|
39
|
|
|
|
222
|
|
Foreign
|
|
|
194
|
|
|
|
79
|
|
Total current income tax expense
|
|
|
49
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(600
|
)
|
|
|
0
|
|
State
|
|
|
(67
|
)
|
|
|
0
|
|
Foreign
|
|
|
0
|
|
|
|
0
|
|
Total deferred income tax (benefit) expense
|
|
|
(667
|
)
|
|
|
0
|
|
Income tax (benefit) expense, net
|
|
$
|
(618
|
)
|
|
$
|
301
|
|
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 net loss from operations in the U.S. for the year ended
December
31,
2017
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
2017
using a
38.9%
effective tax rate. Income tax benefit for the year ended
December
31,
2017
includes a benefit of
$667,000
due to the required intraperiod tax allocation. Conversely, other comprehensive income for the year ended
December
31,
2017
includes income tax expense of
$667,000.
The Company files a consolidated federal income tax return which includes all
domestic subsidiaries. State income taxes paid in the U.S. during
2017
and
2016
totaled
$110,000
and
$41,000,
respectively. State income tax refunds received in the U.S. during
2017
totaled
$63,000.
There were
no
state income tax refunds in
2016.
Foreign income taxes paid during
2017
and
2016
totaled
$486,000
and
$141,000,
respectively. There were
no
foreign refunds received in
2017
and
2016.
There were
no
federal taxes paid in
2017
and
2016,
and there were
no
federal refunds received in
2017
and
2016.
At
December
31,
2017,
the Company had
$134,962,000
of federal net operating loss carryforwards available to offset future federal taxable income, which will expire in various amounts from
2025
to
2036.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
At
December
31,
2017,
the Company had
$95,294,000
of state net operating loss carryforwards available to offset future state taxable income, the majority of which relates to Florida and Kentucky. These carryforwards expire in various amounts from
2019
to
2037.
The following is a reconciliation of income tax (benefit) expense to that computed by applying the federal statutory rate to income (loss) before income taxes (in thousands):
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Federal tax expense at the statutory rate
|
|
$
|
(4,004
|
)
|
|
$
|
2,220
|
|
Current year permanent differences
|
|
|
239
|
|
|
|
598
|
|
State income taxes, net of federal tax impact
|
|
|
(262
|
)
|
|
|
528
|
|
Federal tax reform
– deferred rate change
|
|
|
19,395
|
|
|
|
0
|
|
State deferred rate change
|
|
|
239
|
|
|
|
0
|
|
Foreign repatriation, net of foreign tax credits
|
|
|
(544
|
)
|
|
|
165
|
|
Effect of tax rates of foreign subsidiaries
|
|
|
203
|
|
|
|
(51
|
)
|
Currency translation effect on temporary differences
|
|
|
(372
|
)
|
|
|
626
|
|
Change in valuation allowance
|
|
|
(15,230
|
)
|
|
|
(6,256
|
)
|
State NOL carryforwards, stock compensation and other items
|
|
|
(282
|
)
|
|
|
2,471
|
|
Income tax (benefit) expense, net
|
|
$
|
(618
|
)
|
|
$
|
301
|
|
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 and foreign losses 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 all 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 non-U.S. tax benefits.
In addition, we remeasured certain net deferred tax assets and
liabilities based on the tax rates at which they are expected to reverse in the future. The estimated total impact upon enactment of the Tax Act is
$19,395,000,
however, this impact has been offset due to our valuation allowance. Our analysis could affect the measurement of these balances and give rise to new deferred and other tax assets and liabilities. Since the Tax Act was passed late in the
fourth
quarter of
2017,
and further guidance and accounting interpretation is expected over the next
12
months, our review is still pending. We expect to complete our analysis of the amounts recorded upon enactment of the Tax Act within the measurement period of
one
year.
The T
ax Act also provides that undistributed and previously untaxed post-
1986
foreign earnings will be deemed distributed in
2017
and be subject to tax at reduced effective rates (Transition Tax). The Company estimates it has a net cumulative deficit in E&P from its foreign subsidiaries and, consequently, will
not
be subject to the Transition Tax. In the event that a final calculation were to result in a nominal Transition Tax, the Company has an NOL in excess of the accumulated E&P of its Mexican subsidiaries as of
December
31,
2017,
therefore it will
not
incur a liability for the deemed repatriation of foreign earnings. Additionally, as of
December
31,
2017,
the Company’s U.S. deferred liability for cumulative undistributed earnings has been eliminated.
The gross deferred tax asset for the Company
’s Mexican subsidiaries was
$4,942,000
and
$3,269,000
as of
December 31, 2017
and
2016,
respectively.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
Deferred income tax assets and liabilities are as follows
(in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Compensation and benefit accruals
|
|
$
|
585
|
|
|
$
|
1,517
|
|
Inventory valuation
|
|
|
739
|
|
|
|
1,481
|
|
Federal and state net operating loss carryforwards
|
|
|
32,646
|
|
|
|
49,298
|
|
Deferred revenue
|
|
|
296
|
|
|
|
63
|
|
Accounts receivable allowance
|
|
|
34
|
|
|
|
153
|
|
Defined benefit pension plan
|
|
|
802
|
|
|
|
1,627
|
|
Foreign deferred revenue and other provisions
|
|
|
4,942
|
|
|
|
3,269
|
|
AMT credits
|
|
|
0
|
|
|
|
185
|
|
Other
|
|
|
917
|
|
|
|
777
|
|
Total
|
|
|
40,961
|
|
|
|
58,370
|
|
Domestic valuation allowance
|
|
|
(35,387
|
)
|
|
|
(52,900
|
)
|
Foreign valuation allowance
|
|
|
(4,942
|
)
|
|
|
(3,269
|
)
|
Total deferred tax assets
|
|
|
632
|
|
|
|
2,201
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Foreign subsidiaries
– unrepatriated earnings
|
|
|
0
|
|
|
|
(543
|
)
|
Depreciation
|
|
|
(632
|
)
|
|
|
(1,658
|
)
|
Total deferred tax liabilities
|
|
|
(632
|
)
|
|
|
(2,201
|
)
|
Net deferred tax asset
|
|
$
|
0
|
|
|
$
|
0
|
|
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, 2017
and
2016
was
$200,000.
There were
no
changes to the unrecognized tax benefit balance during the years ended
December
31,
2017
and
2016.
If the Company
’s positions are sustained by the taxing authority, the entire balance at
December
31,
2017
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,
2017
and
2016,
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
2013
through
2016,
for which the statute has yet to expire. In addition, open tax years related to state and foreign jurisdictions remain subject to examination.
(
21
)
(Loss)
Incom
e
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,
2017,
and
992,000
common shares excluded from diluted earnings per share for the year ended
December
31,
2016
because the effect of inclusion would be anti-dilutive.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
A reconciliation of the weighted average shares outstanding used in the calculation of basic and diluted loss per common share is as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
(Loss) income attributable to stockholders:
|
|
|
|
|
|
|
|
|
Net (loss) income as reported
|
|
$
|
(10,822
|
)
|
|
$
|
6,043
|
|
Less distributed and undistributed earnings allocable to restricted award holders
|
|
|
0
|
|
|
|
(184
|
)
|
Net (loss) income allocable to common stockholders
|
|
$
|
(10,822
|
)
|
|
$
|
5,859
|
|
(Loss) income per common share attributable to stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.53
|
)
|
|
$
|
0.30
|
|
Diluted
|
|
$
|
(0.53
|
)
|
|
$
|
0.30
|
|
Weighted average shares outstanding
– basic
|
|
|
20,326
|
|
|
|
19,861
|
|
Weighted average additional shares assuming conversion of potential common shares
|
|
|
0
|
|
|
|
0
|
|
Weighted average shares outstanding
– diluted
|
|
|
20,326
|
|
|
|
19,861
|
|
(
22
) Segment Information
The Company is organized into
two
business
segments, Sypris Technologies and Sypris Electronics. The segments are each managed separately because of the distinctions between the products, markets, customers, technologies, and workforce skills of the segments. Sypris Technologies generates revenue primarily from the sale of forged, machined, welded and heat-treated steel components primarily for the heavy commercial vehicle and high-pressure energy pipeline applications. Sypris Electronics provides circuit card and box build manufacturing, high reliability manufacturing, systems assembly and integration, design for manufacturability and design to specification work to customers in the market for aerospace and defense electronics. Additionally, prior to
August 16, 2016,
Sypris Electronics also provided trusted solutions for identity management, cryptographic key distribution and cyber analytics along with manufacturing of complex data storage systems (see Note
4
). 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,
|
|
|
|
2017
|
|
|
2016
|
|
Net revenue from unaffiliated customers:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
54,891
|
|
|
$
|
63,324
|
|
Sypris Electronics
|
|
|
27,403
|
|
|
|
28,473
|
|
|
|
$
|
82,294
|
|
|
$
|
91,797
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
395
|
|
|
$
|
(254
|
)
|
Sypris Electronics
|
|
|
2,587
|
|
|
|
1,003
|
|
|
|
$
|
2,982
|
|
|
$
|
749
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
(7,459
|
)
|
|
$
|
(8,230
|
)
|
Sypris Electronics
|
|
|
147
|
|
|
|
(7,127
|
)
|
General, corporate and other
|
|
|
(5,232
|
)
|
|
|
(7,401
|
)
|
|
|
$
|
(12,544
|
)
|
|
$
|
(22,758
|
)
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
– CONTINUED
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
(1,906
|
)
|
|
$
|
(4,320
|
)
|
Sypris Electronics
|
|
|
(2
|
)
|
|
|
(31,185
|
)
|
General, corporate and other
|
|
|
(5
|
)
|
|
|
0
|
|
|
|
$
|
(1,913
|
)
|
|
$
|
(35,505
|
)
|
(Loss) income before income taxes:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
(5,844
|
)
|
|
$
|
(4,178
|
)
|
Sypris Electronics
|
|
|
150
|
|
|
|
24,058
|
|
General, corporate and other
|
|
|
(5,746
|
)
|
|
|
(13,536
|
)
|
|
|
$
|
(11,440
|
)
|
|
$
|
6,344
|
|
Income tax (benefit) expense, net:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
194
|
|
|
$
|
79
|
|
Sypris Electronics
|
|
|
0
|
|
|
|
0
|
|
General, corporate and other
|
|
|
(812
|
)
|
|
|
222
|
|
|
|
$
|
(618
|
)
|
|
$
|
301
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
3,399
|
|
|
$
|
4,388
|
|
Sypris Electronics
|
|
|
372
|
|
|
|
1,772
|
|
General, corporate and other
|
|
|
113
|
|
|
|
128
|
|
|
|
$
|
3,884
|
|
|
$
|
6,288
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
1,003
|
|
|
$
|
252
|
|
Sypris Electronics
|
|
|
366
|
|
|
|
1,472
|
|
General, corporate and other
|
|
|
268
|
|
|
|
39
|
|
|
|
$
|
1,637
|
|
|
$
|
1,763
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
31,725
|
|
|
$
|
32,110
|
|
Sypris Electronics
|
|
|
17,440
|
|
|
|
12,881
|
|
General, corporate and other
|
|
|
7,990
|
|
|
|
17,646
|
|
|
|
$
|
57,155
|
|
|
$
|
62,637
|
|
|
|
|
|
|
|
|
|
|
Total liabilities:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
23,854
|
|
|
$
|
24,466
|
|
Sypris Electronics
|
|
|
8,352
|
|
|
|
3,542
|
|
General, corporate and other
|
|
|
8,019
|
|
|
|
8,531
|
|
|
|
$
|
40,225
|
|
|
$
|
36,539
|
|
The Company
’s export sales from the U.S. totaled
$12,068,000
and
$21,010,000
in
2017
and
2016,
respectively. Approximately
$22,874,000
and
$11,706,000
of net revenue in
2017
and
2016,
respectively, and
$6,659,000
and
$6,787,000
of long lived assets at
December
31,
2017
and
2016,
respectively, and net assets of
$5,327,000
and
$9,016,000
at
December
31,
2017
and
2016
relate to the Company’s international operations.