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, 2022 2021 Net sales $ 21,299 $ 19,247 Cost of goods sold 20,038 19,238 Gross profit 1,261 9 Selling, general and administrative expenses 3,280 3,536 Amortization of intangible assets 61 125 Gain on disposal of operating assets ( 11 ) — Operating loss ( 2,069 ) ( 3,652 ) Interest expense, net 275 115 Foreign currency exchange (gain) loss, net ( 3 ) 5 Other expense (income), net 182 ( 32 ) Loss before income tax expense (benefit) ( 2,523 ) ( 3,740 ) Income tax expense (benefit) 66 ( 49 ) Net loss $ ( 2,589 ) $ ( 3,691 ) Net loss per share Basic $ ( 0.44 ) $ ( 0.64 ) Diluted $ ( 0.44 ) $ ( 0.64 ) Weighted-average number of common shares (basic) 5,896 5,800 Weighted-average number of common shares (diluted) 5,896 5,800 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, 2022 2021 Net loss $ ( 2,589 ) $ ( 3,691 ) Other comprehensive (loss) income: Foreign currency translation adjustment, net of tax 342 ( 117 ) Retirement plan liability adjustment, net of tax 78 119 Other 1 ( 6 ) Comprehensive loss $ ( 2,168 ) $ ( 3,695 ) 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, 2022 September 30, 2022 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,157 $ 1,174 Receivables, net of allowance for doubtful accounts of $ 69 and $ 111 , respectively 15,308 16,515 Insurance receivable 1 3,000 — Contract assets 11,522 10,172 Inventories, net 8,322 8,969 Refundable income taxes 97 97 Prepaid expenses and other current assets 1,749 1,851 Total current assets 41,155 38,778 Property, plant and equipment, net 39,633 39,272 Operating lease right-of-use assets, net 14,954 15,167 Intangible assets, net 453 477 Goodwill 3,493 3,493 Other assets 79 79 Total assets $ 99,767 $ 97,266 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Current maturities of long-term debt $ 4,768 $ 4,379 Revolver 11,546 11,163 Short-term operating lease liabilities 807 792 Accounts payable 13,852 10,387 Accrued liabilities 6,425 5,868 Total current liabilities 37,398 32,589 Long-term debt, net of current maturities 3,542 3,508 Long-term operating lease liabilities, net of short-term 14,584 14,786 Deferred income taxes 145 137 Pension liability 4,815 4,812 Other long-term liabilities 710 744 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 6,072 at December 31, 2022 and 6,040 at September 30, 2022 6,072 6,040 Additional paid-in capital 11,406 11,387 Retained earnings 29,367 31,956 Accumulated other comprehensive (loss) ( 8,272 ) ( 8,693 ) Total shareholders’ equity 38,573 40,690 Total liabilities and shareholders’ equity $ 99,767 $ 97,266 See notes to unaudited consolidated condensed financial statements. 1 See Note 12, Commitments & Contingencies on Note 13, Subsequent Events 4 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Cash Flows (Unaudited, Amounts in thousands) Three Months Ended December 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 2,589 ) $ ( 3,691 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,571 1,614 Amortization of debt issuance costs 10 10 Gain on disposal of operating assets ( 11 ) — Loss on insurance proceeds received for non-property claim 110 — LIFO effect 262 176 Share transactions under company stock plan 51 54 Inventory valuation accounts ( 812 ) ( 239 ) Other long-term liabilities ( 96 ) ( 55 ) Deferred income taxes 7 ( 38 ) Changes in operating assets and liabilities: Receivables 1,632 4,906 Contract assets ( 1,350 ) ( 433 ) Inventories 1,544 ( 2,453 ) Prepaid expenses and other current assets 84 521 Other assets 107 ( 15 ) Accounts payable 2,488 1,131 Other accrued liabilities ( 2,775 ) ( 231 ) Accrued income and other taxes 59 ( 18 ) Net cash provided by operating activities 292 1,239 Cash flows from investing activities: Proceeds from disposal of operating assets 12 — Capital expenditures ( 547 ) ( 466 ) Net cash used for investing activities ( 535 ) ( 466 ) Cash flows from financing activities: Proceeds from long-term debt — 1,141 Payments on long-term debt ( 257 ) ( 383 ) Proceeds from revolving credit agreement 19,768 19,412 Repayments of revolving credit agreement ( 19,385 ) ( 19,041 ) Short-term debt borrowings 1,360 — Short-term debt repayments ( 1,370 ) ( 1,487 ) Net cash provided by (used for) financing activities 116 ( 358 ) (Decrease) increase in cash and cash equivalents ( 127 ) 415 Cash and cash equivalents at the beginning of the period 1,174 346 Effect of exchange rate changes on cash and cash equivalents 110 ( 13 ) Cash and cash equivalents at the end of the period $ 1,157 $ 748 Supplemental disclosure of cash flow information of operations: Cash paid for interest $ ( 259 ) $ ( 141 ) Non-cash investing activities: Additions to property, plant & equipment - incurred but not yet paid $ 795 $ 869 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, 2022 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - September 30, 2022 6,040 $ 6,040 $ 11,387 $ 31,956 $ ( 8,693 ) $ 40,690 Comprehensive income (loss) — — — ( 2,589 ) 421 ( 2,168 ) Performance and restricted share expense — — 122 — — 122 Share transactions under equity based plans 32 32 ( 103 ) — — ( 71 ) Balance - December 31, 2022 6,072 $ 6,072 $ 11,406 $ 29,367 $ ( 8,272 ) $ 38,573 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 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 (collectively, 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 2022 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 Annual Report on Form 10-K for the year ended September 30, 2022. C. Net Loss per Share The Company’s net loss per basic share has been computed based on the weighted-average number of common shares outstanding. During a period of net loss, zero restricted and performance shares are included in the calculation of diluted earnings per share because the effect would be anti-dilutive. In a period of net income, the 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, 2022 2021 Net loss $ ( 2,589 ) $ ( 3,691 ) Weighted-average common shares outstanding (basic and diluted) 5,896 5,800 Net loss per share – basic and diluted: $ ( 0.44 ) $ ( 0.64 ) Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share 176 297 D. Going Concern As required by Accounting Standard Codification ("ASC") ASC Topic 205-40, Presentation of Financial Statements - Going Concern, management assesses the Company's ability to continue as a going concern for one year from the financial statement issuance at each annual and interim reporting period. The accompanying consolidated condensed financial statements have been prepared assuming the Company will continue as a going concern. The Company has debt maturing in February 2024 and is currently under a Forbearance Agreement ending August 15, 2023 with its lender as a result of default under the Company’s Credit Agreement to provide (i) timely borrowing base certificates and monthly financial reports for the periods of December 2022, January 2023 and February 2023 and (ii) failure to maintain a fixed charge coverage ratio ("FCCR") not less than 1.1 to 1.0 for the periods of December 2022, January 2023, February 2023 and March 2023. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. 7 The Company is evaluating available financial alternatives, including obtaining acceptable alternative financing as well as seeking additional waivers, forbearances or amendments to the covenants and/or other provisions of the current Credit Agreements and an extension of the forbearance period. The Company cannot provide assurances that it will be successful in negotiating such a waiver or extension of the forbearance period, restructuring of existing debt obligations, obtaining capital or entering into a strategic alternative transaction which provides sufficient funding for the refinancing of its outstanding indebtedness prior to the expiration of the forbearance period or prior to the maturity date of its obligations under the Credit Agreements. The consolidated condensed financial statements do not include any adjustments to the carrying amount and classification of assets, liabilities, and reported expense that may be necessary if the Company was unable to continue as a going concern. See Note 7, Debt and Subsequent Event and Note 13, Subsequent Events. E. Recent Accounting Standards Not Yet Adopted 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 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 is not required 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 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. F. Reclassification Certain amounts in prior years have been reclassified to conform to the fiscal 2023 consolidated condensed statement presentation. In fiscal 2023, the Company revised its classification within the consolidated condensed statements of cash flows by moving a prior year amount of $ 239 of inventories from changes in operating assets and liabilities to adjustments to reconcile net loss to net cash provided by operating activities to conform to current period presentation. 2. Inventories Inventories consist of: December 31, 2022 September 30, 2022 Raw materials and supplies $ 1,968 $ 2,968 Work-in-process 3,625 3,356 Finished goods 2,729 2,645 Total inventories, net $ 8,322 $ 8,969 For a portion of the Company's inventory, cost is determined using the last-in, first-out ("LIFO") method. Approximately 26 % and 42 % of the Company’s inventories at December 31, 2022 and September 30, 2022, respectively, use the LIFO method. An 8 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, the 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 ("NRV"). If the FIFO method had been used for the inventories for which cost is determined using the LIFO method, inventories would have been $ 10,202 and $ 9,939 higher than reported at December 31, 2022 and September 30, 2022, respectively. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The Company estimates excess and obsolescence and shrink reserves for its inventory based upon historical experience, historical and projected sales trends and the age of inventory on hand. As of December 31, 2022 and September 30, 2022, our inventory valuation allowances were $ 4,567 and $ 5,084 , respectively. 3. Long-lived Assets The Company reviews the carrying value of its long-lived assets ("asset groups"), including property, plant and equipment, when events and circumstances indicate a triggering event has occurred. This review is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of the asset group. As required by ASC 360 ("Topic 360"), should the carrying value of an asset group exceed the estimated undiscounted future cash flows, then the asset group is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the asset group exceeds its fair value. The Company continuously monitors for indicators of impairment to determine if further testing is necessary. In the first quarter, the Company evaluated triggering events and did not identify any indicators that the asset groups might be impaired. 4. Goodwill The Company tests its goodwill for impairment in the fourth fiscal quarter, and in interim periods if certain events occur indicating that the carrying amount of goodwill may be impaired. In the first quarter, the Company determined that interim testing was not required. 5. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows: December 31, 2022 September 30, 2022 Foreign currency translation adjustment $ ( 5,854 ) $ ( 6,196 ) Retirement plan liability adjustment, net of tax ( 2,431 ) ( 2,509 ) Interest rate swap agreement, net of tax 13 12 Total accumulated other comprehensive loss $ ( 8,272 ) $ ( 8,693 ) 6. Leases The components of lease expense were as follows: Three Months Ended December 31, 2022 2021 Finance lease expense: Amortization of right-of use assets on finance leases $ 12 $ 12 Interest on lease liabilities 1 1 Operating lease expense 423 429 Variable lease cost 25 30 Total lease expense $ 461 $ 472 9 The following table presents the impact of leasing on the consolidated condensed balance sheet. Classification in the consolidated condensed balance sheets December 31, 2022 September 30, 2022 Assets: Finance lease assets Property, plant and equipment, net $ 202 $ 202 Operating lease assets Operating lease right-of-use assets, net 14,954 15,167 Total lease assets $ 15,156 $ 15,369 Current liabilities: Finance lease liabilities Current maturities of long-term debt $ 65 $ 61 Operating lease liabilities Short-term operating lease liabilities 807 792 Non-current liabilities: Finance lease liabilities Long-term debt, net of current maturities 128 131 Operating lease liabilities Long-term operating lease liabilities, net of short-term 14,584 14,786 Total lease liabilities $ 15,584 $ 15,770 Supplemental cash flow and other information related to leases were as follows: December 31, 2022 December 31, 2021 Other Information Cash paid for amounts included in measurement of liabilities: Operating cash flows from operating leases $ 422 $ 430 Operating cash flows from finance leases 1 1 Financing cash flows from finance leases 12 13 December 31, 2022 September 30, 2022 Weighted-average remaining lease term (years): Finance leases 1.9 3.6 Operating leases 13.3 13.5 Weighted-average discount rate: Finance leases 4.8 % 4.7 % Operating leases 5.9 % 5.9 % Future minimum lease payments under non-cancellable leases at December 31, 2022 were as follows: Finance Leases Operating Leases Year ending September 30, 2023 (excluding the three months ended December 31, 2022) $ 55 $ 1,249 2024 67 1,674 2025 37 1,671 2026 29 1,668 2027 21 1,680 Thereafter — 14,279 Total lease payments $ 209 $ 22,221 Less: Imputed interest ( 16 ) ( 6,830 ) Present value of lease liabilities $ 193 $ 15,391 10 7. Debt and Subsequent Event Debt consists of: December 31, 2022 September 30, 2022 Revolving credit agreement $ 11,546 $ 11,163 Foreign subsidiary borrowings 7,579 7,101 Finance lease obligations 193 192 Other, net of unamortized debt issuance costs $( 18 ) and $( 20 ), respectively 538 594 Total debt 19,856 19,050 Less – current maturities ( 16,314 ) ( 15,542 ) Total long-term debt $ 3,542 $ 3,508 Credit Agreement and Security Agreement The Credit Agreement contains affirmative and negative covenants and events of default. On March 23, 2022, the Company entered into the Sixth Amendment (the "Sixth Amendment") to the Credit Agreement and the Second Amendment (the "Second Amendment") to the Export Credit Agreement with its lender. The total collateral at December 31, 2022 and September 30, 2022 was $ 21,646 and $ 22,711 , respectively, and the revolving commitment was $ 35,000 for both periods. Total availability at December 31, 2022 and September 30, 2022 was $ 8,130 and $ 9,403 , respectively, which exceeds both the collateral and total commitment threshold. Since the availability was greater than 10.0 % of the revolving commitment as of December 31, 2022 and September 30, 2022, no covenant calculations were required. The Company has a letter of credit balance of $ 1,970 as of December 31, 2022 and September 30, 2022, respectively. The Credit Agreement has a maturity date of February 19, 2024. The Sixth Amendment amends the Credit Agreement to, among other things, (i) revise the fixed coverage ratio to exclude the first $ 1,500 of unfunded capital expenditures through April 20, 2023, (ii) increase the letter of credit sub-limit from $ 2,000 to $ 3,000 , (iii) modify the reference rate from the London interbank offered rate ("LIBOR") to the secured overnight financing rate ("SOFR") and (iv) revise the property, plant and equipment component of the borrowing base under the Credit Agreement. The Second Amendment amends the Export Credit Agreement to replace the reference rate from LIBOR to SOFR under the Export Credit Agreement. The revolving credit agreement (or "revolver"), as amended, has a rate based on SOFR plus a 2.25 % spread, which was 6.5 % at December 31, 2022 and a rate based on LIBOR plus a 2.25 % spread, which was 4.9 % at September 30, 2022. The Export Credit Agreement as amended has a rate based on SOFR plus a 1.75 % spread, which was 6.0 % at December 31, 2022 and a rate based on LIBOR plus a 1.75 % spread, which was 4.4 % at September 30, 2022. 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. On February 6, 2023, the Company received a Notice of Event of Default and Reservation of Rights (the “Notice”) from its Lender, with respect to (i) that certain Credit Agreement dated as of August 8, 2018; and (ii) that certain Export Credit Agreement dated as of December 17, 2018. The Notice indicated that the Loan Parties to the Credit Agreements have informed Lender of the occurrence of Events of Defaults under the Credit Agreements as a result of the failure to deliver the required Borrowing Base Certificates thereunder and other Events of Default. The Notice indicated further that Lender is in the process of evaluating the Existing Defaults and reserves all of its rights and remedies under the Credit Agreements and any other Loan Documents with respect thereto. The failure by the Company to provide timely borrowing base certificates and monthly financial reports for the periods of December 2022, January 2023 and February 2023 in accordance with the terms of the Credit Agreements were a result of information access limitations experienced due to the cybersecurity incident that occurred on December 30, 2022. As a secondary default, the Company failed to maintain a FCCR not less than 1.1 to 1.0 for the periods of December 2022, January 2023, February 2023 and March 2023. The secondary default voided the availability spring minimum threshold and triggered the FCCR covenant compliance. See Note 12, Commitments & Contingencies . On April 28, 2023, the Company and its subsidiary guarantors entered into a Forbearance Agreement (the "Forbearance Agreement") with J.P. Morgan Chase Bank, N.A. in respect to the Event of Default under the Credit Agreement. Pursuant to the Forbearance Agreement, during the forbearance period defined therein: (i) the Reserves under the Borrowing Base in the ABL Credit Agreement are reduced to $ 2,000 ; (ii) the aggregate outstanding principal balance of the Revolving Exposure under the ABL Credit Agreement and Export Revolving Loan may not at any time exceed the lesser of $ 19,000 and the Borrowing Base. 11 Foreign subsidiary borrowings in USD Foreign debt consists of: December 31, 2022 September 30, 2022 Term loan $ 3,984 $ 3,818 Short-term borrowings 2,137 2,289 Factor 1,458 994 Total debt $ 7,579 $ 7,101 Less – current maturities ( 4,461 ) ( 4,078 ) Total long-term debt $ 3,118 $ 3,023 Receivables pledged as collateral $ 402 $ 792 Interest rates on foreign borrowings are based on Euribor rates, which range from 0.5 % to 5.6 %. The Company's Maniago, Italy ("Maniago") location obtained borrowings from one lender in the first three months 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 on 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 are included in the consolidated condensed balance sheets as a deferred charge in other current assets, net of amortization of $ 53 and $ 46 at December 31, 2022 and September 30, 2022, respectively. Other On April 10, 2020, the Company entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP Loan”). The PPP Loan had an aggregate principal amount of $ 5,025 . The loan proceeds were used for payroll payments and the SBA granted full forgiveness on January 25, 2022. The Company elected to treat the PPP Loan as debt under FASB Topic 470. As such, the Company derecognized the liability in the second quarter of fiscal 2022 when the loan was forgiven. As of December 31, 2022 and September 30, 2022 the PPP loan balance was $ 0 . 8. 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 2023 was ( 2.6 )%, compared with 1.3 % for the same period of fiscal 2022. The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2023 compared with the same period of 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. 9. Retirement Benefit Plans The Company and certain of its subsidiaries sponsor defined benefit pension plans covering some of its employees. The components of the net periodic benefit cost of the Company’s defined benefit plans are as follows: 12 Three Months Ended December 31, 2022 2021 Service cost $ 6 $ 11 Interest cost 274 178 Expected return on plan assets ( 277 ) ( 340 ) Amortization of net loss 78 119 Net periodic pension cost (benefit) $ 81 $ ( 32 ) During the three months ended December 31, 2022 and 2021, the Company made $ 8 and $ 0 in contributions, respectively to its defined benefit pension plans. The Company anticipates making $ 48 in cash contributions to fund its defined benefit pension plans for the balance of fiscal 2023, 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 2023. 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 2023. 10. Stock-Based Compensation The Company has outstanding equity awards under the Company's 2007 Long-Term Incentive Plan (the "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"), and awards performance and restricted shares under the 2016 Plan. In fiscal 2023, the Company granted 86 shares under the 2016 Plan to certain key employees. The awards were split into two tranches, comprised of 27 performance-based shares and 59 time-based restricted shares, with a grant date fair value of $ 2.84 per share. The awards vest over three years . There were zero shares forfeited during the three month period ended December 31, 2022. If all outstanding share awards are ultimately earned and vest at the target number of shares, there are approximately 387 shares that remain available for award at December 31, 2022. 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 150 % of such target, then a fewer number of shares would be available for award. Stock-based compensation under the 2016 Plan was $ 122 and $ 161 during the first three months of fiscal 2023 and 2022, respectively. As of December 31, 2022, there was $ 395 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 1.5 years. 11. 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) commercial space, semiconductor and other commercial applications. 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. 13 • 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. The following table represents a breakout of total revenue by customer type: Three Months Ended December 31, 2022 2021 Commercial revenue $ 10,181 $ 8,360 Military revenue 11,118 10,887 Total $ 21,299 $ 19,247 The following table represents revenue by end market: Three Months Ended December 31, Net Sales 2022 2021 Aerospace components for: Fixed wing aircraft $ 10,726 $ 9,888 Rotorcraft 4,380 3,544 Energy components for power generation units 4,624 3,657 Commercial product and other revenue 1,569 2,158 Total $ 21,299 $ 19,247 The following table represents revenue by geographic region based on the Company's selling operation locations: Three Months Ended December 31, Net Sales 2022 2021 North America $ 17,294 $ 15,862 Europe 4,005 3,385 Total $ 21,299 $ 19,247 In addition to the disaggregated revenue information provided above, approximately 54 % and 57 % of total net sales for the three months ended December 31, 2022 and 2021, 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. 14 Contract Balances The following table contains a roll forward of contract assets and contract liabilities for the period ended December 31, 2022: Contract assets - Beginning balance, October 1, 2022 $ 10,172 Additional revenue recognized over-time 12,042 Less amounts billed to the customers ( 10,692 ) Contract assets - Ending balance, December 31, 2022 $ 11,522 Contract liabilities (included within Accrued liabilities) - Beginning balance, October 1, 2022 $ ( 807 ) Payments received in advance of performance obligations ( 1,401 ) Performance obligations satisfied 426 Contract liabilities (included within Accrued liabilities) - Ending balance, December 31, 2022 $ ( 1,782 ) There were no impairment losses recorded on contract assets as of December 31, 2022 and September 30, 2022. Remaining performance obligations As of December 31, 2022, the Company has $ 84,169 of remaining performance obligations, the majority of which are anticipated to be completed within the next twelve months. 12. Commitments and Contingencies On December 30, 2022, the Company became aware of a cyber security issue involving unauthorized access to the Company's system (the "Cyber Incident"). The Company immediately began an investigation and engaged cyber security experts to assist with the assessment of the incident and to help determine what data was impacted. The Company's investigation uncovered that the threat actor had gained access to certain areas of the Company's systems on or about December 27, 2022. With the assistance of outside cyber security experts, the Company located and closed the unauthorized access to our systems and identified compromised information, and notified those impacted in accordance with state and federal requirements. The Company undertook a number of other measures to demonstrate our continued support and commitment to data privacy and protection and coordinated with law enforcement. The Company maintains $ 3,000 of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber Incident. Included in the consolidated condensed balance sheets at December 31, 2022, the Company recorded a $ 3,110 liability within accounts payable for costs incurred related to the cyber attack and an insurance receivable of $ 3,000 to other expense (income), net within the consolidated condensed statements of operations. The Company subsequently received the $ 3,000 insurance proceeds on February 20, 2023. The Company has incurred, and may continue to incur, certain expenses related to this attack, including expenses associated with additional remediation measures and further investigation of this matter. The Company will accrue these fees as incurred. 13. Subsequent Events The Company has evaluated subsequent events through July 5, 2023, the date the financial statements were available to be issued, and has determined that the following subsequent events require disclosure in the financial statements. Cyber Incident On December 30, 2022, the Company became aware of a cyber security issue involving unauthorized access to the Company's systems. The Company immediately initiated response protocols and an investigation, engaging cyber security experts to assist with the assessment of the incident and to help determine what data was impacted. See Note 12, Commitments and Contingencies for more information. Forbearance Agreement On April 28, 2023, the Company and its subsidiary guarantors entered into a Forbearance Agreement with J.P. Morgan Chase Bank, N.A. in respect to its Credit Agreement in response to the Notice of Event of Default and Reservation of Rights notice received on February 6, 2023. See Note 7, Debt and Subsequent Event for more information. 15