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 related to geopolitical and economic factors, suppliers, laws and regulatory compliance, and trade measures such as significant tariffs - including 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, such as geopolitical conflicts and supply chain disruptions resulting therefrom. 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 June 30, 2026 was $164.2 million, compared with total backlog of $130.4 million as of June 30, 2025. 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. 17 Three Months Ended June 30, 2026 compared with Three Months Ended June 30, 2025 Net Sales Net sales comparative information for the third quarter of fiscal 2026 and 2025 is as follows: (Dollars in millions) Three Months Ended June 30, Increase/ (Decrease) 2026 2025 Aerospace components for: Fixed wing aircraft $ 12.7 $ 13.2 $ (0.5) Rotorcraft 7.6 5.2 2.4 Commercial space 0.1 1.2 (1.1) Energy components for power generation units — 0.3 (0.3) Commercial product and other revenue 5.7 2.2 3.5 Total $ 26.1 $ 22.1 $ 4.0 Net sales for the third quarter of fiscal 2026 increased $4.0 million to $26.1 million, compared with $22.1 million in the comparable period of fiscal 2025. The increase is driven by higher production volumes and favorable pricing, partially offset by the impact of customer-supplied raw materials. Under these arrangements, the Company does not recognize revenue for materials provided by customers, resulting in lower reported net sales relative to comparable programs utilizing company-procured materials. Fixed wing sales decreased $0.5 million compared with the same period last year, primarily due to timing across most programs. Rotorcraft sales increased compared with the same period last year primarily due to the timing of orders for V-22 Osprey and UH-60 Black Hawk programs. Commercial space products decreased by $1.1 million due to timing of orders in the commercial space market. Net sales for the energy components for power generation units decreased by $0.3 million, primarily due to lower customer demand. Commercial products and other revenue increased $3.5 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 26.7% and 73.3%, respectively, of total net sales in the third quarter of fiscal 2026, compared with 39.3% and 60.7%, respectively, in the comparable period in fiscal 2025. Commercial net sales decreased $1.7 million to $7.0 million in the third quarter of fiscal 2026, compared with $8.7 million in the comparable period of fiscal 2025, primarily due to reduced procurement of components the Company provides for the power generation and commercial space market partially offset by higher demand in the commercial aerospace market. Military net sales increased by $5.7 million to $19.1 million in the third quarter of fiscal 2026, compared with $13.4 million in the comparable period of fiscal 2025, primarily due to increased demand across multiple programs, such as munitions, V-22 Osprey and UH-60 Black Hawk. Cost of Goods Sold Cost of goods sold (“COGS”) increased by $6.5 million, or 40.3%, to $22.7 million, or 86.9% of net sales, during the third quarter of fiscal 2026, compared with $16.2 million, or 73.3% of net sales, in the comparable period of fiscal 2025. The increase is primarily as a result of higher sales volume and a $3.2 million increase in LIFO expense resulting from higher inventory costs and increased purchases. In addition, COGS in the prior year third quarter was reduced by a $2.4 million Employee Retention Credit (“ERC”) benefit that did not recur in the current period and included a LIFO benefit of $0.4 million. Gross Profit Gross profit decreased by $2.5 million to $3.4 million in the third quarter of fiscal 2026, compared with $5.9 million gross profit in the comparable period of fiscal 2025. The prior year period included a $2.4 million ERC benefit recognized within COGS. Excluding the impact of the ERC benefit, gross profit would have decreased by $0.1 million. Higher sales volume, improved pricing, a more favorable customer and product mix, including increased volumes on higher-margin programs, and improved overhead absorption resulting from higher production volumes substantially offset the unfavorable impact of a $3.2 million increase in LIFO expense. Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses were $3.1 million, or 11.9% of net sales, during the third quarter of fiscal 2026, compared with $2.6 million, or 11.9% of net sales, in the comparable period of fiscal 2025. The increase is primarily driven by $0.5 million in incentive compensation accruals. 18 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 third quarter of fiscal 2026 and 2025: (Dollars in millions) Weighted Average Interest Rate Three Months Ended June 30, Weighted Average Outstanding Balance Three Months Ended June 30, 2026 2025 2026 2025 Revolving credit agreement 11.2 % 9.9 % $ 6.4 $ 10.0 Term loan 9.4 % 10.1 % $ 2.1 $ 2.7 Other debt 7.8 % 2.3 % $ 0.2 $ 0.4 The revolving credit agreement weighted average interest rate for the three months ended reflects the impact of a provision within the Company's Loan Agreement that requires interest be calculated on a specified minimum borrowing level, regardless of actual outstanding borrowings. As average borrowings during the period were below threshold, the Company incurred interest expense in amounts in excess of the actual debt outstanding. As a result, the Company's effective interest rate was higher than would be expected based solely on the stated contractual rates applied to its outstanding borrowings. Excluding the impact to this provision, the Company's effective interest rate for the period would have been approximately 9.5%, compared to the reported rate of 11.2%. The impact of this provision may continue in future periods to the extent that outstanding borrowings remain below the specified minimum level. Income Taxes The Company’s effective tax rate through the third quarter of fiscal 2026 was (122.2)%, compared with 1.2% for the same period of fiscal 2025. The change 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. The Company continues to maintain a full valuation allowance against its U.S. deferred tax assets. It is reasonably possible that, if the Company continues to generate sufficient U.S. taxable income, all or a portion of the valuation allowance could be released within the next 12 months. Income (Loss) from Continuing Operations Loss from continuing operations was nominal during the third quarter of fiscal 2026, compared with income of $3.3 million in the comparable period of fiscal 2025. The prior period included a net benefit of $2.7 million related to the ERC. The change in results was primarily attributable to the factors impacting gross profit discussed above. Nine Months Ended June 30, 2026 compared with Nine Months Ended June 30, 2025 Net Sales Net sales comparative information for the first nine months of fiscal 2026 and 2025 is as follows: (Dollars in millions) Nine Months Ended June 30, Increase/ (Decrease) 2026 2025 Aerospace components for: Fixed wing aircraft $ 39.5 $ 40.4 $ (0.9) Rotorcraft 24.1 11.5 12.6 Commercial space 2.1 4.3 (2.2) Energy components for power generation units 0.5 2.0 (1.5) Commercial product and other revenue 10.4 3.8 6.6 Total $ 76.6 $ 62.0 $ 14.6 Net sales for the first nine months of fiscal 2026 increased $14.6 million to $76.6 million, compared with $62.0 million in the comparable period of fiscal 2025. The increase was primarily driven by higher volumes in military programs, partially offset by declines in certain commercial markets. Fixed wing sales decreased $0.9 million compared with the same period last year due to program timing. Rotorcraft sales increased $12.6 million compared with the same period last year primarily due to the timing of orders in the V-22 Osprey and UH-60 Black Hawk programs. Commercial space products decreased by $2.2 million year-over- 19 year due to reduced procurement activity, including one specific customer scaling back orders to manage excess inventory. Net sales for the energy components for power generation units decreased by $1.5 million due to lower customer demand. Commercial products and other revenue increased $6.6 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 31.5% and 68.5%, respectively, of total net sales in the first nine months of fiscal 2026, compared with 45.4% and 54.6%, respectively, in the comparable period in fiscal 2025. Commercial net sales decreased $4.1 million to $24.1 million in the first nine months of fiscal 2026, compared with $28.2 million in the comparable period of fiscal 2025, reflecting reduced demand in commercial space market and reduced procurement of components the Company provides for the power generation market. Military net sales increased by $18.7 million to $52.5 million in the first nine months of fiscal 2026, compared with $33.8 million in the comparable period of fiscal 2025, primarily due to timing of munitions orders, increased demand and pricing across most programs. Cost of Goods Sold COGS increased by $8.7 million, or 16.2%, to $62.3 million, or 81.4% of net sales, during the first nine months of fiscal 2026, compared with $53.6 million, or 86.5% of net sales, in the comparable period of fiscal 2025. The increase in COGS was primarily attributable to higher production and sales volumes and a $4.4 million increase in LIFO expense resulting from higher inventory costs and increased purchases. As a percentage of net sales, COGS decreased, reflecting improved overhead absorption on higher volumes, pricing actions, and an increase of customer supplied material. Prior year included a $2.4 million ERC benefit in COGS which was not repeated in the current year. Gross Profit Gross profit increased $5.9 million to $14.3 million in the first nine months of fiscal 2026, compared with $8.4 million gross profit in the comparable period of fiscal 2025. The prior year period included a $2.4 million ERC benefit recognized within COGS. Excluding the impact of the ERC benefit, gross profit would have increased by $8.3 million. The increase was primarily driven by higher sales volumes, favorable product mix, and improved pricing, partially offset by LIFO expense noted above. Gross margin also increased, reflecting the benefit of these factors, as well as improved cost absorption and impact of cost drivers noted above. Selling, General and Administrative Expenses SG&A expenses were $8.7 million, or 11.4% of net sales, during the first nine months of fiscal 2026, compared with $7.8 million, or 12.6% of net sales, in the comparable period of fiscal 2025. The increase in SG&A expenses was primarily driven $0.7 million increase in incentive compensation and $0.4 million related to environmental reserve and associated legal and professional fees as discussed in Note 10 — Commitments and Contingencies of the notes to unaudited consolidated condensed financial statements. Interest Expense, Net 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 2026 and 2025: (Dollars in millions) Weighted Average Interest Rate Nine Months Ended June 30, Weighted Average Outstanding Balance Nine Months Ended June 30, 2026 2025 2026 2025 Revolving credit agreement 13.9 % 9.7 % $ 5.4 $ 11.7 Term loan 9.5 % 10.2 % $ 2.2 $ 2.6 Other debt 13.5 % 4.3 % $ 0.2 $ 0.4 Interest expense for the nine months ended reflects the impact of a provision within the Company's Loan Agreement that requires interest be calculated on a specified minimum borrowing level, regardless of actual outstanding borrowings. As average borrowings during the period were below threshold, the Company incurred interest expense in amounts in excess of the actual debt outstanding. As a result, the Company's effective interest rate was higher than would be expected based solely on the stated contractual rates applied to its outstanding borrowings. Excluding the impact to this provision, the Company's effective interest rate for the period would have been approximately 9.8%, compared to the reported rate of 13.9%. The impact of this provision may continue in future periods to the extent that outstanding borrowings remain below the specified minimum level. Income Taxes The Company’s effective tax rate through the first nine months of fiscal 2026 was 2.7%, compared with (37.2)% for the same period of fiscal 2025. The change in the effective rate was primarily attributable to changes in jurisdictional mix of income in 20 fiscal 2026 compared with the same period of fiscal 2025, as well as 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. The Company continues to maintain a full valuation allowance against its U.S. deferred tax assets. While the Company has generated U.S. pretax income during fiscal 2026, it has not yet concluded that sufficient positive evidence exists to support a release of the valuation allowance. The Company will continue to evaluate all available evidence, including the sustainability of earnings. It is reasonably possible that, if sufficient positive evidence is obtained, all or a portion of the valuation allowance could be released within the next 12 months, which could result in a material income tax benefit in the period in which it is recognized. Income (Loss) from Continuing Operations Income from continuing operations was $4.4 million during the first nine months of fiscal 2026, compared with a loss of $0.4 million in the comparable period of fiscal 2025 is due to higher sales volumes and gross margin improvements as referenced above. The prior year net loss includes a net benefit of $2.7 million related to ERC that did not repeat in the current period. B. Liquidity and Capital Resources Cash and cash equivalents were $0.1 million and $0.5 million as of June 30, 2026 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 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 June 30, 2026, 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 Company's primary cash requirements consist of obligations related to outstanding debt and lease payments, operating and capital purchase commitments, and contributions to our defined benefit and contribution plans. These requirements are expected to be funded through a combination of cash on hand, cash generated from operations, and availability under the Company's credit facilities. For additional information regarding the Company’s contractual obligations, including 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 and planned capital expenditures for the next 12 months. 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 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 Net cash provided by operating activities was $3.4 million for the first nine months of fiscal 2026, compared to net cash used of $0.6 million in the first nine months of fiscal 2025. The increase was primarily driven by improved operating results, with net income of $4.4 million compared to a net loss of $0.4 million in the prior year period. Non-cash adjustments included $4.4 million of LIFO expense and $3.1 million of depreciation and amortization in the current period, partially offset by a $0.7 million decrease in related inventory valuation accounts. Changes in working capital resulted in a net use of cash of approximately $8.3 million during the period. This use was primarily driven by increases in operating assets, including a $9.6 million increase in inventories, $3.0 million increase in accounts receivable, and a $1.3 million increase in contract assets, reflecting higher business activity and the timing of billings and production. These uses were partially offset by increases in operating liabilities, including a $3.1 million in accounts payable and $1.8 million increase in contract liabilities, reflecting the timing of customer advance payments, timing of raw material receipts and vendor disbursements. In contrast, during the nine months of fiscal 2025, operating activities used $0.6 million of cash, primarily due to net loss of $0.4 million, partially offset by of $3.9 million depreciation and amortization and $0.5 million related to inventory valuation accounts. Changes in working capital resulted in a net use in cash, primarily driven by decreases in accounts payable and 21 accrued liabilities due to timing of payments, partially offset by a decrease in accounts receivable, reflecting the timing of customer receipts and billings. Investing Activities During the first nine months of fiscal 2026 and 2025, cash used for investing activities was $0.5 million and $0.3 million, respectively, attributable to capital expenditures. Capital commitments as of June 30, 2026 were $0.6 million. The Company anticipates that the remaining fiscal 2026 capital expenditures will be within the range of $0.5 million to $0.7 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 $3.7 million in the first nine months of fiscal 2026, compared with $13.4 million in the first nine months of fiscal 2025. The year-over-year decrease in cash used for financing was primarily related to lower repayments on debt obligations during fiscal 2026 versus prior year included the refinancing of debt. Refer to Note 5 — Debt of the notes to unaudited consolidated condensed financial statements for details regarding our financing activities during the nine months ended June 30, 2026. 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. C. Recent Accounting Standards ASU 2024-01 was adopted during the nine months ended June 30, 2026 . 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 .