What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2024-02-14 · 111 added, 57 removed, 144 unchanged (54% of the section changed)

6 unchanged sentences

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

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

future business environment, including capital and consumer spending;

(3) competitive factors, including the ability to replace business that may be lost at comparable margins;

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(17) investigations, claims, disputes, enforcement actions, litigation and/or other legal proceedings;

(18) extraordinary or force majeure events affecting the business or operations of our business (19) the continued long term impact of the COVID-19 pandemic and related residual negative impact on the global economy, which may exacerbate the above factors and/or impact our results of operations and financial condition;

(18) extraordinary or force majeure events affecting the business or operations of our business;

and (19) in connection with its entry into the Ninth Amendment (the "Ninth Amendment") to its Credit Agreement and Fourth Amendment (the "Fourth Amendment") to its Export Credit Agreement, and as a condition to the consummation by the Company’s senior lender of the transactions contemplated thereby:

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Silk executed and delivered a personal guaranty in favor of the Company’s senior lender of certain Company indebtedness under the Credit Agreement and the Export Credit Agreement.

The Company is evaluating available financial alternatives, including obtaining acceptable alternative financing.

If the Company is unable to restructure existing debt obligations, obtain capital or enter into a strategic alternative transaction which provides sufficient funding for the refinancing of its outstanding indebtedness prior to the maturity date of its obligations by the terms of the Ninth Amendment, the lender under the Credit Agreement may choose to accelerate repayment.

The Company is evaluating available strategic alternatives, including obtaining acceptable alternative financing.

If the Company is unable to restructure existing debt obligations, obtain capital or enter into a strategic alternative transaction which provides sufficient funding for the refinancing of its outstanding indebtedness prior to the maturity date stated in the Ninth Amendment, the lender under the Credit Agreement may choose to accelerate repayment.

The Company cannot provide assurances that it will be successful in restructuring the 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.

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The Company operates within a cost structure that includes a significant fixed component.

Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage

the fixed component of their respective cost structures.

Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage the fixed component of their respective cost structures.

Conversely, the opposite effect is expected to occur at lower net sales and related production volumes.

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Backlog of Orders

SIFCO’s total backlog at December 31, 2023 was $130.1 million, of which $103.6 million are anticipated to be complete within the next 12 months, compared with total backlog of $84.2 million as of December 31, 2023.

SIFCO’s total backlog at March 31, 2024 was $137.8 million, of which $105.3 million are anticipated to be complete within the next 12 months, compared with total backlog of $96.7 million as of March 31, 2023.

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

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Backlog information may not be indicative of future sales.

Three Months Ended December 31, 2023 compared with Three Months Ended December 31, 2022

Net sales comparative information for the first three months of fiscal 2024 and 2023 is as follows:

(Dollars in millions) Three Months Ended

December 31, Increase/ (Decrease)

Six Months Ended March 31, 2024 compared with Six Months Ended March 31, 2023

Net sales comparative information for the first six months of fiscal 2024 and 2023 is as follows:

(Dollars in millions) Six Months Ended

March 31, Increase/ (Decrease)

Net Sales 2024 2023

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Total $ 47.6 $ 40.5 $ 7.1

Net sales for the first three months of fiscal 2024 decreased $0.2 million to $21.1 million, compared with $21.3 million in the comparable period of fiscal 2023.

Net sales for the first six months of fiscal 2024 increased $7.1 million to $47.6 million, compared with $40.5 million in the comparable period of fiscal 2023.

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

Fixed wing sales decreased $0.8 million compared with the same period last year primarily due to F18 demand reduction and timing of orders on the 767 and other programs.

Rotorcraft sales decreased $1.2 million compared with the same period last year primarily due to V22 demand reduction.

Fixed wing sales were slightly higher compared with the same period last year.

Rotorcraft sales were slightly lower compared with the same period last year due to demand reduction for the V22 program.

The energy components for power generation units increased by $3.0 million due to growth in the steam turbine markets.

Commercial products and other revenue were slightly higher compared with the same period last year.

Commercial net sales were 62.9% of total net sales and military net sales were 37.1% of total net sales in the first three months of fiscal 2024, compared with 47.8% and 52.2%, respectively, in the comparable period in fiscal 2023.

Military net sales decreased by $3.3 million to $7.8 million in the first three months of fiscal 2024, compared with $11.1 million in the comparable period of fiscal 2023, primarily due to F18 and V22 demand reduction.

Co mmercial net sales increased $3.0 million to $13.2 million in the first three months of fiscal 2024, compared with $10.2 million in the comparable period of fiscal 2023, primarily due to an increase in the power generation steam turbine market and commercial space.

Commercial products and other revenue increased by $4.3 million due to commercial space and the 787 program.

Commercial net sales were 64.3% of total net sales and military net sales were 35.7% of total net sales in the first six months of fiscal 2024, compared with 53.1% and 46.9%, respectively, in the comparable period in fiscal 2023.

Military net sales decreased by $2.0 million to $17.0 million in the first six months of fiscal 2024, compared with $19.0 million in the comparable period of fiscal 2023, primarily due to F35 and V22 demand reduction.

Co mmercial net sales increased $9.1 million to $30.6 million in the first six months of fiscal 2024, compared with $21.5 million in the comparable period of fiscal 2023, primarily due to an increase in the power generation steam turbine market and commercial space.

Cost of Goods Sold

Cost of goods sold increased by $0.3 million, or 1.4%, to $20.3 million, or 96.5% of net sales, during the first three months of fiscal 2024, compared with $20.0 million or 94.1% of net sales, in the comparable period of fiscal 2023.

The increase is primarily due to product mix, higher labor costs of $0.4 million, outside services $0.3 million and $0.1 million of hiring costs as the Company increased production to meet customer demands.

Gross profit decreased $0.5 million to $0.7 million in the first three months of fiscal 2024, compared with $1.3 million gross profit in the comparable period of fiscal 2023.

Gross profit percent of sales was 3.5% during the first three months of fiscal 2024, compared with 5.9% in the comparable period in fiscal 2023.

The decrease in gross profit compared to prior fiscal year

was primarily due to product mix, higher labor costs of $0.4 million, outside services $0.3 million and $0.1 million of hiring costs

Cost of goods sold increased by $6.6 million, or 17.5%, to $44.1 million, or 92.7% of net sales, during the first six months of fiscal 2024, compared with $37.6 million or 92.7% of net sales, in the comparable period of fiscal 2023.

The increase is primarily due to higher sales volume, higher labor costs of $1.4 million and $0.2 million of hiring costs as the Company increased production to meet customer demands, partially offset by lower idle expense of $0.7 million.

Gross profit increase $0.5 million to $3.5 million in the first six months of fiscal 2024, compared with $3.0 million gross profit in the comparable period of fiscal 2023.

Gross profit percent of sales was 7.3% during the first six months of fiscal 2024 and fiscal 2023.

The increase in gross profit compared to prior fiscal year was primarily due to higher volume and reduction of idle expense and outside services $0.2 million, partially offset by higher labor costs of $1.4 million and $0.2 million of hiring costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $3.6 million, or 17.0%, of net sales during the first three months of fiscal 2024, compared with $3.3 million, or 15.4%, of net sales in the comparable period of fiscal 2023.

The increase in selling, general and administrative expenses is primarily due to higher legal costs of $0.2 million related to strategic alternatives and higher salaries and benefits $0.1 million.

Selling, general and administrative expenses were $6.8 million, or 14.3%, of net sales during the first six months of fiscal 2024, compared with $7.1 million, or 17.6%, of net sales in the comparable period of fiscal 2023.

The decrease in selling, general and administrative expenses is primarily due to prior year nonrecurring Cyber incident costs of $1.0 million, partially offset by higher wages, benefits and incentive costs of $0.3 million and higher expenses related to the evaluation of strategic alternatives of $0.3 million.

Amortization of Intangibles

Amortization of intangibles was $0.1 million in the first three months of fiscal 2024 and fiscal 2023.

Amortization of intangibles was $0.1 million in the first six months of fiscal 2024 and fiscal 2023.

Other/General

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first three months of both fiscal 2024 and 2023:

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first six months of both fiscal 2024 and 2023:

Weighted Average

Interest Rate

Six Months Ended

March 31, Weighted Average

Outstanding Balance

Six Months Ended

2024 2023 2024 2023

Revolving credit agreement 7.9 % 6.3 % $ 16.2 million $ 11.8 million

Foreign term debt 5.0 % 4.2 % $ 9.4 million $ 7.2 million

Promissory note - related party 6.6 % — % $ 3.2 million $ 0.0 million

Other debt 0.9 % 1.5 % $ 0.3 million $ 0.5 million

The Company’s effective tax rate through the first six months of fiscal 2024 was (2.0)%, compared with (1.9)% for the same period of fiscal 2023.

The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2024 compared with the same period of fiscal 2023.

The effective tax rate differs from the U.S.

federal statutory rate due primarily to the valuation allowance against the Company’s U.S.

deferred tax assets and income in foreign jurisdictions that are taxed at different rates than the U.S.

statutory tax rate.

Net loss was $5.0 million during the first six months of fiscal 2024 and fiscal 2023.

Net loss is due to higher sales volume and gross margin, offset by higher interest expense as the Company invests to meet increased demand.

Three Months Ended March 31, 2024 compared with Three Months Ended March 31, 2023

Net sales comparative information for the second quarter of fiscal 2024 and 2023 is as follows:

(Dollars in millions) Three Months Ended

March 31, Increase/ (Decrease)

Net Sales 2024 2023

Aerospace components for:

Fixed wing aircraft $ 10.1 $ 8.8 $ 1.3

Rotorcraft 4.2 3.5 0.7

Energy components for power generation units 6.5 5.1 1.4

Commercial product and other revenue 5.8 1.8 4.0

Total $ 26.6 $ 19.2 $ 7.4

Net sales for the second quarter of fiscal 2024 increased $7.4 million to $26.6 million, compared with $19.2 million in the comparable period of fiscal 2023.

Fixed wing sales increased $1.3 million compared with the same period last year primarily due to 787, 767 and other programs.

Rotorcraft sales increased $0.7 million compared with the same period last year primarily due to the H60 program.

The energy components for power generation units increased by $1.4 million due to growth in the steam turbine markets.

Commercial products and other revenue increased $4.0 million compared with the same period last year primarily due to commercial space.

Commercial net sales were 65.5% of total net sales and military net sales were 34.5% of total net sales in the second quarter of fiscal 2024, compared with 59.0% and 41.0%, respectively, in the comparable period in fiscal 2023.

Military net sales increased by $1.3 million to $9.2 million in the second quarter of fiscal 2024, compared with $7.9 million in the comparable period of fiscal 2023, primarily due to the H60 program.

Co mmercial net sales increased $6.0 million to $17.4 million in the second quarter of fiscal 2024, compared with $11.4 million in the comparable period of fiscal 2023, primarily due to an increase in the power generation steam turbine market and commercial space.

Cost of Goods Sold

Cost of goods sold increased by $6.3 million, or 35.9%, to $23.8 million, or 89.7% of net sales, during the second quarter of fiscal 2024, compared with $17.5 million or 91.1% of net sales, in the comparable period of fiscal 2023.

The increase is primarily due to higher volume, higher labor costs of $0.5 million and outside services of $0.2 million as the Company increased production to meet customer demands.

Gross profit increased $1.0 million to $2.7 million in the second quarter of fiscal 2024, compared with $1.7 million gross profit in the comparable period of fiscal 2023.

Gross profit percent of sales was 10.3% during the second quarter of fiscal 2024, compared with 8.9% in the comparable period in fiscal 2023.

The increase in gross profit compared to prior fiscal year was primarily due to higher volume and reduction of idle expense $0.7 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $3.2 million, or 12.1%, of net sales during the second quarter of fiscal 2024, compared with $3.8 million, or 20.0%, of net sales in the comparable period of fiscal 2023.

The decrease in selling, general and administrative expenses is primarily due to prior year nonrecurring Cyber incident costs of $1.0 million, partially offset by legal expenses and costs related to the evaluation of strategic alternatives of $0.1 million.

Amortization of Intangibles

Amortization of intangibles were negligible in the second quarter of fiscal 2024 and fiscal 2023.

Other/General

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the second quarter of both fiscal 2024 and 2023:

Weighted Average

Interest Rate

Three Months Ended

December 31, Weighted Average

March 31, Weighted Average

Outstanding Balance

3 unchanged sentences

Foreign term debt 5.8 % 4.9 % $ 10.0 million $ 7.1 million

Promissory note - related party 13.2 % — % $ 3.2 million $ 0.0 million

Other debt 0.8 % 1.4 % $ 0.3 million $ 0.5 million

The Company’s effective tax rate through the first three months of fiscal 2024 was (1.5)%, compared with (2.6)% for the same period of fiscal 2023.

The Company’s effective tax rate through the second quarter of fiscal 2024 was (3.0)%, compared with (1.2)% for the same period of fiscal 2023.

The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2024 compared with the same period of fiscal 2023.

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statutory tax rate.

Net loss was $3.4 million during the first three months of fiscal 2024, compared with net loss of $2.6 million in the comparable period of fiscal 2023.

Increase in net loss is due to higher labor costs, outside services and hiring costs as the Company positions itself for increased demand.

Net loss was $1.6 million during the second quarter of fiscal 2024, compared with net loss of $2.4 million in the comparable period of fiscal 2023.

Reduction in net loss is primarily due to higher sales volume and gross margin, including reduction of Cyber incident costs and idle expense of $1.0 million and $0.7 million, respectively, partially offset by higher interest expense, labor costs and outside services as the Company increased production to meet customer demands.

Non-GAAP Financial Measures

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Although the Company uses EBITDA and Adjusted EBITDA for the reasons noted above, the use of these non-GAAP financial measures as analytical tools has limitations.

Therefore, reviewers of the Company’s financial information should not consider them in isolation, or as a substitute for analysis of the Company's results of operations as reported in accordance with GAAP.

Therefore, reviewers of the Company’s financial information should not consider them in isolation, or as a

substitute for analysis of the Company's results of operations as reported in accordance with GAAP.

Some of these limitations include:

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

Dollars in thousands Three Months Ended

Dollars in thousands Three Months Ended Six Months Ended

March 31, March 31,

2024 2023 2024 2023

Net loss $ (1,590) $ (2,367) $ (5,013) $ (4,956)

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EBITDA 926 (374) (454) (1,051)

Foreign currency exchange loss (gain), net (1) 4 (3)

Other expense, net (2) 54 72

Gain on disposal of assets (3) — (11)

Foreign currency exchange loss, net (1) 3 12 7 9

Other expense (income), net (2) 52 (328) 105 (146)

Loss on disposal of assets (3) 3 14 3 3

Equity compensation (4) 85 85 171 207

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

The Company's liquidity could be negatively affected if the Company is unable to restructure existing debt obligations, obtain capital or enter 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, by customers

extending payment terms to the Company and/or the decrease in demand for our products.

The Company and management will continue to assess and actively manage liquidity needs.

See Note 7 , Debt .

Cash and cash equivalents was $3.2 million at December 31, 2023 and $0.4 million at September 30, 2023.

At December 31, 2023, the majority of the Company’s cash and cash equivalents were in the possession of its non-U.S.

Cash and cash equivalents was $0.7 million at March 31, 2024 and $0.4 million at September 30, 2023.

Short-term investments was $1.7 million at March 31, 2024 and zero at September 30, 2023.

At March 31, 2024, the majority of the Company’s cash and cash equivalents and short-term investments were in the possession of its non-U.S.

subsidiaries.

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Operating Activities

The Company’s operating activities used $2.1 million of cash in the first three months of fiscal 2024, primarily due to net operating loss of $3.4 million partially offset by depreciation and amortization of $1.6 million and change in inventory valuation accounts of $0.4 million and LIFO effect of $0.3 million.

The uses of cash from working capital of $1.0 million was primarily due to increase in inventory of $4.0 million, contract asset of $0.9 million and other assets/prepaids of $0.7 million, partially offset by accounts receivable reductions of $2.2 million and increase in accrued liabilities $2.4 million.

The increase in inventory is primarily driven by increase in work in process to meet heightened customer demand.

The increase in accrued liabilities is primarily driven by increases in deferred revenue of $1.7 million and legal and professional fess.

The Company’s operating activities for the first three months of fiscal 2023 provided $0.3 million of cash, generated primarily by decreases in accounts receivable of $1.6 million and inventory reserves $0.8 million, partially offset by an increase in inventory $1.5 million.

The Company’s operating activities used $5.3 million of cash in the first six months of fiscal 2024, primarily due to net operating loss of $5.0 million partially offset by non-cash adjustments for depreciation and amortization of $3.1 million and change in inventory valuation accounts of $0.7 million and LIFO effect of $0.4 million.

The uses of cash for working capital of $5.0 million was primarily due to increases in inventory of $5.9 million and accounts receivable of $2.8 million, partially offset by increase in accounts payable $4.0 million.

The increase in inventory is primarily due to increase in raw material and work in process to meet heightened customer demand.

The increase in accounts receivable is due to increases in customer shipments.

The increase in accounts payable is due to increases in raw material purchases and outside processing fees related to inventory build.

The Company’s operating activities for the first six months of fiscal 2023 used $0.4 million primarily due to operating results and an increase in accounts payable of $3.9 million.

Investing Activities

Cash used for investing activities was $0.5 million in the first three months of fiscal 2024 and fiscal 2023, respectively.

Capital commitments as of December 31, 2023 were $0.5 million.

Cash used for investing activities was $3.1 million in the first six months of fiscal 2024 primarily due to purchase of short-term investments of $1.7 million and capital expenditures of $1.3 million.

Cash used for investing activities was $1.4 million in the first six months of fiscal 2023 due to capital expenditures.

Capital commitments as of March 31, 2024 were $0.6 million.

The Company anticipates that the remaining total fiscal 2024 capital expenditures will be within the range of $3.0 million to $3.5 million and will relate principally to the further enhancement of production and product offering capabilities and drive operating cost reductions.

Financing Activities

Cash provided by financing activities was $5.5 million in the first three months of fiscal 2024, compared with $0.1 million in the first three months of fiscal 2023.

As discussed in Note 7, Debt, the Company's Maniago location obtained borrowings from two separate lending sources during the first three months of fiscal 2024.

Cash provided by financing activities was $8.8 million in the first six months of fiscal 2024, compared with $0.8 million in the first six months of fiscal 2023.

As discussed in Note 7, Debt, the Company's Maniago location obtained borrowings from two separate lending sources during the first six months of fiscal 2024.

The first was a bond for approximately $2.2 million with a seven year term.

The proceeds from this loan are shown within cash and cash equivalents on the consolidated condensed balance sheets and will be used for capital investment.

A second loan for approximately $1.1 million with a term of eighteen months, will be for working capital purposes, of which only $0.8 million has been received.

The Company had $1.2 million of net short-term debt borrowings in the first three months of fiscal 2024 compared with nominal net short-term debt repayments in the first three months of fiscal 2023.

The Company had net repayments to the revolver under the Credit Agreement of $0.2 million in the first three months of fiscal 2024 compared with net borrowings of $0.4 million in the first three months of fiscal 2023.

The proceeds from this loan are shown within cash and cash equivalents and short-term investments on the consolidated condensed balance sheets and will be used for capital investment.

A second loan for approximately $1.1 million with a term of eighteen months, will be for working capital purposes.

The Company had $3.1 million of net short-term debt borrowings in the first six months of fiscal 2024 compared with $0.5 million of net short-term debt repayments in the first six months of fiscal 2023.

The Company had net borrowings from the revolver under the Credit Agreement of $1.2 million in the first six months of fiscal 2024 compared with net borrowings of $1.8 million in the first six months of fiscal 2023.

Under the Company's Credit Agreement, the Company is subject to certain customary loan covenants regarding availability.

The availability at December 31, 2023 was $5.0 million, which exceeds reserve minimum threshold as of December 31, 2023, as such, no covenant calculations were required.

The availability at March 31, 2024 was $3.7 million, which exceeds reserve minimum threshold as of March 31, 2024, as such, no covenant calculations were required.

As noted in Note 7, Debt, on November 8, 2023, the Company entered into the Eighth Amendment to the Credit Agreement with its Lender.

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(iii) reduce the Revolving Commitment to $19.0 million from $23.0 million;

(iv) modify the definition of Borrowing Base to mean, at any time, the sum of (a) 85% of Eligible Accounts at such time, plus (b) the lesser of (1) 70% of Eligible Inventory,

valued at the lower of cost or market value, determined on a first-in-first-out basis, at such time and (2) the product of 85% multiplied by the NOLV Percentage identified in the most recent inventory appraisal ordered by the Lender multiplied by Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, at such time, minus (c) Reserves of $1.5 million, increasing on the first day of each month by $0.3 million, commencing on May 1, 2024 and continuing until (and including) August 1, 2024, or such lesser amount, if any, as may be agreed upon in writing by the Lender in its sole discretion (which may be by email from the Lender), plus (d) the PP&E Component;

(iv) modify the definition of Borrowing Base to mean, at any time, the sum of (a) 85% of Eligible Accounts at such time, plus (b) the lesser of (1) 70% of Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, at such time and (2) the product of 85% multiplied by the NOLV Percentage identified in the most recent inventory appraisal ordered by the Lender multiplied by Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, at such time, minus (c) Reserves of $1.5 million, increasing on the first day of each month by $0.3 million, commencing on May 1, 2024 and continuing until (and including) August 1, 2024, or such lesser amount, if any, as may be agreed upon in writing by the Lender in its sole discretion (which may be by email from the Lender), plus (d) the PP&E Component;

(v) modify the Applicable Margin schedule to reflect the following applicable rates:

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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-Q

Item 2. Management’s Discussion and Analysis