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, 2018 and 2017
(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. 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
Cash equivalents include all highly liquid investments with a maturity of three months or less when purchased.
Inventory
Inventory is stated at the lower of cost or estimated net realizable value. Costs for raw materials, work in process and finished goods is determined under the first-in, first-out method. Indirect inventories, which include perishable tooling, repair parts and other materials consumed in the manufacturing process but not incorporated into finished products are classified as raw materials.
The Company’s reserve for excess and obsolete inventory is primarily based upon forecasted demand for its product sales, and any change to the reserve arising from forecast revisions is reflected in cost of sales in the period the revision is made.
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
The Company classifies 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.
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.
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.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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 revenue when it satisfies a performance obligation by transferring control of a promised product or rendering a service to a customer. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for the product or service (the “transaction price”). The Company’s transaction price in its contracts with customers is generally fixed; no payment discounts, rebates or refunds are included within its contracts. The Company does not provide service-type warranties nor does it allow customer returns. In connection with the sale of various parts to customers, the Company is subject to typical assurance warranty obligations covering the compliance of the electronics parts produced to agreed-upon specifications. Customer returns, when they occur, relate to quality rework issues and are not connected to any repurchase obligation of the Company.
A performance obligation is a promise in a contract to transfer a distinct product or render a service to a customer and is the unit of account to which the transaction price is allocated under ASC 606,
Revenue from Contracts with Customers
(“ASC 606”). When a contract contains multiple performance obligations, we allocate the transaction price to the individual performance obligations using the price at which the promised goods or services would be sold to customers on a standalone basis. For most sales within our Sypris Technologies segment and a portion of sales within Sypris Electronics, control transfers to the customer at a point in time. Indicators that control has transferred to the customer include the Company having a present right to payment, the customer obtaining legal title and the customer having the significant risks and rewards of ownership. The Company’s principal terms of sale are FOB Shipping Point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment.
For contracts where Sypris Electronics serves as a contractor for aerospace and defense companies under federally funded programs, we generally recognize revenue over time as we perform due to the continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contracts that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Because control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We use labor hours incurred as a measure of progress for these contracts because it best depicts the Company’s performance of the obligation to the customer, which occurs as we incur labor on our contracts. Under this measure of progress, the extent of progress towards completion is measured based on the ratio of labor hours incurred to date to the total estimated labor hours at completion of the performance obligation.
Our contract profit margins may include estimates of revenues for goods or services on which the customer and the Company have not reached final agreements, such as contract changes, settlements of disputed claims, and the final amounts of requested equitable adjustments permitted under the contract. These estimates are based upon management’s best assessment of the totality of the circumstances and are included in our contract profit based upon contractual provisions and our relationships with each customer.
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, 2018 and 2017, was $582,000 and $666,000, respectively. The Company’s warranty expense for the years ended December 31, 2018 and 2017 was $136,000 and $253,000, 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 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 40% of accounts receivable outstanding at December 31, 2018 is due from two customers. More specifically, Northrop Grumman Corporation (Northrop Grumman) and Sistemas Automotrices de Mexico, S.A. de C. V. (Sistemas) comprise 22% and 18%, respectively, of December 31, 2018 outstanding accounts receivables. 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.
The Company’s largest customers for the year ended December 31, 2018 were Sistemas, Northrop Grummon and Detroit Diesel, which represented approximately 19%, 14% and 14%, 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. Detroit Diesel, Northrop Grummon and Sistemas were the Company’s largest customers for the year ended December 31, 2017, which represented approximately 14%, 13% and 13%, respectively, of the Company’s total net revenue. No other single customer accounted for more than 10% of the Company’s total net revenue for the years ended December 31, 2018 or 2017.
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 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 459, or 64% of the Company’s employees, all within Sypris Technologies, were covered by collective bargaining agreements at December 31, 2018. Excluding certain Mexico employees covered under an annually ratified agreement, collective bargaining agreements covering 36 employees expire within the next 12 months. Certain Mexico employees are covered by an annually ratified collective bargaining agreement. These employees represented approximately 59% of the Company’s workforce, or 423 employees as of December 31, 2018.
Recently Issued Accounting Standards
In 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 -
Revenue from Contracts with Customers
(ASC 606), which supersedes nearly all existing revenue recognition guidance. Subsequent to the issuance of ASU 2014-09, the FASB clarified the new guidance through several additional ASUs; hereinafter the collection of revenue guidance is referred to as “ASC 606.”
ASC 606 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 any assets recognized from costs incurred to fulfill a contract. The Company adopted the guidance effective January 1, 2018 using the modified retrospective approach for all contracts not completed as of the date of adoption. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605, Revenue Recognition.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
We recorded a net decrease to beginning accumulated deficit of $170,000 as of January 1, 2018, for the cumulative impact of adopting the new guidance. The impact primarily arises from a change in how we account for certain federally funded programs within Sypris Electronics where we transfer control of the products to the customer as they are produced (i.e., a change from recognizing revenue at a point in time to recognizing revenue over time, resulting in revenue being recognized earlier in the process of completing the performance obligation).
The following table summarizes the cumulative effect of the changes to our consolidated balance sheet as of January 1, 2018 from the adoption of ASC 606:
|
|
|
|
|
|
|
|
|
Opening
|
|
|
|
Balance at
|
|
|
ASC 606
|
|
|
Balance at
|
|
|
|
Dec. 31, 2017
|
|
|
Adjustments
|
|
|
Jan. 1, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories – net
|
|
$
|
17,641
|
|
|
$
|
(655
|
)
|
|
$
|
16,986
|
|
Contract assets
|
|
|
0
|
|
|
|
825
|
|
|
|
825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(111,591
|
)
|
|
$
|
170
|
|
|
$
|
(111,421
|
)
|
Under the modified retrospective method of adoption, we are also required to disclose in the first year of adoption the hypothetical impact to our financial statements if we had continued to follow our accounting policies under ASC 605 during the period. We estimate that the impact to revenue for the year ended December 31, 2018 would have been a decrease of $600,000, representing the amount of revenue recognized over time versus at a point in time under ASC 606. Additionally, the adoption of ASC 606 increased our operating loss and net loss by $106,000, or less than $0.01 per share for year ended December 31, 2018.
The following table summarizes the effect of adopting ASC 606 on our consolidated statement of operations for the year ended December 31, 2018:
|
|
Legacy GAAP
|
|
|
Impact of
|
|
|
As Reported
|
|
|
|
Dec. 31, 2018
|
|
|
ASC 606
|
|
|
Dec. 31, 2018
|
|
Net revenue
|
|
$
|
87,369
|
|
|
$
|
600
|
|
|
$
|
87,969
|
|
Cost of sales
|
|
|
79,691
|
|
|
|
706
|
|
|
|
80,397
|
|
Gross profit
|
|
|
7,678
|
|
|
|
(106
|
)
|
|
|
7,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
10,474
|
|
|
|
0
|
|
|
|
10,474
|
|
Severance, equipment relocation and other costs
|
|
|
1,394
|
|
|
|
0
|
|
|
|
1,394
|
|
Operating loss
|
|
|
(4,190
|
)
|
|
|
(106
|
)
|
|
|
(4,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
850
|
|
|
|
0
|
|
|
|
850
|
|
Other (income), net
|
|
|
(1,436
|
)
|
|
|
0
|
|
|
|
(1,436
|
)
|
Loss before taxes
|
|
|
(3,604
|
)
|
|
|
(106
|
)
|
|
|
(3,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense, net
|
|
|
(205
|
)
|
|
|
0
|
|
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,399
|
)
|
|
$
|
(106
|
)
|
|
$
|
(3,505
|
)
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The following table summarizes the cumulative effect of the changes to our consolidated balance sheets as of December 31, 2018 from the adoption of ASC 606:
|
|
Legacy GAAP
|
|
|
Impact of
|
|
|
As Reported
|
|
|
|
Dec. 31, 2018
|
|
|
ASC 606
|
|
|
Dec. 31, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories – net
|
|
$
|
19,945
|
|
|
$
|
(1,361
|
)
|
|
$
|
18,584
|
|
Contract assets
|
|
|
0
|
|
|
|
839
|
|
|
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(114,989
|
)
|
|
$
|
63
|
|
|
$
|
(114,926
|
)
|
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(ASC 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 Accounting 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. In July 2018, the FASB issued ASU No. 2018-11,
Leases
(Topic 842): Targeted Improvements
, which provides an alternative modified transition method. Under this method, the cumulative-effect adjustment to the opening balance of retained earnings is recognized on the date of adoption with prior periods not restated.
The new standard provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. In addition, the new standard provides practical expedients for an entity’s ongoing accounting that the Company anticipates making, such as the (1) the election for certain classes of underlying asset to not separate non-lease components from lease components and (2) the election for short-term lease recognition exemption for all leases that qualify.
The Company will adopt this update beginning on January 1, 2019 using the alternative modified retrospective transition method. The Company expects to elect to utilize the FASB approved option for transition relief with adoption occurring through a cumulative-effect adjustment as of January 1, 2019. The Company expects the valuation of right of use assets (ROU) and lease liabilities, previously described as operating leases, to be the present value of the Company’s forecasted future lease commitments. The Company is continuing to assess the overall impacts of the new standard, including the discount rate to be applied in these valuations, and expects the amendments will have a material impact on our consolidated financial statements, primarily from the recognition of right-of-use assets and lease liabilities on our consolidated balance sheets and changes to related disclosures. The Company believes the largest impact will be on the consolidated balance sheets for the accounting of facilities-related leases, which represents a majority of its operating leases it has entered into as a lessee. These leases will be recognized under the new standard as ROU assets and operating lease liabilities. The Company will also be required to provide expanded disclosures for its leasing arrangements. As of December 31, 2018, the Company had $11,273,000 of undiscounted future minimum operating lease commitments that are not recognized on its consolidated balance sheets as determined under the current standard. In connection with the adoption of the new guidance, the Company expects to recognize ROU asset in the range of $7,000,000 to $8,000,000, and lease liabilities in the range of $7,500,000 to $8,500,000 million on its statement of financial position for operating leases and a cumulative effect adjustment to opening retained earnings of $1,442,000 related to a deferred gain on a sale-leaseback transaction, with limited impact to its results of operations and cash flows.
While substantially complete, the Company is still in the process of finalizing its evaluation of the effect of ASU 842 on the Company’s financial statements and disclosures. The Company will finalize its accounting assessment and quantitative impact of the adoption during the first quarter of fiscal year 2019. As the Company completes its evaluation of this new standard, new information may arise that could change the Company’s current understanding of the impact to leases. Additionally, the Company will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession, and adjust the Company’s assessment and implementation plans accordingly.
In June 2016, the FASB issued ASU 2016-13,
Credit Losses – Measurement of Credit Losses on Financial Instruments
, new guidance for the accounting for credit losses on certain financial instruments. This guidance introduces a new approach to estimating credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. This guidance, which becomes effective January 1, 2020, is not expected to have a material impact on our consolidated financial statements.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. ASU 2016-16 modifies the recognition of income tax expense resulting from intra-entity transfers of assets other than inventory. Pursuant to this amendment, entities should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amendment eliminates the exception for an intra-entity transfer of assets other than inventory. The Company adopted ASU 2016-16 as of January 1, 2018 with no material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Restricted Cash
. This ASU requires that amounts generally described as restricted cash and restricted cash equivalents are 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. The Company adopted this ASU on January 1, 2018 using the retrospective method. The adoption of ASU 2016-18 had an impact on our financial statement presentation within the Consolidated Statement of Cash Flows, as amounts generally described as restricted cash and restricted cash equivalents are now 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 and transfers of these amounts between balance sheet line items are no longer presented as an operating, investing or financing cash flow. For the year ended December 31, 2017, cash flow from investing activities decreased by $1,500,000 as a result of the adoption of this ASU. The Company did not have any restricted cash balances as of December 31, 2018 or 2017.
In March 2017, the FASB issued ASU 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. The income statement guidance requires application on a retrospective basis. The Company adopted the ASU on January 1, 2018, and as a result operating income increased $398,000 and other income decreased by $398,000 for the year ended December 31, 2017. The Company used the practical expedient provided in ASU 2017-07 that permits the use of the amounts disclosed in its benefit plans notes for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. These changes in presentation do not result in any changes to net loss or loss per share. Details of the components of net periodic benefit costs are provided in Note 16.
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. GAAP, 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 Act. 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 does not expect the adoption of ASU 2018-02 to have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software: Customer
’
s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
(ASU 2018-15). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(
2
)
|
Revenue from Contracts with Customers
|
The Company recognizes revenue when it satisfies a performance obligation by transferring control of a promised product or rendering a service to a customer. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for the product or service (the “transaction price”). The Company’s transaction price in its contracts with customers is generally fixed; no payment discounts, rebates or refunds are included within its contracts. The Company also does not provide service-type warranties nor does it allow customer returns. In connection with the sale of various parts to customers, the Company is subject to typical assurance warranty obligations covering the compliance of the electronics parts produced to agreed-upon specifications (See Note 1). Customer returns, when they occur, relate to quality rework issues and are not connected to any repurchase obligation of the Company.
A performance obligation is a promise in a contract to transfer a distinct product or render a service to a customer and is the unit of account to which the transaction price is allocated under ASC 606. When a contract contains multiple performance obligations, we allocate the transaction price to the individual performance obligations using the price at which the promised goods or services would be sold to customers on a standalone basis. For most sales within our Sypris Technologies segment and a portion of sales within Sypris Electronics, control transfers to the customer at a point in time. Indicators that control has transferred to the customer include the Company having a present right to payment, the customer obtaining legal title and the customer having the significant risks and rewards of ownership. The Company’s principal terms of sale are FOB Shipping Point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment.
For contracts where Sypris Electronics serves as a contractor for aerospace and defense companies under federally funded programs, we generally recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contracts that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Because control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We use labor hours incurred as a measure of progress for these contracts because it best depicts the Company’s performance of the obligation to the customer, which occurs as we incur labor on our contracts. Under this measure of progress, the extent of progress towards completion is measured based on the ratio of labor hours incurred to date to the total estimated labor hours at completion of the performance obligation.
Our contract profit margins may include estimates of revenues for goods or services on which the customer and the Company have not reached final agreements, such as contract changes, settlements of disputed claims, and the final amounts of requested equitable adjustments permitted under the contract. These estimates are based upon management’s best assessment of the totality of the circumstances and are included in our contract profit based upon contractual provisions and our relationships with each customer.
The majority of our arrangements are for one year or less. For the remaining population of non-cancellable contracts greater than one year we had $15,867,000 of remaining performance obligations as of December 31, 2018, all of which were long-term Sypris Electronics’ contracts. We expect to recognize approximately 58% of our remaining performance obligations as revenue in the 2019, 30% in 2020 and the balance thereafter.
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the year ended December 31, 2018:
|
|
Year Ended
|
|
|
|
Dec. 31, 2018
|
|
|
|
|
|
|
Sypris Technologies – transferred point in time
|
|
$
|
59,816
|
|
Sypris Electronics – transferred point in time
|
|
|
5,800
|
|
Sypris Electronics – transferred over time
|
|
|
22,353
|
|
|
|
|
|
|
Net revenue
|
|
$
|
87,969
|
|
Contract Balances
Differences in the timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and deferred revenue, customer deposits and billings in excess of revenue recognized (contract liabilities) on the consolidated balance sheets.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Contract assets
– Contract assets include unbilled amounts typically resulting from sales under contracts where revenue is recognized over time and revenue recognized exceeds the amount billed to the customer, and the right to payment is subject to conditions other than the passage of time. Contract assets are generally classified as current assets in the consolidated balance sheet. The balance of contract assets as of December 31, 2018 and at the date of adoption of ASC 606 were $839,000 and $825,000, respectively, and are included within other current assets in the accompanying consolidated balance sheets.
Contract liabilities
– Some of the Company’s contracts within Sypris Electronics are billed as work progresses in accordance with the contract terms and conditions, either at periodic intervals or upon achievement of certain milestones. Often this results in billing occurring prior to revenue recognition resulting in contract liabilities. Additionally, the Company may receive cash payments from customers prior to the Company transferring control of the good resulting in contract liabilities. These contract liabilities are classified as either current or long-term in the consolidated balance sheet based on the timing of when the Company expects to recognize revenue. As of December 31, 2018 and at the date of adoption of ASC 606, contract liabilities were $8,369,000 and $1,509,000, respectively, and are included within accrued liabilities in the accompanying consolidated balance sheets. Payments received from customers in advance of revenue recognition are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract.
The amount of revenue recognized in the period that was included in the opening current deferred revenue, which reflects the contract liability amounts, was $1,121,000.
Practical expedients and exemptions
Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in selling, general and administrative expense in the consolidated statements of operations.
We do not disclose the value of unsatisfied performance obligations for contracts with original expected lengths of one year or less.
The Company completed a number of strategic actions during the past four years in response to the nonrenewal of supply agreements 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 included: (i) the Company’s exit from the Broadway Plant (defined below) (see Note 4), (ii) the sale of Sypris Electronics’ SioMetrics, Cyber Range, Information Security Solutions and Data Systems product lines (the “CSS business”) in 2016, (iii) the sale and leaseback of the Company’s facility in Toluca, Mexico in 2016, (iv) the sale of the Company’s manufacturing facility in Morganton, North Carolina in 2015, (v) the capacity reallocation of certain oil and gas industry components to Mexico, (vi) the relocation of its Sypris Electronics operation to a new facility beginning in 2017, and (vii) reductions in employment costs through senior management pay reductions. 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).
The Company has reduced its reliance on 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 more diversified, longer-term relationships, especially among the 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 Inc. (“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 non-renewed its business with Eaton Corporation (“Eaton”). As a result of these decisions, the Company experienced a significant reduction in its commercial vehicle revenues in 2017 (See Note 4). During the fourth quarter of 2018, the Company entered into a three-year agreement to supply axle shafts to Sistemas Automotrices de Mexico, S.A. de C.V. (“Sistemas”), as well as a number of other product lines for periods of up to six years from the commencement of production.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(
4
)
|
Exit and Disposal Activities
|
On February 21, 2017, the Board of Directors approved a modified exit or disposal plan with respect to the Broadway Plant, which included the relocation of production to other Company facilities, as needed, and/or the closure of the plant. The relocation of production was 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 apply the proceeds from the sale of any underutilized or non-core assets to help fund the costs to transfer any additional equipment from the Broadway Plant. Management is currently evaluating options for the real estate and any remaining assets in the Broadway Plant.
As a result of these initiatives, the Company recorded charges of $1,394,000, or $0.07 per share, and $2,360,000, or $0.12 per share, during 2018 and 2017, respectively, 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. All amounts incurred were recorded within Sypris Technologies. The charges for 2018 included $361,000 for equipment relocation costs and $1,033,000 primarily related to mothball costs associated with the closed facility. The charges for 2017 included $936,000 for severance and benefit related costs and $1,424,000 for equipment relocation costs. A summary of the total pre-tax charges is as follows (in thousands):
|
|
|
|
|
|
Costs Incurred
|
|
|
|
|
|
|
|
Year
|
|
|
Total
|
|
|
Remaining
|
|
|
|
|
|
|
|
Total
|
|
|
Ended
|
|
|
Recognized
|
|
|
Costs to be
|
|
|
|
Program
|
|
|
Dec. 31, 2018
|
|
|
to date
|
|
|
Recognized
|
|
Severance and benefit related costs
|
|
$
|
1,350
|
|
|
$
|
0
|
|
|
$
|
1,350
|
|
|
$
|
0
|
|
Asset impairments
|
|
|
188
|
|
|
|
0
|
|
|
|
188
|
|
|
|
0
|
|
Equipment relocation costs
|
|
|
1,955
|
|
|
|
361
|
|
|
|
1,785
|
|
|
|
170
|
|
Other
|
|
|
1,308
|
|
|
|
1,033
|
|
|
|
1,078
|
|
|
|
230
|
|
|
|
$
|
4,801
|
|
|
$
|
1,394
|
|
|
$
|
4,401
|
|
|
$
|
400
|
|
A summary of costs and related reserves for the transition of production from the Broadway Plant at December 31, 2018 is as follows (in thousands):
|
|
Accrued
|
|
|
Cash
|
|
|
Accrued
|
|
|
|
|
|
|
|
Balance at
|
|
|
Payments
|
|
|
Balance at
|
|
|
|
|
|
|
|
Dec. 31,
|
|
|
2018
|
|
|
or Asset
|
|
|
Dec. 31,
|
|
|
|
2017
|
|
|
Charge
|
|
|
Write-Offs
|
|
|
2018
|
|
Severance and benefit-related costs
|
|
$
|
145
|
|
|
$
|
0
|
|
|
$
|
(145
|
)
|
|
$
|
0
|
|
Equipment relocation costs
|
|
|
0
|
|
|
|
361
|
|
|
|
(361
|
)
|
|
|
0
|
|
Other
|
|
|
0
|
|
|
|
1,033
|
|
|
|
(1,033
|
)
|
|
|
0
|
|
|
|
$
|
145
|
|
|
$
|
1,394
|
|
|
$
|
(1,539
|
)
|
|
$
|
0
|
|
The Company expects to incur additional pre-tax costs of approximately $400,000 within Sypris Technologies, the majority of which is expected to be cash expenditures.
As noted above, management expects to apply proceeds from the sale of underutilized or non-core assets to help fund the costs to transfer additional 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 sheets (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Property, plant and equipment
|
|
$
|
11,207
|
|
|
$
|
28,874
|
|
Accumulated depreciation
|
|
|
(9,733
|
)
|
|
|
(25,976
|
)
|
Property, plant and equipment, net
|
|
$
|
1,474
|
|
|
$
|
2,898
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(
5
)
|
Property Insurance Settlement
|
Subsequent to the transfer of production from the Broadway Plant, the primary water supply and sprinkler pipes within the facility suffered freeze damage during an extended period of extreme cold temperatures. The Company and its insurer reached a full and final settlement agreement with respect to the claim during the second quarter of 2018. Insurance proceeds are recorded to the extent of the losses and then, only if recovery is realized or probable. Any gains in excess of losses are recognized only when the contingencies regarding the recovery are resolved and the amount is fixed or determinable. During the year ended December 31, 2018, the Company received insurance proceeds of $2,447,000 and recognized an insurance recovery gain of $2,275,000, net of expenses incurred for claim related expenses.
The Company is currently evaluating options related to the disposition of the Broadway Plant, including the extent to which repairs, if any, are made to the facility. The Company considered the need for an impairment recognition based on the change in the facility’s physical condition following the freeze damage. Although the fair market value of the facility was reduced by the freeze damage, the Company determined the fair market value of the building and land exceeds the net book value as of December 31, 2018.
As described in Note 1, the Company adopted ASU 2017-07 in the first quarter of 2018. ASU 2017-07 requires the Company to disaggregate the service cost component from the other components of net periodic benefit costs and requires application on a retrospective basis. Accordingly, the other components of net periodic benefit costs included in other income for the year ended December 31, 2018 and 2017 were $584,000 and $398,000, respectively.
During 2018, the Company recognized an insurance recovery gain of $2,275,000 related to the settlement of a property insurance claim on the Broadway Plant (see Note 5). Additionally, the Company recognized a net loss of $249,000 related to the sale of certain idle assets and foreign currency related translation gains of $21,000 related to the U.S. dollar denominated monetary asset position of our Mexican subsidiaries for which the Mexican peso is the functional currency.
During the year ended December 31, 2017, the Company recognized other income of $1,515,000, 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.
(
7
)
|
Accounts Receivable
|
Accounts receivable consists of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Commercial
|
|
$
|
9,962
|
|
|
$
|
9,464
|
|
Allowance for doubtful accounts
|
|
|
(81
|
)
|
|
|
(147
|
)
|
Net
|
|
$
|
9,881
|
|
|
$
|
9,317
|
|
Inventory consists of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
12,354
|
|
|
$
|
10,011
|
|
Work in process
|
|
|
6,331
|
|
|
|
7,150
|
|
Finished goods
|
|
|
1,313
|
|
|
|
1,645
|
|
Reserve for excess and obsolete inventory
|
|
|
(1,414
|
)
|
|
|
(1,165
|
)
|
Total
|
|
$
|
18,584
|
|
|
$
|
17,641
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(
9
)
|
Other Current Assets
|
Other current assets consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Prepaid expenses
|
|
$
|
576
|
|
|
$
|
571
|
|
Contract assets
|
|
|
839
|
|
|
|
0
|
|
Other
|
|
|
3,340
|
|
|
|
1,432
|
|
Total
|
|
$
|
4,755
|
|
|
$
|
2,003
|
|
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.
(
1
0
)
|
Property, Plant and Equipment
|
Property, plant and equipment consists of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Land and land improvements
|
|
$
|
219
|
|
|
$
|
219
|
|
Buildings and building improvements
|
|
|
11,178
|
|
|
|
11,140
|
|
Machinery, equipment, furniture and fixtures
|
|
|
59,179
|
|
|
|
54,554
|
|
Construction in progress
|
|
|
2,141
|
|
|
|
998
|
|
|
|
|
72,717
|
|
|
|
66,911
|
|
Accumulated depreciation
|
|
|
(58,062
|
)
|
|
|
(51,337
|
)
|
|
|
$
|
14,655
|
|
|
$
|
15,574
|
|
Depreciation expense, including amortization of assets recorded under capital leases, totaled approximately $2,648,000 and $3,884,000 for the years ended December 31, 2018 and 2017, respectively. Capital expenditures included in accounts payable or accrued liabilities were not material at December 31, 2018 and 2017, respectively.
Included within property, plant and equipment were assets under capital leases as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Buildings and building improvements
|
|
$
|
2,995
|
|
|
$
|
2,987
|
|
Machinery, equipment, furniture and fixtures
|
|
|
1,277
|
|
|
|
1,277
|
|
|
|
|
4,272
|
|
|
|
4,264
|
|
Accumulated depreciation
|
|
|
(976
|
)
|
|
|
(548
|
)
|
|
|
$
|
3,296
|
|
|
$
|
3,716
|
|
Other assets consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Long term spare parts
|
|
$
|
646
|
|
|
$
|
871
|
|
Long term deposits
|
|
|
507
|
|
|
|
578
|
|
Other
|
|
|
362
|
|
|
|
129
|
|
Total
|
|
$
|
1,515
|
|
|
$
|
1,578
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(
1
2
)
|
Accrued Liabilities
|
Accrued liabilities consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Salaries, wages, employment taxes and withholdings
|
|
$
|
2,019
|
|
|
$
|
1,720
|
|
Employee benefit plans
|
|
|
1,050
|
|
|
|
703
|
|
Accrued professional fees
|
|
|
821
|
|
|
|
3,596
|
|
Income, property and other taxes
|
|
|
453
|
|
|
|
387
|
|
Contract liabilities
|
|
|
8,369
|
|
|
|
1,509
|
|
Deferred gain from sale-leaseback
|
|
|
500
|
|
|
|
499
|
|
Exit and disposal activity accruals
|
|
|
0
|
|
|
|
145
|
|
Other
|
|
|
1,753
|
|
|
|
1,771
|
|
Total
|
|
$
|
14,965
|
|
|
$
|
10,330
|
|
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.
(
1
3
)
|
Other Liabilities
|
Other liabilities consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Noncurrent pension liability
|
|
$
|
4,272
|
|
|
$
|
4,781
|
|
Deferred gain from sale leaseback
|
|
|
3,093
|
|
|
|
3,576
|
|
Other
|
|
|
1,131
|
|
|
|
412
|
|
Total
|
|
$
|
8,496
|
|
|
$
|
8,769
|
|
Included in other liabilities are deferred rent expenses and other items, none of which exceed 5% of total liabilities.
Long-term obligations consists of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Current portion of capital lease obligations
|
|
$
|
593
|
|
|
$
|
829
|
|
|
|
|
|
|
|
|
|
|
Long Term:
|
|
|
|
|
|
|
|
|
Note payable – related party
|
|
$
|
6,500
|
|
|
$
|
6,500
|
|
Capital lease obligations
|
|
|
2,804
|
|
|
|
3,397
|
|
Less unamortized debt issuance and modification costs
|
|
|
(51
|
)
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
Long term debt and capital lease obligations, net of unamortized debt costs
|
|
$
|
9,253
|
|
|
$
|
9,832
|
|
The weighted average interest rate for outstanding borrowings at December 31, 2018 and 2017 was 8.0%. The Company had no capitalized interest in 2018 or 2017. Interest paid during the years ended December 31, 2018 and 2017 totaled approximately $526,000 and $526,000, respectively.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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, 2018 and December 31, 2017. 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 is reset on April 1
st
of each year, 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 quarterly. The maturity dates for the obligation are as follows: $2,500,000 of the obligation on April 1, 2021, $2,000,000 on April 1, 2023, and the balance on April 1, 2025. The note allows for up to an 18-month deferral of payment for up to 60% of the interest due on the portion of the notes maturing in April of 2021 and 2023.
Obligations under the promissory note are guaranteed by all of the subsidiaries and are secured by a first priority lien on substantially all assets of the Company.
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 $2,699,000 for the building as of December 31, 2018.
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. The balance of the capital lease obligation as of December 31, 2018 was $698,000.
The future minimum payments for capital leases as of December 31, 2018 are as follows (in thousands):
2019
|
|
$
|
927
|
|
2020
|
|
|
881
|
|
2021
|
|
|
580
|
|
2022
|
|
|
548
|
|
2023
|
|
|
548
|
|
Thereafter
|
|
|
1,143
|
|
Total future payments
|
|
|
4,627
|
|
Less: Amount representing interest
|
|
|
(1,230
|
)
|
Present value of future minimum payments
|
|
|
3,397
|
|
Less: Current portion
|
|
|
(593
|
)
|
Long term portion
|
|
$
|
2,804
|
|
(
1
5
)
|
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, 2018 approximates fair value, and is based upon a market approach (Level 2).
(
1
6
)
|
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.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The following table details the components of pension (income) expense (in thousands):
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
4
|
|
|
$
|
6
|
|
Interest cost on projected benefit obligation
|
|
|
1,315
|
|
|
|
1,518
|
|
Net amortization of actuarial loss
|
|
|
632
|
|
|
|
693
|
|
Expected return on plan assets
|
|
|
(1,363
|
)
|
|
|
(1,813
|
)
|
Net periodic benefit cost
|
|
$
|
588
|
|
|
$
|
404
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
39,179
|
|
|
$
|
39,312
|
|
Service cost
|
|
|
4
|
|
|
|
6
|
|
Interest cost
|
|
|
1,315
|
|
|
|
1,518
|
|
Actuarial (gain) loss
|
|
|
(2,913
|
)
|
|
|
1,278
|
|
Benefits paid
|
|
|
(2,895
|
)
|
|
|
(2,935
|
)
|
Benefit obligation at end of year
|
|
$
|
34,690
|
|
|
$
|
39,179
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
34,398
|
|
|
$
|
33,838
|
|
Actual return on plan assets
|
|
|
(1,381
|
)
|
|
|
3,495
|
|
Company contributions
|
|
|
77
|
|
|
|
0
|
|
Benefits paid
|
|
|
(2,895
|
)
|
|
|
(2,935
|
)
|
Fair value of plan assets at end of year
|
|
$
|
30,199
|
|
|
$
|
34,398
|
|
|
|
|
|
|
|
|
|
|
Underfunded status of the plans
|
|
$
|
(4,491
|
)
|
|
$
|
(4,781
|
)
|
|
|
|
|
|
|
|
|
|
Balance sheet assets (liabilities):
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
138
|
|
|
$
|
0
|
|
Accrued liabilities
|
|
|
(357
|
)
|
|
|
0
|
|
Other liabilities
|
|
|
(4,272
|
)
|
|
|
(4,781
|
)
|
Net amount recognized
|
|
$
|
(4,491
|
)
|
|
$
|
(4,781
|
)
|
|
|
|
|
|
|
|
|
|
Pension plans with accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
23,466
|
|
|
$
|
26,327
|
|
Accumulated benefit obligation
|
|
|
23,466
|
|
|
|
26,327
|
|
Fair value of plan assets
|
|
|
18,838
|
|
|
|
21,539
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Projected benefit obligation and net periodic pension cost assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate – projected benefit obligation
|
|
|
|
4.25%
|
|
|
|
|
|
3.55%
|
|
|
Discount rate – net periodic pension cost
|
|
|
|
3.55
|
|
|
|
|
|
4.05
|
|
|
Rate of compensation increase
|
|
|
|
4.00
|
|
|
|
|
|
4.00
|
|
|
Expected long-term rate of return on plan assets
|
|
|
3.95
|
–
|
4.30
|
|
|
|
5.15
|
–
|
6.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average asset allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
16%
|
|
|
|
|
|
27%
|
|
|
Debt securities
|
|
|
|
80
|
|
|
|
|
|
71
|
|
|
Other
|
|
|
|
4
|
|
|
|
|
|
2
|
|
|
Total
|
|
|
|
100%
|
|
|
|
|
|
100%
|
|
|
The fair values of our pension plan assets as of December 31, 2018 are as follows (in thousands):
|
|
|
|
|
|
Significant
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
|
In Active
|
|
|
Observable
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
Asset categories:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,415
|
|
|
$
|
0
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
U.S. Large Cap
|
|
|
1,590
|
|
|
|
0
|
|
U.S. Mid Cap
|
|
|
967
|
|
|
|
0
|
|
U.S. Small Cap
|
|
|
489
|
|
|
|
0
|
|
World Equity
|
|
|
1,886
|
|
|
|
0
|
|
Real Estate
|
|
|
458
|
|
|
|
0
|
|
Other
|
|
|
690
|
|
|
|
0
|
|
Fixed income securities
|
|
|
5,237
|
|
|
|
17,467
|
|
Total Plan Assets
|
|
$
|
12,732
|
|
|
$
|
17,467
|
|
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
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 2019 is $285,000, 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 2018 and 2017 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.
When establishing the expected long-term rate of return on our U.S. pension plan assets, the Company considered historical performance and forward looking return estimates reflective of our portfolio mix and investment strategy. Based on the most recent analysis of projected portfolio returns, the Company concluded that the use of 3.95% for the Louisville Hourly Plan, 4.30% for the Marion Plan and 4.20% for the Louisville Salaried Plan as the expected return on our U.S. pension plan assets for 2018 was appropriate.
Actuarial gains and losses, which are primarily the result of changes in the discount rate and other assumptions and differences between actual and expected asset returns, are deferred in Accumulated Other Comprehensive Income and amortized to expense following the corridor approach. We use the average remaining service period of active participants unless almost all of the plan’s participants are inactive, in which case we use the average remaining life expectancy for all active and inactive participants. Accumulated other comprehensive loss at December 31, 2018 includes $13,777,000 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, 2019 is $674,000. The actual loss reclassified from accumulated other comprehensive loss for 2018 and 2017 was $632,000 and $693,000, respectively.
At December 31, 2018, 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):
2019
|
|
|
2,903
|
|
2020
|
|
|
2,833
|
|
2021
|
|
|
2,787
|
|
2022
|
|
|
2,723
|
|
2023
|
|
|
2,653
|
|
2024-2028
|
|
|
12,130
|
|
Total
|
|
$
|
26,029
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The Company sponsors a defined contribution plan (the “Defined Contribution Plan”) for substantially all domestic employees of the Company. The Defined Contribution Plan is intended to meet the requirements of Section 401(k) of the Internal Revenue Code. The Defined Contribution Plan allows the Company to match participant contributions up to 3% and provide discretionary contributions. Contributions to the Defined Contribution Plan by the Company in 2018 and 2017 totaled approximately $428,000 and $530,000, 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 $41,000 and $20,000 in 2018 and 2017, respectively. The aggregate benefit plan assets and accumulated benefit obligation of these plans are not significant.
(
1
7
)
|
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, 2018 are as follows (in thousands):
2019
|
|
$
|
1,453
|
|
2020
|
|
|
1,387
|
|
2021
|
|
|
1,430
|
|
2022
|
|
|
1,443
|
|
2023
|
|
|
1,459
|
|
2024 and thereafter
|
|
|
4,101
|
|
Total
|
|
$
|
11,273
|
|
Rent expense for the years ended December 31, 2018 and 2017 totaled approximately $1,415,000 and $1,427,000, respectively.
As of December 31, 2018, the Company had outstanding purchase commitments of approximately $12,027,000 primarily for the acquisition of inventory. These commitments are for goods and services to be acquired in the ordinary course of business and are fulfilled by our vendors within a short period of time.
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.
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.
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. As of December 31, 2018 and 2017, no amounts were accrued for any environmental matters. See “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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. While the Company regards the DOL’s allegations to be without merit, the Company submitted a counteroffer to a proposed settlement offer from the DOL in February 2019 in an amount deemed to be immaterial to the Company’s financial statements.
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 informed the Company that, as a result of the lawsuit, the customer would no longer operate its business, and that it has transferred this business to a designated successor. The Company holds $759,000 of gross inventory related specifically to this customer as of December 31, 2018. On December 21, 2017, the Company entered into a new supply agreement with the designated successor, which provides for purchases of the aforementioned inventory and additional purchases in excess of our inventories on hand and for prices in excess of our cost. As of December 31, 2018, the Company has recognized revenue of $293,000 under the new supply agreement and has received purchase orders under the new supply agreement, however not all purchase obligations were met as of December 31, 2018. No assurances can be given that the successor customer will be successful or will continue to 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. Given the uncertainties described above, the Company established a reserve of $246,000 on the recoverability of the inventory as of December 31, 2018 and estimates that the range of loss that is reasonably possible should the program with the successor not be successful could increase by an additional $513,000.
During the fourth quarter of 2018, the Company resolved an outstanding disputed legal fee for an amount less than originally charged. The resolution of the disputed legal fee resulted in a decrease in selling, general and administrative expense of $1,890,000 for the year ended December 31, 2018.
(
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, 2018 and 2017 was 544,771 and 1,314,021, 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, the 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.
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. Forfeitures are recorded as they occur. Stock based compensation expense of $637,000 and $730,000 has been recorded in selling, general and administrative expense in the consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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,
|
|
|
|
2018
|
|
|
2017
|
|
Expected life (years)
|
|
|
4.0
|
|
|
|
4.0
|
|
Expected volatility
|
|
|
51.8
|
%
|
|
|
51.2
|
%
|
Risk-free interest rates
|
|
|
2.65
|
%
|
|
|
1.91
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
A summary of the restricted stock activity is as follows:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Term
|
|
|
Value
|
|
Nonvested shares at January 1, 2018
|
|
|
1,029,000
|
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(186,000
|
)
|
|
|
2.05
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Nonvested shares at December 31, 2018
|
|
|
843,000
|
|
|
$
|
1.01
|
|
|
|
0.83
|
|
|
$
|
902,000
|
|
The total fair value of shares vested during 2018 and 2017 was $381,000 and $408,000, respectively.
The following table summarizes option activity for the year ended December 31, 2018:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Term
|
|
|
Value
|
|
Outstanding at January 1, 2018
|
|
|
1,821,000
|
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
757,750
|
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(33,500
|
)
|
|
|
1.24
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(219,000
|
)
|
|
|
3.93
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
2,326,250
|
|
|
$
|
1.47
|
|
|
|
2.43
|
|
|
$
|
0
|
|
Exercisable at December 31, 2018
|
|
|
524,700
|
|
|
$
|
2.21
|
|
|
|
0.81
|
|
|
$
|
0
|
|
The weighted average grant date fair value based on the Black-Scholes option pricing model for options granted in the years ended December 31, 2018 and 2017 was $0.69 and $0.45 per share, respectively. There were no options exercised in 2018 or 2017.
As of December 31, 2018, there was $677,000 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, 2018 and 2017 was $184,000 and $228,000, respectively.
(
19
)
|
Stockholders’ Equity
|
As of December 31, 2018 and 2017, 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.
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.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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,
|
|
|
|
2018
|
|
|
2017
|
|
Foreign currency translation adjustments, net of tax
|
|
$
|
(10,967
|
)
|
|
$
|
(10,915
|
)
|
Employee benefit related adjustments – U.S, net of tax.
|
|
|
(14,177
|
)
|
|
|
(14,748
|
)
|
Employee benefit related adjustments – Mexico, net of tax
|
|
|
302
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(24,842
|
)
|
|
$
|
(25,551
|
)
|
Changes in each component of accumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Defined
|
|
|
Other
|
|
|
|
Currency
|
|
|
Benefit
|
|
|
Comprehensive
|
|
|
|
Translation
|
|
|
Plans
|
|
|
Loss
|
|
Balance at January 1, 2017
|
|
$
|
(11,334
|
)
|
|
$
|
(15,264
|
)
|
|
$
|
(26,598
|
)
|
Currency translation adjustments, net of tax
|
|
|
419
|
|
|
|
0
|
|
|
|
419
|
|
Net actuarial gain for the year, net of tax
|
|
|
0
|
|
|
|
205
|
|
|
|
205
|
|
Amortization for the year, net of tax
|
|
|
0
|
|
|
|
423
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
(10,915
|
)
|
|
|
(14,636
|
)
|
|
|
(25,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments, net of tax
|
|
|
(52
|
)
|
|
|
0
|
|
|
|
(52
|
)
|
Net actuarial gain for the year, net of tax
|
|
|
0
|
|
|
|
276
|
|
|
|
276
|
|
Amortization for the year, net of tax
|
|
|
0
|
|
|
|
485
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
(10,967
|
)
|
|
$
|
(13,875
|
)
|
|
$
|
(24,842
|
)
|
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.
The components of income (loss) before taxes are as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Domestic
|
|
$
|
(5,331
|
)
|
|
$
|
(7,328
|
)
|
Foreign
|
|
|
1,621
|
|
|
|
(4,112
|
)
|
Total
|
|
$
|
(3,710
|
)
|
|
$
|
(11,440
|
)
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The components of income tax (benefit) expense are as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
0
|
|
|
$
|
(184
|
)
|
State
|
|
|
2
|
|
|
|
39
|
|
Foreign
|
|
|
302
|
|
|
|
194
|
|
Total current income tax expense
|
|
|
304
|
|
|
|
49
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(191
|
)
|
|
|
(600
|
)
|
State
|
|
|
(21
|
)
|
|
|
(67
|
)
|
Foreign
|
|
|
(297
|
)
|
|
|
0
|
|
Total deferred income tax (benefit) expense
|
|
|
(509
|
)
|
|
|
(667
|
)
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense, net
|
|
$
|
(205
|
)
|
|
$
|
(618
|
)
|
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, 2018 and other comprehensive income from employee benefit adjustments, the Company has allocated income tax expense against the components of other comprehensive income in 2018 using a 23.3% effective tax rate. Income tax benefit for the year ended December 31, 2018 includes a benefit of $212,000 due to the required intraperiod tax allocation. Conversely, other comprehensive income for the year ended December 31, 2018 includes income tax expense of $212,000. 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 2018 and 2017 totaled $33,000 and $110,000, respectively. State income tax refunds received in the U.S. during 2018 and 2017 totaled $12,000 and $63,000, respectively. Foreign income taxes paid during 2018 and 2017 totaled $109,000 and $486,000, respectively. There were no foreign refunds received in 2018 and 2017. There were no federal taxes paid in 2018 and 2017, and there were no federal refunds received in 2018 and 2017. At December 31, 2018, the Company had $137,764,000 of federal net operating loss carryforwards available to offset future federal taxable income. The pre-2018 federal net operating loss carryforwards expire in various amounts from 2026 to 2037. Federal net operating loss carryforwards generated in 2018 and forward will have an unlimited carryforward period as part of the Tax Act. The indefinite lived net operating loss carryforwards as of December 31, 2018 are approximately $3,186,000.
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
At December 31, 2018, the Company had $5,869,000 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 2026 to 2038.
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,
|
|
|
|
2018
|
|
|
2017
|
|
Federal tax expense at the statutory rate
|
|
$
|
(779
|
)
|
|
$
|
(4,004
|
)
|
Current year permanent differences
|
|
|
82
|
|
|
|
239
|
|
State income taxes, net of federal tax impact
|
|
|
(118
|
)
|
|
|
(262
|
)
|
Federal tax reform – deferred rate change
|
|
|
0
|
|
|
|
19,395
|
|
State deferred rate change
|
|
|
0
|
|
|
|
239
|
|
Foreign repatriation, net of foreign tax credits
|
|
|
0
|
|
|
|
(544
|
)
|
Effect of tax rates of foreign subsidiaries
|
|
|
154
|
|
|
|
203
|
|
Currency translation effect on temporary differences
|
|
|
189
|
|
|
|
(372
|
)
|
Change in valuation allowance
|
|
|
358
|
|
|
|
(15,230
|
)
|
State NOL carryforwards, stock compensation and other items
|
|
|
(91
|
)
|
|
|
(282
|
)
|
Income tax (benefit) expense, net
|
|
$
|
(205
|
)
|
|
$
|
(618
|
)
|
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 U.S. deferred tax assets and a portion of its non-U.S. 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 a portion of its non-U.S. tax benefits.
In addition, we remeasured certain net deferred tax assets and liabilities in 2017 based on the tax rates at which they are expected to reverse in the future. The total impact upon enactment of the Tax Act was $19,395,000, however, this impact has been offset due to our valuation allowance. The Tax Act also provides that undistributed and previously untaxed post-1986 foreign earnings will be deemed distributed in 2017. 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 $4,434,000 and $4,942,000 as of December 31, 2018 and 2017, respectively.
Deferred income tax assets and liabilities are as follows (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Compensation and benefit accruals
|
|
$
|
450
|
|
|
$
|
585
|
|
Inventory valuation
|
|
|
759
|
|
|
|
739
|
|
Federal and state net operating loss carryforwards
|
|
|
33,567
|
|
|
|
32,646
|
|
Deferred revenue
|
|
|
90
|
|
|
|
296
|
|
Accounts receivable allowance
|
|
|
11
|
|
|
|
34
|
|
Depreciation
|
|
|
39
|
|
|
|
0
|
|
Defined benefit pension plan
|
|
|
573
|
|
|
|
802
|
|
Foreign deferred revenue and other provisions
|
|
|
4,434
|
|
|
|
4,942
|
|
Other
|
|
|
874
|
|
|
|
917
|
|
Total
|
|
|
40,797
|
|
|
|
40,961
|
|
Domestic valuation allowance
|
|
|
(36,363
|
)
|
|
|
(35,387
|
)
|
Foreign valuation allowance
|
|
|
(4,137
|
)
|
|
|
(4,942
|
)
|
Total deferred tax assets
|
|
|
297
|
|
|
|
632
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
0
|
|
|
|
(632
|
)
|
Total deferred tax liabilities
|
|
|
0
|
|
|
|
(632
|
)
|
Net deferred tax asset
|
|
$
|
297
|
|
|
$
|
0
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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, 2018 and 2017 was $200,000. There were no changes to the unrecognized tax benefit balance during the years ended December 31, 2018 and 2017.
If the Company’s positions are sustained by the taxing authority, the entire balance at December 31, 2018 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, 2018 and 2017, 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 2015 through 2017, for which the statute has yet to expire. In addition, open tax years related to state and foreign jurisdictions remain subject to examination.
(
2
1
)
|
Loss
Per Common Share
|
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and participating securities. Restricted stock granted by the Company is considered a participating security since it contains a non-forfeitable right to dividends.
Our potentially dilutive securities include potential common shares related to our stock options and restricted stock. Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted earnings per share excludes the impact of common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period. All potential common shares were excluded from diluted earnings per share for the year ended December 31, 2018 and 2017 because the effect of inclusion would be anti-dilutive.
A reconciliation of the weighted average shares outstanding used in the calculation of basic and diluted loss per common share is as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Loss attributable to stockholders:
|
|
|
|
|
|
|
|
|
Net loss as reported
|
|
$
|
(3,505
|
)
|
|
$
|
(10,822
|
)
|
Less distributed and undistributed earnings allocable to restricted award holders
|
|
|
0
|
|
|
|
0
|
|
Net loss allocable to common stockholders
|
|
$
|
(3,505
|
)
|
|
$
|
(10,822
|
)
|
Loss per common share attributable to stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.17
|
)
|
|
$
|
(0.53
|
)
|
Diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.53
|
)
|
Weighted average shares outstanding – basic
|
|
|
20,512
|
|
|
|
20,326
|
|
Weighted average additional shares assuming conversion of potential common shares
|
|
|
0
|
|
|
|
0
|
|
Weighted average shares outstanding – diluted
|
|
|
20,512
|
|
|
|
20,326
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(
2
2
)
|
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. 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,
|
|
|
|
2018
|
|
|
2017
|
|
Net revenue from unaffiliated customers:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
59,816
|
|
|
$
|
54,891
|
|
Sypris Electronics
|
|
|
28,153
|
|
|
|
27,403
|
|
|
|
$
|
87,969
|
|
|
$
|
82,294
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
7,523
|
|
|
$
|
743
|
|
Sypris Electronics
|
|
|
49
|
|
|
|
2,587
|
|
|
|
$
|
7,572
|
|
|
$
|
3,330
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
3,207
|
|
|
$
|
(7,061
|
)
|
Sypris Electronics
|
|
|
(2,555
|
)
|
|
|
147
|
|
General, corporate and other
|
|
|
(4,948
|
)
|
|
|
(5,232
|
)
|
|
|
$
|
(4,296
|
)
|
|
$
|
(12,146
|
)
|
Other income, net:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
(1,434
|
)
|
|
$
|
(1,508
|
)
|
Sypris Electronics
|
|
|
0
|
|
|
|
(2
|
)
|
General, corporate and other
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
$
|
(1,436
|
)
|
|
$
|
(1,515
|
)
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
4,349
|
|
|
$
|
(5,844
|
)
|
Sypris Electronics
|
|
|
(2,672
|
)
|
|
|
150
|
|
General, corporate and other
|
|
|
(5,386
|
)
|
|
|
(5,746
|
)
|
|
|
$
|
(3,710
|
)
|
|
$
|
(11,440
|
)
|
Income tax expense (benefit), net:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
5
|
|
|
$
|
194
|
|
Sypris Electronics
|
|
|
0
|
|
|
|
0
|
|
General, corporate and other
|
|
|
(210
|
)
|
|
|
(812
|
)
|
|
|
$
|
(205
|
)
|
|
$
|
(618
|
)
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
2,029
|
|
|
$
|
3,399
|
|
Sypris Electronics
|
|
|
515
|
|
|
|
372
|
|
General, corporate and other
|
|
|
104
|
|
|
|
113
|
|
|
|
$
|
2,648
|
|
|
$
|
3,884
|
|
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
1,311
|
|
|
$
|
1,003
|
|
Sypris Electronics
|
|
|
173
|
|
|
|
366
|
|
General, corporate and other
|
|
|
567
|
|
|
|
268
|
|
|
|
$
|
2,051
|
|
|
$
|
1,637
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
31,312
|
|
|
$
|
31,725
|
|
Sypris Electronics
|
|
|
19,208
|
|
|
|
17,440
|
|
General, corporate and other
|
|
|
11,048
|
|
|
|
7,990
|
|
|
|
$
|
61,568
|
|
|
$
|
57,155
|
|
Total liabilities:
|
|
|
|
|
|
|
|
|
Sypris Technologies
|
|
$
|
23,644
|
|
|
$
|
23,854
|
|
Sypris Electronics
|
|
|
15,180
|
|
|
|
8,352
|
|
General, corporate and other
|
|
|
7,910
|
|
|
|
8,019
|
|
|
|
$
|
46,734
|
|
|
$
|
40,225
|
|
The Company’s export sales from the U.S. totaled $4,155,000 and $12,068,000 in 2018 and 2017, respectively. Approximately $39,744,000 and $22,874,000 of net revenue in 2018 and 2017, respectively, and $7,162,000 and $6,659,000 of long lived assets at December 31, 2018 and 2017, respectively, and net assets of $6,495,000 and $5,327,000 at December 31, 2018 and 2017 relate to the Company’s international operations.