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Item 2. Management’s Discussion and Analysis

2022-02-04 compared with 2021-08-06 · 82 added, 186 removed, 107 unchanged (71% of the section changed)

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Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and includes assumptions concerning the Company’s operations, future results and prospects.

The words "will," "may," "designed to," "outlook," "believes," "should," "anticipates," "plans," "expects," "intends," "estimates," "forecasts" and similar expressions identify certain of these forward-looking statements.

These forward-looking statements are based on current expectations and are subject to risk and uncertainties.

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Such factors include the following:

(1) the impact on business conditions in general, and on the demand for product in the A&E industries in particular, of the global economic outlook, including the continuation of military spending at or near current levels and the availability of capital and liquidity from banks, the financial markets and other providers of credit;

(1) the impact on business conditions in general, and on the demand for product in the aerospace and energy (or "A&E") industries in particular, of the global economic outlook, including the continuation of military spending at or near current levels and the availability of capital and liquidity from banks, the financial markets and other providers of credit;

(2) the future business environment, including capital and consumer spending;

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and (iv) other commercial applications.

Fire Restoration

The insurance claim related to the fire on December 26, 2018 at the Orange location was finalized with the Company's insurance carrier.

In the third quarter of fiscal 2021, the Company completed the restoration of the final two of the six presses damaged in the fire.

Restoration of the building structure is nearly complete.

Having finalized the claim with its insurance carrier, proceeds in the amount of $3.1 million were received in December 2020 and the remaining balance from the landlord, resulting in the Company having received cash proceeds of $4.6 million in fiscal 2021.

A total of $3.1 million was recognized within the consolidated condensed statements of operations and the balance was separately designated as payable to the landlord for the continued restoration of the damaged building as prescribed under the

lease arrangement.

The Company has business interruption insurance coverage, of which $0.5 million of the amount received was reflected within the cost of goods sold line within the consolidated condensed statement of operations.

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

Since being recognized by the World Health Organization as a pandemic, the novel coronavirus ("COVID-19") outbreak continues to impact the United States and other countries in which we operate.

The COVID-19 pandemic and its effects continue to evolve, including scope, severity and duration of the COVID-19 pandemic, as well as any worsening of the pandemic, the potential for additional outbreaks of the pandemic, the impact of new variants of COVID-19, actions to contain the pandemic's spread or treat its impact, the rollout and effectiveness of the vaccine, and governmental, business and other actions taken in response to the pandemic.

The exact timing and pace of the recovery is indeterminable as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, and, throughout the course of the pandemic, new variants of COVID-19 have been identified and spread significantly, resulting in additional restrictions put in place by certain governments around the world.

Capital markets and economies worldwide have been negatively impacted by COVID-19 and, given the fluidity of the situation, it is still unclear how lasting and deep the economic impacts will be, specifically in relation to the commercial aerospace industry.

During fiscal 2021, the COVID-19 pandemic continues to have mixed effects on the Company’s results of operations.

Given the long lead times for certain of the Company's products, the Company has seen a greater impact related to the effects of COVID-19 on orders and deliveries in fiscal 2021 than in fiscal 2020.

In response to the uncertain environment created by the COVID-19 pandemic, the Company has, in prior periods, taken measures to reduce costs by furloughing and laying off certain of its employees from one of its plant locations that has experienced reduced sales of commercial aerospace products.

Such employees have since returned to work;

however, the Company implemented a second furlough in July 2021.

The Company continues to actively monitor and find ways to mitigate the impact of the pandemic on its operations and consider its ability to pivot its operations and the industries served.

The novel coronavirus ("COVID-19") continues to impact the United States and other countries in which we operate, as well as the markets we service.

The effects continue to evolve, including scope, severity and duration, as well as the potential of new outbreaks of the virus, the impact of new variants, actions to contain the continued spread or treat its impact, the effectiveness of the vaccine and vaccine rates, and governmental, business and other actions taken in response to the pandemic.

The exact timing and pace of the recovery continues to be indeterminable as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, and, throughout the course of time, new variants of COVID-19 have been identified and spread significantly, resulting in additional restrictions put in place by certain governments around the world.

Capital markets and economies worldwide continue to be negatively impacted by COVID-19 and, given the fluidity of the situation, it is still unclear how lasting and deep the economic impacts will be, specifically in relation to the commercial aerospace industry and energy industries.

During the first quarter of fiscal 2022, COVID-19 continues to have an impact on the Company’s results of operations.

The Company has been impacted by delays in receiving orders and delays in getting materials required to produce certain products.

Due to the uncertain environment created by COVID-19, the Company has taken measures to reduce costs from time to time since the commencement of the COVID-19 pandemic (including during the first quarter of fiscal 2022) by furloughing certain of its employees from one of its plant locations that continues to experience reduced sales of commercial aerospace products.

The employees furloughed in the first quarter of 2022 have since returned to work.

The Company continues to actively monitor and find ways to mitigate the impact on its operations.

Backlog of Orders

SIFCO’s total backlog at June 30, 2021 was $78.1 million, compared with $100.9 million as of June 30, 2020.

SIFCO’s total backlog at December 31, 2021 was $75.7 million, compared with $81.1 million as of December 31, 2020.

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

Sales in the A&E markets continue to be impacted 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.

Sales in the A&E markets continue to be impacted by COVID-19, which has created increased pressure in these markets and accordingly restrained sales in such markets.

Backlog information may not be indicative of future sales.

Nine Months Ended June 30, 2021 compared with Nine Months Ended June 30, 2020

Net sales comparative information for the first nine months of fiscal 2021 and 2020 is as follows:

(Dollars in millions) Nine Months Ended

June 30, Increase/ (Decrease)

Net Sales 2021 2020

Aerospace components for:

Fixed wing aircraft $ 28.9 $ 39.1 $ (10.2)

Rotorcraft 21.7 22.3 (0.6)

Energy components for power generation units 14.8 9.9 4.9

Commercial product and other revenue 9.9 13.2 (3.3)

Total $ 75.3 $ 84.5 $ (9.2)

Net sales for the first nine months of fiscal 2021 decreased $9.2 million to $75.3 million, compared with $84.5 million in the comparable period of fiscal 2020.

Given the long lead times for certain of the Company's products, the Company has seen a greater impact related to the effects of COVID-19 on orders and deliveries in fiscal 2021 than in fiscal 2020.

Fixed wing aircraft sales decreased $10.2 million compared with the same period last year due to timing of customer orders and a decrease in build rates in certain commercial programs, partially offset by increased sales for military programs.

Commercial products and other revenue decreased $3.3 million in the first nine months of fiscal 2021 compared to the same period in fiscal 2020, primarily due to timing of orders related to a munitions program.

The energy components for power generation units increased by $4.9 million primarily due to customer order increases as the market saw some recovery.

Commercial net sales were 35.1% of total net sales and military net sales were 64.9% of total net sales in the first nine months of fiscal 2021, compared with 41.4% and 58.6%, respectively, in the comparable period in fiscal 2020.

Military net sales decreased by $0.7 million to $48.8 million in the first nine months of fiscal 2021, compared with $49.6 million in the comparable period of fiscal 2020, primarily due to the timing of orders related to a munitions program.

Commercial net sales decreased $8.5 million to $26.5 million in the first nine months of fiscal 2021, compared with $35.0 million in the comparable period of fiscal 2020 primarily due to decreased build rates in certain commercial programs, partially offset by an increase in energy components sales for power generation due to increased customer orders.

Cost of Goods Sold

Cost of goods sold decreased by $5.5 million, or 7.7%, to $65.3 million, or 86.8% of net sales, during the first nine months of fiscal 2021, compared with $70.8 million or 83.7% of net sales, in the comparable period of fiscal 2020.

Prior year results include higher insurance recoveries of $2.0 million related to business interruption and mitigation expense as part of the fire settlement.

Once excluded from the results, the decrease is primarily due to decreased volume, cost controlling measures and the non-recurrence of the one-time pension withdrawal liability charge of $0.8 million incurred in the prior year.

Gross profit decreased $3.8 million to $10.0 million during the first nine months of fiscal 2021, compared with $13.8 million in the comparable period of fiscal 2020.

Gross margin percent of sales was 13.2% during the first nine months of fiscal 2021, compared with 16.3% in the comparable period in fiscal 2020.

The decrease in gross profit was primarily due to decreased volume and lower insurance recoveries.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $10.3 million, or 13.7% of net sales during the first nine months of fiscal 2021, compared with $10.4 million, or 12.3% of net sales in the comparable period of fiscal 2020.

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 lower wages related to a first quarter furlough at one location and less travel expense, partially offset by higher legal and professional costs and commissions.

Amortization of Intangibles

Amortization of intangibles was $0.8 million in the first nine months of fiscal 2021, compared with $1.2 million in the comparable period of fiscal 2020.

Such decrease was primarily due to certain intangible assets that were fully amortized during fiscal 2020.

Other/General

The Company recorded income before taxes of $1.0 million in the first nine months of fiscal 2021, compared with $4.1 million in the first nine months of fiscal 2020.

In the first nine months of fiscal 2021, results included a $2.5 million gain on insurance recoveries, compared to $2.7 million in the comparable period.

Interest expense was $0.5 million in the first nine months of fiscal 2021, compared to $0.7 million in the first nine months of fiscal 2020.

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 2021 and 2020:

Weighted Average

Interest Rate

Nine Months Ended

June 30, Weighted Average

Outstanding Balance

Nine Months Ended

2021 2020 2021 2020

Revolving credit agreement 1.5 % 3.2 % $ 8.8 million $ 14.8 million

Foreign term debt 3.5 % 3.9 % $ 7.0 million $ 5.5 million

Other debt 0.9 % 0.4 % $ 5.7 million $ 6.1 million

The Company’s effective tax rate through the first nine months of fiscal 2021 was (79)%, compared with (2)% for the same period of fiscal 2020.

The decrease in the effective rate was primarily attributable to tax benefits from adjusting deferred taxes recorded in Italy recognized on a discrete basis, partially offset by changes in jurisdictional mix of income in fiscal 2021 compared to the same period of fiscal 2020.

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

Net income was $1.8 million during the first nine months of fiscal 2021, compared with $4.2 million in fiscal 2020.

The decrease in income is primarily due to lower sales and lower insurance recoveries since the claim was settled in the first quarter of 2021, partially offset by continued cost saving activities and the favorable tax benefit recorded in the first nine months of fiscal 2021.

Three Months Ended June 30, 2021 compared with Three Months Ended June 30, 2020

Net sales for the third quarter of fiscal 2021 decreased 8.8% to $25.3 million, compared with $27.8 million in the comparable period of fiscal 2020.

Net sales comparative information for the third quarter of fiscal 2021 and 2020 is as follows:

Net sales comparative information for the first three months of fiscal 2022 and 2021 is as follows:

(Dollars in millions) Three Months Ended

June 30, Increase (Decrease)

December 31, Increase/ (Decrease)

Net Sales 2021 2020

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Total $ 19.2 $ 25.1 $ (5.9)

The increase in commercial product and other revenues was attributed to timing of orders for a munitions program.

There was a decrease of $4.8 million in fixed wing aircraft revenues due to timing of customer orders and a decrease in build rates in certain commercial programs.

The decrease of $2.6 million in rotorcraft sales is primarily due to timing of shipments related to certain military programs.

Commercial net sales were 25.5% of total net sales and military net sales were 74.5% of total net sales in the third quarter of fiscal 2021, compared with 44.2% and 55.8%, respectively, in the comparable period of fiscal 2020.

Military net sales increased by $3.4 million to $18.9 million in the third quarter of fiscal 2021, compared with $15.5 million in the comparable period of fiscal 2020, primarily due to the timing of orders for a munitions program.

Commercial net sales decreased $5.8 million to $6.5 million in the third quarter of fiscal 2021, compared with $12.3 million in the comparable period of fiscal 2020 primarily due to decreased build rates in certain commercial programs.

Net sales for the first three months of fiscal 2022 decreased $5.9 million to $19.2 million, compared with $25.1 million in the comparable period of fiscal 2021.

In general, the production of the Company's products have lead times of varying lengths.

The varying lead times, coupled with constraints caused by pressures in timely obtaining raw materials, have contributed to the decline of sales year over year, along with the current state of the commercial aerospace market, in particular, the wide body market.

Rotorcraft sales decreased $4.2 million compared with the same period last year due to delays in receiving customer orders and a decrease in build rates.

The energy components for power generation units decreased by $2.9 million due to variability in the steam turbine market that we serve.

Commercial products and other revenue increased $1.1 million in the first three months of fiscal 2022 compared to the same period in fiscal 2021, primarily due to the timing of orders.

Commercial net sales were 43.4% of total net sales and military net sales were 56.6% of total net sales in the first three months of fiscal 2022, compared with 42.9% and 57.1%, respectively, in the comparable period in fiscal 2021.

Military net sales decreased by $3.4 million to $10.9 million in the first three months of fiscal 2022, compared with $14.3 million in the comparable period of fiscal 2021, primarily due to delays in receiving customer orders and ability to timely get material to

produce parts.

Commercial net sales decreased $2.4 million to $8.3 million in the first three months of fiscal 2022, compared with $10.7 million in the comparable period of fiscal 2021 primarily due to a decrease in energy components sales for power generation due to decreased demand in the market.

Cost of Goods Sold

Cost of goods sold was $22.0 million, or 87.0% of net sales, during the third quarter of fiscal 2021, compared with $23.6 million or 85.1% of net sales, in the comparable period of fiscal 2020, primarily due to lower volume from commercial aerospace programs.

Gross profit decreased $0.9 million to $3.3 million during the third quarter of fiscal 2021, compared with $4.1 million in the comparable period of fiscal 2020.

Gross margin was 13.0% during the third quarter of fiscal 2021, compared with 14.9% in the comparable period in fiscal 2020.

The decrease in gross margin was primarily due to lower sales volume.

Cost of goods sold decreased by $1.9 million, or 9.1%, to $19.2 million, or 99.9% of net sales, during the first three months of fiscal 2022, compared with $21.1 million or 84.4% of net sales, in the comparable period of fiscal 2021.

The decrease is primarily due to lower volume and lower labor costs, partially offset by $1.2 million of idle expense and $0.3 million in higher natural gas costs.

Prior year included approximately $0.5 million in insurance recoveries related to business interruption from the fire claim that occurred in December 2018 at the Orange, California ("Orange") location .

Gross profit decreased $3.9 million to a breakeven amount in the first three months of fiscal 2022, compared with $3.9 million of gross profit in the comparable period of fiscal 2021.

Gross margin percent of sales was nominal during the first three months of fiscal 2022, compared with 15.6% in the comparable period in fiscal 2021.

The decrease in gross profit was primarily due to decreased volume and higher costs as described above.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2.9 million, or 11.5% of net sales, during the third quarter of fiscal 2021, compared with $2.9 million, or 10.3% of net sales, in the comparable period of fiscal 2020.

The increase is primarily due to an

increase in legal and professional costs and IT related costs partially offset by lower salary and benefits in the third quarter of fiscal 2021.

Selling, general and administrative expenses were $3.5 million, or 18.4% of net sales during the first three months of fiscal 2022, compared with $3.8 million, or 15.3% of net sales in the comparable period of fiscal 2021.

The decrease in selling, general and administrative expenses is due to $0.2 million in lower commissions.

Amortization of Intangibles

Amortization of intangibles was $0.2 million in the third quarter of fiscal 2021 compared with $0.4 million in the third quarter of fiscal 2020.

The decrease was due to certain intangible assets that became fully amortized during the prior fiscal year.

Amortization of intangibles was $0.1 million in the first three months of fiscal 2022, compared with $0.3 million in the comparable period of fiscal 2021.

Such decrease was primarily due to certain intangible assets which became fully amortized.

Other/General

The Company recorded income before income taxes of $0.2 million in the third quarter of fiscal 2021, compared to income before income taxes of $2.3 million in the third quarter of fiscal 2020.

Prior period results include a $1.7 million gain in insurance proceeds related to the insurance recovery from the damage that occurred related to the fire at the Orange location.

Interest expense was $0.1 million in the third quarter of fiscal 2021, compared to $0.2 million in the third quarter of fiscal 2020.

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 2021 and 2020:

Prior year results included a $2.5 million gain in insurance recoveries related to the assets that were damaged in the fire at the Orange location that occurred in December 2018.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first three months of both fiscal 2022 and 2021:

Weighted Average

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Three Months Ended

June 30, Weighted Average

December 31, Weighted Average

Outstanding Balance

Three Months Ended

Thee Months Ended

2021 2020 2021 2020

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Other debt 1.1 % 0.9 % $ 5.6 million $ 5.8 million

The Company's effective tax rate in the third quarter of fiscal 2021 was (16)%, compared with 2% for the same period of fiscal 2020.

The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income during the three months ended June 30, 2021 compared to the same period of fiscal 2020.

The Company’s effective tax rate through the first three months of fiscal 2022 was 1.3%, compared with (43)% for the same period of fiscal 2021.

The increase in the effective rate was primarily attributable to tax benefits from adjusting deferred taxes recorded in Italy recognized on a discrete basis in fiscal 2021, which were non-recurring in fiscal 2022.

The effective tax rate differs from the U.S.

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statutory tax rate.

Net income was $0.3 million during the third quarter of fiscal 2021, compared with net income of $2.3 million in the comparable period of fiscal 2020.

Prior year results benefited from a $1.7 million insurance recovery gain as the Company continued to work through the restoration of the Orange location.

Net (Loss) Income

Net loss was $3.7 million during the first three months of fiscal 2022, compared with net income of $3.0 million in the comparable period of fiscal 2021.

The net loss is attributed to lower sales and decreased gross profit due to idle costs recorded.

Prior year results included $2.5 million in insurance recoveries and a favorable tax benefit.

Non-GAAP Financial Measures

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The following table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA:

Dollars in thousands Three Months Ended Nine Months Ended

June 30, June 30,

2021 2020 2021 2020

Net income $ 254 $ 2,250 $ 1,756 $ 4,168

Dollars in thousands Three Months Ended

Net (loss) income $ (3,691) $ 2,993

Depreciation and amortization expense 1,614 1,825

Interest expense, net 115 165

Income tax expense (benefit) (36) 33 (776) (101)

Income tax benefit (49) (905)

EBITDA (2,011) 4,078

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Other loss (income), net (2) (32) 62

Loss on disposal of assets (3) — 55 — 98

Gain on insurance recoveries (3) — (2,495)

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(1) Represents the gain or loss from changes in the exchange rates between the functional currency and the foreign currency in which the transaction is denominated.

(2) Represents miscellaneous non-operating income or expense, such as pension costs, grant income or extinguishment of debt.

(3) Represents the difference between the proceeds from the sale of operating equipment and the carrying values shown on the Company's books.

(4) Represents the difference between the insurance proceeds received for the damaged property and the carrying values shown on the Company's books for the assets that were damaged in the fire at the Orange location.

(2) Represents miscellaneous non-operating income or expense, such as pension costs or grant income.

(3) Represents the difference between the insurance proceeds received for the damaged property and the carrying values shown on the Company's books for the assets that were damaged in the fire at the Orange location that occurred in December 2018.

(4) Represents the equity-based compensation expense recognized by the Company under the 2016 Plan due to granting of awards, awards not vesting and/or forfeitures.

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Liquidity and Capital Resources

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

The ongoing impact and magnitude of the COVID-19 pandemic remain uncertain (including the pandemic's continued effects on the global economy and potential for market disruptions), with the commercial aerospace market continuing to be impacted by the global disruption in travel and, further, the pandemic and responses to the continued spread of the pandemic causing continued interruptions 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 customers extending payment terms to the Company and/or the decrease in demand for our products as a result of the impact of the COVID-19 on the commercial airline industry.

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 and actively manage liquidity needs.

See "Results of Operation - COVID - 19" for further discussion of the impact of the pandemic.

Cash and cash equivalents was $0.2 million at June 30, 2021 and $0.4 million at September 30, 2020.

At June 30, 2021, the majority of the Company’s cash and cash equivalents were in the possession of its non-U.S.

The main sources of liquidity for the Company have been cash flows from operations and borrowings under our Credit Agreement.

We anticipate that cash provided by the cash flows from operations and borrowing capacity under our Credit Agreement will be sufficient to meet our anticipated cash requirements for the next twelve months, which primarily include operating expenses, including salaries and working capital requirements.

The ongoing impact and magnitude of COVID-19 continues to remain uncertain (including the pandemic's continued effects on the global economy and potential for market disruptions) due to the continued interruptions to the business of our customers and suppliers, which in turn can impact our business operations and results as well as our liquidity and capital resources.

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 and actively manage liquidity needs.

See "Results of Operation" for further discussion of the impact of COVID-19.

Cash and cash equivalents was $0.7 million at December 31, 2021 and $0.3 million at September 30, 2021.

At December 31 2021, the majority of the Company’s cash and cash equivalents were in the possession of its non-U.S.

subsidiaries.

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Operating Activities

The Company’s operating activities provided $3.5 million of cash in the first nine months of fiscal 2021, compared with $2.3 million in the first nine months of fiscal 2020.

The cash provided in fiscal 2021 was primarily due to net income of $1.8 million, a $1.4 million decrease in working capital, and $3.1 million in non-cash items, such as gain on insurance recovery and changes in deferred income taxes, depreciation and amortization, equity based compensation, and LIFO effect.

The cash provided from working capital was primarily due to decrease in receivables due to customer collections and decreased sales.

The Company’s operating activities provided $2.3 million of cash in the first nine months of fiscal 2020.

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 $1.2 million of cash in the first three months of fiscal 2022, generated primarily by accounts receivable collections, an increase in accounts payable due to increased raw material purchases and other non-cash items, such as depreciation and amortization.

Cash generation activities were partially offset by the net loss of $3.7 million and a $2.7 million increase in inventory to support sales in fiscal 2022.

The Company’s operating activities provided $3.1 million of cash in the first three months of fiscal 2021.

The cash provided by operating activities in the first three months of fiscal 2021 was primarily due to net income of $3.0 million and $1.4 million decrease in net working capital, partially offset by $1.2 million in non-cash items, such as gain on insurance recovery, and deferred income taxes, depreciation and amortization, equity based compensation, and LIFO effect.

The cash provided by working capital was primarily due to decrease in receivables due to customer collections and decreased accrued liabilities.

Investing Activities

Cash used for investing activities was $1.8 million in the first nine months of fiscal 2021, which includes $4.1 million of insurance recovery on the damaged property related to the fire at the Orange location, compared with $1.3 million in the first nine months of fiscal 2020.

Capital expenditures were $5.9 million, of which $3.7 million related to the continued restoration of the Orange location as a result of the fire.

In addition to the $5.9 million spent for capital expenditures during the first nine months of fiscal 2021, $1.3 million was committed for future capital expenditures as of June 30, 2021.

The Company anticipates that the remaining total fiscal 2021 capital expenditures will be within the range of $0.5 million to $1.1 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 amounts given above, the Company anticipates incurring additional costs in fiscal 2021 of approximately $0.8 million to $1.0 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 the insurance proceeds previously received.

Cash used for investing activities was $0.5 million in the first three months of fiscal 2022, compared with $0.3 million in the first three months of fiscal 2021, which includes $3.5 million of insurance recovery on the damaged property related to the fire at the Orange location.

Capital commitments as of December 31, 2021 were $1.0 million.

The Company anticipates that the remaining total fiscal 2022 capital expenditures will be within the range of $3.0 million to $4.0 million and will relate principally to the further enhancement of production and product offering capabilities and drive operating cost reductions.

Financing Activities

Cash used for financing activities was $1.9 million in the first nine months of fiscal 2021, compared with cash used for financing activities of $1.1 million in the first nine months of fiscal 2020.

As discussed in Note 5, Debt, the Company amended the Credit Agreement and the Export Agreement on February 19, 2021.

The combined maximum borrowings remain unchanged at $35.0 million.

The Fifth Amendment (the "Fifth Amendment") to the Credit Agreement (as amended, the "Credit Agreement") consists of a senior secured revolving credit facility with a maximum borrowing $28.0 million, previously $30.0 million.

The revolving commitment through the First Amendment (the "First Amendment") of the Export Credit Agreement, which lends amounts to the Company on foreign receivables increased its revolving commitment from $5.0 million to $7.0 million.

The Fifth Amendment, among other things, extends the maturity date from August 6, 2021 to February 19, 2024.

As discussed in Note 5, Debt, the Company's Maniago, Italy location obtained borrowings from two separate lenders during the third quarter of fiscal 2021.

The first loan was for $0.7 million with repayment terms of 78 months, of which $0.3 million was forgiven in the same period and included as a gain in debt extinguishment in the operating activities within the consolidated condensed statements of cash flows.

A second loan with a five year term was obtained in the amount of $0.3 million.

The proceeds of these loans were to be used for working capital purposes.

The Company had net repayments to the revolver under the Credit Agreement of $3.0 million in the first nine months of fiscal 2021 compared with net repayments of $4.2 million in the first nine months of fiscal 2020.

Cash used for financing activities was $0.4 million in the first three months of fiscal 2022, compared with cash used for financing activities of $2.1 million in the first three months of fiscal 2021.

As discussed in Note 5, Debt, the Company's Maniago location obtained new borrowings from a lender during the first quarter of fiscal 2022 for approximately $1.1 million with a six year term.

The proceeds of this loan are to be used for working capital purposes.

Short-term debt repayments were $1.5 million in the first three months of fiscal 2022 compared with net short-term debt borrowings of $1.8 million in the first three months of fiscal 2021.

The Company had net borrowings to the revolver under the Credit Agreement of $0.3 million in the first three months of fiscal 2022 compared with net repayments of $3.7 million in the first three months of fiscal 2021.

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 June 30, 2021 was $17.5 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.

The availability at December 31, 2021 was $12.2 million, which was greater than the 10.0% of the

Revolving Commitment as of December 31, 2021.

As such, no covenant calculation was required.

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 10.0% of the Revolving Commitment as of June 30, 2021, the FCCR calculation was not required.

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 and inventory 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.

As noted in Note 10, Subsequent Events, the Company was notified that its application for forgiveness of the $5.0 million PPP Loan was approved by the SBA in January 2022.

As such, the loan amount and all related interest accrued is to be forgiven.

The Company will derecognize the liability in the second quarter of fiscal 2022 when the loan is forgiven and the Company is legally released from the loan.

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 and (ii) funds available under the Credit Agreement for its domestic locations.

The Company was previously able to defer payments for certain debt obligations at its Maniago location to provide Maniago with liquidity.

Additionally, the credit and capital markets has seen significant volatility during the course of the pandemic.

The Company was able to obtain new financing at its Maniago location to provide Maniago with sufficient liquidity.

Additionally, the credit and capital markets have seen significant volatility during the course of the pandemic.

Tightening of the credit market and standards, as well as capital market volatility, could negatively impact our ability to obtain additional debt financing on terms equivalent to our existing Credit Agreement, in the event the Company seeks additional liquidity sources as a result of the continued impact of COVID-19.

Capital market uncertainty and volatility, together with the Company’s market capitalization and status as a smaller reporting company could also negatively impact our ability to obtain equity financing.

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 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, the FASB issued 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 beginning October 1, 2021.

The Company is currently in the process of evaluating the impact of adoption of the rules on the Company's financial condition, results of operations and disclosure.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which is intended to provide temporary optional expedients and exceptions to the U.S.

GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates.

This ASU, along with recently issued ASU 2021-01, which further clarifies the scope of Topic 848, is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022.

ASU 2020-04 was effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022.

The Company has not applied any optional expedients and exceptions to date, and will continue to evaluate the impact of the guidance and whether it will apply the optional expedients and exceptions.

In August 2018, the FASB issued ASU 2018-14, " Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20), " which adds the following disclosure requirements:

(1) the weighted-average interest crediting rates used in the Company's cash balance pension plans and other similar plans;

(2) a narrative description of the reasons for significant gains and losses affecting the benefit obligation for the period;

and (3) an explanation of any other significant changes in the benefit obligation or plan assets that are not otherwise apparent in the other disclosures required by Accounting Standards Codification ("ASC") Topic 715, " Compensation - Retirement Benefits.

" The ASU also clarifies the guidance included in ASC 715-20-50-3 on defined benefit plans disclosure requirements.

This ASU will be effective October 1, 2021 and the Company is currently assessing the impact that this standard will have on our consolidated condensed financial statements.

Recently Adopted Accounting Standards

For recently adopted accounting standards refer to Note 1, Summary of Significant Accounting Policies - Recently Adopted Accounting Standards for further detail.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis