What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-12-23 compared with 2021-12-10 · 94 added, 119 removed, 220 unchanged (49% of the section changed)

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SIFCO is engaged in the production of forgings and machined and sub-assembled components primarily for the A&E markets.

The processes and services include forging, heat-treating and machining.

The processes and services include forging, heat-treating, chemical processing and machining.

The Company operates under one business segment.

When planning and evaluating its business operations, the Company takes into consideration certain factors, including the following:

(i) the projected build rate for commercial, business and military aircraft, as well as the engines that power such aircraft;

(i) the projected build rate for commercial, business and military aircraft, as well as the engines that power such

(ii) the projected build rate for industrial steam and gas turbine engines;

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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, and all six presses are currently in operation.

Restoration of the building structure was completed as of September 30, 2021.

Having finalized the claim with its insurance carrier, cash proceeds of $4.5 million were received in fiscal 2021.

A total of $3.0 million was recognized within the consolidated statements of operations.

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

statement of operations.

See Note 11, Commitments and Contingencies, of the consolidated financial statements to see how the insurance claim impacted the consolidated statements of operations and balance sheets.

As previously noted, the COVID-19 pandemic continues to impact the United States and other countries in which the Company operates.

During fiscal 2021, the COVID-19 pandemic continued to impact 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.

Impact of COVID-19 & Other Factors

As previously noted, the lingering impact and residual effects of the COVID-19 pandemic, along with other factors such as ongoing geopolitical tensions, continue to impact the United States and other countries in which the Company operates, including strains on supply chains and inflationary impacts.

During fiscal 2022, the ongoing impact of the COVID-19 pandemic continued to effect the Company’s results of operations.

Given the long lead times for certain of the Company's products, the Company has continued to see an impact related to the effects of COVID-19 on orders and deliveries in fiscal 2022.

While the exact timing and pace of recovery in our markets continues to be indeterminable, there are indications that commercial air travel is steadily recovering.

While the long-term outlook remains positive given the nature of the industry, there continues to be uncertainty with the respect to when commercial air traffic will return to pre-COVID-19 levels.

Given the fluidity of the situation, it is still unclear how lasting and deep the ongoing economic impacts of COVID-19 will last.

In response to the uncertain environment created by the COVID-19 pandemic and its effects, the Company has, at various points in fiscal 2022 and 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.

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.

Additionally, our operations are subject to global economic and geopolitical risks.

For example, while the Company does not have a presence in these regions, the ongoing conflict between Russia and Ukraine has impacted economic activity as well as the availability and price of raw materials and energy.

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

Fiscal Year 2022 Compared with Fiscal Year 2021

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Total $ 83.9 $ 99.6 $ (15.7)

Net sales in fiscal 2021 decreased 12.3%, or $14.0 million to $99.6 million, compared with $113.6 million in fiscal 2020.

Net sales in fiscal 2022 decreased 15.8%, or $15.7 million to $83.9 million, compar ed with $99.6 million in fiscal 2021.

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 2022 than in fiscal 2021.

Fixed wing aircraft sales decreased $13.5 million compared with the same period last year due to timing of customer orders and a decrease in build rates in certain commercial programs as the rebound in air travel did not occur as quickly as anticipated, partially offset by increased sales for military programs.

Rotorcraft sales decreased $4.3 million in fiscal 2021 compared to the same period in fiscal 2020 primarily due to revenue recognized over time for certain military applications.

The energy components for power generation units increased $3.7 million compared with the same period last year due to customer order increases as the market saw some recovery.

Commercial net sales were 36.7% of total net sales and military net sales were 63.3% of total net sales in fiscal 2021, compared with 42.6% and 57.4%, respectively, in the comparable period in fiscal 2020.

Commercial net sales (which includes energy components) decreased $11.7 million to $36.6 million in fiscal 2021, compared to $48.3 million in fiscal 2020 primarily due to the decrease in build rates in the commercial aerospace industry, partially offset by an increase in energy component sales for power generation due to increased customer orders.

Military net sales decreased $2.2 million to $63.0 million in fiscal 2021, compared to $65.2 million in fiscal 2020 primarily due to timing of orders related to certain military programs.

Fixed wing aircraft sales increased $1.0 million compared with the same period last year due to timing of customer orders, an increase in build rates in certain commercial programs and sales for military programs.

Rotorcraft sales decreased $11.6 million in fiscal 2022 compared to the same period in fiscal 2021 primarily due to a timing change in requirements after advance ordering from customers in fiscal 2021 to help the

overall supply chain through the effects of the COVID-19 pandemic.

The energy components for power generation un its decreased $3.0 million compared with the same period last year due to customer order reductions.

Commercial net sales wer e 47.4% of total net sales and military net sales wer e 52.6% of to tal net sales in fiscal 2022, compared with 36.7% and 63.3%, respectively, in the comparable period in fiscal 2021.

Commercial net sales (which includes energy components) increased $3.2 million to $39.8 million in fiscal 2022, compared to $36.6 million in fiscal 2021 primarily due to the increase in build rates in the commercial aerospace industry.

Military net sales decreased $18.9 million to $44.1 million in fiscal 2022, compared to $63.0 million in fiscal 2021 primarily due to timing of orders related to certain military programs as a result of advance ordering in fiscal 2021 and lower munition progra m volumes, such as H60 and Hellfire missile due to timing.

Cost of Goods Sold

Cost of goods sold decreased by $5.2 million, or 5.6%, to $88.4 million, or 88.7% of net sales, during fiscal 2021, compared with $93.6 million or 82.4% of net sales in the comparable period of fiscal 2020.

The decrease was primarily due to lower volume from the commercial aerospace programs, cost controlling measures and the non-recurrence of the one-time pension withdrawal charge of $0.8 million incurred in the prior year.

Prior year results included higher insurance recoveries by $2.5 million related to business interruption and mitigation expense as part of the fire settlement.

Gross profit decreased by $8.8 million, or 43.9%, to $11.2 million during fiscal 2021, compared with $20.0 million in fiscal 2020.

Gross margin percent of sales was 11.3% during fiscal 2021, compared with 17.6% in fiscal 2020, primarily due to lower volume, higher idle expense costs of $1.9 million and lower insurance recoveries of $0.5 million in fiscal 2021 compared with $2.0 million in the prior year.

Cost of goods sol d ("COGS") decreased by $2.6 million, or 3.0%, to $85.8 million, or 102.2% of net sales, during fiscal 2022, compared with $88.4 million or 88.7% of net sales in the comparable period of fisc al 2021.

The decrease was primarily due to lower volume from the military and munitions programs, increased raw material pricing and outside processing costs, inventory write down to net realizable value ("NRV") of $1.5 million and idle expense of $3.1 million partially offset by cost controlling measures including lower payroll costs of $1.8 million .

Net sales decreased at a greater rate than COGS, leading COGS as a percent of net sales to be greater in fiscal 2022 than in fiscal 2021.

This was primarily a result of the Company recording idle expense of $3.1 million, an inventory write down to NRV of $1.5 million, and experiencing increased outside processing and raw material costs.

Prior year results include d $2.1 million of idle expense and $0.3 million of inventory write down to NRV.

Gross Profit (Loss)

Gross profit (loss) decreased by $13.1 million, or 116.6%, to a loss of $1.9 million during fiscal 2022, compared with $11.2 million profit in fiscal 2021.

Gross margin percent of sales was (2.2%) during fiscal 2022, compared with 11.3% in fiscal 2021, primarily due to lower volume, inventory write down to NRV o f $1.5 m illion and incremental idle costs of $1.0 million, higher raw material prices, and outside processing costs in fiscal 2022 compared with the prior year, partially offset by lower payroll.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $11.9 million, or 14.2% of net sales, during fiscal 2022, compared with $13.5 million, or 13.5% of net sales, in fiscal 2021.

The decrease in selling, general and administrative expenses is due to the continued cost reduction efforts by management in response to COVID-19, such as lower wages related to a furlough at one location and fewer travel expenses, partially offset by higher legal and professional costs and commissions.

The decrease in selling, general and administrative expenses is due to the continued cost reduction efforts by management, including lower wages, commissions and travel expenses, partially offset by higher legal and professional costs.

Amortization of Intangibles

Amortization of intangibles decreased $0.5 million to $1.0 million during fiscal 2021, compared with $1.5 million in the comparable period of fiscal 2020.

Amortization of in tangibles decreased $0.7 million to $0.3 million during fiscal 2022, compared with $1.0 million in the comparable period of fiscal 2021.

Such decrease was primarily due to certain intangible assets that were fully amortized during fiscal 2022.

Other/General

The Company recorded operating loss of $1.1 million during fiscal 2021, compared with an operating income of $10.1 million in fiscal 2020.

Current period results include a gain on insurance recoveries of $2.4 million in fiscal 2021 compared to $5.9 million in fiscal 2020 as it relates to fire claim at the Orange location.

Interest expense decreased $0.3 million to $0.6 million in fiscal 2021, compared with $0.9 million in the same period in fiscal 2020.

The decrease is primarily due to the reduction of interest rates and lower average borrowings.

The Company recorded an operat ing loss of $14.1 million during fiscal 2022, compared with an operating loss of $1.1 million in fiscal 2021.

Included in the current year results, the Company recognized a gain on extinguishment of debt related to the PPP loan, that was forgiven by the SBA, for $5.1 million.

See Note 5, Debt for further discussion.

Prior year results included a gain on insurance recoveries of $2.4 million a gain on debt extinguishment of $0.3 million due to partial loan forgiveness at the Company's Maniago location.

Interest expe nse was $0.6 million in fisca l 2022 and fiscal 2021.

See Note 5, Debt, of the consolidated financial statements for further information.

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Other debt 0.7% 0.9% $ 1.9 million $ 5.7 million

The Company believes that inflation did not materially affect its results of operations in either fiscal 2021 or 2020 and does not expect inflation to be a significant factor in fiscal 2022, due to the average duration of our projects.

However, no assurances can be made that the Company will not experience inflationary pressures in the future.

The Company believes that inflation did not materially impact its results of operations in either fiscal 2022 or 2021.

However, the Company does expect inflationary pressures to have some impact in fiscal 2023.

The Company’s effective tax rate in fiscal 2022 was 0.4% compared with 62.2% in fiscal 2021.

The increase in the effective tax rate in fiscal 2021 is primarily attributable to tax benefits from adjusting deferred taxes recorded in Italy applied against a year-to-date loss in fiscal 2021 and changes in jurisdictional mix of income in fiscal 2021 compared with the same period in fiscal 2020.

The decrease in the effective tax rate in fiscal 2022 is primarily attributable to tax benefits from adjusting deferred taxes recorded in Italy applied against a year-to-date loss in fiscal 2021 which was non-recurring in fiscal 2022 and changes in jurisdictional mix of income in fiscal 2022 compared with the same period in fiscal 2021.

The effective tax rate differs from the U.S.

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Net Income (Loss)

Net loss was $0.7 million during fiscal 2021, compared with net income of $9.2 million in fiscal 2020.

The decrease in income in the current period was primarily due to lower volume, lower insurance recoveries and higher idle expense, partially offset by continued costs savings activities and the favorable tax benefit recorded in fiscal 2021.

Net loss wa s $9.6 million during fiscal 2022, compared with net loss of $0.7 million in fisca l 2021.

The decrease in income in the current period was primarily due to lower volume, increased inventory write down to NRV, higher idle expense, raw material prices as a result of supply chain constraints, excess and obsolete costs, and outside processing expenses, partially offset by the gain on debt extinguishment of debt related to the PPP loan and lower payroll and selling, general and administrative expenses.

Non-GAAP Financial Measures

Presented below is certain financial information based on our EBITDA and Adjusted EBITDA.

References to “EBITDA” mean earnings (losses) from operations before interest, taxes, depreciation and amortization, and references to “Adjusted EBITDA” mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of net income to EBITDA and Adjusted EBITDA.

Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under generally accepted accounting principles in the United States of America (“GAAP”).

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September 30,

Net income (loss) $ (743) $ 9,191

Net loss $ (9,640) $ (743)

Depreciation and amortization expense 6,348 7,662

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Foreign currency exchange loss, net (1) 15 23

Other income, net (2) (72) (13)

Loss on disposal of assets (3) 209 174

Other (income) loss, net (2) (149) 215

(Gain) loss on disposal of assets (3) (7) 209

Gain on insurance recoveries (4) — (2,397)

Gain on debt extinguishment (5) (5,106) (287)

Equity compensation expense (6) 428 469

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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.

Pension settlement costs was reclassed from this line to Pension settlement/curtailment benefit.

See Footnote 6.

(3) Represents the difference between the proceeds from the sale of operating equipment and the carrying values shown on the Company’s books or asset impairment of long-lived assets.

(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.

(5) Represents the equity-based compensation expense recognized by the Company under its 2016 Long-Term Incentive Plan (as the amendment and restatement of, and successor to, the 2007 Long-Term Incentive Plan, and referred to as the "2016 Plan") due to granting of awards, awards not vesting and/or forfeitures.

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

(3) Represents the difference between the proceeds from the sale of operating equipment and the carrying value shown on the Company's books or asset impairment of long-lived assets.

(5) Represents the gain on extinguishment of debt and interest for the amount forgiven by the SBA as it relates to the PPP loan in fiscal 2022 and term debt forgiveness as is relates to foreign borrowings in fiscal 2021.

(6) 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.

(7) Represents expense incurred by its defined benefit pension plans related to settlement of pension obligations.

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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 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 management will continue to assess and actively manage liquidity.

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

continue to assess and actively manage liquidity.

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

Cash and cash equivalents decreased to $0.3 million at September 30, 2021 compared with $0.4 million at September 30, 2020.

At September 30, 2021 and 2020, a nominal amount and $0.4 million, respectively, of the Company’s cash and cash equivalents were in the possession of its non-U.S.

Cash and cash equivale nts increased to $1.2 million at Septemb er 30, 2022 compared with $0.3 million at September 30, 2021.

At September 30, 2022 and 2021, cash included financing proceeds for capital investment and a nominal amount, respectively, 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 $3.9 million of cash in fiscal 2021, compared with $0.4 million in fiscal 2020.

The cash provided by operating activities in fiscal 2021 was primarily due to non-cash items, such as depreciation and amortization of $7.7 million, LIFO effect of $0.9 million, equity based compensation, and source of working capital of $1.1 million, partially offset by a net gain on insurance recovery combined with loss on disposal of assets of $2.2 million and deferred income taxes of $1.3 million and net loss of $0.7 million.

The source of cash from working capital of $1.1 million was primarily due to reductions in receivables due to lower sales and improved collections as well as decreases in inventories, partially offset by payments to suppliers and disbursements related to the fire recovery.

The Company’s operating activi ties provided $0.3 million of cash in f iscal 2022, compared with $3.9 million in fiscal 2021.

The cash provided by operating activities in fiscal 2022 was primarily due to non-cash items, such as depreciation and amortization of $6.3 million, inventory write down to NRV $1.5 million, LIFO effect of $0.7 million, equity based compensation of $0.3 million and source of working capital of $6.0 million, partially offset by the forgiveness of the PPP loan of $5.1 million and net loss of $9.6 million.

The source of cash from working capital of $6.0 million was primarily due to reductions in receivables due to lower sales and improved collections as well as decreases in inventories, partially offset by payments to suppliers.

The Company’s operating activities provided $3.9 million of cash in fiscal 2021.

The cash provided by operating activities in fiscal 2020 was primarily due to non-cash items, such as depreciation and amortization of $7.4 million, equity based compensation, deferred income taxes and LIFO effect, partially offset by a net gain on insurance recovery combined with loss on disposal of asset of $5.7 million and use of working capital of $10.5 million and net income of $9.1 million.

The decrease in cash from operating activities was primarily due to increased inventories and payments to suppliers and disbursements related to the fire recovery.

The cash provided by operating activities in fiscal 2021 was primarily due to non-cash items, such as depreciation and amortization of $7.7 million, LIFO effect of $0.9 million, inventory write down to NRV $0.3 million, equity based compensation, and source of working capital of $1.4 million, partially offset by a net gain on insurance recovery combined with loss on disposal of assets of $2.2 million and deferred income taxes of $1.3 million and net loss of $0.7 million.

The source of cash from working capital of $1.4 million was primarily due to reductions in receivables due to lower sales and improved collections as well as decreases in inventories, partially offset by payments to suppliers and disbursements related to the fire recovery.

Investing Activities

Cash used for investing activities was $0.9 million in fiscal 2021, compared with cash used for investing activities of $1.2 million in fiscal 2020.

Fiscal 2021 includes $4.1 million in proceeds received from insurance recovery on the damaged property related to the fire at the Orange location, compared with $7.8 million in proceeds received in the previous year.

Capital expenditures were $5.0 million, mainly funded by insurance proceeds from the fire in fiscal 2021 and $9.0 million in fiscal 2020.

Expenditures in fiscal 2021 and in 2020 were used primarily for the restoration of the Orange location as a result of the fire, which was completed as of September 30, 2021.

Cash used for investing activities was $3.2 million in fiscal 2022, compared with $0.9 million in fiscal 2021.

Fiscal 2022 expenditures were used primarily for manufacturing enhancement and maintenance capital.

Fiscal 2021 included $4.1 million in proceeds received from insurance recovery on the damaged property related to the fire at the Orange location.

Expenditures in fiscal 2021were used primarily for the restoration of the Orange location as a result of the fire, which were completed as of September 30, 2021.

Capital commitments at September 30, 2022 were $1.6 million.

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Financing Activities

Cash used by financing activities was $3.1 million in fiscal 2021 compared to cash provided by financing activities of $0.8 million in fiscal 2020.

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

Cash provided by financing activities was $3.7 million in fiscal 2022 compared to cash used by financing activities of $3.1 million in fiscal 2021.

As discussed in Note 5, Debt , the Company amended the Credit Agreement and the Export Agreement on March 23, 2022.

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 of $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.

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

The revolving commitment through the Second Amendment (the "Second 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 Sixth Amendment, among other things, (i) revises the fixed coverage ratio to exclude the first $1,500 of unfunded capital expenditures through April 20, 2023, (ii) increases the letter of credit sub-limit from $2,000 to $3,000, (iii) modifies the reference rate from the London interbank offered rate ("LIBOR") to the secured overnight financing rate ("SOFR") and (iv) revises the property, plant and equipment component of the borrowing base under the Credit Agreement.

As discussed in Note 5, Debt , the Company's Maniago, Italy location obtained borrowings from two separate lenders during fiscal 2022.

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 statements of cash flows.

The first loan was for $1.2 million with repayment terms of six years.

A second loan with a five year term was obtained in the amount of $1.0 million.

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

The proceeds of the first loan is to be used for working capital purposes, the proceeds of the second loan are earmarked for capital investment.

The Company repaid $1.2 million of its Company's foreign term loans in 2022.

In the prior year, the Company received cash proceeds of $6.6 million, which $5.0 million relates to the PPP loan and $1.5 million from a new loan related to the Maniago location.

A small portion of the PPP loan was repaid.

In addition to the two loans entered into in fiscal 2022, in the prior year, the Company received cash proceeds of $1.0 million from two new loans related to the Maniago location.

A total of $0.4 million in cash was used to repay the Company's foreign term loans.

The Company had net repayments under its revolving credit facility of $3.9 million in fiscal 2021 and $2.7 million in fiscal 2020.

The Company had net borrowings under its revolving credit facility of $2.2 million in fiscal 2022 and net repayments of $3.9 million in fiscal 2021.

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

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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 a 1.75% spread, which was 1.8% at September 30, 2021 and the Export Credit Agreement, as discussed in Note 5, Debt, of the consolidated financial statements, has a rate based on LIBOR plus a 1.25% spread, which was 1.3% at September 30, 2021.

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

The revolver has a rate based on SOFR plus a 2.25% spread, which was 4.86% at September 30, 2022 and the Export Credit Agreement, as discussed in Note 5, Debt, of the consolidated financial statements, has a rate based on SOFR plus a 1.75% spread, which was 4.36% at September 30, 2022.

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

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Because the availability was greater than the 10.0% of the Revolving Commitment as of September 30, 2022, the FCCR calculation was not required.

The Company incurred debt issuance costs related to the above Credit Agreements and amendments in fiscal 2021.

See Note 5, Debt , of the consolidated financial statements for further discussion.

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.

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Additionally, the credit and capital markets saw 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.

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Historically, losses have been within management’s expectations and have not been significant.

The Company maintains allowances for obsolete and excess inventory.

The Company evaluates its allowances for obsolete and excess inventory each quarter.

The Company maintains a formal policy, which requires at a minimum, that a reserve be established based on an analysis of the age of the inventory.

In addition, if the Company learns of specific obsolescence, other than that identified by the aging criteria, an additional reserve will be recognized.

Approximately 42% of the Company's inventory is valued using the last-in, first-out (“LIFO”) method with the remaining valued using the first-in, first-out ("FIFO") method stated at the lower of cost or net realizable value.

Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion.

The Company evaluates obsolete and excess inventory on a quarterly basis.

The Company maintains a formal policy, which requires at a minimum, that amounts are written down based on an analysis of the age of the inventory.

In addition, if the Company learns of specific obsolescence, other than that identified by the aging criteria, an additional write down will be recognized.

Specific obsolescence may arise due to a technological or market change or based on cancellation of an order.

Management’s judgment is necessary in determining the realizable value of these products to arrive at the proper allowance for obsolete and excess inventory.

Management’s judgment is necessary in determining the net realizable value of these products to arrive at the proper write down for obsolete and excess inventory.

Revenue Recognition

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The revenue standard also requires disclosure sufficient to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the cost to obtain or fulfill a contract.

The Company recognizes revenue in the following manner using the five-step revenue recognition model.

A contract exists when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Revenue is recognized when performance obligations under the terms of the contract with a customer of the Company are satisfied.

A portion of the Company's contracts are from purchase orders ("PO's"), which continue to be recognized as of a point in time when products are shipped from the Company's manufacturing facilities or at a later time when control of the products transfers to the customer.

Under the revenue standard, the Company recognizes certain revenue over time as it satisfies the performance obligations because the conditions of transfer of control to the applicable customer are as follows:

• Certain military contracts, which relate to the provisions of specialized or unique goods to the U.S.

government with no alternative use, include provisions within the contract that are subject to the Federal Acquisition Regulation ("FAR").

The FAR provision allows the customer to unilaterally terminate the contract for convenience and requires the customer to pay the Company for costs incurred plus reasonable profit margin and take control of any work in process.

• For certain commercial contracts involving customer-specific products with no alternative use, the contract may fall under the FAR clause provisions noted above for military contracts or may include certain provisions within their contract that the customer controls the work in process based on contractual termination clauses or restrictions of the Company's use of the product and the Company possesses a right to payment for work performed to date plus reasonable profit margin.

As a result of control transferring over time for these products, revenue is recognized based on progress toward completion of the performance obligation.

The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products to be provided.

The Company elected to use the cost to cost input method of progress based on costs incurred for these contracts because it best depicts the transfer of goods to the customer based on incurring costs on the contracts.

Under this method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.

Revenues are recorded proportionally as costs are incurred.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods.

An accounting policy election to exclude from transaction price was made for sales, value add, and other taxes the Company collects concurrent with revenue-producing activities when applicable.

The Company has elected to recognize incremental costs incurred to obtain contracts, which primarily represent commissions paid to third party sales agents where the amortization period would be less than one year, as selling, general and administrative expenses in the consolidated statements of operations as incurred.

The Company elected a practical expedient under Accounting Standard Codification ("ASC") 606 ("Topic 606") to not adjust the promised amount of consideration for the effects of any significant financing component where the Company expects, at contract inception, that the period between when the Company transfers a promised good to a customer and when the customer pays for that good will be one year or less.

Finally, the Company's policy is to exclude performance obligations resulting from contracts with a duration of one year or less from its disclosures related to remaining performance obligations.

The amount of consideration to which the Company expects to be entitled in exchange for the goods is not generally subject to significant variations.

The Company elected to recognize the cost of freight and shipping when control of the products has transferred to the customer as an expense in cost of goods sold on the consolidated statements of operations, because those are costs incurred to fulfill the promise recognized, not a separate performance obligation.

To the extent certain freight and shipping fees are charged to customers, the Company recognizes the amounts charged to customers as revenues and the related costs as an expense in cost of goods sold when control of the related products has transferred to the customer.

Contracts are occasionally modified to account for changes in contract specifications, requirements, and pricing.

The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations.

Substantially all of the Company's contract modifications are for goods that are distinct from the existing contract.

Therefore, the effect of a contract modification on the transaction price and the Company's measure of progress for the performance obligation to which it relates is generally recognized on a prospective basis.

Contract Balances

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Impairment of Long-Lived Assets

The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, when events and circumstances warrant such a review.

The Company reviews the carrying value of its long-lived assets when events and circumstances warrant such a review.

This review involves judgment and is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets and which the Company considers a critical accounting estimate.

If the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, then the long-lived asset is evaluated for impairment.

The Company would assess the fair value of the asset group and compare it to its carrying value.

The long-lived assets are considered impaired if the carrying value of the long-lived assets exceeds its fair value, in which case an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.

Under the Accounting Standard Codification ("ASC") 360 ("Topic 360"), if the carrying value of a long-lived asset or asset group is greater than the estimated undiscounted future cash flows, then the long-lived asset or asset group is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset or asset group exceeds its fair value.

In projecting future undiscounted cash flows, the Company relies on internal budgets and forecasts, and projected proceeds upon disposal of long-lived assets.

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however, changes in estimates of such undiscounted cash flows and fair value could change the Company’s estimates, which could result in future impairment charges.

2022 Long-Lived Asset Recoverability Tests

In the third and fourth quarters, certain qualitative factors, including operating results, at the Orange, California ("Orange") location, triggered recoverability tests.

The results of both indicated that the long-lived assets, right-of-use assets and definite lived intangible assets were recoverable and did not require further review for impairment.

2021 Long-Lived Asset Recoverability Tests

In the fourth quarter, certain qualitative factors, including operating results, at the Orange location, triggered a recoverability test.

The results indicated that the long-lived assets, right-of-use assets and definite lived intangible assets were recoverable and did not require further review for impairment.

Impairment of Goodwill

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As permitted, if the reporting unit fails the impairment test, the Financial Accounting Standards Board ("FASB") issued an Accounting Standard Update ("ASU") removing step two from the goodwill impairment test.

If a reporting unit fails the quantitative impairment test, impairment expense is immediately recorded as the difference between the reporting unit's fair value and carrying value.

If a reporting unit fails the

quantitative impairment test, impairment expense is immediately recorded as the difference between the reporting unit's fair value and carrying value.

The Company adopted this standard effective March 31, 2017.

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The discount rate may be further revised if the market environment indicates that the above methodology generates a discount rate that does not accurately reflect the prevailing interest rates as of the fiscal year end measurement date.

The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the Findley Pension Discount Curve.

The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the USI Consulting Group Pension Discount Curve.

As of September 30, 2022 and 2021, SIFCO used the following assumptions:

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ASU 2016-13 is effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

smaller reporting company ("SRC"), as defined by the Securities and Exchange Commission, to fiscal years after December 15, 2022, 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 qualify as a smaller reporting company ("SRC"), as defined by the Securities and Exchange Commission, to fiscal years 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 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 the Company beginning October 1, 2021.

The effect of adopting this ASU is not expected to have a material impact to the Company's results within the consolidated statements of operations and financial condition.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis