Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SIFCO is engaged in the production of forgings and machined and sub-assembled components primarily for the Aerospace and Defense, Energy and Commercial Space markets. The processes and services include forging, heat-treating, chemical processing and machining. The Company operates under one business segment.
When planning and evaluating its business operations, the Company takes 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 demand for private space launch and reentry programs; and (iii) the projected maintenance, repair and overhaul schedules for commercial, business and military aircraft, as well as the engines that power such aircraft.
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 armored military vehicles; (ii) airframe applications for a variety of aircraft; (iii) private space launch and reentry programs; and (iv) other commercial applications.
CBlade Sale
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 CBlade 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 planned sale transaction, the Company’s financial statements have been prepared with the net assets, results of operations, and cash flows of CBlade presented as assets held for sale and discontinued operations, respectively, as of and for the years ended September 30, 2025 and 2024. 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 Consolidated Financial Statements.
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Fiscal Year 2025 Compared with Fiscal Year 2024
Net Sales
Net sales comparative information for fiscal 2025 and 2024 is as follows:
(Dollars in millions) Years Ended September 30, Year Over Year Increase
(Decrease)
2025 2024
Aerospace components for:
Fixed wing aircraft $ 51.4 $ 41.8 $ 9.6
Rotorcraft 17.1 17.3 (0.2)
Commercial space 5.0 13.2 (8.2)
Energy components for power generation units 2.5 1.8 0.7
Commercial products and other revenue 8.8 5.5 3.3
Total $ 84.8 $ 79.6 $ 5.2
Net sales in fiscal 2025 increased 6.5%, or $5.2 million, to $84.8 million, compared with $79.6 million in fiscal 2024. Fixed wing aircraft sales increased $9.6 million compared with the same period last year primarily due to higher demand across most programs. Rotorcraft sales decreased $0.2 million in fiscal 2025 compared to the same period in fiscal 2024 primarily due to timing of orders in the H-60 program. Commercial space products decreased by $8.2 million year-over-year due to reduced procurement activity in the commercial space market. One key customer, significantly scaled back orders as they manage excess inventory. Energy components for power generation units increased $0.7 million due to growth in the steam turbine markets. Commercial products and other revenue increased by $3.3 million in fiscal 2025 compared to fiscal 2024, mostly due to timing of orders related to munitions programs.
Commercial net sales were 43.5% of total net sales and military net sales were 56.5% of total net sales in fiscal 2025, compared with 52.4% and 47.6%, respectively, in fiscal 2024. Commercial net sales decreased $4.8 million to $36.9 million in fiscal 2025, compared to $41.7 million in fiscal 2024 primarily due to reduced procurement activity in the commercial space market due to reasons noted above. Military net sales increased $10.0 million to $47.9 million in fiscal 2025, compared to $37.9 million in fiscal 2024 primarily due to increased demand across most programs.
Cost of Goods Sold
Cost of goods sold (“COGS”) increased by $0.6 million, or 0.8%, to $74.2 million, or 87.5% of net sales, during fiscal 2025, compared with $73.7 million, or 92.5%, of net sales during fiscal 2024. The increase was primarily due to higher sales volume, partially offset by $3.0 million of Employee Retention Credit (“ERC”) benefit.
Gross Profit
Gross profit increased by $4.6 million, to $10.6 million during fiscal 2025, compared with $6.0 million in fiscal 2024. Gross margin percent of sales was 12.5% during fiscal 2025, compared with 7.5% in fiscal 2024, primarily due to higher sales and improved margin, as well as $3.0 million ERC benefit recognized.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses were $10.4 million, or 12.3% of net sales, during fiscal 2025, compared with $11.1 million, or 14.0% of net sales, in fiscal 2024. The decrease in SG&A expenses is primarily due to lower employee-related expenses, resulting from reduced headcount due to deferred backfill of certain positions and a $0.5 million benefit recognized from ERC. These decreases were partially offset by approximately $0.8 million in legal and professional fees related to the ERC submission process. In addition, SG&A expenses in the prior year included a one time credit of $0.6 million from a vendor pertaining to the fiscal 2023 cybersecurity incident and $0.4 million in severance costs, which did not recur in the current period.
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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 fiscal 2025 and 2024:
(Dollars in millions) Weighted Average
Interest Rate
Years Ended September 30, Weighted Average
Outstanding Balance
Years Ended September 30,
2025 2024 2025 2024
Revolving credit agreement 9.8% 8.0% $ 11.3 $ 17.1
Term loan 10.2% —% $ 2.6 $ —
Other debt 4.0% 12.6% $ 0.3 $ 0.3
The Company believes that inflation did not materially impact its results of operations in either fiscal 2025 or 2024.
Income Taxes
The Company’s effective tax rate in fiscal 2025 was 24.7% compared with 0.4% in fiscal 2024. The decrease in the effective tax rate in fiscal 2025 is primarily attributable to changes in jurisdictional mix of income and increase in Ireland income tax expense as a result of the sale of Italian business in fiscal 2025 compared with the same period in 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 $0.9 million during fiscal 2025 compared with a loss from continuing operations of $8.6 million in fiscal 2024 due to higher sales volumes and gross margins improvements coupled with lower SG&A expenses, lower interest expense attributable to lower average debt outstanding during the period and the net benefit recognized of $3.3 million related to ERC.
B. Liquidity and Capital Resources
Cash, cash equivalents and restricted cash decreased to $0.5 million at September 30, 2025 compared with $1.7 million at September 30, 2024. The Company also had cash and cash equivalents related to its discontinued operations (i.e., CBlade) of nil and $1.0 million, September 30, 2025 and 2024, respectively, which are included in current assets of business held for sale in the audited consolidated balance sheets. As of September 30, 2025 and 2024, cash included financing proceeds for capital investment and a nominal amount of the Company’s cash and cash equivalents were in the possession of its non-U.S. holding company subsidiary.
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, 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 September 30, 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. Additionally, refer to Note 9 — Retirement Benefit Plans of the Notes to Consolidated Financial Statements 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 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 Consolidated Financial Statements.
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, if customers extend payment
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terms, and/or if demand for our products decline. The Company and management will continue monitor its liquidity needs. For details regarding our debt agreements, see Note 6 — Debt of the Notes to Consolidated Financial Statements.
Operating Activities
The Company’s operating activities provided $0.1 million of cash in fiscal 2025, compared with $2.6 million of cash used in fiscal 2024. The cash provided by operating activities in fiscal 2025 was primarily due to net operating loss of $0.9 million, adjusted for non-cash items of $8.7 million, partially offset by uses of working capital of $7.6 million. The use of cash from working capital of $7.6 million was primarily due to accounts receivable decreasing, reflecting improved collections and timing of billings, inventories increased, accounts payables and accrued liabilities decreased as the Company reduced outstanding obligations and normalized payment cycles.
The Company’s operating activities used $2.6 million of cash in fiscal 2024. The cash used by operating activities in fiscal 2024 was primarily due to net operating loss of $8.6 million, adjusted for non-cash items of $8.3 million, partially offset by use of working capital of $2.3 million. The use of cash from working capital of $2.3 million was primarily due to higher inventories due to timing of raw material receipts, the increase in account receivables due to higher sales and timing of payments at the end of fiscal year, and higher prepaid expenses attributable to deferred financing costs related to debt refinancing, partially offset by an increase in contract liabilities due to advance payments for raw materials and higher sales recognized over-time and higher accounts payable due to timing of payments
Investing Activities
Cash used for investing activities was $0.5 million in fiscal 2025, compared with $2.0 million in fiscal 2024. Fiscal 2025 and fiscal 2024 expenditures were used primarily for manufacturing enhancement and maintenance. Capital commitments as of September 30, 2025 were $0.1 million. The Company anticipates the total fiscal 2026 capital expenditures will be within the range of $1.0 million to $2.0 million. These expenditures are expected to relate primarily to projects aimed at improving production capabilities, expanding product offering, and achieving operating cost efficiencies.
Financing Activities
Cash used for financing activities was $14.0 million in fiscal 2025 compared to cash provided by financing activities of $6.3 million in fiscal 2024. The year-over-year decrease in cash from financing was primarily related to the higher repayments on our revolving credit line and the debt refinancing and repayment of the promissory note during fiscal 2025.
Refer to Note 6 — Debt of the Notes to Consolidated Financial Statements for details regarding our financing activities during fiscal 2025 and 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 Consolidated Financial Statements.
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.
Net Cash Provided By Discontinued Operations
Net cash from discontinued operations are presented in the consolidated statements of cash flows as summarized operating, investing and financing cash flows, as well as the impact of exchange rate changes on cash. The Company’s operating activities from discontinued operations provided no cash in fiscal 2025, compared with $1.4 million of cash provided by fiscal 2024 primarily driven by net income from discontinued operations and changes in working capital. Cash provided for investing activities from discontinued operations was $14.4 million in fiscal 2025 and cash use of $1.4 million in 2024, related to proceeds received from its sale and outlays for capital expenditures. Cash provided by financing activities from discontinued operations was $0.4 million in fiscal 2025 compared to $1.1 million of cash used in fiscal 2024, attributable to proceeds from new borrowings and loan payments, respectively.
C. Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. The Company believes that the accounting estimates employed and the resulting balances are
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reasonable; however, actual results in these areas could differ from management’s estimates under different assumptions or conditions.
Significant accounting policies used in the preparation of the consolidated financial statements are discussed in Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. The Company believes that the assumptions and estimates associated with allowance for credit losses, inventory valuation, goodwill, contract balances, and income taxes have the greatest potential impact on our financial statements because they are inherently uncertain, involve significant judgements, and include areas where different estimates reasonably could materially impact the financial statements. The Company believes that the critical accounting estimates employed and the resulting balances are reasonable; however, actual results in these areas could differ from management’s estimates under different assumptions or conditions.
Allowances for Credit Losses
The Company establishes allowances for credit losses on accounts receivable, customer financing receivables, and certain other financial assets. The adequacy of these allowances are assessed quarterly through consideration of factors including, but not limited to, customer credit ratings, bankruptcy filings, published or estimated credit default rates, age of the receivable, expected loss rates and collateral exposures. The Company determines the creditworthiness of each customer based upon publicly available information and information obtained directly from its customers. As these factors change, the Company’s allowances for credit losses may change in subsequent periods. Historically, losses have been within management’s expectations and have not been significant.
Inventories
Approximately 40% of the Company’s inventory is valued using the last-in, first-out (“LIFO”) method with the remaining valued using the first-in, first-out (“FIFO”) method stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion.
The Company evaluates obsolete and excess inventory on a quarterly basis. The Company maintains a formal policy, which requires at a minimum, that amounts are written down based on an analysis of the age of the inventory. In addition, if the Company learns of specific obsolescence, other than that identified by the aging criteria, an additional write down will be recognized. Specific obsolescence may arise due to a technological or market change or based on cancellation of an order. Management’s judgment is necessary in determining the proper write down for obsolete and excess inventory. For the portion of the Company’s inventory not valued at LIFO, inventory is valued at FIFO and stated at the lower of cost or net realizable value. The Company evaluates net realizable value on a quarterly basis. See Note 3 — Inventories, net of the Notes to Consolidated Financial Statements for further discussion.
Revenue Recognition
The Company recognizes revenue using the five-step revenue recognition model in which it depicts the transfer of goods to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The revenue standard also requires disclosure sufficient to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the cost to obtain or fulfill a contract.
Contract Balances
Contract assets on the consolidated balance sheets are recognized when a good is transferred to the customer and the Company does not have the contractual right to bill for the related performance obligations. In these instances, revenue recognized exceeds the amount billed to the customer and the right to payment is not solely subject to the passage of time. Amounts do not exceed their net realizable value. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payment from customers are received based on the terms established in the contract with the customer.
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be recoverable. This review involves judgment and is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets and which the Company considers a critical accounting estimate. The Company would assess the fair value of the asset group and compare it to its carrying value. Under the Accounting Standard Codification (“ASC”) 360 (“Topic 360”), if the carrying value of a long-lived asset or asset group is greater than the estimated undiscounted future cash flows, then the long-lived asset or asset group is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset or asset group exceeds its fair value.
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In projecting future undiscounted cash flows, the Company relies on internal budgets and forecasts, including revenue and cash flow projections,, and estimated residual value of the asset group upon disposal of long-lived assets. The Company’s budgets and forecasts are based on historical results and anticipated future market conditions, such as the general business climate and the effectiveness of competition. The Company believes that its estimates of future undiscounted cash flows and fair value are reasonable; however, changes in estimates of such undiscounted cash flows and fair value could change the Company’s estimates, which could result in future impairment charges.
2025 and 2024 Long-Lived Asset Recoverability Tests
In the third quarter of fiscal 2024, certain qualitative factors, including operating results, at the Orange location, triggered a recoverability test. The results indicated that the long-lived assets were recoverable and did not require further review for impairment. The Company did not identify any indicators that the asset groups might be impaired in any of the other quarters assessed during fiscal 2025 and 2024.
Impairment of Goodwill
Goodwill is tested for impairment annually as of July 31. If circumstances change during interim periods between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company will test goodwill for impairment. Factors that would necessitate an interim goodwill impairment assessment include a sustained decline in the Company’s stock price, prolonged negative industry or economic trends, or significant under-performance relative to expected, historical or projected future operating results. Management uses judgment to determine whether to use a qualitative analysis or a quantitative fair value measurement for its goodwill impairment testing. The Company’s fair value measurement approach combines the income and market valuation techniques for each of the Company’s reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparables, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions.
If a reporting unit fails the quantitative impairment test, impairment expense is immediately recorded as the difference between the reporting unit’s fair value and carrying value not to exceed the amount of goodwill recorded.
2025 Annual Goodwill Impairment Tests
SIFCO performed its annual test as of July 31, 2025. Goodwill existed at one of the Company’s reporting units, Cleveland, Ohio as of July 31, 2025 and September 30, 2025. No impairment charge was identified in connection with the annual goodwill impairment test with respect to the Cleveland reporting unit. Refer to Note 4 — Goodwill of the Notes to Consolidated Financial Statements.
2024 Annual Goodwill Impairment Tests
SIFCO performed its annual test as of July 31, 2024. Goodwill existed at one of the Company’s reporting units, Cleveland, Ohio as of July 31, 2024 and September 30, 2024. No impairment charge was identified in connection with the annual goodwill impairment test with respect to the Cleveland reporting unit. Refer to Note 4 — Goodwill of the Notes to Consolidated Financial Statements.
Defined Benefit Pension Plan Expense
The Company maintains three defined benefit pension plans in accordance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). The amounts recognized in the consolidated financial statements for pension benefits under these three defined benefit pension plans are determined on an actuarial basis utilizing various assumptions. The following table illustrates the sensitivity to change in the assumed discount rate and expected long-term rate of return on assets for the Company’s pension plans as of September 30, 2025.
Impact on Fiscal 2025 Benefits Expense Impact on September 30, 2025 Projected Benefit Obligation for Pension Plans
Change in Assumptions
(In thousands)
25 basis point decrease in discount rate $ 10 $ 391
25 basis point increase in discount rate (10) (391)
100 basis point decrease in expected long-term rate of return on assets 172 —
100 basis point increase in expected long-term rate of return on assets (172) —
The discussion that follows provides information on the significant assumptions/elements associated with these defined benefit pension plans.
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The Company determines the expected return on plan assets principally based on (i) the expected return for the various asset classes in the respective plans’ investment portfolios and (ii) the targeted allocation of the respective plans’ assets. The expected return on plan assets is developed using historical asset return performance as well as current and anticipated market conditions such as inflation, interest rates and market performance. Should the actual rate of return differ materially from the assumed/expected rate, the Company could experience a material adverse effect on the funded status of its plans and, accordingly, on its related future net pension expense.
The discount rate for each plan is determined, as of the fiscal year end measurement date, using prevailing market spot-rates (from an appropriate yield curve) with maturities corresponding to the expected timing/date of the future defined benefit payment amounts for each of the respective plans. Such corresponding spot-rates are used to discount future years’ projected defined benefit payment amounts back to the fiscal year end measurement date as a present value. A composite discount rate is then developed for each plan by determining the single rate of discount that will produce the same present value as that obtained by applying the annual spot-rates. The discount rate may be further revised if the market environment indicates that the above methodology generates a discount rate that does not accurately reflect the prevailing interest rates as of the fiscal year end measurement date. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the USI Consulting Group Pension Discount Curve.
As of September 30, 2025 and 2024, SIFCO used the following weighted-average assumptions:
Years Ended September 30,
2025 2024
Discount rate for liabilities 5.1 % 4.8 %
Discount rate for expenses 4.9 % 5.7 %
Expected return on assets 6.2 % 6.2 %
Deferred Tax Valuation Allowance
The Company accounts for deferred taxes in accordance with the provisions of the Accounting Standards Codification guidance related to accounting for income taxes, whereby the Company recognizes an income tax benefit related to income tax credits, loss carryforwards and deductible temporary differences between financial reporting basis and tax reporting basis.
A high degree of judgment is required to determine the extent a valuation allowance should be provided against deferred tax assets. On a quarterly basis, the Company assesses the likelihood of realization of its deferred tax assets considering all available evidence, both positive and negative. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. It is generally difficult to outweigh objectively verifiable negative evidence of recent financial reporting losses. Based on the weight of available evidence, the Company determines if it is more likely than not that its deferred tax assets will be realized in the future.
As a result of losses incurred in recent years, the Company entered into a three-year cumulative loss position in the U.S. jurisdiction during the fourth quarter of fiscal 2016 and remains in a cumulative loss position at the conclusion of fiscal 2025. Accordingly, the Company maintained its valuation allowance on its U.S. deferred tax assets as of the fourth quarter of fiscal 2025.
D. Impact of Newly Issued Accounting Standards
Refer to Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report for information regarding recent accounting pronouncements.
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