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 March 31, Six Months Ended March 31, 2024 2023 2024 2023 Net sales $ 26,543 $ 19,242 $ 47,595 $ 40,541 Cost of goods sold 23,816 17,522 44,132 37,560 Gross profit 2,727 1,720 3,463 2,981 Selling, general and administrative expenses 3,208 3,849 6,789 7,129 Amortization of intangible assets 41 63 81 124 Loss on disposal of operating assets 3 14 3 3 Operating loss ( 525 ) ( 2,206 ) ( 3,410 ) ( 4,275 ) Interest expense, net 963 339 1,393 614 Foreign currency exchange loss, net 3 12 7 9 Other expense (income), net 52 ( 218 ) 105 ( 35 ) Loss before income tax expense ( 1,543 ) ( 2,339 ) ( 4,915 ) ( 4,863 ) Income tax expense 47 28 98 93 Net loss $ ( 1,590 ) $ ( 2,367 ) $ ( 5,013 ) $ ( 4,956 ) Net loss per share Basic $ ( 0.26 ) $ ( 0.40 ) $ ( 0.84 ) $ ( 0.84 ) Diluted $ ( 0.26 ) $ ( 0.40 ) $ ( 0.84 ) $ ( 0.84 ) Weighted-average number of common shares (basic) 6,009 5,940 5,983 5,918 Weighted-average number of common shares (diluted) 6,009 5,940 5,983 5,918 See notes to unaudited consolidated condensed financial statements. 2 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Comprehensive Loss (Unaudited) (Amounts in thousands) Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Net loss $ ( 1,590 ) $ ( 2,367 ) $ ( 5,013 ) $ ( 4,956 ) Other comprehensive loss: Foreign currency translation (loss) gain, net of tax ( 128 ) 74 125 416 Retirement plan liability adjustment, net of tax 43 74 86 152 Other — — 1 1 Comprehensive loss $ ( 1,675 ) $ ( 2,219 ) $ ( 4,801 ) $ ( 4,387 ) 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) March 31, 2024 September 30, 2023 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 747 $ 368 Short-term investments 1,730 — Receivables, net of allowance for credit losses of $ 131 and $ 242 , respectively 23,125 20,196 Contract assets 9,976 10,091 Inventories, net 13,847 8,853 Refundable income taxes 84 84 Prepaid expenses and other current assets 2,112 1,882 Total current assets 51,621 41,474 Property, plant and equipment, net 34,861 36,287 Operating lease right-of-use assets, net 13,911 14,380 Intangible assets, net 203 278 Goodwill 3,493 3,493 Other assets 99 81 Total assets $ 104,188 $ 95,993 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Current maturities of long-term debt $ 6,364 $ 3,820 Promissory note - related party 3,256 — Revolver 17,518 16,289 Short-term operating lease liabilities 894 869 Accounts payable 17,683 13,497 Accrued liabilities ($ 760 is related party) 7,067 6,477 Total current liabilities 52,782 40,952 Long-term debt, net of current maturities, net of unamortized debt issuance costs 4,075 2,457 Long-term operating lease liabilities, net of short-term 13,561 14,020 Deferred income taxes, net — 142 Pension liability 3,457 3,417 Other long-term liabilities 657 670 Shareholders’ equity: Serial preferred shares, no par value, authorized 1,000 shares; 0 shares issued and outstanding at March 31, 2024 and September 30, 2023 — — Common shares, par value $ 1 per share, authorized 10,000 shares; issued and outstanding shares 6,190 at March 31, 2024 and 6,105 at September 30, 2023 6,190 6,105 Additional paid-in capital 11,663 11,626 Retained earnings 18,252 23,264 Accumulated other comprehensive loss ( 6,449 ) ( 6,660 ) Total shareholders’ equity 29,656 34,335 Total liabilities and shareholders’ equity $ 104,188 $ 95,993 See notes to unaudited consolidated condensed financial statements. 4 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Cash Flows (Unaudited, Amounts in thousands) Six Months Ended March 31, 2024 2023 Cash flows from operating activities: Net loss $ ( 5,013 ) $ ( 4,956 ) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 3,068 3,198 Amortization of debt issuance costs 352 20 Loss on disposal of operating assets 3 3 Loss on insurance proceeds received for non-property claim — 110 LIFO effect 351 ( 199 ) Share transactions under company stock plan, net 122 136 Inventory valuation accounts 666 ( 1,657 ) Interest added to promissory note - related party (paid-in-kind) 106 — Other long-term liabilities 106 ( 256 ) Deferred income taxes ( 142 ) ( 64 ) Changes in operating assets and liabilities: Receivables ( 2,840 ) ( 383 ) Contract assets 115 ( 464 ) Inventories ( 5,917 ) ( 29 ) Prepaid expenses and other current assets 362 145 Other assets ( 715 ) 317 Accounts payable 3,994 3,918 Other accrued liabilities ( 201 ) ( 390 ) Accrued income and other taxes 235 178 Net cash used for operating activities ( 5,348 ) ( 373 ) Cash flows from investing activities: Proceeds from disposal of operating assets — 16 Capital expenditures ( 1,314 ) ( 1,435 ) Purchase of short-term investments ( 1,747 ) — Net cash used for investing activities ( 3,061 ) ( 1,419 ) Cash flows from financing activities: Proceeds from long-term debt 2,183 — Payments on long-term debt ( 501 ) ( 525 ) Proceeds from revolving credit agreement 44,319 37,832 Repayments of revolving credit agreement ( 43,090 ) ( 35,991 ) Payment of debt issuance costs ( 228 ) — Proceeds from promissory note - related party 3,000 — Short-term debt borrowings 5,268 2,356 Short-term debt repayments ( 2,168 ) ( 2,856 ) Net cash provided by financing activities 8,783 816 Increase (decrease) in cash and cash equivalents 374 ( 976 ) Cash and cash equivalents at the beginning of the period 367 1,175 Effect of exchange rate changes on cash and cash equivalents 6 117 Cash and cash equivalents at the end of the period $ 747 $ 316 5 Supplemental disclosure of cash flow information of operations: Cash paid for interest $ ( 871 ) $ ( 550 ) Cash paid for income taxes, net $ ( 19 ) $ ( 16 ) Non-cash investing activities: Additions to property, plant & equipment - incurred but not yet paid $ 328 $ 319 Non-cash financing activities: Debt issuance cost due at maturity - related party $ 910 $ — Interest added to promissory note - related party (paid-in-kind) $ 106 $ — See notes to unaudited consolidated condensed financial statements. 6 SIFCO Industries, Inc. and Subsidiaries Consolidated Condensed Statements of Shareholders’ Equity (Unaudited, Amounts in thousands ) Six Months Ended March 31, 2024 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - September 30, 2023 6,105 $ 6,105 $ 11,626 $ 23,264 $ ( 6,660 ) $ 34,335 Comprehensive (loss) income — — — ( 5,012 ) 211 ( 4,801 ) Performance and restricted share expense — — 171 — — 171 Share transactions under equity-based plans 85 85 ( 134 ) — — ( 49 ) Balance - March 31, 2024 6,190 $ 6,190 $ 11,663 $ 18,252 $ ( 6,449 ) $ 29,656 Three Months Ended March 31, 2024 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - December 31, 2023 6,160 $ 6,160 $ 11,609 $ 19,842 $ ( 6,364 ) $ 31,247 Comprehensive loss — — — ( 1,590 ) ( 85 ) ( 1,675 ) Performance and restricted share expense — — 84 — — 84 Share transactions under equity-based plans 30 30 ( 30 ) — — — Balance - March 31, 2024 6,190 $ 6,190 $ 11,663 $ 18,252 $ ( 6,449 ) $ 29,656 Six Months Ended March 31, 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 — — — ( 4,956 ) 569 ( 4,387 ) Performance and restricted share expense — — 207 — — 207 Share transactions under equity-based plans 68 68 ( 139 ) — — ( 71 ) Balance - March 31, 2023 6,108 $ 6,108 $ 11,455 $ 27,000 $ ( 8,124 ) $ 36,439 Three Months Ended March 31, 2023 Common Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance - December 31, 2022 6,072 $ 6,072 $ 11,406 $ 29,367 $ ( 8,272 ) $ 38,573 Comprehensive (loss) income — — — ( 2,367 ) 148 ( 2,219 ) Performance and restricted share expense — — 85 — — 85 Share transactions under equity-based plans 36 36 ( 36 ) — — — Balance - March 31, 2023 6,108 $ 6,108 $ 11,455 $ 27,000 $ ( 8,124 ) $ 36,439 See notes to unaudited consolidated condensed financial statements. 7 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 United States ("U.S.") dollar is the functional currency for all of the Company’s operations in the U.S. and its non-operating subsidiaries. For these operations, all gains and losses from completed currency transactions are included in net loss. 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 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 2023 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. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) and disclosures considered necessary for a fair presentation have been included. 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, 2023. C. Short-term Investments In general, short-term investments have a maturity of three months to one year at the date of purchase. Short-term investments classified as held-to-maturity are recorded at cost, which approximates fair value. D. Accounts Receivable and Allowance for Credit Losses Accounts receivable represent the Company’s unconditional rights to consideration, subject to the payment terms of the contract, for which only the passage of time is required before payment. Unbilled receivables are reflected under contract assets on the consolidated condensed balance sheets. The Company establishes allowances for credit losses on accounts receivable, customer financing receivables, and certain other financial assets. The adequacy of these allowances are assessed quarterly through consideration of factors including, but not limited to, customer credit ratings, bankruptcy filings, published or estimated credit default rates, age of the receivable, expected loss rates and collateral exposures. The Company determines the creditworthiness of each customer based upon publicly available information and information obtained directly from its customers. Allowance for credit losses: Three Months Ended March 31, 2024 Six Months Ended March 31, 2024 Opening allowance for credit losses $ ( 121 ) $ ( 242 ) Changes in estimate ( 21 ) 100 Write-offs 11 11 Recoveries — — Total allowance for credit losses $ ( 131 ) $ ( 131 ) 8 E. 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 March 31, Six Months Ended March 31, 2024 2023 2024 2023 Net loss $ ( 1,590 ) $ ( 2,367 ) $ ( 5,013 ) $ ( 4,956 ) Weighted-average common shares outstanding (basic and diluted) 6,009 5,940 5,983 5,918 Net loss per share – basic and diluted $ ( 0.26 ) $ ( 0.40 ) $ ( 0.84 ) $ ( 0.84 ) Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share 258 196 253 186 F. Going Concern In accordance with ASU 2014-15, " Presentation of Financial Statements—Going Concern (Subtopic 205-40) ("ASC 205-40") ", the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. This evaluation requires management to perform two steps. First, management must evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern. Second, if management concludes that substantial doubt is raised, management is required to consider whether its plans that are not yet fully implemented are probable of both being implemented and effective in alleviating that doubt. In the event substantial doubt is raised, disclosures in the notes to the consolidated condensed financial statements of management’s plans and management’s conclusion as to whether the substantial doubt exists or has been alleviated are required. The consolidated condensed financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty. This step shall not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. The Company has debt maturing in October 2024. As a result of this condition, there is substantial doubt about the Company’s ability to continue as a going concern. The Company continues to evaluate available financial alternatives, including obtaining acceptable alternative financing. 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 Agreement. See Note 7 , Debt. G. Recent Accounting Standards 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, this ASU is effective for the 9 Company beginning October 1, 2023. The effect of adopting this ASU did not have an impact to the Company's results within the consolidated condensed statements of operations and financial condition. H. Recent Accounting Standards Not Yet Adopted In July 2023, the FASB issued ASU 2023-03, " Presentation of Financial Statement (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718)" , to amend various SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 120, among other things. The ASU does not provide any new guidance so there is no transition or effective date associated with it. The Company is currently assessing the impact of adopting ASU 2023-03 on the consolidated condensed financial statements and related disclosures. In November 2023, the FASB issued ASU 2023-07, " Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" , that would enhance disclosures for significant segment expenses for all public entities required to report segment information in accordance with ASC 280. ASC 280 requires a public entity to report for each reportable segment a measure of segment profit or loss that its chief operating decision maker ("CODM") uses to assess segment performance and to make decisions about resource allocations. The amendments in ASU 2023-07 improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more useful financial analyses. Currently, Topic 280 requires that a public entity disclose certain information about its reportable segments. For example, a public entity is required to report a measure of segment profit or loss that the CODM uses to assess segment performance and make decisions about allocating resources. ASC 280 also requires other specified segment items and amounts such as depreciation, amortization and depletion expense to be disclosed under certain circumstances. The amendments in ASU 2023-07 do not change or remove those disclosure requirements. The amendments in ASU 2023-07 also do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. A public entity should apply the amendments in ASU 2023-07 retrospectively to all prior periods presented in the financial statements. The Company is currently assessing the impact of adopting ASU 2023-07 on the consolidated condensed financial statements and related disclosures. In December 2023, the FASB issued ASU 2023-09, " Income Taxes (Topic 740): Improvements to Income Tax Disclosures" . ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. Early adoption is permitted. A public entity should apply the amendments in ASU 2023-09 prospectively to all annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of this standard on our consolidated condensed financial statements and related disclosures. In March 2024, the FASB issued ASU 2024-01 “ Compensation - Stock Compensation (Topic 718) - Scope Application of Profits Interest and Similar Awards ” (“ASU 2024-01”) clarifies how an entity determines whether a profits interest or similar award is within the scope of Topic 718 or is not a share-based payment arrangement and therefore within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. Entities can apply the amendments either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date of adoption. If prospective application is elected, an entity must disclose the nature of and reason for the change in accounting principle. The amendments in ASU 2024-01 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2024. The Company is currently assessing the impact of this standard on our consolidated condensed financial statements and related disclosures. In March 2024, the FASB issued ASU 2024-02 “ Codification Improvements ” (“ASU 2024-02”) amends the Codification to remove references to various concepts statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities and is effective or fiscal years beginning after December 15, 2024. The Company is currently assessing the impact of this standard on our consolidated condensed financial statements and related disclosures. 10 I. Employee Retention Credit Under the Employee Retention Credit ("ERC") program, 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 for refunds under the ERC program on January 23, 2024. These submissions are still pending review and approval from the Internal Revenue Service ("IRS"). 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 ERC will be 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. For the three and six months ended March 31, 2024 and 2023, there was no income or expense recorded. 2. Inventories Inventories consist of: March 31, 2024 September 30, 2023 Raw materials and supplies $ 3,212 $ 1,684 Work-in-process 7,360 4,061 Finished goods 3,275 3,108 Total inventories, net $ 13,847 $ 8,853 For a portion of the Company's inventory, cost is determined using the last-in, first-out ("LIFO") method. Approximately 34 % and 19 % of the Company’s inventories at March 31, 2024 and September 30, 2023, 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 $ 9,985 and $ 9,634 higher than reported at March 31, 2024 and September 30, 2023, 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 March 31, 2024 and September 30, 2023, our inventory valuation allowances were $ 3,883 and $ 4,049 , respectively. 3. Long-lived Assets The Company reviews the carrying value of its long-lived assets ("asset groups"), when events and circumstances indicate a triggering event has occurred. A triggering event is a change in circumstances that indicates the carrying value of the asset group may not be recoverable. This review is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets. Under the Accounting Standard Codification ("ASC") 360 ("Topic 360"), if the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, then the long-lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. The Company continuously monitors for indicators of impairment to determine if further testing is necessary. In the second quarter of fiscal 2024, 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 second quarter of fiscal 2024, the Company evaluated potential triggering events and determined interim testing was not required. 11 5. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows: March 31, 2024 September 30, 2023 Foreign currency translation loss, net of tax $ ( 5,802 ) $ ( 5,927 ) Retirement plan liability adjustment, net of tax ( 656 ) ( 742 ) Interest rate swap agreement, net of tax 9 9 Total accumulated other comprehensive loss $ ( 6,449 ) $ ( 6,660 ) 6. Leases The components of lease expense were as follows: Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Finance lease expense: Amortization of right-of use assets on finance leases $ 18 $ 18 $ 36 $ 29 Interest on lease liabilities 1 2 3 4 Operating lease expense 427 416 854 839 Variable lease cost 20 25 39 50 Total lease expense $ 466 $ 461 $ 932 $ 922 The following table presents the impact of leasing on the consolidated condensed balance sheet. Classification in the consolidated condensed balance sheets March 31, 2024 September 30, 2023 Assets: Finance lease assets Property, plant and equipment, net $ 108 $ 147 Operating lease assets Operating lease right-of-use assets, net 13,911 14,380 Total lease assets $ 14,019 $ 14,527 Current liabilities: Finance lease liabilities Current maturities of long-term debt $ 51 $ 61 Operating lease liabilities Short-term operating lease liabilities 894 869 Non-current liabilities: Finance lease liabilities Long-term debt, net of current maturities 62 81 Operating lease liabilities Long-term operating lease liabilities, net of short-term 13,561 14,020 Total lease liabilities $ 14,568 $ 15,031 Supplemental cash flow and other information related to leases were as follows: March 31, 2024 March 31, 2023 Other Information Cash paid for amounts included in measurement of liabilities: Operating cash flows from operating leases $ 858 $ 844 Operating cash flows from finance leases 3 4 Financing cash flows from finance leases 32 30 Right-of-use assets obtained in exchange for new lease liabilities: Operating leases — 60 12 March 31, 2024 September 30, 2023 Weighted-average remaining lease term (years): Finance leases 2.6 2.9 Operating leases 12.1 12.5 Weighted-average discount rate: Finance leases 5.0 % 5.1 % Operating leases 5.9 % 5.9 % Future minimum lease payments under non-cancellable leases at March 31, 2024 were as follows: Finance Leases Operating Leases Year ending September 30, 2024 (excluding the six months ended March 31, 2024) $ 33 $ 842 2025 37 1,697 2026 30 1,694 2027 21 1,703 2028 — 1,557 Thereafter — 12,740 Total lease payments $ 121 $ 20,233 Less: Imputed interest ( 8 ) ( 5,778 ) Present value of lease liabilities $ 113 $ 14,455 7. Debt Debt consists of: March 31, 2024 September 30, 2023 Revolving credit agreement $ 17,518 $ 16,289 Foreign subsidiary borrowings, net of unamortized debt issuance cost 10,656 5,771 Promissory note - related party 3,256 — Finance lease obligations 113 142 Less: unamortized debt issuance cost - ($ 617 is related party) ( 638 ) — Other, net of unamortized debt issuance costs $( 5 ) and $( 9 ), respectively 308 364 Total debt 31,213 22,566 Less – current maturities ( 27,138 ) ( 20,109 ) Total long-term debt $ 4,075 $ 2,457 Credit Agreement and Security Agreement On November 8, 2023, the Company entered into the Eighth Amendment to the Credit Agreement (the "Eighth Amendment") with JPMorgan Chase Bank, N.A. ("Lender"). The Eighth Amendment, among other things, reduced the Reserves under the Borrowing Base in the Credit Agreement to $ 1,500 , or such lesser amount, if any, as may be agreed upon in writing by the Lender in its sole discretion. The Company entered into the Ninth Amendment (the "Ninth Amendment") to the Credit Agreement and the Fourth Amendment (the "Fourth Amendment") to the Export Credit Agreement with its lender on December 21, 2023. The Ninth Amendment amends the Credit Agreement to, among other things, to: (i) reflect the incurrence by borrowers of the Subordinated Loan and the execution and delivery by borrowers, the Lender and Mark J. Silk (Mr. Silk is a member of the Board of Directors of the Company and considered a related party) of the Subordinated Loan Documents, and the receipt by borrowers of $ 3,000 in immediately available funds on the Ninth Amendment Effective Date; (ii) delay the maturity date from December 31, 2023 to October 4, 2024, or any earlier date on which the Revolving Commitment is reduced to zero or otherwise terminated pursuant to the terms of the Credit Agreement; (iii) reduce the Revolving Commitment to $ 19,000 from $ 23,000 ; 13 (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 $ 1,500 , increasing on the first day of each month by $ 250 , 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: 2.75 % (CBFR REVSOFR30), 0.25 % (CBFR Spread (CB Floating Rate)), 2.75 % (SOFR Spread), and 0.50 % (Commitment Fee Rate); and (vi) amend and restate subsection (l) of the Reporting Schedule to require, by the 17th day of every month, the delivery of a rolling 13 week cash flow forecast in form acceptable to Lender, which must include a projected to actual results comparison for the week then ended and on a cumulative basis from the beginning of the cash flow forecast. The Fourth Amendment of the Export Credit Agreement, to, among other things, to: (i) reflect the incurrence by borrowers of the Subordinated Loan and the execution and delivery by borrowers, the Lender and Silk of the Subordinated Loan Documents, and the receipt by borrowers of $ 3,000 in immediately available funds on the Ninth Amendment Effective Date; and (ii) delay the maturity date to October 4, 2024, or any earlier date on which the Revolving Commitment is reduced to zero or otherwise terminated pursuant to the terms thereof. The total collateral at March 31, 2024 and September 30, 2023 was $ 23,223 and $ 21,089 , respectively, and the revolving commitment was $ 26,000 and $ 30,000 , respectively. Total availability at March 31, 2024 and September 30, 2023 was $ 3,711 and $ 2,830 , respectively, which exceeds both the collateral and total commitment threshold. The Credit Agreement contains affirmative and negative covenants and events of default. Since the availability exceeded the $ 1,500 reserve minimum as of March 31, 2024 and September 30, 2023, no covenant calculations were required. The Company has a letter of credit balance of $ 1,970 as of March 31, 2024 and September 30, 2023, respectively. The revolving credit agreement (or "revolver"), as amended, has a rate based on SOFR plus a 2.75 % spread, which was 8.2 % at March 31, 2024 and a rate based on SOFR plus a 2.25 % spread, which was 7.7 % at September 30, 2023. The Export Credit Agreement as amended has a rate based on SOFR plus a 2.25 % spread, which was 7.7 % at March 31, 2024 and a rate based on SOFR plus a 1.75 % spread, which was 7.2 % at September 30, 2023. The Company also has a commitment fee of 0.50 % under the Credit Agreement as amended to be incurred on the unused balance of the revolver. Debt issuance costs - revolver The Company incurred new debt issuance costs of $ 117 in the first quarter of fiscal 2024 as it pertains to the new amendments entered into, which are included in the consolidated condensed balance sheet as a deferred charge in other current assets, net of amortization of $ 44 at March 31, 2024. The Company previously had debt issuance costs of $ 86 , which were included in the consolidated condensed balance sheets as a deferred charge in other current assets, net of amortization of $ 86 and $ 78 at March 31, 2024 and September 30, 2023, respectively. Subordinated Promissory Note and Guarantee The Company, in connection with the Ninth Amendment and the Fourth Amendment, incurred a secured subordinated loan from Garnet Holdings, Inc., a California corporation owned and controlled by Mark J. Silk ("GHI") (Mr. Silk is a member of the Board of Directors of the Company and considered a related party), in the original principal amount of $ 3,000 (the "Subordinated Loan") on the terms and subject to the conditions of a Subordinated Secured Promissory Note (the "Subordinated Promissory Note"). The obligations of borrowers under the Subordinated Loan mature on October 4, 2024. Interest accrues on the then-outstanding principal amount at a rate of 14 % per annum and shall be paid in kind (and not in cash) by capitalization as additional principal ("PIK Interest") each six-month period after the date hereof in arrears. The Company agreed to pay to Mr. Silk a fully earned and non-refundable fee in an amount equal to $ 150 , which fee shall be due and payable in full on, and subject to the occurrence of the Maturity Date or such earlier date on which the Company’s obligations under the Subordinated Promissory Note are accelerated pursuant to the terms thereof. Borrower’s obligations under the Subordinated Promissory Note are secured by a first priority lien, subject to any liens granted to Lender as described in the Subordination Agreement, on all of borrowers’ accounts, deposit accounts, contract rights, documents, equipment, general intangibles, instruments, inventory, investment property, commercial tort claims, all other goods and personal property whether tangible or intangible and wherever located, and all proceeds of the foregoing. The Subordinated Promissory note carrying value was $ 3,256 and $ 0 at March 31, 2024 and September 30, 2023, respectively. The Subordinated Promissory Note interest rate was 14 % and 0 % at March 31, 2024 and September 2023, respectively. The Ninth Amendment was also subject to including, but not limited to, the execution and delivery by Mark. J. Silk, a member of the Board of Directors of the Company ("Silk"), of a Guaranty Agreement (the "Guaranty") in favor of Lender pursuant to which Silk guarantees the obligations of borrowers under the Credit Agreement and Export Credit Agreement. The Fee Letter 14 requires the borrowers to pay Silk a fee (the "Guaranty Fee") in consideration for his agreement to execute and deliver the Guaranty in an amount equal to $ 760 , which was included in the consolidated condensed balance sheets as a deferred charge in accrued liabilities. The Guaranty Fee becomes due and payable on the maturity date. Foreign subsidiary borrowings in USD Foreign debt consists of: March 31, 2024 September 30, 2023 Term loan, net of unamortized debt issuance cost $( 89 ) and $ 0 , respectively $ 4,999 $ 3,293 Short-term borrowings 3,350 1,862 Factor 2,307 616 Total debt $ 10,656 $ 5,771 Less – current maturities ( 6,638 ) ( 3,386 ) Total long-term debt $ 4,018 $ 2,385 Receivables pledged as collateral $ 1,914 $ 1,247 Interest rates on foreign borrowings are based on Euribor rates, which range from 0.5 % to 8.0 %. The Company's Maniago, Italy ("Maniago") location obtained borrowings from two separate lending sources in the first quarter of fiscal 2024. The first was a bond for $ 2,208 with repayment terms of seven years . Under the terms of the borrowing, repayments are made semi-annually in the amount of $ 200 , beginning on June 29, 2024. 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 with a term of 1 year, 6 months was obtained in the amount of $ 1,104 . The proceeds from this loan will be for working capital purposes. 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. 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 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. The Company is subject to income taxes in the U.S. federal jurisdiction, Ireland, Italy, and various state and local jurisdictions. As of the second quarter of fiscal 2024, the Company maintains a full valuation allowance on the net deferred tax assets in the U.S., Ireland and Italy. 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 March 31, Six Months Ended March 31, 2024 2023 2024 2023 Service cost $ 45 $ 6 $ 90 $ 12 Interest cost 271 274 542 549 Expected return on plan assets ( 260 ) ( 277 ) ( 521 ) ( 554 ) Amortization of net loss 43 77 86 153 Net periodic pension cost $ 99 $ 80 $ 197 $ 160 15 During the six months ended March 31, 2024 and 2023, the Company made $ 18 and $ 13 in cash contributions, and $ 86 and $ 0 in non-cash contributions utilizing carryover balance, respectively, to its defined benefit pension plans. The Company anticipates making $ 57 in cash contributions to fund its defined benefit pension plans for the balance of fiscal 2024, 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 2024. 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 2024. 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 six months of fiscal 2024, the Company granted 120 shares under the 2016 Plan to certain key employees. The awards were split into two tranches, comprised of 46 performance-based shares and 74 time-based restricted shares, with a grant date fair value of $ 3.60 per share. The awards vest over three years . There were 19 shares forfeited during the six month period ended March 31, 2024. In the first six months of fiscal 2024, the Company granted its non-employee directors 39 restricted shares under the 2016 Plan, with a grant date fair value of $ 3.08 per share, which vest over one year . One award for 38 restricted shares vested in January 2024. If all outstanding share awards are ultimately earned and vest at the target number of shares, there are approximately 280 shares that remain available for award at March 31, 2024. 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 $ 171 and $ 207 during the first six months of fiscal 2024 and 2023, respectively. As of March 31, 2024, there was $ 573 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 1.7 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 16 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 March 31, Six Months Ended March 31, 2024 2023 2024 2023 Commercial revenue $ 17,376 $ 11,361 $ 30,616 $ 21,542 Military revenue 9,167 7,881 16,979 18,999 Total $ 26,543 $ 19,242 $ 47,595 $ 40,541 The following table represents revenue by end market: Three Months Ended March 31, Six Months Ended March 31, Net Sales 2024 2023 2024 2023 Aerospace components for: Fixed wing aircraft $ 10,080 $ 8,855 $ 20,019 $ 19,581 Rotorcraft 4,197 3,513 7,347 7,894 Energy components for power generation units 6,470 5,101 12,661 9,724 Commercial product and other revenue 5,796 1,773 7,568 3,342 Total $ 26,543 $ 19,242 $ 47,595 $ 40,541 The following table represents revenue by geographic region based on the Company's selling operation locations: Three Months Ended March 31, Six Months Ended March 31, Net Sales 2024 2023 2024 2023 North America $ 20,514 $ 14,353 $ 35,988 $ 31,647 Europe 6,029 4,889 11,607 8,894 Total $ 26,543 $ 19,242 $ 47,595 $ 40,541 In addition to the disaggregated revenue information provided above, approximately 40 % and 49 % of total net sales for the six months ended March 31, 2024 and 2023, 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 beginning October 1, 2023 and ended March 31, 2024 compared to period beginning October 1, 2022 and ended March 31, 2023: March 31, 2024 March 31, 2023 Contract assets - Beginning balance $ 10,091 $ 10,172 Additional revenue recognized over-time 19,250 20,230 Less amounts billed to the customers ( 19,365 ) ( 19,766 ) Contract assets - Ending balance $ 9,976 $ 10,636 17 March 31, 2024 March 31, 2023 Contract liabilities (included within Accrued liabilities) - Beginning balance $ ( 1,150 ) $ ( 807 ) Payments received in advance of performance obligations ( 1,830 ) ( 1,428 ) Performance obligations satisfied 1,581 1,019 Contract liabilities (included within Accrued liabilities) - Ending balance $ ( 1,399 ) $ ( 1,216 ) Accounts receivable were $ 16,515 and $ 17,395 at September 30, 2022 and March 31, 2023, respectively. There were no impairment losses recorded on contract assets as of March 31, 2024 and September 30, 2023. Remaining performance obligations As of March 31, 2024, the Company has $ 137,771 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, identified compromised information, and notified those impacted in accordance with state and federal requirements. 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 expense of $ 23 to selling, general, and administrative expenses in the six months ended March 31, 2024. The Company recorded expense of $ 977 to selling, general, and administrative expenses and recorded costs of $ 110 to other expense (income), net related to loss on insurance recovery in the six months ended March 31, 2023. At March 31, 2024 and September 30, 2023, the Company recorded $ 827 and $ 965 , respectively, 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. The Company will accrue these costs as incurred. 13. Related Party Transactions On December 21, 2023, the Company entered into the Ninth Amendment and Fourth Amendment with its lender incurring a secured subordinated loan from GHI, in the original principal amount of $ 3,000 . GHI is controlled by Mr. Silk, a member of the Board of Directors of the Company and considered a related party. The Company has recorded interest expense of $ 106 for the three and six month periods ending March 31, 2024, which was included in the consolidated condensed balance sheets in the Promissory note - related party line. Additionally, Mr. Silk provided a Guaranty in favor of the Lender pursuant to which Mr. Silk guarantees the obligations of borrowers under the Credit Agreement and Export Credit Agreement. As part of the Guaranty and Promissory Note, the Company will pay GHI fees of $ 760 and $ 150 , respectively, and has paid $ 30 of legal costs. The Company has a total of $ 638 deferred financing costs related to the Guaranty and Subordinated Promissory Note, which was included in the consolidated condensed balance sheets in current maturities of long-term, net of $ 302 amortization. See Note 7, Debt for further information.