SIFCO INDUSTRIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and includes assumptions concerning the Company’s operations, future results and prospects. The words “will,” “may,” “designed to,” “outlook,” “believes,” “should,” “anticipates,” “plans,” “expects,” “intends,” “estimates,” “forecasts” and similar expressions identify certain of these forward-looking statements. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides this cautionary statement identifying important economic, political and technological factors, among others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. 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; (2) the future business environment, including capital and consumer spending; (3) competitive factors, including the ability to replace business that may be lost at comparable margins; (4) metals and commodities price increases and the Company’s ability to recover such price increases; (5) successful development and market introduction of new products and services; (6) continued reliance on consumer acceptance of regional and business aircraft powered by more fuel efficient turboprop engines; (7) continued reliance on military spending, in general, and/or several major customers, in particular, for revenues; (8) the impact on future contributions to the Company’s defined benefit pension plans due to changes in actuarial assumptions, government regulations and the market value of plan assets; (9) stable governments, business conditions, laws, regulations and taxes in economies where business is conducted; (10) the ability to successfully integrate businesses that may be acquired into the Company’s operations; (11) cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners; (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) 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 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) significant tariffs and other trade measures, including recently announced U.S. tariffs on aluminum and steel. The Company engages in the production of forgings and machined components primarily for the A&E and commercial space markets. The processes and services provided by the Company include forging, heat-treating, machining, subassembly, and test. The Company operates under one business segment. The Company endeavors to continue to plan and evaluate its business operations while taking into consideration certain factors including the following: (i) the projected build rate for commercial, business and military aircraft, as well as the engines that power such aircraft; (ii) the projected maintenance, repair and overhaul schedules for commercial, business and military aircraft, as well as the engines that power such aircraft; (iii) the projected build rate and repair for industrial turbines; and (iv) commercial space. The Company operates within a cost structure that includes a significant fixed component. Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage the fixed component of their respective cost structures. Conversely, the opposite effect is expected to occur at lower net sales and related production volumes. A. Results of Operations Overview 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. CBlade Sale In October 2024, the Company sold its European operations in order to streamline operations 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 six months ended March 31, 2025 and 2024. All historical statements, amounts and related 19 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 as of March 31, 2025 was $129.2 million, of which $98.9 million are anticipated to be complete within the next 12 months, compared with total backlog of $122.9 million as of March 31, 2024. Orders may be subject to modification or cancellation by the customer with limited charges. Recovery in the aerospace markets was the primary contributor to the increased bookings. Backlog information may not be indicative of future sales. Three Months Ended March 31, 2025 compared with Three Months Ended March 31, 2024 Net Sales Net sales comparative information for the second quarter of fiscal 2025 and 2024 is as follows: (Dollars in millions) Three Months Ended March 31, Increase/ (Decrease) 2025 2024 Aerospace components for: Fixed wing aircraft $ 14.4 $ 10.1 $ 4.3 Rotorcraft 2.9 4.2 (1.3) Commercial space 0.6 4.0 (3.4) Energy components for power generation units 0.7 0.4 0.3 Commercial product and other revenue 0.4 1.8 (1.4) Total $ 19.0 $ 20.5 $ (1.5) Net sales for the second quarter of fiscal 2025 decreased $1.5 million to $19.0 million, compared with $20.5 million in the comparable period of fiscal 2024. Fixed wing sales increased $4.3 million compared with the same period last year, primarily due to higher demand across most programs. Rotorcraft sales declined compared with the same period last year primarily due to the timing of orders in the H60 and Osprey V22 programs. Commercial space products decreased by $3.4 million year-over-year due to delays in commercial launch programs. Net sales for the energy components for power generation units increased slightly by $0.3 million. Commercial products and other revenue decreased $1.4 million compared with the same period last year mostly due to the timing of orders related to munitions programs. Commercial net sales and military net sales were 43.7% and 56.3%, respectively, of total net sales in the second quarter of fiscal 2025, compared with 55.3% and 44.7%, respectively, in the comparable period in fiscal 2024. Commercial net sales decreased $3.0 million to $8.3 million in the second quarter of fiscal 2025, compared with $11.3 million in the comparable period of fiscal 2024, primarily due to delays in the commercial space market, partially offset by higher demand in the commercial aerospace market. Military net sales increased by $1.5 million to $10.7 million in the second quarter of fiscal 2025, compared with $9.2 million in the comparable period of fiscal 2024, primarily due to increased demand across multiple programs. Cost of Goods Sold Cost of goods sold (“COGS”) decreased by $1.6 million, or (8.2)%, to $17.5 million, or 91.7% of net sales, during the second quarter of fiscal 2025, compared with $19.0 million, or 92.7% of net sales, in the comparable period of fiscal 2024. The decrease is primarily due to lower sales in the commercial space market and munitions programs, partially offset by higher sales volume and favorable mix of products sold in our fixed wing aircraft sector. Gross Profit Gross profit increased slightly by $0.1 million to $1.6 million in the second quarter of fiscal 2025, compared with $1.5 million gross profit in the comparable period of fiscal 2024, primarily due to the decreases in sales volume and COGS discussed above and the impact of favorable mix of products sold. Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses were $2.4 million, or 12.4% of net sales, during the second quarter of fiscal 2025, compared with $2.8 million, or 13.7% of net sales, in the comparable period of fiscal 2024. The decrease in SG&A expenses was primarily due to lower employee-related expenses attributable to previous headcount reductions, as well as reduced spend related to cost reduction initiatives and legal and strategic alternative expenses. 20 Other/General The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreements in the second quarter of fiscal 2025 and 2024: (Dollars in millions) Weighted Average Interest Rate Three Months Ended March 31, Weighted Average Outstanding Balance Three Months Ended March 31, 2025 2024 2025 2024 Revolving credit agreement 9.7 % 8.1 % $ 11.7 $ 16.8 Term loan 10.0 % — % $ 2.8 $ — Other debt 2.3 % 0.8 % $ 0.4 $ 0.3 Promissory note (related party) — % 13.2 % $ — $ 3.2 Income Taxes The Company’s effective tax rate through the second quarter of fiscal 2025 was (5.9)%, compared with (0.2)% 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. 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. Loss from Continuing Operations Loss from continuing operations was $1.2 million during the second quarter of fiscal 2025, compared with $2.2 million in the comparable period of fiscal 2024 due to gross margins improvements and lower SG&A expenses discussed above, as well as lower interest expense due to lower average debt outstanding. Six Months Ended March 31, 2025 compared with Six Months Ended March 31, 2024 Net Sales Net sales comparative information for the first six months of fiscal 2025 and 2024 is as follows: (Dollars in millions) Six Months Ended March 31, Increase/ (Decrease) 2025 2024 Aerospace components for: Fixed wing aircraft $ 27.2 $ 20.0 $ 7.2 Rotorcraft 6.3 7.3 (1.0) Commercial space 3.1 5.4 (2.3) Energy components for power generation units 1.7 1.1 0.6 Commercial product and other revenue 1.6 2.2 (0.6) Total $ 39.9 $ 36.0 $ 3.9 Net sales for the first six months of fiscal 2025 increased $3.9 million to $39.9 million, compared with $36.0 million in the comparable period of fiscal 2024. Fixed wing sales increased $7.2 million compared with the same period last year, primarily due to higher demand across most programs. Rotorcraft sales declined $1.0 million compared with the same period last year primarily due to the timing of orders in the H60 and Osprey V22 programs. Commercial space products decreased by $2.3 million year-over-year due to delays in commercial launch programs. Net sales for the energy components for power generation units increased by $0.6 million due to growth in the steam turbine markets. Commercial products and other revenue decreased $0.6 million compared with the same period last year mostly due to the timing of orders related to munitions programs. Commercial net sales were 48.8% of total net sales and military net sales were 51.2% of total net sales in the first six months of fiscal 2025, compared with 52.8% and 47.2%, respectively, in the comparable period in fiscal 2024. Commercial net sales increased $0.5 million to $19.5 million in the first six months of fiscal 2025, compared with $19.0 million in the comparable period of fiscal 2024, primarily due to the continued rebound in the aerospace market. Military net sales increased by $3.4 million to $20.4 million in the first six months of fiscal 2025, compared with $17.0 million in the comparable period of fiscal 2024, primarily due to increased demand across most programs. 21 Cost of Goods Sold COGS increased by $2.4 million, or 6.8%, to $37.4 million, or 93.7% of net sales, during the first six months of fiscal 2025, compared with $35.0 million, or 97.4% 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 Gross profit increased $1.6 million to $2.5 million in the first six months of fiscal 2025, compared with $0.9 million gross profit 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. Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses were $5.2 million, or 13.0% of net sales, during the first six months of fiscal 2025, compared with $5.9 million, or 16.5% 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 employee-related costs and legal and strategic alternative costs. 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 six months of both fiscal 2025 and 2024: (Dollars in millions) Weighted Average Interest Rate Six Months Ended March 31, Weighted Average Outstanding Balance Six Months Ended March 31, 2025 2024 2025 2024 Revolving credit agreement 9.7 % 7.9 % $ 12.5 $ 16.2 Term loan 10.2 % — % $ 2.6 $ — Other debt 5.2 % 0.9 % $ 0.4 $ 0.3 Promissory note (related party) — % 6.6 % $ — $ 3.2 Income Taxes The Company’s effective tax rate through the first six months of fiscal 2025 was (2.2)%, compared with (0.2)% 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. 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. Loss from Continuing Operations Loss from continuing operations was $3.7 million during the first six months of fiscal 2025, compared with $6.3 million in the comparable period of fiscal 2024 due to higher sales volumes and gross margins improvements coupled with lower SG&A expenses and lower interest expense attributable to lower average debt outstanding during the period. Non-GAAP Financial Measures Presented below is certain financial information based on the Company’s EBITDA and Adjusted EBITDA. References to “EBITDA” mean earnings (losses) from continuing operations before interest, taxes, depreciation and amortization, and references to “Adjusted EBITDA” mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of net income to EBITDA and Adjusted EBITDA. 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, 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. Therefore, reviewers of the Company’s financial information should not consider them in isolation, or as a substitute for analysis of the Company’s results of operations as reported in accordance with GAAP. Some of these limitations include: • Neither EBITDA nor Adjusted EBITDA reflects the interest expense or the cash requirements necessary to service interest payments on indebtedness; 22 • 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 as measurements of financial performance; and • Neither EBITDA nor Adjusted EBITDA includes the payment of taxes, which is a necessary element of operations. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to the Company to invest in the growth of its businesses. 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 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 loss to EBITDA and Adjusted EBITDA: Three Months Ended March 31, Six Months Ended March 31, Dollars in thousands 2025 2024 2025 2024 Net loss $ (1,392) $ (1,590) $ (3,708) $ (5,013) Less: (Loss) income from discontinued operations, net of tax (70) 642 36 1,289 Loss from continuing operations (1,322) (2,232) (3,744) (6,302) Adjustments: Depreciation and amortization expense 1,189 1,180 2,370 2,412 Interest expense, net 428 818 897 1,160 Income tax expense 75 5 80 11 EBITDA 370 (229) (397) (2,719) Adjustments: Foreign currency exchange loss (gain), net (1) 1 (3) (1) 1 Other expense, net (2) 37 85 75 154 Gain on disposal of assets (3) — 4 — 4 Non-recurring severance expense adjustments (4) 3 — (19) — Equity compensation (4) 67 85 88 171 Transaction-related expense adjustments (5) 1 — (16) — LIFO impact (6) (637) 58 (136) 351 IT incident costs, net (7) — 24 — 23 Strategic alternative expense (8) — 132 — 320 Adjusted EBITDA $ (158) $ 156 $ (406) $ (1,695) (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. (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 and executive severance. (5) Represents credits related to transaction-related legal fees incurred primarily in connection with the unsuccessful attempt in which the Company was the acquisition target. (6) Represents the change in the reserve for inventories for which cost is determined using the last-in, first-out (“LIFO”) method. (7) Represents incremental information technology costs (and credits) as it relates to the cybersecurity incident and loss on insurance recovery. (8) Represents expense related to evaluation of strategic alternatives. B. Liquidity and Capital Resources Cash and cash equivalents were $1.9 million and $1.7 million as of March 31, 2025 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. 23 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 March 31, 2025, 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. 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 $1.0 million of cash in the first six months of fiscal 2025, primarily due to net operating loss from continuing operations of $3.7 million partially offset by depreciation and amortization of $2.4 million and change in inventory valuation accounts of $0.3 million and LIFO effect of $0.1 million. The uses of cash from working capital of $0.1 million was primarily due to higher prepaid expenses attributable to deferred financing costs related to the refinanced revolver and customer deposits, and decreases in accrued liabilities and accounts payable due to timing of payments, partially offset by decreases in accounts receivable. The Company’s operating activities used $2.9 million of cash in the first six months of fiscal 2024, primarily due to net operating loss of $6.3 million partially offset by depreciation and amortization of $2.4 million and change in inventory valuation accounts of $0.5 million and LIFO effect of $0.4 million. The uses of cash from working capital of $0.4 million was primarily due to increases in inventory of $4.4 million, partially offset by accounts receivable and prepaid expense reductions of $1.0 million and $0.4 million, respectively, and an increase in accounts payable of $2.9 million. The increase in inventory was primarily due to increase in raw material and work in process to meet heightened customer demand. The increase in accounts receivable was due to increases in customer shipments. The increase in accounts payable was due to increases in raw material purchases and outside processing fees related to inventory build. Investing Activities During the first six months of fiscal 2025 and 2024, cash used for investing activities was $0.3 million and $1.2 million, respectively, attributable to capital expenditures. Capital commitments as of March 31, 2025 were $0.2 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. 24 Financing Activities Cash used in financing activities was $13.1 million in the first six months of fiscal 2025, compared with $4.0 million provided by financing activities in the first six months of fiscal 2024. The year-over-year decrease was primarily related to higher repayments on our revolving credit line and 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 six months ended March 31, 2025. 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. 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 debt agreements when needed in the future. 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. C. Recent Accounting Standards No recent accounting standards were adopted during the six months ended March 31, 2025 . 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 .