SIFCO INDUSTRIES INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended
June 30, 2024
or
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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
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
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| (Address of principal executive offices) | (Zip Code) | |||||||
(Registrant’s telephone number, including area code)
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
ý
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 (§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
ý
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
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☒ | Smaller reporting company |
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| Emerging growth company |
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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No
☒
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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The number of the Registrant’s Common Shares, par value $1.00, outstanding at June 30, 2024 was
6,179,881
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Part I. Financial Information
Item 1. Financial Statements
SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited, Amounts in thousands, except per share data)
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Three Months Ended
June 30, |
Nine Months Ended
June 30, |
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| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | $ |
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$ |
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$ |
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$ |
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| Cost of goods sold |
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| Gross profit |
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| Selling, general and administrative expenses |
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| Amortization of intangible assets |
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| (Gain) loss on disposal of operating assets |
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| Operating profit (loss) |
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| Interest expense, net |
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| Foreign currency exchange (gain) loss, net |
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| Other expense, net |
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| Income (loss) before income tax expense |
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(
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| Income tax expense |
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| Net income (loss) | $ |
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$ |
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$ |
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$ |
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| Net income (loss) per share | |||||||||||||||||||||||
| Basic | $ |
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$ |
(
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$ |
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$ |
(
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| Diluted | $ |
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$ |
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$ |
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$ |
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| Weighted-average number of common shares (basic) |
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| Weighted-average number of common shares (diluted) |
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See notes to unaudited consolidated condensed financial statements.
2
SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited, Amounts in thousands)
|
Three Months Ended
June 30, |
Nine Months Ended
June 30, |
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| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income (loss) | $ |
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$ |
(
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$ |
(
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$ |
(
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| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation (loss) gain, net of tax |
(
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| Retirement plan liability adjustment, net of tax |
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| Other |
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(
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| Comprehensive income (loss) | $ |
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$ |
(
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$ |
(
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$ |
(
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See notes to unaudited consolidated condensed financial statements.
3
SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Amounts in thousands, except per share data)
|
June 30,
2024 |
September 30,
2023 |
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| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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| Short-term investments |
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Receivables, net of allowance for credit losses of $
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| Contract assets |
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| Inventories, net |
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| Refundable income taxes |
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| Prepaid expenses and other current assets |
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| Total current assets |
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| Property, plant and equipment, net |
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| Operating lease right-of-use assets, net |
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| Intangible assets, net |
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| Goodwill |
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| Other assets |
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| Total assets | $ |
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$ |
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| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current maturities of long-term debt | $ |
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$ |
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| Promissory note - related party |
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| Revolver |
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| Short-term operating lease liabilities |
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| Accounts payable |
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| Contract liabilities |
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Accrued liabilities (Related party is $
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| Total current liabilities |
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| Long-term debt, net of current maturities, net of unamortized debt issuance costs |
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| Long-term operating lease liabilities, net of short-term |
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| Deferred income taxes, net |
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| Pension liability |
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| Other long-term liabilities |
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| Shareholders’ equity: | |||||||||||
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Serial preferred shares, no par value,
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Common shares, par value $
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| Additional paid-in capital |
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| Retained earnings |
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| Accumulated other comprehensive loss |
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(
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| Total shareholders’ equity |
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| Total liabilities and shareholders’ equity | $ |
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$ |
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See notes to unaudited consolidated condensed financial statements.
4
SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited, Amounts in thousands)
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Nine Months Ended
June 30, |
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| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ |
(
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$ |
(
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| Adjustments to reconcile net loss to net cash used for operating activities: | |||||||||||
| Depreciation and amortization |
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| Amortization of debt issuance costs |
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| Loss on disposal of operating assets |
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| Loss on insurance proceeds received for non-property claim |
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| LIFO effect |
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| Share transactions under company stock plan, net |
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| Inventory valuation accounts |
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(
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| Interest added to promissory note - related party (paid-in-kind) |
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| Other long-term liabilities |
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| Deferred income taxes |
(
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(
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| Changes in operating assets and liabilities: | |||||||||||
| Receivables |
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(
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| Contract assets |
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| Inventories |
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| Prepaid expenses and other current assets |
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| Other assets |
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| Accounts payable |
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| Contract liabilities |
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| Other accrued liabilities |
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| Accrued income and other taxes |
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| Net cash used for operating activities |
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(
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| Cash flows from investing activities: | |||||||||||
| Proceeds from disposal of operating assets |
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| Capital expenditures |
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(
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| Purchase of short-term investments |
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| Maturity of short-term investments |
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| Net cash used for investing activities |
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(
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| Cash flows from financing activities: | |||||||||||
| Proceeds from long-term debt |
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| Payments on long-term debt |
(
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(
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| Proceeds from revolving credit agreement |
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| Repayments of revolving credit agreement |
(
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(
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| Payment of debt issuance costs |
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| Proceeds from promissory note - related party |
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| Short-term debt borrowings |
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| Short-term debt repayments |
(
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(
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| Net cash provided by financing activities |
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| Increase (decrease) in cash and cash equivalents |
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| Cash and cash equivalents at the beginning of the period |
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| Effect of exchange rate changes on cash and cash equivalents |
(
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| Cash and cash equivalents at the end of the period | $ |
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$ |
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5
| Supplemental disclosure of cash flow information of operations: | |||||||||||
| Cash paid for interest | $ |
(
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$ |
(
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| Cash paid for income taxes, net | $ |
(
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$ |
(
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| Non-cash investing activities: | |||||||||||
| Additions to property, plant & equipment - incurred but not yet paid | $ |
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$ |
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| Non-cash financing activities: | |||||||||||
| Debt issuance cost due at maturity - related party | $ |
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$ |
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| Interest added to promissory note - related party (paid-in-kind) | $ |
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$ |
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See notes to unaudited consolidated condensed financial statements.
6
SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Shareholders’ Equity
(Unaudited, Amounts in thousands
)
|
Nine Months Ended
June 30, 2024 |
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| Common |
Additional
Paid-In Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Loss |
Total
Shareholders’ Equity |
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| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Comprehensive (loss) income | — | — | — |
(
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(
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| Performance and restricted share expense | — | — |
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— | — |
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| Share transactions under equity-based plans |
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(
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— | — |
(
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| Balance - June 30, 2024 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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|
Three Months Ended
March 31, 2024 |
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| Common |
Additional
Paid-In Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Loss |
Total
Shareholders’ Equity |
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| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Comprehensive loss | — | — | — |
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| Performance and restricted share expense | — | — |
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— | — |
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| Share transactions under equity-based plans |
(
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(
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— | — |
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| Balance - June 30, 2024 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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Nine Months Ended
June 30, 2023 |
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| Common |
Additional
Paid-In Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Loss |
Total
Shareholders’ Equity |
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| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2022 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Comprehensive (loss) income | — | — | — |
(
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(
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| Performance and restricted share expense | — | — |
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— | — |
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| Share transactions under equity-based plans |
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(
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— | — |
(
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| Balance - June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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Three Months Ended
June 30, 2023 |
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| Common |
Additional
Paid-In Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Loss |
Total
Shareholders’ Equity |
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| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Comprehensive (loss) income | — | — | — |
(
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(
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| Performance and restricted share expense | — | — |
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— | — |
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| Share transactions under equity-based plans |
(
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(
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— | — | — |
(
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| Balance - June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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See notes to unaudited consolidated condensed financial statements.
7
SIFCO Industries, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
(Amounts in thousands, except per share data)
1.
Summary of Significant Accounting Policies
A.
Principles of Consolidation
The accompanying unaudited consolidated condensed financial statements include the accounts of SIFCO Industries, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation.
The United States ("U.S.") dollar is the functional currency for all of the Company’s operations in the U.S. and its non-operating subsidiaries. For these operations, all gains and losses from completed currency transactions are included in net loss. 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 for the period which approximate the rates in effect at the date of the transaction. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss in the unaudited consolidated condensed financial statements.
These unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s fiscal 2023 Annual Report on Form 10-K. The year-end consolidated condensed balance sheet contained in these financial statements was derived from the audited financial statements and disclosures required by accounting principles generally accepted in the U.S. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) and disclosures considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of the results to be expected for other interim periods or the full year.
B. Accounting Policies
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company's Annual Report on Form 10-K for the year ended September 30, 2023.
C.
Short-term Investments
In general, short-term investments have a maturity of three months to one year at the date of purchase. Short-term investments classified as held-to-maturity are recorded at cost, which approximates fair value.
D.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable represent the Company’s unconditional rights to consideration, subject to the payment terms of the contract, for which only the passage of time is required before payment. Unbilled receivables are reflected under contract assets on the consolidated condensed balance sheets.
| Allowance for credit losses: |
Three Months Ended
June 30, 2024 |
Nine Months Ended
June 30, 2024 |
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| Opening allowance for credit losses | $ |
(
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$ |
(
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| Changes in estimate |
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| Write-offs |
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| Recoveries |
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| Total allowance for credit losses | $ |
(
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$ |
(
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8
E.
Net Income (Loss) per Share
|
Three Months Ended
June 30, |
Nine Months Ended
June 30, |
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| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income (loss) | $ |
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$ |
(
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$ |
(
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$ |
(
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| Weighted-average common shares outstanding (basic and diluted) |
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| Effect of dilutive securities: | |||||||||||||||||||||||
| Restricted shares |
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| Performance shares |
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| Weighted-average common shares outstanding (diluted) |
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| Net income (loss) per share – basic: | $ |
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$ |
(
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$ |
(
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$ |
(
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| Net income (loss) per share – diluted: | $ |
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$ |
(
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$ |
(
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$ |
(
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| Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share |
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F. 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 its plans that are not yet fully implemented are probable of both being implemented and effective in alleviating that doubt. In the event substantial doubt is raised, disclosures in the notes to the consolidated condensed financial statements of management’s plans and management’s conclusion as to whether the substantial doubt exists or has been alleviated are required. The consolidated condensed 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. This step shall 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.
The Company has debt maturing in October 2024. As a result of this condition, there is substantial doubt about the Company’s ability to continue as a going concern.
The Company continues to evaluate available financial alternatives, including obtaining acceptable alternative financing and the sale of its Maniago location. The Company cannot provide assurances that it will be successful in restructuring the existing debt obligations, obtaining capital or entering into a strategic alternative transaction which provides sufficient funding for the refinancing of its outstanding indebtedness prior to the maturity date of its obligations under the Credit Agreement. See Note 7
, Debt and
Note 14
, Subsequent Events.
G.
Recent Accounting Standards Adopted
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
9
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, this ASU is effective for the Company beginning October 1, 2023. The effect of adopting this ASU did not have an impact to the Company's results within the consolidated condensed statements of operations and financial condition.
H. Recent Accounting Standards Not Yet Adopted
In July 2023, the FASB issued ASU 2023-03, "
Presentation of Financial Statement (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718)"
, to amend various SEC paragraphs in the Accounting Standards Codification (the "Codification") to reflect the issuance of SEC Staff Accounting Bulletin No. 120, among other things. The ASU does not provide any new guidance so there is no transition or effective date associated with it. The Company is currently assessing the impact of adopting ASU 2023-03 on the consolidated condensed financial statements and related disclosures.
In November 2023, the FASB issued ASU 2023-07, "
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures"
, that would enhance disclosures for significant segment expenses for all public entities required to report segment information in accordance with ASC 280. ASC 280 requires a public entity to report for each reportable segment a measure of segment profit or loss that its chief operating decision maker ("CODM") uses to assess segment performance and to make decisions about resource allocations. The amendments in ASU 2023-07 improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more useful financial analyses. Currently,
Topic 280
requires that a public entity disclose certain information about its reportable segments. For example, a public entity is required to report a measure of segment profit or loss that the CODM uses to assess segment performance and make decisions about allocating resources. ASC 280 also requires other specified segment items and amounts such as depreciation, amortization and depletion expense to be disclosed under certain circumstances. The amendments in ASU 2023-07 do not change or remove those disclosure requirements. The amendments in ASU 2023-07 also do not change how a public entity identifies its operating segments, aggregates those operating segments into reportable segments, or applies the quantitative thresholds to determine its reportable segments. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. A public entity should apply the amendments in ASU 2023-07 retrospectively to all prior periods presented in the financial statements. The Company is currently assessing the impact of adopting ASU 2023-07 on the consolidated condensed financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, "
Income Taxes (Topic 740): Improvements to Income Tax Disclosures"
. ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. Early adoption is permitted. A public entity should apply the amendments in ASU 2023-09 prospectively to all annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of this standard on our consolidated condensed financial statements and related disclosures.
In March 2024, the FASB issued ASU 2024-01 “
Compensation - Stock Compensation (Topic 718) - Scope Application of Profits Interest and Similar Awards
” (“ASU 2024-01”) clarifies how an entity determines whether a profits interest or similar award is within the scope of Topic 718 or is not a share-based payment arrangement and therefore within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. Entities can apply the amendments either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date of adoption. If prospective application is elected, an entity must disclose the nature of and reason for the change in accounting principle. The amendments in ASU 2024-01 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2024. The Company is currently assessing the impact of this standard on our consolidated condensed financial statements and related disclosures.
In March 2024, the FASB issued ASU 2024-02 “
Codification Improvements
” (“ASU 2024-02”) amends the Codification to remove references to various concepts statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are
10
extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities and is effective or fiscal years beginning after December 15, 2024. The Company is currently assessing the impact of this standard on our consolidated condensed financial statements and related disclosures.
I.
Employee Retention Credit
Under the Employee Retention Credit ("ERC") program, eligible businesses, both for-profit and not-for-profit, that experienced a full or partial government-ordered suspension of operations or a "significant" decline in gross receipts in any quarter (more than 50% decrease in 2020 from 2019, and more than 20% in 2021) could receive a quarterly refundable payroll tax credit. The Company, with reasonably assured qualification, submitted for refunds under the ERC program on January 23, 2024. These submissions are still pending review and approval from the Internal Revenue Service ("IRS").
J.
Reclassification
2.
Inventories
Inventories consist of:
|
June 30,
2024 |
September 30,
2023 |
||||||||||
| Raw materials and supplies | $ |
|
$ |
|
|||||||
| Work-in-process |
|
|
|||||||||
| Finished goods |
|
|
|||||||||
| Total inventories, net | $ |
|
$ |
|
|||||||
11
3.
Long-lived Assets
The Company reviews the carrying value of its long-lived assets ("asset groups"), when events and circumstances indicate a triggering event has occurred. A triggering event is a change in circumstances that indicates the carrying value of the asset group may not be recoverable. 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.
The Company continuously monitors for indicators of impairment to determine if further testing is necessary. In the third quarter of fiscal 2024, certain qualitative factors, including operating results, at the Orange, California ("Orange") location, triggered a recoverability test. The results indicated that the long-lived assets were recoverable and did not require further review for impairment.
4.
Goodwill
5.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
|
June 30,
2024 |
September 30,
2023 |
||||||||||
| Foreign currency translation loss, net of tax | $ |
(
|
$ |
(
|
|||||||
| Retirement plan liability adjustment, net of tax |
(
|
(
|
|||||||||
| Interest rate swap agreement, net of tax |
|
|
|||||||||
| Total accumulated other comprehensive loss | $ |
(
|
$ |
(
|
|||||||
6.
Leases
The components of lease expense were as follows:
|
Three Months Ended
June 30, |
Nine Months Ended
June 30, |
||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Finance lease expense: | |||||||||||||||||||||||
| Amortization of right-of use assets on finance leases | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Interest on lease liabilities |
|
|
|
|
|||||||||||||||||||
| Operating lease expense |
|
|
|
|
|||||||||||||||||||
| Variable lease cost |
|
|
|
|
|||||||||||||||||||
| Total lease expense | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
12
The following table presents the impact of leasing on the consolidated condensed balance sheet.
| Classification in the consolidated condensed balance sheets |
June 30,
2024 |
September 30,
2023 |
|||||||||||||||
| Assets: | |||||||||||||||||
| Finance lease assets | $ |
|
$ |
|
|||||||||||||
| Operating lease assets | Operating lease right-of-use assets, net |
|
|
||||||||||||||
| Total lease assets | $ |
|
$ |
|
|||||||||||||
| Current liabilities: | |||||||||||||||||
| Finance lease liabilities | $ |
|
$ |
|
|||||||||||||
| Operating lease liabilities | Short-term operating lease liabilities |
|
|
||||||||||||||
| Non-current liabilities: | |||||||||||||||||
| Finance lease liabilities |
|
|
|||||||||||||||
| Operating lease liabilities | Long-term operating lease liabilities, net of short-term |
|
|
||||||||||||||
| Total lease liabilities | $ |
|
$ |
|
|||||||||||||
Supplemental cash flow and other information related to leases were as follows:
|
June 30,
2024 |
June 30,
2023 |
||||||||||
| Other Information | |||||||||||
| Cash paid for amounts included in measurement of liabilities: | |||||||||||
| Operating cash flows from operating leases | $ |
|
$ |
|
|||||||
| Operating cash flows from finance leases |
|
|
|||||||||
| Financing cash flows from finance leases |
|
|
|||||||||
| Right-of-use assets obtained in exchange for new lease liabilities: | |||||||||||
| Operating leases |
|
|
|||||||||
|
June 30,
2024 |
September 30,
2023 |
||||||||||
| Weighted-average remaining lease term (years): | |||||||||||
| Finance leases |
|
|
|||||||||
| Operating leases |
|
|
|||||||||
| Weighted-average discount rate: | |||||||||||
| Finance leases |
|
% |
|
% | |||||||
| Operating leases |
|
% |
|
% | |||||||
Future minimum lease payments under non-cancellable leases at June 30, 2024 were as follows:
| Finance Leases | Operating Leases | |||||||
| Year ending September 30, | ||||||||
| 2024 (excluding the nine months ended June 30, 2024) | $ |
|
$ |
|
||||
| 2025 |
|
|
||||||
| 2026 |
|
|
||||||
| 2027 |
|
|
||||||
| 2028 |
|
|
||||||
| Thereafter |
|
|
||||||
| Total lease payments | $ |
|
$ |
|
||||
| Less: Imputed interest |
(
|
(
|
||||||
| Present value of lease liabilities | $ |
|
$ |
|
||||
13
7.
Debt
Debt consists of:
|
June 30,
2024 |
September 30,
2023 |
||||||||||
| Revolving credit agreement | $ |
|
$ |
|
|||||||
| Foreign subsidiary borrowings, net of unamortized debt issuance cost |
|
|
|||||||||
| Promissory note - related party |
|
|
|||||||||
| Finance lease obligations |
|
|
|||||||||
|
Less: unamortized debt issuance cost - (Related party is $
|
(
|
|
|||||||||
|
Other, net of unamortized debt issuance costs $
|
|
|
|||||||||
| Total debt |
|
|
|||||||||
| Less – current maturities |
(
|
(
|
|||||||||
| Total long-term debt | $ |
|
$ |
|
|||||||
Credit Agreement and Security Agreement
On November 8, 2023, the Company entered into the Eighth Amendment to the Credit Agreement (the "Eighth Amendment") with JPMorgan Chase Bank, N.A. ("Lender"). The Eighth Amendment, among other things, reduced the Reserves under the Borrowing Base in the Credit Agreement to $
1,500
, or such lesser amount, if any, as may be agreed upon in writing by the Lender in its sole discretion.
The Company entered into the Ninth Amendment (the "Ninth Amendment") to the Credit Agreement and the Fourth Amendment (the "Fourth Amendment") to the Export Credit Agreement with its Lender on December 21, 2023. The Ninth Amendment amends the Credit Agreement to, among other things, to: (i) reflect the incurrence by borrowers of the Subordinated Loan and the execution and delivery by borrowers, the Lender and Mark J. Silk (Mr. Silk is a member of the Board of Directors of the Company and considered a related party) of the Subordinated Loan Documents, and the receipt by borrowers of $
3,000
in immediately available funds on the Ninth Amendment Effective Date; (ii) delay the maturity date from December 31, 2023 to October 4, 2024, or any earlier date on which the Revolving Commitment is reduced to zero or otherwise terminated pursuant to the terms of the Credit Agreement; (iii) reduce the Revolving Commitment to $
19,000
from $
23,000
; (iv) modify the definition of Borrowing Base to mean, at any time, the sum of (a)
85
% of Eligible Accounts at such time, plus (b) the lesser of (1)
70
% of Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, at such time and (2) the product of
85
% multiplied by the NOLV Percentage identified in the most recent inventory appraisal ordered by the Lender multiplied by Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, at such time, minus (c) Reserves of $
1,500
, increasing on the first day of each month by $
250
, commencing on May 1, 2024 and continuing until (and including) August 1, 2024, or such lesser amount, if any, as may be agreed upon in writing by the Lender in its sole discretion (which may be by email from the Lender), plus (d) the PP&E Component; (v) modify the Applicable Margin schedule to reflect the following applicable rates:
2.75
% (CBFR REVSOFR30),
0.25
% (CBFR Spread (CB Floating Rate)),
2.75
% (SOFR Spread), and
0.50
% (Commitment Fee Rate); and (vi) amend and restate subsection (l) of the Reporting Schedule to require, by the 17th day of every month, the delivery of a rolling 13 week cash flow forecast in form acceptable to Lender, which must include a projected to actual results comparison for the week then ended and on a cumulative basis from the beginning of the cash flow forecast. The Fourth Amendment of the Export Credit Agreement, to, among other things, to: (i) reflect the incurrence by borrowers of the Subordinated Loan and the execution and delivery by borrowers, the Lender and Silk of the Subordinated Loan Documents, and the receipt by borrowers of $
3,000
in immediately available funds on the Ninth Amendment Effective Date; and (ii) delay the maturity date to October 4, 2024, or any earlier date on which the Revolving Commitment is reduced to zero or otherwise terminated pursuant to the terms thereof.
The Company entered into the Tenth Amendment (the "Tenth Amendment") to the Credit Agreement and the Fifth Amendment (the "Fifth Amendment") to the Export Credit Agreement with its lender on May 21, 2024. The Tenth and Fifth Amendments amend the Credit Agreement and the Export Credit Agreement to, among other things, to: (i) increase the Revolving Commitment, less the Availability Block, if applicable, (y) the Borrowing Base, and (z) in combination with the Export Revolving Loans under the Export Credit Agreement, (i) $
18,000
through September 30, 2023, (ii) $
19,000
from and including October 1, 2023 through May 14, 2024, and (iii) $
22,000
thereafter until, and reducing to
zero
and terminating on, the Maturity Date; (ii) modify the definition of Borrowing Base Reserves to $
1,500
or such other amount, if any, as may be determined in writing by the Lender in its Permitted Discretion (which may be by email from the Lender); and (iii) required the execution and delivery of the First Amendment of the Silk Guaranty discussed below.
14
The total collateral at June 30, 2024 and September 30, 2023 was $
24,576
and $
21,089
, respectively, and the revolving commitment was $
26,000
and $
30,000
, respectively. Total availability at June 30, 2024 and September 30, 2023 was $
2,912
and $
2,830
, respectively, which exceeds both the collateral and total commitment threshold. The Credit Agreement contains affirmative and negative covenants and events of default. Since the availability exceeded the $
1,500
reserve minimum as of June 30, 2024 and September 30, 2023, no covenant calculations were required. The Company had a letter of credit balance of $
1,970
as of June 30, 2024 and September 30, 2023, respectively.
The revolving credit agreement (or "revolver"), as amended, has a rate based on SOFR plus a
2.75
% spread, which was
8.2
% at June 30, 2024 and a rate based on SOFR plus a
2.25
% spread, which was
7.7
% at September 30, 2023. The Export Credit Agreement as amended has a rate based on SOFR plus a
2.25
% spread, which was
7.7
% at June 30, 2024 and a rate based on SOFR plus a
1.75
% spread, which was
7.2
% at September 30, 2023. The Company also has a commitment fee of
0.50
% under the Credit Agreement as amended to be incurred on the unused balance of the revolver.
Debt issuance costs - revolver
The Company incurred new debt issuance costs of $
117
in the first quarter of fiscal 2024 as it pertains to the new amendments entered into, which are included in the consolidated condensed balance sheet as a deferred charge in other current assets, net of amortization of $
81
at June 30, 2024. The Company previously had debt issuance costs of $
86
, which were included in the consolidated condensed balance sheets as a deferred charge in other current assets, net of amortization of $
86
and $
78
at June 30, 2024 and September 30, 2023, respectively.
Subordinated Promissory Note and Guaranty
The Company, in connection with the Ninth Amendment and the Fourth Amendment, incurred a secured subordinated loan from Garnet Holdings, Inc. ("GHI"), a California corporation owned and controlled by Mark J. Silk ("Silk") (Mr. Silk is a member of the Board of Directors of the Company and considered a related party), in the original principal amount of $
3,000
(the "Subordinated Loan") on the terms and subject to the conditions of a Subordinated Secured Promissory Note (the "Subordinated Promissory Note"). The obligations of borrowers under the Subordinated Loan mature on October 4, 2024. Interest accrues on the then-outstanding principal amount at a rate of
14
% per annum and shall be paid in kind (and not in cash) by capitalization as additional principal ("PIK Interest") each six-month period after the date hereof in arrears. The Company agreed to pay to Mr. Silk a fully earned and non-refundable fee in an amount equal to $
150
, which fee shall be included in the carrying value of the promissory note, due and payable in full on, and subject to the occurrence of, the Maturity Date or such earlier date on which the Company’s obligations under the Subordinated Promissory Note are accelerated pursuant to the terms thereof. Borrower’s obligations under the Subordinated Promissory Note are secured by a first priority lien, subject to any liens granted to Lender as described in the Subordination Agreement, on all of borrowers’ accounts, deposit accounts, contract rights, documents, equipment, general intangibles, instruments, inventory, investment property, commercial tort claims, all other goods and personal property whether tangible or intangible and wherever located, and all proceeds of the foregoing. The Subordinated Promissory note carrying value was $
3,366
and $
0
at June 30, 2024 and September 30, 2023, respectively. The Subordinated Promissory Note interest rate was
14
% and
0
% at June 30, 2024 and September 2023, respectively.
The Ninth Amendment was also subject to the satisfaction of certain conditions, including, but not limited to, the execution and delivery by Silk, of a Guaranty Agreement (the "Guaranty") in favor of Lender pursuant to which Silk guarantees the obligations of borrowers under the Credit Agreement and Export Credit Agreement. The Fee Letter requires the borrowers to pay Silk a fee (the "Guaranty Fee") in consideration for his agreement to execute and deliver the Guaranty in an amount equal to $
760
, which was included in the consolidated condensed balance sheets as a deferred charge in accrued liabilities.
The Tenth Amendment was subject to the execution and delivery of the First Amendment of the Guaranty and an amendment to the Fee Letter, which required the borrowers to pay Silk an incremental fee of $
120
in consideration for his agreement to execute and deliver the First Amendment to the Guaranty. Guaranty fees were included in the consolidated condensed balance sheets as a deferred charge in accrued liabilities and become due and payable on the maturity date.
15
Foreign subsidiary borrowings in USD
Foreign debt consists of:
|
June 30,
2024 |
September 30,
2023 |
||||||||||
|
Term loan, net of unamortized debt issuance cost $(
|
$ |
|
$ |
|
|||||||
| Short-term borrowings |
|
|
|||||||||
| Factor |
|
|
|||||||||
| Total debt | $ |
|
$ |
|
|||||||
| Less – current maturities |
(
|
(
|
|||||||||
| Total long-term debt | $ |
|
$ |
|
|||||||
| Receivables pledged as collateral | $ |
|
$ |
|
|||||||
Interest rates on foreign borrowings are based on Euribor rates, which range from
0.5
% to
7.8
%.
The Company's Maniago, Italy ("Maniago") location obtained borrowings from
two
separate lending sources in the first quarter of fiscal 2024. The first was a bond for $
2,208
with repayment terms of
seven years
. Under the terms of the borrowing, repayments are made semi-annually in the amount of $
200
, beginning on June 29, 2024. The proceeds from this loan are shown within cash and cash equivalents and short-term investments on the consolidated condensed balance sheets and will be used for capital investment. A second loan with a term of
1 year, 6 months
was obtained in the amount of $
1,104
. The proceeds from this loan were used for working capital purposes.
In the third quarter, the Company increased three of its credit and factoring lines with existing lenders to support working capital needs.
8.
Income Taxes
For each interim reporting period, the Company makes an estimate of the effective tax rate it expects to be applicable for the full fiscal year for its operations. This estimated effective rate is used in providing for income taxes on a year-to-date basis. The Company’s effective tax rate through the first nine months of fiscal 2024 was (
3.2
)%, compared with (
2.3
)% for the same period of fiscal 2023. The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2024 compared with the same period of fiscal 2023. 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.
9.
Retirement Benefit Plans
The Company and certain of its subsidiaries sponsor defined benefit pension plans covering some of its employees.
The components of the net periodic benefit cost of the Company’s defined benefit plans are as follows:
|
Three Months Ended
June 30, |
Nine Months Ended
June 30, |
||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Service cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Interest cost |
|
|
|
|
|||||||||||||||||||
| Expected return on plan assets |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Amortization of net loss |
|
|
|
|
|||||||||||||||||||
| Settlement cost |
|
|
|
|
|||||||||||||||||||
| Net periodic pension cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
16
During the nine months ended June 30, 2024 and 2023, the Company made $
32
and $
13
in cash contributions, and $
87
and $
0
in non-cash contributions utilizing carryover balance, respectively, to its defined benefit pension plans. The Company anticipates making $
42
in cash contributions to fund its defined benefit pension plans for the balance of fiscal 2024, and will use carryover balances from previous periods that have been available for use as a credit to reduce the amount of cash contributions that the Company is required to make to certain defined benefit plans in fiscal 2024. The Company's ability to elect to use such carryover balance will be determined based on the actual funded status of each defined benefit pension plan relative to the plan's minimum regulatory funding requirements. The Company does not anticipate making cash contributions above the minimum funding requirement to fund its defined benefit pension plans during the balance of fiscal 2024.
10.
Stock-Based Compensation
The Company has outstanding equity awards under the Company's 2007 Long-Term Incentive Plan (the "2007 Plan") and the Company's 2007 Long-Term Incentive Plan (Amended and Restated as of November 16, 2016) (as further amended, the "2016 Plan"), and awards performance and restricted shares under the 2016 Plan.
In the first nine months of fiscal 2024, the Company granted
120
shares under the 2016 Plan to certain key employees. The awards were split into
two
tranches, comprised of
46
performance-based shares and
74
time-based restricted shares, with a grant date fair value of $
3.60
per share. The awards vest over
three years
. There were
66
shares forfeited during the nine month period ended June 30, 2024.
In the first nine months of fiscal 2024, the Company granted its non-employee directors
39
restricted shares under the 2016 Plan, with a grant date fair value of $
3.08
per share, which vest over
one year
. One award for
38
restricted shares vested in January 2024.
If all outstanding share awards are ultimately earned and vest at the target number of shares, there are approximately
327
shares that remain available for award at June 30, 2024. If any of the outstanding share awards are ultimately earned and vest at greater than the target number of shares, up to a maximum of
150
% of such target, then a fewer number of shares would be available for award.
Stock-based compensation under the 2016 Plan was $
243
and $
292
during the first nine months of fiscal 2024 and 2023, respectively. As of June 30, 2024, there was $
421
of total unrecognized compensation cost related to the performance shares and restricted shares awarded under the 2016 Plan. The Company expects to recognize this cost over the next
1.5
years.
11.
Revenue
The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and other military applications; (ii) airframe applications for a variety of aircraft; (iii) industrial gas and steam turbine engines for power generation units; and (iv) commercial space, semiconductor and other commercial applications.
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
17
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.
The following table represents a breakout of total revenue by customer type:
|
Three Months Ended
June 30, |
Nine Months Ended
June 30, |
||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Commercial revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Military revenue |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
The following table represents revenue by end market:
|
Three Months Ended
June 30, |
Nine Months Ended
June 30, |
||||||||||||||||||||||
| Net Sales | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Aerospace components for: | |||||||||||||||||||||||
| Fixed wing aircraft | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Rotorcraft |
|
|
|
|
|||||||||||||||||||
| Energy components for power generation units |
|
|
|
|
|||||||||||||||||||
| Commercial product and other revenue |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
The following table represents revenue by geographic region based on the Company's selling operation locations:
|
Three Months Ended
June 30, |
Nine Months Ended
June 30, |
||||||||||||||||||||||
| Net Sales | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| North America | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Europe |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
In addition to the disaggregated revenue information provided above, approximately
39
% and
47
% of total net sales for the nine months ended June 30, 2024 and 2023, respectively, was recognized on an over-time basis because of the continuous transfer of control to the customer, with the remainder recognized at a point in time.
Contract Balances
The following table contains a roll forward of contract assets and contract liabilities for the period beginning October 1, 2023 and ended June 30, 2024 compared to period beginning October 1, 2022 and ended June 30, 2023:
|
June 30,
2024 |
June 30,
2023 |
||||||||||
| Contract assets - Beginning balance | $ |
|
$ |
|
|||||||
| Additional revenue recognized over-time |
|
|
|||||||||
| Less amounts billed to the customers |
(
|
(
|
|||||||||
| Contract assets - Ending balance | $ |
|
$ |
|
|||||||
|
June 30,
2024 |
June 30,
2023 |
||||||||||
| Contract liabilities - Beginning balance | $ |
(
|
$ |
(
|
|||||||
| Payments received in advance of performance obligations |
(
|
(
|
|||||||||
| Performance obligations satisfied |
|
|
|||||||||
| Contract liabilities - Ending balance | $ |
(
|
$ |
(
|
|||||||
18
Accounts receivable were $
16,515
and $
20,197
at September 30, 2022 and June 30, 2023, respectively. There were
no
impairment losses recorded on contract assets as of June 30, 2024 and September 30, 2023.
Remaining performance obligations
As of June 30, 2024, the Company has $
139,203
of remaining performance obligations, the majority of which are anticipated to be completed within the next
twelve months
.
12.
Commitments and Contingencies
On December 30, 2022, the Company became aware of a cyber security issue involving unauthorized access to the Company's system (the "Cyber Incident"). The Company immediately began an investigation and engaged cyber security experts to assist with the assessment of the incident and to help determine what data was impacted. The Company's investigation uncovered that the threat actor had gained access to certain areas of the Company's systems on or about December 27, 2022. With the assistance of outside cyber security experts, the Company located and closed the unauthorized access to our systems, identified compromised information, and notified those impacted in accordance with state and federal requirements.
The Company maintains $
3,000
of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber Incident. The Company recorded a benefit of $
605
to selling, general, and administrative expenses in the third quarter of fiscal 2024 due to credit of third party restoration fees related to last year's cybersecurity incident. The Company recorded expense of $
1,209
to selling, general, and administrative expenses and recorded costs of $
60
to other expense (income), net related to loss on insurance recovery in the nine months ended June 30, 2023. At June 30, 2024 and September 30, 2023, the Company recorded $
197
and $
965
, respectively, related to the Cyber Incident in accounts payable on the consolidated condensed balance sheets.
13.
Related Party Transactions
On December 21, 2023, the Company entered into the Ninth Amendment and Fourth Amendment with its lender incurring a secured subordinated loan from GHI, in the original principal amount of $
3,000
. GHI is controlled by Mr. Silk, a member of the Board of Directors of the Company and considered a related party. The Company has recorded interest expense of $
110
and $
216
for the three and nine month periods ending June 30, 2024, which was included in the consolidated condensed balance sheets in the Promissory note - related party line. Additionally, Mr. Silk provided a Guaranty in favor of the Lender pursuant to which Mr. Silk guarantees the obligations of borrowers under the Credit Agreement and Export Credit Agreement. As part of the Guaranty and Promissory Note, the Company will pay GHI fees of $
880
and $
150
, respectively, and has paid $
30
of legal costs. The Company has a total of $
397
deferred financing costs related to the Guaranty and Subordinated Promissory Note, which was included in the consolidated condensed balance sheets in current maturities of long-term, net of $
663
amortization. See Note 7,
Debt
for further information.
14.
Subsequent Events
On August 1, 2024, the Company's Board of Directors approved, and management executed, a Share Purchase Agreement ("SPA") with TB2 S.r.l. ("Buyer"), under which the Buyer agreed to acquire
100
% of the share capital of the Company’s Maniago, Italy location (C Blade S.p.A. Forging & Manufacturing). The SPA, among other things, is contingent upon meeting customary conditions, delivering required documents, and obtaining governmental authorization under the Golden Power rules of Italian law. Additionally, the SPA is subject to a Material Adverse Condition (“MAC”) clause. The Company committed to the plan to sell in August 2024, and the Maniago location is considered as held and used as of June 30, 2024.
The Company expects to consummate the sale in the fourth quarter of fiscal 2024, however, the Company cannot provide assurances that all closing conditions will be satisfied. Maniago's total assets were $
23,657
and total liabilities were $
16,498
on the consolidated condensed balance sheets at June 30, 2024.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and includes assumptions concerning the Company’s operations, future results and prospects. The words "will," "may," "designed to," "outlook," "believes," "should," "anticipates," "plans," "expects," "intends," "estimates," "forecasts" and similar expressions identify certain of these forward-looking statements. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides this cautionary statement identifying important economic, political and technological factors, among others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (1) the impact on business conditions in general, and on the demand for product in the aerospace and energy (or
19
"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) our 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 future sales from 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 Company's ability to restructure existing debt obligations prior to their stated maturity date through the execution of a strategic alternative transaction or obtaining acceptable alternative financing.
The Company engages in the production of forgings and machined components primarily for the A&E and commercial space markets. The processes and services provided by the Company include forging, heat-treating, machining, subassembly, and test. The Company operates under one business segment.
The Company endeavors to continue to plan and evaluate its business operations while taking into consideration certain factors including the following: (i) the projected build rate for commercial, business and military aircraft, as well as the engines that power such aircraft; (ii) the projected maintenance, repair and overhaul schedules for commercial, business and military aircraft, as well as the engines that power such aircraft; (iii) the projected build rate and repair for industrial turbines; and (iv) the market for commercial space.
The Company operates within a cost structure that includes a significant fixed component. Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage the fixed component of their respective cost structures. Conversely, the opposite effect is expected to occur at lower net sales and related production volumes.
A. Results of Operations
Overview
The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and other military applications; (ii) airframe applications for a variety of aircraft; (iii) industrial gas and steam turbine engines for power generation units; and (iv) commercial space, semiconductor and other commercial applications.
Backlog of Orders
SIFCO’s total backlog at June 30, 2024 was $139.2 million, of which $108.1 million are anticipated to be complete within the next 12 months, compared with total backlog of $122.8 million as of June 30, 2023. Orders may be subject to modification or cancellation by the customer with limited charges. Recovery in the A&E markets has resulted in increased bookings. Backlog information may not be indicative of future sales.
20
Nine Months Ended June 30, 2024 compared with Nine Months Ended June 30, 2023
Net Sales
Net sales comparative information for the first nine months of fiscal 2024 and 2023 is as follows:
| (Dollars in millions) |
Nine Months Ended
June 30, |
Increase/ (Decrease) | |||||||||||||||
| Net Sales | 2024 | 2023 | |||||||||||||||
| Aerospace components for: | |||||||||||||||||
| Fixed wing aircraft | $ | 30.7 | $ | 28.3 | $ | 2.4 | |||||||||||
| Rotorcraft | 12.8 | 12.0 | 0.8 | ||||||||||||||
| Energy components for power generation units | 20.5 | 16.7 | 3.8 | ||||||||||||||
| Commercial product and other revenue | 12.9 | 5.4 | 7.5 | ||||||||||||||
| Total | $ | 76.9 | $ | 62.4 | $ | 14.5 | |||||||||||
Net sales for the first nine months of fiscal 2024 increased $14.5 million to $76.9 million, compared with $62.4 million in the comparable period of fiscal 2023. In general, the production of the Company's products have lead times of varying lengths. Fixed wing sales increased $2.4 million due to 737, 787, F15 and F16 programs. Rotorcraft sales increased $0.8 million due to H60 program partially offset by V22 demand reduction. The energy components for power generation sales increased by $3.8 million due to growth in the steam turbine markets. Commercial products and other revenue increased by $7.5 million due to commercial space and M1 tank program.
Commercial net sales were 64.7% of total net sales and military net sales were 35.3% of total net sales in the first nine months of fiscal 2024, compared with 55.5% and 44.5%, respectively, in the comparable period in fiscal 2023. Military net sales decreased by $0.6 million to $27.1 million in the first nine months of fiscal 2024, compared with $27.8 million in the comparable period of fiscal 2023,
primarily due to F35 program and V22 demand reduction. Co
mmercial net sales increased $15.1 million to $49.7 million in the first nine months of fiscal 2024, compared with $34.6 million in the comparable period of fiscal 2023, primarily due
to an increase in the power generation steam turbine market, commercial space and 737 and 787 programs.
Cost of Goods Sold
Cost of goods sold increased by $12.9 million, or 23.1%, to $68.8 million, or 89.6% of net sales, during the first nine months of fiscal 2024, compared with $55.9 million or 89.7% of net sales, in the comparable period of fiscal 2023. The increase is primarily due to higher sales volume, higher labor costs of $1.7 million, higher utility cost of $0.4 million and $0.1 million of hiring costs as the Company increased production to meet customer demands, partially offset by lower idle expense of $1.0 million. Prior year results included $1.5 million of ERC benefit and reduction of NRV reserve of $1.4 million.
Gross Profit
Gross profit increased $1.5 million to $8.0 million in the first nine months of fiscal 2024, compared with $6.5 million gross profit in the comparable period of fiscal 2023. Gross profit percent of sales was 10.4% during the first nine months of fiscal 2024 compared with 10.3% in fiscal 2023. The increase in gross profit compared to prior fiscal year was primarily due to higher volume, lower idle expense and lower outside services of $0.3 million, partially offset by higher labor costs of $1.7 million, utility costs of $0.4 million and hiring costs. Prior year results included $1.5 million of ERC benefit and reduction of NRV reserve of $1.4 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $9.9 million, or 12.9%, of net sales during the first nine months of fiscal 2024, compared with $10.5 million, or 16.9%, of net sales in the comparable period of fiscal 2023. The decrease in selling, general and administrative expenses is primarily due to benefit of $0.6 million for reversal of third party restoration fees related to the cybersecurity incident and lower commissions of $0.2 million, partially offset by higher wages, benefits and severance costs of $0.4 million and higher expenses related to the evaluation of strategic alternatives of $0.5 million. Prior year results included $1.2 million of costs related the cybersecurity incident and ERC net expense of $0.2 million.
Amortization of Intangibles
Amortization of intangibles was $0.1 million in the first nine months of fiscal 2024 compared with $0.2 million in fiscal 2023.
21
Other/General
The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first nine months of both fiscal 2024 and 2023:
|
Weighted Average
Interest Rate Nine Months Ended June 30, |
Weighted Average
Outstanding Balance Nine Months Ended June 30, |
||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revolving credit agreement | 8.0 | % | 6.6 | % | $ 16.8 million | $ 12.6 million | |||||||||||||||||
| Foreign term debt | 5.7 | % | 4.4 | % | $ 9.6 million | $ 7.3 million | |||||||||||||||||
| Promissory note - related party | 8.9 | % | — | % | $ 3.3 million | $ 0.0 million | |||||||||||||||||
| Other debt | 0.6 | % | 1.6 | % | $ 0.3 million | $ 0.5 million | |||||||||||||||||
Income Taxes
The Company’s effective tax rate through the first nine months of fiscal 2024 was (3.2)%, compared with (2.3)% for the same period of fiscal 2023. The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2024 compared with the same period of fiscal 2023. 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 Loss
Net loss was $4.9 million during the first nine months of fiscal 2024 compared with net loss of $5.6 million in the comparable period of fiscal 2023. The decrease in net loss is due to higher sales volume and gross margin, offset by higher labor and interest expense as the Company invests to meet increased demand.
Three Months Ended June 30, 2024 compared with Three Months Ended June 30, 2023
Net Sales
Net sales comparative information for the third quarter of fiscal 2024 and 2023 is as follows:
| (Dollars in millions) |
Three Months Ended
June 30, |
Increase/ (Decrease) | |||||||||||||||
| Net Sales | 2024 | 2023 | |||||||||||||||
| Aerospace components for: | |||||||||||||||||
| Fixed wing aircraft | $ | 10.7 | $ | 8.7 | $ | 2.0 | |||||||||||
| Rotorcraft | 5.5 | 4.1 | 1.4 | ||||||||||||||
| Energy components for power generation units | 7.8 | 7.0 | 0.8 | ||||||||||||||
| Commercial product and other revenue | 5.3 | 2.1 | 3.2 | ||||||||||||||
| Total | $ | 29.3 | $ | 21.9 | $ | 7.4 | |||||||||||
Net sales for the third quarter of fiscal 2024 increased $7.4 million to $29.3 million, compared with $21.9 million in the comparable period of fiscal 2023. Fixed wing sales increased $2.0 million compared with the same period last year primarily due to 767, 787 A320, F15, F16, F18 and other programs. Rotorcraft sales increased $1.4 million compared with the same period last year primarily due to the H60 program. Net sales of the energy components for power generation units increased by $0.8 million due to growth in the steam turbine markets. Commercial products and other revenue increased $3.2 million compared with the same period last year primarily due to commercial space.
Commercial net sales were 65.3% of total net sales and military net sales were 34.7% of total net sales in the third quarter of fiscal 2024, compared with 59.9% and 40.1%, respectively, in the comparable period in fiscal 2023. Military net sales increased by $1.4 million to $10.1 million in the third quarter of fiscal 2024, compared with $8.8 million in the comparable period of fiscal 2023,
primarily due to the H60, F15, F16 and F18 programs partially offset by V22 demand reduction. Co
mmercial net sales increased $6.0 million to $19.1 million in the third quarter of fiscal 2024, compared with $13.1 million in the comparable period of fiscal 2023, primarily due
to an increase in the power generation steam turbine market, commercial space and 767, 787 and A320 programs.
22
Cost of Goods Sold
Cost of goods sold increased by $6.4 million, or 34.6%, to $24.7 million, or 84.5% of net sales, during the third quarter of fiscal 2024, compared with $18.4 million or 84.1% of net sales, in the comparable period of fiscal 2023. The increase is primarily due to higher volume, higher labor costs of $0.7 million and utility costs of $0.4 million as the Company increased production to meet customer demands partially offset by lower idle expense $0.4 million. Prior year results included $1.5 million of ERC benefit.
Gross Profit
Gross profit increased $1.0 million to $4.5 million in the third quarter of fiscal 2024, compared with $3.5 million gross profit in the comparable period of fiscal 2023. Gross profit percent of sales was 15.5% during the third quarter of fiscal 2024, compared with 15.9% in the comparable period in fiscal 2023. The increase in gross profit compared to the prior fiscal year was primarily due to higher volume and reduction of idle expense. Prior year results included $1.5 million of ERC benefit.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3.2 million, or 10.8%, of net sales, during the third quarter of fiscal 2024, compared with $3.4 million, or 15.5%, of net sales, in the comparable period of fiscal 2023. The decrease in selling, general and administrative expenses is primarily due to a credit due to last years cybersecurity incident of $0.6 million compared with expense of $0.2 million in 2023. The benefit was partially offset by $0.4 million of severance charges and higher costs related to the evaluation of strategic alternatives of $0.1 million.
Amortization of Intangibles
Amortization of intangibles were negligible in the third quarter of fiscal 2024 and fiscal 2023.
Other/General
The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the third quarter of both fiscal 2024 and 2023:
|
Weighted Average
Interest Rate Three Months Ended June 30, |
Weighted Average
Outstanding Balance Three Months Ended June 30, |
||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revolving credit agreement | 8.1 | % | 7.2 | % | $ 18.0 million | $ 14.2 million | |||||||||||||||||
| Foreign term debt | 7.1 | % | 4.8 | % | $ 10.1 million | $ 7.5 million | |||||||||||||||||
| Promissory note - related party | 13.3 | % | — | % | $ 3.3 million | $ 0.0 million | |||||||||||||||||
| Other debt | — | % | 1.6 | % | $ 0.3 million | $ 0.4 million | |||||||||||||||||
Income Taxes
The Company’s effective tax rate through the third quarter of fiscal 2024 was 43.8%, compared with (5.8)% for the same period of fiscal 2023. The increase in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2024 compared with the same period of fiscal 2023. 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 income was $0.1 million during the third quarter of fiscal 2024, compared with net loss of $0.6 million in the comparable period of fiscal 2023. Increase in net income is primarily due to higher sales volume and gross margin, including reduction of Cyber incident costs and idle expense of $0.8 million and $0.4 million, respectively, partially offset by higher severance, interest expense, and labor costs as the Company increased production to meet customer demands.
Non-GAAP Financial Measures
Presented below is certain financial information based on the Company's EBITDA and Adjusted EBITDA. References to "EBITDA" mean earnings (losses) from continuing 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 to EBITDA and Adjusted EBITDA.
23
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 management 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 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 income (loss), to measure operating performance. Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under GAAP, and neither should be considered as an alternative to net income (loss) or cash flow from operations determined in accordance with GAAP. 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 income to EBITDA and Adjusted EBITDA:
| Dollars in thousands | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income (loss) | $ | 72 | $ | (634) | $ | (4,940) | $ | (5,590) | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Depreciation and amortization expense | 1,499 | 1,623 | 4,567 | 4,820 | |||||||||||||||||||
| Interest expense, net | 1,078 | 305 | 2,471 | 919 | |||||||||||||||||||
| Income tax expense | 56 | 35 | 153 | 128 | |||||||||||||||||||
| EBITDA | 2,705 | 1,329 | 2,251 | 277 | |||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Foreign currency exchange loss, net (1) | (1) | 1 | 6 | 11 | |||||||||||||||||||
| Other expense (income), net (2) | 78 | 295 | 184 | 149 | |||||||||||||||||||
| Gain (loss) on disposal of assets (3) | — | (3) | 3 | — | |||||||||||||||||||
| Equity compensation (4) | 72 | 85 | 243 | 292 | |||||||||||||||||||
| Pension settlement expense (5) | 60 | 78 | 60 | 78 | |||||||||||||||||||
| Severance expense (6) | 435 | — | 435 | — | |||||||||||||||||||
| LIFO impact (7) | 475 | (73) | 826 | (272) | |||||||||||||||||||
| IT incident (benefit) cost, net (8) | (627) | 182 | (605) | 1,269 | |||||||||||||||||||
| Strategic alternative expense (9) | 169 | 29 | 490 | 29 | |||||||||||||||||||
| Adjusted EBITDA | $ | 3,366 | $ | 1,923 | $ | 3,893 | $ | 1,833 | |||||||||||||||
(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 (prior year included $0.1 million in loss on insurance recovery, separately reclassed to IT incident costs, net line).
24
(3)
Represents the difference between the proceeds from the sale of operating equipment and the carrying value shown on the Company's books.
(4)
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.
(5)
Represents expense incurred by its defined benefit pension plans related to settlement of pension obligations.
(6)
Represents expense incurred for executive severance.
(7)
Represents the change in the reserve for inventories for which cost is determined using the last-in, first-out ("LIFO") method.
(8)
Represents incremental information technology costs as it relates to the cybersecurity incident and loss on insurance recovery.
(9)
Represents expense related to evaluation of strategic alternatives.
B. Liquidity and Capital Resources
The main sources of liquidity for the Company have been cash flows from operations and borrowings under our Credit Agreement. The Company's liquidity could be negatively affected if the Company is unable to restructure existing debt obligations, obtain capital or enter into a strategic alternative transaction which provides sufficient funding for the refinancing of its outstanding indebtedness prior to the maturity date of its obligations under the Credit Agreements, by customers extending payment terms to the Company and/or the decrease in demand for our products. The Company and management will continue to assess and actively manage liquidity needs. See Note 7
, Debt
.
Cash and cash equivalents was $1.7 million at June 30, 2024 and $0.4 million at September 30, 2023. At June 30, 2024, the majority of the Company’s cash and cash equivalents were in possession of its domestic subsidiaries. Short-term investments was $1.7 million at June 30, 2024 and zero at September 30, 2023. At June 30, 2024, the Company’s short-term investments were in the possession of its non-U.S. subsidiaries. See Note 7,
Debt - Foreign subsidiary borrowings in USD.
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 used $5.0 million of cash in the first nine months of fiscal 2024, primarily due to net loss of $4.9 million partially offset by non-cash adjustments for depreciation and amortization of $4.6 million, amortization of debt issuance costs of $0.8 million and change in inventory valuation accounts of $0.5 million and LIFO effect of $0.8 million. The uses of cash for working capital of $7.2 million was primarily due to increases in inventory of $5.6 million and accounts receivable of $6.6 million, partially offset by increases in contract liabilities of $2.7 million and accounts payable of $1.4 million. The increase in inventory is primarily due to increase in raw material and work in process to meet heightened customer demand. The increase in accounts receivable is due to increases in customer shipments. The increase in contract liabilities is due to advance raw material payments from customers. The increase in accounts payable is due to increases in raw material purchases and outside processing fees related to inventory build.
The Company’s operating activities for the first nine months of fiscal 2023 used $2.3 million primarily due to operating results and an increase in accounts receivable of $3.2 million partially offset by contract asset and inventory reductions of $1.2 million and $0.9 million, respectively.
Investing Activities
Cash used for investing activities was $3.8 million in the first nine months of fiscal 2024 primarily due to purchase of short-term investments, net of maturities, of $1.7 million and capital expenditures of $2.0 million. Cash used for investing activities was $1.9 million in the first nine months of fiscal 2023 due to capital expenditures. Capital commitments as of June 30, 2024 were $0.4 million. The Company anticipates that the remaining total fiscal 2024 capital expenditures will be within the range of $1.0 million to $1.5 million and will relate principally to the further enhancement of production and product offering capabilities and drive operating cost reductions.
Financing Activities
Cash provided by financing activities was $10.1 million in the first nine months of fiscal 2024, compared with $3.5 million in the first nine months of fiscal 2023.
As discussed in Note 7,
Debt,
the Company's Maniago location obtained borrowings from two separate lending sources and increased during the first nine months of fiscal 2024. The first was a bond for approximately $2.2 million with a seven year term. The proceeds from this loan are shown within cash and cash equivalents and short-term investments on the consolidated
25
condensed balance sheets and will be used for capital investment. A second loan for approximately $1.1 million with a term of eighteen months, will be for working capital purposes. Additionally, the Company increased three of its credit and factoring lines with existing lenders to support working capital needs. The Company had $2.6 million of net short-term debt borrowings in the first nine months of fiscal 2024 compared with $0.5 million in the first nine months of fiscal 2023.
The Company had net borrowings from the revolver under the Credit Agreement of $1.2 million in the first nine months of fiscal 2024 compared with net borrowings of $3.4 million in the first nine months of fiscal 2023. Under the Company's Credit Agreement, the Company is subject to certain customary loan covenants regarding availability. The availability at June 30, 2024 was $2.9 million, which exceeds reserve minimum threshold as of June 30, 2024, as such, no covenant calculations were required.
As noted in Note 7,
Debt,
on November 8, 2023, the Company entered into the Eighth Amendment to the Credit Agreement with its Lender. The Eighth Amendment, among other things, reduced the Reserves under the Borrowing Base in the Credit Agreement to $1.5 million, or such lesser amount, if any, as may be agreed upon in writing by the Lender in its sole discretion.
As noted in Note 7,
Debt,
on December 21, 2023, the Company entered into the Ninth Amendment to the Credit Agreement and the Fourth Amendment to the Export Credit Agreement with its lender. The Ninth Amendment amends the Credit Agreement to, among other things, to: (i) reflect the incurrence by borrowers of the Subordinated Loan and the execution and delivery by borrowers, the Lender and Silk (Mr. Silk is a member of the Board of Directors of the Company and considered a related party) of the Subordinated Loan Documents, and the receipt by borrowers of $3.0 million in immediately available funds on the Ninth Amendment Effective Date; (ii) delay the maturity date from December 31, 2023 to October 4, 2024, or any earlier date on which the Revolving Commitment is reduced to zero or otherwise terminated pursuant to the terms of the Credit Agreement; (iii) reduce the Revolving Commitment to $19.0 million from $23.0 million; (iv) modify the definition of Borrowing Base to mean, at any time, the sum of (a) 85% of Eligible Accounts at such time, plus (b) the lesser of (1) 70% of Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, at such time and (2) the product of 85% multiplied by the NOLV Percentage identified in the most recent inventory appraisal ordered by the Lender multiplied by Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, at such time, minus (c) Reserves of $1.5 million, increasing on the first day of each month by $0.3 million, commencing on May 1, 2024 and continuing until (and including) August 1, 2024, or such lesser amount, if any, as may be agreed upon in writing by the Lender in its sole discretion (which may be by email from the Lender), plus (d) the PP&E Component; (v) modify the Applicable Margin schedule to reflect the following applicable rates: 2.75% (CBFR REVSOFR30), 0.25% (CBFR Spread (CB Floating Rate)), 2.75% (SOFR Spread), and 0.50% (Commitment Fee Rate); and (vi) amend and restate subsection (l) of the Reporting Schedule to require, by the 17th day of every month, the delivery of a rolling 13 week cash flow forecast in form acceptable to Lender, which must include a projected to actual results comparison for the week then ended and on a cumulative basis from the beginning of the cash flow forecast. The Fourth Amendment of the Export Credit Agreement, to, among other things, to: (i) reflect the incurrence by borrowers of the Subordinated Loan and the execution and delivery by borrowers, the Lender and Silk of the Subordinated Loan Documents, and the receipt by borrowers of $3.0 million in immediately available funds on the Ninth Amendment Effective Date; and (ii) delay the maturity date to October 4, 2024, or any earlier date on which the Revolving Commitment is reduced to zero or otherwise terminated pursuant to the terms thereof.
As noted in Note 7,
Debt,
on May 21, 2024, the Company entered into the Tenth Amendment to the Credit Agreement and the Fifth Amendment to the Export Credit Agreement with its lender. The Tenth and Fifth Amendments amend the Credit Agreement and the Export Credit Agreement to, among other things, to: (i) increase the Revolving Commitment, less the Availability Block, if applicable, to (y) the Borrowing Base, and (z) in combination with the Export Revolving Loans under the Export Credit Agreement, (i) $18.0 million through September 30, 2023, (ii) $19.0 million from and including October 1, 2023 through May 14, 2024, and (iii) $22.0 million thereafter until, and reducing to zero and terminating on, the Maturity Date; (ii) modify the definition of Borrowing Base Reserves to $1.5 million or such other amount, if any, as may be determined in writing by the Lender in its Permitted Discretion (which may be by email from the Lender); and (iii) the execution of the First Amendment of the Silk Guaranty.
Future cash flows from the Company’s operations may be used to pay down amounts outstanding under the Credit Agreement, the Export 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. In fiscal year 2024, the Company was able to obtain new financing at its Maniago location to provide Maniago with sufficient liquidity.
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,
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together with the Company’s market capitalization and status as a smaller reporting company, could also negatively impact our ability to obtain equity financing.
C. Recent Accounting Standards
For recent accounting standards adopted and not yet adopted refer to Note 1,
Summary of Significant Accounting Policies - Recent Accounting Standards Adopted
and
Recent Accounting Standards Not Yet Adopted
for further detail. Additionally, the Company's significant accounting policies and procedures are explained in the Management's Discussion and Analysis section of the Company's Annual Report on Form 10-K for the year ended September 30, 2023.
Item 4. Controls and Procedures
As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s disclosure controls and procedures include components of the Company’s internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of June 30, 2024 (the "Evaluation Date"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
No material changes in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) occurred during the period covered by this Quarterly Report on Form 10‑Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Items 1, 1A, 2, 3, 4 and 5 are not applicable or the answer to such items is negative; therefore, the items have been omitted and no reference is required in this Quarterly Report.
Item 6. (a) Exhibits
The following exhibits are filed with this report or are incorporated herein by reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934 (Asterisk denotes exhibits filed with this report.).
|
Exhibit
No. |
Description | |||||||
| 2.1 | ||||||||
| 2.2 | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 9.1 | ||||||||
| 9.2 | ||||||||
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| 9.3 | ||||||||
| 9.4 | ||||||||
| 9.5 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6 | ||||||||
| 10.7 | ||||||||
| 10.8 | ||||||||
| 10.9 | ||||||||
| 10.10 | ||||||||
| 10.11 | ||||||||
| 10.12 | ||||||||
| 10.13 | ||||||||
| 10.14 | ||||||||
| 10.15 | ||||||||
| 10.16 | ||||||||
| 10.17 | ||||||||
| 10.18 | ||||||||
| 10.19 | ||||||||
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| *101 | The following financial information from SIFCO Industries, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 filed with the SEC on August 12, 2024, formatted in XBRL includes: (i) Consolidated Condensed Statements of Operations for the fiscal periods ended June 30, 2024 and 2023, (ii) Consolidated Condensed Statements of Comprehensive Income for the fiscal periods ended June 30, 2024 and 2023, (iii) Consolidated Condensed Balance Sheets at June 30, 2024 and September 30, 2023, (iv) Consolidated Condensed Statements of Cash Flow for the fiscal periods ended June 30, 2024 and 2023, (iv) Consolidated Condensed Statements of Shareholders' Equity for the periods June 30, 2024 and 2023, and (v) the Notes to the Consolidated Condensed Financial Statements. | |||||||
| *104 | Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained with Exhibit 101 | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SIFCO Industries, Inc. | ||||||||
| (Registrant) | ||||||||
| Date: August 12, 2024 | /s/ George Scherff | |||||||
| George Scherff | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| Date: August 12, 2024 | /s/ Thomas R. Kubera | |||||||
| Thomas R. Kubera | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
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TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 4. Controls and ProceduresPart II. Other InformationItem 6. (a) Exhibits