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Item 2. Management’s Discussion and Analysis

2025-02-14 compared with 2024-08-12 · 96 added, 177 removed, 91 unchanged (75% of the section changed)

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Such factors include the following:

(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;

(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;

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(12) our exposure to additional risks as a result of our international business, including risks related to geopolitical and economic factors, suppliers, laws and regulations;

(13) our ability to maintain a qualified workforce;

(13) the ability to maintain a qualified workforce;

(14) the adequacy and availability of our insurance coverage;

(15) our ability to develop new products and technologies and maintain technologies, facilities, and equipment to win new competitions and meet the needs of our customers;

(16) our ability to realize future sales from amounts in our backlog;

(16) our ability to realize amounts in our backlog;

(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;

and (19) the Company's ability to restructure existing debt obligations prior to their stated maturity date through the execution of a strategic alternative transaction or obtaining acceptable alternative financing.

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

The Company engages in the production of forgings and machined components primarily for the A&E and commercial space markets.

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(iii) the projected build rate and repair for industrial turbines;

and (iv) the market for commercial space.

and (iv) commercial space.

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

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and (iv) commercial space, semiconductor and other commercial applications.

In October 2024, the Company sold its European operations in order to streamline operational synergies and refocus on its core aerospace forging business.

SIFCO Irish Holdings, Ltd., a wholly owned subsidiary of the Company, entered into a Share Purchase Agreement (the “SPA”) pursuant to which it sold 100% of the share capital of C Blade S.p.A.

Forging & Manufacturing, an Italian joint stock company and wholly-owned subsidiary of the Company (“CBlade”), for cash consideration.

As a result of the sale transaction, the Company’s financial statements have been prepared with the net assets of CBlade presented as held for sale as of September 30, 2024, and the results of operations and cash flows of CBlade have been presented as discontinued operations for the three months ended December 31, 2024 and 2023.

All historical statements, amounts and

related disclosures have been retrospectively adjusted to conform to this presentation.

Refer to Note 2 — Discontinued Operations of the Notes to Unaudited Consolidated Condensed Financial Statements.

Backlog of Orders

SIFCO’s total backlog at June 30, 2024 was $139.2 million, of which $108.1 million are anticipated to be complete within the next 12 months, compared with total backlog of $122.8 million as of June 30, 2023.

SIFCO’s total backlog as of December 31, 2024 was $121.9 million, of which $90.1 million are anticipated to be complete within the next 12 months, compared with total backlog of $104.8 million as of December 31, 2023.

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

Recovery in the A&E markets has resulted in increased bookings.

Recovery in the aerospace markets was the primary contributor to the increased bookings.

Backlog information may not be indicative of future sales.

Nine Months Ended June 30, 2024 compared with Nine Months Ended June 30, 2023

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

(Dollars in millions) Nine Months Ended

June 30, Increase/ (Decrease)

Net Sales 2024 2023

Aerospace components for:

Fixed wing aircraft $ 30.7 $ 28.3 $ 2.4

Rotorcraft 12.8 12.0 0.8

Energy components for power generation units 20.5 16.7 3.8

Commercial product and other revenue 12.9 5.4 7.5

Total $ 76.9 $ 62.4 $ 14.5

Net sales for the first nine months of fiscal 2024 increased $14.5 million to $76.9 million, compared with $62.4 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 increased $2.4 million due to 737, 787, F15 and F16 programs.

Rotorcraft sales increased $0.8 million due to H60 program partially offset by V22 demand reduction.

The energy components for power generation sales increased by $3.8 million due to growth in the steam turbine markets.

Commercial products and other revenue increased by $7.5 million due to commercial space and M1 tank program.

Commercial net sales were 64.7% of total net sales and military net sales were 35.3% of total net sales in the first nine months of fiscal 2024, compared with 55.5% and 44.5%, respectively, in the comparable period in fiscal 2023.

Military net sales decreased by $0.6 million to $27.1 million in the first nine months of fiscal 2024, compared with $27.8 million in the comparable period of fiscal 2023, primarily due to F35 program and V22 demand reduction.

Co mmercial net sales increased $15.1 million to $49.7 million in the first nine months of fiscal 2024, compared with $34.6 million in the comparable period of fiscal 2023, primarily due to an increase in the power generation steam turbine market, commercial space and 737 and 787 programs.

Cost of Goods Sold

Cost of goods sold increased by $12.9 million, or 23.1%, to $68.8 million, or 89.6% of net sales, during the first nine months of fiscal 2024, compared with $55.9 million or 89.7% of net sales, in the comparable period of fiscal 2023.

The increase is primarily due to higher sales volume, higher labor costs of $1.7 million, higher utility cost of $0.4 million and $0.1 million of hiring costs as the Company increased production to meet customer demands, partially offset by lower idle expense of $1.0 million.

Prior year results included $1.5 million of ERC benefit and reduction of NRV reserve of $1.4 million.

Gross profit increased $1.5 million to $8.0 million in the first nine months of fiscal 2024, compared with $6.5 million gross profit in the comparable period of fiscal 2023.

Gross profit percent of sales was 10.4% during the first nine months of fiscal 2024 compared with 10.3% in fiscal 2023.

The increase in gross profit compared to prior fiscal year was primarily due to higher volume, lower idle expense and lower outside services of $0.3 million, partially offset by higher labor costs of $1.7 million, utility costs of $0.4 million and hiring costs.

Prior year results included $1.5 million of ERC benefit and reduction of NRV reserve of $1.4 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $9.9 million, or 12.9%, of net sales during the first nine months of fiscal 2024, compared with $10.5 million, or 16.9%, of net sales in the comparable period of fiscal 2023.

The decrease in selling, general and administrative expenses is primarily due to benefit of $0.6 million for reversal of third party restoration fees related to the cybersecurity incident and lower commissions of $0.2 million, partially offset by higher wages, benefits and severance costs of $0.4 million and higher expenses related to the evaluation of strategic alternatives of $0.5 million.

Prior year results included $1.2 million of costs related the cybersecurity incident and ERC net expense of $0.2 million.

Amortization of Intangibles

Amortization of intangibles was $0.1 million in the first nine months of fiscal 2024 compared with $0.2 million in 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 nine months of both fiscal 2024 and 2023:

Weighted Average

Interest Rate

Nine Months Ended

June 30, Weighted Average

Outstanding Balance

Nine Months Ended

2024 2023 2024 2023

Revolving credit agreement 8.0 % 6.6 % $ 16.8 million $ 12.6 million

Foreign term debt 5.7 % 4.4 % $ 9.6 million $ 7.3 million

Promissory note - related party 8.9 % — % $ 3.3 million $ 0.0 million

Other debt 0.6 % 1.6 % $ 0.3 million $ 0.5 million

The Company’s effective tax rate through the first nine months of fiscal 2024 was (3.2)%, compared with (2.3)% 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 $4.9 million during the first nine months of fiscal 2024 compared with net loss of $5.6 million in the comparable period of fiscal 2023.

The decrease in net loss is due to higher sales volume and gross margin, offset by higher labor and interest expense as the Company invests to meet increased demand.

Three Months Ended June 30, 2024 compared with Three Months Ended June 30, 2023

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

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

Net sales comparative information for the first three months of fiscal 2025 and 2024 is as follows:

(Dollars in millions) Three Months Ended

June 30, Increase/ (Decrease)

Net Sales 2024 2023

December 31, Increase/ (Decrease)

Aerospace components for:

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Rotorcraft 3.4 3.2 0.2

Commercial space 2.5 1.4 1.1

Energy components for power generation units 1.0 0.6 0.4

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Total $ 20.9 $ 15.5 $ 5.4

Net sales for the third quarter of fiscal 2024 increased $7.4 million to $29.3 million, compared with $21.9 million in the comparable period of fiscal 2023.

Fixed wing sales increased $2.0 million compared with the same period last year primarily due to 767, 787 A320, F15, F16, F18 and other programs.

Rotorcraft sales increased $1.4 million compared with the same period last year primarily due to the H60 program.

Net sales of the energy components for power generation units increased by $0.8 million due to growth in the steam turbine markets.

Commercial products and other revenue increased $3.2 million compared with the same period last year primarily due to commercial space.

Commercial net sales were 65.3% of total net sales and military net sales were 34.7% of total net sales in the third quarter of fiscal 2024, compared with 59.9% and 40.1%, respectively, in the comparable period in fiscal 2023.

Military net sales increased by $1.4 million to $10.1 million in the third quarter of fiscal 2024, compared with $8.8 million in the comparable period of fiscal 2023, primarily due to the H60, F15, F16 and F18 programs partially offset by V22 demand reduction.

Co mmercial net sales increased $6.0 million to $19.1 million in the third quarter of fiscal 2024, compared with $13.1 million in the comparable period of fiscal 2023, primarily due to an increase in the power generation steam turbine market, commercial space and 767, 787 and A320 programs.

Net sales for the first three months of fiscal 2025 increased $5.4 million to $20.9 million, compared with $15.5 million in the comparable period of fiscal 2024.

Fixed wing sales increased $2.9 million compared with the same period last year, primarily due to higher demand across most programs.

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

Commercial space products increased by $1.1 million year-over-year due to higher demand for staged-combustion engine components.

Net sales for the energy components for power generation units increased by $0.4 million due to growth in the steam turbine markets.

Commercial products and other revenue increased $0.8 million compared with the same period last year mostly due to the timing of orders related to munitions programs.

Commercial net sales were 53.4% of total net sales and military net sales were 46.6% of total net sales in the first three months of fiscal 2025, compared with 49.5% and 50.5%, respectively, in the comparable period in fiscal 2024.

Commercial net sales increased $3.5 million to $11.2 million in the first three months of fiscal 2025, compared with $7.7 million in the comparable period of fiscal 2024, primarily due to increases in the commercial space and aerospace markets.

Military net sales increased by $1.9 million to $9.7 million in the first three months of fiscal 2025, compared with $7.8 million in the comparable period of fiscal 2024, primarily due to increased demand across multiple programs.

Cost of Goods Sold

Cost of goods sold increased by $6.4 million, or 34.6%, to $24.7 million, or 84.5% of net sales, during the third quarter of fiscal 2024, compared with $18.4 million or 84.1% of net sales, in the comparable period of fiscal 2023.

The increase is primarily due to higher volume, higher labor costs of $0.7 million and utility costs of $0.4 million as the Company increased production to meet customer demands partially offset by lower idle expense $0.4 million.

Prior year results included $1.5 million of ERC benefit.

Gross profit increased $1.0 million to $4.5 million in the third quarter of fiscal 2024, compared with $3.5 million gross profit in the comparable period of fiscal 2023.

Gross profit percent of sales was 15.5% during the third quarter of fiscal 2024, compared with 15.9% in the comparable period in fiscal 2023.

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

Prior year results included $1.5 million of ERC benefit.

Cost of goods sold (“COGS”) increased by $3.9 million, or 24.6%, to $20.0 million, or 95.6% of net sales, during the first three months of fiscal 2025, compared with $16.0 million, or 103.5% of net sales, in the comparable period of fiscal 2024.

The increase is primarily due to higher sales volume and favorable mix of products sold.

Gross profit increased $1.5 million to $0.9 million in the first three months of fiscal 2025, compared with $0.5 million gross loss in the comparable period of fiscal 2024, primarily due to the increases in sales volume and COGS discussed above and the impact of favorable mix of products sold, particularly due to growth in the commercial space market.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $3.2 million, or 10.8%, of net sales, during the third quarter of fiscal 2024, compared with $3.4 million, or 15.5%, of net sales, in the comparable period of fiscal 2023.

The decrease in selling, general and administrative expenses is primarily due to a credit due to last years cybersecurity incident of $0.6 million compared with expense of $0.2 million in 2023.

The benefit was partially offset by $0.4 million of severance charges and higher costs related to the evaluation of strategic alternatives of $0.1 million.

Amortization of Intangibles

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

Selling, general and administrative (“SG&A”) expenses were $2.8 million, or 13.6% of net sales, during the first three months of fiscal 2025, compared with $3.1 million, or 20.1% of net sales, in the comparable period of fiscal 2024.

The decrease in SG&A expenses was primarily due to lower general operating expenses, particularly legal and strategic alternative costs, of $0.2 million and lower employee-related costs of $0.1 million.

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 third quarter 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 three months of both fiscal 2025 and 2024:

Weighted Average

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Three Months Ended

June 30, Weighted Average

December 31, Weighted Average

Outstanding Balance

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Revolving credit agreement 9.6 % 7.7 % $ 13.3 million $ 15.6 million

Foreign term debt 7.1 % 4.8 % $ 10.1 million $ 7.5 million

Promissory note - related party 13.3 % — % $ 3.3 million $ 0.0 million

Term loan 10.5 % — % 2.4 million — million

Other debt 8.2 % 1.0 % 0.4 million 0.3 million

The Company’s effective tax rate through the third quarter of fiscal 2024 was 43.8%, compared with (5.8)% for the same period of fiscal 2023.

The increase 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.

Promissory note (related party) — % — % — million 3.2 million

The Company’s effective tax rate through the first three months of fiscal 2025 was (0.21)%, compared with (0.15)% for the same period of fiscal 2024.

The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2025 compared with the same period of fiscal 2024.

The effective tax rate differs from the U.S.

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statutory tax rate.

Net Income (Loss)

Net income was $0.1 million during the third quarter of fiscal 2024, compared with net loss of $0.6 million in the comparable period of fiscal 2023.

Increase in net income is primarily due to higher sales volume and gross margin, including reduction of Cyber incident costs and idle expense of $0.8 million and $0.4 million, respectively, partially offset by higher severance, interest expense, and labor costs as the Company increased production to meet customer demands.

Loss from Continuing Operations

Loss from continuing operations was $2.4 million during the first three months of fiscal 2025, compared with $4.1 million in the comparable period of fiscal 2024 due to higher sales volumes and gross margins improvements coupled with lower SG&A expenses, partially offset by higher interest expense.

Non-GAAP Financial Measures

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

The Company presents EBITDA and Adjusted EBITDA because management believes that they are useful indicators for evaluating operating performance and liquidity, including the Company’s ability to incur and service debt and it uses EBITDA to evaluate prospective acquisitions.

The Company presents EBITDA and Adjusted EBITDA because management believes that they are useful indicators for evaluating operating performance, including the Company’s ability to incur and service debt and it uses EBITDA to evaluate prospective acquisitions.

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.

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• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor Adjusted EBITDA reflects any cash requirements for such replacements;

• The omission of the amortization expense associated with the Company’s intangible assets further limits the usefulness of EBITDA and Adjusted EBITDA;

• The omission of the amortization expense associated with the Company’s intangible assets further limits the usefulness of EBITDA and Adjusted EBITDA as measurements of financial performance;

• Neither EBITDA nor Adjusted EBITDA includes the payment of taxes, which is a necessary element of operations.

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Management compensates for these limitations by not viewing EBITDA or Adjusted EBITDA in isolation and specifically by using other GAAP measures, such as net income (loss), net sales, and operating income (loss), to measure operating performance.

Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under GAAP, and neither should be considered as an alternative to net income (loss) or cash flow from operations determined in accordance with GAAP.

Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under GAAP, and neither should be considered as an alternative to net loss or cash flow from operations determined in accordance with GAAP.

The Company’s calculation of EBITDA and Adjusted EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies.

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

Dollars in thousands Three Months Ended Nine Months Ended

June 30, June 30,

2024 2023 2024 2023

Net income (loss) $ 72 $ (634) $ (4,940) $ (5,590)

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

Three Months Ended

Dollars in thousands 2024 2023

Net loss $ (2,316) $ (3,422)

Income from discontinued operations, net of tax 106 647

Loss from continuing operations (2,422) (4,069)

Depreciation and amortization expense 1,181 1,232

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EBITDA (767) (2,489)

Foreign currency exchange loss, net (1) (1) 1 6 11

Other expense (income), net (2) 78 295 184 149

Gain (loss) on disposal of assets (3) — (3) 3 —

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

Other expense, net (2)

Non-recurring severance expense adjustments (3)

Equity compensation (3)

Pension settlement expense (5) 60 78 60 78

Severance expense (6) 435 — 435 —

Transaction-related expense adjustments (4)

LIFO impact (5)

IT incident (benefit) cost, net (8) (627) 182 (605) 1,269

IT incident costs, net (6)

Strategic alternative expense (7)

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(1) Represents the gain or loss from changes in the exchange rates between the functional currency and the foreign currency in which the transaction is denominated.

(2) Represents miscellaneous non-operating income or expense, such as pension costs or grant income (prior year included $0.1 million in loss on insurance recovery, separately reclassed to IT incident costs, net line).

(3) Represents the difference between the proceeds from the sale of operating equipment and the carrying value shown on the Company's books.

(4) Represents the equity-based compensation expense recognized by the Company under the 2016 Plan due to granting of awards, awards not vesting and/or forfeitures.

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

(6) Represents expense incurred for executive severance.

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

(3) Represents the equity-based compensation expense recognized by the Company under the 2016 Plan due to granting of awards, awards not vesting and/or forfeitures and executive severance.

(4) Represents credits related to transaction-related legal fees incurred primarily in connection with the unsuccessful acquisition of another company.

(5) Represents the change in the reserve for inventories for which cost is determined using the last-in, first-out (“LIFO”) method.

(8) Represents incremental information technology costs as it relates to the cybersecurity incident and loss on insurance recovery.

(6) Represents incremental information technology costs (and credits) as it relates to the cybersecurity incident and loss on insurance recovery.

(7) Represents expense related to evaluation of strategic alternatives.

Liquidity and Capital Resources

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.

Cash and cash equivalents were $3.1 million and $1.7 million as of December 31, 2024 and September 30, 2024, respectively.

A nominal amount of the Company’s cash and cash equivalents were in the possession of its non-U.S.

holding company subsidiary, and certain distributions from which to the Company may be subject to adverse tax consequences.

Our primary requirements for liquidity and capital resources besides our growth initiatives, are working capital, capital expenditures, principal and interest payments on our outstanding debt, fulfilling obligations under our loan agreements, and other general corporate needs.

Historically, the main sources of liquidity of the Company have been cash flows from operations and borrowings under our debt agreements.

As of December 31, 2024, the Company was not party to any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

The cash requirements for the upcoming fiscal year relate to payments on our outstanding debt and leases, operating and capital purchase commitments, and expected contributions to our defined benefit and contribution plans.

For information regarding the Company’s expected cash requirements and timing of payments related to leases and noncancellable purchase commitments, see Note 11 — Leases and Note 12 — Commitments and Contingencies of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended September 30, 2024 (the “2024 Annual Report”).

Additionally, refer to Note 19 — Retirement Benefit Plans of the Notes to Consolidated Financial Statements in the Company’s 2024 Annual Report for more information related to the Company’s pension and defined contribution plans.

With the sale of the CBlade manufacturing operations located in Maniago, Italy, the Company increased its cash on hand from the proceeds, which was used to repay a portion of its outstanding debt balances and for general operational needs.

Historically, the cash flows from the Company’s CBlade business represented a material portion of the consolidated results of operations, financial condition and cash flows.

Although future contributions from the CBlade business ceased with the execution of the

sale transaction, the Company believes that its streamlined operations will allow management to focus on domestic growth opportunities.

There is no guarantee however that the Company’s continuing operations will sufficiently replace the liquidity and cash flows previously provided by CBlade’s operations.

For details regarding the sale of CBlade, refer to Note 2 — Discontinued Operations of the Notes to Unaudited Consolidated Condensed Financial Statements.

We believe that our existing cash will be sufficient to finance our continued operations, planned capital expenditures and the additional expenses that we expect to incur during the next 12 months.

In order to support and achieve our future growth plans, we may need or advantageously seek to obtain additional funding through equity or debt financing.

We believe that our current operating structure will facilitate sufficient cash flows from operations to satisfy our expected long-term liquidity requirements beyond the next 12 months.

If these resources are not sufficient to satisfy our liquidity requirements due to changes in circumstances, we may be required to borrow under our loan agreement or seek additional financing.

The Company’s liquidity could be negatively affected if the Company is unable to obtain capital, 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 $1.7 million at June 30, 2024 and $0.4 million at September 30, 2023.

At June 30, 2024, the majority of the Company’s cash and cash equivalents were in possession of its domestic subsidiaries.

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

At June 30, 2024, the Company’s short-term investments were in the possession of its non-U.S.

subsidiaries.

See Note 7, Debt - Foreign subsidiary borrowings in USD.

Distributions from the Company's non-U.S.

subsidiaries to the Company may be subject to adverse tax consequences.

For details regarding our debt agreements, see Note 6 — Debt of the Notes to Unaudited Consolidated Condensed Financial Statements.

Operating Activities

The Company’s operating activities used $5.0 million of cash in the first nine months of fiscal 2024, primarily due to net loss of $4.9 million partially offset by non-cash adjustments for depreciation and amortization of $4.6 million, amortization of debt issuance costs of $0.8 million and change in inventory valuation accounts of $0.5 million and LIFO effect of $0.8 million.

The uses of cash for working capital of $7.2 million was primarily due to increases in inventory of $5.6 million and accounts receivable of $6.6 million, partially offset by increases in contract liabilities of $2.7 million and accounts payable of $1.4 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 contract liabilities is due to advance raw material payments from customers.

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 nine months of fiscal 2023 used $2.3 million primarily due to operating results and an increase in accounts receivable of $3.2 million partially offset by contract asset and inventory reductions of $1.2 million and $0.9 million, respectively.

The Company’s operating activities used $3.8 million of cash in the first three months of fiscal 2025, primarily due to net operating loss from continuing operations of $2.4 million partially offset by depreciation and amortization of $1.2 million and change in inventory valuation accounts of $0.3 million and LIFO effect of $0.5 million.

The uses of cash from working capital of $3.5 million was primarily due to decreases in accounts payable and accrued liabilities due to timing of payments, higher prepaid expenses attributable to deferred financing costs related to the refinanced revolver, decreases in contract liabilities due to satisfaction of performance obligations in sales contracts, and higher inventories due to timing of raw material receipts, partially offset by decreases in accounts receivable and contract assets mostly due to timing of receipts and higher billings to customers, respectively.

The Company’s operating activities used $1.5 million of cash in the first three months of fiscal 2024, primarily due to net operating loss of $4.1 million partially offset by depreciation and amortization of $1.2 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 $0.6 million was primarily due to increase in inventory of $3.1 million, contract asset of $0.9 million and other assets/prepaids of $0.2 million, partially offset by accounts receivable reductions of $3.2 million and increase in contract liabilities of $1.7 million.

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

Investing Activities

Cash used for investing activities was $3.8 million in the first nine months of fiscal 2024 primarily due to purchase of short-term investments, net of maturities, of $1.7 million and capital expenditures of $2.0 million.

Cash used for investing activities was $1.9 million in the first nine months of fiscal 2023 due to capital expenditures.

Capital commitments as of June 30, 2024 were $0.4 million.

During the first three months of fiscal 2025 and 2024, cash used for investing activities was $0.1 million and $0.5 million, respectively, attributable to capital expenditures.

Capital commitments as of December 31, 2024 were $0.3 million.

The Company anticipates that the remaining total fiscal 2025 capital expenditures will be within the range of $1.5 million to $2.0 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 $10.1 million in the first nine months of fiscal 2024, compared with $3.5 million in the first nine months of fiscal 2023.

As discussed in Note 7, Debt, the Company's Maniago location obtained borrowings from two separate lending sources and increased during the first nine 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 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.

Additionally, the Company increased three of its credit and factoring lines with existing lenders to support working capital needs.

The Company had $2.6 million of net short-term debt borrowings in the first nine months of fiscal 2024 compared with $0.5 million in the first nine months of fiscal 2023.

The Company had net borrowings from the revolver under the Credit Agreement of $1.2 million in the first nine months of fiscal 2024 compared with net borrowings of $3.4 million in the first nine months of fiscal 2023.

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

The availability at June 30, 2024 was $2.9 million, which exceeds reserve minimum threshold as of June 30, 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.

The Eighth Amendment, among other things, reduced the Reserves under the Borrowing Base in the Credit Agreement to $1.5 million, or such lesser amount, if any, as may be agreed upon in writing by the Lender in its sole discretion.

As noted in Note 7, Debt, on December 21, 2023, the Company entered into the Ninth Amendment to the Credit Agreement and the Fourth Amendment to the Export Credit Agreement with its lender.

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 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 $3.0 million 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 $19.0 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;

(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 $3.0 million 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.

As noted in Note 7, Debt, on May 21, 2024, the Company entered into the Tenth Amendment to the Credit Agreement and the Fifth Amendment to the Export Credit Agreement with its lender.

The Tenth and Fifth Amendments amend the Credit Agreement and the Export Credit Agreement to, among other things, to:

(i) increase the Revolving Commitment, less the Availability Block, if applicable, to (y) the Borrowing Base, and (z) in combination with the Export Revolving Loans under the Export Credit Agreement, (i) $18.0 million through September 30, 2023, (ii) $19.0 million from and including October 1, 2023 through May 14, 2024, and (iii) $22.0 million thereafter until, and reducing to zero and terminating on, the Maturity Date;

(ii) modify the definition of Borrowing Base Reserves to $1.5 million or such other amount, if any, as may be determined in writing by the Lender in its Permitted Discretion (which may be by email from the Lender);

and (iii) the execution of the First Amendment of the Silk Guaranty.

Future cash flows from the Company’s operations may be used to pay down amounts outstanding under the Credit Agreement, the Export Credit Agreement and its foreign related debts.

In fiscal year 2024, the Company was able to obtain new financing at its Maniago location to provide Maniago with sufficient liquidity.

Tightening of the credit market and standards, as well as capital market volatility, could negatively impact our ability to obtain additional debt financing on terms equivalent to our existing Credit Agreement.

Capital market uncertainty and volatility,

together with the Company’s market capitalization and status as a smaller reporting company, could also negatively impact our ability to obtain equity financing.

Cash provided by financing activities was $9.2 million in the first three months of fiscal 2025, compared with $2.6 million in the first three months of fiscal 2024.

The year-over-year decrease was primarily related to the debt refinancing during fiscal 2025.

Refer to Note 6 — Debt of the Notes to Unaudited Consolidated Condensed Financial Statements for details regarding our financing activities during the three months ended December 31, 2024.

Future cash flows from the Company’s operations may be used to pay down outstanding debt amounts.

The Company believes it has adequate cash/liquidity available to finance its operations from the combination of (i) the Company’s expected cash flows from operations and (ii) funds available under its loan and security agreement as described in Note 6 — Debt of the Notes to Unaudited Consolidated Condensed Financial Statements for its domestic locations.

Capital market uncertainty and volatility, together with the Company’s market capitalization and status as a smaller reporting company, could also negatively impact our ability to obtain equity financing.

Recent Accounting Standards

For recent accounting standards adopted and not yet adopted refer to Note 1, Summary of Significant Accounting Policies - Recent Accounting Standards Adopted and Recent Accounting Standards Not Yet Adopted for further detail.

Additionally, the Company's significant accounting policies and procedures are explained in the Management's Discussion and Analysis section of the Company's Annual Report on Form 10-K for the year ended September 30, 2023.

No recent accounting standards were adopted during the three months ended December 31, 2024 .

Refer to Note 1 — Summary of Significant Accounting Policies for further detail.

Additionally, the Company’s significant accounting policies and procedures are explained in the Management’s Discussion and Analysis section of the Company’s 2024 Annual Report .

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