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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2022
or
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to
_____________________
Commission file number
1-5978
SIFCO Industries, Inc.
(Exact name of registrant as specified in its charter)
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Ohio |
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34-0553950 |
(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
970 East 64th Street, Cleveland Ohio
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44103 |
(Address of principal executive offices) |
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(Zip Code) |
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(216) 881-8600
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(Registrant’s
telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Shares |
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SIF |
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NYSE American |
Securities registered pursuant to Section 12(g) of the Securities
Exchange Act: None.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes
☐
No
☒
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes
☐
No
☒
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Section 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
Yes ☒
No
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company (as defined in Rule 12b-2 of the
Exchange Act).
large accelerated filer
☐
accelerated filer
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non-accelerated filer
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smaller reporting company
☒
emerging growth company
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
Yes
☐
No
☒
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark whether the registrant has filed a report on
an attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the
registered public accounting firm that prepared or issued its audit
report.
☐
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, as of the last business day
of the registrant’s most recently completed second fiscal quarter
is $14,747,885.
The number of the Registrant’s Common Shares outstanding at
November 30, 2022 was 6,098,217.
Documents incorporated by reference: Portions of the definitive
Proxy Statement for the Annual Meeting of Shareholders to be held
on
January 31, 2023
(Part III).
Annual Report on Form 10-K
For the Year-ended September 30, 2022
Table of Contents
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Item
Number
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PART I |
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1 |
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1A. |
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2 |
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3 |
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4A. |
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PART II |
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5 |
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7 |
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8 |
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9 |
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9A |
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9B |
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9C |
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PART III |
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10 |
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11 |
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12 |
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13 |
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14 |
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PART IV |
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15 |
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PART I
Item 1. Business
A.The
Company
SIFCO Industries, Inc. ("SIFCO," "Company," "we" or "our"), an Ohio
corporation, was incorporated in 1916. The executive offices of the
Company are located at 970 East 64th Street, Cleveland, Ohio 44103,
and its telephone number is (216) 881-8600.
SIFCO is engaged in the production of forgings, sub-assemblies, and
machined components primarily for the Aerospace and Energy
("A&E") markets. The processes and services include forging,
heat-treating, chemical processing and machining. The Company's
operations are conducted in a single business segment. Information
relating to the Company's financial results is set forth in the
consolidated financial statements included in Item 8 of this Annual
Report on Form 10-K.
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. The long-term outlook remains positive given the
nature of the industry, there continues to be uncertainty with
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.Principal
Products and Services
Operations
SIFCO is a manufacturer of forgings and machined components for the
A&E markets. We provide our customers with envelope and
precision forgings, rough and finished machined components, as well
as sub-assemblies. SIFCO services both original equipment
manufacturers ("OEM") and aftermarket customers with products that
range in size from approximately 2 to 1,200 pounds. The Company's
strategic vision is to build a leading A&E company positioned
for long-term, stable growth and profitability.
SIFCO's long-term plan is to have a balance comprised of military
and commercial aerospace revenues, supplemented with energy,
commercial space, and adjacent market components. In fiscal 2022,
commercial and military revenues accounted for
47.4%
and 52.6% of
revenues, respectively, compared with 36.7% in commercial revenues
and 63.3% in military revenues in fiscal 2021. The Company's
capabilities are focused on supplying critical components,
consisting primarily of steel, high temperature alloys, nickel
alloys, titanium and aluminum.
SIFCO operates from multiple locations. SIFCO manufacturing
facilities are located in Cleveland, Ohio ("Cleveland"); Orange,
California ("Orange"); and Maniago, Italy ("Maniago"). SIFCO's
operations are AS 9100D and/or ISO 9001:2015 certified and the
Company also holds multiple National Aerospace and Defense
Contractors Accreditation Program (“NADCAP”) certifications and
site approvals from key OEM customers. During fiscal year 2022, the
Company was subject to a NADCAP audit in Orange pursuant to which
maintenance issues were identified that required remediation in
order to meet the requisite qualifications for NADCAP
Certification. The Company temporarily lost NADCAP Certification at
its Orange location in the third quarter of fiscal 2022 and was
required to outsource the process that required such certification
to a third party. The Company has since regained such NADCAP
Certification in Orange in the first quarter of fiscal 2023 and has
been able to fully resume operations.
The Company's success is not dependent on patents, trademarks,
licenses or franchises.
Raw Materials
While the effects from the COVID-19 pandemic disrupted the global
supply chain and availability of raw materials, SIFCO generally has
multiple sources for its raw materials, which consist primarily of
high-quality metals essential to its business. Suppliers of such
materials are located principally in North America and Europe.
SIFCO generally does not depend on a single source for the supply
of its materials. Due to the limited supply of certain raw
materials, some material is provided by a small number of
suppliers; however, SIFCO believes that its sources are adequate
for its business.
The Company has experienced delays in the supply chain, which could
effect our ability to timely obtain materials and components from
our suppliers in the quantities we require or on favorable
terms.
As a result of supply chain disruptions and inflationary pressures,
the Company has experienced increases in pricing for raw materials
which could effect our customer demand and cost. However, SIFCO
believes that its ability to pass through raw material costs on
certain contractual agreements and discrete orders limits this
exposure. For those contractual agreements, in which pass through
pricing is not permissible, a material adverse effect upon the
profitability of one or more of the affected contracts, future
period financial reporting and performance may result.
Products
SIFCO’s products are made primarily of steel, high temperature
alloys, nickel alloy, titanium and aluminum. SIFCO's product
offerings include: OEM and aftermarket components for aircraft and
industrial gas turbine engines; steam turbine blades; structural
airframe components; aircraft landing gear components; aircraft
wheels and brakes; critical rotating components for helicopters;
and commercial/industrial products. SIFCO also provides
heat-treatment, surface-treatment, non-destructive testing and
select machining and sub-assembly of forged
components.
Industry
The performance of the domestic and international air transport
industry, the energy industry, as well as government defense
spending, directly and significantly impact the performance of
SIFCO. The impact of COVID-19 continues to be assessed by the
Company as it has significantly impacted the commercial aerospace
industry through the ongoing disruption of global travel, which
remains uncertain. Therefore, as the effects of the pandemic
continue to be fluid and ever changing, the shape and speed of
recovery for the commercial aerospace industry remain uncertain.
While demand for travel declined at a rapid pace beginning in the
second half of our fiscal 2020 and has remained depressed compared
to pre-pandemic levels, commercial air travel has progressively
shown signs of recovery in recent months with increasing air
traffic, primarily in certain domestic markets. The recovery in
international commercial air travel has been slower with
international travel moderately recovered from COVID-19 pandemic
lows. The exact pace and timing of the commercial air travel
recovery remains uncertain and is expected to continue to be uneven
depending on factors such as trends in the number of COVID-19
infections (e.g., impact of new variants of COVID-19 resurfacing),
the continued efficacy and public acceptance of vaccines and easing
of quarantines and travel restrictions, among other
factors.
•SIFCO
supplies new and spare components to the U.S. military for
aircraft, helicopters, vehicles, and munitions. The Company's top
programs include Blackhawk (H60), V-22, C-130 and F-35. The defense
budget in the United States varies from year to year, driven by
defense procurement policy and government budget constraints.
Coming out of the pandemic, the defense aerospace market has been
impacted by COVID overproduction and build rates. Uncertainty may
arise if the government reprioritizes funding as a result of, among
other factors, potential changes in the threat environment, defense
spending levels, government priorities, political leadership,
procurement strategy, military strategy and planning, and broader
changes in social, economic or political demands or priorities.
Certain programs in which the Company participates have seen
favorable trends, which are expected to continue.
•SIFCO
supplies new and spare components for commercial aircraft,
principally for large aircraft produced by Boeing and Airbus. As
the pandemic has continued, the decrease in passenger air travel
demand has impacted and continues to impact our customers' orders
for new aircraft. Current estimates regarding the return of
passenger air traffic to pre-COVID-19 levels is another two to four
years as recovery has been extremely uneven. Increases in domestic
leisure travel has led to some recovery and domestic business
travel is expected to pick-up later into 2023, while international
travel continues to lag as individual countries and regions have
experienced varied recovery from, and resurgences in, the spread of
COVID-19. Therefore, build rates, particularly the Boeing 777-9
(formerly 777X), 787, 737 Max and the Airbus A350, declined and
partially rebounded in 2022, but not as quickly as previously
anticipated.
•SIFCO
supplies new and spare components to the energy industry,
particularly the industrial gas and steam turbine markets. While
alternative energy markets continue to strengthen, oil and gas
prices are expected to rebound given rising gas prices from
historic lows. As such, it's currently anticipated that purchases
of parts and supplies within the industry will increase. SIFCO has
positioned itself to be less dependent on OEM production, but with
flexibility to address the demand cycle in this segment as well as
continuing to support the aftermarket.
•SIFCO
also supplies components to the commercial space industry, which is
rapidly evolving. An increasing number of commercial companies are
participating in the space launch and reentry industry, which
brings continuous development, innovation in technologies, and new
approaches in this market. We believe there is an opportunity for
SIFCO to gain an increased market share as this industry continues
to evolve and grow.
Competition
SIFCO competes with numerous companies, both in and tangential to
the A&E industry, of which fifteen are known by
SIFCO. SIFCO competes with both U.S. and non-U.S. suppliers of
forgings, some of which are significantly larger than SIFCO;
however, our competitors range from companies focused on the
A&E markets to large diversified corporations that may also
have business interests outside of the A&E markets to smaller
companies that offer a limited portfolio of products in this
market.
SIFCO believes that it has an advantage and distinguishes itself in
the primary markets it serves due to its: (i) demonstrated A&E
expertise; (ii) focus on quality and customer service; (iii)
operating initiatives such as SMART (Streamlined Manufacturing
Activities to Reduce Time/Cost) and Six Sigma; and (iv) broad range
of capabilities and offerings. As customers establish and utilize
new facilities throughout the world, SIFCO will continue to
encounter non-U.S. competition. SIFCO believes it can expand its
market share by (i) continuing to increase capacity
utilization; (ii) broadening its product lines through
investment in equipment that expands its manufacturing
capabilities; and (iii) developing new customers in markets
where the participants require similar technical competence and
service as those in the A&E industries. See further discussion
of the risks relating to competition SIFCO faces in Item 1A.
Risk Factors.
Government Contracts
Companies, such as SIFCO, that supply equipment and products to the
U.S. military are subject to certain risks related to commercial
relationships with the U.S. government and its agencies. Under the
terms of these agreements, it is possible for demand and build
rates to fluctuate or for the U.S. government to terminate existing
contracts.
Customers
During fiscal 2022, SIFCO had one direct customer that accounted
for 11% of consolidated net sales; and 23% of the Company's
consolidated net sales were from two customers and their direct
subcontractors, which individually accounted for 12% and 11% of net
sales, respectively. SIFCO believes that the loss of sales to such
customers would result in a material adverse impact on the
business. However, SIFCO has maintained a business relationship
with these customers for many years and is currently conducting
business with them under multi-year agreements. Although there is
no assurance that these relationships will continue, as one or more
major customers have reduced their purchases, SIFCO has generally
been successful in gaining new business, thereby avoiding a
material adverse impact on the Company. SIFCO relies on its ability
to adapt its services and operations to changing requirements of
the market in general and its customers in particular. No material
part of SIFCO’s business is seasonal. For additional financial
information about geographic areas, refer to Note 12,
Business Information,
of the consolidated financial statements.
Backlog of Orders
SIFCO’s total backlog as of September 30,
2022
increased to $81.9 million, compared
with $77.2 million as of September 30, 2021. Orders for delivery
scheduled in the upcoming fiscal year 2023
increased to $65.5 million
compared with $59.3 million scheduled in fiscal 2022. Orders may be
subject to modification or cancellation by the customer with
limited charges. The increase in total backlog as of
September 30, 2022 compared with the previous year is
primarily
due to timing
of annual awards and SIFCO's customers adjusting orders due to
recovery within the commercial airline industry.
The continuing uncertainty regarding the COVID-19 pandemic and its
impact on the commercial airline industry is expected and may
continue to impact sales order backlog growth in that market into
fiscal 2024. Backlog information may not be
indicative
of future sales.
C.Regulatory
Matters
The Company is subject to a number of domestic and foreign
regulations relating to our operations worldwide and is required to
comply with various environmental, health, and employee safety laws
and regulations. The Company believes that it is in compliance with
these laws and regulations. Historically, compliance with such laws
and regulations have not had, and are not presently expected to
have a material effect on capital expenditures, earnings or
competitive position of the Company or its subsidiaries under
existing regulations and interpretations. Nevertheless, the Company
cannot guarantee that, in the future, it will not incur additional
costs for compliance or that such costs will not be
material.
D.Human
Capital Management
SIFCO employed approximately
378 full-time
employees at the beginning of fiscal 2022, which
decreased to approximately 348 employees at the end of fiscal 2022.
In response to the impact of COVID-19 on the commercial aerospace
industry (including declines in revenues of our customers), during
fiscal 2022, the Company experienced one shutdown at its
Orange
facility, which primarily manufactures commercial aerospace
product. While the Company has brought back the workforce subject
to the shutdown, the Company has experienced a decrease in the
number of employees.
The Company’s employees include full-time, part-time, and temporary
employees. Approximately 67%
of our employees were located within the U.S. and
33%
of our employees were located in Italy. Approximately 65% of our
workforce within the U.S. is composed of skilled and unskilled
labor, and the remaining population includes management, corporate,
administrative and support staff.
The Company is a party to collective bargaining agreements ("CBA")
with certain employees within the Cleveland location. The Company
ratified its CBA with one such bargaining unit in
December 2019 and ratified its CBA with the second
bargaining
unit in December 2021.
The Maniago location is party to the National Collective Agreement
in Metalworking, which renewed in February 2021.
The skills, experience and industry knowledge of our employees
significantly benefit our operations and performance. There are
several ways in which we attract, develop, and retain highly
qualified talent and measure the ongoing effectiveness of our human
capital management practices, including by making the safety and
health of our employees a top priority. The Company is focused on
ensuring the health of our employees through the implementation of
standards, controls, and inspections to help ensure that our
operations and premises comply with national and local regulations.
In addition, the Company conducts annual employee development
reviews, identifies growth opportunities, which include employee
rotations, and engages employees in continuous improvement
activities.
During fiscal 2022, we experienced increased turnover, along with a
shortage of applicants to fill staffing requirements at our U.S.
locations due to the current labor shortage affecting most
businesses across the United States. While this has adversely
affected our operating efficiency, quality and delivery continue to
meet or exceed customer standards as reflected in our customer
scorecards. The steps we have taken to attract and retain labor
include attending hiring events, broadening our recruitment
platforms, paying retention bonuses, offering enhanced wages and
paying sign-on bonuses.
We continue to implement, maintain, and, to the extent needed,
update or modify, procedures and protocols developed in response to
the COVID-19 pandemic to minimize the risk to the health and safety
of our employees continuing to operate our facilities and provide
products to our customers on a timely basis. We have consistently
been able to meet our customers' demands for our products, while at
the same time making the necessary investments to ensure that we
prioritize the health, safety and welfare of our
employees
E.Non-U.S.
Operations
The Company's products are distributed in the U.S. as well as
non-U.S. markets.
Financial information about the Company's U.S. and non-U.S.
operations is set forth in Note 12, Business
Information,
of the consolidated financial statements.
F.Available
Information
The Company files annual, quarterly, and current reports, proxy
statements, and other documents with the SEC under the Securities
Exchange Act of 1934, as amended. The SEC maintains an Internet
website that contains reports, proxy and information statements,
and other information regarding issuers that file electronically
with the SEC. The public can obtain any documents that are filed by
the Company at http://www.sec.gov.
In addition, our annual reports on Form 10-K, as well as our
quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to all of the foregoing reports, are made available free
of charge on or through the “Investor Relations” section of our
website at www.sifco.com as soon as reasonably practicable after
such reports are electronically filed with or furnished to the
SEC.
Information relating to our corporate governance at SIFCO,
including the Audit Committee, Corporate Governance and Nominating
Committee and Compensation Committee Charters, as well as the
Corporate Governance Guidelines and Policies and the Code of
Conduct & Ethics adopted by our Board of Directors, is
available free of charge on or through the “Investor Relations”
section of our website at
www.sifco.com.
References to our website or the SEC’s website do not constitute
incorporation by reference of the information contained on such
websites, and such information is not part of this Form
10-K.
Item 1A. Risk Factors
Set forth below are material risks and uncertainties that could
negatively affect our business and financial condition and could
cause our actual results to differ materially from those expressed
in forward-looking statements contained in this report. Additional
risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations
and financial condition. We face risks related to the COVID-19
pandemic,
its affects,
and actions in response thereto, which have exacerbated or could
further exacerbate conditions in our risk factors noted
below.
Risks Related to Our Business and Operations
We are subject to the cyclical nature of the A&E industries and
the continuing or further downturn in these industries could
adversely impact the demand for our products.
The commercial
aerospace industry is historically driven by the demand from
commercial airlines for new aircraft. Demand for commercial
aircraft is influenced by airline industry profitability, trends in
airline passenger traffic, the state of U.S. and world economies,
the ability of aircraft purchasers to obtain required financing and
numerous other factors including the effects of terrorism, health
and safety concerns and environmental constraints imposed upon
aircraft operators. The commercial aerospace industry has been
significantly impacted by the COVID-19 pandemic and may continue to
be negatively impacted for a prolonged period of time and the
magnitude of the impacts of the COVID-19 pandemic on this industry
cannot be fully understood at this time. We have experienced
changes in demand from our customers in this market and the
reduction in demand for commercial aircraft will adversely impact
our net sales and operating results.
In addition to the near term impact of the COVID-19 pandemic on the
commercial aerospace industry, there is risk that the industry
implements longer-term strategies involving reduced capacity,
shifting route patterns, and mitigation strategies related to
impacts from COVID-19 and the risk of future public health crises.
Furthermore, airlines may experience reduced demand due to
reluctance by the flying public to travel due to travel
restrictions and/or social distancing requirements. As a result,
there is significant uncertainty with respect to when commercial
air traffic levels will fully recover, and whether and at what
point capacity will return to and/or exceed pre-COVID-19 levels.
The COVID-19 pandemic also has increased uncertainty with respect
to global trade volumes, which could put negative pressure on cargo
traffic levels. Any of these factors would have a significant
impact on the demand within the commercial aerospace industry. In
addition, a lengthy period of reduced industry-wide demand for
commercial aircraft could put additional pressure on our suppliers,
resulting in increased procurement costs and/or additional supply
chain disruption. To the extent that the COVID-19 pandemic or its
aftermath further impacts demand for our products and services or
impairs the viability of some of our customers and/or suppliers,
our financial condition, results of operations, and cash flows
could be adversely affected, and those impacts could be
material.
The military aerospace cycle is highly dependent on U.S. and
foreign government funding; as well as the effects of terrorism, a
changing global political environment, U.S. foreign policy, the
retirement of older aircraft and technological improvements to new
engines. Accordingly, the timing, duration and severity of cyclical
upturns and downturns cannot be forecast with certainty. Downturns
or reductions in demand could have a material adverse effect on our
business.
The energy industry is also cyclical in nature. Demand for our new
and spare components in this industry is, in turn, driven by the
global demand for energy, which is affected by, among other
factors, the state of the world economies, the political
environments of numerous countries and environmental constraints.
The availability of alternative energy to oil and gas, and related
prices, also have a large impact on demand. Reductions in demand
for products in this market could have a material adverse effect on
our business.
Cyclical declines or sustained weakness in these markets could have
a material adverse effect on our business.
Government spending priorities and terms may change in a manner
adverse to our business.
At times, our supplying of products to the U.S. military has been
adversely affected by significant changes in U.S. defense and
national security budgets. Budget changes that result in a decline
in overall spending, program delays, program cancellations or a
slowing of new program starts on programs in which we participate
could materially adversely affect our business, prospects,
financial condition or results of operations. Future levels of
expenditures and authorizations for defense-related programs by the
U.S. government may decrease, remain constant or shift to programs
in areas where we do not currently provide products, thereby
reducing the chances that we will be awarded new
contracts.
SIFCO has contracts for programs where the period of performance
may exceed one year. Congress and certain foreign governments must
usually approve funds for a given program each fiscal year and may
significantly reduce funding of a program in a particular year.
Significant reductions in these appropriations or the amount of new
defense contracts awarded may affect our ability to complete
contracts, obtain new work and grow our business. At times when
there are perceived threats to national security, U.S. defense
spending can increase; at other times, defense spending can
decrease. Future levels of defense
spending are uncertain and subject to congressional debate. Any
reduction in future U.S. defense spending levels could adversely
impact our sales, operating profit and cash flow.
Furthermore, business conducted pursuant to U.S. government
contracts is subject to extensive procurement regulations and other
unique risks. New procurement regulations, or changes to existing
requirements, could increase compliance costs or otherwise have a
material impact on the operating margins of the portion of our
business derived from contracts with the U.S. government. The U.S.
government contracting party may modify, curtail, or terminate its
contracts and subcontracts with the company without prior notice
either at its convenience or for default based on performance, and
funding pursuant to our U.S. government contracts may be reduced or
withheld as a part of the appropriations process due to fiscal
constraints or due to changes in foreign or domestic policy
strategy.
Failure to retain existing contracts or win new contracts under
competitive bidding processes may adversely affect our
sales.
SIFCO obtains most of its contracts through a competitive bidding
process, and substantially all of the business that we expect to
seek in the foreseeable future likely will be subject to a
competitive bidding process. Competitive bidding presents a number
of risks, including:
a.the
need to compete against companies or teams of companies with more
financial and marketing resources and more experience in bidding on
and performing major contracts than we have;
b.the
need to compete against companies or teams of companies that may be
long-term, entrenched incumbents for a particular contract for
which we are competing and that have, as a result, greater domain
expertise and better customer relations;
c.the
need to compete to retain existing contracts that have in the past
been awarded to us on a sole-source basis or that have been
incumbent for a long time;
d.the
award of contracts to providers offering solutions at the “lowest
price technically acceptable,” which may lower the profit we may
generate under a contract awarded using this pricing method or
prevent us from submitting a bid for such work due to us deeming
such work to be unprofitable;
e.the
reduction of margins achievable under any contracts awarded to
us;
f.the
need to bid on some programs in advance of the completion of their
specifications, which may result in unforeseen technological
difficulties or increased costs that lower our
profitability;
g.the
substantial cost and managerial time and effort, including design,
development and marketing activities, necessary to prepare bids and
proposals for contracts that may not be awarded to us;
h.the
need to develop, introduce and implement new and enhanced solutions
to our customers’ needs;
i.the
need to locate and contract with teaming partners and
subcontractors;
j.the
need to accurately estimate the resources and cost structure that
will be required to perform any contract that we are awarded;
and
k.long
term agreements - changes in our cost profile over the life of a
long-term agreement.
If SIFCO wins a contract, and upon expiration, the customer
requires further services of the type provided by the contract,
there is frequently a competitive rebidding process. There can be
no assurance that we will win any particular bid, that we will win
the contract at the same profit margin, or that we will be able to
replace business lost upon expiration or completion of a
contract.
If SIFCO is unable to consistently retain existing contracts or win
new contract awards, our business, prospects, financial condition
and results of operations may be adversely affected.
The Company may not receive the full amounts estimated under the
contracts in our total backlog, which could reduce our sales in
future periods below the levels anticipated, and which makes
backlog an uncertain indicator of future operating
results.
As of September 30, 2022, our total backlog was
$81.9 million.
Orders may be canceled and scope adjustments may occur, and we may
not realize the full amounts of sales that we anticipate in our
backlog numbers. Further, there is no assurance that our customers
will purchase all the orders represented in our backlog, due in
part to the U.S. government’s ability to modify, curtail or
terminate major programs. Additionally, the timing of receipt of
orders, if any, on contracts included in our backlog could change.
The failure to realize amounts reflected in our backlog could
materially adversely affect our business, financial condition and
results of operations in future periods.
SIFCO business is dependent on a small number of direct and
indirect customers.
A substantial portion of
SIFCO's business is conducted with a relatively small number of
large direct and indirect customers. In fiscal 2022, one direct
customer accounted for approximately 11% percent of our
consolidated net sales and two direct
customers and their direct subcontractors accounted for
approximately 23% of the Company’s consolidated net sales. A
financial hardship experienced by any one of these key customers,
the loss of any of them or a reduction in or substantial delay of
orders from any of them could have a material adverse effect on our
business.
The Company's failure to identify, attract and retain qualified
personnel could adversely affect our existing business, financial
condition and results of operations.
SIFCO may not be able to identify, attract or retain qualified
technical personnel, sales and customer service personnel,
employees with expertise in forging, or management personnel to
supervise such activities. We may also not attract and retain
employees who share the Company's core values, who can maintain and
grow our existing business, and who are suited to work in a public
company environment, which could adversely affect our financial
condition and results of operations.
The Company's business could be negatively affected by
cybersecurity threats, information systems interruptions,
intrusions or new software implementations and other
disruptions.
SIFCO faces cyber threats, as well as the potential for business
disruptions associated with information technology failures and
interruptions, new software implementation, and damaging weather or
other acts of nature, and pandemics or other public health crises,
which may adversely affect our business.
Although we continue to review and enhance our systems and
cybersecurity controls, SIFCO has experienced and expects to
continue to experience cybersecurity threats, including threats to
our information technology infrastructure and attempts to gain
access to the Company’s sensitive information, as do our customers,
suppliers and subcontractors. Although we maintain information
security policies and procedures to prevent, detect, and mitigate
these threats, information system disruptions, equipment failures
or cybersecurity attacks, such as unauthorized access, malicious
software and other intrusions, could still occur and may lead to
potential data corruption, exposure of proprietary and confidential
information. Further, while SIFCO works cooperatively with its
customers, suppliers and subcontractors to seek to minimize the
impacts of cyber threats, other security threats or business
disruptions, in addition to our internal processes, procedures and
systems, it must also rely on the safeguards put in place by those
entities.
Any intrusion, disruption, breach or similar event may cause
operational stoppages, fines, penalties, diminished competitive
advantages through reputational damages and increased operational
costs. The costs related to cyber or other security threats or
disruptions may not be fully mitigated by insurance or other
means.
In connection with the COVID-19 pandemic, we provided for remote
work for certain of our employees, which may increase our
vulnerability to cyber and other information technology risks. In
addition to existing risks, any adoption or deployment of new
technologies via acquisitions or internal initiatives may increase
our exposure to risks, breaches, or failures, which could
materially adversely affect our results of operations or financial
condition. Furthermore, the Company may have access to sensitive,
confidential, or personal data or information that may be subject
to privacy and security laws, regulations, or other
contractually-imposed controls. Despite our use of reasonable and
appropriate controls, material security breaches, theft, misplaced,
lost or corrupted data, programming, or employee errors and/or
malfeasance could lead to the compromise or improper use of such
sensitive, confidential, or personal data or information, resulting
in possible negative consequences, such as fines, ransom demands,
penalties, loss of reputation, competitiveness or customers, or
other negative consequences resulting in adverse impacts to our
results of operations or financial condition.
SIFCO relies on our suppliers to meet the quality and delivery
expectations of our customers.
The ability to deliver SIFCO's products on schedule is dependent
upon a variety of factors, including execution of internal
performance plans, availability of raw materials, internal and
supplier produced parts and structures, conversion of raw materials
into parts and assemblies, and performance of suppliers and others.
We rely on numerous third-party suppliers for raw materials and a
large proportion of the components used in our production process.
Certain of these raw materials and components are available only
from single sources or a limited number of suppliers, or similarly,
customers’ specifications may require SIFCO to obtain raw materials
and/or components from a single source or certain suppliers. Many
of our suppliers are small companies with limited financial
resources and manufacturing capabilities. We do not currently have
the ability to manufacture these components ourselves.
Consequently, we risk disruptions in our supply of key products and
components if our suppliers fail or are unable to perform because
of shortages in raw materials, operational problems, strikes,
natural disasters, health crises (such as the COVID-19 or other
pandemics) or other factors. We have and may continue to experience
delays in the delivery of such products as a result of increased
demands and pressures on the supply chain, customs, labor issues,
geopolitical pressures, disruptions associated with the COVID-19 or
other pandemics, changes in political, economic, and social
conditions, weather, laws and regulations. Unfavorable fluctuations
in price, international trade policies, quality, delivery, and
availability of these products could continue to adversely affect
the Company's ability to meet demands of customers and cause
negative impacts to the Company's cost structure, profitability and
its cash flow. It is unclear how our supply chain
could
be further impacted by COVID-19, including the spread of new
variants, and there are many unknowns including how long we will be
impacted, the severity of the impacts and the probability of a
recurrence of COVID-19 or similar regional or global pandemics. If
we were unsuccessful in obtaining those products from other sources
or at comparable cost, a disruption in our supply chain could
adversely affect our sales, earnings, financial condition, and
liquidity.
We may have disputes with our vendors arising from, among other
things, the quality of products and services or customer concerns
about the vendor. If any of our vendors fail to timely meet their
contractual obligations or have regulatory compliance or other
problems, our ability to fulfill our obligations may be
jeopardized. Economic downturns can adversely affect a vendor’s
ability to manufacture or deliver products. Further, vendors may
also be enjoined from manufacturing and distributing products to us
as a result of litigation filed by third parties, including
intellectual property litigation. If SIFCO were to experience
difficulty in obtaining certain products, there could be an adverse
effect on its results of operations and on its customer
relationships and our reputation. Additionally, our key vendors
could also increase pricing of their products, which could
negatively affect our ability to win contracts by offering
competitive prices.
Any material supply disruptions could adversely affect our ability
to perform our obligations under our contracts and could result in
cancellation of contracts or purchase orders, penalties, delays in
realizing revenues, and payment delays, as well as adversely affect
our ongoing product cost structure.
Failure to perform by our subcontractors could materially and
adversely affect our contract performance and its ability to obtain
future business.
The performance of contracts often involves subcontractors, upon
which we rely to complete delivery of products to our customers.
SIFCO may have disputes with subcontractors. A failure by a
subcontractor to satisfactorily deliver products can adversely
affect our ability to perform our obligations as a prime
contractor. Any subcontractor performance deficiencies could result
in the customer terminating our contract for default, which could
expose us to liability for excess costs of re-procurement by the
customer and have a material adverse effect on our ability to
compete for other contracts.
The Company's future success depends on the ability to meet the
needs of its customer requirements in a timely manner.
The Company believes that the commercial A&E markets in which
we operate require sophisticated manufacturing and
system-integration techniques and capabilities using composite and
metallic materials. The Company’s success depends to a significant
extent on our ability to acquire, develop, execute and maintain
such sophisticated techniques and capabilities to meet the needs of
our customers and to bring those products to market quickly and at
cost-effective prices. If we are unable to acquire and/or develop,
execute and maintain such techniques and capabilities, we may
experience an adverse effect to our business, financial condition
or results of operation.
The Company faces certain significant risk exposures and potential
liabilities that may not be covered adequately by insurance or
indemnity.
We are exposed to liabilities that are unique to the products we
provide. While we maintain insurance for certain risks, the amount
of insurance or indemnity may not be adequate to cover all claims
or liabilities, and we may be forced to bear substantial costs from
an accident or incident. It also is not possible for SIFCO to
obtain insurance to protect against all operational risks and
liabilities. Substantial claims resulting from an incident in
excess of the indemnification we receive and our insurance coverage
would harm our financial condition, results of operations and cash
flows. Moreover, any accident or incident for which we are liable,
even if fully insured, could negatively affect our standing with
our customers and the public, thereby making it more difficult for
us to compete effectively, and could significantly impact the cost
and availability of adequate insurance in the future.
The Company's business is subject to risks associated with
international operations.
SIFCO has operations in Maniago, Italy and operates
internationally. A number of risks inherent in international
operations could have a material adverse effect on our results of
operations, including:
a.fluctuations
in U.S. dollar value arising from transactions denominated in
foreign currencies and the translation of certain foreign currency
subsidiary balances;
b.difficulties
in staffing and managing multi-national operations;
c.general
economic and political uncertainties and potential for social
unrest in countries in which we or our customers
operate;
d.other
deterioration of economic conditions, including the effect of
inflation on our customers and suppliers;
e.limitations
on our ability to enforce legal rights and remedies;
f.restrictions
on the repatriation of funds;
g.changes
in trade policies, laws, regulations, political leadership and
environment, and/or security risks;
h.tariff
regulations;
i.difficulties
in obtaining export and import licenses and compliance with
export/import controls and regulations;
j.the
risk of government financed competition;
k.compliance
with a variety of international laws as well as U.S. regulations,
rules and practices affecting the activities of companies abroad;
and
l.difficulties
in managing and staffing international operations and the required
infrastructure costs, including legal, tax, accounting, and
information technology.
We operate in a highly competitive and price sensitive industry,
and customer pricing pressures could reduce the demand and/or price
for our products and services.
The end-user markets SIFCO serves are highly competitive and price
sensitive. We compete globally with a number of domestic and
international companies that have substantially greater
manufacturing, purchasing, marketing and financial resources than
we do. Many of SIFCO's customers have the in-house capability to
fulfill their manufacturing requirements. SIFCO's larger
competitors may be able to vie more effectively for very
large-scale contracts than we can by providing different or greater
capabilities or benefits such as technical qualifications, past
performance on large-scale contracts, geographic presence, price
and availability of key professional personnel. If SIFCO is unable
to successfully compete for new business, our net sales growth and
operating margins may decline. Competitive pricing pressures may
have an adverse effect on our financial condition and operating
results. Further, there can be no assurance that competition from
existing or potential competitors will not have a material adverse
effect on our financial results. If SIFCO does not continue to
compete effectively and win contracts, our future business,
financial condition, results of operations and our ability to meet
its financial obligations may be materially
compromised.
The Company uses estimates when pricing contracts and any changes
in such estimates could have an adverse effect on our profitability
and our overall financial performance.
When agreeing to contractual terms, some of which extend for
multiple years, SIFCO makes assumptions and projections about
future conditions and events. These projections assess the
productivity and availability of labor, complexity of the work to
be performed, cost and availability of materials, impact of delayed
performance and timing of product deliveries. Contract pricing
requires judgment relative to assessing risks, estimating contract
revenues and costs, and making assumptions for schedule and
technical issues. Due to the size and nature of many of our
contracts, the estimation of total revenues and costs at completion
is complicated and subject to many variables. For example,
assumptions are made regarding the length of time to complete a
contract since costs also include expected increases in wages,
prices for materials and allocated fixed costs. Similarly,
assumptions are made regarding the future impact of our efficiency
initiatives and cost reduction efforts. Incentives, awards or
penalties related to performance on contracts are considered in
estimating revenue and profit rates and are recorded when there is
sufficient information to assess anticipated performance.
Suppliers' assertions are also assessed and considered in
estimating costs and profit rates.
Because of the significance of the judgment and estimation
processes described above, it is possible that materially different
amounts could be obtained if different assumptions were used or if
the underlying circumstances were to change. Changes in underlying
assumptions, circumstances or estimates may have a material adverse
effect upon the profitability of one or more of the affected
contracts, future period financial reporting and performance, as
pass through pricing is not always permissible.
Our technologies could become obsolete, reducing our revenues and
profitability.
Technologies related to our products have undergone, and in the
future may undergo, significant changes and the future of our
business will depend in large part upon the continuing relevance of
our forging capabilities. SIFCO could encounter competition from
new or revised technologies that render its technologies and
equipment less profitable or obsolete in our chosen markets and our
operating results may suffer.
If the Company fails to maintain an effective system of internal
control over financial reporting, it may not be able to accurately
or timely report its financial results. As a result, current and
potential shareholders could lose confidence in the Company's
financial reporting, which would harm the business and the trading
price of its common stock.
The Sarbanes-Oxley Act, among other things, requires that we
maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, we must perform
system and process evaluations and testing of our internal controls
over financial reporting to allow management to report on the
effectiveness of our internal controls over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act. Compliance with
Section 404 may require that we incur substantial accounting
expenses and expend significant management efforts. Our testing
has, as described below, and in the future may reveal deficiencies
in our internal controls over financial reporting that are deemed
to be material weaknesses. In the event we identify significant
deficiencies or material weaknesses in our internal controls that
we cannot remediate in a timely
manner, the market price of our stock could decline if investors
and others lose confidence in the reliability of our financial
statements and we could be subject to sanctions or investigations
by the SEC or other applicable regulatory authorities.
As further described in Item 9A in our Annual Report on Form 10-K,
for the fiscal year ended September 30, 2022, management determined
that SIFCO’s internal control over financial reporting and its
disclosure controls and procedures were not effective. Management
identified a material weakness related to lack of precise review
controls associated with the valuation of inventory at the Orange
location and long-lived asset impairment triggering event
indicators in the fourth quarter at the Orange location. Until
remediated, this material weakness could result in a material
misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected on a timely
basis. As with any internal control deficiency, there can be no
assurance that our remedial measures will be successful or
otherwise sufficient to address the material weakness. If the
Company is unable to remediate the material weakness, or is
otherwise unable to maintain effective internal control over
financial reporting or disclosure controls and procedures, or if
additional material weaknesses or significant deficiencies in our
internal control over financial reporting are discovered or occur
in the future, the Company’s ability to record, process and report
financial information accurately, and to prepare financial
statements within required time periods, could be adversely
affected, which could subject the Company to litigation or
investigations requiring management resources and payment of legal
and other expenses, including civil penalties, negatively affect
investor confidence in our financial statements and adversely
impact our stock price.
Labor disruptions by our employees or personnel turnover and/or
shortage could adversely affect our business.
As of September 30, 2022, we employed approximately
348 people.
We face competition for management and employees from other
companies and organizations. At various points since the start of
the COVID-19 pandemic, we
furloughed or terminated
portions of our workforce as a result of the negative impact the
pandemic and its effects had on the demand for our products and
services. Although we took measures to maintain good relationships
with our workforce, there can be no assurance that the act of
furloughing or terminating our employees did not damage employee
relations or our ability to attract and retain talent at all
levels. As the demand for employees returns to pre-COVID-19 levels,
if we continue to experience increased turnover and/or are unable
to quickly hire employees and subsequently retain our workforce, or
we experience a significant or prolonged work stoppage in such an
environment, we may experience increased costs, such as increased
overtime to meet demand and increased wage rates to attract and
retain employees, and our ability to secure new work and our
results of operations and financial condition could be adversely
affected. Additionally, two of our locations are parties to
collective bargaining agreements.
Although we have not experienced any material labor-related work
stoppage and consider our relations with our employees to be good,
labor stoppages may occur in the future. If the unionized workers
were to engage in a strike or other work stoppage, or if SIFCO is
unable to negotiate acceptable collective bargaining agreements
with the unions, or if other employees were to become unionized, we
could experience a significant disruption of our operations, higher
ongoing labor costs and possible loss of customer contracts, which
could have an adverse effect on our business and results of
operations.
The price and availability of oil and other energy sources
worldwide could adversely impact our results of operations.
Unexpected pricing of fuel or a shortage of, or disruption in, the
supply of fuel or other energy sources could have a material
adverse effect on our and our customers' business, results of
operations and financial condition.
Our results of operations can be directly affected, positively and
negatively, by volatility in the cost and availability of energy,
which is subject to global supply and demand and other factors
beyond our control. The ongoing conflict between Russia and Ukraine
has impacted global energy markets, particularly in Europe, leading
to high volatility and increasing prices for crude oil, natural gas
and other energy supplies. Our customers' businesses are
significantly impacted by the availability and pricing of fuel.
Weather-related events, natural disasters, terrorism, wars,
political disruption or instability involving oil-producing
countries, changes in governmental or cartel policy concerning
crude oil or aircraft fuel production, labor strikes, cyberattacks
or other events affecting refinery production, transportation,
taxes, marketing, environmental concerns, market manipulation,
price speculation and other unpredictable events may drive actual
or perceived fuel supply shortages. In particular, the recent
conflict between Russia and Ukraine has caused shortages in the
availability of fuel. In the event that the supply of natural gas
from Russia stops or is significantly reduced, there may be supply
disruptions, increased prices, shutdowns of manufacturing
facilities, or further rationing of energy supply within countries
where we and/or our customers do business, which could have a
material adverse impact on our and our customers' business or
results of operations in those countries.
Risks Related to Financial Matters
Global economic conditions may adversely impact our business,
operating results or financial condition.
Disruption and volatility in global financial markets may lead to
increased rates of default and bankruptcy and may negatively impact
consumer and business spending levels. Since 2020, the widespread
public health crisis caused by the COVID-19 outbreak has adversely
impacted the economies and financial markets as well as various
industries worldwide, resulting in a
downturn that has adversely impacted many businesses, including
ours. The ongoing pandemic and other events could adversely affect
our business, operating results or financial condition. Current or
potential customers may delay or decrease spending on our products
and services as their business and/or budgets are impacted by
economic conditions. The inability of current and potential
customers to pay SIFCO for its products and services may adversely
affect its earnings and cash flows.
Further, we are exposed to fluctuations in inflation, which could
negatively affect our business, financial condition and results of
operation. The United States and other jurisdictions have recently
experienced high levels of inflation. If the inflation rate
continues to increase, it will likely affect our expenses,
including, but not limited to, employee compensation and labor
expenses and increased costs for supplies, and we may not be
successful in offsetting such cost increases.
We cannot predict changes in worldwide or regional economic
conditions and government policies, as such conditions are highly
volatile and beyond our control. If these conditions deteriorate
for extended periods, however, our business, results of operations
and financial condition could be materially adversely
affected.
Our indebtedness and restrictive covenants under our credit
facilities could limit our operational and financial
flexibility.
We have incurred indebtedness, and may incur additional debt in the
future. Our ability to make interest and scheduled principal
payments and operate within restrictive covenants could be
adversely impacted by changes in the availability, terms and cost
of capital, changes in interest rates or changes in our credit
ratings or our outlook. These changes could increase our cost of
business, limiting our ability to pursue acquisition opportunities,
react to market conditions and meet operational and capital needs,
thereby placing us at a competitive disadvantage.
The funding and costs associated with our pension plans and
significant changes in key estimates and assumptions, such as
discount rates and assumed long-term returns on assets, actual
investment returns on our pension plan assets, and legislative and
regulatory actions could affect our earnings, equity and
contributions to our pension plans in future periods.
Certain of the Company's employees are covered by its
noncontributory defined benefit pension plans (“Plans”). The impact
of these Plans on our earnings may be volatile in that the amount
of expense we record and may materially change from year to year
because those calculations are sensitive to changes in several key
economic assumptions, including discount rates, inflation, expected
return on plan assets, retirement rates and mortality rates. These
pension costs are dependent on significant judgment in the use of
various estimates and assumptions, particularly with respect to the
discount rate and expected long-term rates of return on plan
assets. Changes to these estimates and assumptions could have a
material adverse effect on our financial position, results of
operations or cash flows. Differences between actual investment
returns and our assumed long-term returns on assets will result in
changes in future pension expense and the funded status of our
Plans, and could increase future funding of the Plans. Changes in
these factors affect our plan funding, cash flows, earnings, and
shareholders’ equity. Additionally, the Company contributed to a
multi-employer retirement plan. While the Company withdrew from
this plan to mitigate future costs, the Company may be subject to
liability in connection with such withdrawal (see Note 8,
Retirement Benefit Plans).
Market volatility and adverse capital or credit market conditions
may affect our ability to access cost-effective sources of funding
and may expose SIFCO to risks associated with the financial
viability of suppliers.
The financial markets can experience high levels of volatility and
disruption, reducing the availability of credit for certain issuers
and the financial markets have undergone significant volatility in
reaction to the COVID-19 pandemic and various economic
factors.
The tightening of the credit market and standards, as well as
capital market volatility, could negatively impact our ability to
obtain additional debt financing on terms equivalent to our
existing Credit Agreement. Capital market uncertainty and
volatility, together with the Company’s market capitalization and
status as a smaller reporting company, could also negatively impact
our ability to obtain capital market financing or bank financing on
favorable terms, or at all, which could have a material adverse
effect on our financial position, results of operations or cash
flows.
Tightening credit markets could also adversely affect our
suppliers' ability to obtain financing. Delays in suppliers'
ability to obtain financing, or the unavailability of financing,
could negatively affect their ability to perform their contracts
with SIFCO and cause our inability to meet our contract
obligations. The inability of our suppliers to obtain financing
could also result in the need for us to transition to alternate
suppliers, which could result in significant incremental costs and
delays.
A write-off of all or part of our goodwill or other intangible
assets could adversely affect our operating results and net
worth.
Goodwill and other intangible assets are a component of our assets.
At September
30, 2022, goodwill was $3.5 million and other intangible assets
were $0.5 million of our total assets of $97.3 million. We may have
to write off all or part of our goodwill or other intangible assets
if their value becomes impaired. Although this write-off would be a
non-cash
charge, it could reduce our earnings and our financial
condition.
General Risks
Our business is subject to risks associated with widespread public
health crises, including the current COVID-19
pandemic.
In March 2020, the outbreak of COVID-19 was recognized as a
pandemic by the World Health Organization, and the outbreak
subsequently became increasingly widespread in the United States
and other countries in which we conduct business. While we continue
to actively monitor the pandemic and take steps to mitigate the
risks posed by its spread, there is no guarantee that our efforts
will mitigate the adverse impacts of COVID-19 or will be effective.
Uncertain factors relating to the COVID-19 pandemic continue to
include the duration of the outbreak, the severity of the disease,
and the actions taken, or perception of actions that may be taken,
to contain or treat its impact, including declarations and/or
re-instituting states of emergency, business closures,
manufacturing restrictions and a prolonged period of travel,
commercial and/or other similar restrictions and limitations. We
have continued to see a prolonged impact on the economy, our
industry, and our business, with increased challenges for
customers, labor shortages, supply chain disruptions, and
increasing inflation, among others.
The pandemic has affected and is expected to continue to affect
certain elements of our operations and business. As a result, we
have been operating in industries which have been significantly
impacted by the COVID-19 pandemic. As a result of the ongoing
impacts of the pandemic, we have experienced, and may in the future
experience, production site shutdowns, and workplace disruptions
and restrictions on the movement of people, raw materials and
goods, both at our own facilities and at the facilities operated by
our customers and suppliers. Further or a more prolonged suspension
of operations or delayed recovery in our operations, and/or any
similar suspension of operations or delayed recovery at one or more
of our key suppliers, or the failure of any of our key suppliers,
would result in further challenges to our business, leading to a
further material adverse effect on our business, financial
condition, results of operations, and cash flows.
We have experienced and expect to continue to experience
unpredictable changes in demand from the markets we serve. The
A&E industries have been negatively impacted by the COVID-19
pandemic and its effects as a result of various restrictions on air
travel and concern regarding air travel during a pandemic. These
factors have caused reductions in demand for commercial aircraft,
which have adversely impacted our net sales and operating results
and may continue to do so for an extended period of time. Further,
an overall reduction in business activity as a result of the
disruption has led to a continued softening of the energy market.
If the pandemic continues and/or conditions worsen, we may
experience additional adverse impacts on our operations, costs,
customer orders, and collections of accounts receivable, which may
be material. While we are unable to predict the magnitude of the
impact of these factors at this time, the loss of, or significant
reduction in, purchases by our large customers could have a
material adverse effect on our business, financial condition, and
results of operations.
Additionally, the pandemic could lead to an extended disruption of
economic activity whereby the impact on our consolidated results of
operations, financial position and cash flows could be material.
While the potential economic impact brought by and the duration of
the coronavirus outbreak may be difficult to assess or predict, the
continuation of a widespread pandemic could result in significant
or sustained disruption of global financial markets, reducing our
ability to access capital, which could in the future negatively
affect our liquidity. While the Company believes it has adequate
cash/liquidity available to finance its operations, our ability to
make scheduled payments of the principal of, to pay interest on or
to refinance our indebtedness, depends on our future performance,
which is subject to general economic, financial, competitive and
other factors (including the continued impact of COVID-19) beyond
our control. In addition, while we believe we have taken
appropriate steps to maintain a safe workplace to protect our
employees from contracting and spreading the coronavirus, we may
not be able to prevent the spread of the virus among our employees,
face litigation or other proceedings making claims related to
unsafe working conditions, inadequate protection of our employees
or other claims. Any of these claims, even if without merit, could
result in costly litigation or divert management's attention and
resources. Furthermore, we may face a sustained disruption to our
operations due to one or more of the factors described
above.
The impact of the COVID-19 pandemic and its effects may also
exacerbate other risks and uncertainties the Company faces or may
face. The impact depends on the severity and duration of the
current COVID-19 pandemic and actions taken by governmental
authorities and other third parties in response, each of which is
uncertain, rapidly changing and difficult to predict.
The price of our common stock may fluctuate
significantly.
An active, liquid and orderly market for our common stock may not
be sustained, which could depress the trading price of our common
stock.
Volatility in the market price of our common stock may prevent you
from being able to sell your shares at or above the price you paid
for your shares or at all. The market price of our common stock
could fluctuate significantly for various reasons, which
include:
a.our
quarterly or annual earnings or those of our competitors or our
significant customers;
b.the
public’s reaction to our press releases, our other public
announcements and our filings with the Securities and Exchange
Commission;
c.changes
in earnings estimates or recommendations by research analysts who
track the stocks of our competitors;
d.new
laws or regulations or new interpretations of laws or regulations
applicable to our business;
e.changes
in accounting standards, policies, guidance, interpretations or
principles;
f.changes
in general conditions in the domestic and global economies or
financial markets, including those resulting from war, incidents of
terrorism, health crises (such as the ongoing COVID-19 pandemic) or
responses to such events;
g.litigation
involving our company or investigations or audits by regulators
into the operations of our company or our competitors;
h.strategic
action by our competitors;
i.sales
of common stock by our directors, executive officers and
significant shareholders; and
j.our
stock being closely held by insider holdings and is thinly traded
which impacts price volatility.
In addition, the stock market in general has experienced extreme
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies.
Broad market and industry factors may significantly affect the
market price of our common stock, regardless of actual operating
performance. In addition, in the past, following periods of
volatility in the overall market and the market price of a
particular company’s securities, securities class action litigation
has often been instituted against these companies. If litigation is
instituted against us, it could result in substantial costs and a
diversion of our management’s attention and resources.
Unanticipated changes in our tax provisions or exposure to
additional income tax liabilities could affect our profitability
and cash flow.
SIFCO is subject to income taxes in the United States, Italy and
Ireland. Significant judgment is required in determining our
provision for income taxes. In the ordinary course of business,
there are many transactions and calculations where the ultimate tax
determination is uncertain. Changes in applicable income tax laws
and regulations, or their interpretation, could result in higher or
lower income tax rates or changes in the taxability of certain
sales or the deductibility of certain expenses, thereby affecting
our income tax expense and profitability. In addition, the final
results of any tax audits or related litigation could be materially
different from our related historical income tax provisions and
accruals. Additionally, changes in our tax rate as a result of
changes in our overall profitability, changes in tax legislation,
changes in the valuation of deferred tax assets and liabilities,
changes in differences between financial reporting income and
taxable income, the examination of previously filed tax returns by
taxing authorities and continuing assessments of our tax exposures
can also impact our tax liabilities and affect our income tax
expense, profitability and cash flow.
Damage or destruction of our facilities caused by storms,
earthquakes or other causes could adversely affect our financial
results and financial condition.
We have operations located in regions of the world that may be
exposed to damaging storms, earthquakes and other natural disasters
as well as other events outside of our control, such as fires,
floods and other catastrophic events. We maintain standard property
casualty insurance coverage for our properties and may be able to
recover costs associated with certain natural disasters through
insurance; however, even if covered by insurance, any significant
damage or destruction of our facilities due to such events could
result in our inability to meet customer delivery schedules and may
result in the loss of customers and significant additional costs to
SIFCO. Thus, any significant damage or destruction of our
properties could have a material adverse effect on our business,
financial condition or results of operations.
The occurrence of litigation where we could be named as a defendant
is unpredictable.
From time to time, we are involved in various legal and other
proceedings that are incidental to the conduct of our business.
While we believe no current proceedings, if adversely determined,
could have a material adverse effect on our financial results, no
assurances can be given. Any such claims may divert financial and
management resources that would otherwise be used to benefit our
operations and could have a material adverse effect on our
financial results.
Our operations are subject to environmental laws, and complying
with those laws may cause us to incur significant
costs.
Our operations and facilities are subject to numerous stringent
environmental laws and regulations. Although we believe that we are
in compliance with these laws and regulations, future changes in
these laws, regulations or interpretations of them, or changes in
the nature of our operations may require us to make significant
capital expenditures to ensure compliance.
Item 2. Properties
The Company’s property, plant and equipment include the facilities
described below and a substantial quantity of machinery and
equipment, most of which consists of industry specific machinery
and equipment using special dies, jigs, tools and fixtures and in
many instances having automatic control features and special
adaptations. In general, the Company’s property, plant and
equipment are in good operating condition, are well maintained, and
its facilities are in regular use. The Company considers its
investment in property, plant and equipment as of
September 30, 2022 suitable and adequate given the current
product offerings for the respective operations in the current
business environment. The square footage numbers set forth in the
following paragraph are approximations:
•SIFCO
operates and manufactures in multiple facilities—(i) an owned
280,000 square foot facility located in Cleveland, Ohio, which is
also the site of the Company’s corporate headquarters,
(ii) leased facilities aggregating approximately 70,500 square
feet located in Orange, California, and (iii) owned facilities
aggregating approximately 91,000 square feet located in Maniago,
Italy.
Item 3. Legal Proceedings
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 and 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.
See
Note 11,
Commitments
and Contingencies,
of the consolidated financial statements for more information
regarding the legal proceedings in which the Company is
involved.
Item 4A. Executive Officers of the Registrant
Set forth below is certain information concerning the Company's
executive officers. The executive officers are appointed annually
by the Board of Directors.
•Peter
W. Knapper - President and Chief Executive Officer
•Thomas
R. Kubera - Chief Financial Officer
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Name |
Age |
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Title and Business Experience |
Peter W. Knapper |
61 |
|
President and Chief Executive Officer since June 2016. Prior to
joining SIFCO, Mr. Knapper worked for the TECT Corporation from
2007 to 2016 and was the Director of Strategy and Site Development.
TECT offers the aerospace, power-generation, transportation,
marine, and medical industries a combination of capabilities unique
among metal component manufacturers. Prior to this role, Mr.
Knapper served as President of TECT Aerospace and Vice President of
Operations of TECT Power. In addition, Mr. Knapper spent five years
at Rolls Royce Energy Systems, Inc., a subsidiary of Rolls-Royce
Holdings plc, as the Director of Component Manufacturing and
Assembly. Mr. Knapper brings his strategic and industry experience
to his role in management and to the Board of the
Company.
|
Thomas R. Kubera |
63 |
|
Chief Financial Officer since August 8, 2018. Prior to his
appointment, Mr. Kubera was Interim Chief Financial Officer from
July 1, 2017 to August 7, 2018 and Chief Accounting Officer since
January 31, 2018. Mr. Kubera was Corporate Controller from May 2014
and had served as Interim Chief Financial Officer from April 2015
to May 2015. Prior to joining SIFCO, Mr. Kubera was previously at
Cleveland-Cliffs, Inc. (previously known as Cliffs Natural
Resources, Inc.) from April 2005 through 2014, most recently as the
Controller of Global Operations Services. He also held several
assistant controller positions and was a Senior Manager of External
Reporting while at Cleveland-Cliffs, Inc. |
PART II
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K may contain various forward-looking
statements and includes assumptions concerning the Company’s
operations, future results and prospects. The words "will," "may,"
"designed to," "outlook," "believes," "should," "anticipates,"
"plans," "expects," "intends," "estimates," "forecasts" and similar
expressions identify certain of these forward-looking statements.
These forward-looking statements are based on current expectations
and are subject to risk and uncertainties. In connection with the
“safe harbor” provisions of the Private Securities Litigation
Reform Act of 1995, the Company provides this cautionary statement
identifying important economic, political and technological
factors, among others, the absence or effect of which could cause
the actual results or events to differ materially from those set
forth in or implied by the forward-looking statements and related
assumptions. Such factors include the following: (1) the impact on
business conditions in general, and on the demand for product in
the A&E industries in particular, of the global economic
outlook, including the continuation of military spending at or near
current levels and the availability of capital and liquidity from
banks, the financial markets and other providers of credit; (2) the
future business environment, including capital and consumer
spending; (3) competitive factors, including the ability to replace
business that may be lost at comparable margins; (4) metals and
commodities price increases and the Company’s ability to recover
such price increases; (5) successful development and market
introduction of new products and services; (6) continued reliance
on consumer acceptance of regional and business aircraft powered by
more fuel efficient turboprop engines; (7) continued reliance on
military spending, in general, and/or several major customers, in
particular, for revenues; (8) the impact on future contributions to
the Company’s defined benefit pension plans due to changes in
actuarial assumptions, government regulations and the market value
of plan assets; (9) stable governments, business conditions, laws,
regulations and taxes in economies where business is conducted;
(10) the ability to successfully integrate businesses that may be
acquired into the Company’s operations; (11) cyber and other
security threats or disruptions faced by us, our customers or our
suppliers and other partners; (12) our exposure to additional risks
as a result of our international business, including risks related
to geopolitical and economic factors, suppliers, laws and
regulations; (13) the ability to maintain a qualified workforce;
(14) the adequacy and availability of our insurance coverage; (15)
our ability to develop new products and technologies and maintain
technologies, facilities, and equipment to win new competitions and
meet the needs of our customers; (16) our ability to realize
amounts in our backlog; (17) investigations, claims, disputes,
enforcement actions, litigation and/or other legal proceedings;
(18) extraordinary or force majeure events affecting the business
or operations of our business; and (19) the impact of the novel
COVID-19 pandemic and related impact on the global economy, which
may exacerbate the above factors and/or impact our results of
operations and financial condition.
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
The Company’s Common Shares are traded on the NYSE American
exchange under the symbol “SIF.”
Dividends and Shareholders
The Company did not declare a cash dividend during fiscal 2022 or
fiscal 2021. The Company will continue to evaluate the payment of
dividends annually based on its relative profitability, available
resources, and investment strategies. The Company currently intends
to retain a significant majority of its earnings for operations,
focusing on its long-term plan and mitigating the uncertainty of
the continuing impact of the COVID-19 pandemic. Additionally, the
Company’s ability to declare or pay cash dividends is limited by
its credit agreement. At
November 30, 2022,
there were approximately 355 shareholders of record of the
Company’s Common Shares, as reported by Computershare, Inc., the
Company’s Transfer Agent and Registrar, which maintains its U.S.
corporate offices at 250 Royall Street, Canton, MA
02021.
Reference Part III, Item 12. “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters”
for information related to the Company’s equity compensation
plans.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
SIFCO is engaged in the production of forgings and machined and
sub-assembled components primarily for the A&E markets. The
processes and services include forging, heat-treating, chemical
processing and machining. The Company operates under one business
segment.
When planning and evaluating its business operations, the Company
takes into consideration certain factors, including the following:
(i) the projected build rate for commercial, business and
military aircraft, as well as the engines that power
such
aircraft; (ii) the projected build rate for industrial steam
and gas turbine engines; and (iii) the projected maintenance,
repair and overhaul schedules for commercial, business and military
aircraft, as well as the engines that power such
aircraft.
The Company operates within a cost structure that includes a
significant fixed component. Therefore, higher net sales volumes
are expected to result in greater operating income because such
higher volumes allow the business operations to better leverage the
fixed component of their respective cost structures. Conversely,
the opposite effect is expected to occur at lower net sales and
related production volumes.
A. Results of
Operations
Overview
The Company produces forged components for (i) turbine engines
that power commercial, business and regional aircraft as well as
military aircraft and armored military vehicles; (ii) airframe
applications for a variety of aircraft; (iii) industrial gas
and steam turbine engines for power generation units; and
(iv) other commercial applications.
Impact of COVID-19 & Other Factors
As previously noted, the lingering impact and residual effects of
the COVID-19 pandemic, along with other factors such as ongoing
geopolitical tensions, continue to impact the United States and
other countries in which the Company operates, including strains on
supply chains and inflationary impacts. During fiscal 2022, the
ongoing impact of the COVID-19 pandemic continued to effect the
Company’s results of operations. Given the long lead times for
certain of the Company's products, the Company has continued to see
an impact related to the effects of COVID-19 on orders and
deliveries in fiscal 2022. 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.
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.
In response to the uncertain environment created by the COVID-19
pandemic and its effects, the Company has, at various points in
fiscal 2022 and prior periods, taken measures to reduce costs by
furloughing and laying off certain of its employees from one of its
plant locations that has experienced reduced sales of commercial
aerospace products. Such employees have since returned to
work.
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.
Fiscal Year 2022 Compared with Fiscal Year 2021
Net Sales
Net sales comparative information for fiscal 2022 and 2021,
respectively, is as follows:
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(Dollars in millions) |
Years Ended
September 30, |
|
Increase
(Decrease)
|
Net Sales |
2022 |
|
2021 |
|
Aerospace components for: |
|
|
|
|
|
Fixed wing aircraft |
$ |
39.5 |
|
|
$ |
38.5 |
|
|
$ |
1.0 |
|
Rotorcraft |
15.6 |
|
|
27.2 |
|
|
(11.6) |
|
Energy components for power generation units |
17.4 |
|
|
20.4 |
|
|
(3.0) |
|
Commercial product and other revenue |
11.4 |
|
|
13.5 |
|
|
(2.1) |
|
Total |
$ |
83.9 |
|
|
$ |
99.6 |
|
|
$ |
(15.7) |
|
Net sales in fiscal 2022
decreased 15.8%, or $15.7 million to $83.9 million,
compared
with $99.6 million in fiscal 2021. Given the long lead times for
certain of the Company's products, the Company has seen a greater
impact related to the effects of COVID-19 on orders and deliveries
in fiscal 2022 than in fiscal 2021. Fixed wing aircraft
sales
increased $1.0
million compared with the same period last year due to timing of
customer orders, an increase in build rates in certain commercial
programs and sales for military programs. Rotorcraft sales
decreased $11.6 million
in fiscal 2022 compared to the same period in fiscal 2021 primarily
due to a timing change in requirements after advance ordering from
customers in fiscal 2021 to help the
overall supply chain through the effects of the COVID-19 pandemic.
The energy components for power generation units
decreased $3.0
million compared with the same period last year due to customer
order reductions.
Commercial net sales were
47.4% of total net
sales and military net sales were
52.6% of total
net sales in fiscal 2022, compared with 36.7% and 63.3%,
respectively, in the comparable period in fiscal 2021. Commercial
net sales (which includes energy components)
increased $3.2 million to $39.8 million in fiscal 2022, compared to
$36.6 million in fiscal 2021 primarily due to the increase in build
rates in the commercial aerospace industry. Military net sales
decreased $18.9 million to $44.1 million in fiscal 2022, compared
to $63.0 million in fiscal 2021 primarily due to timing of orders
related to certain military programs as a result of advance
ordering in fiscal 2021 and lower munition
program
volumes, such as H60 and Hellfire missile due to
timing.
Cost of Goods Sold
Cost of goods sold
("COGS") decreased by $2.6 million, or 3.0%, to $85.8 million, or
102.2% of net sales, during fiscal 2022, compared with $88.4
million or 88.7% of net sales in the comparable period of
fiscal
2021. The decrease was primarily
due to lower volume from the military and munitions programs,
increased raw material pricing and outside processing costs,
inventory write down to net realizable value ("NRV") of $1.5
million
and idle expense of $3.1 million partially offset by cost
controlling measures including lower payroll costs of $1.8
million.
Net sales decreased at a greater rate than COGS, leading COGS as a
percent of net sales to be greater in fiscal 2022 than in fiscal
2021. This was primarily a result of the Company recording idle
expense of $3.1 million, an inventory write down to NRV of $1.5
million, and experiencing increased outside processing and raw
material costs. Prior year results included
$2.1 million of idle expense and $0.3 million of inventory write
down to NRV.
Gross Profit (Loss)
Gross profit (loss) decreased by $13.1 million, or 116.6%, to a
loss of $1.9 million during fiscal 2022, compared with $11.2
million profit in fiscal 2021. Gross margin percent of sales was
(2.2%) during fiscal 2022, compared with 11.3% in fiscal 2021,
primarily due to lower volume, inventory write down to NRV
of
$1.5 million
and incremental idle costs of $1.0 million, higher raw material
prices, and outside processing costs in fiscal 2022 compared with
the prior year, partially offset by lower payroll.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $11.9 million, or
14.2% of net
sales, during fiscal 2022, compared with $13.5 million, or 13.5% of
net sales, in fiscal 2021.
The decrease in selling, general and administrative expenses is due
to the continued cost reduction efforts by management, including
lower wages, commissions and travel expenses, partially offset by
higher legal and professional costs.
Amortization of Intangibles
Amortization of intangibles
decreased $0.7 million to $0.3 million during fiscal 2022, compared
with $1.0 million in the comparable period of fiscal 2021. Such
decrease was primarily due to certain intangible assets that were
fully amortized during fiscal 2022.
Other/General
The Company recorded an operating
loss of $14.1 million during fiscal 2022, compared with an
operating loss of $1.1 million in fiscal 2021.
Included in the current year results, the Company recognized a gain
on extinguishment of debt related to the PPP loan, that was
forgiven by the SBA, for $5.1 million. See Note 5,
Debt
for further discussion. Prior year results included a gain on
insurance recoveries of $2.4 million a gain on debt extinguishment
of $0.3 million due to partial loan forgiveness at the Company's
Maniago location.
Interest expense
was $0.6 million in fiscal
2022 and fiscal 2021. See Note 5,
Debt,
of the consolidated financial statements
for further information.
The following table sets forth the weighted average interest rates
and weighted average outstanding balances under the Company’s debt
agreements in fiscal 2022 and 2021:
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|
Weighted Average
Interest Rate
Years Ended September 30, |
|
Weighted Average
Outstanding Balance
Years Ended September 30, |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
Revolving credit agreement |
2.6% |
|
1.5% |
|
$ 10.4 million |
|
$ 9.1 million |
Foreign term debt |
2.8% |
|
3.5% |
|
$ 6.2 million |
|
$ 7.0 million |
Other debt |
0.7% |
|
0.9% |
|
$ 1.9 million |
|
$ 5.7 million |
The Company believes that inflation did not materially impact its
results of operations in either fiscal 2022 or 2021. However, the
Company does expect inflationary pressures to have some impact in
fiscal 2023.
Income Taxes
The Company’s effective tax rate in fiscal 2022 was 0.4% compared
with 62.2% in fiscal 2021. The decrease in the effective tax rate
in fiscal 2022 is primarily attributable to tax benefits from
adjusting deferred taxes recorded in Italy applied against a
year-to-date loss in fiscal 2021 which was non-recurring in fiscal
2022 and changes in jurisdictional mix of income in fiscal 2022
compared with the same period in fiscal 2021. The effective tax
rate differs from the U.S. federal statutory rate due primarily to
the valuation allowance against the Company’s U.S. deferred tax
assets and income in foreign jurisdictions that are taxed at
different rates than the U.S. statutory tax rate.
Net Income (Loss)
Net loss was
$9.6
million during fiscal 2022, compared with net loss of $0.7 million
in fiscal
2021. The decrease in income in the current period was primarily
due to lower volume, increased inventory write down to NRV, higher
idle expense, raw material prices as a result of supply chain
constraints, excess and obsolete costs, and outside processing
expenses, partially offset by the gain on debt extinguishment of
debt related to the PPP loan and lower payroll and selling, general
and administrative expenses.
Non-GAAP Financial Measures
Presented below is certain financial information based on our
EBITDA and Adjusted EBITDA. References to “EBITDA” mean earnings
(losses) from operations before interest, taxes, depreciation and
amortization, and references to “Adjusted EBITDA” mean EBITDA plus,
as applicable for each relevant period, certain adjustments as set
forth in the reconciliations of net income (loss) to EBITDA and
Adjusted EBITDA.
Neither EBITDA nor Adjusted EBITDA is a measurement of financial
performance under generally accepted accounting principles in the
United States of America (“GAAP”). The Company presents EBITDA and
Adjusted EBITDA because it believes that they are useful
indicators for evaluating operating performance and liquidity,
including the Company’s ability to incur and service debt
and it uses EBITDA to evaluate prospective acquisitions.
Although the Company uses EBITDA and Adjusted EBITDA for the
reasons noted above, the use of these non-GAAP financial measures
as analytical tools has limitations. Therefore, reviewers of the
Company’s financial information should not consider them in
isolation, or as a substitute for analysis of the Company's results
of operations as reported in accordance with GAAP. Some of these
limitations include:
•Neither
EBITDA nor Adjusted EBITDA reflects the interest expense, or the
cash requirements necessary to service interest payments, on
indebtedness;
•Although
depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in
the future, and neither EBITDA nor Adjusted EBITDA reflects any
cash requirements for such replacements;
•The
omission of the substantial amortization expense associated with
the Company’s intangible assets further limits the usefulness of
EBITDA and Adjusted EBITDA; and
•Neither
EBITDA nor Adjusted EBITDA includes the payment of taxes, which is
a necessary element of operations.
Because of these limitations, EBITDA and Adjusted EBITDA should not
be considered as measures of discretionary cash available to the
Company to invest in the growth of its businesses. Management
compensates for these limitations by not viewing EBITDA or Adjusted
EBITDA in isolation and specifically by using other GAAP measures,
such as net income (loss), net sales, and operating profit (loss),
to measure operating performance. The Company’s calculation of
EBITDA and Adjusted EBITDA may not be comparable to the calculation
of similarly titled measures reported by other
companies.
The following table sets forth a reconciliation of net loss to
EBITDA and Adjusted EBITDA:
|
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|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
Years Ended
September 30, |
|
|
2022 |
|
2021 |
|
Net loss |
$ |
(9,640) |
|
|
$ |
(743) |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
Depreciation and amortization expense |
6,348 |
|
|
7,662 |
|
|
Interest expense, net |
646 |
|
|
638 |
|
|
Income tax benefit |
(43) |
|
|
(1,222) |
|
|
EBITDA |
(2,689) |
|
|
6,335 |
|
|
Adjustments: |
|
|
|
|
Foreign currency exchange loss, net (1) |
15 |
|
|
23 |
|
|
Other (income) loss, net (2) |
(149) |
|
|
215 |
|
|
(Gain) loss on disposal of assets (3) |
(7) |
|
|
209 |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on insurance recoveries (4) |
— |
|
|
(2,397) |
|
|
Gain on debt extinguishment (5) |
(5,106) |
|
|
(287) |
|
|
Equity compensation expense (6) |
428 |
|
|
469 |
|
|
Pension settlement/curtailment benefit (7) |
208 |
|
|
274 |
|
|
LIFO impact (8) |
729 |
|
|
924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
$ |
(6,571) |
|
|
$ |
5,765 |
|
(1)Represents
the gain or loss from changes in the exchange rates between the
functional currency and the foreign currency in which the
transaction is denominated.
(2)Represents
miscellaneous non-operating income or expense, such as pension
costs or grant income.
(3)Represents
the difference between the proceeds from the sale of operating
equipment and the carrying value shown on the Company's books or
asset impairment of long-lived assets.
(4)Represents
the difference between the insurance proceeds received for the
damaged property and the carrying values shown on the Company's
books for the assets that were damaged in the fire at the Orange
location that occurred in December 2018.
(5)Represents
the gain on extinguishment of debt and interest for the amount
forgiven by the SBA as it relates to the PPP loan in fiscal 2022
and term debt forgiveness as is relates to foreign borrowings in
fiscal 2021.
(6)Represents
the equity-based compensation expense recognized by the Company
under the 2016 Plan due to granting of awards, awards not vesting
and/or forfeitures.
(7)Represents
expense incurred by its defined benefit pension plans related to
settlement of pension obligations.
(8)Represents
the change in the reserve for inventories for which cost is
determined using the last-in, first-out (“LIFO”)
method.
Reference to the above activities can be found in the consolidated
financial statements included in Item 8 of this Annual Report on
Form 10-K.
B. Liquidity and
Capital Resources
Historically, the main sources of liquidity of the Company have
been cash flows from operations and borrowings under our Credit
Agreement (as defined below under "Financing Activities"). The
ongoing impact and magnitude of the COVID-19 pandemic remain
uncertain (including the pandemic's continued effects on the global
economy and potential for market disruptions) with the commercial
aerospace industry. Along with the global disruption in travel and,
further, the pandemic and responses to the various resurgences and
continued spread of the pandemic continue to cause interruptions to
the business of our customers and suppliers, which in turn is
likely to impact our business operations and results as well as our
liquidity and capital resources. The Company's liquidity could be
negatively affected by customers extending payment terms to the
Company and/or the decrease in demand for our products as a result
of COVID-19 on the commercial airline industry. As the impact of
the COVID-19 pandemic on the economy and the Company's operations
continues to evolve, the Company management will
continue to assess and actively manage liquidity. See "Results of
Operation - COVID-19" for further discussion on the impact of the
pandemic.
Cash and cash equivalents
increased to $1.2 million at September
30, 2022 compared with $0.3 million at September 30, 2021. At
September 30, 2022 and 2021, cash included financing proceeds for
capital investment and a nominal amount, respectively, of the
Company’s cash and cash equivalents were in the possession of its
non-U.S. subsidiaries. Distributions from the Company’s non-U.S.
subsidiaries to the Company may be subject to adverse tax
consequences.
Operating Activities
The Company’s operating activities
provided $0.3 million of cash in fiscal
2022, compared with $3.9 million in fiscal 2021. The cash
provided by operating activities in fiscal 2022 was primarily due
to non-cash items, such as depreciation and amortization of $6.3
million, inventory write down to NRV $1.5 million, LIFO effect of
$0.7 million, equity based compensation of $0.3 million and source
of working capital of $6.0 million, partially offset by the
forgiveness of the PPP loan of $5.1 million and net loss of $9.6
million. The source of cash from working capital of $6.0 million
was primarily due to reductions in receivables due to lower sales
and improved collections as well as decreases in inventories,
partially offset by payments to suppliers.
The Company’s operating activities provided $3.9 million of cash in
fiscal 2021. The cash provided by operating activities in
fiscal 2021 was primarily due to non-cash items, such as
depreciation and amortization of $7.7 million, LIFO effect of $0.9
million, inventory write down to NRV $0.3 million, equity based
compensation, and source of working capital of $1.4 million,
partially offset by a net gain on insurance recovery combined with
loss on disposal of assets of $2.2 million and deferred income
taxes of $1.3 million and net loss of $0.7 million. The source of
cash from working capital of $1.4 million was primarily due to
reductions in receivables due to lower sales and improved
collections as well as decreases in inventories, partially offset
by payments to suppliers and disbursements related to the fire
recovery.
Investing Activities
Cash used for investing activities was $3.2 million in fiscal 2022,
compared with $0.9 million in fiscal 2021. Fiscal 2022 expenditures
were used primarily for manufacturing enhancement and maintenance
capital. Fiscal 2021 included $4.1 million in proceeds received
from insurance recovery on the damaged property related to the fire
at the Orange location. Expenditures in fiscal 2021were used
primarily for the restoration of the Orange location as a result of
the fire, which were completed as of September 30, 2021. Capital
commitments at September 30, 2022 were $1.6 million. The Company
anticipates the total fiscal 2023 capital expenditures will be
within the range of $3.5 million to $5.5 million and will relate
principally to the further enhancement of production and product
offering capabilities and operating cost reductions.
Financing Activities
Cash provided by financing activities was $3.7 million in fiscal
2022 compared to cash used by financing activities of $3.1 million
in fiscal 2021.
As discussed in Note 5,
Debt,
the Company amended the Credit Agreement and the Export Agreement
on March 23, 2022. The combined maximum borrowings remain unchanged
at $35.0 million. The Sixth Amendment (the "Sixth Amendment") to
the Credit Agreement (as amended, the "Credit Agreement") consists
of a senior secured revolving credit facility with a maximum
borrowing of $28.0 million, previously $30.0 million. The revolving
commitment through the Second Amendment (the "Second Amendment") of
the Export Credit Agreement, which lends amounts to the Company on
foreign receivables increased its revolving commitment from $5.0
million to $7.0 million. The Sixth Amendment, among other things,
(i) revises the fixed coverage ratio to exclude the first $1,500 of
unfunded capital expenditures through April 20, 2023, (ii)
increases the letter of credit sub-limit from $2,000 to $3,000,
(iii) modifies the reference rate from the London interbank offered
rate ("LIBOR") to the secured overnight financing rate ("SOFR") and
(iv) revises the property, plant and equipment component of the
borrowing base under the Credit Agreement.
As discussed in Note 5,
Debt,
the Company's Maniago, Italy location obtained borrowings from two
separate lenders during fiscal 2022. The first loan was for $1.2
million with repayment terms of six years. A second loan with a
five year term was obtained in the amount of $1.0 million. The
proceeds of the first loan is to be used for working capital
purposes, the proceeds of the second loan are earmarked for capital
investment. The Company repaid $1.2 million of its Company's
foreign term loans in 2022.
In addition to the two loans entered into in fiscal 2022, in the
prior year, the Company received cash proceeds of $1.0 million from
two new loans related to the Maniago location. A total of $0.4
million in cash was used to repay the Company's foreign term
loans.
The Company had net borrowings under its revolving credit facility
of $2.2 million in fiscal 2022 and net repayments of $3.9 million
in fiscal 2021. Amounts borrowed under the 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. Borrowings will bear interest at the
lender's established domestic rate or SOFR, plus the applicable
margin as set forth in the Credit Agreement. The revolver has a
rate based on SOFR plus a 2.25% spread, which was 4.86% at
September 30, 2022 and the Export Credit Agreement, as discussed in
Note 5,
Debt,
of the consolidated financial statements, has a rate based on SOFR
plus a 1.75% spread, which was 4.36% at September 30, 2022. The
Company also has a commitment fee of 0.25% under the Credit
Agreement to be incurred on the unused balance of the
revolver.
As the Company’s Credit Agreement is asset-based, a sustained
significant decrease in revenue in the U.S. or excessive aging of
the underlying receivables as a result of the impact of the
COVID-19 pandemic could materially affect the collateral capacity
limitation of the availability under the Credit Agreement and could
impact our ability to comply with covenants in our Credit
Agreement.
Under the Company's Credit Agreement, the Company is subject to
certain customary loan covenants regarding availability as
discussed in Note 5,
Debt,
of the consolidated financial statements. The availability at
September 30, 2022 was $9.4 million. If the availability had fallen
short, the Company would be required to meet the fixed charge
coverage ratio ("FCCR") covenant, which must not be less than 1.1
to 1.0. In the event of a default, we may not be able to access our
revolver, which could impact the ability to fund working capital
needs, capital expenditures and invest in new business
opportunities. Because the availability was greater than the 10.0%
of the Revolving Commitment as of September 30, 2022, the FCCR
calculation was not required.
Future cash flows from the Company’s operations may be used to pay
down amounts outstanding under the Credit Agreement and its foreign
related debts. The Company believes it has adequate cash/liquidity
available to finance its operations from the combination of
(i) the Company’s expected cash flows from operations and
(ii) funds available under the Credit Agreement for its
domestic locations. The Company was able to defer payments for
certain debt obligations at its Maniago location along with
obtaining new financing in the current year to provide Maniago with
sufficient liquidity.
Additionally, the credit and capital markets saw significant
volatility during the course of the pandemic. Tightening of the
credit market and standards, as well as capital market volatility,
could negatively impact our ability to obtain additional debt
financing on terms equivalent to our existing Credit Agreement, in
the event the Company seeks additional liquidity sources as a
result of the continued impact of COVID-19. Capital market
uncertainty and volatility, together with the Company’s market
capitalization and status as a smaller reporting company, could
also negatively impact our ability to obtain equity
financing.
C. Off-Balance
Sheet Arrangements
In the normal course of business, the Company may be party to
certain arrangements that are not reflected in the Consolidated
Balance Sheets. The Company does not have obligations that meet the
definition of an off-balance sheet arrangement that have had, or
are reasonably likely to have, a material effect on the Company’s
financial condition or results of operations.
D. Critical
Accounting Policies and Estimates
Allowances for Doubtful Accounts
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of certain customers
to make required payments. The Company evaluates the adequacy of
its allowances for doubtful accounts each quarter based on the
customers’ credit-worthiness, current economic trends or market
conditions, past collection history, aging of outstanding accounts
receivable and specific identified risks. As these factors change,
the Company’s allowances for doubtful accounts may change in
subsequent periods. Historically, losses have been within
management’s expectations and have not been
significant.
Inventories
Approximately 42% of the Company's inventory is valued using the
last-in, first-out (“LIFO”) method with the remaining valued using
the first-in, first-out ("FIFO") method stated at the lower of cost
or net realizable value. Net realizable value is the estimated
selling price in the ordinary course of business less reasonably
predictable costs of completion.
The Company evaluates obsolete and excess inventory on a quarterly
basis. The Company maintains a formal policy, which requires at a
minimum, that amounts are written down based on an analysis of the
age of the inventory. In addition, if the Company learns of
specific obsolescence, other than that identified by the aging
criteria, an additional write down will be recognized. Specific
obsolescence may arise due to a technological or market change or
based on cancellation of an order.
Management’s judgment is necessary in determining the net
realizable value of these products to arrive at the proper write
down for obsolete and excess inventory.
Revenue Recognition
The Company recognizes revenue using the five-step revenue
recognition model in which it depicts the transfer of goods to
customers in an amount that reflects the consideration to which a
company expects to be entitled in exchange for those goods or
services. The revenue standard also requires disclosure sufficient
to enable users to understand the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with
customers, including qualitative and quantitative disclosures about
contracts with customers, significant judgments and changes in
judgments and assets recognized from the cost to obtain or fulfill
a contract.
Contract Balances
Contract assets on the consolidated balance sheets are recognized
when a good is transferred to the customer and the Company does not
have the contractual right to bill for the related performance
obligations. In these instances, revenue recognized exceeds the
amount billed to the customer and the right to payment is not
solely subject to the passage of time. Amounts do not exceed their
net realizable value. Contract liabilities relate to payments
received in advance of the satisfaction of performance under the
contract. Payment from customers are received based on the terms
established in the contract with the customer.
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets
when events and circumstances warrant such a review. This review
involves judgment and is performed using estimates of future
undiscounted cash flows, which include proceeds from disposal of
assets and which the Company considers a critical accounting
estimate. The Company would assess the fair value of the asset
group and compare it to its carrying value. Under the Accounting
Standard Codification ("ASC") 360 ("Topic 360"), if the carrying
value of a long-lived asset or asset group is greater than the
estimated undiscounted future cash flows, then the long-lived asset
or asset group is considered impaired and an impairment charge is
recorded for the amount by which the carrying value of the
long-lived asset or asset group exceeds its fair
value.
In projecting future undiscounted cash flows, the Company relies on
internal budgets and forecasts, and projected proceeds upon
disposal of long-lived assets. The Company’s budgets and forecasts
are based on historical results and anticipated future market
conditions, such as the general business climate and the
effectiveness of competition. The Company believes that its
estimates of future undiscounted cash flows and fair value are
reasonable; however, changes in estimates of such undiscounted cash
flows and fair value could change the Company’s estimates, which
could result in future impairment charges.
2022 Long-Lived Asset Recoverability Tests
In the third and fourth quarters, certain qualitative factors,
including operating results, at the Orange, California ("Orange")
location, triggered recoverability tests. The results of both
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.
2021 Long-Lived Asset Recoverability Tests
In the fourth quarter, certain qualitative factors, including
operating results, at the Orange location, triggered a
recoverability test. 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.
Impairment of Goodwill
Goodwill is tested for impairment annually as of July 31. If
circumstances change during interim periods between annual tests
that would more likely than not reduce the fair value of a
reporting unit below its carrying value, the Company will test
goodwill for impairment. Factors that would necessitate an interim
goodwill impairment assessment include a sustained decline in the
Company's stock price, prolonged negative industry or economic
trends, or significant under-performance relative to expected,
historical or projected future operating results. Management uses
judgment to determine whether to use a qualitative analysis or a
quantitative fair value measurement for its goodwill impairment
testing. The Company's fair value measurement approach combines the
income and market valuation techniques for each of the Company’s
reporting units that carry goodwill. These valuation techniques use
estimates and assumptions including, but not limited to, the
determination of appropriate market comparables, projected future
cash flows (including timing and profitability), discount rate
reflecting the risk inherent in future cash flows, perpetual growth
rate, and projected future economic and market
conditions.
As permitted, if the reporting unit fails the impairment test, the
Financial Accounting Standards Board ("FASB") issued an Accounting
Standard Update ("ASU") removing step two from the goodwill
impairment test. If a reporting unit fails the
quantitative impairment test, impairment expense is immediately
recorded as the difference between the reporting unit's fair value
and carrying value. The Company adopted this standard effective
March 31, 2017.
2022 Annual Goodwill Impairment Tests
SIFCO performed its annual test as of July 31, 2022. Goodwill
existed at one of the Company's reporting units, Cleveland, Ohio as
of September 30, 2022. No impairment charge was identified in
connection with the annual goodwill impairment test with respect to
the Cleveland reporting unit. Refer to Note 3,
Goodwill and Intangible Assets,
of the consolidated financial statements for further
details.
2021 Annual Goodwill Impairment Tests
SIFCO performed its annual test as of July 31, 2021. Goodwill
existed at one of the Company's reporting units, Cleveland, Ohio as
of September 30, 2021. No impairment charge was identified in
connection with the annual goodwill impairment test with respect to
the Cleveland reporting unit. Refer to Note 3,
Goodwill and Intangible Assets,
of the consolidated financial statements for further
details.
Defined Benefit Pension Plan Expense
The Company maintains three defined benefit pension plans in
accordance with the requirements of the Employee Retirement Income
Security Act of 1974 (“ERISA”). The amounts recognized in the
consolidated financial statements for pension benefits under these
three defined benefit pension plans are determined on an actuarial
basis utilizing various assumptions. The following table
illustrates the sensitivity to change in the assumed discount rate
and expected long-rate of return on assets for the Company's
pension plans as of September 30, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Fiscal 2022 Benefits Expense |
|
Impact on September 30, 2022 Projected Benefit Obligation for
Pension Plans |
Change in Assumptions |
|
|
|
|
(In thousands) |
25 basis point decrease in discount rate |
|
$ |
22 |
|
|
$ |
553 |
|
25 basis point increase in discount rate |
|
$ |
(22) |
|
|
$ |
(553) |
|
100 basis point decrease in expected long-term rate of return on
assets |
|
$ |
211 |
|
|
$ |
— |
|
100 basis point increase in expected long-term rate of return on
assets |
|
$ |
(211) |
|
|
$ |
— |
|
The discussion that follows provides information on the significant
assumptions/elements associated with these defined benefit pension
plans.
The Company determines the expected return on plan assets
principally based on (i) the expected return for the various
asset classes in the respective plans’ investment portfolios and
(ii) the targeted allocation of the respective plans’
assets. The expected return on plan assets is developed using
historical asset return performance as well as current and
anticipated market conditions such as inflation, interest rates and
market performance. Should the actual rate of return differ
materially from the assumed/expected rate, the Company could
experience a material adverse effect on the funded status of its
plans and, accordingly, on its related future net pension
expense.
The discount rate for each plan is determined, as of the fiscal
year end measurement date, using prevailing market spot-rates (from
an appropriate yield curve) with maturities corresponding to the
expected timing/date of the future defined benefit payment amounts
for each of the respective plans. Such corresponding spot-rates are
used to discount future years’ projected defined benefit payment
amounts back to the fiscal year end measurement date as a present
value. A composite discount rate is then developed for each plan by
determining the single rate of discount that will produce the same
present value as that obtained by applying the annual spot-rates.
The discount rate may be further revised if the market environment
indicates that the above methodology generates a discount rate that
does not accurately reflect the prevailing interest rates as of the
fiscal year end measurement date. The Company computes a
weighted-average discount rate taking into account anticipated plan
payments and the associated interest rates from the USI Consulting
Group Pension Discount Curve.
As of September 30, 2022 and 2021, SIFCO used the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30, |
|
2022 |
|
2021 |
|
|
|
|
Discount rate for expenses |
2.9 |
% |
|
3.1 |
% |
Expected return on assets |
6.4 |
% |
|
7.0 |
% |
Deferred Tax Valuation Allowance
The Company accounts for deferred taxes in accordance with the
provisions of the Accounting Standards Codification guidance
related to accounting for income taxes, whereby the Company
recognizes an income tax benefit related to income tax credits,
loss carryforwards and deductible temporary differences between
financial reporting basis and tax reporting basis.
A high degree of judgment is required to determine the extent a
valuation allowance should be provided against deferred tax assets.
On a quarterly basis, the Company assesses the likelihood of
realization of its deferred tax assets considering all available
evidence, both positive and negative. In determining whether a
valuation allowance is warranted, the Company evaluates factors
such as prior earnings history, expected future earnings,
carry-back and carry-forward periods and tax strategies that could
potentially enhance the likelihood of the realization of a deferred
tax asset. The weight given to the positive and negative evidence
is commensurate with the extent to which the evidence may be
objectively verified. It is generally difficult to outweigh
objectively verifiable negative evidence of recent financial
reporting losses. Based on the weight of available evidence, the
Company determines if it is more likely than not that its deferred
tax assets will be realized in the future.
As a result of losses incurred in recent years, the Company entered
into a three-year cumulative loss position in the U.S. jurisdiction
during the fourth quarter of fiscal 2016 and remains in a
cumulative loss position at the conclusion of fiscal 2022.
Accordingly, the Company maintained its valuation allowance on its
U.S. deferred tax assets as of the fourth quarter of fiscal year
2022.
Uncertain Tax Positions
The calculation of the Company's tax liabilities also involves
considering uncertainties in the application of complex tax
regulations. SIFCO recognizes liabilities for uncertain income tax
positions based on its estimate of whether it is more likely than
not that additional taxes will be required, and it reports related
interest and penalties as income taxes. Refer to Note 7,
Income Taxes,
of the consolidated financial statements.
E. 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 after December 15, 2022,
including interim periods within those fiscal years. Because SIFCO
is considered a SRC, the Company does not need to implement 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.
Item 8. Financial Statements and Supplementary
Data
Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board of Directors and Shareholders
SIFCO Industries, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated
balance sheets of SIFCO Industries, Inc. (an Ohio corporation) and
subsidiaries (the “Company”) as of September 30, 2022 and 2021, the
related consolidated statements of operations, comprehensive income
(loss), shareholders’ equity, and cash flows for each of the two
years in the period ended September 30, 2022 and the related notes
and financial statement schedule included under Item 15(a)
(collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of September 30,
2022 and 2021, and the results of its operations and its cash flows
for each of the two years in the period ended September 30, 2022,
in conformity with accounting principles generally accepted in the
United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical audit matter
The critical audit matter
communicated below is a matter
arising from the current period audit of the financial statements
that was
communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of
critical audit
matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the
critical audit matter
below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to
which it relates.
Recoverability of long-lived assets at Orange,
California
As described further in Note 1 to the financial statements, the
Company reviews the carrying value of its long-lived assets when
events and circumstances indicate a triggering event has occurred.
This review is performed using estimates of future undiscounted
cash flows. If the carrying value of a long-lived asset or asset
group is greater than the estimated undiscounted future cash flows,
the long-lived asset or asset group is considered impaired and an
impairment charge is recorded for the amount by which the carrying
value exceeds its fair value. We identified the recoverability of
long-lived assets at Orange, California as a critical audit
matter.
The principal considerations for our determination that the
recoverability of long-lived assets at Orange, California is a
critical audit matter are the high degree of auditor judgement
necessary in evaluating certain inputs and assumptions made by
management in the undiscounted cash flow analysis. Those
assumptions include forecasted revenue and EBITDA and estimated
sale price of the asset group at the end of the useful life, which
contribute significantly to the undiscounted cash flows of the
asset group.
Our audit procedures related to the analysis included the
following, among others.
•We
obtained an understanding of and evaluated the design of controls
relating to management’s recoverability of long-lived assets
analysis, including controls over the determination of the
undiscounted cash flows of the asset group and review controls over
the reasonableness of key inputs and assumptions.
•We
assessed the reasonableness of the methodologies and significant
inputs used to estimate the future cash flows of the asset group,
including the revenue and EBITDA growth rates.
•We
assessed the reasonableness of the estimated sale value of the
asset group at the end of the useful life.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2002.
Cleveland, Ohio
December 22, 2022
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, |
|
|
|
|
2022 |
|
2021 |
|
|
Net sales |
|
$ |
83,902 |
|
|
$ |
99,591 |
|
|
|
Cost of goods sold |
|
85,757 |
|
|
88,386 |
|
|
|
Gross (loss) profit |
|
(1,855) |
|
|
11,205 |
|
|
|
Selling, general and administrative expenses |
|
11,909 |
|
|
13,484 |
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
313 |
|
|
1,011 |
|
|
|
(Gain) loss on disposal or impairment of operating
assets |
|
(7) |
|
|
209 |
|
|
|
Gain on insurance recoveries |
|
— |
|
|
(2,397) |
|
|
|
Operating (loss) |
|
(14,070) |
|
|
(1,102) |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
645 |
|
|
638 |
|
|
|
Gain on debt extinguishment |
|
(5,106) |
|
|
(287) |
|
|
|
Foreign currency exchange loss, net |
|
15 |
|
|
23 |
|
|
|
Other expense, net |
|
59 |
|
|
489 |
|
|
|
(Loss) before income tax benefit |
|
(9,683) |
|
|
(1,965) |
|
|
|
Income tax benefit |
|
(43) |
|
|
(1,222) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(9,640) |
|
|
$ |
(743) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share: |
|
|
|
|
|
|
Basic |
|
$ |
(1.65) |
|
|
$ |
(0.13) |
|
|
|
Diluted |
|
$ |
(1.65) |
|
|
$ |
(0.13) |
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares (basic) |
|
5,830 |
|
|
5,759 |
|
|
|
Weighted-average number of common shares (diluted) |
|
5,830 |
|
|
5,759 |
|
|
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, |
|
|
|
|
2022 |
|
2021 |
|
|
Net (loss) |
|
$ |
(9,640) |
|
|
$ |
(743) |
|
|
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax $0 and $0,
respectively
|
|
(837) |
|
|
(102) |
|
|
|
Retirement plan liability adjustment, net of tax $0 and $0,
respectively
|
|
1,211 |
|
|
4,491 |
|
|
|
Interest rate swap agreement adjustment, net of tax $0 and $0,
respectively
|
|
12 |
|
|
— |
|
|
|
Comprehensive (loss) income |
|
$ |
(9,254) |
|
|
$ |
3,646 |
|
|
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2022 |
|
2021 |
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
1,174 |
|
|
$ |
346 |
|
Receivables, net of allowance for doubtful accounts of $111 and
$167, respectively
|
|
16,515 |
|
|
19,914 |
|
|
|
|
|
|
Contract asset |
|
10,172 |
|
|
12,874 |
|
Inventories, net |
|
8,969 |
|
|
12,546 |
|
Refundable income taxes |
|
97 |
|
|
101 |
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
1,851 |
|
|
1,792 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
38,778 |
|
|
47,573 |
|
Property, plant and equipment, net |
|
39,272 |
|
|
42,708 |
|
Operating lease right-of-use assets, net |
|
15,167 |
|
|
15,943 |
|
Intangible assets, net |
|
477 |
|
|
874 |
|
Goodwill |
|
3,493 |
|
|
3,493 |
|
Other assets |
|
79 |
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
97,266 |
|
|
$ |
110,668 |
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
Current liabilities: |
|
|
|
|
Current maturities of long-term debt |
|
$ |
4,379 |
|
|
$ |
9,566 |
|
Revolver |
|
11,163 |
|
|
8,930 |
|
Short-term operating lease liabilities |
|
792 |
|
|
788 |
|
Accounts payable |
|
10,387 |
|
|
9,811 |
|
Accrued liabilities |
|
5,868 |
|
|
6,871 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
32,589 |
|
|
35,966 |
|
Long-term debt, net of current maturities |
|
3,508 |
|
|
2,669 |
|
Long-term operating lease liabilities, net of
short-term |
|
14,786 |
|
|
15,439 |
|
Deferred income taxes |
|
137 |
|
|
158 |
|
Pension liability |
|
4,812 |
|
|
6,073 |
|
Other long-term liabilities |
|
744 |
|
|
741 |
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
Serial preferred shares, no par value, authorized 0
shares
|
|
— |
|
|
— |
|
Common shares, par value $1 per share, authorized 10,000 shares;
issued and outstanding shares 6,040 at September 30, 2022 and
5,987 at September 30, 2021
|
|
6,040 |
|
|
5,987 |
|
Additional paid-in capital |
|
11,387 |
|
|
11,118 |
|
Retained earnings |
|
31,956 |
|
|
41,596 |
|
Accumulated other comprehensive loss |
|
(8,693) |
|
|
(9,079) |
|
Total shareholders’ equity |
|
40,690 |
|
|
49,622 |
|
Total liabilities and shareholders’ equity |
|
$ |
97,266 |
|
|
$ |
110,668 |
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, |
|
|
|
|
2022 |
|
2021 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net (loss) |
|
$ |
(9,640) |
|
|
$ |
(743) |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
6,348 |
|
|
7,662 |
|
|
|
Amortization of debt issuance costs |
|
40 |
|
|
72 |
|
|
|
(Gain) loss on disposal of operating assets or impairment of
operating assets |
|
(7) |
|
|
209 |
|
|
|
Gain on insurance proceeds received for damaged
property |
|
— |
|
|
(2,397) |
|
|
|
Gain on extinguishment of debt |
|
(5,106) |
|
|
(287) |
|
|
|
Inventory valuation accounts |
|
1,639 |
|
|
92 |
|
|
|
LIFO effect |
|
729 |
|
|
924 |
|
|
|
Share transactions under employee stock plan |
|
322 |
|
|
453 |
|
|
|
Deferred income taxes |
|
(48) |
|
|
(1,288) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
19 |
|
|
375 |
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Receivables |
|
2,633 |
|
|
3,244 |
|
|
|
Contract assets |
|
2,702 |
|
|
(877) |
|
|
|
Inventories |
|
443 |
|
|
1,952 |
|
|
|
Refundable income taxes |
|
4 |
|
|
2 |
|
|
|
Prepaid expenses and other current assets |
|
(138) |
|
|
157 |
|
|
|
Other assets |
|
(4) |
|
|
61 |
|
|
|
Accounts payable |
|
808 |
|
|
(4,443) |
|
|
|
Accrued liabilities |
|
(419) |
|
|
(1,279) |
|
|
|
Accrued income tax and other |
|
(27) |
|
|
3 |
|
|
|
Net cash provided by operating activities |
|
298 |
|
|
3,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance proceeds received for damaged property |
|
— |
|
|
4,101 |
|
|
|
Proceeds from disposal of property, plant and equipment |
|
7 |
|
|
— |
|
|
|
Capital expenditures |
|
(3,199) |
|
|
(4,979) |
|
|
|
Net cash used for investing activities |
|
(3,192) |
|
|
(878) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
Proceeds from term note |
|
261 |
|
|
1,020 |
|
|
|
Proceeds from long term debt |
|
2,245 |
|
|
— |
|
|
|
Repayments of long-term debt |
|
(1,243) |
|
|
(405) |
|
|
|
Proceeds from revolving credit agreement |
|
79,802 |
|
|
89,264 |
|
|
|
Repayments of revolving credit agreement |
|
(77,569) |
|
|
(93,204) |
|
|
|
Proceeds from short-term debt borrowings |
|
4,132 |
|
|
3,613 |
|
|
|
Repayments of short-term debt borrowings |
|
(3,894) |
|
|
(3,354) |
|
|
|
Payments for debt issuance costs |
|
— |
|
|
(45) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
3,734 |
|
|
(3,111) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
840 |
|
|
(97) |
|
|
|
Cash and cash equivalents at beginning of year |
|
346 |
|
|
427 |
|
|
|
Effects of exchange rate changes on cash and cash
equivalents |
|
(12) |
|
|
16 |
|
|
|
Cash and cash equivalents at end of year |
|
$ |
1,174 |
|
|
$ |
346 |
|
|
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Supplemental disclosure of Cash Flow Information
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, |
|
|
|
|
2022 |
|
2021 |
|
|
Cash paid during the year: |
|
|
|
|
|
|
Cash paid for interest |
|
$ |
(585) |
|
|
$ |
(397) |
|
|
|
Cash paid for income tax, net |
|
$ |
(19) |
|
|
$ |
(62) |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant & equipment - incurred but not yet
paid |
|
$ |
372 |
|
|
$ |
257 |
|
|
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares |
|
Additional
Paid-In
Capital |
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Loss |
|
|
|
Total
Shareholders’
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2020 |
|
$ |
5,916 |
|
|
$ |
10,736 |
|
|
$ |
42,339 |
|
|
$ |
(13,468) |
|
|
|
|
$ |
45,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
— |
|
|
— |
|
|
(743) |
|
|
4,389 |
|
|
|
|
3,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance and restricted share expense |
|
— |
|
|
469 |
|
|
— |
|
|
— |
|
|
|
|
469 |
|
Share transactions under employee stock plans |
|
71 |
|
|
(87) |
|
|
— |
|
|
— |
|
|
|
|
(16) |
|
Balance - September 30, 2021 |
|
5,987 |
|
|
11,118 |
|
|
41,596 |
|
|
(9,079) |
|
|
|
|
49,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
— |
|
|
— |
|
|
(9,640) |
|
|
386 |
|
|
|
|
(9,254) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance and restricted share expense |
|
— |
|
|
428 |
|
|
— |
|
|
— |
|
|
|
|
428 |
|
Share transactions under employee stock plans |
|
53 |
|
|
(159) |
|
|
— |
|
|
— |
|
|
|
|
(106) |
|
Balance - September 30, 2022 |
|
$ |
6,040 |
|
|
$ |
11,387 |
|
|
$ |
31,956 |
|
|
$ |
(8,693) |
|
|
|
|
$ |
40,690 |
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
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
SIFCO Industries, Inc. and Subsidiaries
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
SIFCO Industries, Inc. and Subsidiaries
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:
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(9,640) |
|
|
$ |
(743) |
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (basic and
diluted) |
|
5,830 |
|
|
5,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share – basic and diluted: |
|
$ |
(1.65) |
|
|
$ |
(0.13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
SIFCO Industries, Inc. and Subsidiaries
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.
SIFCO Industries, Inc. and Subsidiaries
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
2021 |
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment |
|
Retirement Plan Liability Adjustment |
|
Interest Rates Swap Adjustment |
|
Accumulated Other Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of Retirement plan liability: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
(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
SIFCO Industries, Inc. and Subsidiaries
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 |