SYPRIS SOLUTIONS INC. Management’s Discussion and Analysis of Financial Position and Operating Results (Form 10-Q)

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Overview

We are a diverse supplier of truck components, oil and gas pipeline components, and aerospace and defense electronics. We offer a wide range of manufactured products, often under multi-year sole-source contracts.



We are organized into two business segments, Sypris Technologies and Sypris
Electronics. Sypris Technologies, which is comprised of Sypris Technologies,
Inc. and its subsidiaries, 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, which is comprised of Sypris Electronics, LLC, generates revenue
primarily through circuit card and full "box build" manufacturing, high
reliability manufacturing, systems assembly and integration, design for
manufacturability and design to specification work.



We focus on those markets where we believe we have the expertise, qualifications
and leadership position to sustain a competitive advantage. We target our
resources to support the needs of industry participants that embrace
technological innovation and flexibility, coupled with multi-year contractual
relationships, as a strategic component of their supply chain management. These
contracts, many of which are sole-source by part number, have historically
created opportunities to invest in leading-edge processes or technologies to
help our customers remain competitive. The productivity and innovation that can
result from such investments helps to differentiate us from our competition when
it comes to cost, quality, reliability and customer service.



Impact of COVID-19 on our business



The COVID-19 pandemic has resulted, and may continue to result, in significant
economic disruption and has and may continue to adversely affect our business.
As of the date of this filing, significant uncertainty exists concerning the
continued impact and duration of the COVID-19 pandemic. The Company has
continued to operate at each location and sought to remain compliant with
government regulations imposed due to the COVID-19 pandemic. The Company began
to experience lower revenue late in the first quarter of 2020 due to the
COVID-19 pandemic, followed by a more significant impact in the second quarter
of 2020, especially within the Sypris Technologies group. Towards the end of the
second quarter of 2020, some state and local jurisdictions started to lift
mandatory stay-at-home or shelter-in-place orders and started gradually to ease
restrictions. While the COVID-19 pandemic negatively impacted the Company's
results of operations, cash flows and financial position in 2020, management
implemented actions to mitigate the financial impact, to protect the health of
its employees and to comply with government regulations at each of our
locations.



We implemented modifications beginning in the second quarter of 2020 to preserve
adequate liquidity and ensure that our business continued to operate during this
uncertain time. With respect to liquidity, we evaluated and took actions to
reduce costs and spending across our organization. This included reducing hiring
activities, reducing compensation of our Chairman, President and CEO, certain
other senior leadership and corporate personnel and our Board of Directors, and
limiting discretionary spending. In addition, under the CARES Act, we deferred
certain payroll taxes into future years. We also reduced spending on capital
investment projects in 2020 and managed working capital to preserve liquidity
during this crisis. In addition to these activities, during the second quarter
of 2020, the Company secured a $3.6 million term loan with BMO, pursuant to the
PPP under the CARES Act. Proceeds from the PPP Loan have been used to retain
workers and maintain payroll and make lease and utility payments. On June 28,
2021, the Company received notice from BMO that our application for forgiveness
of the PPP Loan had been approved. The loan forgiveness request in the amount of
$3.6 million was applied to the Company's entire outstanding PPP Loan balance
with BMO. During the nine months ended October 3, 2021, the Company recorded a
gain on the forgiveness of the PPP Loan and accrued interest in the amount of
$3.6 million.



On September 9, 2021, President Biden announced a proposed new rule requiring
all employers with at least 100 employees to require that their employees be
fully vaccinated or tested weekly. On November 4, 2021, the U.S. Department of
Labor's Occupational Safety and Health Administration ("OSHA") issued an
emergency regulation to carry out this mandate, which is expected to take effect
on January 4, 2022. As a company with more than 100 employees, it is anticipated
that we would be subject to the OSHA regulation concerning COVID-19 vaccination.
If these mandates are implemented, the extent of the regulatory impact is
unclear and could have an adverse impact on the Company's operations. These or
similar vaccine and testing mandates by other governments may result in
additional labor shortages and/or increased labor or other expenses for us and
our customers and suppliers.



Factors deriving from the COVID-19 response that have and may continue to
negatively impact sales and gross margin in the future include, but are not
limited to: limitations on the ability of our suppliers to manufacture, or
procure from manufacturers, the material components we utilize in the
manufacture of the products we sell, or to meet delivery requirements and
commitments; limitations on the ability of our employees to perform their work
due to illness caused by the pandemic or local, state, or federal orders
requiring employees to remain at home; limitations on the ability of our
customers to conduct their business and purchase our products; and limitations
on the ability of our customers to pay us on a timely basis. While we are unable
to determine or predict the nature, duration or scope of the overall impact the
COVID-19 pandemic will have on our business, results of operations, liquidity or
capital resources, we will continue to actively monitor the situation and may
take further actions that alter our business operations as may be required by
federal, state or local authorities or that we determine are in the best
interests of our employees, customers, suppliers and shareholders.



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Sypris Technologies Outlook



Demand in the North American Class 4-8 commercial vehicle market began to
recover in the second half of 2020 following an anticipated market decline in
the first half of 2020 that was deepened by the impact of the COVID-19 pandemic.
Market conditions have improved since then and have remained favorable through
the first nine months of 2021 for commercial vehicles in addition to the
automotive, sport utility vehicle and off-highway markets served by Sypris
Technologies. The outlook for 2022 for the commercial vehicle market indicates
stronger demand with production expected to be up 18% over 2021 due to an
anticipated improving economic outlook and cyclical growth. Additionally, we
believe that the market diversification Sypris Technologies has accomplished
over recent years by adding new programs in the automotive, sport-utility and
off-highway markets has benefited and will continue to benefit the Company as
demand for our products in these markets did not decline as dramatically as
demand declined in the Class 8 commercial vehicle market.



Depressed oil and gas prices coupled with reduced travel, business closures, and
other economic impacts related to the COVID-19 pandemic suppressed near-term oil
and natural gas demand, which has adversely impacted the oil and gas markets
served by our Tube Turns® brand of engineered product lines. This is causing
major pipeline developers to significantly scale back near-term capital
investments in new pipeline infrastructure. This has resulted in reduced demand
for our products for the oil and gas markets during the second half of 2020 and
the first nine months of 2021. However, as commodity prices improve and activity
increases, we expect customer demand to increase in the fourth quarter of 2021
compared to 2020.


We will continue to pursue new activities in a wide variety of markets, from light automotive to new energy-related product lines, in order to achieve a more balanced portfolio among our customers, markets and products.


Sypris Electronics Outlook



In accordance with the U.S. Department of Defense ("DoD") guidance issued in
March 2020 designating the Defense Industrial Base as a critical infrastructure
workforce, our Sypris Electronics production facility continued to operate in
support of essential products and services required to meet national security
commitments to the U.S. Government and the U.S. military.



The U.S. Government has taken actions in response to COVID-19 to increase
progress payments in new and existing contracts and accelerate contract awards
through increased use of Undefinitized Contracting Actions (UCAs) to provide
cash flow and liquidity for companies in the Defense Industrial Base, including
large prime contractors and smaller suppliers. Certain of the large prime
contractors are implementing multiple actions to help support certain suppliers
affected by COVID-19, including accelerating payments to subcontractors, such as
Sypris Electronics.



The majority of the government aerospace and defense programs that we support
require specific components that are sole-sourced to specific suppliers;
therefore, the resolution of supplier constraints requires coordination with our
customers or the end-users of the products. We have partnered with our customers
to qualify alternative components or suppliers and will continue to focus on our
supply chain to attempt to mitigate the impact of supply component shortages on
our business. While the COVID-19 outbreak did not have a material impact on our
supply chain in 2020 or the first half of 2021, electronic component shortages
impacted our third quarter 2021 results and may continue to be a challenge
during the remainder of 2021 and 2022. We may not be successful in addressing
these shortages and other supply chain issues.



During 2020 and the first nine months of 2021, we announced new program awards
for Sypris Electronics, with certain programs continuing into 2023. In addition
to contract awards from DoD prime contractors related to weapons systems,
electronic warfare and infrared countermeasures in our traditional aerospace and
defense markets, we have also been awarded subcontracts related to the
communication and navigation markets, which align with our advanced capabilities
for delivering products for complex, high cost of failure platforms.



On May 28, 2021, the President of the United States submitted to Congress the
President's fiscal year (FY) 2022 budget request, which proposes $753 billion
for total national defense spending including $715 billion for the DoD, a 1.6%
increase above the FY 2021 enacted amounts for both total national defense and
the DoD (a U.S. Government fiscal year starts on October 1 and ends on September
30). This is the first budget over the past decade that is not restricted by the
discretionary spending caps under the Budget Control Act of 2011. The budget
also proposes to end the use of Overseas Contingency Operations (OCO) as a
separate fund to finance overseas operations.



However, the U.S. Government has not yet enacted an annual budget for FY 2022.
To avert a government shutdown, on September 30, 2021, a continuing resolution
funding measure was enacted to finance all U.S. Government activities through
December 3, 2021. Under the continuing resolution, partial-year funding at
amounts consistent with appropriated levels for FY 2021 are available, subject
to certain restrictions, but new spending initiatives are not authorized.
Importantly, our key programs continue to be supported and funded despite the
continuing resolution financing mechanism. However, during periods covered by
continuing resolutions or in the event of a government shutdown, we may
experience delays in procurement of products and services due to lack of
funding, and those delays may affect our results of operations. In the coming
months, Congress will need to approve or revise the President's FY 2022 budget
proposal through enactment of appropriations bills and other policy legislation,
which would then require final approval from the President in order for the FY
2022 budget to become law and complete the budget process.



In addition to the FY 2022 budget, the U.S. Government continues to face a
variety of fiscal and monetary policy issues, including rising debt levels. The
legal limit on U.S. debt, commonly known as the debt ceiling, was reinstated on
August 1, 2021, after a two-year suspension. On August 2, 2019, with the passage
of the Bipartisan Budget Act of 2019 (BBA-19), Congress suspended the debt
ceiling through July 31, 2021, at which time the debt limit was increased to the
amount of U.S. Government debt outstanding on that date. On October 15, 2021,
the President signed legislation raising the debt limit by $480 billion to $28.9
trillion, which is estimated to provide federal borrowing authority until
December 2021. If the debt ceiling is not raised further, the U.S. Government
may not be able to pay for expenditures or fulfill its funding obligations and
there could be significant disruption to all discretionary programs, including
discretionary programs in which we participate.



We expect to compete for follow-on business opportunities as a subcontractor on
future builds of several existing government programs. However, the federal
budget and debt ceiling are expected to continue to be the subject of
considerable uncertainty and the impact on demand for our products and services
and our business are difficult to predict.



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Results of Operations



The tables below compare our segment and consolidated results for the three and
nine month periods of operations of 2021 to the three and nine month periods of
operations of 2020. The tables present the results for each period, the change
in those results from 2020 to 2021 in both dollars and percentage change and the
results for each period as a percentage of net revenue.



? The first two columns of each table show the absolute results for each period

    presented.



? The columns titled “Year-over-year change” and “Year-over-year percentage

Variation “show the variation in results, both in dollars and in percentages. These two

columns indicate favorable changes as positive and unfavorable changes as

negative. For example, when our net income increases from period to period

then this change is displayed as a positive number in both columns. Conversely,

when expenses increase from period to period, this change is indicated as a

negative number in both columns.

? The last two columns of each table present the results for each period in the form of

percentage of net income. In these two columns, the cost of sales and the gross

the profits of each are expressed as a percentage of the net sales of that segment. Those

    amounts are shown in italics.



Additionally, as used in the table, “NM” means “not significant”.



Three Months Ended October 3, 2021 Compared to Three Months Ended October 4,
2020



                                                                                Year Over Year          Results as Percentage of Net
                                                           Year Over Year         Percentage                Revenue for the Three
                             Three Months Ended,               Change               Change                      Months Ended
                         October 3,       October 4,         Favorable             Favorable          October 3,             October 4,
                            2021             2020          (Unfavorable)         (Unfavorable)           2021                   2020
                                                             (in thousands, except percentage data)
Net revenue:
Sypris Technologies      $    16,693     $     12,072     $          4,621                  38.3 %           65.0 %                 54.5 %
Sypris Electronics             8,990           10,082               (1,092 )               (10.8 )           35.0                   45.5
Total                         25,683           22,154                3,529                  15.9            100.0                  100.0
Cost of sales:
Sypris Technologies           14,584           10,165               (4,419 )               (43.5 )           87.4                   84.2
Sypris Electronics             7,121            8,450                1,329                  15.7             79.2                   83.8
Total                         21,705           18,615               (3,090 )               (16.6 )           84.5                   84.0
Gross profit:
Sypris Technologies            2,109            1,907                  202                  10.6             12.6                   15.8
Sypris Electronics             1,869            1,632                  237                  14.5             20.8                   16.2
Total                          3,978            3,539                  439                  12.4             15.5                   16.0
Selling, general and
administrative                 3,007            2,695                 (312 )               (11.6 )           11.7                   12.2
Operating income                 971              844                  127                  15.0              3.8                    3.8

Interest expense, net            211              216                    5                   2.3              0.8                    1.0
Other expense, net               132              372                  240                  64.5              0.5                    1.7

Income before taxes              628              256                  372                 145.3              2.5                    1.2
Income tax expense
(benefit), net                   334           (3,239 )             (3,573 )                  NM              1.3                  (14.6 )
Net income               $       294     $      3,495     $         (3,201 )               (91.6 )            1.1 %         $       15.8 %




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Nine Months Ended October 3, 2021 Compared to Nine Months Ended October 4, 2020.




                                                                                 Year Over Year          Results as Percentage of Net
                                                           Year Over Year          Percentage                Revenue for the Nine
                              Nine Months Ended,               Change                Change                      Months Ended
                         October 3,       October 4,          Favorable             Favorable          October 3,             October 4,
                            2021             2020           (Unfavorable)         (Unfavorable)           2021                   2020
                                                              (in thousands, except percentage data)
Net revenue:
Sypris Technologies      $    47,022     $     33,234     $          13,788                  41.5 %           65.6 %                 53.8 %
Sypris Electronics            24,612           28,498                (3,886 )               (13.6 )           34.4                   46.2
Total                         71,634           61,732                 9,902                  16.0            100.0                  100.0
Cost of sales:
Sypris Technologies           41,233           28,605               (12,628 )               (44.1 )           87.7                   86.1
Sypris Electronics            20,298           23,742                 3,444                  14.5             82.5                   83.3
Total                         61,531           52,347                (9,184 )               (17.5 )           85.9                   84.8
Gross profit:
Sypris Technologies            5,789            4,629                 1,160                  25.1             12.3                   13.9
Sypris Electronics             4,314            4,756                  (442 )                (9.3 )           17.5                   16.7
Total                         10,103            9,385                   718                   7.7             14.1                   15.2
Selling, general and
administrative                 9,305            9,124                  (181 )                (2.0 )           13.0                   14.8
Operating income                 798              261                   537                 205.7              1.1                    0.4

Interest expense, net            644              636                    (8 )                (1.3 )            0.9                    1.0
Other expense
(income), net                    498             (114 )                (612 )                  NM              0.7                   (0.2 )
Forgiveness of PPP
Loan and related
interest                      (3,599 )              -                 3,599                    NM             (5.0 )                    -

Income (loss) before
taxes                          3,255             (261 )               3,516                    NM              4.6                   (0.4 )
Income tax expense
(benefit), net                   768           (3,103 )              (3,871 )                  NM              1.1                   (5.0 )
Net income               $     2,487     $      2,842     $            (355 )               (12.5 )            3.5 %         $        4.6 %




Net Revenue. Sypris Technologies derives its revenue from the sale of forged and
finished steel components and subassemblies and high-pressure closures and other
fabricated products. Net revenue for Sypris Technologies for the three and
nine-month periods ended October 3, 2021 increased $4.6 million and
$13.8 million, respectively, from the prior year comparable periods primarily as
a result of the rebound in the commercial vehicle market from the impact of the
COVID-19 pandemic experienced during the prior year periods. The net revenue
increase for the comparable three-month period was attributable to increased
sales volumes of $4.8 million primarily with customers in the commercial vehicle
market partially offset by lower energy related product sales of $0.2 million.
The net revenue increase for the comparable nine-month period was attributable
to increased sales volumes of $15.7 million primarily with customers in the
commercial vehicle market, partially offset by decreased energy related product
sales of $1.9 million.



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Sypris Electronics derives its revenue primarily from circuit card and full "box
build" manufacturing, high reliability manufacturing and systems assembly and
integration. Net revenue for Sypris Electronics decreased $1.1 million and
$3.9 million, respectively, for the three and nine months ended October 3, 2021,
from the prior year comparable periods. The decrease in revenue for the three
and nine months ended October 3, 2021 was primarily related to the completion of
a program during the prior year. The follow-on to this program has been awarded
and shipments are expected to resume during the fourth quarter of 2021.
Additionally, in the first nine months of 2021, sales to our customers serving
the communications industry decreased as compared to the first nine months of
2020 due to delayed orders experienced during the first quarter of 2021. Many of
these orders were received beginning late in the first quarter and continued in
the second and third quarters of 2021 and are expected to be converted to
revenue over the balance of the year and in 2022. Certain programs have also
been impacted by material availability as receipts of a limited number of
specific parts necessary to complete the build of the products were delayed or,
in other instances, required us to resource and obtain alternative parts or use
alternative suppliers. The order backlog for Sypris Electronics is expected to
support a stable revenue rate during the balance of 2021 and into 2022, but
revenue could continue to be impacted by material availability.



Gross Profit. Sypris Technologies' gross profit increased $0.2 million and
$1.2 million for the three and nine months ended October 3, 2021, respectively,
from the prior year comparable periods. The net increase in volumes contributed
to an increase in gross profit of $1.5 million and $4.8 million for the three
and nine months ended October 3, 2021, respectively, from the prior year
comparable periods. Partially offsetting this increase was an unfavorable
product mix, increased operating supply spend, additional equipment maintenance
expenses in support of an expected increase in revenue and unfavorable labor
productivity experienced in the first quarter of 2021 as new production workers
were being trained.



Sypris Electronics' gross profit increased $0.2 million and decreased
$0.4 million for the three and nine months ended October 3, 2021, respectively,
from the prior year comparable periods. The increase in gross profit for the
three months ended October 3, 2021 was primarily the result of a favorable
revenue mix during the quarter. The decrease in gross profit for the nine months
ended October 3, 2021 was primarily a result of the decrease in revenue during
the period, which also had a negative impact on overhead absorption.



Selling, General and Administrative. Selling, general and administrative expense
increased by $0.3 million and $0.2 million for the three and nine month periods
ended October 3, 2021, respectively, as compared to the same periods in 2020.
The increase in selling general and administrative expense for the three and
nine months ended October 3, 2021 was primarily the result of higher employee
medical insurance claim expense during the period and an increase in headcount
to support the anticipated increase in volumes for Sypris Technologies. Selling,
general and administrative expense decreased as a percentage of revenue to 11.7%
and 13.0% for the three and nine months ended October 3, 2021, respectively from
12.2% and 14.8% for the three and nine months ended October 4, 2020,
respectively.



Other Expense (Income), Net. The Company recognized other expense, net of
$0.1 million and $0.5 million for the three and nine months ended October 3,
2021, respectively. During the three months ended October 3, 2021, the Company
recognized pension expense of $0.1 million. For the nine months ended October 3,
2021, the Company recognized foreign exchange related losses of $0.1 million and
pension expense of $0.4 million.



The Company recognized other expense of $0.4 million and other income, net of
$0.1 million for the three and nine months ended October 4, 2020, respectively.
During the three months ended October 4, 2020, the Company recognized pension
expense of $0.2 million and a loss on the disposal of assets of $0.2 million.
For the nine months ended October 4, 2020, the Company recognized net gains of
$0.8 million related to the sale of idle assets, partially offset by pension
expense of $0.6 million and foreign exchange related losses of $0.1 million.



Forgiveness of PPP Loan and related interest. On June 28, 2021, the Company
received notice from BMO that BMO had received confirmation from the SBA that
the application for forgiveness of the PPP Loan had been approved. The loan
forgiveness request in the amount of $3.6 million was applied to the Company's
entire outstanding PPP Loan balance with BMO. During the nine months ended
October 3, 2021, the Company recorded a gain on the forgiveness of the PPP Loan
and accrued interest in the amount of $3.6 million.



Income Taxes. The Company's income tax expense for the three and nine months
ended October 3, 2021 consists primarily of foreign income taxes on its Mexican
subsidiaries.



The Company's income tax expense for the three and nine months ended
October 4, 2020 consists primarily of a net deferred tax benefit of
$3.3 million, partially offset by currently payable state and local income taxes
on domestic operations and foreign income taxes on one of its Mexican
subsidiaries. The Company evaluates its deferred tax position on a quarterly
basis and valuation allowances are provided as necessary. During this
evaluation, the Company reviews its forecast of income in conjunction with other
positive and negative evidence surrounding the realizability of its deferred tax
assets to determine if a valuation allowance is needed. Based on the forecast
prepared during this prior period, the Company believed it would have sufficient
future taxable income to realize its deferred tax assets by its Mexican
subsidiaries. Therefore, the Company reversed its valuation allowance recorded
in prior years against certain Mexican net deferred tax assets and recognized an
income tax benefit of $3.3 million during the three and nine months ended
October 4, 2020.



Deferred tax assets and liabilities are determined separately for each tax
jurisdiction in which we conduct our operations or otherwise incur taxable
income or losses. The Company evaluates its deferred tax position on a quarterly
basis and valuation allowances are provided as necessary. During this
evaluation, the Company reviews its forecast of income in conjunction with other
positive and negative evidence surrounding the realizability of its deferred tax
assets to determine if a valuation allowance is needed. Based on its current
forecast, the Company has established a valuation allowance against all 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. tax
benefits. If we determine that we would be able to realize our deferred tax
assets in the future in excess of the net recorded amount, an adjustment to
reduce the valuation allowance would increase net income in the period that such
determination is made.



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Liquidity, Capital Resources



Paycheck Protection Program. As described above, the Company secured the PPP
Loan under the CARES Act during the second quarter of 2020. Proceeds from the
PPP Loan have been used to retain workers and maintain payroll and make lease
and utility payments. The PPP Loan was evidenced by a promissory note in favor
of BMO, as lender, with a principal amount of $3.6 million that bears interest
at a fixed annual rate of 1.00%.



During the fourth quarter of 2020, the Company applied for forgiveness of the
PPP Loan, with the amount which may be forgiven equal to the sum of payroll
costs, covered rent and mortgage obligations, and covered utility payments
incurred by the Company during the 24-week period beginning upon receipt of
funds from the PPP Loan, subject to limitations and calculated in accordance
with the terms of the CARES Act.



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On June 28, 2021, the Company received notice from BMO that BMO had received
confirmation from the SBA that the application for forgiveness of the PPP Loan
had been approved. The loan forgiveness request in the amount of $3.6 million
was applied to the Company's entire outstanding PPP Loan balance with BMO.
During the nine months ended October 3, 2021, the Company recorded a gain on the
forgiveness of the PPP Loan and accrued interest in the amount of $3.6 million.



Gill Family Capital Management Note. The Company has received the benefit of
cash infusions from GFCM in the form of secured promissory note obligations
totaling $6.5 million in principal as of October 3, 2021 and December 31, 2020
(the "Note"). 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. As of October 3, 2021, our principal commitment
under the Note was $2.5 million due on April 1, 2022, $2.0 million on April
1, 2024 and the balance on April 1, 2026. Interest on the Note is reset on April
1 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 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 2022
and 2024. During the first quarter of 2020, the Company provided notice to GFCM
of its intention to elect to defer the specified portion of the interest
payments due beginning on April 6, 2020. All accrued but unpaid interest was
paid on January 4, 2021.



Finance Lease Obligations. As of October 3, 2021, the Company had $2.2 million
outstanding under finance lease obligations for both property and machinery and
equipment at its Sypris Technologies locations with maturities through 2025 and
a weighted average interest rate of 10.04%.



Equipment financing obligations. From October 3, 2021, the Company had $ 1.1 million outstanding for equipment financing, with effective interest rates ranging from 4.55% to 8.06% and maturities until 2026.

Purchase commitments. We had purchase commitments totaling approximately
$ 19.0 million To October 3, 2021, primarily for inventory and manufacturing equipment.



Cash Balance. At October 3, 2021, we had approximately $11.1 million of cash and
cash equivalents, of which $5.0 million was held in jurisdictions outside of the
U.S. that, if repatriated, could result in withholding taxes.



We have projected that our cash and cash equivalents will be sufficient to allow
us to continue operations for the next 12 months. Significant changes from our
current forecasts, including, but not limited to: (i) the impact of the COVID-19
pandemic and changes in worldwide and U.S. economic conditions, (ii) meaningful
shortfalls in projected revenue or sales proceeds from underutilized or non-core
equipment, (iii) unexpected costs or expenses, and/or (iv) operating
difficulties which cause unexpected delays in scheduled shipments, could require
us to seek additional funding or force us to make further reductions in
spending, extend payment terms with suppliers, liquidate assets where possible
and/or suspend or curtail planned programs. Any of these actions could
materially harm our business, results of operations and future prospects.



Cash Flows



Operating Activities. Net cash provided by operating activities was $2.2 million
in the first nine months of 2021 as compared to $0.1 million in the same period
of 2020. The aggregate increase in accounts receivable in 2021 resulted in a
usage of cash of $4.3 million as a result of the increase in revenue for Sypris
Technologies and an early payment by a customer at the end of 2020. The increase
in inventory in 2021 resulted in a usage of cash of $11.3 million. The increase
in inventory is primarily in support of new program revenue growth for Sypris
Electronics anticipated to begin in the fourth quarter of 2021. A significant
portion of the inventory receipts was funded through prepayments from customers
of Sypris Electronics in 2020 and the first nine months of 2021. Additionally,
there was an increase in accounts payable during the first nine months of 2021,
providing a source of cash of $6.4 million, resulting from an increase in the
purchase of inventory. Accrued and other liabilities increased during the first
nine months of 2021, resulting in a source of cash of $10.0 million, primarily
as a result of several substantial prepayments from customers of Sypris
Electronics to fund the purchase of specific program inventory, resulting in an
increase in contract liabilities.



Investing Activities. Net cash used in investing activities was $1.8 million for
the first nine months of 2021 as compared to cash provided of $0.8 million for
the first nine months of 2020. Net cash used in investing activities for the
first nine months of 2021 was comprised of capital expenditures of $1.8 million.



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Net cash used in investing activities for the first nine months of 2020 included
proceeds of $2.0 million from the sale of idle assets by Sypris Technologies
during the period, including the sale of the Broadway Plant, partially offset by
capital expenditures of $1.2 million.



Financing Activities. Net cash used in financing activities was $0.9 million for
the first nine months of 2021 as compared to cash provided of $2.9 million for
the first nine months of 2020. Net cash used in financing activities in the
first nine months of 2021 included principal payments on finance leases and
equipment financing obligations of $0.5 million and payments of $0.4 million for
minimum statutory tax withholdings on stock based compensation.



Net cash flow generated from financing activities in the first nine months of 2020 included the proceeds of $ 3.6 million under the PPP Loan, as described above, partially offset by finance lease payments from $ 0.6 million.


Critical Accounting Policies



See the information concerning our critical accounting policies included under
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operation - Critical Accounting Policies and Estimates" in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2020. There have been no
significant changes in our critical accounting policies during the nine months
ended October 3, 2021.



Forward-looking Statements



This Quarterly Report on Form 10-Q, and our other oral or written
communications, may contain "forward-looking" statements. These statements may
include our expectations or projections about the future of our business,
industries, business strategies, prospects, potential acquisitions, liquidity,
financial condition or financial results and our views about developments beyond
our control, including domestic or global economic conditions, government
spending, industry trends and market developments. These statements are based on
management's views and assumptions at the time originally made, and, except as
required by law, we undertake no obligation to update these statements, even if,
for example, they remain available on our website after those views and
assumptions have changed. There can be no assurance that our expectations,
projections or views will come to pass, and undue reliance should not be placed
on these forward-looking statements.



A number of significant factors could materially affect our specific business
operations and cause our performance to differ materially from any future
results projected or implied by our prior statements. Many of these factors are
identified in connection with the more specific descriptions contained
throughout this report. Other factors which could also materially affect such
future results currently include: the impact of COVID-19 and economic conditions
on our future operations; possible public policy response to the pandemic,
including legislation or restrictions that may impact our operations or supply
chain; the impact of potential U.S. Government COVID-19 vaccine mandates on our
ability to attract and retain employees and on our business and results of
operations; our failure to successfully complete final contract negotiations
with regard to our announced contract "orders", "wins" or "awards"; our failure
to successfully win new business; the termination or non-renewal of existing
contracts by customers; our failure to achieve and maintain profitability on a
timely basis by steadily increasing our revenues from profitable contracts with
a diversified group of customers, which would cause us to continue to use
existing cash resources or require us to sell assets to fund operating losses;
breakdowns, relocations or major repairs of machinery and equipment, especially
in our Toluca Plant; volatility of our customers' forecasts especially in the
commercial truck markets and our contractual obligations to meet current
scheduling demands and production levels (especially in our Toluca Plant), which
may negatively impact our operational capacity and our effectiveness to
integrate new customers or suppliers, and in turn cause increases in our
inventory and working capital levels; cost, quality and availability or lead
times of raw materials such as steel, component parts (especially electronic
components), natural gas or utilities; the cost, quality, timeliness, efficiency
and yield of our operations and capital investments, including the impact of
tariffs, product recalls or related liabilities, employee training, working
capital, production schedules, cycle times, scrap rates, injuries, wages,
overtime costs, freight or expediting costs; dependence on, retention or
recruitment of key employees and distribution of our human capital; inaccurate
data about markets, customers or business conditions; disputes or litigation
involving governmental, supplier, customer, employee, creditor, stockholder,
product liability, warranty or environmental claims; the fees, costs and supply
of, or access to, debt, equity capital, or other sources of liquidity; our
ability to comply with the requirements of the SBA and maintain forgiveness of
all or a portion of our Paycheck Protection Program loan; our inability to
develop new or improved products or new markets for our products; our reliance
on a few key customers, third party vendors and sub-suppliers; inventory
valuation risks including excessive or obsolescent valuations or price erosions
of raw materials or component parts on hand or other potential impairments,
non-recoverability or write-offs of assets or deferred costs; other potential
weaknesses in internal controls over financial reporting and enterprise risk
management; failure to adequately insure or to identify product liability,
environmental or other insurable risks; unanticipated or uninsured disasters,
public health crises, losses or business risks; unanticipated or uninsured
product liability claims; the costs of compliance with our auditing, regulatory
or contractual obligations; labor relations; strikes; union negotiations;
pension valuation, health care or other benefit costs; costs associated with
environmental claims relating to properties previously owned; our inability to
patent or otherwise protect our inventions or other intellectual property from
potential competitors; adverse impacts of new technologies or other competitive
pressures which increase our costs or erode our margins; our reliance on
revenues from customers in the oil and gas and automotive markets, with
increasing consumer pressure for reductions in environmental impacts attributed
to greenhouse gas emissions and increased vehicle fuel economy; U.S. government
spending on products and services that Sypris Electronics provides, including
the timing of budgetary decisions; changes in licenses, security clearances, or
other legal rights to operate, manage our work force or import and export as
needed; risks of foreign operations; currency exchange rates; war, terrorism, or
political uncertainty; cyber security threats and disruptions; our ability to
maintain compliance with the Nasdaq listing standards minimum closing bid price;
risk related to owning our common stock including increased volatility; or
unknown risks and uncertainties and the risk factors disclosed in Item 1A of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2020.



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