SIFCO INDUSTRIES INC 10-Q

Item 1. Financial Statements SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Operations (Unaudited) (Amounts in thousands, except per share data) Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 Net sales $ 27,777 $ 24,873 $ 84,521 $ 81,331 Cost of goods sold 23,628 23,486 70,771 75,119 Gross profit 4,149 1,387 13,750 6,212 Selling, general and administrative expenses 2,864 3,481 10,393 11,375 Goodwill impairment — 8,294 — 8,294 Amortization of intangible assets 408 411 1,224 1,239 Loss (gain) on disposal or impairment of operating assets 55 — 98 (282 ) Gain on insurance proceeds received (1,683 ) (3,304 ) (2,683 ) (4,468 ) Operating income (loss) 2,505 (7,495 ) 4,718 (9,946 ) Interest income — (1 ) — (3 ) Interest expense 183 230 697 838 Foreign currency exchange gain (loss), net 12 (3 ) 12 (4 ) Other loss (income), net 27 (15 ) (58 ) (50 ) Income (loss) before income tax (benefit) expense 2,283 (7,706 ) 4,067 (10,727 ) Income tax (benefit) expense 33 (336 ) (101 ) (816 ) Net income (loss) $ 2,250 $ (7,370 ) $ 4,168 $ (9,911 ) Net income (loss) per share Basic $ 0.40 $ (1.32 ) $ 0.74 $ (1.78 ) Diluted $ 0.39 $ (1.32 ) $ 0.72 $ (1.78 ) Weighted-average number of common shares (basic) 5,676 5,571 5,656 5,556 Weighted-average number of common shares (diluted) 5,807 5,571 5,768 5,556 See notes to unaudited consolidated condensed financial statements. 2 -SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited) (Amounts in thousands) Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 Net income (loss) $ 2,250 $ (7,370 ) $ 4,168 $ (9,911 ) Other comprehensive income (loss): Foreign currency translation adjustment 113 146 175 (441 ) Retirement plan liability adjustment 188 108 626 322 Comprehensive income (loss) $ 2,551 $ (7,116 ) $ 4,969 $ (10,030 ) See notes to unaudited consolidated condensed financial statements. 3 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Balance Sheets (Amounts in thousands, except per share data) June 30, 2020 September 30, 2019 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 289 $ 341 Receivables, net of allowance for doubtful accounts of $229 and $592, respectively 18,961 23,159 Other receivables — 3,500 Contract asset 13,134 10,349 Inventories, net 15,288 10,509 Refundable income taxes 131 141 Prepaid expenses and other current assets 1,518 1,459 Total current assets 49,321 49,458 Property, plant and equipment, net 42,929 39,610 Operating lease right-of-use assets, net 17,363 — Intangible assets, net 2,128 3,320 Goodwill 3,493 3,493 Other assets 115 218 Total assets $ 115,349 $ 96,099 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Current maturities of long-term debt $ 6,682 $ 5,786 Revolver 11,302 15,542 Short-term operating lease liabilities 1,111 — Accounts payable 15,781 19,799 Accrued liabilities 7,222 5,557 Total current liabilities 42,098 46,684 Long-term debt, net of current maturities 4,490 2,052 Long-term operating lease liabilities, net of short-term 16,383 — Deferred income taxes 1,650 1,718 Pension liability 8,627 9,528 Other long-term liabilities 778 63 Shareholders’ equity: Serial preferred shares, no par value, authorized 1,000 shares — — Common shares, par value $1 per share, authorized 10,000 shares; issued and outstanding shares 5,916 at June 30, 2020 and 5,777 at September 30, 2019 5,916 5,777 Additional paid-in capital 10,599 10,438 Retained earnings 37,316 33,148 Accumulated other comprehensive loss (12,508 ) (13,309 ) Total shareholders’ equity 41,323 36,054 Total liabilities and shareholders’ equity $ 115,349 $ 96,099 See notes to unaudited consolidated condensed financial statements. 4 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Cash Flows (Unaudited, Amounts in thousands) Nine Months Ended June 30, 2020 2019 Cash flows from operating activities: Net income (loss) $ 4,168 $ (9,911 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 5,576 5,735 Amortization of debt issuance cost 79 72 Loss (gain) on disposal of operating assets or impairment of operating assets 98 (282 ) Gain on insurance proceeds received (2,683 ) (4,468 ) Goodwill impairment — 8,294 LIFO effect (16 ) 98 Share transactions under company stock plan 253 367 Other long-term liabilities (291 ) (80 ) Deferred income taxes (116 ) (251 ) Changes in operating assets and liabilities: Receivables 4,347 7,602 Contract assets (2,785 ) 1,230 Inventories (4,623 ) (411 ) Refundable income taxes 10 (533 ) Prepaid expenses and other current assets (125 ) 400 Other assets 142 1 Accounts payable (4,175 ) 235 Other accrued liabilities 2,465 1,295 Accrued income and other taxes (30 ) (21 ) Net cash provided by operating activities 2,294 9,372 Cash flows from investing activities: Insurance proceeds received 6,183 5,574 Proceeds from disposal of operating assets — 317 Capital expenditures (7,441 ) (7,036 ) Net cash used for investing activities (1,258 ) (1,145 ) Cash flows from financing activities: Proceeds from long-term debt 5,161 2,748 Payments on long-term debt (839 ) (1,127 ) Proceeds from revolving credit agreement 85,082 50,818 Repayments of revolving credit agreement (89,323 ) (59,383 ) Payment of debt issue costs — (132 ) Short-term debt borrowings 2,139 3,447 Short-term debt repayments (3,319 ) (5,093 ) Share retirement — (62 ) Net cash used for financing activities (1,099 ) (8,784 ) Decrease in cash and cash equivalents (63 ) (557 ) Cash and cash equivalents at the beginning of the period 341 1,252 Effect of exchange rate changes on cash and cash equivalents 11 6 Cash and cash equivalents at the end of the period $ 289 $ 701 Supplemental disclosure of cash flow information of operations: Cash paid for interest $ (583 ) $ (781 ) Cash paid for income taxes, net $ (41 ) $ (103 ) Non-cash investing activities: Additions to property, plant & equipment - incurred but not yet paid $ 20 $ 848 See notes to unaudited consolidated condensed financial statements. 5 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Shareholders’ Equity (Unaudited, Amounts in thousands ) Nine Months Ended June 30, 2020 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - September 30, 2019 5,777 $ 5,777 $ 10,438 $ 33,148 $ (13,309 ) $ 36,054 Comprehensive income — — — 4,168 801 4,969 Other — 46 — — 46 Performance and restricted share expense — — 262 — — 262 Share transactions under equity based plans 139 139 (147 ) — — (8 ) Balance - June 30, 2020 5,916 $ 5,916 $ 10,599 $ 37,316 $ (12,508 ) $ 41,323 Three Months Ended June 30, 2020 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - March 31, 2020 5,916 $ 5,916 $ 10,516 $ 35,066 $ (12,809 ) $ 38,689 Comprehensive income — — — 2,250 301 2,551 Other — — 46 — — 46 Performance and restricted share expense — — 37 — — 37 Balance - June 30, 2020 5,916 $ 5,916 $ 10,599 $ 37,316 $ (12,508 ) $ 41,323 Nine Months Ended June 30, 2019 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - September 30, 2018 5,690 $ 5,690 $ 10,031 $ 37,097 $ (8,629 ) $ 44,189 Cumulative effect for the adoption of ASC 606 — — — 3,598 — 3,598 Comprehensive loss — — — (9,911 ) (119 ) (10,030 ) Share retirement (21 ) (21 ) — (41 ) — (62 ) Performance and restricted share expense — — 367 — — 367 Share transactions under equity based plans 104 104 (104 ) — — — Balance - June 30, 2019 5,773 $ 5,773 $ 10,294 $ 30,743 $ (8,748 ) $ 38,062 Three Months Ended June 30, 2019 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - March 31, 2019 5,773 $ 5,773 $ 10,353 $ 38,113 $ (9,002 ) $ 45,237 Comprehensive loss — — — (7,370 ) 254 (7,116 ) Performance and restricted share expense — — (59 ) — — (59 ) Balance - June 30, 2019 5,773 $ 5,773 $ 10,294 $ 30,743 $ (8,748 ) $ 38,062 See notes to unaudited consolidated condensed financial statements. 6 SIFCO Industries, Inc. and Subsidiaries Notes to Unaudited Consolidated Condensed Financial Statements (Amounts in thousands, except per share data) 1. Summary of Significant Accounting Policies A. Principles of Consolidation The accompanying unaudited consolidated condensed financial statements include the accounts of SIFCO Industries, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The U.S. dollar is the functional currency for all of the Company’s U.S. operations and its non-operating subsidiaries. For these operations, all gains and losses from completed currency transactions are included in income. The functional currency for the Company's other non-U.S. subsidiaries is the Euro. Assets and liabilities are translated into U.S. dollars at the rates of exchange at the end of the period, and revenues and expenses are translated using average rates of exchange for the period. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss in the unaudited consolidated condensed financial statements. These unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s fiscal 2019 Annual Report on Form 10-K. The year-end consolidated balance sheet data was derived from the audited financial statements and disclosures required by accounting principles generally accepted in the United States ("U.S."). The results of operations for any interim period are not necessarily indicative of the results to be expected for other interim periods or the full year. COVID-19 In March 2020, the novel strain of coronavirus ("COVID-19") was recognized as a pandemic by the World Health Organization, and the outbreak subsequently became increasingly widespread in the United States and other countries in which the Company operates. The Company has taken proactive steps to ensure the safety of its employees and customers as well as to preserve the Company’s financial flexibility. The Company continues to monitor the development of and responses to the COVID-19 pandemic and the impact of COVID-19 on its business and respond accordingly. The full impact of the COVID-19 outbreak on the Company continues to evolve and the full magnitude that the pandemic will have on the Company’s financial condition, liquidity and future results of operations is uncertain. As the pandemic continues to impact operations of businesses across the world, our ability to meet customer demands for products may be impaired or, similarly, our customers have experienced and may continue to experience adverse business consequences. Reduced demand for products or impaired ability to meet customer demand (including as a result of disruptions at our facilities, in the transportation of products, and/or in the operations of our vendors) could have a material adverse effect on our business, operations and financial performance. Given the continuing 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. B. Accounting Policies A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company's fiscal 2019 Annual Report on Form 10-K. Since the Annual Report, the Company has implemented Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" and ASU 2018-11, "Leases (Topic 842) Targeted Improvements," (collectively with ASU 2016-02, "Topic 842"), which was adopted by the Company on October 1, 2019 using the cumulative-effect adjustment transition method. Significant changes to the Company's accounting policies as a result of adopting Topic 842 are referenced below within section E. Recently Adopted Accounting Standards and in Note 4, Leases. C. Net Income/(Loss) per Share The Company’s net income and loss per basic share has been computed based on the weighted-average number of common shares outstanding. Net income in the current period, per diluted share reflects the effect of the Company's outstanding restricted shares and performance shares under the treasury method. In the prior period, due to the net loss for each reporting period, zero restricted shares are included in the calculation of diluted earnings per share because the effect would be anti-dilutive. The dilutive effect is as follows: 7 Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 Net Income (loss) $ 2,250 $ (7,370 ) $ 4,168 $ (9,911 ) Weighted-average common shares outstanding (basic and diluted) 5,676 5,571 5,656 5,556 Effect of dilutive securities: Restricted shares 115 — 106 — Performance shares 16 — 6 — Weighted-average common shares outstanding (basic and diluted) 5,807 5,571 5,768 5,556 Net income (loss) per share – basic: $ 0.40 $ (1.32 ) $ 0.74 $ (1.78 ) Net income (loss) per share – diluted: $ 0.39 $ (1.32 ) $ 0.72 $ (1.78 ) Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share 306 214 200 200 D. Impact of Recently Issued Accounting Standards In June 2016, the FASB issued ASU 2016-13, " Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments " and subsequent updates. ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance will replace the current incurred loss approach with an expected loss model. The new expected credit loss impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt instruments, net investments in leases, loan commitments and standby letters of credit. Upon initial recognition of the exposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the estimate, so its application will require significant judgment. ASU 2016-13 is effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. However, in November 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)," which defers the effective date for public filers that are considered smaller reporting companies ("SRC"), as defined by the Securities and Exchange Commission, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Because SIFCO is considered a SRC, the Company does not need to implement ASU 2016-13 until October 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the Company's results within the consolidated condensed statements of operations and financial condition. In December 2019, ASU 2019-12, " Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" was issued to (i) reduce the complexity of the standard by removing certain exceptions to the general principles in Topic 740 and (ii) improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. The Company continues to evaluate the effect adopting this ASU will have on the Company's results within the consolidated condensed statements of operations and financial condition. E. Recently Adopted Accounting Standards The Company adopted Topic 842 as of October 1, 2019, using the cumulative effective method. Under the transition method selected by the Company, leases that are not short-term in nature existing at, or entered on October 1, 2019 were required to be recognized and measured. Prior period amounts were not adjusted and continue to be reflected with the Company's historical accounting. The adoption of Topic 842 resulted in the Company recording right-of-use ("ROU") assets and operating lease liabilities of approximately $18,059 to the consolidated condensed balance sheet as of October 1, 2019, with no related impact on the Company's consolidated condensed statement of comprehensive income (loss) or consolidated condensed statement of cash flows. 8 2. Inventories Inventories consist of: June 30, 2020 September 30, 2019 Raw materials and supplies $ 5,629 $ 4,512 Work-in-process 4,052 2,721 Finished goods 5,607 3,276 Total inventories $ 15,288 $ 10,509 For a portion of the Company's inventory, cost is determined using the last-in, first-out ("LIFO") method. Approximately 41% and 27% of the Company’s inventories at June 30, 2020 and September 30, 2019, respectively, use the LIFO method. An actual valuation of inventory under the LIFO method is made at the end of each fiscal year based on the inventory levels and costs existing at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because the actual results may vary from these estimates, calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to adjustments based on the differences between the estimates and the actual results. The first-in, first-out (“FIFO”) method is used for the remainder of the inventories, which are stated at the lower of cost or net realizable value. If the FIFO method had been used for the inventories for which cost is determined using the LIFO method, inventories would have been $8,280 and $8,296 higher than reported at June 30, 2020 and September 30, 2019 , respectively. 3. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows: June 30, 2020 September 30, 2019 Foreign currency translation adjustment $ (5,492 ) $ (5,667 ) Retirement plan liability adjustment, net of tax (7,016 ) (7,642 ) Total accumulated other comprehensive loss $ (12,508 ) $ (13,309 ) 4. Leases The adoption of Topic 842 requires lessees to recognize a ROU asset and a lease liability on the consolidated condensed balance sheet, with the exception of short-term leases. The Company primarily leases its manufacturing buildings, specifically at its Orange location, machinery and office equipment. The Company determines if a contract contains a lease based on whether the contract conveys the right to control the use of identified assets for a period in exchange for consideration. Upon identification and commencement of a lease, the Company establishes a ROU asset and a lease liability. Operating leases are included in ROU assets, short-term operating lease liabilities, and long-term operating lease liabilities on the consolidated condensed balance sheets. Finance leases are included in property, plant, and equipment, current maturities of long-term debt and long-term debt on the consolidated condensed balance sheets. The Company has remaining lease terms ranging from one to 17 years , some of which include options to renew the lease. The total lease term is determined by considering the initial lease term per the lease agreement, which is adjusted to include any renewal options that the Company is reasonably certain to exercise as well as any period that the Company has control before the stated initial term of the agreement. If the Company determines there exists a reasonable certainty of exercising termination or early buyout options, then the lease terms are adjusted to account for these facts. A portion of our real estate leases include rents that are generally subject to annual changes in the Consumer Price Index ("CPI"). Such changes to the CPI are treated as variable lease payments. The Company elected the package of practical expedients permitted under the transition guidance within the new standard which, among other things, allowed the Company to carry forward the historical lease classification. The Company has made an accounting policy election to not separate non-lease components from lease components when allocating consideration for the buildings and machinery and equipment ROU asset classes. The election was made to reduce the administrative burden that would be imposed on the Company. ROU assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date and duration of the lease term in determining the present value of the future payments. Lease expense for operating leases is recognized on a straight-line basis over the lease term, while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. 9 A lease asset and lease liability are not recorded for leases with an initial term of 12 months or less and the lease expense related to these leases is recognized as incurred over the lease term. The components of lease expense were as follows: Three Months Ended June 30, 2020 Nine Months Ended June 30, 2020 Lease expense Finance lease expense: Amortization of right-of use assets on finance leases $ 14 41 Interest on lease liabilities 1 4 Operating lease expense: 664 1,743 Variable lease cost: 39 118 Total lease expense $ 718 $ 1,906 The following table presents the impact of leasing on the consolidated condensed balance sheet. Classification to the consolidated condensed balance sheets June 30, 2020 Assets: Finance lease assets Property, plant and equipment, net $ 102 Operating lease assets Operating lease right-of-use assets, net 17,363 Total lease assets $ 17,465 Current liabilities: Finance lease liabilities Current maturities of long-term debt $ 59 Operating lease liabilities Short-term operating lease liabilities 1,111 Non-current liabilities: Finance lease liabilities Long-term debt, net of current maturities 35 Operating lease liabilities Long-term operating lease liabilities, net of short-term 16,383 Total lease liabilities $ 17,588 Supplemental cash flow and other information related to leases were as follows: June 30, 2020 Other Information Cash paid for amounts included in measurement of liabilities: Operating cash flows from operating leases $ 1,628 Operating cash flows from finance leases 4 Financing cash flows from finance leases 42 Right-of-use assets obtained in exchange for new lease liabilities: Operating leases 278 June 30, 2020 Weighted-average remaining lease term (years): Finance leases 1.9 Operating leases 15.2 Weighted-average discount rate: Finance leases 5.0 % Operating leases 5.9 % 10 Future minimum lease under non-cancellable leases at June 30, 2020 were as follows: Finance Leases Operating Leases Year ending September 30, 2020 (excluding the nine months ended June 30, 2020) 15 543 2021 55 1,933 2022 21 1,683 2023 6 1,623 2024 — 1,638 Thereafter — 19,179 Total lease payments $ 97 $ 26,599 Less: Imputed interest (3 ) (9,105 ) Present value of lease liabilities $ 94 $ 17,494 As previously disclosed in the Company's 2019 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments under initial or remaining non-cancellable lease terms in excess of one year would have been as follows: Finance Leases Operating Leases Year ending September 30, 2020 $ 61 $ 2,172 2021 61 1,865 2022 21 1,583 2023 6 1,502 2024 — 1,498 Thereafter — 16,711 Total lease payments $ 149 $ 25,331 Less: Interest (11 ) Present value of lease liabilities $ 138 5. Debt Debt consists of: June 30, 2020 September 30, 2019 Revolving credit agreement $ 11,302 $ 15,542 Foreign subsidiary borrowings 5,159 6,592 Finance lease obligations 94 138 Other, net of unamortized debt issuance costs ($23) and ($25), respectively 5,919 1,108 Total debt 22,474 23,380 Less – current maturities (17,984 ) (21,328 ) Total long-term debt $ 4,490 $ 2,052 Credit Agreement and Security Agreement of 2018 On August 8, 2018, the Company entered into an asset-based Credit Agreement ("Credit Agreement") and a Security Agreement (“Security Agreement”) with its current lender (the "Lender"). The Credit Agreement matures on August 6, 2021 and is comprised of a senior secured revolving credit facility with a maximum borrowing of $30,000 . The Credit Agreement also has an accordion feature, which allows the Company to increase maximum borrowings by up to $10,000 upon consent of the Lender or upon additional lenders joining the Credit Agreement. The terms of the Credit Agreement contain both a lock box arrangement and subjective acceleration clause. As a result, the amount outstanding on the revolving credit facility is classified as a short-term 11 liability. The proceeds from the Credit Agreement were used to pay fees and expenses incurred in connection with the Credit Agreement and continue to be used for working capital purposes and general corporate purposes. The Credit Agreement contains affirmative and negative covenants and events of defaults. As set forth in the Credit Agreement, the Company is required to maintain a fixed charge coverage ratio ("FCCR") of 1.1 :1.0 any time the availability is equal to or less than 12.5% of the revolving commitment. In the event of a default, the Company may not be able to access the revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities. See discussion below under the Fourth Amendment to the Credit Agreement and Security Agreement, which revises the provision related to availability and FCCR. On November 5, 2018, the Company entered into the First Amendment (the "First Amendment") to the Credit Agreement and Security Agreement with its Lender. The First Amendment retroactively amended certain definitions and provisions effective as of the original closing date to clarify the parties' original understanding. On December 17, 2018, the Company entered into an Export Credit Agreement (the “Export Credit Agreement”) with its Lender. Pursuant to the terms of the Export Credit Agreement, the Lender will lend amounts to the Company on foreign receivables that are guaranteed by the Export-Import Bank of the United States of America. The Export Credit Agreement provides for a revolving commitment of $5,000 , therefore increasing the maximum borrowing of the revolver to $35,000 . The borrowings under the Export Credit Agreement will bear interest at (depending on the type of borrowing) the Prime or LIBOR Rate, plus the applicable margin as set forth in the Export Credit Agreement. The maturity date under the Export Credit Agreement is August 6, 2021 (or such earlier date as the revolving commitments under the Export Credit Agreement are reduced to zero or otherwise terminated). The Export Credit Agreement contains customary representations, warranties, covenants and events of default, including, without limitation, the affirmative covenants under the Company’s Credit Agreement dated August 8, 2018, as amended with the Lender. In connection with entering into the Export Credit Agreement, the Company also entered into the Second Amendment (the “Second Amendment”) to its Credit Agreement. The Second Amendment amends certain definitions and provisions to provide for the Company’s entrance into the Export Credit Agreement. On March 29, 2019, the Company entered into a Third Amendment with its Lender. This amendment extended the time frame for when certain post-closing requirements would be satisfied by March 31, 2019 to June 30, 2019. These post-closing requirements were completed by June 30, 2019. On September 20, 2019, the Company entered into a Fourth Amendment with its Lender. As previously stated, the Company is subject to certain customary loan covenants if availability is less than or equal to 12.5% of the revolving commitment for three or more business days in any consecutive 30 day period; however, the Fourth Amendment to the Credit Agreement resulted in the reduction of its availability from 12.5% of the revolving commitment to 10% of the lesser of collateral or total revolving commitment, with a $2,000 floor through June 30, 2020. In determining the availability, the Lender looks at the total collateral. If the total collateral is less than $ 20,000 , then the $2,000 floor will apply; however, if the total collateral is greater than or equal to $20,000 , but less than the $35,000 (revolving commitment); then 10% of the total collateral is used, but if the collateral exceeds $35,000 , then 10% of the total commitment is used as lending will not exceed the $35,000 revolving commitment unless the accordion feature is enacted. Commencing July 1, 2020, the terms reverted back to the requirements in place prior to the Fourth Amendment. The total collateral at June 30, 2020 and September 30, 2019 was $25,603 and $24,000 , respectively and the revolving commitment was $35,000 for both periods. The measurement at 10% was $2,560 and $2,400 , respectively. Total availability at June 30, 2020 and September 30, 2019 was $13,492 and $7,709 , respectively, which exceed both the collateral and total commitment threshold. If availability had fallen short, the Company would be required to meet the FCCR covenant, which must not be less than 1.1 to 1.0. Because the availability was greater than the 10.0% of the revolving commitment as of June 30, 2020 and September 30, 2019, the FCCR calculation was not required. Amounts borrowed under the Credit Agreement are secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 66.67% of the stock of its first-tier non-U.S. subsidiaries. Borrowings will bear interest at the Lender's established domestic rate or LIBOR, plus the applicable margin as set forth in the Credit Agreement. The revolver has a rate based on LIBOR plus 1.50% , which was 1.7% at June 30, 2020 and 3.6% at September 30, 2019, and the Export Credit Agreement has a rate based on LIBOR plus 1.00% spread at June 30, 2020 and 1.25% spread at September 30, 2019, which was 1.2% and 3.4% at June 30, 2020 and September 30, 2019, respectively. The Company also has a commitment fee of 0.25% under the Credit Agreement to be incurred on the unused balance of the revolver. 12 Foreign subsidiary borrowings Foreign debt consists of: June 30, 2020 September 30, 2019 Term loan $ 1,890 $ 2,318 Short-term borrowings 3,071 3,744 Factor 198 530 Total debt $ 5,159 $ 6,592 Less – current maturities (4,323 ) (5,501 ) Total long-term debt $ 836 $ 1,091 Receivables pledged as collateral $ 1,322 $ 672 Interest rates on foreign borrowings are based on Euribor rates which range from 1.0% to 4.2% . In December 2018, the Company entered into a six month short-term debt arrangement of $1,137 to be used for working capital purposes at Maniago, which was subsequently repaid in fiscal 2019. In September 2019, Maniago modified its repayment schedule for one tranche of its existing term debt by reducing its next two payments by approximately $96 and extending the loan for an additional six months in which the final payment will be made at that time (to be paid by October 2020). The Company continues to have discussions with its lenders and other potential partners to refinance certain debt obligations at its Maniago location to provide Maniago with sufficient future liquidity. If Maniago is unsuccessful in obtaining additional financing, it may experience challenges in meeting certain current loan obligations. This foreign debt is collateralized by Maniago’s assets. The Company has not pledged any assets as collateral or guaranteed Maniago’s debt. The consolidated condensed financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of the Maniago assets or the amounts and classifications of the Maniago liabilities that may result from the outcome of this uncertainty. Management believes that the actions presently being taken to obtain additional funding and implement its strategic plan will provide adequate liquidity to finance its Maniago operations. The Company factors receivables from one of its customers. The factoring programs are uncommitted, whereby the Company offers receivables for sale to an unaffiliated financial institution, which are then subject to acceptance by the unaffiliated financial institution. Following the sale and transfer of the receivables to the unaffiliated financial institution, the receivables are not isolated from the Company, and effective control of the receivables is not passed to the unaffiliated financial institution, which does not have the right to pledge or sell the receivables. The Company accounts for the pledge of receivables under this agreement as short-term debt and continues to carry the receivables on its consolidated condensed balance sheets. Debt issuance costs The Company incurred debt issuance costs as it pertains to the Credit Agreement in the amount of $212 , and incurred additional costs in fiscal 2019 of $75 related to the First and Second Amendments, which is included in the consolidated condensed balance sheets as a deferred charge in other current assets, net of amortization of $180 and $106 at June 30, 2020 and September 30, 2019, respectively. Other In response to the economic uncertainty created by the COVID-19 pandemic, as described above in Note 1, Summary of Significant Accounting Policies , and taking into consideration the Company’s market capitalization, status as a smaller reporting company, and uncertainties and volatility in, and disruptions to, the capital markets, as well as the terms of the Company’s Credit Agreement, the Company applied for and received funds under Paycheck Protection Program (or "PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). On April 10, 2020, the Company entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP Loan”). The PPP Loan to the Company was made through JPMorgan Chase Bank, N.A., a national banking association and the Company’s existing lender. The note has an aggregate principal amount of approximately $ 5,025 and a two year term. The interest rate on the PPP Loan is 0.98% , which shall be deferred for the first six months of the term of the loan. The promissory note evidencing the PPP Loan contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company. The loan proceeds were received on April 10, 2020 and were used for payroll, interest on mortgage obligations, rents on leases and utility payments. As of June, 30, 2020, the Company 13 repaid $ 261 proceeds back to its lender, leaving a remaining balance of $4,764 , of which $ 2,382 will be paid in the next twelve months and the remaining $ 2,382 in the following twelve months after. Under the terms of the CARES Act, PPP Loan recipients can apply for and potentially be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. Although the Company intends to file for forgiveness, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. As of June 30, 2020, the Company is waiting for further guidance regarding how to apply for the forgiveness for all or a portion of the PPP loan. 6. Income Taxes For each interim reporting period, the Company makes an estimate of the effective tax rate it expects to be applicable for the full fiscal year for its operations. This estimated effective rate is used in providing for income taxes on a year-to-date basis. 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. deferred tax assets and income in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate. As previously mentioned, the CARES Act was enacted and signed into law, which includes provisions relating to refundable payroll tax credits, deferral of certain payment requirements for the employer portion of Social Security taxes, net operating loss carryback periods and temporarily increasing the amount of net operating losses that corporations can use to offset income, alternative minimum tax ("AMT") credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not materially affect the Company’s third quarter of fiscal 2020 income tax provision, deferred tax assets and liabilities, or related taxes payable. The Company continues to assess the future implications of these provisions within the CARES Act on its consolidated condensed financial statements but does not expect the impact to be material. The Company is subject to income taxes in the U.S. federal jurisdiction, Ireland, Italy, and various state and local jurisdictions. 7. Retirement Benefit Plans The Company and certain of its subsidiaries sponsor defined benefit pension plans covering some of its employees. The components of net periodic benefit cost of the Company’s defined benefit plans are as follows: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 Service cost $ 85 $ 74 $ 255 $ 224 Interest cost 208 264 624 791 Expected return on plan assets (363 ) (393 ) (1,090 ) (1,180 ) Amortization of net loss 188 107 564 322 Net periodic cost $ 118 $ 52 $ 353 $ 157 During the nine months ended June 30, 2020 and 2019, the Company made $604 and $48 in contributions, respectively, to its defined benefit pension plans. The Company does no t anticipate making additional cash contributions to fund its defined benefit pension plans for the balance of fiscal 2020 and will use carryover balances from previous periods that have been available for use as a credit to reduce the amount of cash contributions that the Company is required to make to certain defined benefit plans in fiscal 2020. The Company's ability to elect to use such carryover balance will be determined based on the actual funded status of each defined benefit pension plan relative to the plan's minimum regulatory funding requirements. The Company does not anticipate making cash contributions above the minimum funding requirement to fund its defined benefit pension plans during the balance of fiscal 2020. On November 26, 2019, the Company ratified a new collective bargaining agreement with one of its bargaining units. Included within the agreement was a provision to withdraw from its existing multi-employer plan resulting in the imposition of a withdrawal liability. The withdrawal liability of $739 was recorded within the cost of goods sold line of the consolidated condensed statement of operations and is included in other long-term liabilities and the current portion (next four quarterly installments) in accrued liabilities of the consolidated condensed balance sheets, payable in quarterly installments over the next 20 years . 14 8. Stock-Based Compensation The Company has awarded performance and restricted shares under its shareholder-approved amended and restated 2007 Long-Term Incentive Plan ("2007 Plan"), which was further amended and restated under the SIFCO Industries, Inc. 2007 Long-Term Incentive Plan (Amended and Restated as of November 16, 2016) (the "2016 Plan"). At the Annual Meeting of Shareholders held on January 30, 2020, the shareholders of the Company approved the first amendment (the “Amendment”) to the 2016 Plan. The Amendment increased the number of shares available for award under the 2016 Plan by 550 shares. The aggregate number of shares that may be awarded by the Company was increased to 1,196 shares, less any shares previously awarded and subject to an adjustment for the forfeiture of any unvested shares, pursuant to the 2016 Plan. In addition, shares that may be awarded are subject to individual recipient award limitations. The shares awarded under the 2016 Plan may be made in multiple forms, including stock options, stock appreciation rights, restricted or unrestricted stock, and performance related shares. Any such award is exercisable no later than ten years from the date of the grant. The performance shares that have been awarded under both plans generally provide for the vesting of the Company’s common shares upon the Company achieving certain defined financial performance objectives during a period up to three years following the making of such award. The ultimate number of common shares of the Company that may be earned pursuant to an award ranges from a minimum of no shares to a maximum of 200% (for awards granted in fiscal 2020, the maximum is 150% ) of the initial target number of performance shares awarded, depending on the level of the Company’s achievement of its financial performance objectives. With respect to such performance shares, compensation expense is being accrued based on the probability of meeting the performance target. The Company is currently recognizing compensation expense for one of its tranches of awards where it has concluded it is probable that the performance criteria for that award will be met, while the Company is not currently recognizing compensation expense for two tranches of awards where it had concluded that it is not probable that the performance criteria for those awards will be met. During each future reporting period, such expense may be subject to adjustment based upon the Company's financial performance, which impacts the number of common shares that it expects to vest upon the completion of the performance period. The performance shares were valued at the closing market price of the Company’s common shares on the date of the grant. The vesting of such shares is determined at the end of the performance period. During the first nine months of fiscal 2020, the Company granted 134 shares under the 2016 Plan to certain key employees. The awards were split into two tranches, 47 performance shares and 87 shares of time-based restricted shares, with a grant date fair value of $2.50 per share. The awards vest over three years . The Company has awarded restricted shares to its directors, officers, and other employees of the Company. The restricted shares were valued at the closing market price of the Company’s common shares on the date of the grant, and such value was recorded as unearned compensation. The unearned compensation is being amortized ratably over the restricted stock vesting period of one year or three years. During the first nine months of fiscal 2020, the Company granted its non-employee directors 57 restricted shares under the 2016 Plan, with a grant date fair value of $4.39 , which vest over one year. One award for 61 restricted shares vested. If all outstanding share awards are ultimately earned and vest at the target number of shares, there are approximately 524 shares that remain available for award at June 30, 2020 . If any of the outstanding share awards are ultimately earned and vest at greater than the target number of shares, up to a maximum of 200% (decreased to 150% for awards starting in fiscal 2020) of such target, then a fewer number of shares would be available for award. Stock-based compensation under the 2016 Plan was $262 and $367 during the first nine months of fiscal 2020 and 2019, respectively and $37 expense and $59 benefit during the third quarter of fiscal 2020 and 2019, respectively. As of June 30, 2020 , there was $495 of total unrecognized compensation cost related to the performance shares and restricted shares awarded under the 2016 Plan. The Company expects to recognize this cost over the next 1.3 years. 9. Revenue 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; (iii) industrial gas and steam turbine engines for power generation units; and (iv) other commercial applications. 15 The following table represents a breakout of total revenue by customer type: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 Commercial revenue $ 12,266 $ 14,713 $ 34,954 $ 41,213 Military revenue 15,511 10,160 49,567 40,118 Total $ 27,777 $ 24,873 $ 84,521 $ 81,331 The following table represents revenue by the various components: Three Months Ended June 30, Nine Months Ended June 30, Net Sales 2020 2019 2020 2019 Aerospace components for: Fixed wing aircraft $ 13,730 $ 12,557 $ 39,130 $ 38,949 Rotorcraft 8,687 5,088 22,348 17,261 Energy components for power generation units 3,804 4,887 9,879 13,347 Commercial product and other revenue 1,556 2,341 13,164 11,774 Total $ 27,777 $ 24,873 $ 84,521 $ 81,331 The following table represents revenue by geographic region based on the Company's selling operation locations: Three Months Ended June 30, Nine Months Ended June 30, Net Sales 2020 2019 2020 2019 North America 24,261 20,301 75,532 68,745 Europe 3,516 4,572 8,989 12,586 Total $ 27,777 $ 24,873 $ 84,521 $ 81,331 In addition to the disaggregating revenue information provided above, approximately 60% of total net sales as of June 30, 2020 are recognized on an over-time basis because of the continuous transfer of control to the customer, with the remainder recognized at a point in time. Contract Balances Generally, payment is due shortly after the shipment of goods. For performance obligations recognized at a point in time, a contract asset is not established as the billing and revenue recognition occur at the same time. For performance obligations recognized over-time, a contract asset is established as revenue is recognized prior to billing and shipment. Upon shipment and billing, the value of the contract asset is reversed and accounts receivable is recorded. In circumstances where prepayments are required and payment is made prior to satisfaction of performance obligations, a contract liability is established. If the performance obligation occurs over-time, the contract liability is reversed over the course of production. If the performance obligation is point in time, the contract liability reverses upon shipment. The following table contains a roll forward of contract assets and contract liabilities for the period ended June 30, 2020: Contract assets - Beginning balance, October 1, 2019 $ 10,349 Additional revenue recognized over-time 51,132 Less amounts billed to the customers (48,347 ) Contract assets - Ending balance, June 30, 2020 $ 13,134 16 Contract liabilities (included within Accrued liabilities) - Beginning balance, October 1, 2019 $ (382 ) Payments received in advance of performance obligations — Performance obligations satisfied 382 Contract liabilities (included within Accrued liabilities) - Ending balance, June 30, 2020 $ — There were no impairment losses recorded on contract assets as of June 30, 2020. Remaining performance obligations As of June 30, 2020, the Company has $100,880 of remaining performance obligations, the majority of which are anticipated to be completed within the next twelve months. 10. Commitments and Contingencies In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters; however, it does not believe any such matters are material to its financial condition or results of operations. The Company maintains various liability insurance coverages to protect its assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it is possible that the Company’s future operating results could be affected by future costs of litigation. A subsidiary of the Company, Quality Aluminum Forge, LLC ("Orange"), is currently a defendant in a lawsuit filed by Avco Corporation (“Avco”) in the Pennsylvania State Court, which was filed in August 2019, alleging that certain forged pistons delivered by the Orange plant failed to meet material specifications required by Avco. Avco also sued Arconic, Inc. (“Arconic”), which was the raw material supplier. No specific amount of damages was claimed by Avco and discovery has only recently begun. Orange disagrees with the allegations made by Avco and has made cross claims against Arconic. Previously, Orange was a defendant with respect to the same action in the United States District Court for the District of Rhode Island, which action was dismissed in connection with the movement of the matter to Pennsylvania State Court. Although the Company records reserves for legal disputes and other matters in accordance with GAAP, the ultimate outcomes of these types of matters are inherently uncertain. Actual results may differ significantly from current estimates. Given the current status of this matter, the Company has not recorded a charge, as the Company does not have a reasonable basis on which to establish an estimate. The Company is a defendant in a purported class action lawsuit filed in the Superior Court of California, County of Orange, which was filed in August 2017, arising from employee wage-and-hour claims under California law for alleged meal period, rest break, hourly and overtime wage calculation, timely wage payment and necessary expenditure indemnification violations; failure to maintain required wage records and furnish accurate wage statements; and unfair competition. A settlement has been reached and the Company received preliminary court approval on July 13, 2020, following a brief COVID-19 delay. The Company previously recorded adequate reserves to cover the settlement. During the quarter, the Company received notice from the International Association of Machinists and Aerospace Workers Union that they were disclaiming all interest in representing certain hourly employees at the Company’s Cleveland facility. Also, during the quarter, the International Brotherhood of Boilermakers Union filed a petition to represent this same group of hourly employees. A mail ballot election took place in June and the National Labor Relations Board has certified the International Brotherhood of Boilermakers as the elected representative of the Company’s hourly production employees. The Company’s obligations will be more fully understood following the ratification of a collective bargaining agreement. Recovery on the insurance claim related to the fire on December 26, 2018 at the Orange location continues in fiscal 2020. 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, relocated to Orange and was placed into service in March 2020. Restoration is nearly complete for the structure of the manufacturing building and the presses damaged in the fire. The Company began running one restored press at the end of December 2019, while another restored press began running at the end of July 2020, allowing Orange to have 6 out of 8 presses in production going into the fourth quarter. Two of the six presses damaged in the fire are still in the restoration process. The Company anticipates having those restored at the end of fourth quarter of fiscal 2020. During the first nine months of fiscal 2020, the Company received cash proceeds from insurance of $8,787 and, separately, the insurance carrier provided $713 of proceeds 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 June 17 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, of which $915 was realized in the first nine months of fiscal 2020. Balance sheet (Other receivables): September 30, 2019 $ 3,500 Cash proceeds (8,787 ) Capital expenditures (equipment) 2,683 Other expenses 1,689 Business interruption 915 June 30, 2020 $ — The tables below reflect how the proceeds received impacted the consolidated condensed statements of operations for the nine months ended and three months ended June 30,2020. Nine Months Ended June 30, 2020 Balance without insurance proceeds Insurance recoveries Balance with insurance proceeds Cost of goods sold $ 73,374 (2,603 ) $ 70,771 Gain on insurance proceeds received $ — (2,683 ) $ (2,683 ) Income (loss) before income tax (benefit) expense $ (1,219 ) (5,286 ) $ 4,067 Three Months Ended June 30, 2020 Balance without insurance proceeds Insurance recoveries Balance with insurance proceeds Cost of goods sold $ 23,944 (316 ) $ 23,628 Gain on insurance proceeds received $ — (1,683 ) $ (1,683 ) Income (loss) before income tax (benefit) expense $ 284 (1,999 ) $ 2,283