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”), defense, and commercial space 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 15 related to geopolitical and economic factors, suppliers, laws and regulatory compliance, and trade measures such as significant tariffs - including recently announced U.S. tariffs on aluminum and steel; (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 in order to remain competitive, win bids, and meet the evolving 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; 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, defense and commercial space markets. The processes and services provided by the Company include forging, heat-treating, chemical processing, machining, subassembly, and testing. 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 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. Backlog of Orders SIFCO’s total backlog as of December 31, 2025 was $139.5 million, compared with total backlog of $121.9 million as of December 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 December 31, 2025 compared with Three Months Ended December 31, 2024 Net Sales Net sales comparative information for the first quarter of fiscal 2026 and 2025 is as follows: (Dollars in millions) Three Months Ended December 31, Increase/ (Decrease) 2025 2024 Aerospace components for: Fixed wing aircraft $ 10.5 $ 12.8 $ (2.3) Rotorcraft 9.2 3.4 5.8 Commercial space 1.2 2.5 (1.3) Energy components for power generation units 0.3 1.0 (0.7) Commercial product and other revenue 2.8 1.2 1.6 Total $ 24.0 $ 20.9 $ 3.1 Net sales for the first quarter of fiscal 2026 increased $3.1 million to $24.0 million, compared with $20.9 million in the comparable period of fiscal 2025. The increase is attributable to increased throughput and favorable pricing, partially offset by the impact of customer-supplied raw materials. Under these arrangements, net sales excludes the value of materials provided by customers, resulting in lower reported sales relative to comparable programs utilizing company-procured materials. Fixed wing sales decreased $2.3 million compared with the same period last year, primarily due to timing across most programs, such as F-35. Rotorcraft sales increased compared with the same period last year primarily due to the timing of orders for UH-60 Black Hawk and CH47 Chinook programs. Commercial space products decreased by $1.3 million year-over-year due to reduced procurement activity in the commercial space market. Net sales for the energy components for power generation units 16 decreased by $0.7 million. Commercial products and other revenue increased $1.6 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 36.2% and 63.8%, respectively, of total net sales in the first quarter of fiscal 2026, compared with 53.4% and 46.6%, respectively, in the comparable period in fiscal 2025. Commercial net sales decreased $2.5 million to $8.7 million in the first quarter of fiscal 2026, compared with $11.2 million in the comparable period of fiscal 2025, primarily due to reduced procurement activity in the commercial space market, partially offset by higher demand in the commercial aerospace market. Military net sales increased by $5.6 million to $15.3 million in the first quarter of fiscal 2026, compared with $9.7 million in the comparable period of fiscal 2025, primarily due to increased demand across multiple programs, such as munitions and UH-60. Cost of Goods Sold Cost of goods sold (“COGS”) decreased by $1.2 million, or 5.9%, to $18.8 million, or 78.4% of net sales, during the first quarter of fiscal 2026, compared with $20.0 million, or 95.6% of net sales, in the comparable period of fiscal 2025. The decrease is due to improved absorption of fixed manufacturing costs. In addition, customer-supplied raw material reduced both reported net sales and COGS as customer-provided materials are excluded, with a generally neutral impact on gross profit. Gross Profit Gross profit increased by $4.3 million to $5.2 million in the first quarter of fiscal 2026, compared with $0.9 million gross profit in the comparable period of fiscal 2025, primarily attributable to increased throughput, favorable pricing and shift in sales mix resulting from the exit of lower-margin business, partially offset by higher manufacturing costs. Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses were $2.6 million, or 11.0% of net sales, during the first quarter of fiscal 2026, compared with $2.8 million, or 13.6% of net sales, in the comparable period of fiscal 2025. The decrease is primarily driven by lower legal and professional fees. Interest Expense, Net The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreements in the first quarter of fiscal 2026 and 2025: (Dollars in millions) Weighted Average Interest Rate Three Months Ended December 31, Weighted Average Outstanding Balance Three Months Ended December 31, 2025 2024 2025 2024 Revolving credit agreement 10.5 % 9.6 % $ 7.9 $ 13.3 Term loan 9.9 % 10.5 % $ 2.4 $ 2.4 Other debt 25.5 % 8.2 % $ 0.2 $ 0.4 Income Taxes The Company’s effective tax rate through the first quarter of fiscal 2026 was 18.5%, compared with (0.2)% for the same period of fiscal 2025. The increase in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2026 compared with the same period of fiscal 2025 along with the Company's transition from a pre-tax loss to a pre-tax income position. 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. Income (Loss) from Continuing Operations Income from continuing operations was $1.8 million during the first quarter of fiscal 2026, compared with a loss from continuing operations of $2.4 million in the comparable period of fiscal 2025. The improvement is primarily attributable to increased gross profit and lower SG&A expenses as noted above. B. Liquidity and Capital Resources Cash and cash equivalents were $1.1 million and $0.5 million as of December 31, 2025 and September 30, 2025, 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 17 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, 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, 2025 (the “2025 Annual Report”). Additionally, refer to Note 9 — Retirement Benefit Plans of the Notes to Consolidated Financial Statements in the Company’s 2025 Annual Report for more information related to the Company’s pension and defined contribution plans. We believe that our existing cash and available credit lines 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 5 — Debt of the notes to unaudited consolidated condensed financial statements. Operating Activities The Company’s operating activities provided $8.1 million of cash in the first three months of fiscal 2026. The cash provided by operating activities was primarily due to $4.5 million of cash generated from working capital, primarily due to increases in inventory due to timing of raw material receipts, contract liabilities due to receipt of milestone payment from a customer, and accounts payable due to timing of payments, along with $1.8 million of net income from continuing operations and $1.8 million adjusted for non-cash items, such as depreciation. 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 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. Investing Activities During the first three months of fiscal 2026 and 2025, cash used for investing activities was $0.1 million, respectively, attributable to capital expenditures. Capital commitments as of December 31, 2025 were $0.3 million. The Company anticipates that the remaining total fiscal 2026 capital expenditures will be within the range of $1.0 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 used for financing activities was $7.9 million in the first three months of fiscal 2026, compared with $9.2 million in the first three months of fiscal 2025. The year-over-year decrease in cash used from financing was primarily related to lower repayments on debt obligations during fiscal 2026. Refer to Note 5 — Debt of the notes to unaudited consolidated condensed financial statements for details regarding our financing activities during the three months ended December 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 5 — 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 18 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 ASU 2024-01 was adopted during the three months ended December 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 2025 Annual Report .