Notes to Consolidated Financial Statements
(Amounts in thousands, except per share data)
1. Summary of Significant Accounting Policies
A. DESCRIPTION OF BUSINESS
SIFCO Industries, Inc. and its subsidiaries are engaged in the production of forgings and machined components primarily in the Aerospace and Energy ("A&E") market. The Company’s operations are conducted in a single business segment, "SIFCO" or the "Company."
Impact of COVID-19 & Other Factors
The lingering impact and residual effects of the coronavirus ("COVID-19") pandemic, along with other factors, such as ongoing geopolitical tensions, have created strains on supply chains, and general economic conditions. While the exact timing and pace of recovery in our markets continues to be indeterminable, there are indications that commercial air travel is steadily recovering in certain areas. While the long-term outlook remains positive given the nature of the industry, there continues to be uncertainty with the respect to when commercial air traffic will return to pre-COVID-19 levels. Given the fluidity of the situation, it is still unclear how lasting and deep the ongoing economic impacts of COVID-19 will last.
During fiscal 2022, the effects of COVID-19 continued to have an impact on the Company’s results of operations. The Company has been impacted by delays in receiving orders and obtaining materials required to produce certain products. As sales volumes have fluctuated, the Company has taken measures to reduce costs by furloughing certain of its employees from time to time at one of its plant locations. Additionally, our operations are subject to global economic and geopolitical risks. For example, while the Company does not have a presence in these regions, the ongoing conflict between Russia and Ukraine has impacted economic activity as well as the availability and price of raw materials and energy. The Company continues to actively monitor these factors and find ways to mitigate the impact on its operations.
B. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The U.S. dollar is the functional currency for all the Company’s U.S. operations and its non-operating subsidiaries. For these operations, all gains and losses from completed currency transactions are included in income. The functional currency for the Company's other non-U.S. subsidiaries is the Euro. Assets and liabilities are translated into U.S. dollars at the rates of exchange at the end of the period, and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss in the consolidated statements of shareholders’ equity.
C. CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. A substantial majority of the Company’s cash and cash equivalent bank balances exceed federally insured limits as of September 30, 2022 and 2021.
D. CONCENTRATIONS OF CREDIT RISK
Receivables are presented net of allowance for doubtful accounts of $111 and $167 at September 30, 2022 and 2021, respectively. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company writes off accounts receivable when they become uncollectible. In fiscal 2022 $53 of accounts receivable were written off against the allowance for doubtful accounts, while in fiscal 2021 $9 of accounts receivable were recovered against the allowance for doubtful accounts. Bad debt benefit totaled $3 and $91 in fiscal 2022 and fiscal 2021, respectively.
Most of the Company’s receivables represent trade receivables due from manufacturers of turbine engines and aircraft components as well as turbine engine overhaul companies located throughout the world, including a significant concentration of U.S. based companies. In fiscal 2022, 11% of the Company’s consolidated net sales were from one of its largest customers; and 23% of the Company's consolidated net sales were from the two largest customers and their direct subcontractors, which individually accounted for 12% and 11%, of consolidated net sales, respectively. In fiscal 2021, 20% of the Company’s consolidated net sales were from two of its largest customers; and 38% of the Company's consolidated net sales were from three of the largest customers and their direct subcontractors which individually accounted for 17%, 11%, and 10%, of consolidated
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Notes to Consolidated Financial Statements - (Continued)
net sales, respectively. Other than what has been disclosed, no other single customer or group represented greater than 10% of total net sales in fiscal 2022 and 2021.
At September 30, 2022, three of the Company’s largest customers had outstanding net accounts receivable balances that were 15%, 11% and 10%, respectively of the total net accounts receivable; and four of the largest customers and their direct subcontractors collectively had outstanding net accounts receivable which accounted for 15%, 11%, 11% and 10%, respectively of total net accounts receivable. At September 30, 2021, none of the Company’s largest customers had outstanding net accounts receivable which individually accounted for 10% or more of total net accounts receivable; and one of the largest customers and their direct subcontractors had outstanding net accounts receivable which accounted for 17%, of total net accounts receivable, respectively. The Company performs ongoing credit evaluations of its customers’ financial conditions. The Company believes its allowance for doubtful accounts is sufficient based on the credit exposures outstanding at September 30, 2022.
E. INVENTORY VALUATION
For a portion of the Company's inventory, cost is determined using the last-in, first-out (“LIFO”) method. For approximately 42% and 39% of the Company’s inventories at September 30, 2022 and 2021, respectively, the LIFO method is used to value the Company’s inventories. The first-in, first-out (“FIFO”) method is used to value the remainder of the Company’s inventories, which are 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. In order to accurately reflect inventory, the Company wrote down inventory to realizable value of $1,538 and $325 for years ended September 30, 2022 and 2021, respectively.
The Company writes down inventory for obsolete and excess inventory each quarter and requires at a minimum that the write down be established based on an analysis of the age of the inventory. In addition, if the Company identifies specific obsolescence, other than that identified by the aging criteria, an additional write down will be recognized. Specific obsolescence and excess write down requirements may arise due to technological or market changes or based on cancellation of an order. The Company did not have a significant write down for obsolete and excess inventory for the years ended September 30, 2022 and 2021.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is generally computed using the straight-line method. Depreciation is provided in amounts sufficient to amortize the cost of the assets over their estimated useful lives. Depreciation provisions are based on estimated useful lives: (i) buildings, including building improvements - 5 to 40 years; (ii) machinery and equipment, including office and computer equipment - 3 to 20 years; (iii) software - 3 to 7 years (included in machinery and equipment); and (iv) leasehold improvements - 6 to 15 years range represent the remaining life or length of the lease, whichever is less (included in buildings).
The Company's property, plant and equipment assets by major asset class at September 30 consist of:
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| | | 2022 | | 2021 |
| Property, plant and equipment: | | | | |
| Land | | $ | 913 | | | $ | 994 | |
| Buildings | | 16,553 | | | 16,931 | |
| Machinery and equipment | | 93,510 | | | 92,871 | |
| Total property, plant and equipment | | 110,976 | | | 110,796 | |
Less: Accumulated depreciation | | 71,704 | | | 68,088 | |
| Property, plant and equipment, net | | $ | 39,272 | | | $ | 42,708 | |
Depreciation expense was $6,035 and $6,651 in fiscal 2022 and 2021, respectively.
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Notes to Consolidated Financial Statements - (Continued)
G. ASSET IMPAIRMENT
The Company reviews the carrying value of its long-lived assets ("asset groups"), when events and circumstances indicate a triggering event has occurred. This review is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets. Under the Accounting Standard Codification ("ASC") 360 ("Topic 360"), if the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, then the long-lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
Fiscal 2022
The Company continuously monitors triggers to determine if further testing is necessary. In the third and fourth quarters, further assessment was necessary as certain qualitative factors, such as, operating results, historical and forecasted market conditions and projected undiscounted future cash flows triggered a recoverability test on its Orange, California ("Orange") location. The results indicated that the long-lived assets, right-of-use assets and definite lived intangible assets were recoverable and did not require further review for impairment.
Fiscal 2021
The Company continuously monitors triggers to determine if further testing is necessary. In the fourth quarter, further assessment was necessary as certain qualitative factors, such as, operating results, historical and forecasted market conditions and projected undiscounted future cash flows triggered a recoverability test on its Orange location. The results indicated that the long-lived assets, right-of-use assets and definite lived intangible assets were recoverable and did not require further review for impairment.
H. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill is subject to impairment testing if triggered in the interim, and if not, on an annual basis. The Company has selected July 31 as the annual impairment testing date. The first step of the goodwill impairment test compares the fair value of a reporting unit (as defined) with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired. However, if the carrying amount exceeds the fair value, the Company should recognize an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. See Note 3, Goodwill and Intangibles Assets, of the consolidated financial statements for further discussion of the July 31, 2022 and 2021 annual impairment test results. The Company monitors for triggering events outside of the annual impairment assessment date and no potential triggers were identified through September 30, 2022.
Intangible assets consist of identifiable intangibles acquired or recognized in the accounting for the acquisition of a business and include such items as a trade name, a non-compete agreement, below market lease, customer relationships and order backlog. Intangible assets are amortized over their useful lives ranging from one year to ten years. Identifiable intangible assets assessment for impairment is evaluated when events and circumstances warrant such a review, as noted within Note 1, Summary of Significant Accounting Policies - Asset Impairment, of the consolidated financial statements.
I. NET (LOSS) PER SHARE
The Company’s net loss per basic share has been computed based on the weighted-average number of common shares outstanding. Due to the net loss in the reporting period, zero restricted shares and performance shares are included in the calculation of diluted earnings per share because the effect would be anti-dilutive. In the prior period, net loss per diluted share reflects the effect of the Company's outstanding restricted shares and performance shares under the treasury method. The dilutive effect is as follows:
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Notes to Consolidated Financial Statements - (Continued)
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| Net (loss) | | $ | (9,640) | | | $ | (743) | | | |
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| Weighted-average common shares outstanding (basic and diluted) | | 5,830 | | | 5,759 | | | |
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| Net (loss) income per share – basic and diluted: | | $ | (1.65) | | | $ | (0.13) | | | |
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| Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share | | 270 | | | 412 | | | |
J. 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.
The Company recognizes revenue in the following manner using the five-step revenue recognition model. A contract exists when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Revenue is recognized when performance obligations under the terms of the contract with a customer of the Company are satisfied. A portion of the Company's contracts are from purchase orders ("PO's"), which continue to be recognized as of a point in time when products are shipped from the Company's manufacturing facilities or at a later time when control of the products transfers to the customer. Under the revenue standard, the Company recognizes certain revenue over time as it satisfies the performance obligations because the conditions of transfer of control to the applicable customer are as follows:
•Certain military contracts, which relate to the provisions of specialized or unique goods to the U.S. government with no alternative use, include provisions within the contract that are subject to the Federal Acquisition Regulation ("FAR"). The FAR provision allows the customer to unilaterally terminate the contract for convenience and requires the customer to pay the Company for costs incurred plus reasonable profit margin and take control of any work in process.
•For certain commercial contracts involving customer-specific products with no alternative use, the contract may fall under the FAR clause provisions noted above for military contracts or may include certain provisions within their contract that the customer controls the work in process based on contractual termination clauses or restrictions of the Company's use of the product and the Company possesses a right to payment for work performed to date plus reasonable profit margin.
As a result of control transferring over time for these products, revenue is recognized based on progress toward completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products to be provided. The Company elected to use the cost to cost input method of progress based on costs incurred for these contracts because it best depicts the transfer of goods to the customer based on incurring costs on the contracts. Under this method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. An accounting policy election to exclude from transaction price was made for sales, value add, and other taxes the Company collects concurrent with revenue-producing activities when applicable. The Company has elected to recognize incremental costs incurred to obtain contracts, which primarily represent commissions paid to third party sales agents where the amortization period would be less than one year, as selling, general and administrative expenses in the consolidated statements of operations as incurred.
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Notes to Consolidated Financial Statements - (Continued)
The Company elected a practical expedient under Topic 606 to not adjust the promised amount of consideration for the effects of any significant financing component where the Company expects, at contract inception, that the period between when the Company transfers a promised good to a customer and when the customer pays for that good will be one year or less. Finally, the Company's policy is to exclude performance obligations resulting from contracts with a duration of one year or less from its disclosures related to remaining performance obligations.
The amount of consideration to which the Company expects to be entitled in exchange for the goods is not generally subject to significant variations.
The Company elected to recognize the cost of freight and shipping when control of the products has transferred to the customer as an expense in cost of goods sold on the consolidated statements of operations, because those are costs incurred to fulfill the promise recognized, not a separate performance obligation. To the extent certain freight and shipping fees are charged to customers, the Company recognizes the amounts charged to customers as revenues and the related costs as an expense in cost of goods sold when control of the related products has transferred to the customer.
Contracts are occasionally modified to account for changes in contract specifications, requirements, and pricing. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Substantially all of the Company's contract modifications are for goods that are distinct from the existing contract. Therefore, the effect of a contract modification on the transaction price and the Company's measure of progress for the performance obligation to which it relates is generally recognized on a prospective basis.
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. Payments from customers are received based on the terms established in the contract with the customer.
K. LEASES
The leasing standard requires lessees to recognize a Right-of-Use ("ROU") asset and a lease liability on the consolidated balance sheet, with the exception of short-term leases. The Company primarily leases its manufacturing buildings, specifically at its Orange location, as well as certain machinery and office equipment. The Company determines if a contract contains a lease based on whether the contract conveys the right to control the use of identified assets for a period in exchange for consideration. Upon identification and commencement of a lease, the Company establishes a ROU asset and a lease liability. Operating leases are included in ROU assets, short-term operating lease liabilities, and long-term operating lease liabilities on the consolidated balance sheets. Finance leases are included in property, plant, and equipment, current maturities of long-term debt and long-term debt on the consolidated balance sheets.
ROU assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date and duration of the lease term in determining the present value of the future payments. Lease expense for operating leases is recognized on a straight-line basis over the lease term, while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition.
L. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, "Income Taxes (ASC 740) – Simplifying the Accounting for Income Taxes," which is intended to reduce complexity in the accounting for income taxes while maintaining or improving the usefulness of information provided to financial statement users. The guidance amends certain existing provisions under ASC 740 to address a number of distinct items. The Company adopted ASU 2019-12 effective October 1, 2021. Adoption of the amendments in this ASU did not have an impact to the Company's results of operations and financial condition.
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Notes to Consolidated Financial Statements - (Continued)
M. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and subsequent updates. ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance will replace the current incurred loss approach with an expected loss model. The new expected credit loss impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt instruments, net investments in leases, loan commitments and standby letters of credit. Upon initial recognition of the exposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the estimate, so its application will require significant judgment. ASU 2016-13 is effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. However, in November 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)," which defers the effective date for public filers that qualify as a smaller reporting company ("SRC"), as defined by the Securities and Exchange Commission, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Because SIFCO is considered a SRC, the Company does not need to implement this standard until October 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the Company's results within the consolidated statements of operations and financial condition.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This ASU, along with recently issued ASU 2021-01, which further clarifies the scope of Topic 848, is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022. ASU 2020-04 was effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company has not applied any optional expedients and exceptions to date, and will continue to evaluate the impact of the guidance and whether it will apply the optional expedients and exceptions.
N. USE OF ESTIMATES
Accounting principles generally accepted in the U.S. require management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period in preparing these financial statements. Actual results could differ from those estimates.
O. RESEARCH AND DEVELOPMENT
Research and development costs are expensed as they are incurred. Research and development expenses were nominal in fiscal 2022 and 2021.
P. DEBT ISSUANCE COSTS
Debt issuance costs are capitalized and amortized over the life of the related debt. Amortization of debt issuance costs is included in interest expense in the consolidated statements of operations.
Q. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as shown on the consolidated balance sheets at September 30 are as follows:
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Foreign currency translation adjustment, net of income tax benefit of $0 and $0, respectively | $ | (6,196) | | | $ | (5,359) | | | |
Net retirement plan liability adjustment, net of income tax benefit of $(3,758) and $(3,758), respectively | (2,509) | | | (3,720) | | | |
Interest rate swap agreement, net of income tax benefit of $0 and $0, respectively | 12 | | | — | | | |
| Total accumulated other comprehensive loss | $ | (8,693) | | | $ | (9,079) | | | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive loss, net of tax:
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| Foreign Currency Translation Adjustment | | Retirement Plan Liability Adjustment | | Interest Rates Swap Adjustment | | Accumulated Other Comprehensive Loss |
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| Balance at September 30, 2020 | $ | (5,257) | | | $ | (8,211) | | | $ | — | | | $ | (13,468) | |
| Other comprehensive income (loss) before reclassifications | (102) | | | 3,371 | | | — | | | 3,269 | |
| Amounts reclassified from accumulated other comprehensive loss | — | | | 1,120 | | | — | | | 1,120 | |
| Net current-period other comprehensive income (loss) | (102) | | | 4,491 | | | — | | | 4,389 | |
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| Balance at September 30, 2021 | (5,359) | | | (3,720) | | | — | | | (9,079) | |
| Other comprehensive income (loss) before reclassifications | (837) | | | 527 | | | 12 | | | (298) | |
| Amounts reclassified from accumulated other comprehensive loss | — | | | 684 | | | | | 684 | |
| Net current-period other comprehensive income (loss) | (837) | | | 1,211 | | | 12 | | | 386 | |
| Balance at September 30, 2022 | $ | (6,196) | | | $ | (2,509) | | | $ | 12 | | | $ | (8,693) | |
The following table reflects the changes in accumulated other comprehensive loss related to the Company for September 30, 2022 and 2021:
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| | Amount reclassified from accumulated other comprehensive loss | | | | | | |
| Details about accumulated other comprehensive loss components | | 2022 | | 2021 | | | | | | Affected line item in the Consolidated Statement of Operations |
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| Amortization of Retirement plan liability: | | | | | | | | | | |
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| Net actuarial gain | | 1,003 | | | 4,217 | | | | | | | (1) |
Settlements/curtailments | | 208 | | | 274 | | | | | | | (1) |
| | 1,211 | | | 4,491 | | | | | | | Total before taxes |
| | — | | | — | | | | | | | Income tax expense |
| | $ | 1,211 | | | $ | 4,491 | | | | | | | Net of taxes |
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(1) These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 8, Retirement Benefit Plans, of the consolidated financial statements for further information.
R. INCOME TAXES
The Company files a consolidated U.S. federal income tax return and tax returns in various state and local jurisdictions. The Company’s Irish and Italian subsidiaries also file tax returns in their respective jurisdictions.
The Company provides deferred income taxes for the temporary difference between the financial reporting basis and tax basis of the Company’s assets and liabilities. Such taxes are measured using the enacted tax rates that are assumed to be in effect when the differences reverse. Deductible temporary differences result principally from recording certain expenses in the financial statements in excess of amounts currently deductible for tax purposes. Taxable temporary differences result principally from tax depreciation in excess of book depreciation.
The Company evaluates for uncertain tax positions taken at each balance sheet date. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the
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Notes to Consolidated Financial Statements - (Continued)
largest cumulative benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company's policy for interest and/or penalties related to underpayments of income taxes is to include interest and penalties in tax expenses.
The Company maintains a valuation allowance against its deferred tax assets when management believes it is more likely than not that all or a portion of a deferred tax asset may not be realized. Changes in valuation allowances are recorded in the period of change. 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 Tax Cut and Jobs Act (the "Act") includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein minimum taxes are imposed on foreign income in excess of a deemed return on the tangible assets of foreign corporations. This income will effectively be taxed at a 10.5% tax rate. GILTI was effective for the Company starting in fiscal 2019. The Company has elected to account for GILTI as a component of tax expense in the period in which the Company is subject to the rules.
S. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.
Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 - Quoted market prices in active markets for identical assets or liabilities
Level 2 - Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3 - Unobservable inputs that are not corroborated by market data
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The book value of cash equivalents, accounts receivable, and accounts payable are considered to be representative of their fair values because of their short maturities. The carrying value of debt is considered to approximate the fair value based on the borrowing rates currently available to us for loans with similar terms and maturities. Fair value measurements of non-financial assets and non-financial liabilities are primarily used in goodwill, other intangible assets and long-lived assets impairment analysis, the valuation of acquired intangibles and in the valuation of assets held for sale. Goodwill and intangible assets are valued using Level 3 inputs.
T. SHARE-BASED COMPENSATION
Share-based compensation is measured at the grant date, based on the calculated fair value of the award and the probability of meeting its performance condition, and is recognized as expense when it is probable that the performance conditions will be met over the requisite service period (generally the vesting period). Share-based expense includes expense related to restricted shares and performance shares issued under the Company's 2007 Long-Term Incentive Plan (Amended and Restated as of November 16, 2016) (as further amended, the "2016 Plan"). The Company recognizes share-based expense within selling, general, and administrative expense and adjusts for any forfeitures as they occur.
U. GOING CONCERN
In accordance with ASU 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40) ("ASC 205-40")", the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. This evaluation requires management to perform two steps. First, management must evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern. Second, if management concludes that substantial doubt is raised, management is required to consider whether it has plans in place to alleviate that doubt. This evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Disclosures in the notes to the consolidated financial statements are required if management concludes that substantial doubt exists or that its plans alleviate the substantial doubt that was
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
raised. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
V. RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to the 2022 consolidated statement presentation. In fiscal 2022, the Company revised its classification within the Consolidated Statement of Cash Flows by moving a prior year amount of $325 of inventories from changes in operating assets and liabilities to adjustments to reconcile net loss to net cash provided by operating activities as this item is non-cash and is not a part of operating assets and liabilities.
2. Inventories
Inventories at September 30 consist of: | | | | | | | | | | | |
| 2022 | | 2021 |
| Raw materials and supplies | $ | 2,968 | | | $ | 4,111 | |
| Work-in-process | 3,356 | | | 3,560 | |
| Finished goods | 2,645 | | | 4,875 | |
| Total inventories | $ | 8,969 | | | $ | 12,546 | |
If the FIFO method had been used for the entire Company, inventories would have been $9,939 and $9,210 higher than reported at September 30, 2022 and 2021, respectively. LIFO expense was $729 in fiscal 2022 and $924 in fiscal 2021.
In fiscal 2022, results showed a reduction of inventory resulting in liquidations of LIFO inventory quantities. The estimated liquidation of LIFO inventory quantities results in a projected increase in cost of goods sold of approximately $180 during fiscal 2022. These inventories were carried in prior periods at the then prevailing costs, which were accurate at the time, but differ from the current manufacturing cost and/or material costs. There was $156 of LIFO liquidation in fiscal 2021.
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 wrote down inventory to net realizable value by $1,538 and $325 for the years ended September 30, 2022 and 2021, respectively.
The Company did not have a significant write down for obsolete and excess inventory for the years ended September 30, 2022 and 2021.
The allocation of production costs to inventory are based on a normal range of capacity in production. The amount of cost allocated to each unit of production is not increased as a consequence of low production or idle capacity. As a result, the Company recorded idle cost of $3,087 and $2,126 for years ended September 30, 2022 and 2021, respectively.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
3. Goodwill and Intangible Assets
The Company’s intangible assets by major asset class subject to amortization as of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | Weighted Average Life at September 30, | | Original
Cost | | Accumulated
Amortization | | Impairment | | Currency Translation | | Net Book
Value |
| Intangible assets: | | | | | | | | | | | |
| Trade name | 8 years | | $ | 1,876 | | | $ | 1,868 | | | $ | — | | | $ | — | | | $ | 8 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Technology asset | 5 years | | 1,869 | | | 1,869 | | | — | | | — | | | — | |
| Customer relationships | 10 years | | 13,589 | | | 13,036 | | | — | | | (84) | | | 469 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total intangible assets | | | $ | 17,334 | | | $ | 16,773 | | | $ | — | | | $ | (84) | | | $ | 477 | |
| | | | | | | | | | | |
| September 30, 2021 | | | | | | | | | | | |
| Intangible assets: | | | | | | | | | | | |
| Trade name | 8 years | | $ | 1,876 | | | $ | 1,850 | | | $ | — | | | $ | — | | | $ | 26 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Technology asset | 5 years | | 1,869 | | | 1,869 | | | — | | | — | | | — | |
| Customer relationships | 10 years | | 13,589 | | | 12,736 | | | — | | | (5) | | | 848 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total intangible assets | | | $ | 17,334 | | | $ | 16,455 | | | $ | — | | | $ | (5) | | | $ | 874 | |
The amortization expense on identifiable intangible assets for fiscal 2022 and 2021 was $313 and $1,011, respectively.
Amortization expense associated with the identified intangible assets is expected to be as follows:
| | | | | |
| | Amortization
Expense |
| Fiscal year 2023 | $ | 222 | |
| Fiscal year 2024 | 149 | |
| Fiscal year 2025 | 106 | |
| Fiscal year 2026 | — | |
| Fiscal year 2027 | — | |
Goodwill is not amortized, but is subject to an annual impairment test. The Company tests its goodwill for impairment in the fourth fiscal quarter, and in interim periods if certain events occur indicating that the carrying amount of goodwill may be impaired. 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.
The Company uses a fair value measurement approach which combines the income (discounted cash flow method) and market valuation (market comparable method) 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 comparable, 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 (Level 3 inputs).
Although the Company believes its assumptions are reasonable, actual results may vary significantly and may expose the Company to material impairment charges in the future. The methodology for determining fair values was consistent for the periods presented.
2022 and 2021 Annual Goodwill Impairment Tests
SIFCO performed its annual impairment test as of July 31, 2022 and 2021, respectively, for the Cleveland, Ohio ("Cleveland") reporting unit. Results determined that the fair value of the reporting unit exceeded the carrying value at each assessment date. As a result, no impairment was required as of September 30, 2022 and 2021, respectively.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Goodwill is expected to be deductible for tax purposes. Changes in the net carrying amount of goodwill were as follows:
| | | | | |
| |
| |
| |
| |
| Balance at September 30, 2020 | $ | 3,493 | |
| Goodwill impairment adjustment | — | |
| Currency translation | — | |
| Balance at September 30, 2021 | 3,493 | |
| Goodwill impairment adjustment | — | |
| Currency translation | — | |
| Balance at September 30, 2022 | $ | 3,493 | |
| |
| |
| |
| |
| |
4. Accrued Liabilities
Accrued liabilities at September 30 consist of: | | | | | | | | | | | |
| 2022 | | 2021 |
| Accrued employee compensation and benefits | $ | 2,705 | | | $ | 4,075 | |
| | | |
| | | |
| Accrued workers’ compensation | 912 | | | 888 | |
| | | |
| | | |
| Contract liabilities | 807 | | | 236 | |
| | | |
| Other accrued liabilities | 1,444 | | | 1,672 | |
| Total accrued liabilities | $ | 5,868 | | | $ | 6,871 | |
5. Debt
Debt at September 30 consists of:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Revolving credit agreement | $ | 11,163 | | | $ | 8,930 | |
| Foreign subsidiary borrowings | 7,101 | | | 6,632 | |
| Finance lease obligations | 192 | | | 22 | |
| | | |
| | | |
| | | |
Other, net of unamortized debt issuance cost ($20) and $(32) | 594 | | | 5,581 | |
| Total debt | 19,050 | | | 21,165 | |
| | | |
| Less – current maturities | (15,542) | | | (18,496) | |
| Total long-term debt | $ | 3,508 | | | $ | 2,669 | |
Credit Agreement and Security Agreement
The Company's asset-based Credit Agreement (as amended, the "Credit Agreement"), Security Agreement (“Security Agreement”) and Export Credit Agreement (as amended, the "Export Credit Agreement") are secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 66.67% of the stock of its first-tier non-U.S. subsidiaries. The Credit Agreement (as amended by Fifth Amendment (the "Fifth Amendment") described below), consists of a senior secured revolving credit facility with a maximum borrowing of $28,000. The revolving commitment through the Export Credit Agreement, as amended, which lends amounts to the Company on foreign receivables is $7,000. The Credit Agreement also has an accordion feature, which allows the Company to increase maximum borrowings by up to $10,000 upon consent of the Lender (as defined below) or upon additional lenders joining the Credit Agreement. The Credit Agreement and the Export Agreement were amended on February 19, 2021, when the Company and certain of its subsidiaries (collectively, the "borrowers") entered into the Fifth Amendment to the Credit Agreement and the First Amendment (the "First Amendment") to the Export Credit Agreement, in each case, with JPMorgan Chase Bank, N.A., a national banking association, (the "Lender"). The combined maximum borrowings remain unchanged at $35,000; however the maximum borrowing under the Credit Agreement was decreased to $28,000 (from $30,000) and the revolving commitment through the Export Agreement was increased to $7,000 (from $5,000). The Fifth Amendment, among other things, extended the maturity date from August 6, 2021 to February 19, 2024.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Credit Agreement and the Export Credit Agreement were amended on March 23, 2022, when the Company entered into the Sixth Amendment to the Credit Agreement and the Second Amendment to the Export Agreement with its Lender. The Sixth Amendment, among other things, (i) revised the fixed coverage ratio to exclude the first $1,500 of unfunded capital expenditures through April 20, 2023, (ii) increased the letter of credit sub-limit from $2,000 to $3,000, (iii) modified the reference rate from the London interbank offered rate ("LIBOR") to SOFR and (iv) revised the property, plant and equipment component of the borrowing base under the Credit Agreement. The Second Amendment amends the Export Credit Agreement to replace the reference rate from LIBOR to SOFR.
The Credit Agreement contains affirmative and negative covenants and events of defaults. Prior to the Fifth Amendment, the Credit Agreement required the Company to maintain a fixed charge coverage ratio ("FCCR") of 1.1:1.0 any time the availability is equal to or less than 12.5% of the revolving commitment. However, the Fifth Amendment provides that the Company will not permit the fixed charge coverage ratio to be less than 1.1 to 1.0 as of the last day of any calendar month; provided that the fixed charge coverage ratio will not be tested unless (i) a default has occurred and is continuing, (ii) when the combined availability was less than or equal to the greater of (x) 10% of the lesser of the combined commitments or (y) 10% of the combined borrowing base, and $2,000, for three or more business days in any consecutive 30 day period. In the event of a default, the Company may not be able to access the revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities. The total collateral at September 30, 2022 and September 30, 2021 was $22,711 and $25,370, respectively and the revolving commitment was $35,000 for both periods. Total availability at September 30, 2022 and September 30, 2021 was $9,403 and $14,570, respectively, which exceeds both the collateral and total commitment threshold. Since the availability was greater than the 10.0% of the revolving commitment as of September 30, 2022 and 10.0% of the revolving commitment at September 30, 2021, the FCCR calculation was not required. The Company's letters of credit balance was $1,970 and $1,800 as of September 30, 2022 and 2021, respectively.
Borrowings will bear interest at the Lender's established domestic rate or SOFR, plus the applicable margin as set forth in the Sixth Amendment. The revolver has a rate based on SOFR plus 2.25% spread, which was 4.86% at September 30, 2022 and a rate based on LIBOR plus 1.75% spread, which was 1.84% at September 30, 2021. The Export Credit Agreement has a rate based on SOFR plus 1.75% spread, which was 4.36% at September 30, 2022 and a rate based on LIBOR plus 1.25% spread, which was 1.3% at September 30, 2021, respectively. The Company also has a commitment fee of 0.25% under the Credit Agreement as amended to be incurred on the unused balance of the revolver.
Foreign subsidiary borrowings
Foreign debt at September 30 consists of:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Term loan | $ | 3,818 | | | $ | 3,127 | |
| Short-term borrowings | 2,289 | | | 1,867 | |
| Factor | 994 | | | 1,638 | |
| Total debt | $ | 7,101 | | | $ | 6,632 | |
| | | |
| Less – current maturities | (4,078) | | | (4,551) | |
| Total long-term debt | $ | 3,023 | | | $ | 2,081 | |
| | | |
| Receivables pledged as collateral | $ | 792 | | | $ | 485 | |
Interest rates are based on Euribor rates plus spread which range from 1.5% to 5.1%. In September 2020, Maniago entered into a long-term term debt agreement in the amount of $1,465, which was used to repay existing debt and for working capital purposes. The long-term loan repayment schedule is over a 72 month period and has a rate based on Euribor plus 3.20% spread, which was 2.7% at September 30, 2020. To assist with the preservation of liquidity and uncertainty of COVID-19, subsequent to September 30, 2020, Maniago finalized with certain lenders a deferment of payments ranging between 6 to 12 months which has been reflected within the future minimum payment schedule.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Company factors receivables from one of its customers. The factoring programs are uncommitted, whereby the Company offers receivables for sale to an unaffiliated financial institution, which are then subject to acceptance by the unaffiliated financial institution. Following the sale and transfer of the receivables to the unaffiliated financial institution, the receivables are not isolated from the Company, and effective control of the receivables is not passed to the unaffiliated financial institution, which does not have the right to pledge or sell the receivables. The Company accounts for the pledge of receivables under this agreement as short-term debt and continues to carry the receivables on its consolidated balance sheets.
The Maniago location obtained borrowings from two separate lenders in fiscal 2022. The first loan agreement was entered into in October 2021, in the amount of $1,200 with a repayment term of six years. The second loan agreement was entered into in September 2022, in the amount of $1,100 with a repayment term of five years. The proceeds from the first loan were used for working capital and the proceeds from the second loan for capital investment.
The Maniago location obtained borrowings from two separate lenders in fiscal 2021. The first loan was for $717 with repayment terms of approximately seven years, of which $287 was forgiven in the same period and was recorded in other income within the consolidated statements of operations and treated as a gain on debt extinguishment. A second loan with a repayment term of five years was obtained in the amount of $303. The proceeds of these loans were used for working capital purposes.
Payments on debt under foreign debt and other debt (excluding finance lease obligations, see Note 10, Leases, of the consolidated financial statements) over the next 5 years are as follows:
| | | | | | | | |
| | Minimum debt payments |
| | |
| 2023 | | $ | 4,299 | |
| 2024 | | 1,215 | |
| 2025 | | 889 | |
| 2026 | | 818 | |
| 2027 | | 450 | |
| Thereafter | | 44 | |
| Total Minimum long-term debt payments | | $ | 7,715 | |
| | |
| | |
| | |
Debt issuance costs
The Company had debt issuance costs of $86, which are included in the consolidated balance sheets as a deferred charge in other current assets, net of amortization of $46 and $17 at September 30, 2022 and 2021, respectively.
Other
On April 10, 2020, the Company entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP Loan”). The PPP Loan had an aggregate principal amount of $5,025. The loan proceeds were used for payroll payments and the SBA granted full forgiveness on January 25, 2022. The Company elected to treat the PPP Loan as debt under FASB Topic 470. As such, the Company derecognized the liability in the second quarter of fiscal 2022 when the loan was forgiven. As of September 30, 2022 and 2021 the PPP loan balance was $0 and $4,764, respectively.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
6. Revenue
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) industrial gas and steam turbine engines for power generation units; and (iv) other commercial applications.
The following table represents a breakout of total revenue by customer type: | | | | | | | | | | | | | | |
| | Years Ended
September 30, |
| | 2022 | | 2021 |
| Commercial revenue | | $ | 39,786 | | | $ | 36,587 | |
| Military revenue | | 44,116 | | | 63,004 | |
| Total | | $ | 83,902 | | | $ | 99,591 | |
| | | | |
The following table represents revenue by the various components: | | | | | | | | | | | | | | |
| | Years Ended
September 30, |
| Net Sales | | 2022 | | 2021 |
| Aerospace components for: | | | | |
| Fixed wing aircraft | | $ | 39,474 | | | $ | 38,474 | |
| Rotorcraft | | 15,602 | | | 27,214 | |
| Energy components for power generation units | | 17,396 | | | 20,390 | |
| Commercial product and other revenue | | 11,430 | | | 13,513 | |
| Total | | $ | 83,902 | | | $ | 99,591 | |
The following table represents revenue by geographic region based on the Company's selling operation locations:
| | | | | | | | | | | | | | |
| | Years Ended
September 30, |
| Net Sales | | 2022 | | 2021 |
| North America | | $ | 68,333 | | | $ | 81,719 | |
| Europe | | 15,569 | | | 17,872 | |
| Total | | $ | 83,902 | | | $ | 99,591 | |
In addition to the disaggregating revenue information provided above, approximately 56% and 65% of total net sales as of September 30, 2022 and 2021, respectively, was recognized on an over-time basis because of the continuous transfer of control to the customer, with the remainder recognized as a point in time.
Contract Balances
Generally, payment is due shortly after the shipment of goods. For performance obligations recognized at a point in time, a contract asset is not established as the billing and revenue recognition occur at the same time. For performance obligations recognized over time, a contract asset is established for revenue that is recognized prior to billing and shipment. Upon shipment and billing, the value of the contract asset is reversed and accounts receivable is recorded. In circumstances where prepayments are required and payment is made prior to satisfaction of performance obligations, a contract liability is established. If the satisfaction of the performance obligation occurs over time, the contract liability is reversed over the course of production. If the satisfaction of the performance obligation is point in time, the contract liability reverses upon shipment.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The following table contains a roll forward of contract assets and contract liabilities for the period ended September 30, 2022 and 2021: | | | | | | | | |
| | |
| Contract assets - Ending balance, September 30, 2020 | | $ | 11,997 | |
| Additional revenue recognized over-time | | 64,384 | |
| Less amounts billed to the customers | | (63,507) | |
| Contract assets - Ending balance, September 30, 2021 | | $ | 12,874 | |
| Additional revenue recognized over-time | | 46,747 | |
| Less amounts billed to the customers | | (49,449) | |
| Contract assets - Ending balance, September 30, 2022 | | $ | 10,172 | |
| | | | | | | | |
| | |
| Contract liabilities (included within Accrued liabilities) - Ending balance, September 30, 2020 | | $ | (636) | |
| Payments received in advance of performance obligations | | (829) | |
| Performance obligations satisfied | | 1,229 | |
| Contract liabilities (included within Accrued liabilities) - Ending balance, September 30, 2021 | | $ | (236) | |
| Payments received in advance of performance obligations | | (1,691) | |
| Performance obligations satisfied | | 1,120 | |
| Contract liabilities (included within Accrued liabilities) - Ending balance, September 30, 2022 | | $ | (807) | |
There were no impairment losses recorded on contract assets during the year ended September 30, 2022 and 2021, respectively.
Remaining performance obligations
As of September 30, 2022 and 2021, the Company has $81,852 and $77,198, respectively, of remaining performance obligations, the majority of which are anticipated to be completed within the next twelve months.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
7. Income Taxes
The components of loss before income tax benefit are as follows: | | | | | | | | | | | | | |
| | Years Ended
September 30, | | |
| | 2022 | | 2021 | | |
| U.S. | $ | (6,985) | | | $ | (1,523) | | | |
| Non-U.S. | (2,698) | | | (442) | | | |
| Loss before income tax benefit | $ | (9,683) | | | $ | (1,965) | | | |
Income tax benefit consist of the following: | | | | | | | | | | | | | |
| | Years Ended
September 30, | | |
| | 2022 | | 2021 | | |
| Current income tax provision (benefit): | | | | | |
| U.S. federal | $ | — | | | $ | (1) | | | |
| U.S. state and local | 14 | | | 8 | | | |
| Non-U.S. | (9) | | | 59 | | | |
| Total current tax provision | 5 | | | 66 | | | |
| Deferred income tax provision (benefit): | | | | | |
| U.S. federal | 10 | | | 10 | | | |
| U.S. state and local | 3 | | | (2) | | | |
| Non-U.S. | (61) | | | (1,296) | | | |
| Total deferred tax benefit | (48) | | | (1,288) | | | |
| Income tax benefit | $ | (43) | | | $ | (1,222) | | | |
The income tax benefit in the accompanying consolidated statements of operations differs from amounts determined by using the statutory rate as follows:
| | | | | | | | | | | | | |
| | Years Ended
September 30, | | |
| | 2022 | | 2021 | | |
| (Loss) before income tax benefit | $ | (9,683) | | | $ | (1,965) | | | |
| | | | | |
| | | | | |
| | | | | |
| Income tax (benefit) at U.S. federal statutory rates | $ | (2,033) | | | $ | (413) | | | |
| Tax effect of: | | | | | |
| Foreign rate differential | (46) | | | (193) | | | |
| | | | | |
| Permanent items | (1,032) | | | 27 | | | |
| | | | | |
| | | | | |
| State and local income taxes | 18 | | | 6 | | | |
| | | | | |
| Federal tax credits | (157) | | | (145) | | | |
| Valuation allowance | 3,198 | | | 601 | | | |
| Prior year tax adjustments | — | | | (1,115) | | | |
| Other | 9 | | | 10 | | | |
| Income tax benefit | $ | (43) | | | $ | (1,222) | | | |
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which includes a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases after December 31, 2022, and several tax incentives to promote clean energy. The Company does not believe this legislation will have a material impact on the Company’s consolidated financial statements and will continue to assess the implications.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Deferred tax assets and liabilities at September 30 consist of the following:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| Net U.S. operating loss carryforwards | $ | 6,166 | | | $ | 3,833 | |
| Net non-U.S. operating loss carryforwards | 1,023 | | | 637 | |
| Employee benefits | 1,514 | | | 1,761 | |
| Inventory reserves | 1,045 | | | 897 | |
| Allowance for doubtful accounts | 33 | | | 45 |
| | | |
| Intangibles | 1,223 | | | 1,621 | |
| Foreign tax credits | 1,724 | | | 1,724 | |
| Other tax credits | 1,684 | | | 1,514 | |
| Other | 1,171 | | | 1,216 | |
| Total deferred tax assets | $ | 15,583 | | | $ | 13,248 | |
| Deferred tax liabilities: | | | |
| Depreciation | (7,298) | | | (7,948) | |
| | | |
| Prepaid expenses | (286) | | | (359) | |
| Other | (419) | | | (458) | |
| Total deferred tax liabilities | $ | (8,003) | | | $ | (8,765) | |
| Net deferred tax assets | 7,580 | | | 4,483 | |
| Valuation allowance | (7,717) | | | (4,641) | |
| Net deferred tax liabilities | $ | (137) | | | $ | (158) | |
| | | |
At September 30, 2022, the Company has a non-U.S. tax loss carryforward of approximately $7,190 related to the Company’s non-operating and Italian subsidiaries. The Company's non-operating subsidiary ceased operations in 2007 and therefore, a valuation allowance has been recorded against the deferred tax asset related to the Irish tax loss carryforward because it is unlikely that such operating loss can be utilized unless the Irish subsidiary resumes operations. Additionally, a valuation allowance has been recorded against the deferred tax asset related to the Italian tax loss carryforward as it is not more-likely-than-not that the deferred tax asset will be realizable. The non-operating and Italian tax loss carryforwards do not expire.
The Company has $1,724 of foreign tax credit carryforwards that are subject to expiration in fiscal 2023-2028, $1,506 of U.S. general business tax credits that are subject to expiration in 2035-2042, $466 of interest expense carryforward that do not expire, and $25,038 of U.S. Federal tax loss carryforwards with $9,107 subject to expiration in fiscal 2037 and $15,931 that do not expire. A valuation allowance has been recorded against the deferred tax assets related to the foreign tax credit carryforwards, U.S. general business credits, and U.S. Federal tax loss carryforwards.
In addition, the Company has $178 of U.S. state tax credit carryforwards subject to expiration in fiscal 2022-2024 and $23,994 of U.S. state and local tax loss carryforwards subject to expiration in fiscal 2023-2042. The U.S. state tax credit carryforwards and U.S. state and local tax loss carryforwards have been fully offset by a valuation allowance.
The Company reported liabilities for uncertain tax positions, excluding any related interest and penalties, of $22 for both fiscal 2022 and 2021. If recognized, $22 of the fiscal 2022 uncertain tax positions would impact the effective tax rate. As of September 30, 2022, the Company had accrued interest of $16 and recognized $1 for interest and penalties in operations. The Company classifies interest and penalties on uncertain tax positions as income tax expense. A summary of activity related to the Company’s uncertain tax position is as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Balance at beginning of year | $ | 22 | | | $ | 22 | |
| | | |
| Decrease due to lapse of statute of limitations | — | | | — | |
| | | |
| Balance at end of year | $ | 22 | | | $ | 22 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Company is subject to income taxes in the U.S. federal jurisdiction, Ireland, Italy and various states and local jurisdictions. The Company believes it has appropriate support for its federal income tax returns. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2019, state and local income tax examinations for fiscal years prior to 2016, or non-U.S. income tax examinations by tax authorities for fiscal years prior to 2007.
The Company does not record deferred taxes on the undistributed earnings of its non-U.S. subsidiaries as it does not expect the temporary differences related to those unremitted earnings to reverse in the foreseeable future. As of September 30, 2022, the Company's non-U.S. subsidiaries had accumulated deficits of approximately $2,062. Future distributions of accumulated earnings of the Company's non-U.S. subsidiaries may be subject to nominal withholding taxes.
8. Retirement Benefit Plans
Defined Benefit Plans
The Company and certain of its subsidiaries sponsor four defined benefit pension plans covering some of its employees. The Company’s funding policy for its defined benefit pension plans is based on an actuarially determined cost method allowable under Internal Revenue Service regulations. One of the defined benefit pension plans covers non-union employees of the Company’s U.S. operations who were hired prior to March 1, 2003. Benefit accruals ceased in March 2003. A second defined benefit plan covered employees at a business location that closed in December 2013, at which time benefits accruals ceased. The third defined pension plan covers one of the Company's union groups at the Cleveland location. Benefits accruals under this plan ceased in March 2020, when the then-current union disclaimed all interest in the bargaining unit. Curtailment occurred; however, there was no impact to consolidated financial statements. A new union was certified and the collective bargaining agreement was finalized in December 2021, at which time it was agreed that the defined benefit plan would be frozen and retirement benefits are to be provided through a defined contribution plan. The Company sponsors a fourth defined benefit plan for certain employees at its Maniago location. The plan is a severance entitlement payable to the Italian employees who qualified prior to December 27, 2006. The plan is considered an unfunded defined benefit plan and its liability is measured as the actuarial present value of the vested benefits to which the employees would be entitled if they separated at the consolidated balance sheet date.
The Company uses a September 30 measurement date for its U.S. defined benefit pension plans. Net pension expense, benefit obligations and plan assets for the Company-sponsored defined benefit pension plans consist of the following:
| | | | | | | | | | | | | |
| | Years Ended
September 30, | | |
| | 2022 | | 2021 | | |
| Service cost | $ | 42 | | | $ | 131 | | | |
| Interest cost | 714 | | | 699 | | | |
| Expected return on plan assets | (1,362) | | | (1,421) | | | |
| | | | | |
| Amortization of net loss | 476 | | | 846 | | | |
| | | | | |
| Settlement cost | 208 | | | 274 | | | |
| Net pension expense for defined benefit plans | $ | 78 | | | $ | 529 | | | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The status of all defined benefit pension plans at September 30 is as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Benefit obligations: | | | |
| Benefit obligations at beginning of year | $ | 29,330 | | | $ | 31,793 | |
| | | |
| Service cost | 42 | | | 131 | |
| Interest cost | 714 | | | 699 | |
| Actuarial (gain) | (5,265) | | | (967) | |
| Benefits paid | (1,970) | | | (2,349) | |
| Currency translation | (56) | | | 23 | |
| | | |
| | | |
| Benefit obligations at end of year | $ | 22,795 | | | $ | 29,330 | |
| Plan assets: | | | |
| Plan assets at beginning of year | $ | 23,211 | | | $ | 21,609 | |
| Actual return on plan assets | (3,376) | | | 3,825 | |
| Employer contributions | 72 | | | 126 | |
| Benefits paid | (1,970) | | | (2,349) | |
| Plan assets at end of year | $ | 17,937 | | | $ | 23,211 | |
As shown within the above table, there was a decrease in the benefit obligation of $6,535 to $22,795 at September 30, 2022 compared with $29,330 at September 30, 2021. The primary drivers that attributed to the change pertained to increase in the discount rate used partially offset by asset returns.
| | | | | | | | | | | | | | |
| | | Plans in which
Benefit Obligations
Exceed Assets at
September 30, |
| | | | | 2022 | | 2021 |
| Reconciliation of funded status: | | | | | | |
| Plan assets less than projected benefit obligations | | | | $ | (4,858) | | | $ | (6,119) | |
| Amounts recognized in accumulated other comprehensive loss: | | | | | | |
| Net loss | | | | 6,271 | | | 7,482 | |
| | | | | | |
| Net amount recognized in the consolidated balance sheets | | | | $ | 1,413 | | | $ | 1,363 | |
| Amounts recognized in the consolidated balance sheets are: | | | | | | |
| | | | | | |
| Accrued liabilities | | | | (46) | | | (46) | |
| Pension liability | | | | (4,812) | | | (6,073) | |
| Accumulated other comprehensive loss – pretax | | | | 6,271 | | | 7,482 | |
| Net amount recognized in the consolidated balance sheets | | | | $ | 1,413 | | | $ | 1,363 | |
Where applicable, the following weighted-average assumptions were used in developing the benefit obligation and the net pension expense for defined benefit pension plans:
| | | | | | | | | | | |
| | Years Ended
September 30, |
| | 2022 | | 2021 |
| Discount rate for liabilities | 5.2 | % | | 2.6 | % |
| Discount rate for expenses | 2.9 | % | | 3.1 | % |
| Expected return on assets | 6.4 | % | | 7.0 | % |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Company holds investments in pooled separate accounts and common/collective trusts, in which the fair value of assets of the underlying funds are determined in the following ways:
•U.S. equity securities are comprised of domestic equities that are priced using the closing price of the applicable nationally recognized stock exchange, as provided by industry standard vendors such as Interactive Data Corporation.
•Non-U.S. equity securities are comprised of international equities. These securities are priced using the closing price from the applicable foreign stock exchange.
•U.S. bond funds are comprised of domestic fixed income securities. Securities are priced by industry standards vendors, such as Interactive Data Corporation, using inputs such as benchmark yields, reported trades, broker/dealer quotes, or issuer spreads.
◦Included as part of the U.S. bond funds, are private placement funds, for which fair market value is not always commercially available, the fair value of these investments is primarily determined using a discounted cash flow model, which utilizes a discount rate based upon the average of spread surveys collected from private-market intermediaries who are active in both primary and secondary transactions, and takes into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements.
•Non-U.S. bond funds are comprised of international fixed income securities. Securities are priced by Interactive Data Corporation, using inputs such as benchmark yields, reported trades, broker/dealer quotes, or issuer spreads.
•Stable value fund is comprised of short-term securities and cash equivalent securities, which seek to provide high current income consistent with the preservation of principal and liquidity. As permitted under relevant securities laws, securities in this type of fund are valued initially at cost and thereafter adjusted for amortization of any discount or premium.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. However, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement result.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The following tables set forth the asset allocation of the Company’s defined benefit pension plan assets and summarize the fair values and levels within the fair value hierarchy for such plan assets as of September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | Asset
Amount | | | | Level 2 | | Level 3 |
| U.S. equity securities: | | | | | | | |
| Large value | $ | 393 | | | | | $ | 393 | | | $ | — | |
| Large blend | 7,637 | | | | | 7,637 | | | — | |
| Large growth | 302 | | | | | 302 | | | — | |
| Mid blend | 167 | | | | | 167 | | | — | |
| Small blend | 359 | | | | | 359 | | | — | |
| Non-U.S. equity securities: | | | | | | | |
| Foreign large blend | 1,276 | | | | | 1,276 | | | — | |
| Diversified emerging markets | 63 | | | | | 63 | | | — | |
| U.S. debt securities: | | | | | | | |
| Inflation protected bond | 971 | | | | | 971 | | | — | |
| Intermediate term bond | 6,332 | | | | | 4,503 | | | 1,829 | |
| High inflation bond | 78 | | | | | 78 | | | — | |
| | | | | | | |
| | | | | | | |
| Stable value: | | | | | | | |
| Short-term bonds | 359 | | | | | 359 | | | — | |
| Total plan assets at fair value | $ | 17,937 | | | | | $ | 16,108 | | | $ | 1,829 | |
| | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | Asset
Amount | | | | Level 2 | | Level 3 |
| U.S. equity securities: | | | | | | | |
| Large value | $ | 514 | | | | | $ | 514 | | | $ | — | |
| Large blend | 10,227 | | | | | 10,227 | | | — | |
| Large growth | 519 | | | | | 519 | | | — | |
| Mid blend | 223 | | | | | 223 | | | — | |
| Small blend | 697 | | | | | 697 | | | — | |
| Non-U.S. equity securities: | | | | | | | |
| Foreign large blend | 1,807 | | | | | 1,807 | | | — | |
| Diversified emerging markets | 86 | | | | | 86 | | | — | |
| U.S. debt securities: | | | | | | | |
| Inflation protected bond | 1,087 | | | | | 1,087 | | | — | |
| Intermediate term bond | 7,396 | | | | | 5,288 | | | 2,108 | |
| High inflation bond | 189 | | | | | 189 | | | — | |
| Non-U.S. debt securities: | | | | | | | |
| Emerging markets bonds | 164 | | | | | 164 | | | — | |
| Stable value: | | | | | | | |
| Short-term bonds | 302 | | | | | 302 | | | — | |
| Total plan assets at fair value | $ | 23,211 | | | | | $ | 21,103 | | | $ | 2,108 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Changes in the fair value of the Company’s Level 3 investments during the years ending September 30, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Balance at beginning of year | $ | 2,108 | | | $ | 2,098 | |
| Actual return on plan assets | (279) | | | 52 | |
| Purchases and sales of plan assets, net | — | | | (42) | |
| Balance at end of year | $ | 1,829 | | | $ | 2,108 | |
Investment objectives relative to the assets of the Company’s defined benefit pension plans are to (i) optimize the long-term return on the plans’ assets while assuming an acceptable level of investment risk; (ii) maintain an appropriate diversification across asset categories and among investment managers; and (iii) maintain a careful monitoring of the risk level within each asset category. Asset allocation objectives are established to promote optimal expected returns and volatility characteristics given the long-term time horizon for fulfilling the obligations of the Company’s defined benefit pension plans. Selection of the appropriate asset allocation for the plans’ assets was based upon a review of the expected return and risk characteristics of each asset category in relation to the anticipated timing of future plan benefit payment obligations. The Company has a long-term objective for the allocation of plan assets. However, the Company realizes that actual allocations at any point in time will likely vary from this objective due principally to (i) the impact of market conditions on plan asset values and (ii) required cash contributions to and distribution from the plans. The “Asset Allocation Range” listed below anticipates these potential scenarios and provides flexibility for the plans' investments to vary around the objective without triggering a reallocation of the assets, as noted by the following:
| | | | | | | | | | | | | | | | | |
| | Percent of Plan Assets at
September 30, | | Asset Allocation Range |
| | 2022 | | 2021 | |
| U.S. equities | 49 | % | | 53 | % | | 30% to 70% |
| Non-U.S. equities | 8 | % | | 8 | % | | 0% to 20% |
| U.S. debt securities | 41 | % | | 37 | % | | 20% to 70% |
| Non-U.S. debt securities | — | % | | 1 | % | | 0% to10% |
| Other securities | 2 | % | | 1 | % | | 0% to 60% |
| Total | 100 | % | | 100 | % | | |
External consultants assist the Company with monitoring the appropriateness of the above investment strategy and the related asset mix and performance. To develop the expected long-term rate of return assumptions on plan assets, generally the Company uses long-term historical information for the target asset mix selected. Adjustments are made to the expected long-term rate of return assumptions when deemed necessary based upon revised expectations of future investment performance of the overall investments markets.
The Company anticipates making approximately $77 in contributions to its defined benefit pension plans during fiscal 2023. The Company has carryover balances from previous periods that may be available for use as a credit to reduce the amount of contributions that the Company is required to make to certain of its defined benefit pension plans in fiscal 2023. The Company’s ability to elect to use such carryover balances will be determined based on the actual funded status of each defined benefit pension plan relative to the plan’s minimum regulatory funding requirements.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The following defined benefit payment amounts are expected to be made in the future:
| | | | | |
Years Ending September 30, | Projected
Benefit Payments |
| 2023 | $ | 2,355 | |
| 2024 | 1,903 | |
| 2025 | 1,968 | |
| 2026 | 1,785 | |
| 2027 | 1,732 | |
| 2028-2032 | 8,032 | |
Multi-Employer Plan
As noted within Note 12, Business Information, one of the bargaining units previously participated in a multi-employer plan; however, as part of the ratification of a new collective bargaining agreement in December 2019, there was a provision to withdraw from the existing multi-employer plan effective December 31, 2019. The withdrawal resulted in a liability of $739, which was recorded within the costs of goods sold line in fiscal 2020 of the consolidated statements of operations and is included in other long-term liabilities. The liability is payable in quarterly installments over the next 20 years. The next four quarterly installments are recorded in accrued liabilities of the consolidated balance sheet.
The Company's withdrawal from the multi-employer plan was to mitigate the risks associated with such type of plan. Subsequent to the withdrawal, the remaining risk to the Company is the potential occurrence of a "mass withdrawal" of all participating employers within three years of the Company's withdrawal date, in which case the Company could be assessed additional withdrawal liability.
Defined Contribution Plans
Substantially all non-union U.S. employees of the Company and its U.S. subsidiaries are eligible to participate in the Company’s U.S. defined contribution plan. The Company makes non-discretionary, regular matching contributions to this plan equal to an amount that represents one hundred percent (100%) of a participant’s deferral contribution up to one percent (1%) of eligible compensation plus eighty percent (80%) of a participant’s deferral contribution between one percent (1%) and six percent (6%) of eligible compensation. The Company’s regular matching contribution expense for its U.S. defined contribution plan in fiscal 2022 and 2021 was $528 and $571, respectively. This defined contribution plan provides that the Company may also make an additional discretionary matching contribution during those periods in which the Company achieves certain performance levels. The Company did not provide additional discretionary matching contributions in either fiscal 2022 and 2021.
The Company sponsors two defined contribution plans for the Cleveland bargaining units that either withdrew from the multi-employer plan (union) pension plan or bargained to freeze the company-sponsored pension plan. Impacted employees were enrolled into one of two newly formed defined contribution plans. The Company makes a non-elective contribution equal to $1.50 or $1.25 per work, vacation, or holiday hour, up to a maximum of 40 hours per week. The Company's non-elective contribution expense was $204 in fiscal 2022 and $112 in fiscal 2021.
The Company sponsors a defined contribution plan for certain of its Maniago union employees. The plan is a severance entitlement plan payable to Italian employees based on local government laws, which qualifies as a defined contribution plan.
9. Stock-Based Compensation
The Company has awarded performance and restricted shares under the Company's 2007 Long-Term Incentive Plan ("2007 Plan") and the Company's 2007 Long-Term Incentive Plan (Amended and Restated as of November 16, 2016) (as further amended, the "2016 Plan"). The aggregate number of shares that may be awarded by the Company under the 2016 Plan is 1,196 shares, less any shares previously awarded and subject to an adjustment for the forfeiture of any unvested shares. In addition, shares that may be awarded are subject to individual recipient award limitations. The shares awarded under the 2016 Plan may be made in multiple forms including stock options, stock appreciation rights, restricted or unrestricted stock, and performance related shares. Any such awards are exercisable no later than ten years from the date of grant.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The performance shares that have been awarded under both plans generally provide for the vesting of the Company’s common shares upon the Company achieving certain defined financial performance objectives during a period up to three years following the granting of such award. The ultimate number of common shares of the Company that may be earned pursuant to an award ranges from a minimum of no shares to a maximum of 200% of the initial target number of performance shares awarded, depending on the level of the Company’s achievement of its financial performance objectives. Beginning in fiscal 2020, the maximum shares that may be achieved was reduced to 150% of target.
With respect to such performance shares, compensation expense is being accrued based on the probability of meeting the performance target. The Company is not recognizing compensation expense for three tranches of awards as it has concluded it is not probable that the performance criteria for those awards will be met. During each future reporting period, such expense may be subject to adjustment based upon the Company's financial performance, which impacts the number of shares that it expects to vest upon the completion of a performance period. The performance shares were valued at the closing market price of the Company’s common shares on the date of grant. The vesting of such shares is determined at the end of the performance period.
The Company has awarded restricted shares to certain of its directors, officers and other employees of the Company. The restricted shares were valued at the closing market price of the Company’s common shares on the date of grant, and such value was recorded as unearned compensation. The unearned compensation is being amortized ratably over the restricted stock vesting period of one (1) year or three (3) years.
If all outstanding share awards are ultimately earned and vest at the target number of shares, there are approximately 473 shares that remain available for award at September 30, 2022. If any of the outstanding share awards are ultimately earned and vest at greater than the target number of shares, up to the maximum of 200% or 150% of such target, then a fewer number of shares would be available for award.
Stock-based compensation under the 2016 Plan was expense of $428 and $469 for fiscal 2022 and 2021, respectively. As of September 30, 2022, there was $275 of total unrecognized compensation cost related to the performance and restricted shares awarded under the 2016 Plan. The Company expects to recognize this cost over the next year.
The following is a summary of activity related to performance and restricted shares:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | |
| Number of
Shares | | Weighted Average
Fair Value at Date
of Grant | | Number of
Shares | | Weighted Average
Fair Value at Date
of Grant | | | | |
| Outstanding at beginning of year | 406 | | | $ | 4.05 | | | 371 | | | $ | 4.14 | | | | | |
| Restricted shares awarded | 72 | | | 7.18 | | | 79 | | | 5.76 | | | | | |
| Restricted shares earned | (75) | | | 6.47 | | | (107) | | | 5.47 | | | | | |
| Performance shares awarded | 44 | | | 8.00 | | | 71 | | | 3.74 | | | | | |
| | | | | | | | | | | |
| Awards forfeited | (142) | | | 4.73 | | | (8) | | | 3.18 | | | | | |
| Outstanding at end of year | 305 | | | $ | 4.75 | | | 406 | | | $ | 4.05 | | | | | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
10. Leases
The components of lease expense were as follows: | | | | | | | | | | | |
| Year Ended
September 30, 2022 | | Year Ended
September 30, 2021 |
| Lease expense | | | |
| Finance lease expense: | | | |
| Amortization of right-of use assets on finance leases | $ | 46 | | | $ | 55 | |
| Interest on lease liabilities | 4 | | 2 |
| Operating lease expense | 1,696 | | | 1,952 | |
| | | |
| Variable lease cost | 118 | | 138 |
| | | |
| Total lease expense | $ | 1,864 | | | $ | 2,147 | |
The following table presents the impact of leasing on the consolidated balance sheet at September 30:
| | | | | | | | | | | | | | | | | |
| Classification to the consolidated balance sheets | | 2022 | | 2021 |
| Assets: | | | | | |
| Finance lease assets | Property, plant and equipment, net | | $ | 202 | | | $ | 34 | |
| Operating lease assets | Operating lease right-of-use assets, net | | 15,167 | | | 15,943 | |
| Total lease assets | | | $ | 15,369 | | | $ | 15,977 | |
| | | | | |
| Current liabilities: | | | | | |
| Finance lease liabilities | Current maturities of long-term debt | | $ | 61 | | | $ | 17 | |
| Operating lease liabilities | Short-term operating lease liabilities | | 792 | | | 788 | |
| Non-current liabilities: | | | | | |
| Finance lease liabilities | Long-term debt, net of current maturities | | 131 | | | 5 | |
| Operating lease liabilities | Long-term operating lease liabilities, net of short-term | | 14,786 | | | 15,439 | |
| Total lease liabilities | | | $ | 15,770 | | | $ | 16,249 | |
Supplemental cash flow and other information related to leases were as follows: | | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
| Other Information | | | |
| | | |
| Cash paid for amounts included in measurement of liabilities: | | | |
| Operating cash flows from operating leases | $ | 1,693 | | | $ | 1,952 | |
| Operating cash flows from finance leases | 3 | | 2 |
| Financing cash flows from finance leases | 53 | | 59 |
| Right-of-use assets obtained in exchange for new lease liabilities: | | | |
| Finance leases | $ | 206 | | | $ | — | |
| Operating leases | 236 | | | 43 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
| Weighted-average remaining lease term (years): | | | |
| Finance leases | 3.6 | | 1.1 |
| Operating leases | 13.5 | | 14.4 |
| Weighted-average discount rate: | | | |
| Finance leases | 4.70 | % | | 2.83 | % |
| Operating leases | 5.93 | % | | 5.89 | % |
Future minimum lease payments under non-cancellable leases as of September 30, 2022 were as follows: | | | | | | | | | | | |
| Year ending September 30, | Finance Leases | | Operating
Leases |
| 2023 | $ | 69 | | | $ | 1,662 | |
| 2024 | 61 | | | 1,671 | |
| 2025 | 33 | | | 1,669 | |
| 2026 | 27 | | | 1,667 | |
| 2027 | 19 | | | 1,680 | |
| Thereafter | — | | | 14,280 | |
| Total lease payments | $ | 209 | | | $ | 22,629 | |
| Less: Imputed interest | (17) | | | (7,051) | |
| Present value of lease liabilities | $ | 192 | | | $ | 15,578 | |
11. Commitments and Contingencies
In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters; however, it does not believe any such matters are material to its financial condition or results of operations. The Company maintains various liability insurance coverages to protect its assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it is possible that the Company’s future operating results could be affected by future costs of litigation.
A subsidiary of the Company, Quality Aluminum Forge, LLC ("Orange"), was a defendant in a lawsuit filed by Avco Corporation (“Avco”) in the Pennsylvania State Court, which was filed in August 2019, alleging that certain forged pistons delivered by the Orange plant failed to meet material specifications required by Avco. Avco also sued Arconic, Inc. (“Arconic”), which was the raw material supplier. The lawsuit has been resolved in a manner satisfactory to all parties pursuant to a confidential settlement agreement for an immaterial amount, and the case was dismissed on October 14, 2021.
The Company was a defendant in a purported class action lawsuit filed in the Superior Court of California, County of Orange, which was filed in August 2017, arising from employee wage-and-hour claims under California law for alleged meal period, rest break, hourly and overtime wage calculation, timely wage payment and necessary expenditure indemnification violations; failure to maintain required wage records and furnish accurate wage statements; and unfair competition. A settlement has been reached and the Company received preliminary court approval on July 13, 2020, following a brief delay caused by COVID-19 closures and restrictions. Class action notices were sent at the end of September 2020 and there were no objections to the settlement. On February 4, 2021, the court issued a tentative ruling to grant final approval. The final approval was granted and the previously recorded liability of $315 was paid on March 29, 2021.
In fiscal 2021, the insurance claim related to the fire on December 26, 2018 at the Orange location was finalized with the Company's insurance carrier. The Company completed the restoration of the final two of the six presses damaged in the fire at the end of the third quarter of fiscal 2021. The restoration of the building structure was completed as of September 30, 2021.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Having finalized the claim with its insurance carrier, cash proceeds of $4,548 were received in fiscal 2021. As noted in the table below, $3,001 was recognized within the consolidated statements of operations. The Company has business interruption insurance coverage, of which $546 of the amount received was reflected within the cost of goods line within the consolidated statement of operations.
| | | | | | | | |
| Balance sheet (Other receivables): | |
| |
| September 30, 2020 | $ | 1,547 | |
| Cash received | (4,548) | |
| Capital expenditures (equipment) | 2,397 | |
| Other expenses | 58 | |
| Business interruption | 546 | |
| September 30, 2021 | $ | — | |
The following table reflects how the proceeds received impacted the consolidated statements of operations as of September 30, 2021: | | | | | | | | | | | |
| Year Ended
September 30, 2021 |
| Balance without insurance proceeds | Insurance recoveries | Balance with insurance proceeds |
| | | |
| Cost of goods sold | $ | 88,990 | | $ | (604) | | $ | 88,386 | |
| Gain on insurance recoveries | $ | — | | $ | (2,397) | | $ | (2,397) | |
| (Loss) before income tax benefit | $ | (4,966) | | $ | (3,001) | | $ | (1,965) | |
The following table demonstrates the total settlement amount since December 26, 2018:
| | | | | | | | |
| | Total Claim |
| Property & damage ** | | $ | 20,364 | |
| Extra expense & mitigation expense | | 4,404 | |
| Business interruption | | 2,932 | |
| | $ | 27,700 | |
**$3,640 of total was directed to the landlord of the property for the restoration of the building in response to the fire damage that occurred in 2018 as prescribed by the lease arrangement.
12. Business Information
The Company identifies itself as one reportable segment, SIFCO, which is a manufacturer of forgings and machined components for the A&E markets.
Geographic net sales are based on location of customer. The United States of America is the single largest country for unaffiliated customer sales, accounting for 72% and 66% of consolidated net sales in fiscal 2022 and 2021, respectively. No other single country represents greater than 10% of consolidated net sales in fiscal 2022 and 2021. Net sales to unaffiliated customers located in various European countries accounted for 19% and 18% of consolidated net sales in fiscal 2022 and 2021, respectively. Net sales to unaffiliated customers located in various Asian countries accounted for 6% and 8% of consolidated net sales in fiscal 2022 and 2021, respectively.
Substantially all of the Company's operations and identifiable assets are located within the United States with the exception of its non-U.S. subsidiary located in Maniago, Italy. The identifiable assets for the Company's foreign subsidiaries as of September 30, 2022 were $15,219 compared with $19,586 as of September 30, 2021.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Long-Lived Assets | | | | |
| United States | | $ | 51,801 | | | 54,109 | |
| Europe | | 6,686 | | | 8,986 | |
| | $ | 58,487 | | | 63,095 | |
At September 30, 2022, approximately 179 of the hourly plant personnel are represented by three separate collective bargaining agreements. The table below shows the expiration dates of the collective bargaining agreements. | | | | | | | | |
| Plant locations | | Expiration date |
| Cleveland, Ohio (unit 1) | | May 15, 2025 |
| Cleveland, Ohio (unit 2) | | March 31, 2025 |
| Maniago, Italy | | June 30, 2024 |
The Company is a party to collective bargaining agreements ("CBA") with certain employees located in Cleveland, which has two bargaining units. The Company's Cleveland bargaining unit 1 ratified its CBA in fiscal 2020. The second bargaining unit, under its new representative the International Brotherhood of Boilermakers, was ratified in fiscal 2022. The Maniago location is party to the National Collective Agreement in Metalworking, which was renewed in February 2021.
13. Subsequent events
The Company is not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.