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 December 31, 2021 2020 Net sales $ 19,247 $ 25,078 Cost of goods sold 19,238 21,155 Gross profit 9 3,923 Selling, general and administrative expenses 3,536 3,827 Amortization of intangible assets 125 269 Gain on insurance recoveries — ( 2,495 ) Operating (loss) income ( 3,652 ) 2,322 Interest expense 115 165 Foreign currency exchange loss, net 5 7 Other loss (income), net ( 32 ) 62 (Loss) income before income tax benefit ( 3,740 ) 2,088 Income tax benefit ( 49 ) ( 905 ) Net (loss) income $ ( 3,691 ) $ 2,993 Net (loss) income per share Basic $ ( 0.64 ) $ 0.53 Diluted $ ( 0.64 ) $ 0.51 Weighted-average number of common shares (basic) 5,800 5,691 Weighted-average number of common shares (diluted) 5,800 5,890 See notes to unaudited consolidated condensed financial statements. 2 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Comprehensive (Loss) Income (Unaudited) (Amounts in thousands) Three Months Ended December 31, 2021 2020 Net (loss) income $ ( 3,691 ) $ 2,993 Other comprehensive (loss) income: Foreign currency translation adjustment, net of tax $ 0 and $ 0 for the three months ended, respectively ( 117 ) 287 Retirement plan liability adjustment, net of tax $ 0 and $ 0 for the three months ended, respectively 119 211 Other ( 6 ) — Comprehensive (loss) income $ ( 3,695 ) $ 3,491 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) December 31, 2021 September 30, 2021 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 748 $ 346 Receivables, net of allowance for doubtful accounts of $ 160 and $ 167 , respectively 14,933 19,914 Contract assets 13,307 12,874 Inventories, net 14,979 12,546 Refundable income taxes 101 101 Prepaid expenses and other current assets 1,259 1,792 Total current assets 45,327 47,573 Property, plant and equipment, net 42,415 42,708 Operating lease right-of-use assets, net 15,709 15,943 Intangible assets, net 738 874 Goodwill 3,493 3,493 Other assets 91 77 Total assets $ 107,773 $ 110,668 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Current maturities of long-term debt $ 7,847 $ 9,566 Revolver 9,301 8,930 Short-term operating lease liabilities 782 788 Accounts payable 11,756 9,811 Accrued liabilities 6,550 6,871 Total current liabilities 36,236 35,966 Long-term debt, net of current maturities 3,558 2,669 Long-term operating lease liabilities, net of short-term 15,248 15,439 Deferred income taxes 118 158 Pension liability 5,891 6,073 Other long-term liabilities 741 741 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 6,003 at December 31, 2021 and 5,987 at September 30, 2021 6,003 5,987 Additional paid-in capital 11,156 11,118 Retained earnings 37,905 41,596 Accumulated other comprehensive loss ( 9,083 ) ( 9,079 ) Total shareholders’ equity 45,981 49,622 Total liabilities and shareholders’ equity $ 107,773 $ 110,668 See notes to unaudited consolidated condensed financial statements. 4 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Cash Flows (Unaudited, Amounts in thousands) Three Months Ended December 31, 2021 2020 Cash flows from operating activities: Net (loss) income $ ( 3,691 ) $ 2,993 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 1,614 1,825 Amortization of debt issuance costs 10 26 Gain on insurance proceeds received for damaged property — ( 2,495 ) LIFO effect 176 128 Share transactions under company stock plan 54 127 Other long-term liabilities ( 55 ) 13 Deferred income taxes ( 38 ) ( 950 ) Changes in operating assets and liabilities: Receivables 4,906 2,529 Contract assets ( 433 ) 71 Inventories ( 2,692 ) ( 877 ) Prepaid expenses and other current assets 521 144 Other assets ( 15 ) 77 Accounts payable 1,131 982 Other accrued liabilities ( 231 ) ( 1,620 ) Accrued income and other taxes ( 18 ) 150 Net cash provided by operating activities 1,239 3,123 Cash flows from investing activities: Insurance proceeds received for damaged property — 3,452 Capital expenditures ( 466 ) ( 3,710 ) Net cash used for investing activities ( 466 ) ( 258 ) Cash flows from financing activities: Proceeds from long-term debt 1,141 — Payments on long-term debt ( 383 ) ( 238 ) Proceeds from revolving credit agreement 19,412 23,970 Repayments of revolving credit agreement ( 19,041 ) ( 27,694 ) Short-term debt borrowings — 2,431 Short-term debt repayments ( 1,487 ) ( 606 ) Net cash used for financing activities ( 358 ) ( 2,137 ) Increase in cash and cash equivalents 415 728 Cash and cash equivalents at the beginning of the period 346 427 Effect of exchange rate changes on cash and cash equivalents ( 13 ) 25 Cash and cash equivalents at the end of the period $ 748 $ 1,180 Supplemental disclosure of cash flow information of operations: Cash paid for interest $ ( 141 ) $ ( 106 ) Cash paid for income taxes, net $ — $ ( 11 ) See notes to unaudited consolidated condensed financial statements. 5 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Shareholders’ Equity (Unaudited, Amounts in thousands ) Three Months Ended December 31, 2021 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - September 30, 2021 5,987 $ 5,987 $ 11,118 $ 41,596 $ ( 9,079 ) $ 49,622 Comprehensive loss — — — ( 3,691 ) ( 4 ) ( 3,695 ) Performance and restricted share expense — — 161 — — 161 Share transactions under equity based plans 16 16 ( 123 ) — — ( 107 ) Balance - December 31, 2021 6,003 $ 6,003 $ 11,156 $ 37,905 $ ( 9,083 ) $ 45,981 Three Months Ended December 31, 2020 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - September 30, 2020 5,916 $ 5,916 $ 10,736 $ 42,339 $ ( 13,468 ) $ 45,523 Comprehensive income — — — 2,993 498 3,491 Performance and restricted share expense — — 143 — — 143 Share transactions under equity based plans 43 43 ( 59 ) — — ( 16 ) Balance - December 31, 2020 5,959 $ 5,959 $ 10,820 $ 45,332 $ ( 12,970 ) $ 49,141 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 operations in the United States ("U.S.") 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 2021 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 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. 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 2021 Annual Report on Form 10-K. C. Net (Loss)/Income per Share The Company’s net loss and net income per basic share has been computed based on the weighted-average number of common shares outstanding. Due to the net loss in the current period, zero restricted and performance shares are included in the calculation of diluted earnings per share because the effect would be anti-dilutive. In the prior period, net income per diluted share reflects the effect of the Company's outstanding restricted shares and performance shares under the treasury method. The dilutive effect is as follows: Three Months Ended December 31, 2021 2020 Net (loss) income $ ( 3,691 ) $ 2,993 Weighted-average common shares outstanding (basic) 5,800 5,691 Effect of dilutive securities: Restricted shares — 161 Performance shares — 38 Weighted-average common shares outstanding (diluted) 5,800 5,890 Net (loss) income per share – basic: $ ( 0.64 ) $ 0.53 Net (loss) income per share – diluted: $ ( 0.64 ) $ 0.51 Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share 297 219 7 D. Recently Adopted Accounting Standards In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, " Income Taxes (ASC 740) – Simplifying the Accounting for Income Taxes ," which is intended to reduce complexity in the accounting for income taxes while maintaining or improving the usefulness of information provided to financial statement users. The guidance amends certain existing provisions under ASC 740 to address a number of distinct items. The Company adopted ASU 2019-12 effective October 1, 2021. Adoption of the amendments in this ASU did not have an impact to the Company's results of operations and financial condition. 2. Inventories Inventories consist of: December 31, 2021 September 30, 2021 Raw materials and supplies $ 4,941 $ 4,111 Work-in-process 5,740 3,560 Finished goods 4,298 4,875 Total inventories $ 14,979 $ 12,546 For a portion of the Company's inventory, cost is determined using the last-in, first-out ("LIFO") method. Approximately 44 % and 39 % of the Company’s inventories at December 31, 2021 and September 30, 2021, 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, and 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 $ 9,386 and $ 9,210 higher than reported at December 31, 2021 and September 30, 2021, respectively. 3. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows: December 31, 2021 September 30, 2021 Foreign currency translation adjustment $ ( 5,476 ) $ ( 5,359 ) Retirement plan liability adjustment, net of tax ( 3,601 ) ( 3,720 ) Other ( 6 ) — Total accumulated other comprehensive loss $ ( 9,083 ) $ ( 9,079 ) 4. Leases The components of lease expense were as follows: Three Months Ended December 31, 2021 2020 Finance lease expense: Amortization of right-of use assets on finance leases $ 12 $ 16 Interest on lease liabilities 1 1 Operating lease expense 429 549 Variable lease cost 30 35 Total lease expense $ 472 $ 601 8 The following table presents the impact of leasing on the consolidated condensed balance sheet. Classification in the consolidated condensed balance sheets December 31, 2021 September 30, 2021 Assets: Finance lease assets Property, plant and equipment, net $ 22 $ 34 Operating lease assets Operating lease right-of-use assets, net 15,709 15,943 Total lease assets $ 15,731 $ 15,977 Current liabilities: Finance lease liabilities Current maturities of long-term debt $ 10 $ 17 Operating lease liabilities Short-term operating lease liabilities 782 788 Non-current liabilities: Finance lease liabilities Long-term debt, net of current maturities 3 5 Operating lease liabilities Long-term operating lease liabilities, net of short-term 15,248 15,439 Total lease liabilities $ 16,043 $ 16,249 Supplemental cash flow and other information related to leases were as follows: December 31, 2021 December 31, 2020 Other Information Cash paid for amounts included in measurement of liabilities: Operating cash flows from operating leases $ 430 $ 551 Operating cash flows from finance leases 1 1 Financing cash flows from finance leases 13 14 December 31, 2021 September 30, 2021 Weighted-average remaining lease term (years): Finance leases 1.3 1.1 Operating leases 14.2 14.4 Weighted-average discount rate: Finance leases — % 2.8 % Operating leases 5.9 % 5.9 % Future minimum lease under non-cancellable leases at December 31, 2021 were as follows: Finance Leases Operating Leases Year ending September 30, 2022 (excluding the three months ended December 31, 2021) $ 8 $ 1,263 2023 5 1,632 2024 — 1,647 2025 — 1,644 2026 — 1,620 Thereafter — 15,911 Total lease payments $ 13 $ 23,717 Less: Imputed interest — ( 7,687 ) Present value of lease liabilities $ 13 $ 16,030 9 5. Debt Debt consists of: December 31, 2021 September 30, 2021 Revolving credit agreement $ 9,301 $ 8,930 Foreign subsidiary borrowings 5,866 6,632 Finance lease obligations 13 22 Other, net of unamortized debt issuance costs $( 29 ) and $( 32 ), respectively 5,526 5,581 Total debt 20,706 21,165 Less – current maturities ( 17,148 ) ( 18,496 ) Total long-term debt $ 3,558 $ 2,669 Credit Agreement and Security Agreement The Credit Agreement (as amended, the "Credit Agreement") contains affirmative and negative covenants and events of default. The total collateral at December 31, 2021 and September 30, 2021 was $ 23,328 and $ 25,370 , respectively and the revolving commitment was $ 35,000 for both periods. Total availability at December 31, 2021 and September 30, 2021 was $ 12,157 and $ 14,570 , respectively, which exceed both the collateral and total commitment threshold. Since the availability was greater than the 10.0 % of the revolving commitment as of December 31, 2021 and September 30, 2021, no covenant calculations were required. The revolver has a rate based on LIBOR plus 2.25 % spread, which was 2.3 % at December 31, 2021 and a rate based on LIBOR plus 1.75 % spread, which was 1.8 % at September 30, 2021. The Export Credit Agreement as amended has a rate based on LIBOR plus 1.25 % spread, which was 1.3 % at December 31, 2021 and a rate based on LIBOR plus 1.25 % spread, which was 1.3 % at September 30, 2021, respectively. The Company also has a commitment fee of 0.25 % under the Credit Agreement as amended to be incurred on the unused balance of the revolver. Foreign subsidiary borrowings Foreign debt consists of: December 31, 2021 September 30, 2021 Term loan $ 3,890 $ 3,127 Short-term borrowings 1,513 1,867 Factor 463 1,638 Total debt $ 5,866 $ 6,632 Less – current maturities ( 2,837 ) ( 4,551 ) Total long-term debt $ 3,029 $ 2,081 Receivables pledged as collateral $ 491 $ 485 Interest rates on foreign borrowings are based on Euribor rates which range from 1.0 % to 4.2 %. The Maniago, Italy ("Maniago") location obtained borrowings from one lender in the first quarter of fiscal 2022. The loan was for $ 1,141 with repayment terms of six years . Under the terms of the borrowing, repayments are made quarterly in the amount of $ 56 , beginning December 31, 2022. The Company factors receivables from one of its customers. 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 had debt issuance costs of $ 86 , which is included in the consolidated condensed balance sheets as a deferred charge in other current assets, net of amortization of $ 24 and $ 17 at December 31, 2021 and September 30, 2021, respectively. 10 Other As of December 31, 2021 and September 30, 2021, the Paycheck Protection Program loan (the "PPP Loan") balance was $ 4,764 . The Company has submitted the application for forgiveness of the full amount of the PPP Loan to the Small Business Administration ("SBA"). The Company was notified in January 2022 of the approval for the forgiveness of the PPP Loan (including the amounts previously paid and all accrued interest). See Note 10, Subsequent Events , for further discussion related to the status of loan forgiveness. 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 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. 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. 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 December 31, 2021 2020 Service cost $ 11 $ 26 Interest cost 178 175 Expected return on plan assets ( 340 ) ( 355 ) Amortization of net loss 119 211 Net periodic cost $ ( 32 ) $ 57 During the three months ended December 31, 2021 and 2020, the Company made $ 0 in contributions to its defined benefit pension plans. The Company anticipates making $ 36 in cash contributions to fund its defined benefit pension plans for the balance of fiscal 2022 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 2022. 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 2022. 8. Stock-Based Compensation The Company awards performance and restricted shares under the Company's 2007 Long-Term Incentive Plan ("2007 Plan") and the Company's 2007 Long-Term Incentive Plan (Amended and Restated as of November 16, 2016) (as further amended, the "2016 Plan"). Through the end of the first quarter of 2022, the Company granted 74 shares under the 2016 Plan to certain key employees. The awards were split into two tranches, 44 performance shares and 30 shares of time-based restricted shares, with a grant date fair value of $ 8.00 per share. The awards vest over three years . If all outstanding share awards are ultimately earned and vest at the target number of shares, there are approximately 456 shares that remain available for award at December 31, 2021. 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 % or 150 % of such target, then a fewer number of shares would be available for award. Stock-based compensation under the 2016 Plan was $ 161 and $ 143 during the first three months of fiscal 2022 and 2021, respectively. As of December 31, 2021, there was $ 779 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 1.6 years. 11 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. The following table represents a breakout of total revenue by customer type: Three Months Ended December 31, 2021 2020 Commercial revenue $ 8,360 $ 10,753 Military revenue 10,887 14,325 Total $ 19,247 $ 25,078 The following table represents revenue by the various components: Three Months Ended December 31, Net Sales 2021 2020 Aerospace components for: Fixed wing aircraft $ 9,888 $ 9,790 Rotorcraft 3,544 7,731 Energy components for power generation units 3,657 6,462 Commercial product and other revenue 2,158 1,095 Total $ 19,247 $ 25,078 The following table represents revenue by geographic region based on the Company's selling operation locations: Three Months Ended December 31, Net Sales 2021 2020 North America $ 15,862 $ 19,766 Europe 3,385 5,312 Total $ 19,247 $ 25,078 In addition to the disaggregated revenue information provided above, approximately 57 % and 58 % of total net sales as of December 31, 2021 and 2020, respectively, was 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 The following table contains a roll forward of contract assets and contract liabilities for the period ended December 31, 2021: Contract assets - Beginning balance, October 1, 2021 $ 12,874 Additional revenue recognized over-time 11,245 Less amounts billed to the customers ( 10,812 ) Contract assets - Ending balance, December 31, 2021 $ 13,307 Contract liabilities (included within Accrued liabilities) - Beginning balance, October 1, 2021 $ ( 236 ) Payments received in advance of performance obligations ( 1,152 ) Performance obligations satisfied 172 Contract liabilities (included within Accrued liabilities) - Ending balance, December 31, 2021 $ ( 1,216 ) There were no impairment losses recorded on contract assets as of December 31, 2021 and September 30, 2021. 12 Remaining performance obligations As of December 31, 2021, the Company has $ 75,730 of remaining performance obligations, the majority of which are anticipated to be completed within the next twelve months. 10. Subsequent Events As referenced in Note 5, Debt, the PPP Loan application for forgiveness was in review with the SBA as of December 31, 2021. In January 2022, the Company was notified by the SBA that the full PPP Loan originating amount of $ 5,025 was forgiven. All accrued interest was forgiven and the amount previously repaid by the Company of $ 261 was reimbursed to the Company by its lender. The Company elected to treat the PPP Loan as debt under FASB Topic 470. As such, the Company will derecognize the liability in the second quarter of fiscal 2022 when the loan was forgiven and the Company is legally released from the loan.