What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-05-20 compared with 2019-11-12 · 132 added, 123 removed, 104 unchanged (71% of the section changed)

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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 is likely to continue to result, in significant economic disruption and has and will likely adversely affect our business.

As of the date of this filing, significant uncertainty exists concerning the magnitude of the 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.

During periods of lower production, the Company is scheduling and performing certain preventative maintenance procedures on its equipment and is utilizing resources to continue making progress on certain of the strategic initiatives included in the Company’s 2020 annual operating plan.

The Company began to experience lower revenue late in the first quarter due to the COVID-19 pandemic, and a more significant impact is expected in the second quarter.

While the Company expects the effects of the pandemic will negatively impact its results of operations, cash flows and financial position, management has implemented actions to mitigate the financial impact, to protect the health of its employees and to comply with government regulations at each location.

Factors deriving from the COVID-19 response that have or may 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.

We are experiencing disruptions in our business as we implement modifications to preserve adequate liquidity and ensure that our business can continue to operate during this uncertain time.

Certain states and the Mexican government have issued executive orders requiring all workers to remain at home, unless their work is essential.

We believe that, based on the various standards published to date, the work our employees are performing for the aerospace and defense, energy and transportation markets is essential.

With respect to liquidity, we are evaluating and taking actions to reduce costs and spending across our organization.

This includes reducing hiring activities, reducing compensation for our Chairman, President and CEO, certain other senior leadership and corporate personnel and our Board of Directors, and limiting discretionary spending.

We have also reduced anticipated spending on capital investment projects and are managing working capital to preserve liquidity during this crisis.

In addition to these activities, subsequent to quarter end, the Company secured a $3.6 million term loan with BMO Harris Bank National Association (“BMO”), pursuant to the Paycheck Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

Proceeds from the PPP Loan are expected to be used to retain workers and maintain payroll, make lease payments and utility payments.

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.

Sypris Technologies Outlook

The Sypris Technologies segment continues to migrate from its historical, concentrated dependence upon the commercial vehicle markets to a more diversified base of customers who place value on our innovation, flexibility and lean manufacturing capabilities.

During 2016, the continued strength of the U.S.

dollar, the tightening of margins in certain sectors of the commercial vehicle markets and the generally softening of certain key market segments led the Company to reevaluate the strategic importance of each of its customers to the Company’s long-term success.

The Company has reduced its reliance on certain of its traditional Tier 1 customers that represent the primary suppliers to the original equipment manufacturers (“OEMs”) in the commercial vehicle markets, while targeting to replace these customers with more diversified, longer-term relationships, especially among the OEMs and others who place a higher value on the Company’s innovation, flexibility and core commitment to lean manufacturing principles.

Among the customer programs not being renewed were (i) a supply agreement with Meritor that expired on January 1, 2017 and (ii) the Company’s business with Eaton, both of which utilized production at the Company’s Broadway Plant.

However, the Company continues to supply component parts to Sistemas Automotrices de Mexico, S.A de C.V.

(“Sistemas”), Meritor’s joint venture in Mexico.

During the fourth quarter of 2018, the Company entered into a new three-year agreement to supply axle shafts, as well as a number of other product lines, to Sistemas for periods of up to six years from the commencement of production.

As a result of these decisions, the Company experienced a significant reduction in its commercial vehicle revenues in 2017.

On February 21, 2017, the Board of Directors approved a modified exit or disposal plan with respect to the Broadway Plant, which was substantially complete as of the end of 2017.

The Company has relocated certain assets from the Broadway Plant to other manufacturing facilities as needed to serve its existing and targeted customer base and identified underutilized or non-core assets for disposal.

Management is currently evaluating options for the real estate and any remaining assets in the Broadway Plant (See Note 6 to the consolidated financial statements in this Form 10-Q).

The oil and gas markets, served by our Tube Turns® brand of engineered product lines, have strengthened along with the overall economy, and domestic pipeline projects continue to be active with U.S.

domestic gas and oil production increasing in 2018 and the first nine months of 2019.

We are committed to exploring new product developments and potential new markets, which will be an increasing area of focus for the Company going forward.

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

We have recently announced new program awards in each of these markets that have contributed to revenue growth for Sypris Technologies in 2018 and the first nine months of 2019.

We believe these opportunities provide a solid multi-year foundation for growth and that additional prospective business may result in increased revenue going forward to help offset the anticipated short-term cyclical decrease in production volumes in the commercial vehicle market.

After two years of record high volumes, the commercial vehicle market softened materially during the fourth quarter of 2019, impacting production rates as customers responded to the demand reduction and balanced inventory levels.

This anticipated cyclical decline, coupled with the impact of the COVID-19 pandemic, is expected to result in a significant decline in North American Class 4-8 shipments in 2020, with Class 8 production dropping as much as 40%.

Sypris Technologies has experienced a significant reduction in demand from customers serving the automotive, commercial vehicle, sport utility vehicle and off-highway markets and the significant drop in oil prices has created uncertainty for many of the energy infrastructure projects utilizing the components we produce and sell.

Sypris Technologies’ revenue was negatively impacted at the end of the first quarter and a more significant impact is expected in the second quarter.

We further believe that revenue will continue to be negatively impacted in periods beyond the second quarter until the COVID-19 pandemic diminishes.

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 overall commercial vehicle market.

In addition, we believe that demand may recover more quickly in the sport-utility and off-highway markers than the overall commercial vehicle market.

Depressed oil and gas prices coupled with reduced travel, business closures, and other economic impacts related to the COVID-19 pandemic are suppressing 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.

However, the downturn is having less of an impact on existing pipeline development projects, as many have been financed based upon long-term, bilateral contracts.

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

In the past few years, we have faced challenges within Sypris Electronics, including the emergence of new competitors to our manufacturing capabilities.

However, in 2018 and 2019, we announced new program awards for Sypris Electronics that contributed to revenue in 2019, with certain programs continuing into 2020.

In addition to program awards related to weapons systems, electronic warfare and infrared countermeasures in our traditional aerospace and defense markets, we have also been awarded programs related to the communication and navigation markets which align with our advanced capabilities for delivering products for complex, high cost of failure platforms.

Full year appropriations for FY 2019 were enacted for all remaining U.S.

government agencies and the President proposed a FY 2020 budget requesting nearly $750 billion for national security, which is expected to support program growth and market expansion for the remainder of 2019 for aerospace and defense participants.

We expect to compete for follow-on business opportunities on future builds of several existing programs, as our competitiveness is enhanced by the reduction in our overhead structure following our relocation into a new manufacturing facility at the beginning of 2017.

In the near term, certain electronic component shortages and extensive lead-time issues are prevalent in many of the segments in the electronic manufacturing industry that we serve.

This had a negative impact on our segment revenues and gross profit in the first nine months of 2019.

We are working with our customers to qualify alternative components or suppliers to mitigate the impact on our business.

We expect that these issues will be resolved for some component shortages in the next 3 months, but these and other shortages may persist as a challenge throughout 2020.

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 has 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.

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 businesses, such as Sypris Electronics.

In the past few years, we have faced challenges within Sypris Electronics, including certain electronic component shortages and extensive lead-time manufacturing issues.

This had a negative impact on our production schedules and margin performance in 2019.

However, these negative impacts did not persist in the first quarter of 2020, as many of the component shortages and issues were resolved.

The majority of our aerospace and defense programs 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.

As a result, there can be no assurance that we will be successful in addressing these shortages and issues.

We have partnered with our customers to qualify alternative components or suppliers and will continue to exercise our supply chain to mitigate the impact on our business.

While the COVID-19 outbreak did not have a material impact on our supply chain in the first quarter of 2020, overall component shortages may become a challenge throughout 2020.

As a result, there can be no assurance that we will continue to be successful in addressing these shortages and issues.

Despite the electronic component shortage challenges, in 2019, we announced new program awards for Sypris Electronics, with certain programs continuing into 2020.

On February 10, 2020, the U.S.

presidential administration submitted the fiscal year (FY) 2021 President’s Budget, requesting $1.34 trillion in total discretionary funding (a U.S.

Government fiscal year starts on October 1 and ends on September 30).

The FY 2021 budget requests $672 billion for base discretionary national defense spending, the maximum permitted under the Bipartisan Budget Act of 2019 (BBA-19).

The total national defense request is $741 billion.

The FY 2021 budget requests $705 billion for the DoD.

The FY 2021 budget is expected to support program growth and market expansion opportunities for periods beginning late in 2020 and into 2021 for aerospace and defense participants.

We expect to compete for follow-on business opportunities on future builds of several existing programs.

Results of Operations

The tables below compare our segment and consolidated results for the three and nine month periods of operations of 2019 to the three and nine month periods of operations of 2018.

The tables present the results for each period, the change in those results from 2018 to 2019 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 table below compares our segment and consolidated results for the first quarter of 2020 to the first quarter of 2019.

It presents the results for each period, the change in those results from 2019 to 2020 in both dollars and as a percentage, as well as the results for each period as a percentage of net revenue.

The first two columns in the 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.

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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.

The last two columns in the 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 segment 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 September 29, 2019 Compared to Three Months Ended September 30, 2018

Three Months Ended April 5, 2020 Compared to Three Months Ended March 31, 2019

Results as Percentage of

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Severance, relocation and other costs

Operating loss

Operating income (loss)

Interest expense, net

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Income tax expense, net

Nine Months Ended September 29, 2019 Compared to Nine Months Ended September 30, 2018.

Results as Percentage of

Net Revenue for the Nine

Nine Months Ended,

(Unfavorable)

(in thousands, except percentage data)

Sypris Technologies

Sypris Electronics

Cost of sales:

Sypris Technologies

Sypris Electronics

Gross profit (loss):

Sypris Technologies

Sypris Electronics

Selling, general and administrative

Severance, relocation and other costs

Operating loss

Interest expense, net

Other (income), net

Loss before taxes

Income tax expense, net

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 September 29, 2019 increased $0.8 million and $4.0 million from the prior year comparable periods, respectively.

The net revenue growth for the three-month period was primarily attributable to increased energy related product sales of $0.9 million partially offset by a $0.3 million decline in volumes with customers in the commercial vehicle market.

Additionally, price increases with one of our commercial vehicle programs implemented during the fourth quarter of 2018 resulted in an increase of $0.3 million for the three months ended September 29, 2019.

The net revenue growth for the nine-month period was primarily attributable to increased sales volume of $1.6 million with customers in the commercial vehicle market, increased energy related product sales of $1.4 million and price increases of $1.0 million.

Sypris Technologies primarily 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 decreased 15.0%, or $2.4 million, for the first quarter of 2020 compared to the first quarter of 2019.

The net revenue decrease for the quarter was primarily attributable to decreased sales volume of $3.5 million with customers in the commercial vehicle market and a $0.9 million decline in energy related product sales partially offset by growth in the automotive, light truck and sport utility markets of $1.9 million.

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 increased $0.4 million and decreased $1.7 million, respectively, for the three and nine months ended September 29, 2019, from the prior year comparable periods.

Revenue for the first nine months of 2019 was partially affected by shortages of certain electronic components and extensive lead-time issues in the electronic manufacturing industry.

The first nine months of 2019 was also impacted by shipments accelerated into the fourth quarter of 2018 as the Company planned for the implementation of a new ERP system effective in January.

Net revenue for Sypris Electronics increased $5.3 million to $8.7 million in the first quarter of 2020 compared to $3.4 million in the first quarter of 2019.

In the prior year, revenue for the first quarter was negatively impacted by shortages of certain electronic components and extensive lead-time issues in the electronic manufacturing industry.

Additionally, the first quarter of 2019 was also impacted by shipments accelerated into the fourth quarter of 2018 as the Company planned for the implementation of a new ERP system effective in January 2019.

Many of challenges faced during the prior year with the electronic component shortages have been resolved and production rebounded to more normal run rates during the first quarter of 2020.

Gross Profit.

Sypris Technologies’ gross profit increased $1.2 million and $2.4 million for the three and nine months ended September 29, 2019.

The net increase in volumes contributed to an increase in gross profit of $0.1 million and $0.6 million for the three and nine months ended September 29, 2019, respectively.

Additionally, gross profit for the three and nine months ended September 29, 2019 was positively impacted by a price increase on a commercial vehicle program implemented during the fourth quarter of 2018 and improvements in supply and maintenance expense.

Sypris Electronics’ gross profit decreased $0.1 million and $1.4 million for the three and nine months ended September 29, 2019.

The decrease in gross profit was primarily as a result of lower than expected volumes during the three and nine month periods, driving an increase in unabsorbed overhead.

Program mix also factored into the decrease, as the Company experienced declines on certain higher margin legacy programs.

The lower volumes on the legacy programs were partially offset by a new program which launched during 2018 and was in the ramp-up phase for the first half of 2019 impacting margin performance during the ramp up period.

Gross profit was further impacted during the three and nine months ended September 29, 2019 by a $0.3 million physical inventory adjustment and additional excess and obsolete inventory reserves of $0.1 million and $0.3 million for the three and nine month periods, respectively.

Sypris Technologies’ gross profit increased $0.2 million to $2.5 million in the first quarter of 2020 as compared to $2.3 million in the first quarter of 2019.

During 2019, the results for the period were negatively impacted by additional start-up costs on new programs including lower productivity, higher supply consumption and scrap and rework expense.

Additionally, utility costs were higher as more production occurred during peak electrical rate periods.

Labor productivity improved in the first quarter of 2020 driving lower variable employment costs and controls over supply spend, product quality and utility consumption contributed to increased profitability.

These improvements were partially offset by lower contribution margin from the net decrease in sales volume over the prior period.

Gross margin for the first quarter of 2020 reached 18.0% as compared to 14.3% in the prior year period.

Sypris Electronics’ gross profit increased $2.5 million to $1.1 million in the first quarter of 2020 as compared to a loss of $1.4 million for the first quarter of 2019.

The increase in gross profit was primarily as a result of the growth in revenue during the quarter.

Certain programs contributing to the improvement in revenue and gross margin for the comparable periods reached their expected quarterly run rates during the first quarter of 2020 and allowed management to more efficiently balance production and to improve overhead absorption.

The order backlog for Sypris Electronics is expected to support a stable revenue rate during the balance of 2020 and price increases on certain programs could contribute to margin expansion beginning in the second quarter.

Gross margin for the first quarter of 2020 was 12.6% as compared to a negative gross margin of 42.2% in the prior year.

Selling, General and Administrative.

Selling, general and administrative expense increased by $0.2 million and $0.9 million for the three and nine month periods ended September 29, 2019, respectively, as compared to the same periods in 2018.

The increase is primarily as a result of additional professional fees associated with the restatement of the Company’s first quarter Form 10-Q, consultation costs associated with the Company’s new ERP implementation effective in January and higher employee medical insurance claim expenses during the period as compared to the prior year period.

Other Expense (Income ) , Net.

The Company recognized other income, net of $1.2 million for the nine months ended September 29, 2019 compared to $1.7 million for the nine months ended September 30, 2018.

During the nine months ended September 29, 2019, the Company recognized a gain in other income of $1.5 million related to a settlement agreement reached with one of its customers during the period (see Note 7).

Additionally, the Company recognized a net gain of $0.5 million related to the sale of idle assets, offset by pension expense of $0.7 million.

During the nine months ended September 30, 2018, the Company recognized an insurance recovery gain of $2.3 million related to proceeds received related to damage sustained at one of its plants (see Note 7).

Additionally, the Company recognized a net loss of $0.2 million related to the sale of idle assets and pension expense of $0.5 million.

Selling, general and administrative expense decreased $0.2 million to $3.2 million in the first quarter of 2020 as compared to $3.5 million for the same period in 2019 primarily as a result of lower consultation costs associated with the Company’s new ERP implementation effective in January 2019 and a reduction in director fees, which were temporarily suspended effective as of the first quarter of 2020 amid the COVID-19 pandemic.

Salary reductions implemented in response to the COVID-19 pandemic were effective as of the beginning of the second quarter and will contribute to lower expense in future periods.

Income Taxes.

The Company’s income tax expense for the three and nine month periods ended September 29, 2019 and September 30, 2018 consists primarily of currently payable state and local income taxes on domestic operations and foreign income taxes on one of its Mexican subsidiaries.

The Company currently maintains a valuation allowance against its domestic deferred tax assets and a material portion of its foreign deferred tax assets as of September 29, 2019.

The Company’s income tax expense for the three months ended April 5, 2020 and March 31, 2019 consists primarily of currently payable state and local income taxes on domestic operations and foreign income taxes on one of its Mexican subsidiaries.

The Company currently maintains a valuation allowance against its domestic deferred tax assets and a material portion of its foreign deferred tax assets as of April 5, 2020.

The Company intends to continue to maintain a valuation allowance on these deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

However, given the recent earnings and anticipated future earnings for its Mexican operation, we believe that there is a reasonable possibility that, within the next 12 months, sufficient positive evidence may become available to allow management to reach a conclusion that up to approximately $3.5 million of the valuation allowance against foreign deferred tax assets will no longer be needed.

However, given the recent earnings and anticipated future earnings for its Mexican operation, we believe that there is a reasonable possibility that, within the next 12 months, sufficient positive evidence may become available to allow management to reach a conclusion that up to approximately $3.7 million of the valuation allowance against foreign deferred tax assets as of December 31, 2019 will no longer be needed.

Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense in the period the release is recorded.

However, the exact timing and amount of any valuation allowance release are subject to change on the basis of the level of profitability that the Company is able to achieve.

Liquidity, Capital Resources

Liquidity and Capital Resources

Payroll Protection Program .

As described above, the Company secured a PPP Loan under the CARES Act after the end of the first quarter of 2020.

Proceeds from the PPP Loan are expected to be used to retain workers and maintain payroll, make lease payments and utility payments.

The PPP Loan is evidenced by a promissory note in favor of BMO, as lender, with a principal amount of $3.6 million (the “PPP Note”) that bears interest at a fixed annual rate of 1.00%, with the first six months of principal and interest deferred.

Beginning in October 2020, the Company expects to make 18 equal monthly payments of principal and interest with the final payment due in April 2022.

The PPP Note may be accelerated upon the occurrence of an event of default.

The PPP Note is unsecured and guaranteed by the U.S.

Small Business Administration.

The Company may apply for forgiveness of the PPP Note, 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 eight-week period beginning upon receipt of PPP Term Note funds, subject to limitations and calculated in accordance with the terms of the CARES Act.

Any forgiveness of the PPP Note shall be subject to approval of the SBA and will require the Company and BMO to apply to the SBA for such treatment in the future.

We intend to comply with the necessary requirements to seek forgiveness of all or a portion of the PPP Note, but no assurance can be provided that we will obtain forgiveness of the PPP Note in whole or in part.

Gill Family Capital Management Note .

The Company has received the benefit of cash infusions from Gill Family Capital Management, Inc.

(“GFCM”) in the form of secured promissory note obligations totaling $6.5 million in principal as of September 29, 2019 and December 31, 2018 (the “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 April 5, 2020 and December 31, 2019 (the “Note”).

GFCM is an entity controlled by the Company’s chairman, president and chief executive officer, Jeffrey T.

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Scott Gill are significant beneficial stockholders of the Company.

As of September 29, 2019, our principal commitment under the Note was $2.5 million due on April 1, 2021, $2.0 million on April 1, 2023 and the balance on April 1, 2025.

As of April 5, 2020, our principal commitment under the Note was $2.5 million due on April 1, 2021, $2.0 million on April 1, 2023 and the balance on April 1, 2025.

The Note allows for up to an 18-month deferral of payment for up to 60% of the interest due on the notes maturing in April of 2021 and 2023, and provide for a first security interest in substantially all of the Company’s assets, including those in Mexico.

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 on April 6, 2020 and July 6, 2020.

Finance Lease Obligations.

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Simultaneously, the Company entered into a ten-year lease of the 9 acres and buildings currently occupied by the Company and needed for its ongoing business in Toluca.

As a result of the Toluca Sale-Leaseback, the Company has a capital lease obligation of $2.5 million for the building as of September 29, 2019.

As a result of the Toluca Sale-Leaseback, the Company has a capital lease obligation of $2.4 million for the building as of April 5, 2020.

In January 2018, the Company entered into a capital lease for $1.3 million for new production equipment installed at its Sypris Electronics facility during 2017.

The balance of the lease obligation as of September 29, 2019 was $0.5 million.

The balance of the lease obligation as of April 5, 2020 was $0.3 million.

In February 2019, the Company entered into a capital lease for $0.3 million for new machinery at its Sypris Technologies facility in the U.S.

The balance of the lease obligation as of September 29, 2019 was $0.2 million.

The balance of the lease obligation as of April 5, 2020 was $0.2 million.

Purchase Commitments.

We had purchase commitments totaling approximately $9.3 million at September 29, 2019, primarily for inventory.

We had purchase commitments totaling approximately $8.0 million at April 5, 2020, primarily for inventory and manufacturing equipment.

Cash Balance.

At September 29, 2019, we had approximately $7.1 million of cash and cash equivalents, of which $2.9 million was held in jurisdictions outside of the U.S.

April 5, 2020, we had approximately $5.2 million of cash and cash equivalents, of which $1.9 million was held in jurisdictions outside of the U.S.

that, if repatriated, could result in withholding taxes.

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Significant changes from our current forecasts, including, but not limited to:

(i) meaningful shortfalls in projected revenue or sales proceeds from underutilized or non-core equipment, (ii) unexpected costs or expenses, and/or (iii) 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.

(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.

Operating Activities.

Net cash used by operating activities was $3.1 million in the first nine months of 2019 as compared to $1.1 million in the same period of 2018.

The aggregate decrease in accounts receivable in 2019 resulted in an increase in cash of $1.2 million as a result of the timing of shipments primarily within Sypris Electronics.

The investment in inventory in the first nine months of 2019 resulted in a usage of cash of $2.5 million.

The increase in inventory primarily relates to the new programs for Sypris Electronics.

A significant portion of the inventory receipts were funded through prepayments from customers of Sypris Electronics in the second half of 2018.

Additionally, there was a decrease in accounts payable during the first nine months of 2019, which resulted in a usage of cash of $3.3 million.

Accrued and other liabilities increased during the first nine months of 2019, resulting in a source of cash of $1.9 million, primarily as a result of additional prepayments from customers and a deposit of $0.5 million received during the nine months ended for the sale of idle assets by Sypris Technologies.

Net cash provided by operating activities was $0.7 million in the first quarter of 2020, as compared to cash used of $4.5 million in the same period of 2019.

The aggregate increase in accounts receivable in 2020 resulted in a usage of cash of $1.5 million.

The decrease in inventory in 2020 resulted in a source of cash of $0.8 million.

The decrease in inventory primarily relates to the expected decline in volumes within the commercial vehicle market in 2020.

Additionally, there was an increase in accounts payable during the quarter, providing a source of cash of $1.5 million.

Accrued and other liabilities decreased during the first quarter of 2020, resulting in a use of cash of $0.8 million, primarily as a result of a decrease in unearned revenue.

Investing Activities.

Net cash provided by investing activities was $0.1 million for the first nine months of 2019 as compared to $2.3 million for the first nine months of 2018.

Net cash used in investing activities for the first nine months of 2019 included capital expenditures of $0.6 million offset by proceeds of $0.7 million from the sale of idle assets by Sypris Technologies during the period.

Net cash provided by investing activities for the first nine months of 2018 includes $2.3 million from insurance proceeds related to damage sustained at one of its plants from freezing pipes (See Note 7).

Additionally, the company received proceeds of $1.4 million from the sale of idle assets by Sypris Technologies during the period.

This was partially offset by capital expenditures of $1.3 million during the period.

Net cash used in investing activities was $0.2 million for the first quarter of 2020 as compared to $0.3 million for the first quarter of 2019.

Net cash used in investing activities for the first quarter of 2020 included capital expenditures of $0.5 million partially offset by proceeds of $0.3 million from the sale of idle assets by Sypris Technologies during the period.

Net cash used in investing activities in the first quarter of 2019 included capital expenditures of $0.3 million.

On April 13, 2020, the Company completed the sale of the Broadway Plant real estate and received gross cash proceeds of $1.7 million and recognized a gain of $0.8 million.

Financing Activities.

Net cash used in financing activities was $0.6 million for the first nine months of 2019 as compared to $0.8 million for the first nine months of 2018.

Net cash used in financing activities in the first nine months of 2019 included finance lease payments of $0.5 million and payments of $0.1 million for minimum statutory tax withholdings on stock-based compensation.

Net cash used in financing activities in the first nine months of 2018 included finance lease payments of $0.7 million and payments of $0.1 million for minimum statutory tax withholdings on stock-based compensation.

Net cash used in financing activities was $0.2 million for the first quarter of 2020 and was primarily comprised of capital lease payments.

Net cash used in financing activities was $0.2 million for the first quarter of 2019 and was comprised of capital lease payments of $0.1 million and payments of $0.1 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, 2019.

There have been no significant changes in our critical accounting policies during the nine months ended September 29, 2019.

There have been no significant changes in our critical accounting policies during the three months ended April 5, 2020.

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, trends and market developments.

These statements, including those outlined in management’s recovery plan, 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.

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Other factors which could also materially affect such future results currently include:

the quantitative effects of the restatement of our previously issued unaudited consolidated interim financial statements as of and for the quarter ended March 31, 2019;

the effectiveness of our internal control over financial reporting and our disclosure controls and procedures;

our failure to return to 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 other assets to fund operating losses;

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;

our ability to comply with the requirements of the SBA and seek forgiveness of all or a portion of the PPP Loan;

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 other assets to fund operating losses;

our failure to achieve targeted gains and cash proceeds from the anticipated sale of certain equipment;

dependence on, retention or recruitment of key employees;

the fees, costs and supply of, or access to, debt, equity capital, or other sources of liquidity;

dependence on, retention or recruitment of key employees and distribution of our human capital;

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;

disputes or litigation involving governmental, supplier, customer, employee, creditor, stockholder, product liability or environmental claims;

our inability to develop new or improved products or new markets for our products;

cost, quality and availability of raw materials such as steel, component parts (especially electronic components), natural gas or utilities;

breakdowns, relocations or major repairs of machinery and equipment, especially in our Toluca Plant;

our inability to regain compliance with the NASDAQ listing standards minimum closing bid price in a timely manner;

our reliance on a few key customers, third party vendors and sub-suppliers;

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other potential weaknesses in internal controls over financial reporting and enterprise risk management;

disputes or litigation involving governmental, supplier, customer, employee, creditor, stockholder, product liability or environmental claims;

the fees, costs and supply of, or access to, debt, equity capital, or other sources of liquidity;

failure to adequately insure or to identify environmental or other insurable risks;

unanticipated or uninsured disasters, losses or business risks;

breakdowns, relocations or major repairs of machinery and equipment, especially in our Toluca Plant;

unanticipated or uninsured disasters, public health crises, losses or business risks;

our failure to successfully complete final contract negotiations with regard to our announced contract “orders”, “wins” or “awards”;

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the costs of compliance with our auditing, regulatory or contractual obligations;

our inability to develop new or improved products or new markets for our products;

labor relations;

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adverse impacts of new technologies or other competitive pressures which increase our costs or erode our margins;

our ability to maintain compliance with the NASDAQ listing standards;

government spending on products and services that Sypris Electronics provides, including the timing of budgetary decisions;

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inaccurate data about markets, customers or business conditions;

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, 2018 and Part II — Item 1A of this Quarterly Report on Form 10-Q.

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, 2019.

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis