# Sypris Solutions Inc: Form 10-Q for the period ended Oct 2, 2022

- Company: [Sypris Solutions Inc](/companies/sypr.md) (CIK 864240)
- Form: 10-Q
- Filed: 2022-11-16
- Accepted by EDGAR: Nov 16, 2022, 10:55 ET
- Period: 2022-10-02
- Accession: 0001437749-22-027505
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/864240/000143774922027505/sypr20220930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/864240/000143774922027505/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-10-02.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-04 to 2022-10-02 | $25.2m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-10-02 | $80.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-04 to 2022-10-02 | $23.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-10-02 | $70.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-04 to 2022-10-02 | $2.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-01 to 2022-10-02 | $10.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-07-04 to 2022-10-02 | $3.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-10-02 | $10.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-04 to 2022-10-02 | −$1.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-10-02 | −$440.0k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-04 to 2022-10-02 | $273.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-10-02 | $784.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-04 to 2022-10-02 | −$16.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-10-02 | $755.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-04 to 2022-10-02 | −$2.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-10-02 | −$2.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-04 to 2022-10-02 | −$0.10 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-10-02 | −$0.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-04 to 2022-10-02 | −$0.10 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-10-02 | −$0.12 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-04 to 2022-10-02 | 21,740,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-10-02 | 21,716,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-10-02 | $8.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-10-02 | $2.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Current assets | at 2022-10-02 | $68.0m | us-gaap:AssetsCurrent |
| Total assets | at 2022-10-02 | $92.1m | us-gaap:Assets |
| Current liabilities | at 2022-10-02 | $41.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-10-02 | $74.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-10-02 | $17.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,531 characters.

### Overview

We are a diversified provider 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 negatively impacted the Company’s results of operations, cash flows and financial position in 2020 and 2021, and in the first nine months of 2022. We have also continued to experience various degrees of supply chain challenges in the first nine months of 2022, including increased lead times for raw materials due to availability constraints and high demand. While we have elevated our engagement with our suppliers and used secondary suppliers and new methods of procurement where available to mitigate the supply chain pressures, we expect supply chain challenges to continue throughout 2022 and into 2023.

In connection with the supply chain challenges described above, we have experienced inflationary increases of certain raw materials, as well as logistics, transportation, utilities and labor costs. While we have taken pricing actions and we strive for productivity improvements that could help offset these inflationary cost increases, we expect inflationary cost increases to continue throughout 2022 and into 2023.

#### 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 for commercial vehicles in addition to the automotive, sport utility vehicle and off-highway markets also served by Sypris Technologies. While there is growing evidence of a slowing North American economy, 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 has experienced less volatility than the Class 8 commercial vehicle market.

Reduced travel, business closures, and other economic impacts related to the COVID-19 pandemic suppressed oil and natural gas demand, thereby adversely impacting the oil and gas markets served by our Tube Turns® brand of engineered products. This caused major pipeline developers to significantly scale back near-term capital investments in new pipeline infrastructure, which resulted in reduced demand for our products for the oil and gas markets during 2021 and the first nine months of 2022. Sales in this market are dependent on, among other things, the level of worldwide oil and gas drilling, the price of crude oil and natural gas and capital spending by exploration and production companies and drilling contractors. The U.S. average land rig count continues to be below pre-pandemic levels, but rose 42% in the third quarter of 2022 compared to the third quarter of 2021. As commodity prices improve and activity increases, particularly in liquefied natural gas (“LNG”) shipments to Europe, we currently expect customer demand in this market to increase in the fourth quarter of 2022 compared to same period of 2021. However, the conflict between Russia and Ukraine has led to disruption, instability and volatility in global markets and industries that could negatively impact our operations.

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

#### Sypris Electronics Outlook

As noted above, the COVID-19 pandemic continued to cause business impacts in the first nine months of 2022 including supply chain challenges and delays. 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. Electronic component shortages may continue to be a challenge during the remainder of 2022 and into 2023. We may not be successful in addressing these shortages and other supply chain issues.

During 2021 and the first nine months of 2022, we announced new program awards for Sypris Electronics, with certain programs continuing into 2024. In addition to contract awards from Department of Defense (“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 March 15, 2022, President Biden signed the Consolidated Appropriations Act, 2022, providing annual funding for the DoD and other government departments and agencies. The appropriation provided $781 billion for national defense, which includes the DoD, Department of Energy (DoE) nuclear weapons-related activities, and the national security activities of the Coast Guard, Federal Bureau of Investigation, and others. The DoD portion was $742.3 billion, $25 billion more than the President’s Fiscal Year (FY) 2022 request. Additionally, the legislation included $13.6 billion in supplemental funding to support Ukraine, including $3.5 billion for defense articles and $650 million in Foreign Military Financing (FMF) for Ukraine and other Eastern European allies. An additional $40 billion in emergency supplemental appropriations was approved by Congress in May 2022.

On March 28, 2022, President Biden’s Administration submitted to Congress the President’s FY 2023 budget request, which proposes $813 billion for national defense. The DoD portion of this request is $773 billion, a 4% increase above the FY 2022 enacted amount. However, Congress has not yet enacted an annual budget for FY 2023. To avert a government shutdown, on September 30, 2022, a continuing resolution funding measure was enacted to finance all U.S. government activities through December 16, 2022. Under the continuing resolution, partial-year funding at amounts consistent with appropriated levels for FY 2022 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, we may experience delays in procurement of products and services due to a lack of funding, and those delays may affect our results of operations.

It is difficult to predict the specific course of future defense budgets. However, we believe the ongoing conflict in Ukraine and the escalating tensions between China and Taiwan have highlighted some of the national security threats to our nation and our allies, and the need for strong deterrence and a robust defense capability, as well as impacting our political and economic environment. More generally, the threat to U.S. national security remains very substantial and we believe that our capabilities should help our customers defend against current and future threats and, as a result, continue to allow for long-term profitable business growth.

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.

See also the discussion of Congressional budgetary constraints or reallocations risks within “Item 1A, Risk Factors” included in our 2021 Form 10-K.

### Results of Operations

The tables below compare our segment and consolidated results for the three and nine month periods of operations of 2022 to the three and nine month periods of operations of 2021. The tables present the results for each period, the change in those results from 2021 to 2022 in both dollars and percentage change and the results for each period as a percentage of net revenue.

- The first two columns in each table show the absolute results for each period presented.
- The columns entitled “Year Over Year Change” and “Year Over Year Percentage Change” show the change in results, both in dollars and percentages. These two columns show favorable changes as positive and unfavorable changes as negative. For example, when our net revenue increases from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative number in both columns.
- The last two columns in each table show the results for each period as a percentage of net revenue. In these two columns, the cost of sales and gross profit for each are given as a percentage of that segment’s net revenue. These amounts are shown in italics.

In addition, as used in the table, “NM” means “not meaningful.”

### Three Months Ended October 2, 2022 Compared to Three Months Ended October 3, 2021

*(in thousands, except percentage data)*

| Net revenue: | Three Months Ended, October 2, 2022 | October 3, 2021 | Year Over Year Change Favorable (Unfavorable) | Year Over Year Percentage Change Favorable (Unfavorable) | Results as Percentage of Net Revenue for the Three Months Ended October 2, 2022 | October 3, 2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sypris Technologies | $16,990 | $16,693 | $297 | 1.8% | 67.4% | 65.0% |
| Sypris Electronics | 8,209 | 8,990 | (781) | (8.7) | 32.6 | 35.0 |
| Total | 25,199 | 25,683 | (484) | (1.9) | 100.0 | 100.0 |
| Cost of sales: |  |  |  |  |  |  |
| Sypris Technologies | 15,919 | 14,584 | (1,335) | (9.2) | 93.7 | 87.4 |
| Sypris Electronics | 7,309 | 7,121 | (188) | (2.6) | 89.0 | 79.2 |
| Total | 23,228 | 21,705 | (1,523) | (7.0) | 92.2 | 84.5 |
| Gross profit: |  |  |  |  |  |  |
| Sypris Technologies | 1,071 | 2,109 | (1,038) | (49.2) | 6.3 | 12.6 |
| Sypris Electronics | 900 | 1,869 | (969) | (51.8) | 11.0 | 20.8 |
| Total | 1,971 | 3,978 | (2,007) | (50.5) | 7.8 | 15.5 |
| Selling, general and administrative | 3,574 | 3,007 | (567) | (18.9) | 14.2 | 11.7 |
| Operating (loss) income | (1,603) | 971 | (2,574) | NM | (6.4) | 3.8 |
| Interest expense, net | 273 | 211 | (62) | (29.4) | 1.1 | 0.8 |
| Other expense, net | 382 | 132 | (250) | (189.4) | 1.5 | 0.5 |
| (Loss) income before taxes | (2,258) | 628 | (2,886) | NM | (9.0) | 2.5 |
| Income tax (benefit) expense, net | (16) | 334 | 350 | NM | (0.1) | 1.3 |
| Net (loss) income | $(2,242) | $294 | $(2,536) | NM | (8.9)% | 1.1% |

20

### Nine Months Ended October 2, 2022 Compared to Nine Months Ended October 3, 2021.

*(in thousands, except percentage data)*

| Net revenue: | Nine Months Ended, October 2, 2022 | October 3, 2021 | Year Over Year Change Favorable (Unfavorable) | Year Over Year Percentage Change Favorable (Unfavorable) | Results as Percentage of Net Revenue for the Nine Months Ended October 2, 2022 | October 3, 2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sypris Technologies | $52,096 | $47,022 | $5,074 | 10.8% | 64.8% | 65.6% |
| Sypris Electronics | 28,313 | 24,612 | 3,701 | 15.0 | 35.2 | 34.4 |
| Total | 80,409 | 71,634 | 8,775 | 12.2 | 100.0 | 100.0 |
| Cost of sales: |  |  |  |  |  |  |
| Sypris Technologies | 45,762 | 41,233 | (4,529) | (11.0) | 87.8 | 87.7 |
| Sypris Electronics | 24,387 | 20,298 | (4,089) | (20.1) | 86.1 | 82.5 |
| Total | 70,149 | 61,531 | (8,618) | (14.0) | 87.2 | 85.9 |
| Gross profit: |  |  |  |  |  |  |
| Sypris Technologies | 6,334 | 5,789 | 545 | 9.4 | 12.2 | 12.3 |
| Sypris Electronics | 3,926 | 4,314 | (388) | (9.0) | 13.9 | 17.5 |
| Total | 10,260 | 10,103 | 157 | 1.6 | 12.8 | 14.1 |
| Selling, general and administrative | 10,700 | 9,305 | (1,395) | (15.0) | 13.3 | 13.0 |
| Operating (loss) income | (440) | 798 | (1,238) | NM | (0.5) | 1.1 |
| Interest expense, net | 784 | 644 | (140) | (21.7) | 1.0 | 0.9 |
| Other expense, net | 655 | 498 | (157) | (31.5) | 0.8 | 0.7 |
| Forgiveness of PPP Loan and related interest | 0 | (3,599) | (3,599) | NM | 0.0 | (5.0) |
| (Loss) income before taxes | (1,879) | 3,255 | (5,134) | NM | (2.3) | 4.6 |
| Income tax expense, net | 755 | 768 | 13 | 1.7 | 0.9 | 1.1 |
| Net (loss) income | $(2,634) | $2,487 | $(5,121) | NM | (3.3)% | 3.5% |

*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 2, 2022 increased $0.3 million and $5.1 million, respectively, from the prior year comparable periods. The comparison of net revenue for the three and nine month periods includes price adjustments for increases in the market price of steel over the past year, which is contractually passed through to customers under certain contracts. The steel price adjustments totaled approximately $0.9 million and $3.4 million for the three and nine month periods, respectively. The increase is partially offset by lower shipment volume to the commercial vehicle market. Production of Class 8 commercial vehicles in North America continues to be impacted by supply chain constraints unrelated to the availability of the drive axle shafts and other components we manufacture. This in turn has trickled down into our shipment volume, as our customers adjust their inventory levels to align with the end market build rates. Higher shipments of sport utility and energy components contributed to the revenue increase for the comparable three and nine month periods.

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 $0.8 million and increased $3.7 million, respectively, for the three and nine months ended October 2, 2022, from the prior year comparable periods. The decrease in revenue for the three months ended October 2, 2022 was primarily related to material availability, as receipts of a limited number of specific parts necessary to complete the build of products were delayed or, in other instances, required us to resource and obtain alternative parts or use alternative suppliers. The increase in sales for the nine months ended October 2, 2022, was a result of the ramping of production during the year for two follow-on programs that began shipments during the fourth quarter of 2021.

*Gross Profit.* Sypris Technologies’ gross profit decreased $1.0 million and increased $0.5 million for the three and nine months ended October 2, 2022, respectively, from the prior year comparable periods. Revenue mix was unfavorable for the three months ended October 2, 2022 contributing to the decrease in gross profit. Variable manufacturing costs also increased during the current year as inflationary pressure increased spend for consumable supplies and tooling, and natural gas and electricity rates increased from the prior year. The gross profit variance for both the three and nine month periods also includes additional costs incurred during 2022 to support the previously forecasted increase in demand driven by the commercial vehicle market. For the nine months ended October 2, 2022, favorable revenue mix from our higher value add components for the sport utility and energy markets contributed to the increase in gross profit.

Sypris Electronics’ gross profit decreased $1.0 million and $0.4 million for the three and nine months ended October 2, 2022, respectively, from the prior year comparable periods. The decrease in gross profit for the three and nine months ended October 2, 2022 was primarily a result of lower margins on new programs ramping during the period compared to margins on mature programs completed during 2021. Additional engineering costs were also incurred in 2022 on certain programs that have not yet reached full rate production. The order backlog for Sypris Electronics is expected to support a stable revenue rate during the balance of 2022.

*Selling, General and Administrative.* Selling, general and administrative expense increased by $0.6 million and $1.4 million for the three and nine month periods ended October 2, 2022, respectively, as compared to the same periods in 2021, primarily as a result of a reinstatement of compensation for our Chairman, President and CEO and certain other senior leadership and corporate personnel and our Board of Directors, which had been reduced in 2020 across the Company amid the onset of the COVID-19 pandemic. Selling, general and administrative expense increased as a percentage of revenue to 14.2% and 13.3% for the three and nine months ended October 2, 2022, respectively from 11.7% and 13.0% for the three and nine months ended October 3, 2021, respectively.

*Forgiveness of PPP Loan and related interest.* On June 28, 2021, the Company received notice from BMO Harris Bank National Association (“BMO”) that BMO had received confirmation from the Small Business Administration (“SBA”) that the Company’s application for forgiveness of a loan in the amount of $3.6 million (the “PPP Loan”) pursuant to expansion of the SBA 7(a) loan program, established under the CARES Act 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 (benefit) expense for the three and nine months ended October 2, 2022 and October 3, 2021 consists primarily of foreign income taxes on its Mexican subsidiaries.

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.

### Liquidity, Capital Resources

*Cash Balance.* As of October 2, 2022, we had approximately $16.5 million of cash and cash equivalents, of which $2.7 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, (iv) operating difficulties which cause unexpected delays in scheduled shipments, and/or (v) inflation, 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.

### Material Cash Requirements

*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 2, 2022 and December 31, 2021 (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 2, 2022, our principal commitment under the Note was $2.5 million due on April 1, 2023, $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 2023 and 2024.

*Finance Lease Obligations.* As of October 2, 2022, the Company had $3.7 million outstanding under finance lease obligations for both property and machinery and equipment with maturities through 2026 and a weighted average interest rate of 8.5%.

*Equipment Financing Obligations.* As of October 2, 2022, the Company had $1.2 million outstanding under equipment financing facilities, with fixed interest rates ranging from 4.4% to 8.1% and payments due through 2028.

*Purchase Commitments.* We had purchase commitments totaling approximately $58.3 million at October 2, 2022, primarily for inventory and manufacturing equipment, which are due through 2024.

### Cash Flows

*Operating Activities.* Net cash provided by operating activities was $8.3 million in the first nine months of 2022 as compared to $2.2 million in the same period of 2021. The increase in inventory in 2022 resulted in a usage of cash of $5.1 million. The increase in inventory is primarily in support of new program revenue growth for Sypris Electronics. A significant portion of the inventory receipts were funded through prepayments from customers of Sypris Electronics in 2022, which are recorded as contract liabilities and are the primary component of the $10.8 million increase in accrued and other liabilities during the first nine months of 2022. Accounts payable also increased during the first nine months of 2022, primarily associated with the inventory additions, providing a source of cash of $3.9 million. Prepaid expenses and other current assets increased during the first nine months of 2022 resulting in a cash use of $2.2 million primarily as a result of increased capitalized costs associated with programs in the startup phase of production at Sypris Electronics and an increase in VAT taxes refundable in Mexico.

*Investing Activities.* Net cash used in investing activities was $2.8 million for the first nine months of 2022 as compared to $1.8 million for the first nine months of 2021. Net cash used in investing activities for the first nine months of 2022 was comprised of capital expenditures of $2.8 million. Net cash used in investing activities for the first nine months of 2021 was comprised of capital expenditures of $1.8 million.

*Financing Activities.* Net cash used in financing activities was $1.0 million for the first nine months of 2022 as compared to $0.9 million for the first nine months of 2021. Net cash used in financing activities in the first nine months of 2022 included principal payments on finance leases and equipment financing obligations of $1.0 million. 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.

### 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, 2021. There have been no significant changes in our critical accounting policies during the nine months ended October 2, 2022.

### 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, including inflation, supply chain 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: 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; the cost, quality, timeliness, efficiency and yield of our operations and capital investments, including the impact of inflation, 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 highly skilled personnel and distribution of our human capital; cost, quality and availability or lead times of raw materials such as steel, component parts (especially electronic components), natural gas or utilities including increased cost relating to inflation; our failure to successfully win new business or develop new or improved products or new markets for our products; our failure to successfully complete final contract negotiations with regard to our announced contract “orders”, “wins” or “awards”; adverse impacts of new technologies or other competitive pressures which increase our costs or erode our margins; breakdowns, relocations or major repairs of machinery and equipment, especially in our Toluca Plant; volatility of our customers’ forecasts and our contractual obligations to meet current scheduling demands and production levels, 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; the fees, costs and supply of, or access to, debt, equity capital, or other sources of liquidity; the impact of COVID-19 and economic conditions on our future operations; possible public policy response to the pandemic, including U. S or foreign government legislation or restrictions that may impact our operations or supply chain; the termination or non-renewal of existing contracts by customers; inaccurate data about markets, customers or business conditions; disputes or litigation involving governmental, supplier, customer, employee, creditor, stockholder, product liability, warranty or environmental claims; risks of foreign operations; currency exchange rates; inflation; war, geopolitical conflict, terrorism, or political uncertainty, including disruptions resulting from the conflict between Russia and Ukraine arising out of international sanctions, foreign currency fluctuations and other economic impacts; 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; failure to adequately insure or to identify product liability, environmental or other insurable risks; unanticipated or uninsured product liability claims, disasters, public health crises, losses or business risks; the costs of compliance with our auditing, regulatory or contractual obligations; labor relations; strikes; union negotiations; costs associated with environmental claims relating to properties previously owned; pension valuation, health care or other benefit costs; our inability to patent or otherwise protect our inventions or other intellectual property from potential competitors; 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; cyber security threats and disruptions, including ransomware attacks on our systems and the systems of third-party vendors and other parties with which we conduct business, all of which may become more pronounced in the event of geopolitical conflicts and other uncertainties, such as the conflict in Ukraine; our ability to maintain compliance with the Nasdaq listing standards minimum closing bid price; risks 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, 2021.

## Market risk

As filed, 221 characters.

We are a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and thus are not required to provide the quantitative and qualitative disclosures about market risk specified in Item 305 of Regulation S-K.

## Controls and procedures

As filed, 740 characters.

(a) *Evaluation of disclosure controls and procedures.* Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Principal Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

(b) *Changes in internal controls*. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 468 characters.

Information regarding risk factors appears in Part I — Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements,” in this Quarterly Report on Form 10-Q, and in Part I — Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no material changes during the fiscal quarter from the risk factors disclosed in our Annual Report on Form 10-K.

Filed Nov 16, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-027505. Last ingested by Listed: Oct 24, 2026, 14:58 ET. No prices; not investment advice.