SIFCO INDUSTRIES INC 10-Q

Item 1. Financial Statements SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Operations (Unaudited) (Amounts in thousands, except per share data) Three Months Ended June 30, Nine Months Ended June 30, 2023 2022 2023 2022 Net sales $ 21,853 $ 21,454 $ 62,394 $ 65,269 Cost of goods sold 18,375 21,080 55,935 63,427 Gross profit 3,478 374 6,459 1,842 Selling, general and administrative expenses 3,388 2,821 10,517 9,037 Amortization of intangible assets 63 62 187 252 Gain on disposal of operating assets ( 3 ) — — ( 2 ) Operating income (loss) 30 ( 2,509 ) ( 4,245 ) ( 7,445 ) Interest expense, net 305 146 919 453 Gain on debt extinguishment — — — ( 5,106 ) Foreign currency exchange loss (gain), net 1 ( 7 ) 11 2 Other expense (income), net 323 23 287 ( 45 ) Loss before income tax benefit ( 599 ) ( 2,671 ) ( 5,462 ) ( 2,749 ) Income tax expense (benefit) 35 ( 3 ) 128 ( 29 ) Net loss $ ( 634 ) $ ( 2,668 ) $ ( 5,590 ) $ ( 2,720 ) Net loss per share Basic $ ( 0.11 ) $ ( 0.46 ) $ ( 0.94 ) $ ( 0.47 ) Diluted $ ( 0.11 ) $ ( 0.46 ) $ ( 0.94 ) $ ( 0.47 ) Weighted-average number of common shares (basic) 5,940 5,840 5,925 5,827 Weighted-average number of common shares (diluted) 5,940 5,840 5,925 5,827 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 June 30, Nine Months Ended June 30, 2023 2022 2023 2022 Net loss $ ( 634 ) $ ( 2,668 ) $ ( 5,590 ) $ ( 2,720 ) Other comprehensive loss: Foreign currency translation adjustment, net of tax 20 ( 304 ) 436 ( 563 ) Retirement plan liability adjustment, net of tax 153 188 305 426 Other — — 1 — Comprehensive loss $ ( 461 ) $ ( 2,784 ) $ ( 4,848 ) $ ( 2,857 ) See notes to unaudited consolidated condensed financial statements. 3 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Balance Sheets (Amounts in thousands, except per share data) June 30, 2023 September 30, 2022 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 598 $ 1,174 Receivables, net of allowance for doubtful accounts of $ 137 and $ 111 , respectively 20,197 16,515 Contract assets 9,019 10,172 Inventories, net 10,610 8,969 Refundable income taxes 97 97 Prepaid expenses and other current assets 1,176 1,851 Total current assets 41,697 38,778 Property, plant and equipment, net 37,387 39,272 Operating lease right-of-use assets, net 14,567 15,167 Intangible assets, net 333 477 Goodwill 3,493 3,493 Other assets 79 79 Total assets $ 97,556 $ 97,266 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Current maturities of long-term debt $ 5,394 $ 4,379 Revolver 14,948 11,163 Short-term operating lease liabilities 847 792 Accounts payable 11,469 10,387 Accrued liabilities 6,173 5,868 Total current liabilities 38,831 32,589 Long-term debt, net of current maturities, net of unamortized debt issuance costs 2,994 3,508 Long-term operating lease liabilities, net of short-term 14,203 14,786 Deferred income taxes, net — 137 Pension liability 4,789 4,812 Other long-term liabilities 676 744 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 6,107 at June 30, 2023 and 6,040 at September 30, 2022 6,107 6,040 Additional paid-in capital 11,541 11,387 Retained earnings 26,366 31,956 Accumulated other comprehensive loss ( 7,951 ) ( 8,693 ) Total shareholders’ equity 36,063 40,690 Total liabilities and shareholders’ equity $ 97,556 $ 97,266 See notes to unaudited consolidated condensed financial statements. 4 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Cash Flows (Unaudited, Amounts in thousands) Nine Months Ended June 30, 2023 2022 Cash flows from operating activities: Net loss $ ( 5,590 ) $ ( 2,720 ) Adjustments to reconcile net loss to net cash (used for) provided by operating activities: Depreciation and amortization 4,821 4,800 Amortization of debt issuance costs 30 30 Gain on disposal of operating assets — ( 2 ) Loss on insurance proceeds received for non-property claim 60 — LIFO effect ( 272 ) 586 Share transactions under company stock plan, net 221 203 Inventory valuation accounts ( 1,793 ) 332 Gain on extinguishment of debt — ( 5,106 ) Other long-term liabilities 66 ( 104 ) Deferred income taxes ( 136 ) ( 18 ) Changes in operating assets and liabilities: Receivables ( 3,160 ) 2,730 Contract assets 1,153 938 Inventories 869 ( 1,384 ) Prepaid expenses and other current assets 653 479 Other assets 128 ( 13 ) Accounts payable 585 828 Other accrued liabilities ( 157 ) ( 857 ) Accrued income and other taxes 252 ( 25 ) Net cash (used for) provided by operating activities ( 2,270 ) 697 Cash flows from investing activities: Proceeds from disposal of operating assets 13 2 Capital expenditures ( 1,905 ) ( 2,501 ) Net cash used for investing activities ( 1,892 ) ( 2,499 ) Cash flows from financing activities: Proceeds from long-term debt — 1,402 Payments on long-term debt ( 809 ) ( 1,039 ) Proceeds from revolving credit agreement 60,087 59,668 Repayments of revolving credit agreement ( 56,301 ) ( 58,486 ) Short-term debt borrowings 4,459 2,762 Short-term debt repayments ( 3,965 ) ( 2,715 ) Net cash provided by financing activities 3,471 1,592 Decrease in cash and cash equivalents ( 691 ) ( 210 ) Cash and cash equivalents at the beginning of the period 1,174 346 Effect of exchange rate changes on cash and cash equivalents 115 ( 25 ) Cash and cash equivalents at the end of the period $ 598 $ 111 Supplemental disclosure of cash flow information of operations: Cash paid for interest $ ( 924 ) $ ( 423 ) Cash paid for income taxes, net $ ( 16 ) $ ( 23 ) Non-cash investing activities: Additions to property, plant & equipment - incurred but not yet paid $ 306 $ 336 See notes to unaudited consolidated condensed financial statements. 5 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Shareholders’ Equity (Unaudited, Amounts in thousands ) Nine Months Ended June 30, 2023 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 (loss) income — — — ( 5,590 ) 742 ( 4,848 ) Performance and restricted share expense — — 292 — — 292 Share transactions under equity-based plans 67 67 ( 138 ) — — ( 71 ) Balance - June 30, 2023 6,107 $ 6,107 $ 11,541 $ 26,366 $ ( 7,951 ) $ 36,063 Three Months Ended June 30, 2023 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - March 31, 2023 6,108 $ 6,108 $ 11,455 $ 27,000 $ ( 8,124 ) $ 36,439 Comprehensive (loss) income — — — ( 634 ) 173 ( 461 ) Performance and restricted share expense — — 86 — — 86 Share transactions under equity-based plans ( 1 ) ( 1 ) — — — ( 1 ) Balance - June 30, 2023 6,107 $ 6,107 $ 11,541 $ 26,366 $ ( 7,951 ) $ 36,063 Nine Months Ended June 30, 2022 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 — — — ( 2,720 ) ( 137 ) ( 2,857 ) Performance and restricted share expense — — 309 — — 309 Share transactions under equity-based plans 53 53 ( 159 ) — — ( 106 ) Balance - June 30, 2022 6,040 $ 6,040 $ 11,268 $ 38,876 $ ( 9,216 ) $ 46,968 Three Months Ended June 30, 2022 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - March 31, 2022 6,040 $ 6,040 $ 11,264 $ 41,544 $ ( 9,100 ) $ 49,748 Comprehensive loss — — — ( 2,668 ) ( 116 ) ( 2,784 ) Performance and restricted share expense — — 4 — — 4 Balance - June 30, 2022 6,040 $ 6,040 $ 11,268 $ 38,876 $ ( 9,216 ) $ 46,968 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 (loss). The functional currency for the Company's 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 which approximate the rates in effect at the date of the transaction. 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 condensed balance sheet contained in these financial statements 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 stock method. The dilutive effect is as follows: Three Months Ended June 30, Nine Months Ended June 30, 2023 2022 2023 2022 Net loss $ ( 634 ) $ ( 2,668 ) $ ( 5,590 ) $ ( 2,720 ) Weighted-average common shares outstanding (basic and diluted) 5,940 5,840 5,925 5,827 Effect of dilutive securities: Restricted shares — — — — Performance shares — — — — Weighted-average common shares outstanding (diluted) 5,940 5,840 5,925 5,827 Net loss per share – basic: $ ( 0.11 ) $ ( 0.46 ) $ ( 0.94 ) $ ( 0.47 ) Net loss per share – diluted: $ ( 0.11 ) $ ( 0.46 ) $ ( 0.94 ) $ ( 0.47 ) Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share 211 313 187 309 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. 7 The accompanying consolidated condensed financial statements have been prepared assuming the Company will continue as a going concern. The Company has debt maturing in December 2023 and an alternate financing arrangement has yet to be executed. This condition raises substantial doubt about the Company’s ability to continue as a going concern. The Company is evaluating available financial alternatives, including obtaining acceptable alternative financing. The Company cannot provide assurances that it will be able to provide the remaining post closing deliverable as established under the Seventh Amendment of the Credit Agreement discussed in Note 7, Debt and Subsequent Event or be successful in 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 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. F. Employee Retention Credit Under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the Employee Retention Credit ("ERC") is a refundable payroll tax credit for businesses and tax-exempt organizations that were affected during the COVID-19 pandemic. Eligible businesses, both for-profit and not-for-profit, that experienced a full or partial government-ordered suspension of operations or a "significant" decline in gross receipts in any quarter (more than 50% decrease in 2020 from 2019, and more than 20% in 2021) could receive a quarterly refundable payroll tax credit. The Company, with reasonably assured qualification, submitted and received approval for refunds under the ERC program. As no authoritative guidance exists under U.S. GAAP for reporting ERCs, the Company adopted International Accounting Standards (“IAS”) 20 – Accounting for Government Grants and Disclosure of Government Assistance which permits the recording and presentation of either the gross amount as other income or netting the credit against related expense. The Company recorded a gross benefit of $ 1,772 , which represented $ 1,688 claimed as refund and $ 84 in interest income. The ERC was recognized as a reduction in other manufacturing and selling, general and administrative expenses and allocated to the financial statement categories from which the payroll taxes were originally incurred. The Company recorded benefits to cost of goods sold of $ 1,452 , selling, general and administrative expense of $ 236 and interest income $ 84 , respectively and recorded selling, general and administrative expense of $ 354 for professional fees related to the tax credit in the consolidated condensed statements of operations during the three and nine months ended June 30, 2023. The Company received $ 1,246 of refunds on May 9, 2023 and recorded $ 526 in accounts receivable on the consolidated condensed balance sheets as of June 30, 2023. G. 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 statement of cash flows by moving a prior year amount of $ 332 of inventories from changes in operating assets and liabilities to inventory valuation accounts adjustment to reconcile net loss to net cash used for operating activities to conform to current period presentation. 8 2. Inventories Inventories consist of: June 30, 2023 September 30, 2022 Raw materials and supplies $ 1,763 $ 2,968 Work-in-process 5,342 3,356 Finished goods 3,505 2,645 Total inventories, net $ 10,610 $ 8,969 For a portion of the Company's inventory, cost is determined using the last-in, first-out ("LIFO") method. Approximately 19 % and 42 % of the Company’s inventories at June 30, 2023 and September 30, 2022, 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, 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 $ 9,668 and $ 9,939 higher than reported at June 30, 2023 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 net realizable value, 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 June 30, 2023 and September 30, 2022, our inventory valuation allowances were $ 3,857 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 a 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 third quarter, the Company evaluated potential 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 third quarter, the Company evaluated potential triggering events and determined interim testing was not required. 5. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows: June 30, 2023 September 30, 2022 Foreign currency translation adjustment $ ( 5,760 ) $ ( 6,196 ) Retirement plan liability adjustment, net of tax ( 2,204 ) ( 2,509 ) Interest rate swap agreement, net of tax 13 12 Total accumulated other comprehensive loss $ ( 7,951 ) $ ( 8,693 ) 9 6. Leases The components of lease expense were as follows: Three Months Ended June 30, Nine Months Ended June 30, 2023 2022 2023 2022 Finance lease expense: Amortization of right-of use assets on finance leases $ 11 $ 2 $ 47 $ 16 Interest on lease liabilities 1 — 6 1 Operating lease expense 421 425 1,243 1,283 Variable lease cost 29 29 89 89 Total lease expense $ 462 $ 456 $ 1,385 $ 1,389 The following table presents the impact of leasing on the consolidated condensed balance sheet. Classification in the consolidated condensed balance sheets June 30, 2023 September 30, 2022 Assets: Finance lease assets Property, plant and equipment, net $ 170 $ 202 Operating lease assets Operating lease right-of-use assets, net 14,567 15,167 Total lease assets $ 14,737 $ 15,369 Current liabilities: Finance lease liabilities Current maturities of long-term debt $ 64 $ 61 Operating lease liabilities Short-term operating lease liabilities 847 792 Non-current liabilities: Finance lease liabilities Long-term debt, net of current maturities 98 131 Operating lease liabilities Long-term operating lease liabilities, net of short-term 14,203 14,786 Total lease liabilities $ 15,212 $ 15,770 Supplemental cash flow and other information related to leases were as follows: June 30, 2023 June 30, 2022 Other Information Cash paid for amounts included in measurement of liabilities: Operating cash flows from operating leases $ 1,261 $ 1,285 Operating cash flows from finance leases 6 1 Financing cash flows from finance leases 46 18 Right-of-use assets obtained in exchange for new lease liabilities: Operating leases 60 — June 30, 2023 September 30, 2022 Weighted-average remaining lease term (years): Finance leases 3.1 3.6 Operating leases 12.8 13.5 Weighted-average discount rate: Finance leases 4.9 % 4.7 % Operating leases 5.9 % 5.9 % 10 Future minimum lease payments under non-cancellable leases at June 30, 2023 were as follows: Finance Leases Operating Leases Year ending September 30, 2023 (excluding the nine months ended June 30, 2023) $ 18 $ 417 2024 68 1,686 2025 37 1,683 2026 30 1,681 2027 22 1,693 Thereafter — 14,297 Total lease payments $ 175 $ 21,457 Less: Imputed interest ( 13 ) ( 6,407 ) Present value of lease liabilities $ 162 $ 15,050 7. Debt and Subsequent Event Debt consists of: June 30, 2023 September 30, 2022 Revolving credit agreement $ 14,948 $ 11,163 Foreign subsidiary borrowings 7,803 7,101 Finance lease obligations 162 192 Other, net of unamortized debt issuance costs $( 12 ) and $( 20 ), respectively 423 594 Total debt 23,336 19,050 Less – current maturities ( 20,342 ) ( 15,542 ) Total long-term debt $ 2,994 $ 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 June 30, 2023 and September 30, 2022 was $ 19,567 and $ 22,711 , respectively, and the revolving commitment was $ 35,000 for both periods. Total availability at June 30, 2023 and September 30, 2022 was $ 2,649 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 September 30, 2022, no covenant calculations were required. As of June 30, 2023, the Company was not in compliance with covenant requirements as a result of the Event of Default described below. The Company has a letter of credit balance of $ 1,970 as of June 30, 2023 and September 30, 2022, respectively. The Credit Agreement under the Sixth Amendment had a maturity date of February 19, 2024. The maturity is modified to December 31, 2023 under the Seventh Amendment (the "Seventh Amendment") to the Credit Agreement, which is discussed in additional detail below. The Sixth Amendment amended the Credit Agreement to, among other things, (i) revise the fixed charge coverage ratio ("FCCR") 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 7.5 % at June 30, 2023 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 7.0 % at June 30, 2023 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. 11 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, (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. On August 9, 2023, the Company entered into the Seventh Amendment to the Credit Agreement and the Third Amendment (the "Third Amendment") to the Export Credit Agreement with its lender. The Seventh Amendment amends the Credit Agreement to, among other things, (i) reduce the Revolving Credit Agreement to $ 23,000 , thereby reducing the total revolving commitment to $ 30,000 ; (ii) advances the loan maturity date to December 31, 2023; (iii) provides a waiver of Existing Defaults and concludes the forbearance period as described under the Forbearance Agreement dated April 28, 2023; (iv) 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 Revolving Commitment, less the Availability Block, if applicable, the Borrowing Base, and in combination with the Export Revolving Loan under the Export Credit Agreement to $ 18,000 through September 30, 2023 and $ 19,000 thereafter; (v) the Reserves under the Borrowing Base in the ABL Credit Agreement are reduced to $ 1,500 through September 30, 2023 and $ 2,000 thereafter. The Third Amendment amends the Export Credit Agreement to (i) modify the loan maturity date to December 31, 2023 and (ii) provides waiver of Existing Defaults and concludes the forbearance period as described under the Forbearance Agreement dated April 28, 2023. Lender’s agreement is subject to satisfaction of certain post closing deliverables, including: (i) one or more proposed term sheets which provide for the refinancing of all of the Obligations, in each case in an amount sufficient to repay the Obligations in full, by no later than September 19, 2023; (ii) a Confidential Information Memorandum ("CIM"), by no later than September 20, 2023; and (iii) a duly executed term sheet providing for the refinancing of all of the Obligations in an amount sufficient to repay the Obligations in full, by no later than October 8, 2023. The Company has provided to its lender one or more proposed term sheets which provide for the refinancing of all of the Obligations and a CIM as required under the terms of the Seventh Amendment on or before the requisite due dates. Foreign subsidiary borrowings in USD Foreign debt consists of: June 30, 2023 September 30, 2022 Term loan $ 3,616 $ 3,818 Short-term borrowings 3,703 2,289 Factor 484 994 Total debt $ 7,803 $ 7,101 Less – current maturities ( 5,120 ) ( 4,078 ) Total long-term debt $ 2,683 $ 3,023 Receivables pledged as collateral $ 256 $ 792 Interest rates on foreign borrowings are based on Euribor rates, which range from 0.5 % to 7.6 %. The Company's Maniago, Italy ("Maniago") location obtained borrowings from one lender in the first nine 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. 12 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 $ 67 and $ 46 at June 30, 2023 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 June 30, 2023 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 nine months of fiscal 2023 was ( 2.3 )%, compared with 1 % 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: Three Months Ended June 30, Nine Months Ended June 30, 2023 2022 2023 2022 Service cost $ 6 $ 10 $ 18 $ 31 Interest cost 274 178 824 535 Expected return on plan assets ( 277 ) ( 340 ) ( 831 ) ( 1,021 ) Amortization of net loss 77 119 230 357 Settlement cost 78 69 78 69 Net periodic pension cost (benefit) $ 158 $ 36 $ 319 $ ( 29 ) During the nine months ended June 30, 2023 and 2022, the Company made $ 13 and $ 12 in contributions, respectively, to its defined benefit pension plans. The Company anticipates making $ 43 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 the first nine months of 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 13 grant date fair value of $ 2.84 per share. The awards vest over three years . There were 3 shares forfeited during the nine month period ended June 30, 2023. In the first nine months of fiscal 2023, the Company granted its non-employee directors 38 restricted shares under the 2016 Plan, with a grant date fair value of $ 3.48 per share, which vest over one year . One award for 42 restricted shares vested in January 2023. If all outstanding share awards are ultimately earned and vest at the target number of shares, there are approximately 300 shares that remain available for award at June 30, 2023. 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 $ 292 and $ 309 during the first nine months of fiscal 2023 and 2022, respectively. As of June 30, 2023, there was $ 348 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 1.2 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. • 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 June 30, Nine Months Ended June 30, 2023 2022 2023 2022 Commercial revenue $ 13,086 $ 11,863 $ 34,629 $ 29,729 Military revenue 8,767 9,591 27,765 35,540 Total $ 21,853 $ 21,454 $ 62,394 $ 65,269 14 The following table represents revenue by end market: Three Months Ended June 30, Nine Months Ended June 30, Net Sales 2023 2022 2023 2022 Aerospace components for: Fixed wing aircraft $ 8,726 $ 10,351 $ 28,307 $ 30,310 Rotorcraft 4,067 4,067 11,960 11,982 Energy components for power generation units 7,005 4,899 16,729 12,902 Commercial product and other revenue 2,055 2,137 5,398 10,075 Total $ 21,853 $ 21,454 $ 62,394 $ 65,269 The following table represents revenue by geographic region based on the Company's selling operation locations: Three Months Ended June 30, Nine Months Ended June 30, Net Sales 2023 2022 2023 2022 North America $ 15,391 $ 17,051 $ 47,037 $ 53,339 Europe 6,462 4,403 15,357 11,930 Total $ 21,853 $ 21,454 $ 62,394 $ 65,269 In addition to the disaggregated revenue information provided above, approximately 47 % and 58 % of total net sales for the nine months ended June 30, 2023 and 2022, 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 June 30, 2023: Contract assets - Beginning balance, October 1, 2022 $ 10,172 Additional revenue recognized over-time 28,955 Less amounts billed to the customers ( 30,108 ) Contract assets - Ending balance, June 30, 2023 $ 9,019 Contract liabilities (included within Accrued liabilities) - Beginning balance, October 1, 2022 $ ( 807 ) Payments received in advance of performance obligations ( 1,531 ) Performance obligations satisfied 1,435 Contract liabilities (included within Accrued liabilities) - Ending balance, June 30, 2023 $ ( 903 ) There were no impairment losses recorded on contract assets as of June 30, 2023 and September 30, 2022. Remaining performance obligations As of June 30, 2023, the Company has $ 122,826 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 15 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. The Company recorded costs in selling, general and administrative expense associated with the Cyber Incident of $ 232 and a benefit of $ 50 to other expense (income) due to reversal of insurance deductible accrual during the three months ended June 30, 2023. The Company recorded costs of $ 60 to other expense (income), net of $ 3,000 insurance recovery and $ 1,209 to selling, general and administrative expense in the nine months ended June 30, 2023, resulting in net IT incident costs of $ 182 and $ 1,269 in the three and nine months ended June 30, 2023, respectively. The Company received the $ 3,000 of insurance proceeds on February 20, 2023. At June 30, 2023, the Company recorded $ 1,037 related to the Cyber Incident in accounts payable on the consolidated condensed balance sheets. The Company has incurred, and may continue to incur, certain expenses related to this attack, including expenses associated with additional remediation measures. The Company will accrue these costs as incurred. 13. Subsequent Events The Company has evaluated subsequent events through September 28, 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. On August 9, 2023, the Company entered into the Seventh Amendment to the Credit Agreement and the Third Amendment to the Export Credit Agreement with its lender which waived the Event of Default, ended the forbearance period, and provided for further changes to the agreements. See Note 7, Debt and Subsequent Event for more information. The Company provided to its lender one or more proposed term sheets which provide for the refinancing of all of the Obligations and a CIM as required under the terms of the Seventh Amendment on or before the requisite due dates. See Note 7, Debt and Subsequent Event for more information.