What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-12 · 104 added, 99 removed, 217 unchanged (48% of the section changed)

27 unchanged sentences

Results of Operations

The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and armored military vehicles;

The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and other military applications;

(ii) airframe applications for a variety of aircraft;

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The Company continues to work diligently to restore the site back to full service as safely and quickly as possible.

The 2500 ton press from storage that was placed in service in fiscal 2019 continues to run and the press located in Michigan was taken off-line at the end of November 2019, was relocated to Orange and was placed in service in March 2020.

Restoration is nearly complete for the structure of the manufacturing building and two additional presses damaged in the fire.

The Company began running one of the restored presses at the end of December 2019, while the second is now expected to be in use starting June 2020.

During the first six months of fiscal 2020, the Company received cash proceeds from insurance of $6.8 million, of which $3.5 million was realized in fiscal 2019, $2.3 million was used to offset expense incurred as a result of the fire and business interruption and $1.0 million used for capital;

The 2500 ton press from storage that was placed in service in fiscal 2019 continues to run and the press located in Michigan was taken off-line at the end of November 2019 relocated to Orange and placed in service in March 2020.

Restoration is nearly complete for the structure of the manufacturing building and presses damaged in the fire.

The Company began running one restored press at the end of December 2019, while another finished being restored at the end of July 2020.

During the first nine months of fiscal 2020, the Company received cash proceeds from insurance of $8.8 million, of which $3.5 million was recognized in fiscal 2019, $2.6 million was used to offset expense incurred as a result of the fire and business interruption and $2.7 million used for capital;

and, separately, $0.7 million in proceeds from the insurance carrier went directly to the landlord for the continued restoration of the damaged building as prescribed under the lease arrangement.

The table below reflects the receipt of proceeds and how they were expended as of March 31, 2020.

The table below reflects the receipt of proceeds and how they were expended as of June 30, 2020.

Any additional recoveries in excess of recognized losses are treated as gain contingencies and will be recognized when the gain is realized or realizable.

The Company also maintains business interruption insurance coverage and continues to work with the insurance company to reach an agreement on the recoverable amounts of business interruption expenses, which $0.9 million was realized in the first six months of fiscal 2020.

Balance sheet (Other receivables - dollars in millions):

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Business interruption

March 31, 2020

For further detail of how the consolidated condensed statements of operations were impacted for the six and three months ended, refer to Note 10, Commitments and Contingencies.

June 30, 2020

For further detail of how the consolidated condensed statements of operations were impacted for the nine and three months ended, refer to Note 10, Commitments and Contingencies.

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak became widespread in the United States and other countries in which we operate.

The Company has taken proactive steps to ensure the safety of its employees and customers and to preserve the Company’s financial flexibility.

The Company has continued to take proactive steps to ensure the safety of its employees and customers and to preserve the Company’s financial flexibility.

We have enacted operating protocols to ensure the safety of our employees and adopted precautions in compliance with various regulatory orders and recommendations imposed in the jurisdictions in which we operate.

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Reduced demand for products or impaired ability to meet customer demand as a result of the pandemic or future developments could have a material adverse effect on our business, operations and financial performance.

Given the evolution of the COVID-19 pandemic and the varied global responses to curb its spread, the Company is not presently able to

estimate the effects of the COVID-19 outbreak on its future results of operations, financial condition or liquidity for fiscal year 2020.

Given the evolution of the COVID-19 pandemic and the varied global responses to curb its spread, the Company is not presently able to estimate the effects of the COVID-19 outbreak on its future results of operations, financial condition or liquidity.

Backlog of Orders

SIFCO’s total backlog at March 31, 2020 was $107.0 million, compared with $94.1 million as of March 31, 2019 and $117.6 million as of September 30, 2019.

SIFCO’s total backlog at June 30, 2020 was $100.9 million, compared with $104.4 million as of June 30, 2019 and $117.6 million as of September 30, 2019.

Orders may be subject to modification or cancellation by the customer with limited charges.

Sales in the A&E markets are impacted by the general economy, newly acquired part numbers won and continued sales recovery from the fire at Orange and may be potentially affected by the COVID-19 pandemic, which has created increased pressure in these markets.

If the COVID-19 pandemic continues to have a material impact on the A&E markets, including our more significant customers, it could materially affect our business and results of operations.

Sales in the A&E markets continue to be impacted by the general economy, newly acquired part numbers won and continued sales recovery from the fire at Orange and may be affected by the COVID-19 pandemic, which has created increased pressure in these markets.

If the COVID-19 pandemic continues to have a material impact on the A&E markets, including with regards to our more significant customers, it could materially affect our business and results of operations.

Backlog may decline as customers adjust orders in response to the ongoing COVID-19 pandemic and its impact on their operations.

Backlog information may not be indicative of future sales.

Six Months Ended March 31, 2020 compared with Six Months Ended March 31, 2019

Net sales for the first six months of fiscal 2020 increased to $56.7 million, compared with $56.5 million in the comparable period of fiscal 2019.

Net sales comparative information for the first six months of fiscal 2020 and 2019 is as follows:

Nine Months Ended June 30, 2020 compared with Nine Months Ended June 30, 2019

Net sales for the first nine months of fiscal 2020 increased to $84.5 million, compared with $81.3 million in the comparable period of fiscal 2019.

Net sales comparative information for the first nine months of fiscal 2020 and 2019 is as follows:

(Dollars in millions)

Six Months Ended March 31,

Nine Months Ended June 30,

Increase/ (Decrease)

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Commercial product and other revenue

Fixed wing aircraft sales decreased $1.0 million to $25.4 million in the first six months ended March 31, 2020 compared with $26.4 million in the comparable period of fiscal 2019.

The decrease is primarily attributed to continued delays in production delivery from the Orange location due to the fire along with reduced production of the Boeing 737 and production timing in the C-130J program.

The increase of $1.4 million in rotorcraft sales in the first six months of fiscal 2020 compared to the same period in fiscal 2019 is primarily due to increased shipments related to the Black Hawk program.

Commercial products and other revenue increased $2.2 million in the first six months of fiscal 2020 compared to the same period in fiscal 2019, primarily due to timing of shipments for the Hellfire II missile program.

The increase of $5.1 million in rotorcraft sales in the first nine months of fiscal 2020 compared to the same period in fiscal 2019 is primarily due to increased shipments relating to certain military programs, such as the Black Hawk and CH53.

Commercial products and other revenue increased $1.4 million in the first nine months of fiscal 2020 compared to the same period in fiscal 2019, primarily due to timing of shipments for the Hellfire II missile program and other ordnance work along with new product sales.

Net sales in energy components for power generation units decreased by $3.4 million compared with the same period last year due to the continued softening of the energy market and some impact due to the global outbreak of COVID-19.

In response to the outbreak of COVID-19, the Italian government restricted the operations of businesses within Italy, including the Company’s operations in Maniago, Italy ("Maniago").

The Company received an exemption from these government restrictions based on the nature of its operations, but temporarily reduced its operations in Maniago and also undertook a temporary shutdown from March 17 through March 22 to perform a deep cleaning of the facility for employee safety due to the COVID-19 outbreak.

The Company re-opened the facility on March 23 and resumed limited production.

The temporary cessation of operations in Maniago resulted in a delay in product shipments to customers, which impacted the quarter by approximately $0.6 million.

Commercial net sales were 40.0% of total net sales and military net sales were 60.0% of total net sales in the first six months of fiscal 2020, compared with 46.9% and 53.1%, respectively, in the comparable period in fiscal 2019.

A shift in mix between commercial versus military sales between comparable periods is due to an increase in military programs, such as the Black Hawk program, offset by the decline in energy sales and continued delays in production due to the ongoing recovery efforts at the Orange location resulting in reduced commercial sales.

Military net sales increased by $4.0 million to $34.0 million in the first six months of fiscal 2020, compared with $30.0 million in the comparable period of fiscal 2019, primarily due to the timing of shipments for the Hellfire II missile program.

Commercial net sales decreased $3.8 million to $22.7 million in the first six months of fiscal 2020, compared with $26.5 million in the comparable period of fiscal 2019 primarily due to the continued business interruption created by the fire at the Orange location, production timing on certain programs and the soft energy market.

The Company received an exemption from these government restrictions based on the nature of its operations, and temporarily reduced its operations in Maniago and undertook a temporary shutdown from March 17 through March 22 to perform a deep cleaning of the facility for employee safety due to the COVID-19 outbreak.

Since the temporary cessation of operations in Maniago that occurred in March, Maniago has resumed operations and has experienced other disruptions, such as border closures to other countries, resulting in a delay in product shipments as of the end of June, which impacted the quarter by approximately $1.3 million.

With countries subsequently beginning to reopen, Maniago expects to complete such shipments within the upcoming quarter.

Commercial net sales were 41.4% of total net sales and military net sales were 58.6% of total net sales in the first nine months of fiscal 2020, compared with 50.7% and 49.3%, respectively, in the comparable period in fiscal 2019.

A shift in mix between commercial versus military sales in comparable periods is due to an increase in military programs, such as the Black Hawk program, partially offset by the decline in energy sales and continued delays in production due to the ongoing recovery efforts at the Orange location and the impact to the commercial aerospace industries due to COVID-19.

Military net sales increased by $9.5 million to $49.6 million in the first nine months of fiscal 2020, compared with $40.1 million in the comparable period of fiscal 2019, primarily due to the timing of shipments for the Hellfire II missile program and other programs such as the Black Hawk and CH53.

net sales decreased $6.3 million to $34.9 million in the first nine months of fiscal 2020, compared with $41.2 million in the comparable period of fiscal 2019 primarily due to the continued business interruption created by the fire at the Orange location and timing related to certain programs as they were impacted by COVID-19 and the soft energy market.

Cost of Goods Sold

Cost of goods sold decreased by $4.5 million, or 8.7%, to $47.1 million, or 83.1% of net sales, during the first six months of fiscal 2020, compared with $51.6 million or 91.5% of net sales, in the comparable period of fiscal 2019.

Cost of goods sold decreased by $4.3 million, or 5.8%, to $70.8 million, or 83.7% of net sales, during the first nine months of fiscal 2020, compared with $75.1 million or 92.4% of net sales, in the comparable period of fiscal 2019.

The decrease was due primarily to improved productivity and the receipt of $2.7 million in insurance proceeds related to business interruption and expense incurred related to the fire, partially offset by $1.7 million of unabsorbed costs related to the Orange location due to the fire and the one-time pension withdrawal liability charge of $0.8 million incurred for exiting its multi-employer plan as further explained in Note 7, Retirement Benefit Plans .

Gross profit increased $4.8 million to $9.6 million during the first six months of fiscal 2020, compared with $4.8 million in the comparable period of fiscal 2019.

Gross margin percent of sales was 16.9% during the first six months of fiscal 2020, compared with 8.6% in the comparable period in fiscal 2019.

The increase in gross profit was primarily due to improved productivity and the inclusion of insurance proceeds related to business interruption and extra expense coverage.

Gross profit increased $7.5 million to $13.8 million during the first nine months of fiscal 2020, compared with $6.2 million in the comparable period of fiscal 2019.

Gross margin percent of sales was 16.3% during the first nine months of fiscal 2020, compared with 7.6% in the comparable period in fiscal 2019.

The increase in gross profit was primarily due to the reduced cost of goods sold as a percentage of sales, as outlined above.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $7.5 million, or 13.3% of net sales during the first six months of fiscal 2020, compared with $7.9 million, or 14.0% of net sales in the comparable period of fiscal 2019.

The decrease is due to lower equity compensation of $0.2 million, lower salaries and benefits of $0.2 million and lower legal and professional costs of $0.1 million, partially offset by higher incentive compensation accrual of $0.2 million.

Selling, general and administrative expenses were $10.4 million, or 12.3% of net sales during the first nine months of fiscal 2020, compared with $11.4 million, or 14.0% of net sales in the comparable period of fiscal 2019.

The decrease in selling, general and administrative expenses is due to the continued cost reduction efforts by management in response to COVID-19 and other effects of the COVID-19 pandemic and its impact on operations such as reduced bank fees, less travel expense, lower legal and professional costs (prior year included arbitration costs), lower equity compensation and commissions, partially offset by higher incentive compensation accrual of $0.5 million.

Amortization of Intangibles

Amortization of intangibles was $0.8 million in the first six months of fiscal 2020 and fiscal 2019, respectively.

Amortization of intangibles was $1.2 million in the first nine months of fiscal 2020 and fiscal 2019, respectively.

Other/General

The Company recorded operating income of $1.8 million in the first six months of fiscal 2020, compared with an operating loss of $3.0 million in the first six months of fiscal 2019.

In the first six months ended March 31, 2020, results included $1.0 million gain on insurance proceeds, compared to a gain of $1.4 million in the comparable period which included a $1.1 million gain on insurance proceeds and $0.3 million gain on disposal of assets which relates to the sale of the Alliance building.

Interest expense was $0.5 million in the first six months of fiscal 2020, compared to $0.6 million in the first six months of fiscal 2019.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first six months of both fiscal 2020 and 2019:

The Company recorded operating income of $4.7 million in the first nine months of fiscal 2020, compared with an operating loss of $9.9 million in the first nine months of fiscal 2019.

The prior year's operating loss includes an $8.3 million non-cash charge related to the Maniago reporting unit as its goodwill was impaired.

In the first nine months ended June 30, 2020, results included $2.7 million gain on insurance proceeds, compared to a gain of $4.5 million in the comparable period, both periods related to the net gain on insurance proceeds related to the fire at the Orange location.

Interest expense was $0.7 million in the first nine months of fiscal 2020, compared to $0.8 million in the first nine months of fiscal 2019.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first nine months of both fiscal 2020 and 2019:

Weighted Average

Interest Rate

Six Months Ended

Nine Months Ended

Weighted Average

Outstanding Balance

Six Months Ended

Nine Months Ended

Revolving credit agreement

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$ 0.0 million

The Company’s effective tax rate through the first six months of fiscal 2020 was (8%), compared with 16% for the same period of fiscal 2019.

The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2020 compared with the same period of fiscal 2019 and discrete tax benefits through the second quarter of fiscal 2019 applied against a year-to-date loss.

The Company’s effective tax rate through the first nine months of fiscal 2020 was (2%), compared with 8% for the same period of fiscal 2019.

The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2020 compared with the same period of fiscal 2019.

The effective tax rate differs from the U.S.

federal statutory rate due primarily to the valuation allowance against the Company’s U.S.

federal statutory rate due primarily

to the valuation allowance against the Company’s U.S.

deferred tax assets and income in foreign jurisdictions that are taxed at different rates than the U.S.

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Net Income (Loss)

Net income was $1.9 million during the first six months of fiscal 2020, compared with a net loss of $2.5 million in fiscal 2019, respectively.

The increase in income is primarily due to higher gross profit, attributed to improved productivity and insurance proceeds received in the first six months of fiscal 2020.

Three Months Ended March 31, 2020 compared with Three Months Ended March 31, 2019

Net sales for the second quarter of fiscal 2020 increased 11.5% to $30.5 million, compared with $27.4 million in the comparable period of fiscal 2019.

Net sales comparative information for the second quarter of fiscal 2020 and 2019 is as follows:

Net income was $4.2 million during the first nine months of fiscal 2020, compared with a net loss of $9.9 million in fiscal 2019, respectively.

The increase in income is primarily due to higher gross profit, attributed to continued improved productivity and insurance proceeds received in the first nine months of fiscal 2020 and lower selling, general and administrative expenses.

Additionally, the Company did not experience a non-cash charge to goodwill as it did in the prior year.

Three Months Ended June 30, 2020 compared with Three Months Ended June 30, 2019

Net sales for the third quarter of fiscal 2020 increased 11.7% to $27.8 million, compared with $24.9 million in the comparable period of fiscal 2019.

Net sales comparative information for the third quarter of fiscal 2020 and 2019 is as follows:

(Dollars in millions)

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Commercial product and other revenue

Total net sales for the Company increased $3.1 million in the second quarter of fiscal 2020 compared with the same period of fiscal 2019.

The majority of the increase was attributed to a $3.7 million increase in commercial product and other revenue primarily due to timing of shipments for the Hellfire II missile program.

Net sales in energy components for power generation units decreased by $1.3 million compared with the same period last year due to the continued softening of the energy market and as previously discussed within the six months management and analysis, due to the global outbreak of COVID-19 impacted the quarter by approximately $0.6 million due to the inability to ship to its customers late in the quarter.

Commercial net sales were 40.9% of total net sales and military net sales were 59.1% of total net sales in the second quarter of fiscal 2020, compared with 52.7% and 47.3%, respectively, in the comparable period of fiscal 2019.

Military net sales increased by $5.0 million to $18.0 million in the second quarter of fiscal 2020, compared with $13.0 million in the comparable period of fiscal 2019.

Commercial net sales decreased $1.9 million to $12.5 million in the second quarter of fiscal 2020, compared with $14.4 million in the comparable period of fiscal 2019 primarily due to delays in deliveries from the Orange location as a result of damage from the fire and lower sales due to the soft energy market.

The majority of the increase was attributed to a $3.6 million increase in rotorcraft sales in the third quarter of fiscal 2020 compared to the same period in fiscal 2019 and is primarily due to increased shipments relating to certain military programs, such as the Black Hawk and Apache.

The $1.1 million increase in fixed wing aircraft sales is due to increased shipments coming from the Orange location as it increases its production and its capabilities are restored when compared to the same period in fiscal 2019.

Net sales in energy components for power generation units decreased by $1.1 million compared with the same period last year due to the continued softening of the energy market and as previously discussed within the nine months management and analysis section and due to the global outbreak of COVID-19.

Sales were impacted in the quarter by approximately $1.3 million attributable to the inability to ship to its customers due to border closures, which have subsequently reopened.

Commercial net sales were 44.2% of total net sales and military net sales were 55.8% of total net sales in the third quarter of fiscal 2020, compared with 59.2% and 40.8%, respectively, in the comparable period of fiscal 2019.

Military net sales increased by $5.4 million to $15.5 million in the third quarter of fiscal 2020, compared with $10.1 million in the comparable period of fiscal 2019.

Commercial net sales decreased $2.4 million to $12.3 million in the third quarter of fiscal 2020, compared with $14.7 million in the comparable period of fiscal 2019 primarily due to lower sales in the energy market.

Cost of Goods Sold

Cost of goods sold was $24.3 million, or 79.4% of net sales, during the second quarter of fiscal 2020, compared with $25.3 million or 92.4% of net sales, in the comparable period of fiscal 2019, primarily driven by improved productivity and receipt of insurance proceeds of $2.3 million related to business interruption and extra expense coverage.

Gross profit increased $4.2 million to $6.3 million during the second quarter of fiscal 2020, compared with $2.1 million in the comparable period of fiscal 2019.

Gross margin was 20.6% during the second quarter of fiscal 2020, compared with 7.6% in the comparable period in fiscal 2019.

The increase in gross margin was primarily due to higher sales volume, improved productivity and receipt of insurance proceeds related to business interruption/extra expense from the Orange fire.

Cost of goods sold was $23.6 million, or 85.1% of net sales, during the third quarter of fiscal 2020, compared with $23.5 million or 94.4% of net sales, in the comparable period of fiscal 2019, primarily driven by improved productivity as the Orange location completes restoration on certain presses and receipt of insurance proceeds of $0.3 million related to extra expense coverage.

Gross profit increased $2.8 million to $4.1 million during the third quarter of fiscal 2020, compared with $1.4 million in the comparable period of fiscal 2019.

Gross margin was 14.9% during the third quarter of fiscal 2020, compared with 5.6% in the comparable period in fiscal 2019.

The increase in gross margin was primarily due to higher sales volume, improved productivity and receipt of insurance proceeds related to extra expense from the Orange fire.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $3.3 million, or 10.9% of net sales, during the second quarter of fiscal 2020, compared with $3.8 million, or 13.9% of net sales, in the comparable period of fiscal 2019.

The slight decrease in expenses was attributed to the unwind of certain stock compensation awards due to the Company falling short of targeted achievement percentages and decrease in legal and professional costs of $0.2 million.

Selling, general and administrative expenses were $2.9 million, or 10.3% of net sales, during the third quarter of fiscal 2020, compared with $3.5 million, or 14.0% of net sales, in the comparable period of fiscal 2019.

The decrease is primarily due to a decrease in legal and professional costs of $0.3 million.

Amortization of Intangibles

Amortization of intangibles was $0.4 million for both the second quarter of fiscal 2020 and fiscal 2019, respectively.

Amortization of intangibles was $0.4 million for both the third quarter of fiscal 2020 and fiscal 2019, respectively.

Other/General

The Company recorded an operating income of $3.5 million in the second quarter of fiscal 2020, compared to an operating loss of $0.9 million in the second quarter of fiscal 2019.

Current period results include a $1.0 million gain in insurance proceeds compared to $1.2 million in the second quarter of fiscal 2019 related to insurance recovery from the damage that occurred related to the fire at the Orange location.

Interest expense was $0.3 million in the second quarter of fiscal 2020 and fiscal 2019.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s Credit Agreement in the second quarter of both fiscal 2020 and 2019:

The Company recorded an operating income of $2.5 million in the third quarter of fiscal 2020, compared to an operating loss of $7.5 million in the third quarter of fiscal 2019.

Current period results include a $1.7 million gain in insurance proceeds compared to $3.3 million in the third quarter of fiscal 2019 related to insurance recovery from the damage that occurred related to the fire at the Orange location.

The results from the third quarter of the prior year include an $8.3 million non-cash charge related to the Maniago reporting unit as its goodwill was impaired.

Interest expense was $0.2 million in the third quarter of fiscal 2020 and fiscal 2019.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s Credit Agreement in the third quarter of both fiscal 2020 and 2019:

Weighted Average

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$ 0.0 million

The Company's effective tax rate in the second quarter of fiscal 2020 was (1%), compared with (3%) for the same period of fiscal 2019.

The increase in the effective rate was primarily attributable to changes in jurisdictional mix of income during the three months ended March 31, 2020 compared to the same period of fiscal 2019 and discrete tax benefits recorded in fiscal 2019 which were non-recurring in fiscal 2020.

The Company's effective tax rate in the third quarter of fiscal 2020 was 2%, compared with 4% for the same period of fiscal 2019.

The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income during the three months ended June 30, 2020 compared to the same period of fiscal 2019, partially offset by an increase in discrete tax.

The effective tax rate differs from the U.S.

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Net Income (Loss)

Net income was $3.3 million during the second quarter of fiscal 2020, compared with net loss of $1.3 million in the comparable period of fiscal 2019.

Net income increased primarily due to higher sales and increased gross profit along with the gain on property recovered by insurance of $1.0 million and $1.1 million of business interruption as the Company continues to work through the rebuilding of the Orange location.

Net income was $2.3 million during the third quarter of fiscal 2020, compared with net loss of $7.4 million in the comparable period of fiscal 2019.

Net income increased primarily due to higher sales and increased gross profit, lower selling, general and administrative expenses along with the gain on property recovered by insurance of $1.7 million as the Company continues to work through the restoration of the Orange location, while results from the third quarter of the prior year includes $8.3 million non-cash charge due to goodwill impairment at one of its reporting units.

Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

Nine Months Ended

Net income (loss)

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Income tax (benefit)

Foreign currency exchange gain, net (1)

Foreign currency exchange loss (gain), net (1)

Other income, net (2)

3 unchanged sentences

LIFO impact (6)

Goodwill impairment (7)

Adjusted EBITDA

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Represents the change in the reserve for inventories for which cost is determined using the last-in, first-out (“LIFO”) method.

Represents non-cash charge of goodwill impairment experienced at its reporting unit level.

Liquidity and Capital Resources

Cash and cash equivalents were both $0.3 million at March 31, 2020 and September 30, 2019.

At March 31, 2020, all of the $0.3 million of the Company’s cash and cash equivalents were in the possession of its non-U.S.

Cash and cash equivalents were both $0.3 million at June 30, 2020 and September 30, 2019.

At June 30, 2020, the majority of the $0.3 million of the Company’s cash and cash equivalents were in the possession of its non-U.S.

subsidiaries.

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Historically, the main sources of liquidity have been cash flows from operations and borrowings under our Credit Agreement.

However, the impact of the COVID-19 pandemic (and the rapidly changing U.S.

However, the continued impact of the COVID-19 pandemic (and the rapidly changing U.S.

and global market and economic conditions due to the COVID-19 outbreak) is highly uncertain, with disruptions to the business of our customers and suppliers, which in turn is likely to impact our business, operations and results as well as our liquidity and capital resources.

The Company's liquidity could be negatively affected by extending payment terms to customers and/or a decrease in demand for our products as a result of the COVID-19 pandemic.

Accordingly, during the quarter ended March 31, 2020 (and subsequent to the quarter end), management evaluated the Company’s liquidity and capital resources and took a number of steps to help preserve financial flexibility in light of uncertainty resulting from the COVID-19 pandemic by deferring wage increases to non-union employees, increased oversight of all capital expenditure approval, working with vendors to reduce costs and subsequent to quarter-end, obtained a Paycheck Protection Program Loan as referenced in Note 11, Subsequent Events and for the reasons described below.

The Company's

liquidity could be negatively affected by customers extending payment terms to the Company and/or a decrease in demand for our products as a result of the COVID-19 pandemic.

Since the start of the pandemic, management has continued to evaluate the Company’s liquidity and capital resources and has taken a number of steps to help preserve financial flexibility in light of uncertainty resulting from the COVID-19 pandemic by deferring wage increases to non-union employees, increased oversight of all capital expenditure approval, working with vendors to reduce costs and obtained a Paycheck Protection Program Loan as referenced in Note 5, Debt and for the reasons described below.

As the impact of the COVID-19 pandemic on the economy and the Company's operations continues to evolve, the Company and management will continue to assess liquidity needs.

Operating Activities

The Company’s operating activities used $0.4 million of cash in the first six months of fiscal 2020, compared with providing cash of $5.0 million in the first six months of fiscal 2019.

The cash used by operating activities in the first six months of fiscal 2020 was primarily due to the use in working capital of $5.1 million (increase in inventory of $2.9 million, $2.2 million in contract assets, net accruals of $1.2 million offset by $1.5 million decrease in receivables) partially offset by net income of $1.9 million

and by $2.8 million of non-cash items such as depreciation and amortization of $3.8 million, offset by $1.0 million of other non-cash items, such as equity based compensation, deferred income taxes and LIFO effect.

The use of cash from working capital was primarily due to increase in inventories to support orders in the second half of fiscal 2020 and payments to suppliers and disbursements related to the fire recovery, partially offset by decreased receivables resulting from improved collections.

The Company's operating activities provided $4.9 million of cash in the first six months of fiscal 2019.

The cash provided by operating activities in the first six months of fiscal 2019 was primarily due to non-cash items of $2.6 million, such as depreciation and amortization of $3.8 million offset by a gain on insurance proceeds received for the damaged property of $1.2 million, a net gain on sale of the Alliance building and other assets of $0.3 million and other non-cash items, such as equity based compensation, deferred income taxes and LIFO effect, and a net source of working capital of $4.9 million, partially offset by a net loss of $2.5 million.

The cash used for working capital was primarily due to decreased receivables due to collections, partially offset by timing of payments to suppliers.

The Company’s operating activities provided $2.3 million of cash in the first nine months of fiscal 2020, compared with providing cash of $9.4 million in the first nine months of fiscal 2019.

The cash provided by operating activities in the first nine months of fiscal 2020 was primarily due to net income of $4.2 million and $2.9 million in non-cash items, such as depreciation and amortization, equity based compensation, deferred income taxes and LIFO effect, partially offset by the use of working capital of $4.8 million (increase in inventory of $4.6 million, $2.8 million in contract assets, net accruals of $1.7 million offset by $4.3 million decrease in receivables).

The use of cash from working capital was primarily due to increase in inventories to support orders and customer adjustments for the remaining fiscal 2020 and payments to suppliers and disbursements related to the fire recovery, partially offset by decreased receivables resulting from improved collections.

The Company’s operating activities provided $9.4 million of cash in the first nine months of fiscal 2019.

The cash provided by operating activities in the first nine months of fiscal 2019 was primarily due to a reduction in working capital of $9.8 million, a result in non-cash items such as the goodwill impairment charge of $8.3 million, depreciation and amortization of $5.7 million, and other non-cash items, such as equity based compensation, deferred income taxes and LIFO effect, partially offset by a gain on insurance recovery combined with a disposal of asset of $4.8 million and a net loss of $9.9 million.

The increase in cash from working capital was primarily due to decreased receivables due to collections, partially offset by timing of payments to suppliers.

Investing Activities

Cash used by investing activities was $0.1 million in the first six months of fiscal 2020, which includes $4.5 million of insurance proceeds received due to the Orange location fire, compared with cash used by investing activities of $1.2 million in the first six months of fiscal 2019.

In addition to the $4.6 million expended for capital expenditures during the first six months of fiscal 2020, $3.9 million was committed for future capital expenditures as of March 31, 2020.

Cash used for investing activities was $1.3 million in the first nine months of fiscal 2020, which includes $6.2 million of insurance proceeds received due to the Orange location fire, compared with cash used for investing activities of $1.2 million in the first nine months of fiscal 2019.

In addition to the $7.4 million expended for capital expenditures during the first nine months of fiscal 2020, $2.6 million was committed for future capital expenditures as of June 30, 2020.

The Company anticipates that the total fiscal 2020 capital expenditures will be within the range of $4.0 million to $5.0 million (exclusive of fire related expenditures) and will relate principally to the further enhancement of production and product offering capabilities and operating cost reductions.

Separate from the range provided, the Company anticipates incurring additional costs in fiscal 2020 of approximately $5.0 million to $7.0 million in capital expenditures at the Orange location as the result of the fire and resulting damage that took place.

These costs are expected to be offset by insurance proceeds, approximately of which $6.8 million of insurance proceeds have been received as of March 31, 2020.

Separate from the amounts given above, the Company anticipates incurring additional costs in fiscal 2020 of approximately $4.5 million to $6.5 million in capital expenditures at the Orange location as the result of the fire and resulting damage that took place.

These costs are expected to be offset by insurance proceeds, approximately of which $8.8 million of insurance proceeds have been received as of June 30, 2020.

Of the proceeds received, $6.2 million have been used towards capital expenditures and the remaining $2.6 million received is offsetting operating costs.

Financing Activities

Cash provided by financing activities was $0.5 million in the first six months of fiscal 2020, compared with cash used by financing activities of $3.2 million in the first six months of fiscal 2019.

The Company had made repayments of $0.6 million of long-term debt, which $0.5 million were from the Company's foreign term loan, compared with repayments of $0.7 million in the comparable period.

Cash used by financing activities was $1.1 million in the first nine months of fiscal 2020, compared with cash used by financing activities of $8.7 million in the first nine months of fiscal 2019.

As discussed in Note 5, Debt, of the consolidated condensed statements the Company received cash proceeds of $5.0 million as it relates to the Paycheck Protection Program (or "PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and made repayments of $0.8 million of long-term debt, which $0.5 million were from the Company's foreign term loan, compared with repayments of $1.1 million in the comparable period.

In August 2018, the Company entered into an asset-based Credit Agreement ("Credit Agreement") and Security Agreement ("Security Agreement") with a lender.

See Note 5, Debt, of the consolidated condensed statements for further discussion related to the Credit Agreement and the First, Second, Third and Fourth Amendment to the Credit Agreement.

The Company had net borrowings from the revolver under the Credit Agreement of $1.6 million in the first six months of fiscal 2020, compared with net repayments of $2.6 million in the first six months of fiscal 2019.

The Company had net repayments from the revolver under the Credit Agreement of $4.2 million and $8.6 million in the first nine months of fiscal 2020 and fiscal 2019, respectively.

Amounts borrowed under the Credit Agreement are secured by substantially all the assets of the Company and its U.S.

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Borrowings will bear interest at the lender's established domestic rates or LIBOR, plus the applicable margin as set forth in the Credit Agreement.

The revolver has a rate based on LIBOR plus 2.00% spread, which was 3.6% at March 31, 2020 and the Export Credit Agreement as discussed in Note 5, Debt, has a rate based on LIBOR plus 1.50% spread, which was 3.1% at March 31, 2020.

The revolver has a rate based on LIBOR plus 1.5% spread, which was 1.7% at June 30, 2020 and the Export Credit Agreement as discussed in Note 5, Debt, has a rate

based on LIBOR plus 1.0% spread, which was 1.2% at June 30, 2020.

The Company also has a commitment fee of 0.25% under the Credit Agreement to be incurred on the unused balance of the revolver.

As the Company’s Credit Agreement is asset-based, sustained significant decrease in revenue in the U.S.

or excessive aging of the underlying receivables as a result of the impact of the COVID-19 pandemic could materially affect the collateral capacity limitation on the availability under the Credit Agreement and could impact our ability to comply with covenants in our Credit Agreement.

As the Company’s Credit Agreement is asset-based, a sustained significant decrease in revenue in the U.S.

or excessive aging of the underlying receivables as a result of the impact of the COVID-19 pandemic could materially affect the collateral capacity limitation of the availability under the Credit Agreement and could impact our ability to comply with covenants in our Credit Agreement.

Under the Company's Credit Agreement, the Company is subject to certain customary loan covenants regarding availability as discussed in Note 5, Debt.

The availability at March 31, 2020 was $8.0 million.

The availability at June 30, 2020 was $13.5 million.

If availability had fallen short, the Company would be required to meet the fixed charge coverage ratio ("FCCR") covenant, which must not be less than 1.1 to 1.0.

In the event of a default, we may not be able to access our revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities.

Because the availability was greater than the 10% of the Revolving Commitment as of March 31, 2020, the FCCR calculation was not required.

Because the availability was greater than the 10% of the Revolving Commitment as of June 30, 2020, the FCCR calculation was not required.

Future cash flows from the Company’s operations may be used to pay down amounts outstanding under the Credit Agreement and its foreign related debts.

The Company believes it has adequate cash/liquidity available to finance its operations from the combination of (i) the Company’s expected cash flows from operations, (ii) funds available under the Credit Agreement for its domestic locations and (iii) subsequent to quarter end, funds received pursuant to the Paycheck Protection Program Loan.

The Company believes it has adequate cash/liquidity available to finance its operations from the combination of (i) the Company’s expected cash flows from operations, (ii) funds available under the Credit Agreement for its domestic locations and (iii) funds received pursuant to the Paycheck Protection Program Loan.

The Company continues to seek alternatives with its lenders and other potential partners to refinance certain debt obligations at its Maniago location to provide Maniago with sufficient future liquidity.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis