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utr:D sypr:Customers sypr:Employees iso4217:USD xbrli:shares xbrli:pure xbrli:shares iso4217:USD <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Note 1 - us-gaap:OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureAndSignificantAccountingPoliciesTextBlock--> <!-- xbrl,ns --> <!-- xbrl,nx --> <font style="font-family:times new roman" size="2"><b></b></font> <font style="font-family:times new roman" size="2"> <b></b></font> <font style="font-family:times new roman" size="2"><b></b></font> <table style="border-collapse:collapse; text-align: left" border="0" cellpadding="0" cellspacing="0" width="100%"> <tr> <td width="4%" valign="top" align="left"><font style="font-family:times new roman" size="2"><b>(1)</b></font></td> <td align="left" valign="top"><font style="font-family:times new roman" size="2"><b>Organization and Significant Accounting Policies </b></font></td> </tr> </table> <p style="margin-top:6px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Consolidation Policy </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The accompanying consolidated financial statements include the accounts of Sypris Solutions, Inc. and its wholly-owned subsidiaries (collectively, &#8220;Sypris&#8221; or the &#8220;Company&#8221;) and have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission. The Company&#8217;s operations are domiciled in the United States (U.S.), Mexico and Denmark and serve a wide variety of domestic and international customers. All intercompany accounts and transactions have been eliminated. </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Nature of Business </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Sypris is a diversified provider of outsourced services and specialty products. The Company performs a wide range of manufacturing, engineering, design and other technical services, typically under multi-year, sole-source contracts with corporations and government agencies in the markets for truck components and assemblies and aerospace and defense electronics. The Company provides such services through its Industrial and Electronics Groups (Note 24). </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Use of Estimates </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2"> 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. </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Discontinued Operations </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The Company classifies a business component that either has been disposed of or is classified as held for sale as a discontinued operation if the cash flows of the component have been or will be eliminated from ongoing operations and the Company will no longer have any significant continuing involvement in the component. The results of operations related to the discontinued operations are aggregated and presented on one line on the statement of operations. See Note 2 for additional information regarding discontinued operations. </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Cash Equivalents and Restricted Cash </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Cash equivalents include all highly liquid investments with a maturity of three months or less when purchased. Restricted cash at December&#160;31, 2011 included money held in escrow pursuant to the sale of Sypris Test&#160;&#038; Measurement in 2009 in connection with certain customary representations, warranties, covenants and indemnifications of the Company (Note 2). </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Inventory </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2"> 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. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The Company&#8217;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. </font></p> <p style="font-size:1px;margin-top:18px;margin-bottom:0px">&#160;</p> <p style="margin-top:0px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Investment in Marketable Securities </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Securities are carried at fair value based on quoted market prices. Increases and decreases in fair value are recorded as unrealized gains and losses in other comprehensive income (loss). Management evaluates its marketable securities for other-than-temporary impairment when the fair value of the investment is lower than its book value. Factors that are considered when evaluating for other-than-temporary impairment include the length of time and the extent to which market value has been less than cost, the financial condition and near-term prospects of the issuer, credit risk, and the Company&#8217;s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Property, Plant and Equipment </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">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. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Plant assets classified as Assets held for sale are initially measured at the lesser of the assets&#8217; carrying amount or the fair value less costs to sell.&#160;Gains or losses are recognized for any subsequent changes in the fair value less cost to sell; however, gains are only recognized to the extent of cumulative losses previously recognized.&#160;Plant assets classified as assets held for sale are not depreciated. </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Long-lived Assets </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">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. </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Goodwill </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Goodwill is tested for impairment during the fourth quarter or more frequently if events occur or circumstances change that would warrant such a review. The Company assesses recoverability using a discounted cash flow analysis. The analysis is based upon available information regarding expected future cash flows of each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. A growth rate is used to calculate the terminal value of the reporting unit and is added to the present value of the forecasted cash flows. The growth rate is the expected rate at which a reporting unit&#8217;s cash flow is projected to grow beyond the period covered by the long-range plan. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The sum of the calculated fair values of each reporting unit is then reconciled and compared to our total market capitalization, allowing for a reasonable control premium. If the discounted cash flow analysis yields a fair value estimate less than the reporting unit&#8217;s carrying value, we proceed to step two of the impairment process. In the second step, the implied fair value of the reporting unit&#8217;s goodwill is determined by allocating the reporting unit&#8217;s fair value to all of the assets and liabilities of the reporting unit. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">As a result of the first step of the goodwill impairment analysis performed as of December&#160;31,&#160;2012, the fair value estimate for the Electronics Group, which is the only reporting unit with goodwill, exceeded its carrying value by approximately 21%. Therefore the second step was not necessary. Key assumptions used to determine the fair value estimate of our Electronics Group during the fourth quarter were the expected after-tax cash flows for the period from 2013 to 2017, which include projected improvements in operating margins and a terminal growth rate of 3.0%, which is consistent with the prior year growth rate. Our analysis included a comparison of our market capitalization to the fair value of the entire enterprise. These and other estimates and assumptions are impacted by economic conditions and expectations of management and may change in the future based on period-specific facts and circumstances. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The cash flow analysis requires significant judgment in our evaluation of the business and establishing an appropriate discount rate and terminal value to apply in the calculation. In selecting these and other assumptions for each business, we consider historical performance, forecasted operating results, expected changes in product mix, general market conditions and industry considerations specific to the business. We make significant assumptions and estimates about the extent and timing of future cash flows, growth rates and discount rates. The cash flows are estimated over a future period of time, which makes those estimates and assumptions inherently subject to a high degree of potential uncertainty. We believe that the assumptions and estimates used to determine the fair value of our reporting unit were reasonable. However, different assumptions could materially affect the results. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">This particular reporting unit has proprietary technology, patents and levels of security clearance with the U.S. Government. We face continued uncertainty in our business environment due to the substantial fiscal and economic challenges facing the U.S. Government. The U.S. Government is currently under pressure to decrease its spending, and reductions across the defense industry may be mandated in connection with sequestration. The impact of reduced government spending on our programs and industry could cause our revenues, profits and cash flows to be lower than our current projections. Any adverse impact to our financial outlook could result in impairments to our long-term assets, such as goodwill. In addition, market-based inputs to the calculations in the impairment test, such as weighted average cost of capital and terminal value (based on market comparisons) could also be negatively impacted. Deteriorating market conditions for comparable public companies in our industry, or a decline in the market price for the Company&#8217;s stock, could result in a reduction in the fair value of our assets. If any impairment were indicated as a result of a review, we would recognize a loss based on the amount by which the carrying amount exceeds the estimated fair value. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The Company will continue to monitor the performance of the Electronics Group, the performance of the overall aerospace and defense industry and significant changes in the Company&#8217;s market capitalization. </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Pre-contract Costs </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Costs incurred on projects as pre-contract costs are deferred as assets in accordance with ASC 605-35-25 when the Company has been requested by the customer to begin work under a new arrangement prior to contract execution. The Company records pre-contract costs when formal contracts have not yet been executed, and it is probable that the Company will recover the costs through the issuance of a contract. If we determine it is probable that we will be awarded the specific anticipated contract, we capitalize the pre-contract costs we incur, excluding start-up costs which are expensed as incurred. Conversely, if it appears uncertain that we will obtain the contract within a specified time period, all previously deferred costs are expensed. During December&#160;2012, it was determined that certain pre-contract costs could no longer be capitalized due to current year market events involving a specific contract. As a result, the Company wrote-off deferred costs of $1,709,000 associated with the contract to selling, general and administrative expense in the accompanying consolidated statements of operations for the fiscal year ended December&#160;31,&#160;2012. There were no other capitalized pre-contract costs as of December&#160;31, 2012. Capitalized pre-contract costs of $1,113,000 at December&#160;31, 2011 are included in other assets in the accompanying Consolidated Balance Sheets. </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Deferred Revenue </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Deferred revenue for the Electronics Group is recorded when payments are received in advance for service agreements and extended warranties on certain products and is amortized into revenue on a straight-line basis over the contractual term. Deferred revenue for the Industrial Group is generally associated with the Dana settlement (Note 5) and will be amortized into income on a units-of-production basis over the term of the related supply agreement. See Notes 14 and 15 for the amount of deferred revenue included in accrued liabilities and other liabilities. </font></p> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Income Taxes </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2"> 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. 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Actual results could differ from these estimates. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table4 - us-gaap:DiscontinuedOperationsPolicyTextBlock--> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Discontinued Operations </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The Company classifies a business component that either has been disposed of or is classified as held for sale as a discontinued operation if the cash flows of the component have been or will be eliminated from ongoing operations and the Company will no longer have any significant continuing involvement in the component. The results of operations related to the discontinued operations are aggregated and presented on one line on the statement of operations. See Note 2 for additional information regarding discontinued operations. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table5 - us-gaap:CashAndCashEquivalentsRestrictedCashAndCashEquivalentsPolicy--> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Cash Equivalents and Restricted Cash </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Cash equivalents include all highly liquid investments with a maturity of three months or less when purchased. 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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. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The Company&#8217;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. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table7 - us-gaap:MarketableSecuritiesPolicy--> <p style="margin-top:0px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Investment in Marketable Securities </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Securities are carried at fair value based on quoted market prices. Increases and decreases in fair value are recorded as unrealized gains and losses in other comprehensive income (loss). Management evaluates its marketable securities for other-than-temporary impairment when the fair value of the investment is lower than its book value. Factors that are considered when evaluating for other-than-temporary impairment include the length of time and the extent to which market value has been less than cost, the financial condition and near-term prospects of the issuer, credit risk, and the Company&#8217;s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table8 - us-gaap:PropertyPlantAndEquipmentPolicyTextBlock--> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Property, Plant and Equipment </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">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. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Plant assets classified as Assets held for sale are initially measured at the lesser of the assets&#8217; carrying amount or the fair value less costs to sell.&#160;Gains or losses are recognized for any subsequent changes in the fair value less cost to sell; however, gains are only recognized to the extent of cumulative losses previously recognized.&#160;Plant assets classified as assets held for sale are not depreciated. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table9 - us-gaap:ImpairmentOrDisposalOfLongLivedAssetsIncludingIntangibleAssetsPolicyPolicyTextBlock--> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Long-lived Assets </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">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. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table10 - us-gaap:GoodwillAndIntangibleAssetsGoodwillPolicy--> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Goodwill </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Goodwill is tested for impairment during the fourth quarter or more frequently if events occur or circumstances change that would warrant such a review. The Company assesses recoverability using a discounted cash flow analysis. The analysis is based upon available information regarding expected future cash flows of each reporting unit discounted at rates consistent with the cost of capital specific to the reporting unit. A growth rate is used to calculate the terminal value of the reporting unit and is added to the present value of the forecasted cash flows. The growth rate is the expected rate at which a reporting unit&#8217;s cash flow is projected to grow beyond the period covered by the long-range plan. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The sum of the calculated fair values of each reporting unit is then reconciled and compared to our total market capitalization, allowing for a reasonable control premium. If the discounted cash flow analysis yields a fair value estimate less than the reporting unit&#8217;s carrying value, we proceed to step two of the impairment process. In the second step, the implied fair value of the reporting unit&#8217;s goodwill is determined by allocating the reporting unit&#8217;s fair value to all of the assets and liabilities of the reporting unit. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">As a result of the first step of the goodwill impairment analysis performed as of December&#160;31,&#160;2012, the fair value estimate for the Electronics Group, which is the only reporting unit with goodwill, exceeded its carrying value by approximately 21%. Therefore the second step was not necessary. Key assumptions used to determine the fair value estimate of our Electronics Group during the fourth quarter were the expected after-tax cash flows for the period from 2013 to 2017, which include projected improvements in operating margins and a terminal growth rate of 3.0%, which is consistent with the prior year growth rate. Our analysis included a comparison of our market capitalization to the fair value of the entire enterprise. These and other estimates and assumptions are impacted by economic conditions and expectations of management and may change in the future based on period-specific facts and circumstances. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The cash flow analysis requires significant judgment in our evaluation of the business and establishing an appropriate discount rate and terminal value to apply in the calculation. In selecting these and other assumptions for each business, we consider historical performance, forecasted operating results, expected changes in product mix, general market conditions and industry considerations specific to the business. We make significant assumptions and estimates about the extent and timing of future cash flows, growth rates and discount rates. The cash flows are estimated over a future period of time, which makes those estimates and assumptions inherently subject to a high degree of potential uncertainty. We believe that the assumptions and estimates used to determine the fair value of our reporting unit were reasonable. However, different assumptions could materially affect the results. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">This particular reporting unit has proprietary technology, patents and levels of security clearance with the U.S. Government. We face continued uncertainty in our business environment due to the substantial fiscal and economic challenges facing the U.S. Government. The U.S. Government is currently under pressure to decrease its spending, and reductions across the defense industry may be mandated in connection with sequestration. The impact of reduced government spending on our programs and industry could cause our revenues, profits and cash flows to be lower than our current projections. Any adverse impact to our financial outlook could result in impairments to our long-term assets, such as goodwill. In addition, market-based inputs to the calculations in the impairment test, such as weighted average cost of capital and terminal value (based on market comparisons) could also be negatively impacted. Deteriorating market conditions for comparable public companies in our industry, or a decline in the market price for the Company&#8217;s stock, could result in a reduction in the fair value of our assets. If any impairment were indicated as a result of a review, we would recognize a loss based on the amount by which the carrying amount exceeds the estimated fair value. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">The Company will continue to monitor the performance of the Electronics Group, the performance of the overall aerospace and defense industry and significant changes in the Company&#8217;s market capitalization. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table11 - us-gaap:PrecontractCostsPolicyTextBlock--> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Pre-contract Costs </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Costs incurred on projects as pre-contract costs are deferred as assets in accordance with ASC 605-35-25 when the Company has been requested by the customer to begin work under a new arrangement prior to contract execution. The Company records pre-contract costs when formal contracts have not yet been executed, and it is probable that the Company will recover the costs through the issuance of a contract. If we determine it is probable that we will be awarded the specific anticipated contract, we capitalize the pre-contract costs we incur, excluding start-up costs which are expensed as incurred. Conversely, if it appears uncertain that we will obtain the contract within a specified time period, all previously deferred costs are expensed. During December&#160;2012, it was determined that certain pre-contract costs could no longer be capitalized due to current year market events involving a specific contract. As a result, the Company wrote-off deferred costs of $1,709,000 associated with the contract to selling, general and administrative expense in the accompanying consolidated statements of operations for the fiscal year ended December&#160;31,&#160;2012. There were no other capitalized pre-contract costs as of December&#160;31, 2012. Capitalized pre-contract costs of $1,113,000 at December&#160;31, 2011 are included in other assets in the accompanying Consolidated Balance Sheets. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table12 - us-gaap:RevenueRecognitionDeferredRevenue--> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Deferred Revenue </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">Deferred revenue for the Electronics Group is recorded when payments are received in advance for service agreements and extended warranties on certain products and is amortized into revenue on a straight-line basis over the contractual term. Deferred revenue for the Industrial Group is generally associated with the Dana settlement (Note 5) and will be amortized into income on a units-of-production basis over the term of the related supply agreement. See Notes 14 and 15 for the amount of deferred revenue included in accrued liabilities and other liabilities. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table13 - us-gaap:IncomeTaxPolicyTextBlock--> <p style="margin-top:18px;margin-bottom:0px; margin-left:4%"><font style="font-family:times new roman" size="2"><i>Income Taxes </i></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2"> 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. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:8%"><font style="font-family:times new roman" size="2">In the ordinary course of business there is inherent uncertainty in quantifying the Company&#8217;s income tax positions. The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon management&#8217;s evaluation of the facts, circumstances, and information available at the reporting dates. 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