UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 20172020
or
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/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _____________________
Commission file number 1-5978
SIFCO Industries, Inc.
(Exact name of registrant as specified in its charter) |
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| Ohio | | 34-0553950 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| 970 East 64th Street, Cleveland Ohio | | 44103 |
| (Address of principal executive offices) | | (Zip Code) |
| (216) 881-8600 | |
| (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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Securities Registered Pursuant to Section 12(b) of the Act: | |
Common Shares, $1 Par Value | | NYSE American |
(Title of each class)class | | (Trading Symbol(s) | | Name of each exchange on which registered)registered |
| Common Shares | | SIF | | NYSE American |
Securities registered pursuant to Section 12(g) of the Securities Exchange Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ]☐ No [X]☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ]☐ No [X]☒
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 [ X ]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]☒ No [ ] ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
large accelerated filer [ ]☐ accelerated filer [ ]☐ non-accelerated filer [ ]☐ smaller reporting company [ X ]☒ emerging growth company [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ]☐ No [X]☒
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. ¨
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter is $23,542,755.is $6,614,854.
The number of the Registrant’s Common Shares outstanding at October 31, 20172020 was 5,595,779.5,916,123.
Documents incorporated by reference: Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on January 31, 201827, 2021 (Part III).
Annual Report on Form 10-K
For the Year-ended September 30, 20172020
Table of Contents
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PART I
Item 1. Business
A.The Company
SIFCO Industries, Inc. ("SIFCO," "Company," "we" or "our"), an Ohio corporation, was incorporated in 1916. The executive offices of the Company are located at 970 East 64th Street, Cleveland, Ohio 44103, and its telephone number is (216) 881-8600.
SIFCO Industries, Inc. is engaged in the production of forgings, sub-assemblies, and machined components primarily for the Aerospace and Energy ("A&E") markets. The processes and services include forging, heat-treating and machining. The Company's operations are conducted in a single business segment. Information relating to the Company's financial results is set forth in the consolidated financial statements included in Item 8.8 of this Annual Report on Form 10-K.
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B. | Principal Products and Services |
1. SIFCO
COVID-19 Pandemic
In March 2020, a novel strain of coronavirus ("COVID-19") was recognized as a pandemic by the World Health Organization and the outbreak subsequently became increasingly widespread in the United States and other countries in which the Company operates. As a result of the pandemic, governments around the world implemented stringent measures to help control the spread of the virus, including quarantines, “stay at home” orders, travel restrictions, and other measures. During this time, we took proactive measures to ensure the safety of our employees and customers as well as to preserve the Company's financial flexibility. The full impact of the COVID-19 outbreak on the Company continues to evolve and the full extent of the effects of the pandemic on the Company's financial condition, liquidity and future results is uncertain. Also uncertain is the timing, duration, shape and magnitude of recovery. While a number of the markets in which the Company operates have reopened, other markets, while open, have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing renewed or extended quarantines or other restrictions.
B.Principal Products and Services
Operations
SIFCO is a manufacturer of forgings and machining components for the A&E markets. We provide our customers with envelope and precision forgings, rough and machined components, as well as sub-assemblies. SIFCO services both original equipment manufacturers ("OEM") and aftermarket customers with products that range in size from approximately 2 to 1,200 pounds. The Company's strategic vision is to build a leading A&E company positioned for long-term, stable growth and profitability.
SIFCO's strategic visionlong-term plan is to have a revenue balance comprised of military and commercial aerospace and power generation.revenues, supplemented with energy components. In fiscal 2017,2020, commercial and military revenues accounted for 59.9%42.6% and 40.1%57.4% of revenues, respectively, compared with 60.9%48.9% in commercial revenues and 39.1%51.1% in military revenues in fiscal 2016.2019. The Company has also expanded itsCompany's capabilities to be a supplier of forged and machinedare focused on supplying critical components, consisting primarily of aluminum, steel, high temperature alloys, titanium and titanium.aluminum.
SIFCO operates from multiple locations. SIFCO manufacturing facilities are located in Cleveland, Ohio ("Cleveland"); Alliance, Ohio ("Alliance"); Orange, California ("Orange"); and Maniago, Italy ("Maniago"). TheSIFCO's operations are AS 9100D and/or ISO 9001:2015 certified and the Company closed Alliance in October 2017.also holds multiple NADCAP certifications and site approvals from key OEM customers.
The Company's success is not dependent on patents, trademarks, licenses or franchises.
Raw Materials
SIFCO generally has multiple sources for its raw materials, which consist primarily of high qualityhigh-quality metals essential to its business. Suppliers of such materials are located principally in North America and Europe. SIFCO generally does not depend on a single source for the supply of its materials. Due to the limited supply of certain raw materials, some material is provided by a small number of suppliers; however, SIFCO believes that its sources are adequate for its business. SIFCO's operations are AS 9100C and/or ISO 9001:2000 certified and the Company also holds multiple NADCAP certifications and site approvals from key OEM customers.
Products
SIFCO’s products are made primarily of steel, stainless steel, nickel alloy, titanium and aluminum andaluminum. SIFCO's product offerings include: OEM and aftermarket components for aircraft and industrial gas turbine engines; steam turbine blades; structural airframe components; aircraft landing gear components; aircraft wheels and brakes; critical rotating components for helicopters; and commercial/industrial products. SIFCO also provides heat-treatment, surface-treatment, non-destructive testing and select machining and sub-assembly of forged components.
Industry
The performance of the domestic and international air transport industry, and the energy industry, as well asand government defense spending, directly and significantly impacts the performance of SIFCO. The impact of COVID-19 continues to be assessed by the Company. It has significantly impacted the commercial aerospace industry through the ongoing disruption of global travel, which continues to remain depressed. Therefore, as the outbreak and responses continue to be fluid and ever changing, the shape and speed of recovery for the commercial aerospace industry remain uncertain.
•SIFCO supplies new and spare components for the U.S. military for aircraft, helicopters, vehicles, and munitions. The defense budget in the United States varies from year to year, driven by defense procurement policy and government budget constraints. The defense aerospace market has been impacted by the COVID-19 pandemic less than the commercial aerospace. Uncertainty may arise if the government reprioritizes funding, such as potentially shifting funds to fight the pandemic or aid in recovery. Certain programs in which the Company participates have been favorable and are expected to continue.
���SIFCO supplies new and spare components for commercial aircraft, principally for large aircraft produced by Boeing and Airbus. AAs the pandemic has continued, increasethe decrease in passenger air travel demand will drive backloghas impacted and continues to impact our customers' orders for new aircraft. Demand for more fuel-efficient aircraft,Current estimates regarding the return of passenger air traffic to pre-COVID-19 levels is three to five years. Build rates, particularly the Boeing 737Max,777X, 787, 777X737 Max and the Airbus A320/A321neo and A350, remains strong with both companies reporting healthy backlogs.have declined as a result of the impacts of COVID-19 on commercial air travel.
SIFCO also supplies new and spare components to the U.S. military for aircraft, helicopters, vehicles, and munitions. While the defense budget in the United States has decreased in recent years, certain programs in which the Company participates has been favorable and are expected to continue to increase.
•SIFCO supplies new and spare components to the energy industry, particularly the industrial gas and steam turbine markets. The industrial gas and steam turbine markets have experienced a downturn in demand for new units in the near term. The overall market is forecastingWhile alternative energy markets continue to be flatstrengthen, oil and gas prices are expected to potentially down due to green technology alternatives gaining greater market share.rebound from historic lows. As such, it's currently anticipated that purchases of parts and supplies within the industry will increase. SIFCO has positioned itself to support OEM production in a more limited role, but with flexibility to address the demand cycle in this segment as well as continuing to support the aftermarket.
Competition
SIFCO competes with numerous companies, approximately fifteen of which are known by SIFCO. SIFCO competes with both U.S. and non-U.S. suppliers of forgings, some of which are non-U.S. based companies. Many of thesesignificantly larger than SIFCO; however, our competitors range from companies focus withinfocused on the A&E markets. While there has been some consolidationmarkets to large diversified corporations that may also have business interests outside of the A&E markets to smaller companies that offer a limited portfolio of products in the forging industry, SIFCO believes there is limited opportunity to increase prices, other than for the pass-through of raw material price increases and value added services. this market.SIFCO believes that it has an advantage and distinguishes itself in the primary markets it serves due to:to its: (i) demonstrated A&E expertise; (ii) focusingfocus on quality and customer service; (iii) operating initiatives such as SMART (Streamlined Manufacturing Activities to Reduce Time/Cost) and Six Sigma; and (iv) offering a broad range of capabilities. SIFCO competes with both U.S.capabilities and non-U.S. suppliers of forgings, some of which are significantly larger than SIFCO.offerings. As customers establish new facilities throughout the world, SIFCO will continue to encounter non-U.S. competition. SIFCO believes it can expand its marketsmarket share by (i) acquiring additional forging and machining operations;continuing to increase capacity utilization; (ii) broadening its product lines through investment in equipment that expands its manufacturing capabilities; and (iii) developing new customers in markets where the participants require similar technical competence and service as those in the A&E industriesindustries. See further discussion of the risks relating to competition SIFCO faces in Item 1A. Risk Factors.
Government Contracts
Companies, such as SIFCO, that supply equipment and whoproducts to the U.S. military are willingsubject to pay a premiumcertain risks related to commercial relationships with the U.S. government and its agencies. Under the terms of these agreements, it is possible for qualitydemand and service.build rate to fluctuate or for the U.S. government to terminate existing contracts.
Customers
During fiscal 2017,2020, SIFCO had three customers consisting of various business units of Boeing, United Technologies Corporation and Siemens, whichthat accounted for 13%, 11% and 11%, respectively,47% of consolidated net sales. Thesales; and 49% of the Company's consolidated net sales to these threewere from four customers and to their direct subcontractors, which individually accounted for 35%16%, 13%, 10% and 10% of consolidated net sales in fiscal 2017.sales. SIFCO believes that the loss of sales to such customers would result in a material adverse impact on the business. However, SIFCO has maintained a business relationship with these customers for many years and is currently conducting business with them under multi-year agreements. Although there is no assurance that thisthese relationships will continue, historically, as one or more major customers have reduced their purchases, SIFCO has generally been successful in gaining new business, thereby avoiding a material adverse impact on the Company. SIFCO relies on its ability to adapt its services and operations to changing requirements of the market in general and its customers in particular. No material part of SIFCO’s business is seasonal. For additional financial information about geographic areas, refer to Note 10, 12, Business Information, of the consolidated financial statements.
Backlog of Orders
SIFCO’s total backlog as of September 30, 20172020 decreased to $76.0$91.1 million, compared with $92.5$117.6 million as of September 30, 2016.2019. Orders for delivery scheduled withinin the upcoming fiscal year 2021 decreased to $70.4$63.6 million compared with $84.3$93.8 million scheduled in fiscal 2017.2020. Orders may be subject to modification or cancellation by the customer with limited charges. The decrease in total backlog as of September 30, 20172020 compared with the previous year is primarily attributabledue to loss of sales from the closure of Alliance (completed in October 2017) and timing of long-term agreement negotiations.annual awards and SIFCO's customers adjusting orders as a result of impacts of COVID-19 on the commercial airline industry. The continuing uncertainty regarding the COVID-19 pandemic and its duration and impact on the commercial airline industry is expected and may continue to impact sales order backlog growth in that market into fiscal 2021. Backlog information may not be indicative of future sales.
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C. | Environmental Regulations |
C.Regulatory Matters
The Company is subject to a number of domestic and foreign regulations relating to our operations worldwide and is required to comply with various environmental, health, and employee safety laws and regulations. The Company believes that it is in compliance with these laws and regulations. Historically, compliance with such laws and regulations relating to the protection of the environment. The costs of such compliance have not had, and are not presently expected to have a material effect on the capital expenditures, earnings or competitive position of the Company andor its subsidiaries under existing regulations and interpretations. Nevertheless, the Company cannot guarantee that, in the future, it will not incur additional costs for compliance or that such costs will not be material.
D.Employees
The number of SIFCO employees decreased fromwere approximately 607434 at the beginning of fiscal 20172020 and increased to approximately 491446 employees at the end of fiscal 2017.2020. The decreaseincrease in employee headcount is due to botha result of increasing production at the closureOrange location as a result of Alliancethe progress in the restoration from the fire incident that occurred in fiscal 2019. The Company’s employees include full-time, part-time, and headcount rationalizations at Cleveland, Orangetemporary employees. Approximately 73% of our employees were located within the U.S. and Maniago. 27% of our employees were located in Italy. Approximately 64% of our workforce within the U.S. is composed of skilled and unskilled labor, and the remaining population includes management, corporate, administrative and support staff.
The Company is a party to collective bargaining agreements ("CBA") with certain employees located atwithin the Cleveland (expireslocation. The Cleveland location has two bargaining units; the Company ratified its CBA with one such unit in May 2020)December 2019. The second bargaining unit received notice in the second quarter of fiscal 2020 from the International Association of Machinists and Alliance (agreement ceased on October 26, 2017 dueAerospace Workers Union that they were disclaiming all interest in representing such unit. In the same quarter, the International Brotherhood of Boilermakers Union filed a petition to closurerepresent such unit. In June 2020, the National Labor Relations Board certified the International Brotherhood of Alliance) plants.Boilermakers as the elected representative of the Company’s second bargaining unit. Negotiations with this second bargaining group are ongoing and there have been no work disruptions as the Company continues to operate per the terms of the previous contract. The Company’s obligations will be more fully understood following the ratification of a collective bargaining agreement. The Maniago location is party to the National Collective Agreement in metal working (expiresMetalworking, which expired in December 2019).2019. Negotiations have been ongoing regarding such agreement; however, until an agreement is reached, Maniago will continue to apply existing terms of its most recent contract.
The skills, experience and industry knowledge of our employees significantly benefit our operations and performance. There are several ways in which we attract, develop, and retain highly qualified talent, including by making the safety and health of our employees a top priority. In response to the COVID-19 pandemic, we developed, implemented, and have maintained procedures and protocols to minimize the risk to the health and safety of our employees while allowing us to continue to operate our facilities and provide our products to our customers on a timely basis.Included among these procedures were providing for remote work where practicable and implementing protocols for social distancing, disinfecting, sanitation and
mask-wearing. Throughout the pandemic, we have consistently been able to meet our customers' demands for our products, while at the same time making the necessary investments to ensure that we prioritize the health, safety and welfare of our employees.
E.Non-U.S. Operations
The Company's products are distributed in the U.S. as well as non-U.S. markets.
Financial information about the Company's U.S. and non-U.S. operations is set forth in Note 10, 12, Business Information, of the consolidated financial statements.
F.Available Information
The Company files annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Securities Exchange Act of 1934.1934, as amended. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that are filed by the Company at http://www.sec.gov.
In addition, our annual reports on Form 10-K, as well as our quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to all of the foregoing reports, are made available free of charge on or through the “Investor Relations” section of our website at www.sifco.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.
Information relating to our corporate governance at SIFCO, including the Audit Committee, Corporate Governance and Nominating Committee and Compensation Committee Charters, as well as the Corporate Governance Guidelines and Policies and the Code of Conduct & Ethics adopted by our Board of Directors, is available free of charge on or through the “Investor Relations” section of our website at www.sifco.com. References to our website or the SEC’s website do not constitute incorporation by reference of the information contained on such websites, and such information is not part of this Form 10-K.
Item 1A. Risk Factors
Set forth below are material risks and uncertainties that could negatively affect our business and financial condition and could cause our actual results to differ materially from those expressed in forward-looking statements contained in this report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and financial condition. We face risks related to the COVID-19 outbreak and actions in response thereto, which have exacerbated or could further exacerbate conditions in our risk factors noted below.
Risks Related to Our Business and Operations
We are subject to the cyclical nature of the A&E industries and the continuing or further downturn in these industries could adversely impact the demand for our products.
The commercial aerospace industry is historically driven by the demand from commercial airlines for new aircraft. Demand for commercial aircraft is influenced by airline industry profitability, trends in airline passenger traffic, the state of U.S. and world economies, the ability of aircraft purchasers to obtain required financing and numerous other factors including the effects of terrorism, health and safety concerns and environmental constraints imposed upon aircraft operators. The commercial aerospace industry has been significantly impacted by the COVID-19 pandemic and may continue to be negatively impacted for a prolonged period of time and the magnitude of the impacts of the COVID-19 pandemic on this industry cannot be fully understood at this time. We have experienced changes in demands from our customers in this market and the reduction in demand for commercial aircraft will adversely impact our net sales and operating results.
The military aerospace cycle is highly dependent on U.S. and foreign government funding; as well as the effects of terrorism, a changing global political environment, U.S. foreign policy, the retirement of older aircraft and technological improvements to new engines. Accordingly, the timing, duration and severity of cyclical upturns and downturns cannot be forecast with certainty. Downturns or reductions in demand could have a material adverse effect on our business.
The energy industry is also cyclical in nature. Demand for our new and spare components in this industry is, in turn, driven by the global demand for energy, which is affected by, among other factors, the state of the world economies, the political environments of numerous countries and environmental constraints. The availability of alternative energy and oil and gas, and related prices, also have a large impact on demand. Reductions in demand for products in this market could have a material adverse effect on our business.
Cyclical declines or sustained weakness in these markets could have a material adverse effect on our business.
Government spending priorities and terms may change in a manner adverse to our business.
At times, our supplying of products to the U.S. military has been adversely affected by significant changes in U.S. defense and national security budgets. Budget changes that result in a decline in overall spending, program delays, program cancellations or a slowing of new program starts on programs in which we participate could materially adversely affect our business, prospects, financial condition or results of operations. Future levels of expenditures and authorizations for defense-related programs by the U.S. government may decrease, remain constant or shift to programs in areas where we do not currently provide products, thereby reducing the chances that we will be awarded new contracts.
SIFCO has contracts for programs where the period of performance may exceed one year. Congress and certain foreign governments must usually approve funds for a given program each fiscal year and may significantly reduce funding of a program in a particular year. Significant reductions in these appropriations or the amount of new defense contracts awarded may affect our ability to complete contracts, obtain new work and grow our business. At times when there are perceived threats to national security, U.S. defense spending can increase; at other times, defense spending can decrease. Future levels of defense spending are uncertain and subject to congressional debate. Any reduction in future U.S. defense spending levels could adversely impact our sales, operating profit and our cash flow.
Failure to retain existing contracts or win new contracts under competitive bidding processes may adversely affect our sales.
SIFCO obtains most of its contracts through a competitive bidding process, and substantially all of the business that we expect to seek in the foreseeable future likely will be subject to a competitive bidding process. Competitive bidding presents a number of risks, including:
a.the need to compete against companies or teams of companies with more financial and marketing resources and more experience in bidding on and performing major contracts than we have;
b.the need to compete against companies or teams of companies that may be long-term, entrenched incumbents for a particular contract for which we are competing and that have, as a result, greater domain expertise and better customer relations;
c.the need to compete to retain existing contracts that have in the past been awarded to us on a sole-source basis or that have been incumbent for a long time;
d.the award of contracts to providers offering solutions at the “lowest price technically acceptable,” which may lower the profit we may generate under a contract awarded using this pricing method or prevent us from submitting a bid for such work due to us deeming such work to be unprofitable;
e.the reduction of margins achievable under any contracts awarded to us;
f.the need to bid on some programs in advance of the completion of their specifications, which may result in unforeseen technological difficulties or increased costs that lower our profitability;
g.the substantial cost and managerial time and effort, including design, development and marketing activities, necessary to prepare bids and proposals for contracts that may not be awarded to us;
h.the need to develop, introduce and implement new and enhanced solutions to our customers’ needs;
i.the need to locate and contract with teaming partners and subcontractors;
j.the need to accurately estimate the resources and cost structure that will be required to perform any contract that we are awarded; and
k.long term agreements - changes in our cost profile over the life of a long-term agreement.
If SIFCO wins a contract, and upon expiration, the customer requires further services of the type provided by the contract, there is frequently a competitive rebidding process. There can be no assurance that we will win any particular bid, that we will win the contract at the same profit margin, or that we will be able to replace business lost upon expiration or completion of a contract.
If SIFCO is unable to consistently retain existing contracts or win new contract awards, our business, prospects, financial condition and results of operations may be adversely affected.
The Company may not receive the full amounts estimated under the contracts in our total backlog, which could reduce our sales in future periods below the levels anticipated, and which makes backlog an uncertain indicator of future operating results.
As of September 30, 2020, our total backlog was $91.1 million. Orders may be canceled and scope adjustments may occur, and we may not realize the full amounts of sales that we anticipate in our backlog numbers. Further, there is no assurance that our customers will purchase all the orders represented in our backlog, due in part to the U.S. government’s ability to modify, curtail or terminate major programs. Additionally, the timing of receipt of orders, if any, on contracts included in our backlog could change. The failure to realize amounts reflected in our backlog could materially adversely affect our business, financial condition and results of operations in future periods.
SIFCO business is dependent on a small number of direct and indirect customers.
A substantial portion of SIFCO's business is conducted with a relatively small number of large direct and indirect customers. In fiscal 2020, three customers accounted for approximately 47% percent of our consolidated net sales and 49% of the Company’s consolidated net sales were from four customers and their direct subcontractors. A financial hardship experienced by any one of these key customers, the loss of any of them or a reduction in or substantial delay of orders from any of them could have a material adverse effect on our business.
The Company's failure to identify, attract and retain qualified personnel could adversely affect our existing business, financial condition and results of operations.
SIFCO may not be able to identify, attract or retain qualified technical personnel, sales and customer service personnel, employees with expertise in forging, or management personnel to supervise such activities. We may also not attract and retain employees who share the Company's core values, who can maintain and grow our existing business, and who are suited to work in a public company environment, which could adversely affect our financial condition and results of operations.
The Company's business could be negatively affected by cybersecurity threats, information systems interruptions, intrusions or new software implementations and other disruptions.
SIFCO faces cyber threats, as well as the potential for business disruptions associated with information technology failures and interruptions, new software implementation, and damaging weather or other acts of nature, and pandemics or other public health crises, which may adversely affect our business.
Although we continue to review and enhance our systems and cybersecurity controls, SIFCO has experienced and expects to continue to experience cybersecurity threats, including threats to our information technology infrastructure and attempts to gain access to the Company’s sensitive information, as do our customers, suppliers and subcontractors. Although we maintain information security policies and procedures to prevent, detect, and mitigate these threats, information system disruptions, equipment failures or cybersecurity attacks, such as unauthorized access, malicious software and other intrusions, could still occur and may lead to potential data corruption, exposure of proprietary and confidential information. Further, while SIFCO works cooperatively with its customers, suppliers and subcontractors to seek to minimize the impacts of cyber threats, other security threats or business disruptions, in addition to our internal processes, procedures and systems, it must also rely on the safeguards put in place by those entities.
Any intrusion, disruption, breach or similar event may cause operational stoppages, fines, penalties, diminished competitive advantages through reputational damages and increased operational costs. The costs related to cyber or other security threats or disruptions may not be fully mitigated by insurance or other means. Further, these risks may be increased to the extent employees work from home as part of our response to the COVID-19 pandemic. The occurrence of any of these events could adversely affect our internal operations, the services we provide to customers, our competitive advantages, our future financial results, our reputation, our stock price, and lead to early obsolescence of our products and services. The occurrence of any of these events could also result in civil and/or criminal liabilities.
SIFCO relies on our suppliers to meet the quality or delivery expectations of our customers.
The ability to deliver SIFCO's products on schedule is dependent upon a variety of factors, including execution of internal performance plans, availability of raw materials, internal and supplier produced parts and structures, conversion of raw materials into parts and assemblies, and performance of suppliers and others. We rely on numerous third-party suppliers for raw materials and a large proportion of the components used in our production process. Certain of these raw materials and components are available only from single sources or a limited number of suppliers, or similarly, customers’ specifications may require SIFCO to obtain raw materials and/or components from a single source or certain suppliers. Many of our suppliers are small companies with limited financial resources and manufacturing capabilities. We do not currently have the ability to manufacture these components ourselves. Consequently, we risk disruptions in our supply of key products and components if our suppliers fail or are unable to perform because of shortages in raw materials, operational problems, strikes, natural disasters,
health crises (such as the COVID-19 pandemic) or other factors. We may have disputes with our vendors arising from, among other things, the quality of products and services or customer concerns about the vendor. If any of our vendors fail to timely meet their contractual obligations or have regulatory compliance or other problems, our ability to fulfill our obligations may be jeopardized. Economic downturns can adversely affect a vendor’s ability to manufacture or deliver products. Further, vendors may also be enjoined from manufacturing and distributing products to us as a result of litigation filed by third parties, including intellectual property litigation. If SIFCO were to experience difficulty in obtaining certain products, there could be an adverse effect on its results of operations and on its customer relationships and our reputation. Additionally, our key vendors could also increase pricing of their products, which could negatively affect our ability to win contracts by offering competitive prices.
Any material supply disruptions could adversely affect our ability to perform our obligations under our contracts and could result in cancellation of contracts or purchase orders, penalties, delays in realizing revenues, and payment delays, as well as adversely affect our ongoing product cost structure.
Failure to perform by our subcontractors could materially and adversely affect our contract performance and its ability to obtain future business.
The performance of contracts often involves subcontractors, upon which we rely to complete delivery of products to our customers. SIFCO may have disputes with subcontractors. A failure by a subcontractor to satisfactorily deliver products can adversely affect our ability to perform our obligations as a prime contractor. Any subcontractor performance deficiencies could result in the customer terminating our contract for default, which could expose us to liability for excess costs of re-procurement by the customer and have a material adverse effect on our ability to compete for other contracts.
The Company's future success depends on the ability to meet the needs of its customer requirements in a timely manner.
The Company believes that the commercial A&E markets in which we operate require sophisticated manufacturing and system-integration techniques and capabilities using composite and metallic materials. The Company’s success depends to a significant extent on our ability to acquire, develop, execute and maintain such sophisticated techniques and capabilities to meet the needs of our customers and to bring those products to market quickly and at cost-effective prices. If we are unable to acquire and/or develop, execute and maintain such techniques and capabilities, we may experience an adverse effect to our business, financial condition or results of operation.
The Company faces certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or indemnity.
We are exposed to liabilities that are unique to the products we provide. While we maintain insurance for certain risks, the amount of insurance or indemnity may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs from an accident or incident. It also is not possible for SIFCO to obtain insurance to protect against all operational risks and liabilities. Substantial claims resulting from an incident in excess of the indemnification we receive and our insurance coverage would harm our financial condition, results of operations and cash flows. Moreover, any accident or incident for which we are liable, even if fully insured, could negatively affect our standing with our customers and the public, thereby making it more difficult for us to compete effectively, and could significantly impact the cost and availability of adequate insurance in the future.
The Company's business is subject to risks associated with international operations.
SIFCO has operations in Maniago, Italy. A number of risks inherent in international operations could have a material adverse effect on our results of operations, including:
a.fluctuations in U.S. dollar value arising from transactions denominated in foreign currencies and the translation of certain foreign currency subsidiary balances;
b.difficulties in staffing and managing multi-national operations;
c.general economic and political uncertainties and potential for social unrest in countries in which we or our customers operate;
d.limitations on our ability to enforce legal rights and remedies;
e.restrictions on the repatriation of funds;
f.changes in trade policies, laws, regulations, political leadership and environment, and/or security risks;
g.tariff regulations;
h.difficulties in obtaining export and import licenses and compliance with export/import controls and regulations;
i.the risk of government financed competition;
j.compliance with a variety of international laws as well as U.S. regulations, rules and practices affecting the activities of companies abroad; and
k.difficulties in managing and staffing international operations and the required infrastructure costs, including legal, tax, accounting, and information technology.
We operate in a highly competitive and price sensitive industry, and customer pricing pressures could reduce the demand and/or price for our products and services.
The end-user markets SIFCO serves are highly competitive and price sensitive. We compete globally with a number of domestic and international companies that have substantially greater manufacturing, purchasing, marketing and financial resources than we do. Many of SIFCO's customers have the in-house capability to fulfill their manufacturing requirements. SIFCO's larger competitors may be able to vie more effectively for very large-scale contracts than we can by providing different or greater capabilities or benefits such as technical qualifications, past performance on large-scale contracts, geographic presence, price and availability of key professional personnel. If SIFCO is unable to successfully compete for new business, our net sales growth and operating margins may decline. Competitive pricing pressures may have an adverse effect on our financial condition and operating results. Further, there can be no assurance that competition from existing or potential competitors will not have a material adverse effect on our financial results. If SIFCO does not continue to compete effectively and win contracts, our future business, financial condition, results of operations and our ability to meet its financial obligations may be materially compromised.
The Company uses estimates when pricing contracts and any changes in such estimates could have an adverse effect on our profitability and our overall financial performance.
When agreeing to contractual terms, some of which extend for multiple years, SIFCO makes assumptions and projections about future conditions and events. These projections assess the productivity and availability of labor, complexity of the work to be performed, cost and availability of materials, impact of delayed performance and timing of product deliveries. Contract pricing requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and costs at completion is complicated and subject to many variables. For example, assumptions are made regarding the length of time to complete a contract since costs also include expected increases in wages, prices for materials and allocated fixed costs. Similarly, assumptions are made regarding the future impact of our efficiency initiatives and cost reduction efforts. Incentives, awards or penalties related to performance on contracts are considered in estimating revenue and profit rates and are recorded when there is sufficient information to assess anticipated performance. Suppliers' assertions are also assessed and considered in estimating costs and profit rates.
Because of the significance of the judgment and estimation processes described above, it is possible that materially different amounts could be obtained if different assumptions were used or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may have a material adverse effect upon the profitability of one or more of the affected contracts, future period financial reporting and performance.
Our technologies could become obsolete, reducing our revenues and profitability.
Technologies related to our products have undergone, and in the future may undergo, significant changes and the future of our business will depend in large part upon the continuing relevance of our forging capabilities. SIFCO could encounter competition from new or revised technologies that render its technologies and equipment less profitable or obsolete in our chosen markets and our operating results may suffer.
If the Company fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately or timely report its financial results. As a result, current and potential shareholders could lose confidence in the Company's financial reporting, which would harm the business and the trading price of its common stock.
As further described in Item 9A in our Annual Report on Form 10-K, for the fiscal year ended September 30, 2020, management identified a material weakness in the Company’s internal control over financial reporting and determined that SIFCO’s internal control over financial reporting and its disclosure controls and procedures were not effective. Management identified a material weaknesses related to insufficient review of specific controls associated with revenue, inventory and income taxes at its Maniago location. Until remediated, these material weaknesses could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. As with any internal control deficiency, there can be no assurance that our remedial measures will be successful or otherwise sufficient to address the material weakness. If the Company is unable to remediate the material weaknesses, or is otherwise unable to maintain effective internal control over financial reporting or disclosure controls and procedures, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, the Company’s ability to record, process and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected, which could subject the Company to litigation or investigations requiring management resources and payment of legal and other expenses, including civil penalties, negatively affect investor confidence in our financial statements and adversely impact our stock price.
Labor disruptions by our employees could adversely affect our business.
As of September 30, 2020, we employed approximately 446 people. Two of our locations are parties to collective bargaining agreements. Although we have not experienced any material labor-related work stoppage and consider our relations with our employees to be good, labor stoppages may occur in the future. If the unionized workers were to engage in a strike or other work stoppage, or if SIFCO is unable to negotiate acceptable collective bargaining agreements with the unions, or if other employees were to become unionized, we could experience a significant disruption of our operations, higher ongoing labor costs and possible loss of customer contracts, which could have an adverse effect on our business and results of operations.
Risks Related to Financial Matters
Global economic conditions may adversely impact our business, operating results or financial condition.
Disruption and volatility in global financial markets may lead to increased rates of default and bankruptcy and may negatively impact consumer and business spending levels. In 2020, the widespread public health crisis caused by the COVID-19 outbreak has adversely impacted the economies and financial markets worldwide, resulting in an economic downturn that has adversely impacted many businesses, including ours. The pandemic and other events could adversely affect our business, operating results or financial condition. Current or potential customers may delay or decrease spending on our products and services as their business and/or budgets are impacted by economic conditions. The inability of current and potential customers to pay SIFCO for its products and services may adversely affect its earnings and cash flows.
Our indebtedness and restrictive covenants under our credit facilities could limit our operational and financial flexibility.
We have incurred significant indebtedness, and may incur additional debt in the future. Our ability to make interest and scheduled principal payments and operate within restrictive covenants could be adversely impacted by changes in the availability, terms and cost of capital, changes in interest rates or changes in our credit ratings or our outlook. These changes could increase our cost of business, limiting our ability to pursue acquisition opportunities, react to market conditions and meet operational and capital needs, thereby placing us at a competitive disadvantage. Further, the Company's credit agreement matures within the next 12 months. While it is the intent of the Company's management to refinance its credit facilities with the existing lender, no assurances can be made that such refinancing will be completed or completed on similar terms to the existing credit facilities.
If we do not meet the standards for forgiveness of our PPP Loan, we may be required to repay the loan over a period of two years.
On April 10, 2020, we entered into a promissory note evidencing an unsecured $5.0 million loan under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The PPP Loan was made by the Company’s current lenders. The term of the PPP Loan is two years and the interest rate on the PPP Loan is 0.98%. Although the Company intends to apply for forgiveness of all or a portion of its PPP Loan (with such forgiveness based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels), we make no representations that we will qualify for forgiveness of all or part of the PPP Loan. While we expect to meet the standards for full forgiveness of the PPP Loan, there can be no assurance that we will meet such standards. Further, as a consequence of post-PPP Loan rule making by the Small Business Administration, shifting regulatory guidance and/or other factors, we may be required to repay the PPP Loan before its expected maturity date.
The funding and costs associated with our pension plans and significant changes in key estimates and assumptions, such as discount rates and assumed long-term returns on assets, actual investment returns on our pension plan assets, and legislative and regulatory actions could affect our earnings, equity and contributions to our pension plans in future periods.
Certain of the Company's employees are covered by its noncontributory defined benefit pension plans (“Plans”). The impact of these Plans on our earnings may be volatile in that the amount of expense we record and may materially change from year to year because those calculations are sensitive to changes in several key economic assumptions, including discount rates, inflation, expected return on plan assets, retirement rates and mortality rates. These pension costs are dependent on significant judgment in the use of various estimates and assumptions, particularly with respect to the discount rate and expected long-term rates of return on plan assets. Changes to these estimates and assumptions could have a material adverse effect on our financial position, results of operations or cash flows. Differences between actual investment returns and our assumed long-term returns on assets will result in changes in future pension expense and the funded status of our Plans, and could increase future funding of the Plans. Changes in these factors affect our plan funding, cash flows, earnings, and shareholders’ equity. Additionally, the Company contributed to a multi-employer retirement plan. While the Company withdrew from this plan to mitigate future costs, the Company may be subject to liability in connection with such withdrawal (see Note 8, Retirement Benefit Plans).
Market volatility and adverse capital or credit market conditions may affect our ability to access cost-effective sources of funding and may expose SIFCO to risks associated with the financial viability of suppliers.
The financial markets can experience high levels of volatility and disruption, reducing the availability of credit for certain issuers and the financial markets have undergone significant volatility in reaction to the COVID-19 pandemic.
The tightening of the credit market and standards, as well as capital market volatility, could negatively impact our ability to obtain additional debt financing on terms equivalent to our existing Credit Agreement. Capital market uncertainty and volatility, together with the Company’s market capitalization and status as a smaller reporting company, could also negatively impact our ability to obtain capital market financing or bank financing on favorable terms, or at all, which could have a material adverse effect on our financial position, results of operations or cash flows.
Tightening credit markets could also adversely affect our suppliers' ability to obtain financing. Delays in suppliers' ability to obtain financing, or the unavailability of financing, could negatively affect their ability to perform their contracts with SIFCO and cause our inability to meet our contract obligations. The inability of our suppliers to obtain financing could also result in the need for us to transition to alternate suppliers, which could result in significant incremental costs and delays.
A write-off of all or part of our goodwill or other intangible assets could adversely affect our operating results and net worth.
Goodwill and other intangible assets are a component of our assets. At September 30, 2020, goodwill was $3.5 million and other intangible assets were $1.9 million of our total assets of $121.9 million. We may have to write off all or part of our goodwill or other intangible assets if their value becomes impaired. Although this write-off would be a non-cash charge, it could reduce our earnings and our financial condition.
General Risks
Our business is subject to risks associated with widespread public health crises, including the current COVID-19 pandemic.
In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization, and the outbreak subsequently became increasingly widespread in the United States and other countries in which we conduct business. While we continue to actively monitor the pandemic and take steps to mitigate the risks posed by its spread, there is no guarantee that our efforts will mitigate the adverse impacts of COVID-19 or will be effective. Uncertain factors relating to the COVID-19 pandemic continue to include the duration of the outbreak, the severity of the disease, and the actions taken, or perception of actions that may be taken, to contain or treat its impact, including declarations and/or re-instituting states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/or other similar restrictions and limitations.
The pandemic is affecting and is expected to continue to affect certain elements of our operations and business. We have experienced operational interruptions as a result of COVID-19, including the temporary suspension of operations at our facilities in Maniago, Italy and border closures that have resulted in delayed shipments, as well as temporary interruptions of the Company's other facilities in order to undertake deep cleaning and other preventative measures. Further or more prolonged operational disruptions in the U.S. or other locations in which we or our customers operate could have a material impact on our consolidated results of operations.
We have experienced and expect to continue to experience unpredictable changes in demand from the markets we serve. The A&E industries have been negatively impacted by the COVID-19 pandemic as a result of various restrictions on air travel and concern regarding air travel during a pandemic. These factors have caused reductions in demand for commercial aircraft, which will adversely impact our net sales and operating results and may continue to do so for an extended period of time. Further, an overall reduction in business activity as a result of the disruption has led to a continued softening of the energy market. If the pandemic continues and conditions worsen, we may experience additional adverse impacts on our operations, costs, customer orders, and collections of accounts receivable, which may be material. While we are unable to predict the magnitude of the impact of these factors at this time, the loss of, or significant reduction in, purchases by our large customers could have a material adverse effect on our business, financial condition, and results of operations.
Additionally, the pandemic could lead to an extended disruption of economic activity whereby the impact on our consolidated results of operations, financial position and cash flows could be material. While the potential economic impact brought by and the duration of the coronavirus outbreak may be difficult to assess or predict, the continuation of a widespread pandemic could result in significant or sustained disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. While the Company believes it has adequate cash/liquidity available to finance its operations, our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, depends on our future performance, which is subject to general economic, financial, competitive and other factors (including
the continued impact of COVID-19) beyond our control. In addition, while we believe we have taken appropriate steps to maintain a safe workplace to protect our employees from contracting and spreading the coronavirus, we may not be able to prevent the spread of the virus among our employees, face litigation or other proceedings making claims related to unsafe working conditions, inadequate protection of our employees or other claims. Any of these claims, even if without merit, could result in costly litigation or divert management's attention and resources. Furthermore, we may face a sustained disruption to our operations due to one or more of the factors described above.
The impact of the COVID-19 pandemic may also exacerbate other risks and uncertainties the Company faces or may face. The impact depends on the severity and duration of the current COVID-19 pandemic and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict.
The price of our common stock may fluctuate significantly.
An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares or at all. The market price of our common stock could fluctuate significantly for various reasons, which include:
a.our quarterly or annual earnings or those of our competitors or our significant customers;
b.the public’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission;
c.changes in earnings estimates or recommendations by research analysts who track the stocks of our competitors;
d.new laws or regulations or new interpretations of laws or regulations applicable to our business;
e.changes in accounting standards, policies, guidance, interpretations or principles;
f.changes in general conditions in the domestic and global economies or financial markets, including those resulting from war, incidents of terrorism, health crises (such as the ongoing COVID-19 pandemic) or responses to such events;
g.litigation involving our company or investigations or audits by regulators into the operations of our company or our competitors;
h.strategic action by our competitors;
i.sales of common stock by our directors, executive officers and significant shareholders; and
j.our stock being closely held by insider holdings and is thinly traded which impacts price volatility.
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our common stock, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. If litigation is instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability and cash flow.
SIFCO is subject to income taxes in the United States, Italy and Ireland. Significant judgment is required in determining our provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Changes in applicable income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates or changes in the taxability of certain sales or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. In addition, the final results of any tax audits or related litigation could be materially different from our related historical income tax provisions and accruals. Additionally, changes in our tax rate as a result of changes in our overall profitability, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities, changes in differences between financial reporting income and taxable income, the examination of previously filed tax returns by taxing authorities and continuing assessments of our tax exposures can also impact our tax liabilities and affect our income tax expense, profitability and cash flow.
Damage or destruction of our facilities caused by storms, earthquakes or other causes could adversely affect our financial results and financial condition.
We have operations located in regions of the world that may be exposed to damaging storms, earthquakes and other natural disasters as well as other events outside of our control, such as fires, floods and other catastrophic events. Although we maintain standard property casualty insurance covering our properties and may be able to recover costs associated with certain natural disasters through insurance. Even if covered by insurance, any significant damage or destruction of our facilities due to such events could result in its inability to meet customer delivery schedules and may result in the loss of customers and
significant additional costs to SIFCO. Thus, any significant damage or destruction of our properties could have a material adverse effect on our business, financial condition or results of operations.
The occurrence of litigation where we could be named as a defendant is unpredictable.
From time to time, we are involved in various legal and other proceedings that are incidental to the conduct of our business. While we believe no current proceedings, if adversely determined, could have a material adverse effect on our financial results, no assurances can be given. Any such claims may divert financial and management resources that would otherwise be used to benefit our operations and could have a material adverse effect on our financial results.
Our operations are subject to environmental laws, and complying with those laws may cause us to incur significant costs.
Our operations and facilities are subject to numerous stringent environmental laws and regulations. Although we believe that we are in compliance with these laws and regulations, future changes in these laws, regulations or interpretations of them, or changes in the nature of our operations may require us to make significant capital expenditures to ensure compliance.
Item 2. Properties
The Company’s property, plant and equipment include the facilities described below and a substantial quantity of machinery and equipment, most of which consists of industry specific machinery and equipment using special dies, jigs, tools and fixtures and in many instances having automatic control features and special adaptations. In general, the Company’s property, plant and equipment are in good operating condition, are well maintained, and its facilities are in regular use. The Company considers its investment in property, plant and equipment as of September 30, 20172020 suitable and adequate given the current product offerings for the respective operations in the current business environment. The square footage numbers set forth in the following paragraphs are approximations:
•SIFCO operates and manufactures in multiple facilities—(i) an owned 240,000 square foot facility located in Cleveland, Ohio, which is also the site of the Company’s corporate headquarters, (ii) an owned 450,000 square foot facility located in Alliance, Ohio, (iii) leased facilities aggregating approximately 70,00070,500 square feet located in Orange, California, after the expansion and consolidation, and (iv)(iii) owned facilities aggregating approximately 91,000 square feet located in Maniago, Italy. As of September 30, 2017, the Alliance building is classified as an asset held for sale.
The Company also leased space in its Colorado Springs facility which expired at December 31, 2016 and was not renewed.
The Company owns a building located in Cork, Ireland (59,000 square feet) that is subject to a long-term lease arrangement with the acquirer of the Repair Group’s industrial turbine engine component repair business that was sold in June 2007. As of September 30, 2017, the building is classified as asset held for sale.
Item 3. Legal Proceedings
In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters and does not believe any such matters are material to its financial condition or results of operations. The Company maintains various liability insurance coverages to protect its assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it is possible that the Company’s future operating results could be affected by future costs of litigation. For a more complete description of our outstanding material legal proceedings, seeSee Note 9, Commitments11, Commitments and Contingencies, of the consolidated financial statements.statements for more information regarding the legal proceedings in which the Company is involved.
Executive Officers of the Registrant
Set forth below is certain information concerning the Company's executive officers. The executive officers are appointed annually by the Board of Directors.
•Peter W. Knapper - President and Chief Executive Officer
•Thomas R. Kubera - Interim Chief Financial Officer (July 1, 2017 to present).
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| | | | | | | | | | |
| Name | Age | | Title and Business Experience |
| Peter W. Knapper | 5659 | | President and Chief Executive Officer since June 2016. Prior to his appointment,joining SIFCO, Mr. Knapper worked for the TECT Corporation from 2007 to 2016 and was the Director of Strategy and Site Development. TECT offers the aerospace, power-generation, transportation, marine, and medical industries a combination of capabilities unique among metal component manufacturers. Prior to this role, Mr. Knapper, served as President of TECT Aerospace and Vice President of Operations of TECT Power. In addition, Mr. Knapper spent five years at Rolls Royce Energy Systems, Inc., a subsidiary of Rolls-Royce Holdings plc, as the Director of Component Manufacturing and Assembly. Mr. Knapper brings his strategic and industry experience to his role in management and to the Board of the Company.
|
| Thomas R. Kubera | 5861 | | Chief Financial Officer since August 8, 2018. Prior to his appointment, Mr. Kubera was Interim Chief Financial Officer sincefrom July 1, 2017 since the departure of the Company's former Chief Financial Officer. Mr. Kubera has been Corporate Controllerto August 7, 2018 and Chief Accounting Officer since May 2014.January 31, 2018. Mr. Kubera was Corporate Controller from May 2014 and had served as interimInterim Chief Financial Officer from April 2015 to May 2015. Prior to joining SIFCO, Mr. Kubera was previously at Cleveland-Cliffs, Inc. (previously known as Cliffs Natural Resources),Resources, Inc.) from April 2005 through 2014, most recently as the Controller of Global Operations Services. He also held several assistant controller positions and was a Senior Manager of External Reporting while at Cleveland-Cliffs, Inc. |
PART II
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K may contain various forward-looking statements and includes assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides this cautionary statement identifying important economic, political and technological factors, among others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (1) the impact on business conditions in general, and on the demand for product in the A&E industries in particular, of the global economic outlook, including the continuation of military spending at or near current levels and the availability of capital and liquidity from banks, the financial markets and other providers of credit; (2) the future business environment, including capital and consumer spending; (3) competitive factors, including the ability to replace business that may be lost at comparable margins; (4) metals and commodities price increases and the Company’s ability to recover such price increases; (5) successful development and market introduction of new products and services; (6) continued reliance on consumer acceptance of regional and business aircraft powered by more fuel efficient turboprop engines; (7) continued reliance on military spending, in general, and/or several major customers, in particular, for revenues; (8) the impact on future contributions to the Company’s defined benefit pension plans due to changes in actuarial assumptions, government regulations and the market value of plan assets; (9) stable governments, business conditions, laws, regulations and taxes in economies where business is conducted; and (10) the ability to successfully integrate businesses that may be acquired into the Company’s operations.operations; (11) cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners; (12) our exposure to additional risks as a result of our international business, including risks related to geopolitical and economic factors, suppliers, laws and regulations; (13) the ability to maintain a qualified workforce; (14) the adequacy and availability of our insurance coverage; (15) our ability to develop new products and technologies and maintain technologies, facilities, and equipment to win new competitions and meet the needs of our customers; (16) our ability to realize amounts in our backlog; (17) investigations, claims, disputes, enforcement actions, litigation and/or other legal proceedings; (18) extraordinary or force majeure events affecting the business or operations of our business; and (19) the impact of the novel COVID-19 pandemic and related impact on the global economy, which may exacerbate the above factors and/or impact our results of operations and financial condition.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s Common Shares are traded on the NYSE American exchange under the symbol “SIF”. The following table sets forth, for the periods indicated, the high and low sales price for the Company’s Common Shares.“SIF.”
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| | | | | | | | | | | | | | | |
| | Years Ended September 30, |
| | 2017 | | 2016 |
| | High | | Low | | High | | Low |
| First Quarter | $ | 11.75 |
| | $ | 7.05 |
| | $ | 13.20 |
| | $ | 9.50 |
|
| Second Quarter | 9.80 |
| | 7.15 |
| | 10.08 |
| | 7.58 |
|
| Third Quarter | 8.75 |
| | 6.40 |
| | 11.00 |
| | 9.09 |
|
| Fourth Quarter | 7.19 |
| | 5.50 |
| | 9.96 |
| | 6.29 |
|
Dividends and Shares OutstandingShareholders
The Company did not declare a cash dividend during fiscal 20172020 or fiscal 2016.2019. The Company will continue to evaluate the payment of such dividends annually based on its relative profitability, available resources, and investment strategies. The Company currently intends to retain a significant majority of its earnings for operations and to aid in mitigating the operation and growthuncertainty of its business. Thethe impact to COVID-19. Additionally, the Company’s ability to declare or pay cash dividends is limited by its credit agreement covenants.agreement. At October 31, 2017,30, 2020, there were approximately 447373 shareholders of record of the Company’s Common Shares, as reported by Computershare, Inc., the Company’s Transfer Agent and Registrar, which maintains its U.S. corporate offices at 250 Royall Street, Canton, MA 02021.
Reference Part III, Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information related to the Company’s equity compensation plans.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SIFCO is engaged in the production of forgings and machined and sub-assembled components primarily for the A&E markets. The processes and services include forging, heat-treating and machining. The Company operates under one business segment.
The Company endeavors to planWhen planning and evaluateevaluating its business operations, while takingthe Company takes into consideration certain factors, including the following: (i) the projected build rate for commercial, business and military aircraft, as well as the engines that power such aircraft; (ii) the projected build rate for industrial steam and gas turbine engines; and (iii) the projected maintenance, repair and overhaul schedules for commercial, business and military aircraft, as well as the engines that power such aircraft.
The Company operates within a cost structure that includes a significant fixed component. Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage the fixed component of their respective cost structures. Conversely, the opposite effect is expected to occur at lower net sales and related production volumes.
A. Results of Operations
Overview
In June 2017, the Company announced the decision to close its Alliance facility and consolidate its sales due to decreased sales from a key customer and consolidate operations to Cleveland to improve utilization and reduce fixed costs. This closure falls in line with management's key strategic initiatives to make organizational and operational changes needed to improve profitability. Orders after September 30, 2017 are being processed and manufactured at Cleveland. Alliance continued to manufacture product through September 30, 2017 and the closure was completed in October 2017. As a result of the decision to close Alliance, $5.1 million of non-cash costs were incurred, of which $4.8 million relates to asset impairment discussed below and $0.3 million of accelerated depreciation of assets as of September 30, 2017. The remaining estimated exit costs are to be expensed as incurred, which include workforce reduction costs. Workforce reduction costs incurred at September 30, 2017 of approximately $0.2 million, of which a nominal amount was paid by September 30, 2017 and the remainder is expected to be paid in the first quarter of fiscal 2018. Certain machinery and equipment and the land and building were classified as assets held for sale as of September 30, 2017.
The Ireland building located in Cork, Ireland is classified as an asset held for sale as of September 30, 2017. A contract with a buyer has been signed subsequent to September 30, 2017 as further discussed in Note 12, Subsequent Events, of the consolidated financial statements.
Fiscal Year 2017 Compared with Fiscal Year 2016
Net Sales
The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and armored military vehicles; (ii) airframe applications for a variety of aircraft; (iii) industrial gas and steam turbine engines for power generation units; and (iv) other commercial applications.
In fiscal 2020, the Company continued to make significant progress in the restoration of its operations at the manufacturing facility at the Company’s Orange location, which was damaged by a fire that occurred in fiscal 2019. As part of these efforts, the Company continued to actively work with its insurance carrier to obtain insurance proceeds in order to restore its Orange location to full service as safely and quickly as possible following the fire. SIFCO relocated a press to Orange from a temporary Michigan location in November 2019, which was placed into service in March 2020, and two other presses were brought into service at the Orange location, one in December 2019 and the second at the end of July 2020. Restoration of the building structure is nearly complete. As of September 30, 2020, Orange had six out of eight presses in production. Two of the six presses damaged in the fire are still in the restoration process. The Company currently anticipates having those restored within the first half of fiscal 2021; however, no assurances can be made that the restoration will be completed within such time-frame.
In fiscal 2020, the Company realized insurance recoveries of $9.0 million ($7.4 million has been received) and in fiscal 2019 realized $12.0 million ($8.5 million was received) in connection with the Orange fire. As the fire damaged a building leased by the Company, pursuant to the terms of the lease agreement, the Company was responsible for restoring the property to full replacement value. With the Company being fully insured, the restoration of the property was covered by insurance and the insurance carrier has separately funded payments of insurance proceeds as of September 30, 2020 and 2019, respectively, directly to the landlord for the restoration of the building as prescribed under the lease arrangement in the amount of $0.7 million and $2.9 million, respectively. See Note 11, Commitment and Contingencies, of the consolidated financial statements, for further information on how the insurance proceeds are reflected within the financial results. Any additional recoveries in
excess of recognized losses are treated as gain contingencies and will be recognized when the gain is realized or realizable. The Company maintains business interruption insurance coverage and continues to work with the insurance company to reach an agreement on the recoverable amounts of business interruption expenses. The Company recognized business interruption proceeds of $1.2 million in each of fiscal year 2020 and 2019, which is reflected within the cost of goods sold line within the consolidated financial statements.
As previously noted, the COVID-19 pandemic became increasingly widespread in the United States and other countries in which the Company operates. The impact of the COVID-19 outbreak on the Company continues to evolve and the full extent the pandemic will have on the Company's financial condition, liquidity and future results is uncertain. Also uncertain is the timing, duration, shape and magnitude of recovery. A number of the markets in which the Company operates have reopened, other markets, while open, have since experienced a resurgence of COVID-19 cases. Other markets, particularly international markets, remain closed or are enforcing renewed or extended quarantines or other restrictions. As such, the Company continues to actively monitor the impact of the pandemic on its operations and the industries served. The resurgence of COVID-19 cases, renewed or extended quarantines and other restrictions, the continued disruptions to travel, and the accompanying impact that the pandemic has had on businesses worldwide. Our ability to meet customer demands for products may be impaired or, similarly, our customers have experienced and may continue to experience adverse business consequences. Reduced demand for products or impaired ability to meet customer demand (including as a result of disruptions at our facilities, in the transportation of products, and/or in the operations of our vendors) could have a material adverse effect on our business, operations and financial performance. There continues to be significant uncertainty regarding the duration of the pandemic as well as the timing and scope of recovery in the commercial aerospace industry, with a return to pre-COVID-19 levels of activity not expected in commercial aerospace industry for several years. The Company expects to continue to assess the potential implications of these conditions on its operations and take actions to preserve liquidity, including certain cost reduction measures it has taken subsequent to the end of fiscal year 2020, including a furlough of employees at one of its locations, starting in late November 2020 and continuing through the balance of the calendar year, in response to market conditions and its impact on customers’ ordering schedules.
Fiscal Year 2020 Compared with Fiscal Year 2019
Net Sales
Net sales comparative information for fiscal 20172020 and 2016,2019, respectively, is as follows:
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Years Ended
September 30, | | Increase (Decrease) |
| Net Sales | 2020 | | 2019 | |
| Aerospace components for: | | | | | |
| Fixed wing aircraft | $ | 52.0 | | | $ | 52.9 | | | $ | (0.9) | |
| Rotorcraft | 31.5 | | | 23.6 | | | 7.9 | |
| Energy components for power generation units | 16.7 | | | 17.6 | | | (0.9) | |
| Commercial product and other revenue | 13.4 | | | 18.3 | | | (4.9) | |
| Total | $ | 113.6 | | | $ | 112.4 | | | $ | 1.2 | |
|
| | | | | | | | | | | |
| (Dollars in millions) | Years Ended September 30, | | Increase (Decrease) |
| Net Sales | 2017 | | 2016 | |
| Aerospace components for: | | | | | |
| Fixed wing aircraft | $ | 58.3 |
| | $ | 63.0 |
| | $ | (4.7 | ) |
| Rotorcraft | 19.7 |
| | 18.5 |
| | 1.2 |
|
| Energy components for power generation units | 34.1 |
| | 29.2 |
| | 4.9 |
|
| Commercial product and other revenue | 9.4 |
| | 8.4 |
| | 1.0 |
|
| Total | $ | 121.5 |
| | $ | 119.1 |
| | $ | 2.4 |
|
While COVID-19 has had an unprecedented impact on the global market, interruptions to SIFCO's operations have not been significant thus far as we have remained operational and in production working to fulfill customer orders. SIFCO was deemed an essential business, as such, received exemptions or was otherwise exempt from government "stay at home" restrictions based on the nature of our operations both domestically and in the Maniago location. We took precautionary measures in the second quarter of fiscal 2020 and performed deep cleaning of the Maniago location, which resulted in a temporary five day shutdown. Additionally, we experienced some further disruptions at our Maniago facility as a result of the closure of borders between countries. While the Maniago location experienced product shipment delays in the second and third quarters, most of the shipments were completed prior to the end of the fiscal year. During fiscal 2020, the Company experienced a shift in customer orders for commercial aircraft, including the Boeing 737 Max, which was not cleared for re-entry into service until late 2020.
Net sales in fiscal 20172020 increased 2.0%1.0%, or $2.4$1.2 million to $121.5$113.6 million, compared with $119.1$112.4 million in fiscal 2016. Energy2019. The increase of $7.9 million in rotorcraft sales in fiscal 2020 compared to the same period in fiscal 2019 is primarily due to the increased shipments relating to certain military programs, such as the Black Hawk, V-22 and CH53. Commercial products and other revenue decreased $4.9 million, primarily due to timing of shipments for the Hellfire II missile program. The decrease in fixed wing aircraft sales of $0.9 million is primarily attributed to shift in build rates in certain commercial programs, partially offset by increased military programs. The energy components for power generation units increased by $4.9decreased $0.9 million compared with the same period last year mainly dueas the location continues to higherexperience market demand of turbine enginesoftening; however, the Company experienced positive results in its energy components at our Maniago location partially offset by lower demand from our largest customer at the Alliance location. Rotorcraft sales increased to $19.7 million in fiscal 2017 from $18.5 million in the comparable periodfourth quarter of fiscal 2016 due to a customer's inventory destocking efforts which impacted fiscal 2016. The increase in commercial product and other revenue sales is largely driven by an increase in the Hellfire II missile program and the timing2020.
The Company's aerospace components have both military and commercial applications.
Commercial net sales were 59.9%42.6% of total net sales and military net sales were 40.1%57.4% of total net sales in fiscal 2017,2020, compared with 60.9%48.9% and 39.1%51.1%, respectively, in the comparable period in fiscal 2016.2019. Commercial net sales increased $0.3(which includes energy components) decreased $6.7 million to $72.8$48.3 million in fiscal 2017,2020, compared to $72.5$55.0 million in fiscal 2016.2019 primarily due to shift in build rates in the commercial aerospace industry. Military net sales increased $2.1$7.8 million to $48.7$65.2 million in fiscal 2017,2020, compared to $46.6$57.4 million in fiscal 20162019 primarily due to an increase in the Hellfire II missile program, partially off-set by a decrease to a customer's buffering plandemand for a plant closure and a destocking program which impacted the fiscal 2016 period.certain military programs.
Cost of Goods Sold
Cost of goods sold increaseddecreased by $1.1$8.2 million, or 1.0%8.1%, to $108.1$93.6 million, or 89.0%82.4% of net sales, during fiscal 2017,2020, compared with $107.0$101.8 million or 89.9%90.5% of net sales in the comparable period of fiscal 2016.2019. The increasedecrease was due primarily to higher volumesimproved productivity at its Orange location, as previously mentioned, $0.5more presses were operational, as well as improved operating margins at its remaining locations, partially offset by a one-time pension withdrawal charge of $0.8 million increasefor exiting its multi-employer plan as further explained in excess and obsolescence charges and $0.5 million in employee severance charges.Note 8, Retirement Benefit Plans, of the consolidated financial statements.
Gross Profit
Gross profit increased by $1.3$9.3 million, or 10.6%87.7%, to $13.4$20.0 million during fiscal 2017,2020, compared with $12.1$10.6 million in fiscal 2016.2019. Gross margin percent of sales was 11.0%17.6% during fiscal 2017,2020, compared with 10.1%9.5% in fiscal 2016. The increase in gross profit was2019, primarily due to higher sales volume offset partially by higher excessimproved productivity across all Company sites and obsolescence charges of $0.5 million and $0.5 million in employee severance charges.product mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $17.8$14.0 million, or 14.6%12.4% of net sales, during fiscal 2017,2020, compared to $17.4with $15.3 million, or 14.6%13.6% of net sales, in fiscal 2016.2019. The increasedecrease in selling, general and administrative expenses is primarily due to $0.9 million in higher long-term equity compensation in fiscal 2017the continued cost reduction efforts by management such as compared to anless travel expense, reversal in fiscal 2016, $0.8 million in higher expansion costs related to one of the Company's plant locations, $0.3 million in higher depreciation expense associated with the accelerated depreciation of software used at Alliance, partially offset byas well as reduced bank fees, lower legal and professional expensecosts (prior year included arbitration costs), lower equity compensation and commissions, partially offset by a higher incentive compensation accrual of $1.2 million due to higher expenses in fiscal 2016 associated with the late filing of of SIFCO's fiscal 2015 annual report on Form 10-K and $0.6 million lower information technology expenses in fiscal 2017.
million.
Amortization of Intangibles and Goodwill Impairment
Amortization of intangibles decreased $0.4$0.1 million to $2.2$1.5 million during fiscal 2017,2020, compared with $2.6$1.6 million in the comparable period of fiscal 2016. 2019.
Other/General
The decrease was due to the completionCompany recorded operating income of the estimated useful life assigned to the below market leases and non-compete agreement at one of the Company's locations in the prior period.
There were asset impairment charges of long-lived assets of $5.0$10.1 million during fiscal 2017,2020, compared with an operating loss of $7.0 million in fiscal 2019.
Current period results include a gain on insurance recoveries of $5.9 million in fiscal 2020 compared to fiscal 2019, a net $7.3 million gain on insurance recoveries from the fire at the Orange location was recorded, which $2.7includes $1.1 million impairment of assets damaged by the fire. Prior year results include an $8.3 million non-cash goodwill impairment charge related to machinery and equipment and $2.3 million related to definite-lived intangible assets. Asthe Maniago reporting unit that was recorded in the third quarter of fiscal 2019, discussed further discussed in Note 1, Summary of Account Policies,3, Goodwill and Intangible Assets, of the consolidated financial statements, the Company's announcement of the Alliance closure resultedstatements.
Interest expense decreased $0.2 million to $0.9 million in fiscal 2020, compared with $1.1 million in the above impairment charges.
After performing its annual goodwill impairment testsame period in fiscal 2019. The decrease is primarily due to the fourth quarterreduction of fiscal 2016, it was determined that $4.2 million of goodwill associated with the Orange, California reporting unit was impaired as the carrying value of the reporting unit exceeded its fair value. This is further referenced ininterest rates and lower average borrowings. See Note 3, Goodwill and Intangible Assets,5, Debt, of the consolidated financial statements.
Other/General
Interest expense increased to $2.2 million during fiscal 2017, compared with $1.7 million in fiscal 2016. The increase is primarily due to a $0.3 million write-off of deferred financing costs associated with the Company’s Amended and Restated Credit and Security Agreement and Second Amendment with its lender in November 2016 and its Second Amendment in August 2017 and higher interest expense related to a higher interest rate on the Company's revolving credit facility. See Note 5, Debt, of the consolidated financial statementsfor further information.
The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreements in fiscal 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted Average
Interest Rate
Years Ended September 30, | | Weighted Average
Outstanding Balance
Years Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revolving credit agreement | 2.9% | | 4.1% | | $ 13.8 million | | $ 16.9 million |
| Foreign term debt | 4.4% | | 2.7% | | $ 5.5 million | | $ 6.9 million |
| Other debt | 0.5% | | 0.9% | | $ 6.1 million | | $ 0.6 million |
|
| | | | | | | | | |
| | Weighted Average Interest Rate Years Ended September 30, | | Weighted Average Outstanding Balance Years Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revolving credit agreement | 4.8 | % | | 3.9 | % | | $ 21.2 million | | $ 14.0 million |
| Term note | 5.3 | % | | 3.8 | % | | $ 5.8 million | | $ 18.2 million |
| Foreign term debt | 2.8 | % | | 2.5 | % | | $ 9.3 million | | $ 11.7 million |
Other income, (net) was $0.6 million duringexpense, net amount includes pension cost related to other components of net periodic benefit costs that are presented outside of operating income. Also included in both fiscal 2017, compared with $0.42020 and 2019 is approximately $0.2 million in pension settlement expense that was accelerated in the comparablecurrent period, primarily due to lump sum distributions from our qualified pension plans exceeding a threshold of fiscal 2016. The amount principally consistsservice and interest cost for the period.
The Company believes that inflation did not materially affect its results of operations in either fiscal 20172020 or 20162019 and does not expect inflation to be a significant factor in fiscal 2018.2021.
Income Taxes
The Company’s effective tax rate in fiscal 20172020 was (8)%,(2.3%) compared with 15%8.5% in fiscal 2016. This change2019. The effective tax rate differences between years is primarily attributedattributable to changes in jurisdictional mix of income with an increase in the U.S. loss in fiscal year 20172020 compared with fiscal year 2016 where2019 with no associated tax benefit can be realized in either year due toexpense, given the effects of the valuation allowance.
The effective tax rate differs from the U.S. federal statutory rate in fiscal 2017 due primarily to current year losses incurred in the U.S. where no associated tax benefit can be realized due 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. In fiscal 2016, the effective tax rate differed from the U.S. federal statutory rate due primarily to (i) the establishment of a valuation allowance in the U.S., and (ii) current year losses incurred in the U.S. where no associated tax benefit can be realized due to the valuation allowance.
Net LossIncome (Loss)
Net lossincome was $14.2$9.2 million during fiscal 2017,2020, compared with net loss of $11.3$7.5 million in fiscal 2016. Results decreased2019. Net income in the current period increased primarily due to increased excesshigher gross profit attributable to improved productivity and obsolescence and severance charges, impairment charges, higher interest expense incurredinsurance proceeds received, and lower income tax benefits as noted above.selling, general and administrative expenses. Additionally, the current period did not include the non-cash impairment charge described in Other/General.
Non-GAAP Financial Measures
Presented below is certain financial information based on our 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.
Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under generally accepted accounting principles in the United States of America (“GAAP”). The Company presents EBITDA and Adjusted EBITDA because it believes that they are useful indicators for evaluating operating performance and liquidity, including the Company’s ability to incur and service debt and it uses EBITDA to evaluate prospective acquisitions. Although the Company uses EBITDA and Adjusted EBITDA for the reasons noted above, the use of these non-GAAP financial measures as analytical tools has limitations. Therefore, reviewers of the Company’s financial information should not consider them in isolation, or as a substitute for analysis of the Company's results of operations as reported in accordance with GAAP. Some of these limitations include:
•Neither EBITDA nor Adjusted EBITDA reflects the interest expense, or the cash requirements necessary to service interest payments, on indebtedness;
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor Adjusted EBITDA reflects any cash requirements for such replacements;
•The omission of the substantial amortization expense associated with the Company’s intangible assets further limits the usefulness of EBITDA and Adjusted EBITDA; and
•Neither EBITDA nor Adjusted EBITDA includes the payment of taxes, which is a necessary element of operations.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to the Company to invest in the growth of its businesses. Management compensates for these limitations by not viewing EBITDA or Adjusted EBITDA in isolation and specifically by using other GAAP measures, such as net income (loss), net sales, and operating profit (loss), to measure operating performance. The Company’s calculation of EBITDA and Adjusted EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies.
The following table sets forth a reconciliation of net loss to EBITDA and Adjusted EBITDA:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | Years Ended
September 30, |
| | 2020 | | 2019 |
| Net income (loss) | $ | 9,191 | | | $ | (7,506) | |
| | | | |
| | | | |
| Adjustments: | | | |
| Depreciation and amortization expense | 7,380 | | | 7,525 | |
| Interest expense, net | 886 | | | 1,053 | |
| Income tax benefit | (211) | | | (701) | |
| EBITDA | 17,246 | | | 371 | |
| Adjustments: | | | |
| Foreign currency exchange loss (gain), net (1) | 51 | | | (7) | |
| Other expense (income), net (2) | (13) | | | 117 | |
| Loss (gain) on disposal and impairment of assets (3) | 174 | | | (282) | |
| | | | |
| | | | |
| Gain on insurance recoveries (4) | (5,874) | | | (7,253) | |
| Equity compensation expense (5) | 398 | | | 511 | |
| Pension settlement/curtailment benefit (6) | 239 | | | — | |
| | | | |
| LIFO impact (7) | (10) | | | (75) | |
| | | | |
| | | | |
| Goodwill impairment charge (8) | — | | | 8,294 | |
| Adjusted EBITDA | $ | 12,211 | | | $ | 1,676 | |
|
| | | | | | | |
| (Dollars in thousands) | Years Ended September 30, |
| | 2017 | | 2016 |
| Net loss | $ | (14,209 | ) | | $ | (11,335 | ) |
| Adjustments: | | | |
| Depreciation and amortization expense | 9,988 |
| | 10,766 |
|
| Interest expense, net | 2,152 |
| | 1,664 |
|
| Income tax expense (benefit) | 1,069 |
| | (1,998 | ) |
| EBITDA | (1,000 | ) | | (903 | ) |
| Adjustments: | | | |
| Foreign currency exchange loss, net (1) | 47 |
| | 33 |
|
| Other income, net (2) | (593 | ) | | (429 | ) |
| (Gain)/loss on disposal of operating assets (3) | (3 | ) | | 31 |
|
| Inventory purchase accounting adjustments (4) | — |
| | 266 |
|
| Equity compensation expense (income) (5) | 404 |
| | (474 | ) |
| Pension settlement/curtailment (benefit) expense (6) | (48 | ) | | 223 |
|
| Acquisition transaction-related expenses (7) | — |
| | (94 | ) |
| LIFO impact (8) | 293 |
| | (482 | ) |
| Orange expansion (9) | 2,170 |
| | 1,419 |
|
| Executive search (10) | — |
| | 223 |
|
| Asset impairment charges (11) | 4,960 |
| | 4,164 |
|
| Adjusted EBITDA | $ | 6,230 |
| | $ | 3,977 |
|
| |
(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, primarily rental income from the Company's Irish subsidiary. |
| |
(3) | Represents the difference between the proceeds from the sale of operating equipment and the carrying value shown on the Company’s books. |
(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 and grant income. Pension settlement costs was reclassed from this line to Pension settlement/curtailment benefit. See Footnote 6.
11
(4)Represents the difference between the insurance proceeds received for the damaged property and the carrying values shown on the Company's books for the assets that were damaged in the fire at the Orange location.
| |
(4) | Represents accounting adjustments to value inventory at fair market value associated with the acquisition of a business that was charged to cost of goods sold when the inventory was sold. |
| |
(5) | Represents the equity-based compensation benefit and expense recognized by the Company under its 2016 and 2007 Long-term Incentive Plan due to granting of awards, awards not vesting and/or forfeitures. |
| |
(6) | Represents expense (benefit) incurred by a defined benefit pension plan related to settlement of pension obligations. |
| |
(7) | Represents transaction-related costs such as legal, financial, tax due diligence expenses, valuation services, costs, and executive travel that are required to be expensed as incurred. |
| |
(8) | Represents the increase (decrease) in the reserve for inventories for which cost is determined using the last in, first out ("LIFO") method. |
| |
(9) | Represents costs related to expansion of one of the plant locations that are required to be expensed as incurred. |
| |
(10) | Represents costs incurred for executive search fees as mentioned in its Form 8-K filing on March 18, 2016. |
| |
(11) | Represents long-lived and definite-lived intangible asset impairment from the Alliance reporting unit in fiscal 2017 and goodwill impairment charge incurred at the Orange reporting unit in fiscal 2016. See Note 1, Summary of Significant Accounting Policies - Asset Impairment, and Note 3, Goodwill and Intangible Assets, of the consolidated financial statements for further discussion.
|
(5)Represents the equity-based compensation expense recognized by the Company under its 2016 Long-Term Incentive Plan (as the amendment and restatement of, and successor to, the 2007 Long-Term Incentive Plan, and referred to as the "2016 Plan") due to granting of awards, awards not vesting and/or forfeitures.
(6)Represents expense incurred by a defined benefit pension plan related to settlement of pension obligations. (7)Represents the change in the reserve for inventories for which cost is determined using the last in, first out ("LIFO") method.
(8)Represents non-cash charge of goodwill impairment experienced at its reporting unit level.
Reference to the above activities can found in the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
B. Liquidity and Capital Resources
Historically, the main sources of liquidity of the Company have been cash flows from operations and borrowings under our Credit Agreement. However, the ongoing impact of the COVID-19 pandemic (and the rapidly changing U.S. and global market and economic conditions due to the COVID-19 outbreak) remain uncertain, with the commercial aerospace market continuing to be significantly impacted by the global disruption in travel and, further, the pandemic and responses to the continued spread of the pandemic causing continued interruptions to the business of our customers and suppliers, which in turn is likely to impact our business, operations and results as well as our liquidity and capital resources. The Company's liquidity could be negatively affected by customers extending payment terms to the Company and/or the decrease in demand for our products as a result of the COVID-19 pandemic and the Company has experienced a decrease in orders as a result of the impact of COVID-19 on the commercial airline industry.
Since the start of the pandemic, management has continuously evaluated the Company’s liquidity and capital resources and has taken a number of steps to help preserve financial flexibility in light of uncertainty resulting from the COVID-19 pandemic by deferring wage increases to non-union employees, increased oversight of all capital expenditure approval, working with
vendors to reduce costs and obtaining a Paycheck Protection Program Loan as referenced in Note 5, Debt and for the reasons described below. As the impact of the COVID-19 pandemic on the economy and the Company's operations continues to evolve, the Company expects to continue to focus on preserving cash and managing costs.
Cash and cash equivalents increased to $1.4$0.4 million at September 30, 20172020 compared with $0.5$0.3 million at September 30, 2016. The increase is primarily due to the receipt of rental income from its Ireland location and timing of cash receipts between years.2019. At September 30, 20172020 and 2016,2019, approximately $0.9$0.4 million and $0.3 million, respectively, of the Company’s cash and cash equivalents were in the possession of its non-U.S. subsidiaries. Distributions from the Company’s non-U.S. subsidiaries to the Company may be subject to adverse tax consequences.
Operating Activities
The Company’s operating activities from continuing operations provided $12.0$0.4 million of cash in fiscal 2017,2020, compared with $12.3$5.7 million in fiscal 2016.2019. The cash provided by operating activities in fiscal 20172020 was primarily due to $9.4 million of cash generated through working capital management, $16.8 million of non-cash items, such as depreciation and amortization expense, asset impairment charge, amortizationof $7.6 million, equity based compensation, deferred income taxes and write-offs of debt issuance costs and equity compensation, partially offset by the Company’s net loss of $14.2 million. Cash provided by working capital was generated by a $8.1 million decrease in inventories as the Company focused on increasing inventory turns, reductions in current assets, such as prepaid expenses and the receipt of refundable income taxes,LIFO effect, partially offset by a $2.3gain on insurance recovery combined with gain on disposal of assets of $5.7 million reductionand an increase in accounts payable. Cashworking capital of $10.5 million and net income of $9.1 million. The decrease in cash from operating activities was primarily due to increased inventories and payments to suppliers and disbursements related to the fire recovery.
The Company’s operating activities provided $5.7 million of cash in fiscal 2019. The cash provided by operating activities in 2016fiscal 2019 was primarily due to $7.9 million of cash generated throughreduction in working capital management, $15.7of $4.8 million, ofand non-cash items, such as $8.3 million related to the goodwill impairment charge, depreciation and amortization expense, goodwill impairment charge, LIFO expenseof $7.5 million and equity based compensation, deferred income taxes and LIFO effect, partially offset by a gain on insurance recovery combined with gain on disposal of asset of $7.5 million and a net loss of $11.3$7.5 million. Cash provided byThe increase in cash from working capital in 2016 was primarily due to a $10.9 million decrease in accounts receivabledecreased receivables due to improved collections and decreased inventories, and by timing of customer receivables,payments to suppliers, partially offset by a $3.2 million reduction in accrued liabilities. insurance receivables.
Investing Activities
Cash used for investing activities of operations was $2.3$1.2 million in fiscal 2017,2020, which includes $7.8 million in proceeds from insurance recovery on the damaged property related to the fire at the Orange location, compared with $2.1investing activities used of $0.8 million in fiscal 2016.2019, which includes cash proceeds of $8.4 million from insurance proceeds received in the prior year related to the Orange location. Capital expenditures were $2.3$9.0 million, mainly funded by insurance proceeds from the fire in fiscal 2020 and $9.4 million in both fiscal 2017 and fiscal 2016.2019. Expenditures in fiscal 20172020 and in 2019 were used primarily for the expansionrestoration of our operating plant inthe Orange California, and for maintenance capital.location as a result of the fire. Capital commitments at September 30, 20172020 were $0.5 million.$2.1 million, including $1.4 million in capital commitments for the continued restoration of equipment and the building at the Orange facility related to the fire. The Company anticipates thatthe total fiscal 20182021 capital expenditures will be within the range of $3.5$4.0 million to $4.0$6.0 million (excluding fire related expenditures) and will relate principally to the further enhancement of production and product offering capabilities and operating cost reductions. Separate from the range provided, SIFCO anticipates incurring additional costs in fiscal 2021 of approximately $2.0 million to $3.5 million for capital expenditures related to the Orange location in order to finalize the restoration as a result of the fire. These costs are expected to be funded by insurance proceeds.
Financing Activities
Cash used forprovided by financing activities was $8.8$0.8 million in fiscal 2017,2020, compared with $10.4$5.9 million of cash used for financing activities in fiscal 2016.2019.
TheAs discussed in Note 5, Debt, of the consolidated statements the Company hadreceived cash proceeds of $6.6 million, which $5.0 million relates to the PPP loan and $1.5 million from a non-U.S. bank at its Maniago location and have made repayments of $12.4 million (includes $11.6$1.6 million of long-term debt, of which $1.3 million were from the Company's foreign term loan, repayment after enteringcompared with repayments of $1.4 million in the comparable period.
In August 2018, the Company entered into the November 9, 2016 Amended and Restatedan asset-based Credit Agreement ("Credit Agreement") and Security Agreement ("Credit Facility")Security Agreement") under its term loan and repaymentswith a lender. See Note 5, Debt, of $1.9 million under its foreign long-term loan in fiscal 2017, compared with repayments under its term loan of $2.8 million and $2.4 million under is foreign long-term loan in fiscal 2016. The principal reasonthe consolidated statements for the term loan repayment was duefurther discussion related to the modification ofCredit Agreement and the debt structure, as further discussed below.First, Second, Third and Fourth Amendment to the Credit Agreement.
The Company had net borrowingsrepayments under its revolving credit facility of $5.8$2.7 million in fiscal 2017, compared with net repayments of $3.72020 and $5.7 million in fiscal 2016. The net borrowings in fiscal 2017 were used to repay long-term debt and fund operations. The net repayments in fiscal 2016 were attributed to improvements in working capital.2019.
On November 9, 2016, the Company entered into a Credit Facility with its Lender. The new Credit Facility matures on June 25, 2020 and consisted of senior secured loans in the aggregate principal amount of up to $39.9 million. The Credit Facility was comprised of (i) a senior secured revolving credit facility of a maximum borrowing amount of $35.0 million, including swing line loans and letters of credit provided by the Lender and (ii) a senior secured term loan facility in the amount of $4.9 million (the “Term Facility”). The new Term Facility is repayable in monthly installments of $0.1 million which began December 1, 2016. The terms of the Credit Facility contain both a lockbox arrangement and a subjective acceleration clause. As a result, the amounts outstanding on the revolving credit facility are classified as a short term liability. The amountsAmounts borrowed under the Credit Facility were used to repay the amounts previously outstanding under the Company’s existing Credit Agreement as of September 30, 2016 and for working capital, general corporate purposes and to pay fees and expenses associated with this transaction.
In the prior year, the Company had the Credit and Security Agreement (the "2015 Credit Agreement") in place with its Lender until it entered into the above Credit Facility. The 2015 Credit Agreement was comprised of (i) a five-year revolving credit facility with a maximum borrowing amount of up to $25.0 million, which reduced to $20.0 million on January 1, 2016, and (ii) a five-year term loan of $20.0 million. Amounts borrowed under the 2015 Credit Agreement wereare secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 65%66.67% of the stock of its first-tier non-U.S. subsidiaries. The term loan was repayable in quarterly installments of $0.7 million starting September 30, 2015. The amounts borrowed under the 2015 Credit Agreement were used to repay the Company's previous revolver and term note, to fund the acquisition of Maniago and for working capital and general corporate purposes. The 2015 Credit Agreement also had an accordion feature, which allowed the Company to increase the availability by up to $15.0 million upon consent of the existing lenders or upon additional lenders being joined to the facility. Borrowings borewill bear interest at the LIBOR rate, primelender's established domestic rate or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin as set forth in the 2015 Credit Agreement.
Borrowings bears interest at the LIBOR, rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin as set forth in the Credit Facility.Agreement. The revolver has a rate based on LIBOR plus a 3.75%1.50% spread, and a prime rate which resulted in a weighted average rate of 4.8% and 3.9%was 1.7% at September 30, 2017 and 2016, respectively2020 and the term loanExport Credit Agreement as discussed in Note 5, Debt, of the consolidated financial statements has a rate of 5.5% and 3.8% at September 30, 2017 and 2016, respectively, which was based on LIBOR plus a 4.25% spread. This rate becomes an effective fixed rate1.00% spread, which was
1.2% at September 30, 2017 and 2016, respectively, after giving effect to the interest rate swap agreement. There is2020. The Company also has a commitment fee ranging from 0.15% to 0.375%of 0.25% under the Credit Agreement to be incurred on the unused balance.balance of the revolver.
In connection with entering intoAs the Company’s Credit Agreement is asset-based, a sustained significant decrease in revenue in the U.S. or excessive aging of the underlying receivables as a result of the impact of the COVID-19 pandemic could materially affect the collateral capacity limitation of the availability under the Credit Facility, the Company terminated its interest rate swap agreementAgreement and could impact our ability to comply with the Lender and entered into a new swap agreement as more fully discussedcovenants in Note 1, Summary of Accounting Principles - Derivative Financial Instruments, of the consolidated financial statements.our Credit Agreement.
The Company entered into its First Amendment Agreement ("First Amendment") to the Credit Facility on February 16, 2017. The First Amendment assigned its Lender as Administrative Agent and assigned a portion of its Credit Facility to another participating Lender.
Under the Company's Credit Facility,Agreement, the Company is subject to certain customary loan covenants. These include, without limitation, covenants that require maintenance of certain specified financial ratios, including that the Company meeting a minimum EBITDA and the maintenanceregarding availability as discussed in Note 5, Debt. The availability at September 30, 2020 was $13.3 million. The Credit Agreement provides for testing of a minimum fixed charge coverage ratio ("FCCR") in the event (a) of a default or if availability under the Credit Agreement or (b) the Company does not meet certain availability requirements under the Credit Agreement. If the occurrence of such event occurs and the Company is required to commence on September 30, 2017.test its FCCR, such ratio must not be less than 1.1 to 1.0. In the event of a default, we may not be able to access our revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities. On August 4, 2017,Because the Company entered into its Second Amendment Agreement ("Second Amendment") with its Lender to (i) amend certain definitions within its Credit Facility to, among other things, effectavailability was greater than the changes described herein and to reset the Fixed Charge Coverage Ratio (as defined in the Credit Facility) to build to a trailing four quarters in each12.5% of the fiscal 2018 quarters, commencing with the quarter ended December 31, 2017; (ii) replace certain of its financial covenants outlined in the description of Credit Facility and amend its financial covenants with a revised minimum EBITDA for the four fiscal quarters ending September 30, 2017 and to maintain a fixed charge coverage ratio commencing on December 31, 2017; (iii) reduce its maximum revolving amount of $35.0 million to $30.0 million; and (iv) the Company must use its cash proceeds from the sale of the Irish building discussed in Note 1, Summary of Significant Accounting Policies - Asset Held for Sale,of the consolidated financial statements to reduce the Term Facility by $0.7 million and use the remaining proceeds to reduce the revolver. On November 28, 2017, the Company obtained a consent letter from its Lender which extended to December 31, 2017 the date to consummate such sale of the Irish property. The Company is in compliance with its loan covenantsRevolving Commitment as of September 30, 2017.2020, the FCCR calculation was not required.
The Company incurred debt issuance costs related to the above Credit Agreements and certain costs were written-off duringamendments in fiscal 2017. 2019. See Note 5, Debt, of the consolidated financial statements for further discussion.
Future cash flows from the Company’s operations willmay be used to pay down amounts outstanding under the Credit Facility.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 Facility.Agreement for its domestic locations. In fiscal 2020, the Company was able to obtain financing with a lender and was able to defer payments for certain debt obligations at its Maniago location to provide Maniago with sufficient liquidity. The Company's current Credit Agreement is set to mature within the next twelve months, and as such, if the Company is not successful in refinancing, it may experience certain challenges in meeting its obligations. While no assurances can be made that such refinancing will be completed or occur on terms similar to the terms of the existing Credit Agreement or otherwise satisfactory to management, management intends to refinance the Credit Agreement with its Lender. Such refinancing is deemed probable to be implemented based on previous experience and recent communications with the Lender, which would mitigate any adverse consequences of the Credit Agreement maturing.
Additionally, the credit and capital markets saw significant volatility in 2020. Tightening of the credit market and standards, as well as capital market volatility, could negatively impact our ability to obtain additional debt financing on terms equivalent to our existing Credit Agreement, in the event the Company seeks additional liquidity sources as a result of the continued impact of COVID-19. Capital market uncertainty and volatility, together with the Company’s market capitalization and status as a smaller reporting company could also negatively impact our ability to obtain equity financing.
C. Off-Balance Sheet Arrangements
In the normal course of business, the Company ismay be party to certain arrangements that are not reflected in the Consolidated Balance Sheets. These include operating and capital leases as described more fully in Note 9, Commitments and Contingencies, of the consolidated financial statements, which primarily relate to facilities and machinery and equipment and an interest rate swap agreement that the Company entered into with its Lender, as described more fully in Note 1, Summary of Significant Accounting Policies - Derivatives Financial Instruments, of the consolidated financial statements. The Company does not have obligations that meet the definition of an off-balance sheet arrangement that have had, or are reasonably likely to have, a material effect on the Company’s financial condition or results of operations.
D. Critical Accounting Policies and Estimates
Allowances for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of certain customers to make required payments. The Company evaluates the adequacy of its allowances for doubtful accounts each quarter based on the customers’ credit-worthiness, current economic trends or market conditions, past collection history, aging of outstanding accounts receivable and specific identified risks. As these factors change, the Company’s allowances for doubtful accounts may change in subsequent periods. Historically, losses have been within management’s expectations and have not been significant.
Inventories
The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete and excess inventory each quarter. The Company maintains a formal policy, which requires at a minimum, that a reserve be established based on an analysis of the age of the inventory. In addition, if the Company learns of specific obsolescence, other than that identified by the aging criteria, an additional reserve will be recognized as well.recognized. Specific obsolescence may arise due to a
technological or market change or based on cancellation of an order. Management’s judgment is necessary in determining the realizable value of these products to arrive at the proper allowance for obsolete and excess inventory.
Restructuring ChargesRevenue Recognition
The Company’sCompany recognizes revenue using the five-step revenue recognition model in which it depicts the transfer of goods to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The revenue standard also requires disclosure sufficient to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the cost to obtain or fulfill a contract.
The Company recognizes revenue in the following manner using the five-step revenue recognition model. A contract exists when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Revenue is recognized when performance obligations under the terms of the contract with a customer of the Company are satisfied. A portion of the Company's contracts are from purchase orders ("PO's"), which continue to be recognized as of a point in time when products are shipped from the Company's manufacturing facilities or at a later time when control of the products transfers to the customer. Revenue was previously recognized for certain long-term agreements ("LTA's"), firm fixed pricing agreements, and PO's at the point in time when the shipping terms were satisfied. Under the revenue standard, the Company now recognizes certain revenue over time as it satisfies the performance obligations because the conditions of transfer of control to the applicable customer are as follows:
•Certain military contracts, which relate to the provisions of specialized or unique goods to the U.S. government with no alternative use, include provisions within the contract that are subject to the Federal Acquisition Regulation ("FAR"). The FAR provision allows the customer to unilaterally terminate the contract for convenience and requires the customer to pay the Company for costs incurred plus reasonable profit margin and take control of any work in process.
•For certain commercial contracts involving customer-specific products with no alternative use, the contract may fall under the FAR clause provisions noted above for military contracts or may include certain provisions within their contract that the customer controls the work in process based on contractual termination clauses or restrictions of the Company's use of the product and the Company possesses a right to payment for work performed to date plus reasonable profit margin.
As a result of control transferring over time for these products, revenue is recognized based on progress toward completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products to be provided. The Company elected to use the cost to cost input method of progress based on costs incurred for these contracts because it best depicts the transfer of goods to the customer based on incurring costs on the contracts. Under this method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. An accounting policy election to exclude from transaction price was made for sales, value add, and other taxes the Company collects concurrent with revenue-producing activities when applicable. The Company has elected to recognize incremental costs incurred to obtain contracts, which primarily represent commissions paid to third party sales agents where the amortization period would be less than one year, as selling, general and administrative expenses in the consolidated statements of operations as incurred.
The Company elected a practical expedient under Accounting Standard Codification ("ASC") 606 ("Topic 606") to not adjust the promised amount of consideration for the effects of any significant financing component where the Company expects, at contract inception, that the period between when the Company transfers a promised good to a customer and when the customer pays for that good will be one year or less. Finally, the Company's policy is to exclude performance obligations resulting from contracts with a duration of one year or less from its disclosures related to remaining performance obligations.
The amount of consideration to which the Company expects to be entitled in exchange for the goods is not generally subject to significant variations.
The Company elected to recognize restructuringthe cost of freight and shipping when control of the products has transferred to the customer as an expense in cost of goods sold on the consolidated statements of operations, because those are costs incurred to fulfill the promise recognized, not a separate performance obligation. To the extent certain freight and shipping fees are charged to customers, the Company recognizes the amounts charged to customers as revenues and the related costs as an expense in accordancecost of goods sold when control of the related products has transferred to the customer.
Contracts are occasionally modified to account for changes in contract specifications, requirements, and pricing. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Substantially all of the Company's contract modifications are for goods that are distinct from the existing contract. Therefore, the effect of a contract modification on the transaction price and the Company's measure of progress for the performance obligation to which it relates is generally recognized on a prospective basis.
Contract Balances
Contract assets on the consolidated balance sheets are recognized when a good is transferred to the customer and the Company does not have the contractual right to bill for the related performance obligations. In these instances, revenue recognized exceeds the amount billed to the customer and the right to payment is not solely subject to the passage of time. Amounts do not exceed their net realizable value. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payment from customers are received based on the terms established in the contract with the accounting rules related to exit or disposal activities and compensation and non-retirement post-employment benefits. Detailed documentation is maintained and updated to ensure that accruals are properly supported. If management determines that there is a change in estimate, the accruals are adjusted to reflect this change.customer.
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, when events and circumstances warrant such a review. This review involves judgment and is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets and which the Company considers a critical accounting estimate. If the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, then the long-lived asset is evaluated for impairment. The Company would assess the fair value of the asset group and compare it to its carrying value. The long-lived assets are considered impaired andif the carrying value of the long-lived assets exceeds its fair value, in which case an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
In projecting future undiscounted cash flows, the Company relies on internal budgets and forecasts, and projected proceeds upon disposal of long-lived assets. The Company’s budgets and forecasts are based on historical results and anticipated future market conditions, such as the general business climate and the effectiveness of competition. The Company believes that its estimates of future undiscounted cash flows and fair value are reasonable; however, changes in estimates of such undiscounted cash flows and fair value could change the Company’s estimates, of fair value, which could result in future impairment charges.
Impairment of Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. The determination of the fair value of assets and liabilities acquired typically involves obtaining independent appraisals of certain tangible and intangible assets and may require management to make certain assumptions and estimates regarding future events. Goodwill is not amortized, but is subject to an annual impairment test or more frequently if events or changes in circumstances indicate that goodwill may be impaired.
Goodwill is tested for impairment annually as of July 31. If circumstances change during interim periods between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company will test goodwill for impairment. Factors whichthat would necessitate an interim goodwill impairment assessment include a sustained decline in the Company's stock price, prolonged negative industry or economic trends, or significant under-performance relative to expected, historical or projected future operating results. Management uses judgment to determine whether to use a qualitative analysis or a quantitative fair value measurement for its goodwill impairment testing. The Company's fair value measurement approach combines the income and market valuation techniques for each of the Company’s reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparables, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions.
In January 2017,As permitted, if the reporting unit fails the impairment test, the Financial Accounting Standards Board ("FASB") issued an Accounting Standard Update ("ASU") removing step two from the goodwill impairment test. If a reporting unit fails the quantitative impairment test, impairment expense is immediately recorded as the difference between the reporting unit's fair value and carrying value. The Company adopted this standard effective March 31, 2017. Refer to Note 1, Summary of Significant Accounting Policies - Goodwill and Intangible Assets, of the consolidated financial statements for details.
2017 Interim and2020 Annual Goodwill Impairment TestTests
In the interim, certain qualitative factors triggered an impairment analysis of goodwill, primarily due to under-performance relative to projected future operating results at the Alliance Reporting unit. When the Company made the decision to close the Alliance facility and moveSIFCO performed its business to the Cleveland reporting unit, it resulted in the reallocation of $3.5 million of goodwill from the Alliance to the Cleveland reporting unit. The Company considered this to be a triggering event and performed a goodwill impairment analysis of the Cleveland reporting unitannual test as of May 31, 2017.
As of July 31, 2017, the annual goodwill impairment test date for fiscal 2017, goodwill2020. Goodwill existed at twoone of the Company's reporting units, Cleveland, Ohio and Maniago, Italy.
as of September 30, 2020. No impairment charges werecharge was identified in connection with our interim andthe annual goodwill impairment test with respect to any of the identifiedCleveland reporting units. The fair values of the reporting units were in excess of our carrying values.unit. Refer to Note 3, Goodwill and Intangible Assets, of the consolidated financial statements for further details.
2016
2019 Interim and Annual Goodwill Impairment TestTests
In performing ourSIFCO performed an interim assessment of goodwill for its Maniago location as of May 31, 2019 and performed its annual test as of July 31, 2019. The Maniago reporting unit's goodwill was fully impaired based on the interim assessment. Goodwill existed at one of the Company's reporting units, Cleveland, Ohio as of September 30, 2019 and no impairment charge was identified in connection with the annual goodwill impairment test in the fourth quarter of 2016, it was determined that $4.2 million of goodwill associated with the Orange reporting unit was impaired as the carrying value of the reporting unit exceeded its fair value.test.
Defined Benefit Pension Plan Expense
The Company maintains three defined benefit pension plans in accordance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). The amounts recognized in the consolidated financial statements for pension benefits under these three defined benefit pension plans are determined on an actuarial basis utilizing various assumptions. The following table illustrates the sensitivity to change in the assumed discount rate and expected long-rate of return on assets for the Company's pension plans as of September 30, 2017.2020.
| | | | | | | | | | | | | | |
| | Impact on Fiscal 2020 Benefits Expense | | Impact on September 30, 2020 Projected Benefit Obligation for Pension Plans |
| Change in Assumptions | | |
| | (In thousands) |
| 25 basis point decrease in discount rate | | $ | 31 | | | $ | 895 | |
| 25 basis point increase in discount rate | | $ | (31) | | | $ | (895) | |
| 100 basis point decrease in expected long-term rate of return on assets | | $ | 92 | | | $ | — | |
| 100 basis point increase in expected long-term rate of return on assets | | $ | (92) | | | $ | — | |
|
| | | | | | | | |
| | | Impact on Fiscal 2017 Benefits Expense | | Impact on September 30, 2017 Projected Benefit Obligation for Pension Plans |
| Change in Assumptions | | |
| | | (In thousands) |
| 25 basis point decrease in discount rate | | $ | 47 |
| | $ | 744 |
|
| 25 basis point increase in discount rate | | $ | (47 | ) | | $ | (744 | ) |
| 100 basis point decrease in expected long-term rate of return on assets | | $ | 205 |
| | $ | — |
|
| 100 basis point increase in expected long-term rate of return on assets | | $ | (205 | ) | | $ | — |
|
The discussion that follows provides information on the significant assumptions/elements associated with these defined benefit pension plans.
The Company determines the expected return on plan assets principally based on (i) the expected return for the various asset classes in the respective plans’ investment portfolios and (ii) the targeted allocation of the respective plans’ assets. The expected return on plan assets is developed using historical asset return performance as well as current and anticipated market conditions such as inflation, interest rates and market performance. Should the actual rate of return differ materially from the assumed/expected rate, the Company could experience a material adverse effect on the funded status of its plans and, accordingly, on its related future net pension expense.
The discount rate for each plan is determined, as of the fiscal year end measurement date, using prevailing market spot-rates (from an appropriate yield curve) with maturities corresponding to the expected timing/date of the future defined benefit payment amounts for each of the respective plans. Such corresponding spot-rates are used to discount future years’ projected defined benefit payment amounts back to the fiscal year end measurement date as a present value. A composite discount rate is then developed for each plan by determining the single rate of discount that will produce the same present value as that obtained by applying the annual spot-rates. The discount rate may be further revised if the market environment indicates that the above methodology generates a discount rate that does not accurately reflect the prevailing interest rates as of the fiscal year end measurement date. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the CitigroupFindley Pension Discount Yield Curve and the BPS&M Discount Curve.
As of September 30, 20172020 and 2016,2019, SIFCO used the following assumptions:
| | | | | | | | | | | |
| | Years Ended
September 30, |
| | 2020 | | 2019 |
| | | |
| Discount rate for expenses | 2.9 | % | | 4.2 | % |
| Expected return on assets | 7.2 | % | | 7.5 | % |
|
| | | | | |
| | Years Ended
September 30, |
| | 2017 | | 2016 |
| Discount rate for expenses | 3.1 | % | | 3.8 | % |
| Expected return on assets | 7.9 | % | | 8.0 | % |
Deferred Tax Valuation Allowance
The Company accounts for deferred taxes in accordance with the provisions of the Accounting Standards Codificationguidance related to accounting for income taxes, whereby the Company recognizes an income tax benefit related to income tax credits, loss carryforwards and deductible temporary differences between financial reporting basis and tax reporting basis.
A high degree of judgment is required to determine the extent a valuation allowance should be provided against deferred tax assets. On a quarterly basis, the Company assesses the likelihood of realization of its deferred tax assets considering all available evidence, both positive and negative. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. It is generally difficult to outweigh objectively verifiable negative evidence of recent financial reporting losses. Based on the weight of available evidence, the Company determines if it is more likely than not that its deferred tax assets will be realized in the future.
As a result of losses incurred in recent years, the Company entered into a three yearthree-year cumulative loss position in the U.S. jurisdiction during the fourth quarter of fiscal 2016 and remains in fiscal 2020, the Company entered into a three-year cumulative loss position atincome position. Based on the conclusionCompany’s assessment of fiscal year 2017. Accordingly,all available evidence, the Company maintained its valuation allowance on its U.S. deferred tax assets as of the fourth quarter of fiscal year 2017.2020.
Uncertain Tax Positions
The calculation of the Company's tax liabilities also involves considering uncertainties in the application of complex tax regulations. SIFCO recognizes liabilities for uncertain income tax positions based on its estimate of whether it is more likely than not that additional taxes will be required, and it reports related interest and penalties as income taxes. Refer to Note 6, 7, Income Taxes, of the consolidated financial statements.
E. Impact of Newly Issued Accounting Standards
In May 2017,June 2016, the FASB issued ASU 2017-09, which clarifies when a change to the terms or conditions2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of a share-based payment award must be accountedCredit Losses on Financial Instruments" and subsequent updates. ASU 2016-13 changes how entities will measure credit losses for as a modification.most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance requires modification accounting ifwill replace the fair value, vesting condition or the classificationcurrent 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 award isexposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the same immediately before and after a change to the terms and conditions of the award. The new guidanceestimate, so its application will require significant judgment. ASU 2016-13 is effective for the Company on a prospective basispublic companies in fiscal years beginning on October 1, 2018, with early adoption permitted. This new guidance is not expected to have an impact on the Company’s consolidated financial statements as it is not the Company’s practice to change either the terms or conditions of share-based payment awards once they are granted.
In March 2017,after December 15, 2019, including interim periods within those fiscal years. However, in November 2019, the FASB issued ASU 2017-07,2019-10, "Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)," which relatesdefers the effective date for public filers that are considered smaller reporting companies ("SRC"), as defined by the Securities and Exchange Commission, to pension related costs that require an entityfiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Because SIFCO is considered a SRC, the Company does not need to reportimplement until October 1, 2023. The Company will continue to evaluate the service cost componenteffect of adopting ASU 2016-13 will have on the Company's results within the consolidated statements of operations and financial condition.
In December 2019, ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" was issued to (i) reduce the complexity of the net periodic benefit coststandard by removing certain exceptions to the general principles in the same income statement line item asTopic 740 and (ii) improve consistency and simplify other employee compensation costs. The other componentsareas of the net periodic benefit cost are required to be presented in the income statement separately from the service cost componentTopic 740 by clarifying and outside of any subtotal of operating income. Additionally, only the service cost component will be eligible for capitalization in assets. Theamending existing guidance. This ASU is effective for the Company beginning October 1, 2018. Early adoption is permitted and the ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively for the capitalization of the service cost component.2021. The amendment allows for a practical expedient that permits an employer to use the amounts disclosed in its pension and other post-retirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company would need to disclose if the practical expedient was used. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements and it does not plan to early adopt the ASU.
In January 2017, the FASB issued ASU 2017-01, Business Combinations, which clarified existing guidance on the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Early adoption is permitted and the guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18 requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is currently evaluating its plans regarding the adoption, but does not believe that this ASU would have a material impact to the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements together with evaluating the adoption date.
In August 2016, the FASB issued ASU 2016-15, which amends certain cash flow issues which apply to all entities required to present a statement of cash flow. The amendments are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements together with evaluating the adoption date.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which makes a number of changes meant to simplify and improve accounting for share-based payments. The ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has considered the potential implications of adoption of the ASU and is in the process of evaluating some components of the guidance. Due the Company having recorded a domestic valuation allowance at September 30, 2017 and September 30, 2016, the Company does not expect a material impact to the consolidated financial statements from a tax perspective.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact to its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” The ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” This ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs, along
with subsequent updates, will apply to all companies for fiscal years beginning after December 15, 2017, that enter into contracts with customers to transfer goods or services. The Company will adopt the new guidance on October 1, 2018. The Company is executing a bottom up approach to analyze the standard's impact on its revenues by looking at historical policies and practices and identifying the differences from applying the new standard to its revenue streams. The Company has determined that many of its long-term agreements contain variable consideration clauses and is in the process of quantifying the impact to its consolidated financial statements. In addition, some of the Company's agreements have clauses which may require the Company to recognize revenue over time. The majority of the Company's current revenue is recognized at a point-in-time. As such, SIFCO continues to evaluate the impacteffect adopting this ASU will have on the Company's results within the consolidated statements of the standard on itsoperations and financial reporting, disclosures, and related systems and internal controls.condition.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
SIFCO Industries, Inc.
Opinion on the financial statements
We have audited the accompanying consolidatedbalance sheets of SIFCO Industries, Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of September 30, 20172020 and 2016, and2019, the related consolidated statements of operations, comprehensive loss,income (loss), shareholders’ equity, and cash flows for the two years then ended. Our auditsended, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the basicCompanyas of September 30, 2020 and 2019, and the results of itsoperations and itscash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Change in accounting principle
As discussed in Note 1 to the consolidated financial statements, included the financial statement schedulelisted inCompany has changed its method of accounting for leases as of October 1, 2019 due to the index appearing under Item 15(a)(2)adoption of ASU 2016-02, Leases (Topic 842).
Basis for opinion
These financial statements and financial statement scheduleare the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements and financial statement schedulebased on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Wemisstatement, whether due to error or fraud. The Company is not required to have, nor were notwe engaged to perform, an audit of the Company’sits internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SIFCO Industries, Inc. and subsidiaries as of September 30, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2002.
Cincinnati,
Cleveland, Ohio
December 20, 2017
23, 2020
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
| | | | | Years Ended September 30, | | | Years Ended September 30, | |
| | | 2017 | | 2016 | | | 2020 | | 2019 | |
| Net sales | | $ | 121,458 |
| | $ | 119,121 |
| Net sales | | $ | 113,573 | | | $ | 112,454 | | |
| Cost of goods sold | | 108,094 |
| | 107,039 |
| Cost of goods sold | | 93,611 | | | 101,817 | | |
| Gross profit | | 13,364 |
| | 12,082 |
| Gross profit | | 19,962 | | | 10,637 | | |
| Selling, general and administrative expenses | | 17,773 |
| | 17,359 |
| Selling, general and administrative expenses | | 14,022 | | | 15,274 | | |
| Goodwill impairment | | — |
| | 4,164 |
| Goodwill impairment | | 0 | | | 8,294 | | |
| Amortization of intangible assets | | 2,168 |
| | 2,593 |
| Amortization of intangible assets | | 1,497 | | | 1,648 | | |
| Loss on disposal or impairment of operating assets | | 4,957 |
| | 31 |
| |
| Operating loss | | (11,534 | ) | | (12,065 | ) | |
| Interest income | | (56 | ) | | (51 | ) | |
| Interest expense | | 2,208 |
| | 1,715 |
| |
| Foreign currency exchange loss, net | | 47 |
| | 33 |
| |
| Other income, net | | (593 | ) | | (429 | ) | |
| Loss from operations before income tax expense (benefit) | | (13,140 | ) | | (13,333 | ) | |
| Income tax expense (benefit) | | 1,069 |
| | (1,998 | ) | |
| Net loss | | $ | (14,209 | ) | | $ | (11,335 | ) | |
| Loss (gain) on disposal or impairment of operating assets | | Loss (gain) on disposal or impairment of operating assets | | 174 | | | (282) | | |
| Gain on insurance recoveries | | Gain on insurance recoveries | | (5,874) | | | (7,253) | | |
| Operating income (loss) | | Operating income (loss) | | 10,143 | | | (7,044) | | |
| | Interest expense, net | | Interest expense, net | | 886 | | | 1,053 | | |
| Foreign currency exchange loss (gain), net | | Foreign currency exchange loss (gain), net | | 51 | | | (7) | | |
| Other expense, net | | Other expense, net | | 226 | | | 117 | | |
| Income (loss) before income tax benefit | | Income (loss) before income tax benefit | | 8,980 | | | (8,207) | | |
| Income tax benefit | | Income tax benefit | | (211) | | | (701) | | |
| | | | | | |
| | | | | | |
| Net loss per share: | | | | | |
| Net income (loss) | | Net income (loss) | | $ | 9,191 | | | $ | (7,506) | | |
| | | | Net income (loss) per share: | | Net income (loss) per share: | | |
| Basic | | $ | (2.59 | ) | | $ | (2.07 | ) | Basic | | $ | 1.62 | | | $ | (1.35) | | |
| Diluted | | $ | (2.59 | ) | | $ | (2.07 | ) | Diluted | | $ | 1.59 | | | $ | (1.35) | | |
| | | | | | | |
| Weighted-average number of common shares (basic) | | 5,487 |
| | 5,475 |
| Weighted-average number of common shares (basic) | | 5,661 | | | 5,566 | | |
| Weighted-average number of common shares (diluted) | | 5,487 |
| | 5,475 |
| Weighted-average number of common shares (diluted) | | 5,791 | | | 5,566 | | |
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Comprehensive LossIncome (Loss)
(Amounts in thousands, except per share data)thousands)
| | | | | | | | Years Ended September 30, | |
| | | Years Ended September 30, | | | 2020 | | 2019 | |
| | | 2017 | | 2016 | |
| Net loss | | $ | (14,209 | ) | | $ | (11,335 | ) | |
| Net income (loss) | | Net income (loss) | | $ | 9,191 | | | $ | (7,506) | | |
| Other comprehensive income (loss), net of tax: | | | | | Other comprehensive income (loss), net of tax: | | |
| Foreign currency translation adjustment, net of tax $0 and $0, respectively | | 1,016 |
| | 108 |
| Foreign currency translation adjustment, net of tax $0 and $0, respectively | | 410 | | | (712) | | |
| Retirement plan liability adjustment, net of tax $0 and $0, respectively | | 2,549 |
| | (940 | ) | Retirement plan liability adjustment, net of tax $0 and $0, respectively | | (569) | | | (3,968) | | |
| Interest rate swap agreement adjustment, net of tax $0 and $0, respectively | | 34 |
| | (30 | ) | |
| Comprehensive loss | | $ | (10,610 | ) | | $ | (12,197 | ) | |
| | Comprehensive income (loss) | | Comprehensive income (loss) | | $ | 9,032 | | | $ | (12,186) | | |
See notes to the consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
| | | | | September 30, | | | September 30, |
| | | 2017 | | 2016 | | | 2020 | | 2019 |
| ASSETS | | | | | ASSETS | |
| Current assets: | | | | | Current assets: | |
| Cash and cash equivalents | | $ | 1,399 |
| | $ | 471 |
| Cash and cash equivalents | | $ | 427 | | | $ | 341 | |
| Receivables, net of allowance for doubtful accounts of $330 and $706, respectively | | 25,894 |
| | 25,158 |
| |
| Receivables, net of allowance for doubtful accounts of $249 and $592, respectively | | Receivables, net of allowance for doubtful accounts of $249 and $592, respectively | | 23,225 | | | 23,159 | |
| Other receivables | | Other receivables | | 1,547 | | | 3,500 | |
| Contract asset | | Contract asset | | 11,997 | | | 10,349 | |
| Inventories, net | | 20,381 |
| | 28,496 |
| Inventories, net | | 15,569 | | | 10,509 | |
| Refundable income taxes | | 292 |
| | 1,773 |
| Refundable income taxes | | 103 | | | 141 | |
| | Prepaid expenses and other current assets | | 1,644 |
| | 2,177 |
| Prepaid expenses and other current assets | | 2,338 | | | 1,459 | |
| Current assets of business held for sale | | 2,524 |
| | — |
| |
| | Total current assets | | 52,134 |
| | 58,075 |
| Total current assets | | 55,206 | | | 49,458 | |
| Property, plant and equipment, net | | 39,508 |
| | 48,958 |
| Property, plant and equipment, net | | 44,201 | | | 39,610 | |
| Operating lease right-of-use assets, net | | Operating lease right-of-use assets, net | | 17,021 | | | 0 | |
| Intangible assets, net | | 6,814 |
| | 11,138 |
| Intangible assets, net | | 1,890 | | | 3,320 | |
| Goodwill | | 12,170 |
| | 11,748 |
| Goodwill | | 3,493 | | | 3,493 | |
| Other assets | | 261 |
| | 538 |
| Other assets | | 137 | | | 218 | |
| | Total assets | | $ | 110,887 |
| | $ | 130,457 |
| Total assets | | $ | 121,948 | | | $ | 96,099 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| Current liabilities: | | | | | Current liabilities: | |
| Current maturities of long-term debt | | $ | 7,560 |
| | $ | 18,258 |
| Current maturities of long-term debt | | $ | 7,144 | | | $ | 5,786 | |
| Revolver | | 18,557 |
| | 12,751 |
| Revolver | | 12,870 | | | 15,542 | |
| Short-term operating lease liabilities | | Short-term operating lease liabilities | | 991 | | | 0 | |
| Accounts payable | | 12,817 |
| | 14,520 |
| Accounts payable | | 14,002 | | | 19,799 | |
| Accrued liabilities | | 6,791 |
| | 5,234 |
| Accrued liabilities | | 8,290 | | | 5,557 | |
| | Total current liabilities | | 45,725 |
| | 50,763 |
| Total current liabilities | | 43,297 | | | 46,684 | |
| Long-term debt, net of current maturities | | 5,151 |
| | 7,623 |
| Long-term debt, net of current maturities | | 4,606 | | | 2,052 | |
| Long-term operating lease liabilities, net of short-term | | Long-term operating lease liabilities, net of short-term | | 16,188 | | | 0 | |
| Deferred income taxes | | 3,266 |
| | 2,929 |
| Deferred income taxes | | 1,400 | | | 1,718 | |
| Pension liability | | 6,184 |
| | 8,341 |
| Pension liability | | 10,165 | | | 9,528 | |
| Other long-term liabilities | | 430 |
| | 431 |
| Other long-term liabilities | | 769 | | | 63 | |
| | Shareholders’ equity: | | | | | Shareholders’ equity: | |
| Serial preferred shares, no par value, authorized 1,000 shares | | — |
| | — |
| Serial preferred shares, no par value, authorized 1,000 shares | | 0 | | | 0 | |
| Common shares, par value $1 per share, authorized 10,000 shares; issued and outstanding shares – 5,596 at September 30, 2017 and 5,525 at September 30, 2016 | | 5,596 |
| | 5,525 |
| |
| Common shares, par value $1 per share, authorized 10,000 shares; issued and outstanding shares – 5,916 at September 30, 2020 and 5,777 at September 30, 2019 | | Common shares, par value $1 per share, authorized 10,000 shares; issued and outstanding shares – 5,916 at September 30, 2020 and 5,777 at September 30, 2019 | | 5,916 | | | 5,777 | |
| Additional paid-in capital | | 9,519 |
| | 9,219 |
| Additional paid-in capital | | 10,736 | | | 10,438 | |
| Retained earnings | | 44,267 |
| | 58,476 |
| Retained earnings | | 42,339 | | | 33,148 | |
| Accumulated other comprehensive loss | | (9,251 | ) | | (12,850 | ) | Accumulated other comprehensive loss | | (13,468) | | | (13,309) | |
| Total shareholders’ equity | | 50,131 |
| | 60,370 |
| Total shareholders’ equity | | 45,523 | | | 36,054 | |
| Total liabilities and shareholders’ equity | | $ | 110,887 |
| | $ | 130,457 |
| Total liabilities and shareholders’ equity | | $ | 121,948 | | | $ | 96,099 | |
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | (Amounts in thousands) | | Years Ended September 30, | (Amounts in thousands) | | Years Ended September 30, | |
| | | 2017 | | 2016 | | | 2020 | | 2019 | |
| Cash flows from operating activities: | | | | | Cash flows from operating activities: | | |
| Net loss | | $ | (14,209 | ) | | $ | (11,335 | ) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Net income (loss) | | Net income (loss) | | $ | 9,191 | | | $ | (7,506) | | |
| | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| Depreciation and amortization | | 9,988 |
| | 10,766 |
| Depreciation and amortization | | 7,380 | | | 7,525 | | |
| Amortization and write-off of debt issuance costs | | 519 |
| | 145 |
| |
| Loss on disposal of operating assets or impairment of operating assets | | 4,957 |
| | 31 |
| |
| LIFO expense (income) | | 293 |
| | (482 | ) | |
| Amortization of debt issuance costs | | Amortization of debt issuance costs | | 129 | | | 99 | | |
| Loss (gain) on disposal of operating assets or impairment of operating assets | | Loss (gain) on disposal of operating assets or impairment of operating assets | | 174 | | | (282) | | |
| Gain on insurance proceeds received for damaged property | | Gain on insurance proceeds received for damaged property | | (5,874) | | | (7,253) | | |
| | LIFO effect | | LIFO effect | | (10) | | | (75) | | |
| Share transactions under employee stock plan | | 371 |
| | (502 | ) | Share transactions under employee stock plan | | 390 | | | 515 | | |
| Deferred income taxes | | 228 |
| | 850 |
| Deferred income taxes | | (422) | | | (565) | | |
| Purchase price inventory adjustment | | — |
|
| 266 |
| |
| Other | | — |
| | (101 | ) | |
| | Goodwill impairment | | — |
| | 4,164 |
| Goodwill impairment | | 0 | | | 8,294 | | |
| Other long-term liabilities | | 408 |
| | 605 |
| Other long-term liabilities | | 27 | | | 162 | | |
| Changes in operating assets and liabilities, net of acquisition: | | | | | |
| Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | | |
| Receivables | | (294 | ) | | 10,892 |
| Receivables | | 251 | | | 4,506 | | |
| Contract assets | | Contract assets | | (1,648) | | | (209) | | |
| Inventories | | 8,093 |
| | (314 | ) | Inventories | | (4,653) | | | 1,025 | | |
| Refundable income taxes | | 1,482 |
| | 743 |
| Refundable income taxes | | 38 | | | (15) | | |
| Prepaid expenses and other current assets | | 1,493 |
| | (572 | ) | Prepaid expenses and other current assets | | (980) | | | (3,069) | | |
| Other assets | | (433 | ) | | (76 | ) | Other assets | | 125 | | | (50) | | |
| Accounts payable | | (2,315 | ) | | 424 |
| Accounts payable | | (7,060) | | | 2,046 | | |
| Accrued liabilities | | 1,414 |
| | (3,223 | ) | Accrued liabilities | | 3,240 | | | 714 | | |
| Accrued income tax and other | | Accrued income tax and other | | 151 | | | (133) | | |
| Net cash provided by operating activities | | 11,995 |
| | 12,281 |
| Net cash provided by operating activities | | 449 | | | 5,729 | | |
| | | | | | | |
| | Cash flows from investing activities: | | | |
| Cash flows from investing activities: | | |
| Acquisition of business | | — |
| | 275 |
| |
| | Insurance proceeds received for damaged property | | Insurance proceeds received for damaged property | | 7,828 | | | 8,363 | | |
| Proceeds from disposal of property, plant and equipment | | 70 |
| | — |
| Proceeds from disposal of property, plant and equipment | | 0 | | | 317 | | |
| Capital expenditures | | (2,339 | ) | | (2,349 | ) | Capital expenditures | | (9,026) | | | (9,447) | | |
| Net cash used for investing activities | | (2,269 | ) | | (2,074 | ) | Net cash used for investing activities | | (1,198) | | | (767) | | |
| | | | | | | |
| | Cash flows from financing activities: | | | | | Cash flows from financing activities: | | |
| Repayments of term note | | (14,332 | ) | | (5,192 | ) | |
| Proceeds from long-term debt | | Proceeds from long-term debt | | 6,628 | | | 1,505 | | |
| Repayments of long-term debt | | Repayments of long-term debt | | (1,618) | | | (1,424) | | |
| Proceeds from revolving credit agreement | | 85,934 |
| | 46,917 |
| Proceeds from revolving credit agreement | | 111,404 | | | 80,154 | | |
| Repayments of revolving credit agreement | | (80,128 | ) | | (50,667 | ) | Repayments of revolving credit agreement | | (114,076) | | | (85,865) | | |
| Proceeds from short-term debt borrowings | | 3,429 |
| | 1,904 |
| Proceeds from short-term debt borrowings | | 3,206 | | | 6,363 | | |
| Repayments of short-term debt borrowings | | (3,143 | ) | | (3,384 | ) | Repayments of short-term debt borrowings | | (4,722) | | | (6,408) | | |
| Payments for debt financing | | (562 | ) | | — |
| Payments for debt financing | | 0 | | | (132) | | |
| Net cash used for financing activities | | (8,802 | ) | | (10,422 | ) | |
| Share retirement | | Share retirement | | 0 | | | (62) | | |
| | Net cash provided by (used for) financing activities | | Net cash provided by (used for) financing activities | | 822 | | | (5,869) | | |
| | Increase (decrease) in cash and cash equivalents | | 924 |
| | (215 | ) | Increase (decrease) in cash and cash equivalents | | 73 | | | (907) | | |
| Cash and cash equivalents at beginning of year | | 471 |
| | 667 |
| Cash and cash equivalents at beginning of year | | 341 | | | 1,252 | | |
| Effects of exchange rate changes on cash and cash equivalents | | 4 |
| | 19 |
| Effects of exchange rate changes on cash and cash equivalents | | 13 | | | (4) | | |
| Cash and cash equivalents at end of year | | $ | 1,399 |
| | $ | 471 |
| Cash and cash equivalents at end of year | | $ | 427 | | | $ | 341 | | |
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Supplemental disclosure of Cash Flow Information
| | | (Amounts in thousands) | | Years Ended September 30, | (Amounts in thousands) | | Years Ended September 30, | |
| | | 2017 | | 2016 | | | 2020 | | 2019 | |
| Cash (paid) received during the year: | | | | | |
| Cash paid during the year: | | Cash paid during the year: | | |
| Cash paid for interest | | $ | (1,564 | ) | | $ | (1,420 | ) | Cash paid for interest | | $ | (692) | | | $ | (952) | | |
| Cash income tax refunds received, net | | $ | 1,343 |
| | $ | 2,897 |
| |
| Cash paid for income tax, net | | Cash paid for income tax, net | | $ | (52) | | | $ | (123) | | |
| | | | | | | |
| Non-cash investing and financing activities: | | | | | Non-cash investing and financing activities: | | |
| Capital expenditures funded by capital lease borrowings | | $ | 288 |
| | $ | — |
| |
| | Additions to property, plant & equipment - incurred but not yet paid | | $ | 667 |
| | $ | 256 |
| Additions to property, plant & equipment - incurred but not yet paid | | $ | 915 | | | $ | 2,480 | | |
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands)
| | | | | | | | | | | | | | Common
Shares | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | | Total
Shareholders’
Equity |
| | | Common Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity | |
| Balance - September 30, 2015 | | $ | 5,468 |
| | $ | 9,778 |
| | $ | 69,811 |
| | $ | (11,988 | ) | | $ | 73,069 |
| |
| | | | | | | | | | | | |
| | Balance - September 30, 2018 | | Balance - September 30, 2018 | | $ | 5,690 | | | $ | 10,031 | | | $ | 37,097 | | | $ | (8,629) | | | | $ | 44,189 | |
| | | Cumulative effect for the adoption of ASC 606 | | Cumulative effect for the adoption of ASC 606 | | — | | | — | | | 3,598 | | | — | | | | 3,598 | |
| Comprehensive loss | | — |
| | — |
| | (11,335 | ) | | (862 | ) | | (12,197 | ) | Comprehensive loss | | — | | | — | | | (7,506) | | | (4,680) | | | | (12,186) | |
| Shares retired | | Shares retired | | (21) | | | — | | | (41) | | | — | | | | (62) | |
| Performance and restricted share expense | | — |
| | (474 | ) | | — |
| | — |
| | (474 | ) | Performance and restricted share expense | | — | | | 511 | | | — | | | — | | | | 511 | |
| Share transactions under employee stock plans | | 57 |
| | (85 | ) | | — |
| | — |
| | (28 | ) | Share transactions under employee stock plans | | 108 | | | (104) | | | — | | | — | | | | 4 | |
| Balance - September 30, 2016 | | 5,525 |
| | 9,219 |
| | 58,476 |
| | (12,850 | ) | | 60,370 |
| |
| Balance - September 30, 2019 | | Balance - September 30, 2019 | | 5,777 | | | 10,438 | | | 33,148 | | | (13,309) | | | | 36,054 | |
| | | | | | | | | | | | | | |
| Comprehensive loss | | — |
| | — |
| | (14,209 | ) | | 3,599 |
| | (10,610 | ) | |
| Performance and restricted share benefit | | — |
| | 404 |
| | — |
| | — |
| | 404 |
| |
| | Comprehensive income (loss) | | Comprehensive income (loss) | | — | | | — | | | 9,191 | | | (159) | | | | 9,032 | |
| Other | | Other | | — | | | 47 | | | — | | | — | | | | 47 | |
| | Performance and restricted share expense | | Performance and restricted share expense | | — | | | 398 | | | — | | | — | | | | 398 | |
| Share transactions under employee stock plans | | 71 |
| | (104 | ) | | — |
| | — |
| | (33 | ) | Share transactions under employee stock plans | | 139 | | | (147) | | | — | | | — | | | | (8) | |
| Balance - September 30, 2017 | | $ | 5,596 |
| | $ | 9,519 |
| | $ | 44,267 |
| | $ | (9,251 | ) | | $ | 50,131 |
| |
| Balance - September 30, 2020 | | Balance - September 30, 2020 | | $ | 5,916 | | | $ | 10,736 | | | $ | 42,339 | | | $ | (13,468) | | | | $ | 45,523 | |
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share data)
1. Summary of Significant Accounting Policies
A. DESCRIPTION OF BUSINESS
SIFCO Industries, Inc. and its subsidiaries are engaged in the production of forgings and machined components primarily in the Aerospace and Energy ("A&E") market. The Company’s operations are conducted in a single business segment, "SIFCO" or the "Company."
Impact of COVID-19 Pandemic
In March 2020, a novel strain of coronavirus ("COVID-19") was recognized as a pandemic by the World Health Organization and the outbreak subsequently became increasingly widespread in the United States and other countries in which the Company operates.
The Company has taken proactive steps to ensure the safety of its employees and customers as well as to preserve the Company’s financial flexibility. Immediate action was taken by the Company to minimize the spread of COVID-19 in its workplace and monitor the development of and responses to the COVID-19 pandemic and the impact it may have on the business. We have been following the guidance from the U.S. Centers for Disease Control to protect employees and prevent the spread at our plant locations. The actions implemented include: telework, alternate schedules, pre-shift temperature screenings, masks, social distancing, and enhanced cleaning protocols. The impact of the COVID-19 outbreak on the Company continues to evolve and the full magnitude the pandemic will have on the Company's financial condition, liquidity and future results is uncertain. Also uncertain is the timing, duration, shape and magnitude of recovery.
The resurgence of COVID-19 cases, and the continuation of restrictions, disruptions to travel, and businesses worldwide, may reduce customer demand and/or impair our ability to meet customer demands for products. Reduced demand for products or impaired ability to meet customer demand (including as a result of disruptions at our facilities, in the transportation of products, and/or in the operations of our vendors) could have a material adverse effect on our business, operations and financial performance. There continues to be significant uncertainty regarding the duration of the pandemic as well as the timing and scope of recovery in the commercial aerospace industry, with a return to pre-COVID-19 levels of activity not expected in commercial aerospace industry for several years. The Company expects to continue to assess the potential implications of these conditions on its operations and take actions to preserve liquidity, including certain cost reduction measures taken subsequent to the end of fiscal year 2020, including a furlough of employees at one of its locations, starting in late November 2020 and continuing through the balance of the calendar year, in response to market conditions and its impact of the COVID-19 pandemic on customers’ ordering schedules.
B. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The U.S. dollar is the functional currency for all the Company’s U.S. operations and its Irish subsidiary.non-operating subsidiaries. For these operations, all gains and losses from completed currency transactions are included in income currently.income. The functional currency for the Company's other non-U.S. subsidiaries is the Euro. Assets and liabilities are translated into U.S. dollars at the rates of exchange at the end of the period, and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss in the consolidated statements of shareholders’ equity.
C. CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. A substantial majority of the Company’s cash and cash equivalent bank balances exceedare within federally insured limits as of September 30, 2017; however, were within federally insured limits at September 30, 2016.2020 and 2019.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
D. CONCENTRATIONS OF CREDIT RISK
Receivables are presented net of allowance for doubtful accounts of $330$249 and $706$592 at September 30, 20172020 and 2016,2019, respectively. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company writes off accounts receivable when they become uncollectible. During fiscal 20172020 and 2016, $4612019, $263 and $581,$33, respectively, of accounts receivable were written off against the allowance for doubtful accounts. Bad debt expense totaled $77$80 and $359$39 in fiscal 20172020 and fiscal 2016,2019, respectively.
Most of the Company’s receivables represent trade receivables due from manufacturers of turbine engines and aircraft components as well as turbine engine overhaul companies located throughout the world, including a significant concentration of U.S. based companies. In fiscal 2017, 22%2020, 47% of the Company’s consolidated net sales were from two3 of its largest customers; and 35%49% of the Company's consolidated net sales were from the three4 largest customers and their direct subcontractors, which individually accounted for 16%, 13%, 11%10% and 11%10%, of consolidated net sales, respectively. In fiscal 2016, 21%2019, 44% of the Company’s consolidated net sales were from two3 of its largest customers; and 46%50% of the Company's consolidated net sales were from four4 of the largest customers and their direct subcontractors which individually accounted for 12%14%, 13%, 12%, 11% and 11%, of consolidated net sales, respectively. NoOther than what has been disclosed, no other single customer or group represented greater than 10% of total net sales in fiscal 20172020 and 2016.2019.
At September 30, 2017, one2020, 2 of the Company’s largest customers had outstanding net accounts receivable which individually accounted for 10%30% of the total net accounts receivable; and three3 of the largest customers and their direct subcontractors had outstanding net accounts receivable which accounted for 13%, 10%13%, and 10%12% of total net accounts receivable, respectively. At September 30, 2016, two2019, 2 of the Company’s largest customers had outstanding net accounts receivable which individually accounted for 14% and 11%10% of total net accounts receivable; and four3 of the largest customers and their direct subcontractors had outstanding net accounts receivable which accounted for 15%, 13%14%, 12% and 11%12% of total net receivables,accounts receivable, respectively. The Company performs ongoing credit evaluations of its customers’ financial conditions. The Company believes its allowance for doubtful accounts is sufficient based on the credit exposures outstanding at September 30, 2017.2020.
E. INVENTORY VALUATION
Inventories are stated at the lower of cost or market. For a portion of the Company's inventory, cost is determined using the last-in, first-out (“LIFO”) method. For approximately 38%47% and 44%27% of the Company’s inventories at September 30, 20172020 and 2016,2019, respectively, the LIFO method is used to value the Company’s inventories. The first-in, first-out (“FIFO”) method is used to value the remainder of the Company’s inventories.inventories, which are stated at the lower cost or net realizable value.
The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete and excess inventory each quarter and requires at a minimum that reserves be established based on an analysis of the age of the inventory. In addition, if the Company identifies specific obsolescence, other than that identified by the aging criteria, an additional
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
reserve will be recognized. Specific obsolescence and excess reserve requirements may arise due to technological or market changes or based on cancellation of an order. The Company’s reserves for obsolete and excess inventory were $3,859$3,676 and $3,308$3,335 at September 30, 20172020 and 2016,2019, respectively.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is generally computed using the straight-line method. Depreciation is provided in amounts sufficient to amortize the cost of the assets over their estimated useful lives. Depreciation provisions are based on estimated useful lives: (i) buildings, including building improvements - 5 to 40 years; (ii) machinery and equipment, including office and computer equipment - 3 to 20 years; (iii) software - 3 to 7 years (included in machinery and equipment); and (iv) leasehold improvements - remaining life or length of the lease, whichever is less (included in buildings).
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Company's property, plant and equipment assets by major asset class at September 30 consist of:
| | | | | | | | | | | | | | |
| | | 2020 | | 2019 |
| Property, plant and equipment: | | | | |
| Land | | $ | 1,000 | | | $ | 964 | |
| Buildings | | 15,564 | | | 15,805 | |
| Machinery and equipment | | 91,461 | | | 82,379 | |
| Total property, plant and equipment | | 108,025 | | | 99,148 | |
| Less: Accumulated depreciation | | 63,824 | | | 59,538 | |
| Property, plant and equipment, net | | $ | 44,201 | | | $ | 39,610 | |
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Property, plant and equipment: | | | | |
| Land | | $ | 1,005 |
| | $ | 979 |
|
| Buildings | | 15,084 |
| | 15,393 |
|
| Machinery and equipment | | 75,080 |
| | 82,665 |
|
| Total property, plant and equipment | | 91,169 |
| | 99,037 |
|
| Accumulated depreciation | | 51,661 |
| | 50,079 |
|
| Property, plant and equipment, net | | $ | 39,508 |
| | $ | 48,958 |
|
The (gain) loss on disposal of operating assets is included as a separate line item in the accompanying consolidated statements of operations. Depreciation expense was $7,820$5,883 and $8,173$5,877 in fiscal 20172020 and 2016,2019, respectively.
G. ASSET IMPAIRMENT
The Company reviews the carrying value of its long-lived assets ("asset groups"), including property, plant and equipment, when events and circumstances indicate a triggering event has occured.occurred. This review is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets. IfUnder the Accounting Standard Codification ("ASC") 360 ("Topic 360"), if the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, then the long-lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
Fiscal 2020
The Company continuously monitors triggers to determine if further testing is necessary. In the announcement made in the third quarter of fiscal 2017,2020, the Company decided to closeevaluated triggers for asset impairment three times. During two of the Alliance, Ohio ("Alliance") plant and transferthree assessments, it was determined that there were no triggering events requiring further review of its assets groups. The fourth quarter assessment resulted in further evaluation. Certain qualitative factors, such as the reduction on future ordersforecasted sales due to the Cleveland, Ohioreduction of committed orders by certain customers triggered a recoverability test on its Orange, California ("Cleveland"Orange") plant resulted in a triggering event, requiring an impairmentlocation. The result of management's analysis to be performed byon the Company in accordance with Accounting Standard Codification ("ASC") 360 Property, Plantasset group's recoverability at year-end indicated that the long-lived assets, right-of-use assets and Equipment.
As required by ASC 360, an impairment loss shall be recognized only if the carrying amount of a long-lived asset is notdefinite lived intangible assets were recoverable and exceeds its fair value. The carrying amount of long-lived asset isdid not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. require further review for impairment.
Fiscal 2019
The Company used May 31, 2017 as theexperienced 3 triggering date to evaluate the carrying values and test for recoverability of the Alliance machinery and equipment, customer list and trade name as this was the date of when the decision to close Alliance was approved. The fair value of the assets was estimated using Level 2 and Level 3 inputs based on the orderly liquidation value as determined by a third party appraisal and undiscounted cash flows. As a result, the Company recorded asset impairment charges of $4,786, which is labeled as asset impairment in the consolidated statements of operations included within loss on disposal or impairment of operating assets; $2,497 of the total impairment charge related to machinery and equipment and the remaining $2,289 related to intangible assets. The Company also impaired assets totaling $174 related to development of an ERP solution for one of its operating plants. There were no long-lived asset impairment chargesevents in fiscal 2016.
H. ASSETS HELD FOR SALE
The Company’s Irish subsidiary sold its operating business in June 2007, but retained ownership2019 requiring the review of its Cork, Ireland facility. This property is subject2 asset groups to a lease arrangement with the acquirer of the business that expires in June 2027. Rental income is earned in quarterly installments of $103. At September 30, 2017, the net carrying value of the property was $1,447, which was reclassed to asset held for sale. At September 30, 2016,determine if the carrying value of each asset group is recoverable. Certain qualitative factors were triggered at its Orange location. See Note 11, Commitments and Contingencies, of the property was $1,496 (accumulated depreciation of $1,437). Rental income of $413 was recognized in each of fiscal years 2017 and 2016, respectively, and is recorded in other income, netconsolidated financial statements, for further discussion on the consolidated statementsevaluation of operations.
SIFCO Industries, Inc.its long-lived assets as of May 31, 2019 and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
At June 30, 2017, the Company met the requirements of ASC 360 - asset held for sale classification for the Irish building. A formal plan was in place to sell the property in its current condition. At September 30, 2017, the Company had a buyer who agreed to specified terms. Refer to Note 8 Subsequent Events for further discussion. As such, the net book value of $1,447 represents a portion of the asset held for sale amount on the consolidated balance sheets as of September 30, 2017. No loss on sale of asset was recorded in the statement of operations under the loss on disposal or impairment of operating assets line2019, respectively, due to the carrying amountcontinued challenges on operating income trends for the respective asset group. The results of the property being less than the fair value less expected costs to sell. The remaining assets held for sale balance of $1,077 pertains to the Alliance building and certain machinery and equipment that meetmanagement's analysis on the asset heldgroup's recoverability at interim and at year-end, respectively, indicated that the long-lived assets and definite lived intangible assets were recoverable and did not require further review for sale classification at September 30, 2017 due to the circumstances of the closure of Alliance and expected plan to sell. As previously stated, there was an initial impairment recorded within the consolidated statements of operations included within loss on disposal or impairment of operating assets for the Alliance assets that brought the fair value of the assets held for sale to its orderly liquidation value.impairment.
Both the Irish property and the Alliance building and machinery and equipment are recorded as assets held for sale in the consolidated balance sheets. The Company expects to sell these assets within the next 12 months.
I.H. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill is subject to impairment testing if triggered in the interim, and if not, on an annual basis. The Company has selected July 31 as the annual impairment testing date. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. SinceWith the adoption of Accounting Standard Update ("ASU") 2017-04, Step 2 has been eliminated from the goodwill impairment test. The first step of the goodwill impairment test compares the fair value of a reporting unit (as defined) with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired. However, if the carrying amount exceeds the fair value, the Company should recognize an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. See Note 3, Goodwill and Intangibles, of the consolidated financial statements for further discussion of the July 31, 2020 and 2019 annual impairment test results and its interim goodwill test performed as of May 31, 20172019 for one of its reporting unitsunits.
SIFCO Industries, Inc. and as of July 31, 2017 annual impairment test results.Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Intangible assets consist of identifiable intangibles acquired or recognized in the accounting for the acquisition of a business and include such items as a trade name, a non-compete agreement, below market lease, customer relationships and order backlog. Intangible assets are amortized over their useful lives ranging from one year to ten years.years. Identifiable intangible assets assessment for impairment is evaluated when events and circumstances warrant such a review, as noted within Note 1, Summary of Significant Accounting Policies - Asset Impairment,. of the consolidated financial statements.
J.I. NET LOSSINCOME (LOSS) PER SHARE
The Company’s net income and loss per basic share has been computed based on the weighted-average number of common shares outstanding. DueNet income in the current period, per diluted share reflects the effect of the Company's outstanding restricted shares and performance shares under the treasury method. In the prior period, due to the net loss for each reporting period, zero0 restricted shares are included in the calculation of diluted earnings per share because the effect would be anti-dilutive. The dilutive effect of the Company’s restricted shares and performance shares wereis as follows:
|
| | | | | | | | |
| | | September 30, |
| | | 2017 | | 2016 |
| Net loss | | $ | (14,209 | ) | | $ | (11,335 | ) |
| | | | | |
| Weighted-average common shares outstanding (basic and diluted) | | 5,487 |
| | 5,475 |
|
| | | | | |
| Net loss per share – basic and diluted: | | | | |
| Net loss per share | | $ | (2.59 | ) | | $ | (2.07 | ) |
| | | | | |
| Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share | | 93 |
| | 32 |
|
| | | | | | | | | | | | | | | | |
| | | September 30, | | |
| | | 2020 | | 2019 | | |
| | | | | | |
| | | | | | |
| Net income (loss) | | $ | 9,191 | | | $ | (7,506) | | | |
| | | | | | |
| Weighted-average common shares outstanding (basic) | | 5,661 | | | 5,566 | | | |
| Effect of dilutive securities: | | | | | | |
| | | | | | |
| Restricted shares | | 120 | | | 0 | | | |
| Performance shares | | 10 | | | 0 | | | |
| Weighted-average common shares outstanding (diluted) | | 5,791 | | | 5,566 | | | |
| | | | | | |
| | | | | | |
| Net income (loss) per share – basic: | | $ | 1.62 | | | $ | (1.35) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net income (loss) per share – diluted: | | $ | 1.59 | | | $ | (1.35) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share | | 207 | | | 196 | | | |
K.J. REVENUE RECOGNITION
Revenue is generallyThe Company recognizes revenue using the five-step revenue recognition model in which it depicts the transfer of goods to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The revenue standard also requires disclosure sufficient to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the sale of products shippedcost to obtain or fulfill a contract.
Contract Balances
Contract assets on the consolidated balance sheets are recognized when the title and risk of loss passesa good is transferred to the customer whichand the Company does not have the contractual right to bill for the related performance obligations. In these instances, revenue recognized exceeds the amount billed to the customer and the right to payment is generally atnot solely subject to the timepassage of shipment. Substantially all product salestime. Amounts do not exceed their net realizable value. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payment from customers are made pursuant to a firm, fixed-price purchase orders or supply agreement demand forecasts received from customers. Provisions for estimated returns and uncollectible accounts provisions are provided forbased on the terms established in the same periodcontract with the customer.
K. LEASES
The Company has implemented ASU 2016-02, "Leases (Topic 842)" and ASU 2018-11, "Leases (Topic 842) Targeted Improvements," (collectively with ASU 2016-02, "Topic 842"), which was adopted on October 1, 2019 using the cumulative-effect adjustment transition method. Significant changes to the Company's accounting policies as the related revenuesa result of adopting Topic 842 are recordedreferenced in Note 1, Summary of Significant Accounting Policies - Impact of Recently Adopted Accounting Standards and are principally based on historical results modified, as appropriate, by the most current information available. Due to uncertainties in the estimation process, it is possible that actual results may vary from the estimates.Note 10, Leases.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –- (Continued)
L. CAPITAL LEASE OBLIGATIONS
Capital leases are accounted for as the acquisition of an asset and the commitment of an obligation by the lessee and as a sale or financing by the lessor. All other leases are accounted for as operating leases.
M. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
The Company adopted Topic 842 as of October 1, 2019, using the cumulative effective method. Under the transition method selected by the Company, leases that are not short-term in nature existing at, or entered on October 1, 2019 were required to be recognized and measured. Prior period amounts were not adjusted and continue to be reflected with the Company's historical accounting. The adoption of Topic 842 resulted in the Company recording right-of-use ("ROU") assets and operating lease liabilities of approximately $18,059 to the consolidated balance sheet as of October 1, 2019, with no related impact on the Company's consolidated statement of comprehensive income (loss) or consolidated statement of cash flows.
M. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In January 2017,June 2016, the Financial Accounting Standards Board ("FASB")FASB issued ASU 2017-04, which simplifies2016-13, "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 subsequent measurementcurrent 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 goodwill by eliminating Step 2 from the goodwill impairment test. The Company performs Step 1credit. Upon initial recognition of the annual or interim goodwill impairment test by comparingexposure, the fair valueexpected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a reporting unit withspecific method to make the estimate, so its carrying amount. If the carrying amount exceeds the fair value, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Thisapplication will require significant judgment. ASU must be applied prospectively and2016-13 is effective for any annual and interim goodwill impairment testpublic companies in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company adopted the standard in its second quarter of fiscal 2017 and there was no impact to the consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern," which is intended to define the Company's responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures, regardless of the Company's performance or financial position. In connection with preparing financial statements for each annual and interim reporting period, an entity's management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. The Company adopted this standard effective September 30, 2017 and there was no impact to the consolidated financial statements.
N. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In May 2017, the FASB issued ASU 2017-09, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on October 1, 2018, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements and it does not plan to early adopt the ASU.
In March 2017, the FASB issued ASU 2017-07, which relates to pension related costs that require an entity to report the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs. The other components of the net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside of any subtotal of operating income. Additionally, only the service cost component will be eligible for capitalization in assets. The ASU is effective for October 1, 2018, early adoption is permitted and the ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively for the capitalization of the service cost component. The amendment allows for a practical expedient that permits an employer to use the amounts disclosed in its pension and other post-retirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company would need to disclose if the practical expedient was used. The Company is currently evaluating the impact it may have on its consolidated financial statements and it does not plan to early adopt the ASU.
In January 2017, the FASB issued ASU 2017-01, Business Combinations, which clarified existing guidance on the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Early adoption is permitted and the guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18 requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
currently evaluating its plans regarding the adoption, but does not expect that this ASU would have a material impact to the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements together with evaluating the adoption date.
In August 2016, the FASB issued ASU 2016-15, which amends certain cash flow issues which apply to all entities required to present a statement of cash flow. The amendments are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements together with evaluating the adoption date.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which makes a number of changes meant to simplify and improve accounting for share-based payments. The ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has considered the potential implications of adoption of the ASU and due to the valuation allowance recorded at September 30, 2017 and September 30, 2016 in the U.S., the Company does not expect a material impact from a tax perspective. The Company is still evaluating other non-tax components it may have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. The ASU is effective for fiscal years beginning after December 15, 2018,2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact to its consolidated financial statements.
In May 2014,However, in November 2019, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers2019-10, "Financial Instruments - Credit Loss (Topic 606).” ASU 2014-09 completes326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)," which defers the joint efforteffective date for public filers that are considered smaller reporting companies ("SRC"), as defined by the FASBSecurities and International Accounting Standards BoardExchange Commission, to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” The ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” This ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs, along with subsequent updates, apply to all companies that enter into contracts with customers to transfer goods or services, and are effective for public entities for interim and annual reporting periodsfiscal years beginning after December 15, 2017.2022, including interim periods within those fiscal years. Because SIFCO is considered a SRC, the Company does not need to implement until October 1, 2023. The Company will adoptcontinue to evaluate the new guidanceeffect of adopting ASU 2016-13 will have on the Company's results within the consolidated statements of operations and financial condition.
In December 2019, ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" was issued to (i) reduce the complexity of the standard by removing certain exceptions to the general principles in Topic 740 and (ii) improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective beginning October 1, 2018.2021. The Company is executing a bottom up approach to analyze the standard's impact on its revenues by looking at historical policies and practices and identifying the differences from applying the new standard to its revenue streams. The Company has determined that many of its long-term agreements contain variable consideration clauses and is in the process of quantifying the impact to its consolidated financial statements. In addition, some of the Company's agreements have clauses which may require the Company to recognize revenue over time. The majority of the Company's current revenue is recognized at a point-in-time. As such, SIFCO continues to evaluate the impacteffect adopting this ASU will have on the Company's results within the consolidated statements of the standard on itsoperations and financial reporting, disclosures and related systems and internal controls.condition.
O.N. USE OF ESTIMATES
Accounting principles generally accepted in the U.S. require management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period in preparing these financial statements. Actual results could differ from those estimates.
P. DERIVATIVE FINANCIAL INSTRUMENTS
The Company entered an interest rate swap agreement on March 29, 2016 to reduce risk related to variable-rate debt, which was subject to changes in market rates of interest. The interest rate swap was designated as a cash flow hedge. The agreement was canceled as part of the debt modification on November 9, 2016, as further discussed in Note 5, Debt, of the consolidated financial statements. The Company accounted for the interest rate swap termination by recording the loss in accumulated other comprehensive
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
loss as of December 31, 2016. The amount incurred in interest expense was nominal. As part of the new Credit Facility (described further in Note 5, Debt, of the consolidated financial statements) on November 9, 2016, the Company entered a new interest rate swap on November 30, 2016 to reduce risk related to the variable debt over the life of the new term loan. At September 30, 2017, the Company held one interest rate swap agreement with a notional amount of $4,059. Cash flows related to the interest rate swap agreement are included in interest expense. The Company’s interest rate swap agreement and its variable-rate term debt were based upon LIBOR. At September 30, 2017 and 2016, the Company’s interest rate swap agreement qualified as a fully effective cash flow hedge against the Company’s variable-rate term note. The mark-to-market valuation was a $4 asset and a $30 liability at September 30, 2017 and September 30, 2016, respectively.
Q.O. RESEARCH AND DEVELOPMENT
Research and development costs are expensed as they are incurred. Research and development expense wasexpenses were nominal in fiscal 20172020 and 2016.2019.
R. DEFERRED FINANCINGP. DEBT ISSUANCE COSTS
Debt issuance costs are capitalized and amortized over the life of the related debt. Amortization of deferred financingdebt issuance costs is included in interest expense in the consolidated statements of operations.
S.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Q.ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as shown on the consolidated balance sheets at September 30 are as follows:
| | | | | | | | | | | | | |
| 2020 | | 2019 | | |
| Foreign currency translation adjustment, net of income tax benefit of $0 and $0, respectively | $ | (5,257) | | | $ | (5,667) | | | |
| Net retirement plan liability adjustment, net of income tax benefit of $(3,758) and $(3,758), respectively | (8,211) | | | (7,642) | | | |
| | | | | |
| Total accumulated other comprehensive loss | $ | (13,468) | | | $ | (13,309) | | | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Foreign currency translation adjustment, net of income tax benefit of $0 and $0, respectively | $ | (4,607 | ) | | $ | (5,623 | ) |
| Net retirement plan liability adjustment, net of income tax benefit of ($3,758) and ($3,758), respectively | (4,648 | ) | | (7,197 | ) |
| Interest rate swap agreement, net of income tax benefit of $0 and $0, respectively | 4 |
| | (30 | ) |
| Total accumulated other comprehensive loss | $ | (9,251 | ) | | $ | (12,850 | ) |
The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive loss, net of tax:
| | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | Retirement Plan Liability Adjustment | | | | Accumulated Other Comprehensive Loss |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance at September 30, 2018 | $ | (4,955) | | | $ | (3,674) | | | | | $ | (8,629) | |
| Other comprehensive loss before reclassifications | (712) | | | (4,643) | | | | | (5,355) | |
| Amounts reclassified from accumulated other comprehensive income | 0 | | | 675 | | | | | 675 | |
| Net current-period other comprehensive loss | (712) | | | (3,968) | | | | | (4,680) | |
| | | | | | | |
| Balance at September 30, 2019 | (5,667) | | | (7,642) | | | | | (13,309) | |
| Other comprehensive income (loss) before reclassifications | 410 | | | (1,560) | | | | | (1,150) | |
| Amounts reclassified from accumulated other comprehensive income | 0 | | | 991 | | | | | 991 | |
| Net current-period other comprehensive income (loss) | 410 | | | (569) | | | | | (159) | |
| Balance at September 30, 2020 | $ | (5,257) | | | $ | (8,211) | | | | | $ | (13,468) | |
|
| | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustment | | Retirement Plan Liability Adjustment | | Interest Rates Swap Adjustment | | Accumulated Other Comprehensive Loss |
| Balance at September 30, 2015 | $ | (5,731 | ) | | $ | (6,257 | ) | | $ | — |
| | $ | (11,988 | ) |
| Other comprehensive income (loss) before reclassifications | 108 |
| | (1,991 | ) | | (30 | ) | | (1,913 | ) |
| Amounts reclassified from accumulated other comprehensive loss | — |
| | 1,051 |
| | — |
| | 1,051 |
|
| Net current-period other comprehensive loss | $ | 108 |
| | $ | (940 | ) | | $ | (30 | ) | | $ | (862 | ) |
| | | | | | | | |
| Balance at September 30, 2016 | $ | (5,623 | ) | | $ | (7,197 | ) | | $ | (30 | ) | | $ | (12,850 | ) |
| Other comprehensive income (loss) before reclassifications | 1,016 |
| | 1,655 |
| | 28 |
| | 2,699 |
|
| Amounts reclassified from accumulated other comprehensive loss | — |
| | 894 |
| | 6 |
| | 900 |
|
| Net current-period other comprehensive loss | 1,016 |
| | 2,549 |
| | 34 |
| | 3,599 |
|
| Balance at September 30, 2017 | $ | (4,607 | ) | | $ | (4,648 | ) | | $ | 4 |
| | $ | (9,251 | ) |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
The following table reflects the changes in accumulated other comprehensive loss related to the Company for September 30, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount reclassified from accumulated other comprehensive loss | | | | | | |
| Details about accumulated other comprehensive loss components | | 2020 | | 2019 | | | | | | Affected line item in the Consolidated Statement of Operations |
| | | | | | | | | | |
| Amortization of Retirement plan liability: | | | | | | | | | | |
| Prior service costs | | $ | 0 | | | $ | 0 | | | | | | | (1) |
| Net actuarial gain (loss) | | (808) | | | (4,214) | | | | | | | (1) |
| Settlements/curtailments | | 239 | | | 246 | | | | | | | (1) |
| | (569) | | | (3,968) | | | | | | | Total before taxes |
| | 0 | | | 0 | | | | | | | Income tax expense |
| | $ | (569) | | | $ | (3,968) | | | | | | | Net of taxes |
| | | | | | | | | | |
|
| | | | | | | | | | |
| | | Amount reclassified from accumulated other comprehensive loss | | |
| Details about accumulated other comprehensive loss components | | 2017 | | 2016 | | Affected line item in the Consolidated Statement of Operations |
| | | | | | | |
| Amortization of Retirement plan liability: | | | | | | |
| Prior service costs | | $ | 15 |
| | $ | — |
| | (1) |
| Net actuarial loss | | 927 |
| | 828 |
| | (1) |
| Settlements/curtailments | | (48 | ) | | 223 |
| | (1) |
| | | 894 |
| | 1,051 |
| | Total before taxes |
| | | — |
| | — |
| | Income tax expense |
| | | $ | 894 |
| | $ | 1,051 |
| | Net of taxes |
| | | | | | | |
(1) These accumulated other comprehensive incomeloss components are included in the computation of net periodic benefit cost. See Note 7, 8, Retirement Benefit Plans, of the consolidated financial statements for further information.
T.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
R. INCOME TAXES
The Company files a consolidated U.S. federal income tax return and tax returns in various state and local jurisdictions. The Company’s Irish and Italian subsidiaries also file tax returns in thetheir respective jurisdictions.
The Company provides deferred income taxes for the temporary difference between the financial reporting basis and tax basis of the Company’s assets and liabilities. Such taxes are measured using the enacted tax rates that are assumed to be in effect when the differences reverse. Deductible temporary differences result principally from recording certain expenses in the financial statements in excess of amounts currently deductible for tax purposes. Taxable temporary differences result principally from tax depreciation in excess of book depreciation.
The Company evaluates for uncertain tax positions taken at each balance sheet date. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest cumulative benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax
authority. The Company's policy for interest and/or penalties related to underpayments of income taxes is to include interest and penalties in tax expenses.
The Company maintains a valuation allowance against its deferred tax assets when management believes it is more likely than not that all or a portion of a deferred tax asset may not be realized. Changes in valuation allowances are recorded in the period of change. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.
U.The Tax Cut and Jobs Act (the "Act") includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein minimum taxes are imposed on foreign income in excess of a deemed return on the tangible assets of foreign corporations. This income will effectively be taxed at a 10.5% tax rate. GILTI was effective for the Company starting in fiscal 2019. The Company has elected to account for GILTI as a component of tax expense in the period in which the Company is subject to the rules.
S. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 - Quoted market prices in active markets for identical assets or liabilities
Level 2 - Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3 - Unobservable inputs that are not corroborated by market data
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The book value of cash equivalents, accounts receivable, and accounts payable and revolving credit facilities are considered to be representative of their fair values because of their short maturities. The carrying value of debt is considered to approximate the fair value based on the borrowing rates currently available to us for loans with similar terms and maturities. Fair value measurements of non-financial assets and non-financial liabilities are primarily used in goodwill, other intangible assets and long-lived assets impairment analysis, the valuation of acquired intangibles and in the valuation of assets held for sale. Goodwill and intangible assets are valued using Level 3 inputs.
V.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
T. SHARE-BASED COMPENSATION
Share-based compensation is measured at the grant date, based on the calculated fair value of the award and the probability of meeting its performance condition, and is recognized as expense when it is probable that the performance conditions will be met over the requisite service period (generally the vesting period). Share-based expense includes expense related to restricted shares and performance shares issued under the Company's 2007 Long-Term Incentive Plan ("2007 Plan") and the 2016Company's 2007 Plan Long-Term Incentive Plan ("2016(Amended and Restated as of November 16, 2016) (as further amended, the "2016 Plan"). The Company recognizes share-based expense within selling, general, and administrative expense.
W. SHIPPING AND HANDLING COSTSU. GOING CONCERN
The Company classifies all amounts billed to customers for shipping and handling as revenue and reflects shipping and handling costs in cost of sales.
X. RESTRUCTURING CHARGES
The Company’s policy is to recognize restructuring costs inIn accordance with the accounting rules related to exit or disposal activities and compensation and non-retirement post-employment benefits. Detailed documentation is maintained and updated to ensure that accruals are properly supported. If management determines that there is a change in estimate, the accruals are adjusted to reflect this change.
Y. RECLASSIFICATIONS
Certain amounts in prior years, as appropriate, have been reclassified to conform to the 2017 consolidated financial statement presentation.
In fiscal 2017,ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company revisedhas the responsibility to evaluate whether conditions and/or events raise substantial doubt about its classificationability to meet its future financial obligations as they become due within one year after the consolidated balance sheet. It reclassifieddate that the prior year balancefinancial statements are issued. This evaluation requires management to perform two steps. First, management must evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern. Second, if management concludes that substantial doubt is raised, management is required to consider whether it has plans in place to alleviate that doubt. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of $12,751 from current maturitiesplans that have not been fully implemented as of long-term debtthe date the financial statements are issued. Disclosures in the notes to the revolver line. The Company revised its classification within the consolidated cash flows as it relates to short-term borrowings from a net presentation to a gross presentation.
In fiscal 2017, Note 6, Income Taxes, of the consolidated financial statements includes revisionsare required if management concludes that substantial doubt exists or that its plans alleviate the substantial doubt that was raised. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments to certain prior yearreflect 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. See Note 5, Debt, for further discussion regarding the Company's Credit Agreement, which matures in fewer than 12 months and management's plan related to conform to current year disclosures.going concern.
2.Inventories
Inventories at September 30 consist of:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Raw materials and supplies | $ | 6,548 | | | $ | 4,512 | |
| Work-in-process | 3,786 | | | 2,721 | |
| Finished goods | 5,235 | | | 3,276 | |
| Total inventories | $ | 15,569 | | | $ | 10,509 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Raw materials and supplies | $ | 6,108 |
| | $ | 7,724 |
|
| Work-in-process | 7,650 |
| | 10,459 |
|
| Finished goods | 6,623 |
| | 10,313 |
|
| Total inventories | $ | 20,381 |
| | $ | 28,496 |
|
If the FIFO method had been used for the entire Company, inventories would have been $8,319$8,286 and $8,026$8,296 higher than reported at September 30, 20172020 and 2016,2019, respectively. LIFO expensebenefit was $293$10 and $75 in fiscal 20172020 and 2019, respectively.
There was no LIFO income was $482liquidation in fiscal 2016, respectively.2020. In fiscal 2019, results showed a reduction of inventory resulting in liquidations of LIFO inventory quantities. The estimated liquidation of LIFO inventory quantities results in a projected increase in cost of goods sold of approximately $340 during fiscal 2019. These inventories were carried in prior periods at the then prevailing costs, which were accurate at the time, but differ from the current manufacturing cost and/or material costs.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –- (Continued)
3. Goodwill and Intangible Assets
The Company’s intangible assets by major asset class subject to amortization as of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | Weighted Average Life at September 30, | | Original
Cost | | Accumulated
Amortization | | Impairment | | Currency Translation | | Net Book
Value |
| Intangible assets: | | | | | | | | | | | |
| Trade name | 8 years | | $ | 1,876 | | | $ | 1,729 | | | $ | 0 | | | $ | (12) | | | $ | 135 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Technology asset | 5 years | | 1,869 | | | 1,843 | | | 0 | | | (24) | | | 2 | |
| Customer relationships | 10 years | | 13,589 | | | 11,833 | | | 0 | | | (3) | | | 1,753 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total intangible assets | | | $ | 17,334 | | | $ | 15,405 | | | $ | 0 | | | $ | (39) | | | $ | 1,890 | |
| | | | | | | | | | | |
| September 30, 2019 | | | | | | | | | | | |
| Intangible assets: | | | | | | | | | | | |
| Trade name | 8 years | | $ | 1,876 | | | $ | 1,503 | | | $ | 0 | | | $ | (13) | | | $ | 360 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Technology asset | 5 years | | 1,869 | | | 1,544 | | | 0 | | | (28) | | | 297 | |
| Customer relationships | 10 years | | 13,589 | | | 10,859 | | | 0 | | | (67) | | | 2,663 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total intangible assets | | | $ | 17,334 | | | $ | 13,906 | | | $ | 0 | | | $ | (108) | | | $ | 3,320 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | Weighted Average Life at September 30, | | Original Cost | | Accumulated Amortization | | Impairment | | Currency Translation | | Net Book Value |
| Intangible assets: | | | | | | | | | | | |
| Trade name | 8 years | | $ | 2,776 |
| | $ | 1,564 |
| | $ | 310 |
| | $ | 19 |
| | $ | 921 |
|
| Non-compete agreement | 5 years | | 1,600 |
| | 1,584 |
| | — |
| | — |
| | 16 |
|
| Technology asset | 5 years | | 1,869 |
| | 749 |
| | — |
| | 50 |
| | 1,170 |
|
| Customer relationships | 10 years | | 15,568 |
| | 8,946 |
| | 1,979 |
| | 64 |
| | 4,707 |
|
| Total intangible assets | | | $ | 21,813 |
| | $ | 12,843 |
| | $ | 2,289 |
| | $ | 133 |
| | $ | 6,814 |
|
| | | | | | | | | | | | |
| September 30, 2016 | | | | | | | | |
| | |
| Intangible assets: | | | | | | | | | | | |
| Trade name | 8 years | | $ | 2,776 |
| | $ | 1,240 |
| | $ | — |
| | $ | 9 |
| | $ | 1,545 |
|
| Non-compete agreement | 5 years | | 1,600 |
| | 1,547 |
| | — |
| | — |
| | 53 |
|
| Technology asset | 5 years | | 1,869 |
| | 389 |
| | — |
| | 37 |
| | 1,517 |
|
| Customer relationships | 10 years | | 15,568 |
| | 7,571 |
| | — |
| | 26 |
| | 8,023 |
|
| Total intangible assets | | | $ | 21,813 |
| | $ | 10,747 |
| | $ | — |
| | $ | 72 |
| | $ | 11,138 |
|
The amortization expense on identifiable intangible assets for fiscal 20172020 and 20162019 was $2,168$1,497 and $2,593,$1,648, respectively.
Amortization expense associated with the identified intangible assets is expected to be as follows:
| | | | | |
| Amortization
Expense |
| Fiscal year 2021 | $ | 1,009 | |
| Fiscal year 2022 | 327 | |
| Fiscal year 2023 | 250 | |
| Fiscal year 2024 | 177 | |
| Fiscal year 2025 | 127 | |
|
| | | |
| | Amortization Expense |
| Fiscal year 2018 | $ | 1,704 |
|
| Fiscal year 2019 | 1,539 |
|
| Fiscal year 2020 | 1,539 |
|
| Fiscal year 2021 | 1,015 |
|
| Fiscal year 2022 | 329 |
|
Goodwill is not amortized, but is subject to an annual impairment test. The Company tests its goodwill for impairment in the fourth fiscal quarter, and in interim periods if certain events occur indicating that the carrying amount of goodwill may be impaired.
In the third quarter of fiscal 2017, there was a triggering event, which resulted in the Company performing an interim impairment test. Certain qualitative factors, primarily the under-performance relative to projected future operating results for the Alliance reporting unit caused the triggering event. The Company used May 31, 2017, the announcement date of the decision to close Alliance and move its business to its Cleveland reporting unit, as the triggering date to evaluate the carrying values and test for recoverability at the lowest level starting with Alliance's long-lived assets, primarily its machinery and equipment and its identifiable intangible assets. See Note 1, Summary of Significant Accounting Policies - Asset Impairment for further discussion on the long-lived assets impairment test. At the time the announcement was made, it was determined that orders after September 30, 2017 are to be transferred to Cleveland which resulted in the reallocation of $3,493 of goodwill to the Cleveland reporting unit. The Company used the carrying value of the reporting unit, inclusive of the assigned goodwill and to compare to its fair value using the market and income approach to estimate the fair value of this reporting unit. Significant assumptions inherent in the valuation methodologies for goodwill were employed and include, but are not limited to, prospective financial information, growth rates, terminal value and discount rates and required the Company to make certain assumptions and estimates regarding industry economic factors and future profitability of its business. When performing the income and market approach for the reporting unit, SIFCO incorporated the use of projected financial information and a discount rate that was developed using market participant based assumptions. The cash flow projections are based on five-year financial forecasts developed by management that include revenue projections, capital spending trends, and investment in working capital to support anticipated revenue growth. The selected
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
discount rate considers the risk and nature of the reporting unit's cash flows and ratios of return that market participants would require to invest their capital in our plant.
Although the Company believes its assumptions are reasonable, actual results may vary significantly and may expose the Company to material impairment charges in the future. The methodology for determining fair values was consistent for the periods presented.
Based on this quantitative test performed during the interim test date, it was determined that the fair value (using Level 3 inputs) of this reporting unit exceeded the carrying value. As such there was no goodwill impairment of the Cleveland reporting unit at May 31, 2017.
The Company completed its annual impairment test of goodwill as of July 31, 2017 for the Cleveland and Maniago, Italy ("Maniago") reporting units. Prior year financials included full impairment of goodwill for the Orange, California ("Orange") reporting unit. The Company completed its review using judgment to determine whether to useuses a qualitative analysis or a quantitative fair value measurement for its goodwill impairment testing. The Company's fair value measurement approach which combines the income (discounted cash flow method) and market valuation (market comparable method) techniques for each of the Company’s reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparables,comparable, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions (Level 3 inputs).
Although the Company believes its assumptions are reasonable, actual results may vary significantly and may expose the Company to material impairment charges in the future. The methodology for determining fair values was consistent for the periods presented.
2020 Annual Goodwill Impairment Tests
SIFCO performed its annual impairment test as of July 31, 2020 for the Cleveland, Ohio ("Cleveland") reporting unit, it was determined that the fair value of the reporting unit exceeds the carrying value. NaN impairment charge as of September 30, 2020.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
2019 Annual Goodwill Impairment Tests
During the third quarter of fiscal 2019, management reviewed qualitative factors under ASC 350 ("Topic 350"), which triggered an interim goodwill assessment as of May 31, 2019 for its Maniago reporting unit. Certain qualitative factors, such as lower sales due to the soft energy market and continued under-performance relative to projected future operating results were factors that led the Company to perform an interim assessment of goodwill.
Upon completion of the interim impairment test performed in fiscal 2019 for the Maniago reporting unit, it was determined that the fair value of the reporting unit for Maniago did not exceed the carrying value, which resulted in a full write-down of the reporting unit's goodwill in the third quarter of fiscal 2019 in the amount of $8,294 (non-cash charge).
Upon completion of the annual impairment testing for the Maniago reporting unit and the Cleveland reporting unit, it was determined that the fair value of goodwill for the reporting units exceededunit exceeds the carrying value. As such, no0 additional impairment of goodwill existed as of September 30, 2017, compared with $4,164 of goodwill charge related to the Orange reporting unit, which was fully impaired in fiscal 2016. The Orange goodwill impairment was due to not meeting revenue expectations, and in part, to product mix, which resulted in lower margins and related business practices had not come to fruition for cost savings measures undertaken to address increased costs. All of the goodwill was2019.
Goodwill is expected to be deductible for tax purposes. Changes in the net carrying amount of goodwill were as follows:
| | | | | |
| |
| |
| |
| |
| Balance at September 30, 2018 | $ | 12,020 | |
| Goodwill impairment adjustment | (8,294) | |
| Currency translation | (233) | |
| Balance at September 30, 2019 | 3,493 | |
| Goodwill impairment adjustment | 0 | |
| Currency translation | 0 | |
| Balance at September 30, 2020 | $ | 3,493 | |
| |
| |
| |
| |
| |
|
| | | |
| Balance at September 30, 2015 | $ | 16,480 |
|
| Goodwill adjustment | (589 | ) |
| Currency translation | 21 |
|
| Impairment adjustment | $ | (4,164 | ) |
| Balance at September 30, 2016 | $ | 11,748 |
|
| Currency translation | 422 |
|
| Balance at September 30, 2017 | $ | 12,170 |
|
4. Accrued Liabilities
Accrued liabilities at September 30 consist of: | | | | 2017 | | 2016 | | 2020 | | 2019 |
| Accrued employee compensation and benefits | $ | 4,309 |
| | $ | 3,681 |
| Accrued employee compensation and benefits | $ | 5,476 | | | $ | 4,238 | |
| Accrued income taxes | 901 |
| | 264 |
| |
| Accrued legal and professional | 497 |
| | 124 |
| |
| | Accrued workers’ compensation | 237 |
| | 324 |
| Accrued workers’ compensation | 546 | | | 181 | |
| | Contract liabilities | | Contract liabilities | 636 | | | 382 | |
| | Other accrued liabilities | 847 |
| | 841 |
| Other accrued liabilities | 1,632 | | | 756 | |
| Total accrued liabilities | $ | 6,791 |
| | $ | 5,234 |
| Total accrued liabilities | $ | 8,290 | | | $ | 5,557 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
5. Debt
Debt at September 30 consists of:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Revolving credit agreement | $ | 12,870 | | | $ | 15,542 | |
| Foreign subsidiary borrowings | 5,759 | | | 6,592 | |
| Capital lease obligations | 80 | | | 138 | |
| | | |
| | | |
| | | |
| Other, net of unamortized debt issuance cost $(20) and $(25) | 5,911 | | | 1,108 | |
| Total debt | 24,620 | | | 23,380 | |
| | | |
| Less – current maturities | (20,014) | | | (21,328) | |
| Total long-term debt | $ | 4,606 | | | $ | 2,052 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
|
| | | | | | | |
| | 2017 | | 2016 |
| Revolving credit agreement | $ | 18,557 |
| | $ | 12,751 |
|
| Foreign subsidiary borrowings | 8,346 |
| | 9,540 |
|
| Capital lease obligations | 352 |
| | 153 |
|
| | | | |
| Term loan | 4,060 |
| | 16,429 |
|
| Less: unamortized debt issuance cost | (47 | ) | | (241 | ) |
| Term loan less unamortized debt issuance cost | 4,013 |
| | 16,188 |
|
| | | | |
| Total debt | 31,268 |
| | 38,632 |
|
| | | | |
| Less – current maturities | (26,117 | ) | | (31,009 | ) |
| Total long-term debt | $ | 5,151 |
| | $ | 7,623 |
|
On November 9, 2016,August 8, 2018, the Company entered into an Amendedasset-based Credit Agreement ("Credit Agreement") and Restated Credit anda Security Agreement ("Credit Facility"(“Security Agreement”) with its Lender.current lender. The Credit FacilityAgreement matures on June 25, 2020August 6, 2021 and consisted of secured loans is an aggregate principal amount of to $39,871. The Credit Facility was comprised of (i) a senior secured revolving credit facility with a maximum borrowing amount of $35,000, including swing line loans and letters$30,000. The Credit Agreement also has an accordion feature, which allows the Company to increase maximum borrowings by up to $10,000 upon consent of credit provided by the Lender and (ii) a secured term loan facility in the amount of $$4,871 (the "Term Facility"). Amounts borrowed underexisting lender or upon additional lenders joining the Credit Facility are secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 65% of the stock of its non-U.S. subsidiaries. The new Term Facility is repayable in monthly installments of $81, which commenced December 1, 2016.Agreement. The terms of the Credit FacilityAgreement contain both a lock-boxlock box arrangement and a subjective acceleration clause. As a result, the amount outstanding on the revolving credit facility is classified as a short-term liability. The amounts borrowed underproceeds from the Credit FacilityAgreement were used to repay the amounts outstanding under the Company's Credit and Security Agreement (the "2015 Credit Agreement"), for working capital, for general corporate purposes and to pay fees and expenses associated with this transaction. Inincurred in connection with entering into the Credit Facility, the Company terminated its interest rate swap agreement with the LenderAgreement and subsequently entered into another agreement on November 30, 2016, as referenced in Note 1, Summary of Significant Accounting Policies -Derivative Financial Instruments, of the consolidated financial statements.
In the prior year, the Company had the 2015 Credit Agreement in place with its Lender until it entered in the above Credit Facility. The 2015 Credit Agreement was comprised of (i) a five-year revolving credit facility with a maximum borrowing amount of upcontinue to $25,000, which reduced to $20,000 on January 1, 2016, and (ii) a five-year term loan of $20,000. Amounts borrowed under the 2015 Credit Agreement were secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 65% of the stock of its non-U.S. subsidiaries. The term loan was repayable in quarterly installments of $714 starting September 30, 2015. The amounts borrowed under the 2015 Credit Agreement werebe used to repay the Company's previous revolver and term note, to fund the acquisition of Maniago and for working capital purposes and general corporate purposes.
The 2015 Credit Agreement also had an accordion feature, which allowed the Company to increase the availability by up to $15,000 upon consentcontains affirmative and negative covenants and events of the existing lenders or upon additional lenders being joined to the facility. Borrowings bore interest at the LIBOR rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin asdefaults. As set forth in the 2015 Credit Agreement.
Borrowings bear interest at the LIBOR rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin as set forth Credit Facility. The revolver has a rate based on LIBOR plus 3.75% spread and a prime rate which resulted in a weighted average rate of 4.8% and 3.9% at September 30, 2017 and 2016, respectively and the term loan has a rate of 5.5% and 3.8% at September 30, 2017 and 2016, respectively, which was based on LIBOR plus 4.25% spread. This rate becomes effective at a fixed rate of 5.8% and 3.9% after giving effect to the interest rate swap agreement as of September 30, 2017 and 2016, respectively. There is also a commitment fee ranging from 0.15% to 0.375%, to be incurred on the unused balance.
The Company entered into its First Amendment Agreement, ("First Amendment") to the Credit Facility on February 16, 2017. The First Amendment assigned its Lender as Administrative Agent and assigned a portion of its Credit Facility to a participating Lender.
Under the Company's Credit Facility, the Company is subjectrequired to certain customary loan covenants. These include, without limitation, covenants that require maintenance of certain specified financial ratios, including that the Company meetingmaintain a minimum EBITDA
and the maintenance of a minimum fixed charge coverage ratio ("FCCR") of 1.1 to commence on September 30, 2017.1.0 any time the availability is equal to or less than 12.5% of the revolving commitment. In the event of a default, wethe Company may not be able to access ourthe revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities. See discussion below regarding the Fourth Amendment (the "Fourth Amendment") to the Credit Agreement and Security Agreement discussion, which revises the provision related to FCCR.
On August 4, 2017,November 5, 2018, the Company entered into the First Amendment with its Secondlender. The First Amendment retroactively amended certain definitions and provisions effective as of the original closing date to clarify the parties' original understanding.
On December 17, 2018, the Company entered into an Export Credit Agreement ("Second Amendment"(the “Export Credit Agreement”) with its lenderLender. Pursuant to (i) amendthe terms of the Export Credit Agreement, the Lender will lend amounts to the Company on foreign receivables that are guaranteed by the Export-Import Bank of the United States of America. The Export Credit Agreement provides for a revolving commitment of $5,000, therefore increasing the maximum borrowing of the revolver to $35,000. The borrowings under the Export Credit Agreement will bear interest at (depending on the type of borrowing) the Prime or LIBOR Rate, plus the applicable margin as set forth in the Export Credit Agreement. The maturity date under the Export Credit Agreement is August 6, 2021 (or such earlier date as the revolving commitments under the Export Credit Agreement are reduced to zero or otherwise terminated). The Export Credit Agreement contains customary representations, warranties, covenants and events of default, including, without limitation, the affirmative covenants under the Company’s Credit Agreement dated August 8, 2018, as amended with the Lender. In connection with entering into the Export Credit Agreement, the Company also entered into the Second Amendment (the “Second Amendment”) to its Credit Agreement. The Second Amendment amends certain definitions withinand provisions to provide for the Company’s entrance into the Export Credit Agreement.
On March 29, 2019, the Company entered into a Third Amendment with its Lender. This amendment extended the time frame for when certain post-closing requirements would be satisfied by March 31, 2019 to June 30, 2019. These post-closing requirements were completed by June 30, 2019.
On September 20, 2019, the Company entered into a Fourth Amendment with its Lender. As previously stated, the Company is subject to certain customary loan covenants if availability is less than or equal to 12.5% of the revolving commitment for three or more business days in any consecutive 30 day period; however, the Fourth Amendment to the Credit Facility to, among other things, effect the changes described herein and to reset the Fixed Charge Coverage Ratio (as definedAgreement resulted in the Credit Facility) to build to a trailing four quarters in eachreduction of its availability from 12.5% of the fiscal 2018 quarters, commencing with the quarter ended December 31, 2017; (ii) replace certain of its financial covenants outlined in the descriptionrevolving commitment to 10% of the Credit Facility and amend its financial covenantslesser of the collateral or total revolving commitment, with a revised minimum EBITDA for$2,000 floor through June 30, 2020. This previous requirement prior to the four fiscal quarters endingFourth Amendment reset on July 1, 2020. As of September 30, 20172020 and to maintain a fixed charge coverage ratio commencing on December 31, 2017; (iii) reduce its maximum2019, the total collateral was $26,964 and $24,000, respectively, and the revolving amount ofcommitment was $35,000 to $30,000;for both periods. Total availability at September 30, 2020 and (iv)2019 was $13,284 and $7,709, respectively, which exceed both the collateral and total commitment threshold. If availability had fallen short, the Company would be required to meet the FCCR covenant, which must use its cash proceeds fromnot be less than 1.1 to 1.0. Because the saleavailability was greater than the 12.5% of the Irish building discussed in Note 1, Summary of Significant Accounting Policies - Asset Held for Sale, of the consolidated financial statements to reduce the Term Facility by $700 and use the remaining proceeds to reduce the revolver. On November 28, 2017, the Company obtained a consent letter from its Lender which extended to December 31, 2017 the date to consummate such sale of the Irish property. The Company is in compliance with its loan covenantsrevolving commitment as of September 30, 2017.2020, the FCCR calculation was not required.
Amounts borrowed under the Credit Agreement are secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 66.67% of the stock of its first-tier non-U.S. subsidiaries. Borrowings will bear interest at the lender's established domestic rate or LIBOR, plus the applicable margin as set forth in the Credit Agreement. The revolver has a rate based on LIBOR plus a 1.50% spread, which was 1.7% and 3.6% at September 30, 2020 and 2019, respectively. The Export Credit Agreement has a rate based on LIBOR plus a 1.00% spread at September 30, 2020 and 1.25% spread at September 30, 2019, which was 1.2% and 3.4% at September 30, 2020 and 2019, respectively. The Company also has a commitment fee of 0.25% under the Credit Agreement to be incurred on the unused balance of the revolver.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Company's Credit Agreement is set to mature within the next twelve months. Absent being able to refinance, the reporting entity would not be able to meet its obligations within the next year. Although there is no assurance that management will be successful in completing such refinancing or that such refinancing will be on terms similar to the current Credit Agreement or otherwise satisfactory to management, management intends to refinance its Credit Agreement with its Lender and is deemed probable of being implemented which would mitigate any adverse conditions.
Foreign subsidiary borrowings
As ofForeign debt at September 30 2017 and 2016, the total foreign debt borrowings were $8,346 and $9,540, respectively, of which $5,805 and $5,833, respectively is current. Current debt as of September 30, 2017 and 2016, consists of $2,618 and $3,262 of short-term borrowings, $1,340 and $2,014 is the current portion of long-term debt, and $1,847 and $557, of factoring. of:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Term loan | $ | 2,670 | | | $ | 2,318 | |
| Short-term borrowings | 2,620 | | | 3,744 | |
| Factor | 469 | | | 530 | |
| Total debt | $ | 5,759 | | | $ | 6,592 | |
| | | |
| Less – current maturities | (3,544) | | | (5,501) | |
| Total long-term debt | $ | 2,215 | | | $ | 1,091 | |
| | | |
| Receivables pledged as collateral | $ | 1,859 | | | $ | 672 | |
Interest rates are based on Euribor rates plus spread which range from 1.0% to 4.0%4.2%. In December 2018, Maniago entered into a six month short-term debt arrangement with one of its lenders in the amount of $1,137, to be used for working capital purposes, which has been repaid as of the end of the fiscal year 2019. In September 2020, Maniago entered into a long-term term debt agreement in the amount of $1,465, which was used to repay existing debt and for working capital purposes. The long-term loan repayment schedule is over a 72 month period and has a rate based on EURIBOR plus 3.20% spread, which was 2.7% at September 30, 2020. To assist with the preservation of liquidity and uncertainty of COVID-19, subsequent to September 30, 2020, Maniago finalized with certain lenders a deferment of payments ranging between 6 to 12 months which has been reflected within the future minimum payment schedule.
The Company factors receivables from 1 of its customers. The factoring programs are uncommitted, whereby the Company offers receivables for sale to an unaffiliated financial institution, which are then subject to acceptance by the unaffiliated financial institution. Following the sale and transfer of the receivables to the unaffiliated financial institution, the receivables are not isolated from the Company, and effective control of the receivables is not passed to the unaffiliated financial institution, which does not have the right to pledge or sell the receivables. The Company accounts for the pledge of receivables under this agreement as short-term debt and continues to carry the receivables on its consolidated balance sheets. The carrying value of the receivables pledged as collateral was $3,548 and $1,156 at September 30, 2017 and 2016, respectively.
Payments on long-term debt under the Credit Facility and foreign term debt and other debt (excluding capitalfinance lease obligations, see Note 9, Commitments and Contingencies10, Leases, of the consolidated financial statements) over the next 5 years are as follows:
| | | | | | | | |
| | Minimum long-term debt payments |
| | |
| 2021 | | $ | 3,995 | |
| 2022 | | 2,789 | |
| 2023 | | 595 | |
| 2024 | | 575 | |
| 2025 | | 381 | |
| thereafter | | 266 | |
| Total Minimum long-term debt payments | | $ | 8,601 | |
| | |
| | |
| | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
|
| | | | |
| | | Minimum long-term debt payments |
| | | |
| 2018 | | $ | 3,014 |
|
| 2019 | | 2,195 |
|
| 2020 | | 2,453 |
|
| 2021 | | 279 |
|
| 2022 | | — |
|
| 2023 and thereafter | | — |
|
| Total Minimum long-term debt payments | | $ | 7,941 |
|
Debt Issuanceissuance costs
The Company incurred debt issuance costs relatedas it pertains to its 2015the Credit Agreement in the amount of $724 ($194 had been amortized prior$212, and incurred additional costs in fiscal 2019 of $75 related to the write-off in November 2016). The Company incurred an additional $562 of debt issuance costs in November 2016First and August 2017 and wrote off a combined $323 of debt issuance costs during fiscal 2017 due to the debt modification accounting for deferred financing costs as it relates to the term note and due to the Second Amendment. These costsAmendments, which are included in interest expense in the accompanying consolidated financial statements. Total debt issuance cost in the amount of $769 is split between the Term Facility and the revolving credit facility. The portion noted above within the debt table relates to the Term Facility in the amount of $61, net of amortization of $14 at September 30, 2017. The remaining $707 of debt issuance cost relates to the revolving credit facility. This portion is shown in the consolidated balance sheet as a deferred charge in other current assets, which was reclassed from other long-term assets due to the classification of the revolving credit facility noted above, net of amortization of $282$205 and $106 at September 30, 2017.2020 and 2019, respectively.
Other
In response to the economic uncertainty created by the COVID-19 pandemic, as described above in Note 1, Summary of Significant Accounting Policies, and taking into consideration the Company’s market capitalization, status as a smaller reporting company, and uncertainties and volatility in, and disruptions to, the capital markets, as well as the terms of the Company’s Credit Agreement, the Company applied for and received funds under Paycheck Protection Program (or "PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). On April 10, 2020, the Company entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP Loan”). The PPP Loan to the Company was made through JPMorgan Chase Bank, N.A., a national banking association and the Company’s existing lender. The note has an aggregate principal amount of approximately $5,025 and a two year term. The interest rate on the PPP Loan is 0.98%, which was deferred for the first six months of the term of the loan. The promissory note evidencing the PPP Loan contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company. The loan proceeds were received on April 10, 2020 and were used for payroll, interest on mortgage obligations, rents on leases and utility payments. The Company repaid $261 of proceeds back to its lender, leaving a remaining balance of $4,764, of which $3,176 will be paid in the next twelve months and the remaining $1,588 in the following twelve months after, pending any forgiveness of such loan, as described below.
Under the terms of the CARES Act, PPP Loan recipients can apply for and potentially be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. Although the Company intends to file for forgiveness, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. As of September 30, 2020, the Company is waiting for further guidance regarding how to apply for the forgiveness for all or a portion of the PPP loan.
6. Revenue
The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and armored military vehicles; (ii) airframe applications for a variety of aircraft; (iii) industrial gas and steam turbine engines for power generation units; and (iv) other commercial applications.
The following table represents a breakout of total revenue by customer type:.
| | | | | | | | | | | | | | |
| | Years Ended
September 30, |
| | 2020 | | 2019 |
| | | | |
| Commercial revenue | | $ | 48,335 | | | $ | 54,999 | |
| Military revenue | | 65,238 | | | 57,455 | |
| Total | | $ | 113,573 | | | $ | 112,454 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –- (Continued)
The following table represents revenue by the various components:
6. | | | | | | | | | | | | | | |
| | Years Ended
September 30, |
| Net Sales | | 2020 | | 2019 |
| Aerospace components for: | | | | |
| Fixed wing aircraft | | $ | 52,039 | | | $ | 52,895 | |
| Rotorcraft | | 31,454 | | | 23,602 | |
| Energy components for power generation units | | 16,682 | | | 17,646 | |
| Commercial product and other revenue | | 13,398 | | | 18,311 | |
| Total | | $ | 113,573 | | | $ | 112,454 | |
The following table represents revenue by geographic region based on the Company's selling operation locations:
| | | | | | | | | | | | | | |
| | Years Ended
September 30, |
| Net Sales | | 2020 | | 2019 |
| North America | | $ | 98,144 | | | $ | 95,667 | |
| Europe | | 15,429 | | | 16,787 | |
| Total | | $ | 113,573 | | | $ | 112,454 | |
In addition to the disaggregating revenue information provided above, approximately 59% and 56% of total net sales as of September 30, 2020 and 2019, respectively, was recognized on an over-time basis because of the continuous transfer of control to the customer, with the remainder recognized as a point in time.
Contract Balances
Generally, payment is due shortly after the shipment of goods. For performance obligations recognized at a point in time, a contract asset is not established as the billing and revenue recognition occur at the same time. For performance obligations recognized over time, a contract asset is established as revenue that is recognized prior to billing and shipment. Upon shipment and billing, the value of the contract asset is reversed and accounts receivable is recorded. In circumstances where prepayments are required and payment is made prior to satisfaction of performance obligations, a contract liability is established. If the satisfaction of the performance obligation occurs over time, the contract liability is reversed over the course of production. If the satisfaction of the performance obligation is point in time, the contract liability reverses upon shipment.
The following table contains a roll forward of contract assets and contract liabilities for the period ended September 30, 2020 and 2019:
| | | | | | | | |
| | |
| Contract assets - Beginning balance, October 1, 2018 | | $ | 10,140 | |
| Additional revenue recognized over-time | | 62,499 | |
| Less amounts billed to the customers | | (62,290) | |
| Contract assets - Ending balance, September 30, 2019 | | $ | 10,349 | |
| Additional revenue recognized over-time | | 67,043 | |
| Less amounts billed to the customers | | (65,395) | |
| Contract assets - Ending balance, September 30, 2020 | | $ | 11,997 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
| | | | | | | | |
| | |
| Contract liabilities (included within Accrued liabilities) - Beginning balance, October 1, 2018 | | $ | 0 | |
| Payments received in advance of performance obligations | | (2,000) | |
| Performance obligations satisfied | | 1,618 | |
| Contract liabilities (included within Accrued liabilities) - Ending balance, September 30, 2019 | | $ | (382) | |
| Payments received in advance of performance obligations | | (865) | |
| Performance obligations satisfied | | 611 | |
| Contract liabilities (included within Accrued liabilities) - Ending balance, September 30, 2020 | | $ | (636) | |
There were 0 impairment losses recorded on contract assets during the year ended September 30, 2020 and 2019, respectively.
Remaining performance obligations
As of September 30, 2020 and 2019, the Company has $91,135 and $117,600, respectively, of remaining performance obligations, the majority of which are anticipated to be completed within the next twelve months.
7. Income Taxes
The components of loss from operationsincome (loss) before income tax benefit are as follows:
| | | | | | | | | | | | | |
| | Years Ended
September 30, | | |
| | 2020 | | 2019 | | |
| U.S. | $ | 10,071 | | | $ | 3,416 | | | |
| Non-U.S. | (1,091) | | | (11,623) | | | |
| Income (loss) before income tax benefit | $ | 8,980 | | | $ | (8,207) | | | |
|
| | | | | | | |
| | Years Ended September 30, |
| | 2017 | | 2016 |
| U.S. | $ | (15,574 | ) | | $ | (11,506 | ) |
| Non-U.S. | 2,434 |
| | (1,827 | ) |
| Loss before income tax provision (benefit) | $ | (13,140 | ) | | $ | (13,333 | ) |
Income taxes from operations before income tax provision (benefit)benefit consist of the following:
| | | | | | | | | | | | | |
| | Years Ended
September 30, | | |
| | 2020 | | 2019 | | |
| Current income tax provision (benefit): | | | | | |
| U.S. federal | $ | 0 | | | $ | 0 | | | |
| U.S. state and local | 19 | | | (27) | | | |
| Non-U.S. | 192 | | | (109) | | | |
| Total current tax provision (benefit) | 211 | | | (136) | | | |
| Deferred income tax provision (benefit): | | | | | |
| U.S. federal | 10 | | | 8 | | | |
| U.S. state and local | 1 | | | 2 | | | |
| Non-U.S. | (433) | | | (575) | | | |
| Total deferred tax provision (benefit) | (422) | | | (565) | | | |
| Income tax benefit | $ | (211) | | | $ | (701) | | | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
|
| | | | | | | |
| | Years Ended September 30, |
| | 2017 | | 2016 |
| Current income tax provision (benefit): | | | |
| U.S. federal | $ | (64 | ) | | $ | (2,687 | ) |
| U.S. state and local | (11 | ) | | (111 | ) |
| Non-U.S. | 951 |
| | 94 |
|
| Total current tax provision (benefit) | 876 |
| | (2,704 | ) |
| Deferred income tax provision (benefit): | | | |
| U.S. federal | 147 |
| | 1,481 |
|
| U.S. state and local | 5 |
| | 69 |
|
| Non-U.S. | 41 |
| | (844 | ) |
| Total deferred tax provision | 193 |
| | 706 |
|
| Income tax provision (benefit) | $ | 1,069 |
| | $ | (1,998 | ) |
The income tax benefit from operations in the accompanying consolidated statements of operations differs from amounts determined by using the statutory rate as follows:
| | | | | | | | | | | | | |
| | Years Ended
September 30, | | |
| | 2020 | | 2019 | | |
| Income (loss) before income tax benefit | $ | 8,980 | | | $ | (8,207) | | | |
| | | | | |
| | | | | |
| | | | | |
| Income tax provision (benefit) at U.S. federal statutory rates | $ | 1,886 | | | $ | (1,723) | | | |
| Tax effect of: | | | | | |
| Foreign rate differential | 0 | | | 1,698 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| State and local income taxes | 20 | | | 14 | | | |
| | | | | |
| Federal tax credits | (135) | | | (144) | | | |
| Valuation allowance | (2,025) | | | (556) | | | |
| | | | | |
| Other | 43 | | | 10 | | | |
| Income tax benefit | $ | (211) | | | $ | (701) | | | |
|
| | | | | | | |
| | Years Ended September 30, |
| | 2017 | | 2016 |
| Loss before income tax benefit | $ | (13,140 | ) | | $ | (13,333 | ) |
| | | | |
| Income tax benefit at U.S. federal statutory rates | $ | (4,599 | ) | | $ | (4,667 | ) |
| Tax effect of: | | | |
| Foreign rate differential | 120 |
| | 254 |
|
| State and local income taxes | (6 | ) | | (42 | ) |
| Impact of tax law changes | (103 | ) | | (338 | ) |
| Federal tax credits | (252 | ) | | (572 | ) |
| Valuation allowance | 5,720 |
| | 3,309 |
|
| Other | 189 |
| | 58 |
|
| Income tax provision (benefit) | $ | 1,069 |
| | $ | (1,998 | ) |
SIFCO Industries, Inc.certain payment requirements for the employer portion of Social Security taxes, net operating loss carryback periods and Subsidiaries
Notestemporarily increasing the amount of net operating losses that corporations can use to Consolidated Financial Statements –(Continued)
offset income, alternative minimum tax ("AMT") credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not materially affect the Company’s fiscal 2020 income tax provision, deferred tax assets and liabilities, or related taxes payable. The Company continues to assess the future implications of these provisions within the CARES Act on its consolidated financial statements but does not expect the impact to be material.
Deferred tax assets and liabilities at September 30 consist of the following:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Deferred tax assets: | | | |
| Net U.S. operating loss carryforwards | $ | 3,543 | | | $ | 5,002 | |
| Net non-U.S. operating loss carryforwards | 789 | | | 866 | |
| Employee benefits | 2,688 | | | 2,456 | |
| Inventory reserves | 1,049 | | | 970 | |
| Allowance for doubtful accounts | 73 | | | 144 |
| | | |
| Intangibles | 2,197 | | | 2,535 | |
| Foreign tax credits | 1,724 | | | 1,724 | |
| Other tax credits | 1,359 | | | 1,232 | |
| Other | 1,171 | | | 918 | |
| Total deferred tax assets | 14,593 | | | 15,847 | |
| Deferred tax liabilities: | | | |
| Depreciation | (8,653) | | | (8,135) | |
| | | |
| Prepaid expenses | (376) | | | (192) | |
| Other | (1,635) | | | (1,681) | |
| Total deferred tax liabilities | $ | (10,664) | | | $ | (10,008) | |
| Net deferred tax assets | 3,929 | | | 5,839 | |
| Valuation allowance | (5,329) | | | (7,557) | |
| Net deferred tax liabilities | (1,400) | | | (1,718) | |
| | | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
|
| | | | | | | |
| | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Net U.S. operating loss carryforwards | $ | 5,188 |
| | $ | 195 |
|
| Net non-U.S. operating loss carryforwards | 596 |
| | 777 |
|
| Employee benefits | 2,461 |
| | 3,366 |
|
| Inventory reserves | 1,240 |
| | 1,032 |
|
| Allowance for doubtful accounts | 135 |
| | 234 |
|
| Capitalized research and development expenses | — |
| | 870 |
|
| Intangibles | 4,873 |
| | 4,364 |
|
| Foreign tax credits | 602 |
| | 575 |
|
| Other tax credits | 994 |
| | 1,006 |
|
| Other | 1,126 |
| | 1,106 |
|
| Total deferred tax assets | 17,215 |
| | 13,525 |
|
| Deferred tax liabilities: | | | |
| Depreciation | (8,854 | ) | | (10,777 | ) |
| Unremitted foreign earnings | (65 | ) | | (65 | ) |
| Prepaid expenses | (247 | ) | | (566 | ) |
| Other tax credits | (1,718 | ) | | (647 | ) |
| Total deferred tax liabilities | (10,884 | ) | | (12,055 | ) |
| Net deferred tax assets (liabilities) | 6,331 |
| | 1,470 |
|
| Valuation allowance | (9,597 | ) | | (4,399 | ) |
| Net deferred tax liabilities | $ | (3,266 | ) | | $ | (2,929 | ) |
At September 30, 2017,2020, the Company has a non-U.S. tax loss carryforward of approximately $5,473$6,141 related to the Company’s Irishnon-operating and Italian subsidiaries. The Company's Irishnon-operating subsidiary ceased operations in 2007 and therefore, a valuation allowance has been recorded against the deferred tax asset related to the Irish tax loss carryforward because it is unlikely that such operating loss can be utilized unless the Irish subsidiary resumes operations. The non-U.S.Additionally, a valuation allowance has been recorded in fiscal 2020 against a portion of the deferred tax asset related to the Italian tax loss carryforward doesthat was not considered realizable. The non-operating and Italian tax loss carryforwards do not expire.
The Company has $602$1,724 of foreign tax credit carryforwards that are subject to expiration in fiscal 2023-2026, $7582023-2028, $1,182 of U.S. general business tax credits that are subject to expiration in 2035-2037, $28 of alternative minimum tax that do not expire,2035-2040, and $13,561$12,943 of U.S. Federal tax loss carryforwards with $9,622 subject to expiration in fiscal 2036-2037.2037 and $3,321 that do not expire. A valuation allowance has been recorded against the deferred tax assets related to the foreign tax credit carryforwards, U.S. general business credits, and U.S. Federal tax loss carryforwards.
In addition, the Company has $165$178 of U.S. state tax credit carryforwards subject to expiration in fiscal 2022-2024 and $23,848$25,782 of U.S. state and local tax loss carryforwards subject to expiration in fiscal 2020-2037.2021-2039. The U.S. state tax credit carryforwards and U.S. state and local tax loss carryforwards have been fully offset by a valuation allowance. A
As of fiscal 2020, the valuation allowance on the Company’s U.S. net deferred tax assets is $5,329. Each reporting period, the Company assesses available positive and negative evidence and estimate in determining the realizability of its deferred tax assets. Through fiscal 2019, the Company’s history of U.S. operating losses has resulted in significant negative evidence requiring a full valuation allowance to be recorded against the U.S. net deferred tax assets. Recent positive evidence includes profitable fiscal 2020 U.S. results, however, there continues to be uncertainty as a result of the ongoing COVID-19 pandemic. Accordingly, the Company has maintained a full valuation allowance on its U.S. net deferred tax assets in fiscal 2020. However, it is reasonably possible that sufficient positive evidence required to release all, or a portion, of the U.S. state and local tax loss carryforwards presentedvaluation allowance in the table above have been reduced by unrealized stock compensation deductions of $5.U.S. will exist within the next 12 months.
The Company reported liabilities for uncertain tax positions, excluding any related interest and penalties, of $69 in$22 for both fiscal 20172020 and 2016.2019. If recognized, $69$22 of the fiscal 20172020 uncertain tax positions would impact the effective tax rate. As of September 30, 2017,2020, the Company had accrued interest of $24$14 and recognized $3$1 for interest and penalties in operations. The Company classifies interest and penalties on uncertain tax positions as income tax expense. A summary of activity related to the Company’s uncertain tax position is as follows:
|
| | | | | | | |
| 2017 | | 2016 |
| Balance at beginning of year | $ | 69 |
| | $ | 105 |
|
| Decrease due to lapse of statute of limitations | — |
| | (36 | ) |
| Balance at end of year | $ | 69 |
| | $ | 69 |
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
| | | | | | | | | | | |
| 2020 | | 2019 |
| Balance at beginning of year | $ | 22 | | | $ | 53 | |
| | | |
| Decrease due to lapse of statute of limitations | 0 | | | (31) | |
| | | |
| Balance at end of year | $ | 22 | | | $ | 22 | |
The Company is subject to income taxes in the U.S. federal jurisdiction, Ireland, Italy and various states and local jurisdictions. The Company believes it has appropriate support for its federal income tax returns. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2013,2017, state and local income tax examinations for fiscal years prior to 2014, or non-U.S. income tax examinations by tax authorities for fiscal years prior to 2007.
The Company does not record deferred taxes on the undistributed earnings of its non-U.S. subsidiaries as it does not expect the temporary differences related to those unremitted earnings to reverse in the foreseeable future. As of September 30, 2017,2020, the Company has $11,427Company's non-U.S. subsidiaries had accumulated deficits of undistributedapproximately $485. Future distributions of accumulated earnings of the Company's non-U.S. subsidiaries for which no deferred taxes have been provided as the Company intendsmay be subject to permanently reinvest these earnings outside the U.S. Quantificationnominal withholding taxes.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued) 7.
8. Retirement Benefit Plans
Defined Benefit Plans
The Company and certain of its subsidiaries sponsor 4 defined benefit pension plans covering mostsome of its employees. The Company’s funding policy for its defined benefit pension plans is based on an actuarially determined cost method allowable under Internal Revenue Service regulations. One of the defined benefit pension plans covers substantially all non-union employees of the Company’s U.S. operations who were hired prior to March 1, 2003,2003. Benefit accruals ceased in March 2003. A second defined benefit plan covered employees at a business location that closed in December 2013, at which time benefits accruals ceased. The third defined pension plan covers one of the Company's union groups at the Cleveland location. See Notes 11 and 12, Commitment and Contingencies and Business information, for further discussion regarding its union status. Benefits accruals under this plan ceased in March 2020, when the then-current union disclaimed all interest in the bargaining unit. Curtailment occurred; however, there was frozen in 2003, while anotherno impact to consolidated financial statements. A new union has been certified and collective bargaining is underway. Such bargaining will determine whether benefit accruals under this plan that covered union employees no longer has active participants due to the business closure. Consequently, although both plans continue, the non-union plan ceased the accrual of additional pensionwill resume or whether retirement benefits for service subsequent to March 1, 2003, and the related union plan has had no participants accrue any additional benefits subsequent to December 31, 2013.will be provided through a defined contribution plan. The Company sponsors a fourth defined benefit plan for certain ofemployees at its employees.Maniago location. The plan is a severance entitlement payable to the Italian employees who qualified prior to December 27, 2006. The plan is considered an unfunded defined benefit plan and its liability is measured as the actuarial present value of the vested benefits to which the employees would be entitled if the employeethey separated at the consolidated balance sheet date.
The Company uses a September 30 measurement date for its U.S. defined benefit pension plans. Net pension expense, benefit obligations and plan assets for the Company-sponsored defined benefit pension plans consists of the following:
|
| | | | | | | |
| | Years Ended September 30, |
| | 2017 | | 2016 |
| Service cost | $ | 324 |
| | $ | 280 |
|
| Interest cost | 883 |
| | 1,017 |
|
| Expected return on plan assets | (1,615 | ) | | (1,632 | ) |
| Amortization of net loss | 861 |
| | 828 |
|
| Settlement cost | — |
| | 223 |
|
| Net pension expense for defined benefit plan | $ | 453 |
| | $ | 716 |
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
| | | | | | | | | | | | | |
| | Years Ended
September 30, | | |
| | 2020 | | 2019 | | |
| Service cost | $ | 341 | | | $ | 299 | | | |
| Interest cost | 832 | | | 1,055 | | | |
| Expected return on plan assets | (1,453) | | | (1,573) | | | |
| | | | | |
| Amortization of net loss | 752 | | | 429 | | | |
| | | | | |
| Settlement cost | 239 | | | 246 | | | |
| Net pension expense for defined benefit plans | $ | 711 | | | $ | 456 | | | |
The status of all defined benefit pension plans at September 30 is as follows:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Benefit obligations: | | | |
| Benefit obligations at beginning of year | $ | 30,548 | | | $ | 27,437 | |
| | | |
| Service cost | 341 | | | 299 | |
| Interest cost | 832 | | | 1,055 | |
| Actuarial loss | 2,037 | | | 3,691 | |
| Benefits paid | (1,965) | | | (1,914) | |
| Currency translation | 0 | | | (20) | |
| | | |
| | | |
| Benefit obligations at end of year | $ | 31,793 | | | $ | 30,548 | |
| Plan assets: | | | |
| Plan assets at beginning of year | $ | 20,970 | | | $ | 22,052 | |
| Actual return on plan assets | 1,930 | | | 622 | |
| Employer contributions | 674 | | | 210 | |
| Benefits paid | (1,965) | | | (1,914) | |
| Plan assets at end of year | $ | 21,609 | | | $ | 20,970 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
|
| | | | | | | |
| | 2017 | | 2016 |
| Benefit obligations: |
| | |
| Benefit obligations at beginning of year | $ | 29,731 |
| | $ | 27,685 |
|
| Service cost | 324 |
| | 280 |
|
| Interest cost | 883 |
| | 1,017 |
|
| Actuarial (loss) gain | (1,292 | ) | | 2,405 |
|
| Benefits paid | (1,740 | ) | | (1,659 | ) |
| Currency translation | 15 |
| | 3 |
|
| Benefit obligations at end of year | $ | 27,921 |
| | $ | 29,731 |
|
| Plan assets: | | | |
| Plan assets at beginning of year | $ | 21,344 |
| | $ | 20,896 |
|
| Actual return on plan assets | 1,978 |
| | 2,061 |
|
| Employer contributions | 109 |
| | 46 |
|
| Benefits paid | (1,740 | ) | | (1,659 | ) |
| Plan assets at end of year | $ | 21,691 |
| | $ | 21,344 |
|
| | | | | | | | | | | | | | |
| | | Plans in which
Benefit Obligations
Exceed Assets at
September 30, |
| | | | | 2020 | | 2019 |
| Reconciliation of funded status: | | | | | | |
| Plan assets less than projected benefit obligations | | | | $ | (10,211) | | | $ | (9,574) | |
| Amounts recognized in accumulated other comprehensive loss: | | | | | | |
| Net loss | | | | 11,973 | | | 11,404 | |
| | | | | | |
| Net amount recognized in the consolidated balance sheets | | | | $ | 1,762 | | | $ | 1,830 | |
| Amounts recognized in the consolidated balance sheets are: | | | | | | |
| | | | | | |
| Accrued liabilities | | | | (46) | | | (46) | |
| Pension liability | | | | (10,165) | | | (9,528) | |
| Accumulated other comprehensive loss – pretax | | | | 11,973 | | | 11,404 | |
| Net amount recognized in the consolidated balance sheets | | | | $ | 1,762 | | | $ | 1,830 | |
|
| | | | | | | |
| | Plans in which Benefit Obligations Exceed Assets at September 30, |
| | 2017 | | 2016 |
| Reconciliation of funded status: | | | |
| Plan assets less than projected benefit obligations | $ | (6,230 | ) | | $ | (8,387 | ) |
| Amounts recognized in accumulated other comprehensive loss: |
| |
|
| Net loss | 8,406 |
| | 10,926 |
|
| Net amount recognized in the consolidated balance sheets | $ | 2,176 |
| | $ | 2,539 |
|
| Amounts recognized in the consolidated balance sheets are: | | | |
| Accrued liabilities | (46 | ) | | (46 | ) |
| Pension liability | (6,184 | ) | | (8,341 | ) |
| Accumulated other comprehensive loss – pretax | 8,406 |
| | 10,926 |
|
| Net amount recognized in the consolidated balance sheets | $ | 2,176 |
| | $ | 2,539 |
|
The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit costs during fiscal 20182021 are as follows:
| | | | | | | | | | | |
| Plans in which
Assets Exceed
Benefit
Obligations | | Plans in which
Benefit
Obligations
Exceed Assets |
| Net loss | $ | 0 | | | $ | 844 | |
| | | |
| | | |
|
| | | | | | | |
| Plans in which
Assets Exceed
Benefit
Obligations |
| Plans in which
Benefit
Obligations
Exceed Assets |
| Net loss | $ | — |
| | $ | 669 |
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
Where applicable, the following weighted-average assumptions were used in developing the benefit obligation and the net pension expense for defined benefit pension plans:
| | | | Years Ended
September 30, | | Years Ended
September 30, |
| | 2017 | | 2016 | | 2020 | | 2019 |
| Discount rate for liabilities | 3.6 | % | | 3.1 | % | Discount rate for liabilities | 2.3 | % | | 2.9 | % |
| Discount rate for expenses | 3.1 | % | | 3.8 | % | Discount rate for expenses | 2.9 | % | | 4.2 | % |
| Expected return on assets | 7.9 | % | | 8.0 | % | Expected return on assets | 7.2 | % | | 7.5 | % |
The Company holds investments in pooled separate accounts and common/collective trusts, in which the fair value of assets of the underlying funds are determined in the following ways:
•U.S. equity securities are comprised of domestic equities that are priced using the closing price of the applicable nationally recognized stock exchange, as provided by industry standard vendors such as Interactive Data Corporation.
•Non-U.S. equity securities are comprised of international equities. These securities are priced using the closing price from the applicable foreign stock exchange.
•U.S. bond funds are comprised of domestic fixed income securities. Securities are priced by industry standards vendors, such as Interactive Data Corporation, using inputs such as benchmark yields, reported trades, broker/dealer quotes, or issuer spreads.
| |
◦ | Included as part of the U.S. bond funds, are private placement funds, for which fair market value is not always commercially available, the fair value of these investments is primarily determined using a discounted cash flow model, which utilizes a discount rate based upon the average of spread surveys collected from private-market intermediaries who are active in both primary and secondary transactions, and takes into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. |
◦Included as part of the U.S. bond funds, are private placement funds, for which fair market value is not always commercially available, the fair value of these investments is primarily determined using a discounted cash flow model, which utilizes a discount rate based upon the average of spread surveys collected from private-market intermediaries who are active in both primary and secondary transactions, and takes into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
•Non-U.S. bond funds are comprised of international fixed income securities. Securities are priced by Interactive Data Corporation, using inputs such as benchmark yields, reported trades, broker/dealer quotes, or issuer spreads.
•Stable value fund is comprised of short-term securities and cash equivalent securities, which seek to provide high current income consistent with the preservation of principal and liquidity. As permitted under relevant securities laws, securities in this type of fund are valued initially at cost and thereafter adjusted for amortization of any discount or premium.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. However, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement result.
The following tables set forth the asset allocation of the Company’s defined benefit pension plan assets and summarize the fair values and levels within the fair value hierarchy for such plan assets as of September 30, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | Asset
Amount | | | | Level 2 | | Level 3 |
| U.S. equity securities: | | | | | | | |
| Large value | $ | 175 | | | | | $ | 175 | | | $ | 0 | |
| Large blend | 9,334 | | | | | 9,334 | | | 0 | |
| Large growth | 1,109 | | | | | 1,109 | | | 0 | |
| Mid blend | 176 | | | | | 176 | | | 0 | |
| Small blend | 224 | | | | | 224 | | | 0 | |
| Non-U.S. equity securities: | | | | | | | |
| Foreign large blend | 1,603 | | | | | 1,603 | | | 0 | |
| Diversified emerging markets | 50 | | | | | 50 | | | 0 | |
| U.S. debt securities: | | | | | | | |
| Inflation protected bond | 1,028 | | | | | 1,028 | | | 0 | |
| Intermediate term bond | 7,479 | | | | | 5,381 | | | 2,098 | |
| High inflation bond | 178 | | | | | 178 | | | 0 | |
| Non-U.S. debt securities: | | | | | | | |
| Emerging markets bonds | 106 | | | | | 106 | | | 0 | |
| Stable value: | | | | | | | |
| Short-term bonds | 147 | | | | | 147 | | | 0 | |
| Total plan assets at fair value | $ | 21,609 | | | | | $ | 19,511 | | | $ | 2,098 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –- (Continued)
| | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | Asset
Amount | | | | Level 2 | | Level 3 |
| U.S. equity securities: | | | | | | | |
| Large value | $ | 435 | | | | | $ | 435 | | | $ | 0 | |
| Large blend | 9,368 | | | | | 9,368 | | | 0 | |
| Large growth | 625 | | | | | 625 | | | 0 | |
| Mid blend | 163 | | | | | 163 | | | 0 | |
| Small blend | 159 | | | | | 159 | | | 0 | |
| Non-U.S. equity securities: | | | | | | | |
| Foreign large blend | 1,607 | | | | | 1,607 | | | 0 | |
| Diversified emerging markets | 17 | | | | | 17 | | | 0 | |
| U.S. debt securities: | | | | | | | |
| Inflation protected bond | 1,100 | | | | | 1,100 | | | 0 | |
| Intermediate term bond | 6,974 | | | | | 4,969 | | | 2,005 | |
| High inflation bond | 173 | | | | | 173 | | | 0 | |
| Non-U.S. debt securities: | | | | | | | |
| Emerging markets bonds | 106 | | | | | 106 | | | 0 | |
| Stable value: | | | | | | | |
| Short-term bonds | 243 | | | | | 243 | | | 0 | |
| Total plan assets at fair value | $ | 20,970 | | | | | $ | 18,965 | | | $ | 2,005 | |
|
| | | | | | | | | | | |
| September 30, 2017 | Asset Amount | | Level 2 | | Level 3 |
| U.S. equity securities: | | | | | |
| Large value | $ | 681 |
| | $ | 681 |
| | $ | — |
|
| Large blend | 9,788 |
| | 9,788 |
| | — |
|
| Large growth | 470 |
| | 470 |
| | — |
|
| Mid blend | 79 |
| | 79 |
| | — |
|
| Small blend | 111 |
| | 111 |
| | — |
|
| Non-U.S. equity securities: | | |
| |
|
| Foreign large blend | 1,731 |
| | 1,731 |
| | — |
|
| Diversified emerging markets | 19 |
| | 19 |
| | — |
|
| U.S. debt securities: | | |
| |
|
| Inflation protected bond | 1,089 |
| | 1,089 |
| | — |
|
| Intermediate term bond | 7,240 |
| | 5,065 |
| | 2,175 |
|
| High inflation bond | 187 |
| | 187 |
| | — |
|
| Non-U.S. debt securities: | | |
| |
|
| Emerging markets bonds | 77 |
| | 77 |
| | — |
|
| Stable value: | | |
| |
|
| Short-term bonds | 219 |
| | 219 |
| | — |
|
| Total plan assets at fair value | $ | 21,691 |
| | $ | 19,516 |
| | $ | 2,175 |
|
|
| | | | | | | | | | | |
| September 30, 2016 | Asset Amount | | Level 2 | | Level 3 |
| U.S. equity securities: | | | | | |
| Large value | $ | 492 |
| | $ | 492 |
| | $ | — |
|
| Large blend | 9,593 |
| | 9,593 |
| | — |
|
| Large growth | 503 |
| | 503 |
| | — |
|
| Mid blend | 57 |
| | 57 |
| | — |
|
| Small blend | 56 |
| | 56 |
| | — |
|
| Non-U.S. equity securities: | | |
| |
|
| Foreign large blend | 1,565 |
| | 1,565 |
| | — |
|
| Diversified emerging markets | 18 |
| | 18 |
| | — |
|
| U.S. debt securities: | | |
| |
|
| Inflation protected bond | 537 |
| | 537 |
| | — |
|
| Intermediate term bond | 7,747 |
| | 5,562 |
| | 2,185 |
|
| High inflation bond | 360 |
| | 360 |
| | — |
|
| Non-U.S. debt securities: | | |
| |
|
| Emerging markets bonds | 66 |
| | 66 |
| | — |
|
| Stable value: | | |
| |
|
| Short-term bonds | 350 |
| | 350 |
| | — |
|
| Total plan assets at fair value | $ | 21,344 |
| | $ | 19,159 |
| | $ | 2,185 |
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
Changes in the fair value of the Company’s Level 3 investments during the years ending September 30, 20172020 and 20162019 were as follows:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Balance at beginning of year | $ | 2,005 | | | $ | 1,815 | |
| Actual return on plan assets | 128 | | | 190 | |
| Purchases and sales of plan assets, net | (35) | | | 0 | |
| Balance at end of year | $ | 2,098 | | | $ | 2,005 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Balance at beginning of year | $ | 2,185 |
| | $ | 2,045 |
|
| Actual return on plan assets | 26 |
| | 126 |
|
| Purchases and sales of plan assets, net | (36 | ) | | 14 |
|
| Balance at end of year | $ | 2,175 |
| | $ | 2,185 |
|
Investment objectives relative to the assets of the Company’s defined benefit pension plans are to (i) optimize the long-term return on the plans’ assets while assuming an acceptable level of investment risk; (ii) maintain an appropriate diversification across asset categories and among investment managers; and (iii) maintain a careful monitoring of the risk level within each asset category. Asset allocation objectives are established to promote optimal expected returns and volatility characteristics given the long-term time horizon for fulfilling the obligations of the Company’s defined benefit pension plans. Selection of the appropriate asset allocation for the plans’ assets was based upon a review of the expected return and risk characteristics of each asset category in relation to the anticipated timing of future plan benefit payment obligations. The Company has a long-term objective for the allocation of plan assets. However, the Company realizes that actual allocations at any point in time will likely vary from this objective due principally to (i) the impact of market conditions on plan asset values and (ii) required cash contributions to and distribution from the plans. The “Asset Allocation Range” listed below anticipates these potential scenarios and provides flexibility for the Plan’s investments to vary around the objective without triggering a reallocation of the assets, as noted by the following:
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
|
| | | | | | | |
| | Percent of Plan Assets at September 30, | | Asset Allocation Range |
| | 2017 | | 2016 | |
| U.S. equities | 51 | % | | 50 | % | | 30% to 70% |
| Non-U.S. equities | 8 | % | | 7 | % | | 0% to 20% |
| U.S. debt securities | 39 | % | | 41 | % | | 20% to 70% |
| Non-U.S. debt securities | 1 | % | | — | % | | 0% to 10% |
| Other securities | 1 | % | | 2 | % | | 0% to 60% |
| Total | 100 | % | | 100 | % | | |
| | | | | | | | | | | | | | | | | |
| | Percent of Plan Assets at
September 30, | | Asset Allocation Range |
| | 2020 | | 2019 | |
| U.S. equities | 51 | % | | 51 | % | | 30% to 70% |
| Non-U.S. equities | 8 | % | | 8 | % | | 0% to 20% |
| U.S. debt securities | 40 | % | | 39 | % | | 20% to 70% |
| Non-U.S. debt securities | 0 | % | | 1 | % | | 0% to10% |
| Other securities | 1 | % | | 1 | % | | 0% to 60% |
| Total | 100 | % | | 100 | % | | |
External consultants assist the Company with monitoring the appropriateness of the above investment strategy and the related asset mix and performance. To develop the expected long-term rate of return assumptions on plan assets, generally the Company uses long-term historical information for the target asset mix selected. Adjustments are made to the expected long-term rate of return assumptions when deemed necessary based upon revised expectations of future investment performance of the overall investments markets.
The Company anticipates making approximately $91$245 in contributions to its defined benefit pension plans during fiscal 2018.2021. The Company has carryover balances from previous periods that may be available for use as a credit to reduce the amount of contributions that the Company is required to make to certain of its defined benefit pension plans in fiscal 2018.2021. The Company’s ability to elect to use such carryover balances will be determined based on the actual funded status of each defined benefit pension plan relative to the plan’s minimum regulatory funding requirements. The following defined benefit payment amounts are expected to be made in the future:
| | | | | |
Years Ending September 30, | Projected
Benefit Payments |
| 2021 | $ | 2,332 | |
| 2022 | 1,884 | |
| 2023 | 1,886 | |
| 2024 | 1,836 | |
| 2025 | 1,926 | |
| 2026-2030 | 8,432 | |
|
| | | |
Years Ending September 30, | Projected Benefit Payments |
| 2018 | $ | 1,897 |
|
| 2019 | 1,723 |
|
| 2020 | 1,901 |
|
| 2021 | 1,920 |
|
| 2022 | 1,740 |
|
| 2023-2027 | 8,986 |
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
Multi-Employer PlansPlan
The Company contributes to one (1) U.S. multi-employer retirement plan for certain union employees, as follow:
| | Pension Fund | | Pension Protection Act Zone Status | | FIP/RP Status Pending/ Implemented | | Contributions by the Company | | Surcharge Imposed | | Expiration of Collective Bargaining Agreement | Pension
Fund | | Pension Protection Act Zone Status | | FIP/RP Status
Pending/
Implemented | | Contributions by the Company | | Surcharge
Imposed | | Expiration of
Collective
Bargaining
Agreement |
| | 2017 | | 2016 | | 2017 | | 2016 | | | 2020 | | 2019 | | 2020 | | 2019 | | |
| Fund ¹ | | Green | | Green | | No | | $ | 58 |
| | $ | 65 |
| | No | | 5/31/2020 | Fund ¹ | | N/A | | Red | | Implemented | | $ | 0 | | | $ | 55 | | | | Yes | | 5/31/2020 |
|
¹ The fund is the IAM National Pension Fund – EIN 51-6031295 / Plan number 2. The IAM National Pension Fund ("IAM plan") utilized the special 30-year amortization provided by Public law 111-192, section 211 to amortize its losses from 2008.
The plan's year-end to which the zone status relates is December 31, 20162018.
Under the Pension Protection Act of 2006 and 2015.extended by the Multi-employer Pension Reform Act of 2014, certain safeguards were implemented to inform participants about the financial health of pension plan. The Company received the zone status notice from the IAM plan. The notice states the plan is well funded at 89%; however, the IAM Plan's Board of Trustees voluntarily elected to place the plan in the Red Zone, which deems it to be in critical status for 2019 due to decline of the IAM Plan's credit balance and challenging investment environment. As such, all participating employers were required by regulation to begin contributing 5% Pension Protection Act ("PPA") contribution surcharges effective June 1, 2019. The Company began contributing the surcharges during fiscal 2019.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
As noted within Note 12, Business Information, the bargaining unit that participated in this multi-employer plan ratified a new collective bargaining agreement in December 2019. Included within this agreement was a provision to withdraw from the existing multi-employer plan effective December 31, 2019. The withdrawal resulted in a withdrawal liability of $739, which was recorded within the costs of goods sold line of the consolidated statements of operations and is included in other long-term liabilities. The liability is payable in quarterly installments over the next 20 years. The next four quarterly installments are recorded in accrued liabilities of the consolidated balance sheet.
The risks of participating in the multi-employer retirement plan are differentCompany withdrew from a single-employer plan in that (i) assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributingmitigate the risks associated with these plans. Subsequent to the plan,withdrawal, the unfunded obligationsremaining risk to the Company is the potential occurrence of a "mass withdrawal" of all participating employers within three years of the plan may be borne by the remaining participating employers; and (iii) ifCompany's withdrawal date, in which case the Company chooses to stop participating in the multi-employer retirement plan, the Company maycould be required to pay the plan an amount based on the unfunded status of the plan, referred to as aassessed additional withdrawal liability.
Defined Contribution Plans
Substantially all non-union U.S. employees of the Company and its U.S. subsidiaries are eligible to participate in the Company’s U.S. defined contribution plan. The Company makes non-discretionary, regular matching contributions to this plan equal to an amount that represents one hundred percent (100%) of a participant’s deferral contribution up to one percent (1%) of eligible compensation plus eighty percent (80%) of a participant’s deferral contribution between one percent (1%) and six percent (6%) of eligible compensation. The Company’s regular matching contribution expense for its U.S. defined contribution plan in fiscal 20172020 and 20162019 was $574$648 and $647,$470, respectively. This defined contribution plan provides that the Company may also make an additional discretionary matching contribution during those periods in which the Company achieves certain performance levels. The Company did not provide additional discretionary matching contributions in either fiscal 20172020 and 2016. The2019.
Effective January 1, 2020, the Company sponsors a separate defined contribution plan for certain of its U.S. union employees related to the Alliance plant.Cleveland bargaining unit that withdrew from the multi-employer plan, as described above. The Company's makes a non-elective contribution equal to this plan is based on$1.50 per work, vacation, or holiday hour, up to a specified amountmaximum of 40 hours per hour based on the provisions of the applicable collective bargaining agreement. Due to the closure of the Alliance facility, as described previously, the related definedweek. The Company non-elective contribution plan for its union employees terminatedexpense was $56 in October 2017.fiscal 2020.
The Company sponsors a defined contribution plan for certain of its employees Maniago union employees. The plan is a severance entitlement payable plan to Italian employees based on local government laws, which qualifies as a defined contribution plan.
8.9. Stock-Based Compensation
The Company with the approval ofhas awarded performance and restricted shares under its shareholders on January 25, 2017,shareholder-approved amended and restated its 2007 Long-Term Incentive Plan, (“2007 Plan”which was further amended and restated under the 2016 Plan. At the Annual Meeting of Shareholders held on January 30, 2020, the shareholders of the Company approved the first amendment (the "Amendment") to the 2016 Long-Term IncentivePlan. The Amendment increased the number of shares available for award under the 2016 Plan ("2016 Plan").by 550 shares. The amendment increased the aggregate number of shares that may be awarded underby the 2016 PlanCompany was increased to 6461,196 shares, less any shares previously awarded and subject to an adjustment for the forfeiture of any unvested shares.shares, pursuant to the 2016 Plan. In addition, shares that may be awarded are subject to individual recipient award limitations. The shares awarded under the 2016 Plan may be made in multiple forms including stock options, stock appreciation rights, restricted or unrestricted stock, and performance related shares. Any such awards are exercisable no later than ten years from the date of grant.
The performance shares that have been awarded under both plans generally provide for the vesting of the Company’s common shares upon the Company achieving certain defined financial performance objectives during a period up to three years following the granting of such award. The ultimate number of common shares of the Company that may be earned pursuant to an award ranges from a minimum of no0 shares to a maximum of 150%200% of the initial target number of performance shares awarded, depending on the level of the Company’s achievement of its financial performance objectives. Beginning in fiscal 2020, the maximum shares that may be achieved was reduced to 150% of target.
With respect to such performance shares, compensation expense is being accrued based on the probability of meeting the performance target. The Company is currently recognizing compensation expense for one of its tranches of awards as it has concluded it is probable that the performance criteria for that award will be met. The Company is not currently recognizing compensation expense for two tranches of awards as it has concluded it is not probable it will meet the performance criteria for those awards. During each future reporting period, such expense is evaluated and may be subject to adjustment based upon the Company’sCompany's financial
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
performance, which impacts the number of common shares that it expects to issue uponvest up on the completion of thea performance period. The performance shares were valued at the closing market price of the Company’s common shares on the date of grant. The vesting of such shares is determined at the end of the performance period.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –(Continued)
The Company has awarded restricted shares to certain of its directors, officers and other employees of the Company. The restricted shares were valued at the closing market price of the Company’s common shares on the date of grant, and such value was recorded as unearned compensation. The unearned compensation is being amortized ratably over the restricted stock vesting period of one (1) year or three (3) years.
If all outstanding share awards are ultimately earned and issued at the target number of shares, then at September 30, 20172020 there are approximately 413589 shares that remain available for award.award under the 2016 Plan. If any of the outstanding share awards are ultimately earned and issued at greater than the target number of shares, up to athe maximum of 200% or 150% of such target, then a fewer number of shares would be available for award.
Stock-based compensation under the 2016 Plan was expense of $404$398 and $511 for fiscal 20172020 and $474 benefit (due to performance share awards not achieving minimum target thresholds) in fiscal 2016. The Company did not record income tax benefits in Additional Paid-in Capital related to shares that were earned under the 2016 Plan in fiscal 2017 and 2016.2019, respectively. As of September 30, 2017,2020, there was $698$359 of total unrecognized compensation cost related to the performance and restricted shares awarded under the 2016 Plan. The Company expects to recognize this cost over the next 1.4 years.1.0 year.
The following is a summary of activity related to performance and restricted shares:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | |
| Number of
Shares | | Weighted Average
Fair Value at Date
of Grant | | Number of
Shares | | Weighted Average
Fair Value at Date
of Grant | | | | |
| Outstanding at beginning of year | 331 | | | $ | 5.33 | | | 271 | | | $ | 7.20 | | | | | |
| Restricted shares awarded | 145 | | | 3.25 | | | 108 | | | 3.84 | | | | | |
| Restricted shares earned | (87) | | | 4.42 | | | (77) | | | 7.74 | | | | | |
| Performance shares awarded | 47 | | | 2.50 | | | 87 | | | 4.73 | | | | | |
| Performance shares earned | 0 | | | 0 | | | 0 | | | 0 | | | | | |
| Awards forfeited | (65) | | | 5.70 | | | (58) | | | 7.29 | | | | | |
| Outstanding at end of year | 371 | | | $ | 4.14 | | | 331 | | | $ | 5.33 | | | | | |
10. Leases
The adoption of Topic 842 requires lessees to recognize a ROU asset and a lease liability on the consolidated balance sheet, with the exception of short-term leases. The Company primarily leases its manufacturing buildings, specifically at its Orange location, machinery and office equipment. The Company determines if a contract contains a lease based on whether the contract conveys the right to control the use of identified assets for a period in exchange for consideration. Upon identification and commencement of a lease, the Company establishes a ROU asset and a lease liability. Operating leases are included in ROU assets, short-term operating lease liabilities, and long-term operating lease liabilities on the consolidated balance sheets. Finance leases are included in property, plant, and equipment, current maturities of long-term debt and long-term debt on the consolidated balance sheets.
The Company has remaining lease terms ranging from one to 16 years, some of which include options to renew the lease. The total lease term is determined by considering the initial lease term per the lease agreement, which is adjusted to include any renewal options that the Company is reasonably certain to exercise as well as any period that the Company has control before the stated initial term of the agreement. If the Company determines there exists a reasonable certainty of exercising termination or early buyout options, then the lease terms are adjusted to account for these facts. A portion of our real estate leases include rents that are generally subject to annual changes in the Consumer Price Index ("CPI"). Such changes to the CPI are treated as variable lease payments.
The Company elected the package of practical expedients permitted under the transition guidance within the new standard which, among other things, allowed the Company to carry forward the historical lease classification.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
|
| | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Number of Shares | | Weighted Average Fair Value at Date of Grant | | Number of
Shares | | Weighted Average
Fair Value at Date
of Grant |
| Outstanding at beginning of year | 146 |
| | $ | 13.07 |
| | 98 |
| | $ | 28.50 |
|
| Restricted shares awarded | 71 |
| | 7.73 |
| | 59 |
| | 9.53 |
|
| Restricted shares earned | (29 | ) | | 9.45 |
| | (20 | ) | | 29.59 |
|
| Performance shares awarded | 69 |
| | 7.45 |
| | 102 |
| | 10.40 |
|
| Performance shares earned | (10 | ) | | 9.50 |
| | — |
| | — |
|
| Awards forfeited | (53 | ) | | 17.75 |
| | (93 | ) | | 20.58 |
|
| Outstanding at end of year | 194 |
| | $ | 8.57 |
| | 146 |
| | $ | 13.07 |
|
The Company has made an accounting policy election to not separate non-lease components from lease components when allocating consideration for the buildings and machinery and equipment ROU asset classes. The election was made to reduce the administrative burden that would be imposed on the Company.
9.ROU assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date and duration of the lease term in determining the present value of the future payments. Lease expense for operating leases is recognized on a straight-line basis over the lease term, while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition.
A lease asset and lease liability are not recorded for leases with an initial term of 12 months or less and the lease expense related to these leases is recognized as incurred over the lease term.
The components of lease expense were as follows:
| | | | | |
| Year Ended
September 30, 2020 |
| Lease expense | |
| Finance lease expense: | |
| Amortization of right-of use assets on finance leases | $ | 55 | |
| Interest on lease liabilities | 5 |
| Operating lease expense: | 2,173 | |
| |
| Variable lease cost: | 157 |
| |
| Total lease expense | $ | 2,390 | |
The following table presents the impact of leasing on the consolidated balance sheet at September 30:
| | | | | | | | | | | |
| Classification to the consolidated balance sheets | | 2020 |
| Assets: | | | |
| Finance lease assets | Property, plant and equipment, net | | $ | 89 | |
| Operating lease assets | Operating lease right-of-use assets, net | | 17,021 | |
| Total lease assets | | | $ | 17,110 | |
| | | |
| Current liabilities: | | | |
| Finance lease liabilities | Current maturities of long-term debt | | $ | 58 | |
| Operating lease liabilities | Short-term operating lease liabilities | | 991 | |
| Non-current liabilities: | | | |
| Finance lease liabilities | Long-term debt, net of current maturities | | 22 | |
| Operating lease liabilities | Long-term operating lease liabilities, net of short-term | | 16,188 | |
| Total lease liabilities | | | $ | 17,259 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Supplemental cash flow and other information related to leases were as follows:
| | | | | |
| September 30, 2020 |
| Other Information | |
| |
| Cash paid for amounts included in measurement of liabilities: | |
| Operating cash flows from operating leases | $ | 2,173 | |
| Operating cash flows from finance leases | 5 |
| Financing cash flows from finance leases | 57 |
| Right-of-use assets obtained in exchange for new lease liabilities: | |
| |
| Operating leases | $ | 278 | |
| | | | | |
| September 30, 2020 |
| Weighted-average remaining lease term (years): | |
| Finance leases | 1.64 |
| Operating leases | 15.15 |
| Weighted-average discount rate: | |
| Finance leases | 4.84 | % |
| Operating leases | 5.89 | % |
Future minimum lease payments under non-cancellable leases as of September 30, 2020 were as follows:
| | | | | | | | | | | |
| Year ending September 30, | Finance Leases | | Operating
Leases |
| 2021 | $ | 55 | | | $ | 1,939 | |
| 2022 | 21 | | | 1,687 | |
| 2023 | 6 | | | 1,624 | |
| 2024 | 0 | | | 1,639 | |
| 2025 | 0 | | 1,635 | |
| Thereafter | 0 | | 17,515 | |
| Total lease payments | $ | 82 | | | $ | 26,039 | |
| Less: Imputed interest | (2) | | | (8,860) | |
| Present value of lease liabilities | $ | 80 | | | $ | 17,179 | |
As previously disclosed in the Company's 2019 Annual Report on Form 10-K, the Company recorded rent expense of $2,391 in fiscal 2019 and under the previous lease accounting standard, future minimum lease payments under initial or remaining non-cancellable lease terms in excess of one year would have been as follows:
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
| | | | | | | | | | | |
| Year ending September 30, | Finance Leases | | Operating
Leases |
| 2020 | $ | 61 | | | $ | 2,172 | |
| 2021 | 61 | | | 1,865 | |
| 2022 | 21 | | | 1,583 | |
| 2023 | 6 | | | 1,502 | |
| 2024 | 0 | | | 1,498 | |
| Thereafter | 0 | | | 16,711 | |
| Total lease payments | $ | 149 | | | $ | 25,331 | |
| Less: Interest | (11) | | | |
| Present value of lease liabilities | $ | 138 | | | |
11. Commitments and Contingencies
In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters; however, it does not believe any such matters are material to its financial condition or results of operations. The Company maintains various liability insurance coverages to protect its assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it is possible that the Company’s future operating results could be affected by future costs of litigation.
TheA subsidiary of the Company, Quality Aluminum Forge, LLC ("Orange"), is currently a defendant in a class action lawsuit filed by Avco Corporation (“Avco”) in the SuperiorPennsylvania State Court, which was filed in August 2019, alleging that certain forged pistons delivered by the Orange plant failed to meet material specifications required by Avco. Avco also sued Arconic, Inc. (“Arconic”), which was the raw material supplier. No specific amount of California, Countydamages was claimed by Avco and discovery has only recently begun. Orange disagrees with the allegations made by Avco and has made cross claims against Arconic. Previously, Orange was a defendant with respect to the same action in the United States District Court for the District of Orange, alleging violationsRhode Island, which action was dismissed in connection with the movement of California wage-and-hour laws, rules and regulations pertaining primarilythe matter to failure to accurately calculate and pay hourly and overtime wages; failure to provide meal periods; failure to authorize and permit rest periods; failure to indemnify necessary expenditures; failure to timely pay wages; and unfair competition.Pennsylvania State Court. Although the Company records reserves for legal disputes and other matters in accordance with generally accepted accounting principles in the United States of America ("GAAP"),GAAP, the ultimate outcomes of these types of matters are inherently uncertain. Actual results may differ significantly from current estimates. Given the current status of this matter, the Company has not recorded a charge, as the Company does not have a reasonable basis on which to establish an estimate.
The Company is a defendant in a purported class action lawsuit filed in the Superior Court of California, County of Orange, which was filed in August 2017, arising from employee wage-and-hour claims under California law for alleged meal period, rest break, hourly and overtime wage calculation, timely wage payment and necessary expenditure indemnification violations; failure to maintain required wage records and furnish accurate wage statements; and unfair competition. A settlement has been reached and the Company received preliminary court approval on July 13, 2020, following a brief delay caused by COVID-19 closures and restrictions. Class action notices were sent at the end of September. The Company recorded an additional $65 in fiscal 2020 as part of the estimated loss and had previously recorded an estimated loss of $385$250 as of September 30, 2017.2019.
The Company's Cleveland, Ohio location had an Occupational SafetyDuring fiscal 2020, the Company received notice from the International Association of Machinists and Health Administration ("OSHA") inspectionAerospace Workers Union that they were disclaiming all interest in representing certain hourly employees at the facility on September 1, 2016. This inspection resultedCompany’s Cleveland facility. Subsequently, the International Brotherhood of Boilermakers Union filed a petition to represent this same group of hourly employees. A mail ballot election took place in OSHA issuing citations toJune and the location. SinceNational Labor Relations Board certified the inspection, SIFCO has abated or is inInternational Brotherhood of Boilermakers as the processelected representative of abating all issues identified. These findings resulted in penalties having been assessed in the amountCompany’s hourly production employees. The Company’s obligations will be more fully understood following the ratification of $127 duringa collective bargaining agreement.
In fiscal 2017.
The Company leases certain facilities, machinery and equipment, and office buildings under long-term leases. The leases generally provide renewal options and require2020, the Company continued to pay for utilities, insurance, taxes and maintenance. The Company recorded rent expensemake significant progress in its restoration of $1,925 and $1,313 in fiscal 2017 and 2016, respectively. Included are lease payments onits operations at the manufacturing facility at the Company's Orange newly built facility forlocation, which was damaged by a fire that occurred in fiscal 2019. As part of these efforts, the lease payments commencedCompany continued to actively work with its insurance carrier to obtain insurance proceeds in order to restore its Orange location to full service as safely and quickly as possible, following the fire. The Company relocated a press to Orange from a temporary Michigan location in November 2019, which was placed into service in March 2020, and 2 other presses were brought into service at the Orange location, one in December 20162019 and expirethe second at the end of July 2020. Restoration of the building structure is nearly complete. As of the September 30, 2020, Orange had 6 out of 8 presses in 2036.
production. NaN of
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –- (Continued)
the 6 presses damaged in the fire are still in the restoration process. The Company anticipates to have those restored within the first half of fiscal 2021; however, no assurances can be made that the restoration will be completed within such timeframe.
AtAs of September 30, 2017, minimum rental commitments2020, the Company recognized insurance proceeds of $8,974, of which $7,427 out of the $10,927 received pertains to fiscal 2020. As of September 30, 2019, the Company recognized insurance proceeds of $11,986, of which $8,486 had been received. As the fire damaged a building leased by the Company, pursuant to the terms of the lease agreement, the Company was responsible to restore the property to full replacement value. With the Company being fully insured, the restoration of the property was covered by insurance and the insurance carrier has separately funded payments of insurance proceeds as of September 30, 2020 and 2019, respectively, directly to the landlord for the restoration of the building as prescribed under non-cancelable leasesthe lease arrangement in the amount of $713 and $2,878, respectively. The table below reflects the receipt of proceeds and how they were disbursed as of September 30, 2020 and 2019, respectively. Any additional recoveries in excess of recognized losses are treated as follows:
|
| | | | | | | |
| Year ending September 30, | Capital Leases | | Operating Leases |
| 2018 | $ | 123 |
| | $ | 2,026 |
|
| 2019 | 114 |
| | 1,831 |
|
| 2020 | 66 |
| | 1,440 |
|
| 2021 | 66 |
| | 1,300 |
|
| 2022 | 14 |
| | 1,274 |
|
| Thereafter | — |
| | 17,524 |
|
| Total minimum lease payments | $ | 383 |
| | $ | 25,395 |
|
| Plus: Amount representing interest | (31 | ) | | |
| Present value of minimum lease payments | $ | 352 |
| | |
Amortizationgain contingencies and will be recognized when the gain is realized or realizable. The Company maintains business interruption insurance coverage and continues to work with the insurance company to reach an agreement on the recoverable amounts of business interruption expenses. As noted within the tables below, payments totaling $1,219 and $1,168 were made towards this coverage as of September 30, 2020 and 2019 and are reflected within the cost of equipment under capital leases is included in depreciation expense. Atgoods sold line within the consolidated financial statements.
| | | | | | | | |
| Balance sheet (Other receivables): | |
| |
| September 30, 2018 | $ | 0 | |
| Cash received | (8,486) | |
| Capital expenditures (equipment) | 8,355 | |
| | |
| Other expenses | 2,463 | |
| Business interruption | 1,168 | |
| September 30, 2019 | $ | 3,500 | |
| | | | | | | | |
| Balance sheet (Other receivables): | |
| |
| September 30, 2019 | $ | 3,500 | |
| Cash received | (10,927) | |
| Capital expenditures (equipment) | 5,874 | |
| Other expenses | 1,881 | |
| Business interruption | 1,219 | |
| September 30, 2020 | $ | 1,547 | |
The following table reflects how the proceeds received impacted the consolidated statements of operations as of September 30, assets recorded under capital leases consist
| | | | | | | | | | | |
| Year Ended
September 30, 2020 |
| Balance without insurance proceeds | Insurance recoveries | Balance with insurance proceeds |
| | | |
| Cost of goods sold | $ | 96,711 | | $ | (3,100) | | $ | 93,611 | |
| Gain on insurance recoveries | $ | 0 | | (5,874) | | $ | (5,874) | |
| Income before income tax benefit | $ | 6 | | (8,974) | | $ | 8,980 | |
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
| | | | | | | | | | | |
| Year Ended
September 30, 2019 |
| Balance without insurance proceeds | Insurance recoveries | Balance with insurance proceeds |
| | | |
| Cost of goods sold | $ | 105,448 | | $ | (3,631) | | $ | 101,817 | |
| Loss (gain) on insurance recoveries | $ | 1,102 | | (8,355) | | $ | (7,253) | |
| Loss before income tax benefit | $ | (20,193) | | (11,986) | | $ | (8,207) | |
Included in the September 30, 2019 loss (gain) on insurance proceeds in the consolidated statements of operations is approximately $1,107 in impairment charges for the equipment damaged by the fire offset by insurance proceeds received. In fiscal 2019, the Company performed a separate evaluation of the following:
|
| | | | | | | |
| | 2017 | | 2016 |
| Machinery and equipment | $ | 550 |
| | $ | 250 |
|
| Accumulated depreciation | (162 | ) | | (60 | ) |
10.12. Business Information
The Company identifies itself as one1 reportable segment, SIFCO, which is a manufacturer of forgings and machined components for the A&E markets.
Geographic net sales are based on location of customer. The United States of America is the single largest country for unaffiliated customer sales, accounting for 63% and 62%72% of consolidated net sales in fiscal 20172020 and 2016, respectively.2019. No other single country represents greater than 10% of consolidated net sales in fiscal 20172020 and 2016.2019. Net sales to unaffiliated customers located in various European countries accounted for 27%14% and 22%15% of consolidated net sales in fiscal 20172020 and 2016,2019, respectively. Net sales to unaffiliated customers located in various Asian countries accounted for 2%8% and 4%6% of consolidated net sales in fiscal 20172020 and 2016,2019, respectively.
Substantially all of the Company's operations and identifiable assets are located within the United States with the exception of its non-U.S. subsidiariessubsidiary located in Maniago, Italy and Cork, Ireland.Italy. The identifiable assets for the Company's foreign subsidiaries as of September 30, 20172020 was $37,607$21,989 compared with $37,196$20,986 as of September 30, 2016.2019.
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Long-Lived Assets | | | | |
| United States | | $ | 56,134 | | | 35,079 | |
| Europe | | 10,607 | | | 11,562 | |
| | $ | 66,741 | | | 46,641 | |
|
| | | | | | | |
| | | 2017 | | 2016 |
| Long-Lived Assets | | | | |
| United States | | $ | 33,114 |
| | 44,108 |
|
| Europe | | 25,639 |
| | 28,274 |
|
| | | $ | 58,753 |
| | 72,382 |
|
At September 30, 2017,2020, approximately 234203 of the hourly plant personnel are represented by three3 separate collective bargaining agreements. The table below shows the expiration dates of the collective bargaining agreements.
|
| | | | | | | |
| Plant locations | | Expiration date |
| Cleveland, Ohio (unit 1) | | May 15, 2025 |
| Cleveland, Ohio (unit 2) | | May 31, 2020 |
Alliance, Ohio * | | October 26, 2017 |
| Maniago, Italy | | December 31, 2019 |
* Agreement ceased dueThe Company is a party to closurecollective bargaining agreements ("CBA") with certain employees located in Cleveland, which has 2 bargaining units. The Company entered into early negotiations and ratified its CBA with one such unit in December 2019. The second bargaining unit received notice in the second quarter of Alliance facility.
fiscal 2020 from the International Association of Machinists and Aerospace Workers Union that they were disclaiming all interest in representing the unit. In the same quarter, the International Brotherhood of Boilermakers Union filed a petition to represent the unit. In June 2020, the National Labor Relations Board certified the International Brotherhood of Boilermakers as the elected representative of the Company’s second bargaining group. Negotiations with this bargaining group are ongoing and the workforce continues to work under existing
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –- (Continued)
11. Restructuring Costs
On May 31, 2017, the Company approved the decision to close Alliance as disclosed in the June 1, 2017 Form 8-K, as amended on July 17, 2017.terms and conditions. The closureManiago location is a result of decreased sales from a key customer, which ledparty to the reductionNational Collective Agreement in sales volumes at this location. This closure fallsMetalworking, which expired in line with management's key strategic initiativesDecember 2019. Negotiations have been ongoing regarding such agreement and Maniago continues to make organizationalapply existing terms and operational changes needed to improve profitability. Orders after September 30, 2017 are being processed and manufactured by Cleveland. Alliance manufactured products through September 30, 2017. Ascondition until a result of the announcement of the decision to close Alliance, $5,048 non-cash costs were incurred, of which $4,786 relates to asset impairment discussed above and $262 of accelerated depreciation of assets due to useful lives been reassessed as of September 30, 2017. The remaining estimated exit costs are to be expensed as incurred, which include workforce reduction costs. Workforce reduction costs incurred at September 30, 2017 were approximately $215, of which a $15 was paid by September 30, 2017 and the remaindernew agreement is expected to be paid in the first quarter of fiscal 2018.reached.
12.13. Subsequent eventevents
The Company has evaluated its September 30, 2017 financial statements for subsequent events through the date the consolidated financial statements were available to beare issued. On October 10, 2017,December 3, 2020, the Company signed a purchase agreement with a buyer for the sale of the Ireland building. The sale transaction was finalized on December 15, 2017 for cash proceeds of approximately $3,068, resulting in an approximate gain of $1,100.
On November 28, 2017, the Company obtained a consent letterreceived its final installment from its Lender which extendedinsurance claims relating to December 31, 2017 the date to consummate such salefire at the Orange location that occurred during fiscal 2019. The amount received was $3,148 that will be realized in the first quarter of the Irish property.fiscal 2021.
The Company is not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.
Schedule II
SIFCO Industries, Inc. and Subsidiaries
Valuation and Qualifying Accounts
Years Ended September 30, 20172020 and 20162019
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at
Beginning
of Period | | Additions
(Reductions)
Charged to
Expense | | Additions
(Reductions)
Charged to
Other
Accounts | | Deductions | | | Balance at
End of
Period |
| Year Ended September 30, 2020 | | | | | | | | | | |
| Deducted from asset accounts | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 592 | | | (80) | | | 0 | | | (263) | | (a) | | $ | 249 | |
| Inventory obsolescence reserve | 3,335 | | | 518 | | | (151) | | | (26) | | (b) | | $ | 3,676 | |
| Inventory LIFO reserve | 8,296 | | | (10) | | | 0 | | | — | | | | $ | 8,286 | |
| | | | | | | | | | |
| Deferred tax valuation allowance | 7,557 | | | (2,362) | | | 134 | | | 0 | | | $ | 5,329 | |
| Accrual for estimated liability | | | | | | | | | | |
| Workers’ compensation reserve | 181 | | | 703 | | | 0 | | | (338) | | (c) | | $ | 546 | |
| | | | | | | | | | |
| Year Ended September 30, 2019 | | | | | | | | | | |
| Deducted from asset accounts | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 520 | | | $ | 39 | | | $ | 0 | | | $ | 33 | | (a) | | $ | 592 | |
| Inventory obsolescence reserve¹ | 3,556 | | | 517 | | | (106) | | | (632) | | (b) | | 3,335 | |
| Inventory LIFO reserve¹ | 8,371 | | | (75) | | | 0 | | | 0 | | | | 8,296 | |
| | | | | | | | | | |
| Deferred tax valuation allowance | 8,400 | | | (1,817) | | | 974 | | | 0 | | | | 7,557 | |
| Accrual for estimated liability | | | | | | | | | | |
| Workers’ compensation reserve | 136 | | | 395 | | | 0 | | | (350) | | (c) | | 181 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Additions (Reductions) Charged to Expense | | Additions (Reductions) Charged to Other Accounts | | Deductions | | | Balance at End of Period |
| Year Ended September 30, 2017 | | | | | | | | | | |
| Deducted from asset accounts | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 706 |
| | 77 |
| | 8 |
| | (461 | ) | (a) | | $ | 330 |
|
| Inventory obsolescence reserve | 3,308 |
| | 657 |
| | 91 |
| | (197 | ) | (b) | | $ | 3,859 |
|
| Inventory LIFO reserve | 8,026 |
| | 293 |
| | — |
| | — |
| | | $ | 8,319 |
|
| Deferred tax valuation allowance | 4,399 |
| | 6,117 |
| | (919 | ) | | — |
| | | $ | 9,597 |
|
| Accrual for estimated liability | | | | | | | | | | |
| Workers’ compensation reserve | 324 |
| | 234 |
| | 1 |
| | (322 | ) | (c) | | $ | 237 |
|
| | | | | | | | | | | |
| Year Ended September 30, 2016 | | | | | | | | | | |
| Deducted from asset accounts | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 1,127 |
| | $ | 359 |
| | $ | (199 | ) | | $ | (581 | ) | (a) | | $ | 706 |
|
| Inventory obsolescence reserve | 3,022 |
| | 571 |
| | — |
| | (285 | ) | (b) | | 3,308 |
|
| Inventory LIFO reserve | 8,508 |
| | (482 | ) | | — |
| | — |
| | | 8,026 |
|
| Deferred tax valuation allowance | 1,095 |
| | 3,304 |
| | — |
| | — |
| | | 4,399 |
|
| Accrual for estimated liability | | | | | | | | | | |
| Workers’ compensation reserve | 688 |
| | 157 |
| | — |
| | (521 | ) | (c) | | 324 |
|
| | | | | | | | | | | |
| |
(a) | Accounts determined to be uncollectible, net of recoveries |
| |
(b) | Inventory sold or otherwise disposed |
| |
(c) | (a) Accounts determined to be uncollectible, net of recoveries (b) Inventory sold or otherwise disposed (c) Payment of workers’ compensation claims |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). As of September 30, 2017, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’sOur disclosure controls and procedures. Based on this evaluation, management concluded as of September 30, 2017 that, dueprocedures are designed to the material weaknesses in our internal control over financial reporting, which are described below, our disclosure controls were not effective in ensuringensure that information required to be disclosed in the Company’s SEC reports was recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2020, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, management concluded that our disclosure controls were not effective as of September 30, 2020 due to the material weakness in our internal control over financial reporting, as described below. Notwithstanding the identified material weakness described below, management does not believe that these deficiencies had an adverse effect on our reported operating results or financial condition and management has determined that the financial statements and other information included in this report and other periodic filings present fairly in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with accounting principles generally accepted in the United States (“GAAP”).
The Company's internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. If the Company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if the Company experiences difficulties in their implementation, the Company's business and financial results could be harmed, and the Company could fail to meet its financial reporting obligations.
NotwithstandingIn response to the identified material weaknesses described below, our management does not believe that these deficiencies had an adverse effectCOVID-19 pandemic, a number of employees intermittently began working remotely during the second half of fiscal 2020. We monitored and assessed the changing business environment resulting from COVID-19 on our reportedinternal controls to minimize the impact on their design and operating results oreffectiveness. Management has taken measures to ensure that our disclosure controls and procedures and internal controls over financial condition and management has determined that the financial statements and other information included inreporting were not materially affected during this report and other periodic filings present fairly in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with accounting principles generally accepted in the United States (“GAAP”).period.
Management’s Report on Internal Control over Financial Reporting
Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of September 30, 2017.2020. In making this assessment, our management used the criteria for effective internal control over financial reporting described in the 2013 “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that due to the material weaknessesweakness described below, our internal control over financial reporting was not effective as of September 30, 2017.2020. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The Company identified the following material weaknesses:weakness:
Key•Insufficient review of specific controls within IT generalassociated with revenue, inventory and application controls for domestic operations were not operating effectively.income taxes at the Maniago location.
Key controls within business and IT processes were not designed and operating effectively at Maniago.
Due to a lack of resources in accounting personnel, the Company did not evaluate a complex accounting issue in a timely manner.
Remediation Plan for Material Weakness in Internal Control over Financial Reporting
Management and the Company's Board of Directors are committed to improving the Company's overall system of internal controls over financial reporting.
To address the material weakness identified in our control environment, the Company is taking the following actions to remediate the material weaknesses:weakness:
Implement
•Using a robust security and access reviews at a level of precision necessary to ensure they are timely and appropriate, including monitoring activities for users with privileged access. The Company is making progress, andrisk-based approach, management will continue to explore other information technology tools withimplement additional detective and monitoring controls through increased oversight and training local management to mitigate this risk.execute additional controls in detecting material errors.
•External resources with specialized knowledge and expertise, where appropriate, will be engaged and utilized and additional review controls will be instituted to prevent and detect material errors on a timely basis.
Management is unable to remediate the Company's Maniago IT general controls for fiscal 2018. However, management will continue to perform quarterly evaluation of business process control effectiveness, implement periodic monitoring controls over its financial review procedures, and deploy additional resources to enhance its internal controls over financial reporting.
Management will evaluate the structure of the finance organization and consider adding resources to further strengthen its internal controls over financial reporting.
With the oversight of senior management and the Company's Board of Directors, the Company continues to take steps and additional measures to remediate the underlying causes of the identified material weaknesses,weakness, including but not limited to (i) evaluating our information technology systems or investengaging subject matter experts on an as need basis to assist management in improvements to our technology sufficient to generategenerating accurate, transparent, and timely financial information, and (ii) continue to strengthen organizational structure byincluding holding individuals accountable for their internal control responsibilities.
Although we expect to make meaningful progress on our remediation plan during fiscal year 2018,2021, we cannot estimate how long it will take to complete the process or the costs of actions required. There is no assurance that the aforementioned plans will be sufficient and that additional steps may not be necessary.
Changes in Internal Control over Financial Reporting and other Remediation
As of September 30, 2020, management remediated the outstanding material weaknesses as noted below:
There have been no
•Key controls around segregation of duties and periodic access reviews within IT general and application controls for the Cleveland operation were not designed nor operating effectively.
Management concluded that the previously reported material weakness related to ineffective controls around segregation of duties and periodic access reviews within IT general and application controls for the Cleveland location was remediated. During fiscal 2020, management completed remediation efforts by designing controls and testing operating effectiveness and implementing detective and monitoring business process controls to further mitigate IT risks over financial reporting.
No material changes in the Company'sour internal controlscontrol over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) occurred during the Company's most recent fiscal quarter that havehas materially affected, or areis reasonably likely to materially affect, the Company'sour internal controlscontrol over financial reporting, except as discussed above.reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information about the Executive Officers of the Company appears in Part I of this Report.
The Company incorporates herein by reference the information required by this Item as to the Directors, procedures for recommending Director nominees and the Audit Committee appearing under the captions “Proposal 1 - toTo Elect Seven (7) Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”Directors,” and “Corporate Governance and Board of Director Matters” of the Company’s definitive Proxy Statement to be filed with the SEC on or about November 21, 2017.December 23, 2020.
The Directors of the Company are elected annually to serve for one-year terms or until their successors are elected and qualified.
The Company has adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-K under the Securities Exchange Act of 1934, as amended. The Code of Ethics is applicable to, among other people, the Company’s Chief Executive Officer, Chief Financial Officer, who is the Company’s Principal Financial Officer, and to the Corporate Controller, who is the Company’s Principal Accounting Officer. The Company’s Code of Ethics is available on its website: www.sifco.com.
Item 11. Executive Compensation
The Company incorporates herein by reference the information appearing under the captions "Executive Compensation" and "Director Compensation" of the Company’s definitive Proxy Statement to be filed with the SEC on or about December 20, 2017.23, 2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding Common Shares to be issued under the Company’s equity compensation plans as of September 30, 2017.2020.
| | | | | | | | | | | | | | | | | |
| Plan category | Number of
securities to
be issued
upon
exercise of
outstanding
options, warrants and rights | | Weighted-
average
exercise
price of
outstanding
options, warrants and rights | | Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans |
| Equity compensation plans approved by security holders: | | | | |
| | | | | |
| 2016 Plan (1) | 371,148 | | | N/A | | 588,795 | |
| | | | | |
|
| | | | | | | |
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted- average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans |
| Equity compensation plans approved by security holders: | | | | |
| 2016 Long-term Incentive Plan (1) | 194,014 |
| | N/A | | 412,929 |
|
(1)Under the 2016 Plan, the aggregate number of common shares that are available to be granted is 1,196,401 shares, with a further limit of no more than 50,000 shares to any one person in any twelve-month period. For additional information concerning the Company’s equity compensation plans, refer to the discussion in Note 10, Stock-Based Compensation, of the consolidated financial statements. These securities are issued upon meeting performance objectives.
| |
(1) | Under the 2016 Long-Term Incentive Plan, the aggregate number of common shares that are available to be granted is 646,401 shares, with a further limit of no more than 50,000 shares to any one person in any twelve-month period. For additional information concerning the Company’s equity compensation plans, refer to the discussion in Note 8, Stock Compensation, of the consolidated financial statements. These securities are issued upon meeting performance objectives.
|
The Company incorporates herein by reference the beneficial ownership information appearing under the captions "Stock Ownership of Certain Beneficial Owners" and "Stock Ownership of Executive Officers, Director and Nominees" of the Company’s definitive Proxy Statement to be filed with the SEC on or about December 20, 2017.23, 2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The Company incorporates herein by reference the information required by this item appearing under the captions "Corporate Governance and Board of Director Matters" of the Company’s definitive Proxy Statement to be filed with the SEC on or about December 20, 2017.23, 2020.
Item 14. Principal Accounting Fees and Services
The Company incorporates herein by reference the information required by this item appearing under the caption "Principal Accounting Fees and Services" of the Company’s definitive Proxy Statement to be filed with the SEC on or about December 20, 201723, 2020.
Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Financial Statements:
The following Consolidated Financial Statements; Notes to the Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are included in Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Years Ended September 30, 20172020 and 20162019
Consolidated Statements of Comprehensive IncomeLoss for the Years Ended September 30, 20172020 and 20162019
Consolidated Balance Sheets—September 30, 20172020 and 20162019
Consolidated Statements of Cash Flows for the Years Ended September 30, 20172020 and 20162019
Consolidated Statements of Shareholders’ Equity for the Years Ended September 30, 20172020 and 20162019
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules:
The following financial statement schedule is included in Item 8:
Schedule II – Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related regulations, are inapplicable, or the information has been included in the Notes to the Consolidated Financial Statements.
(a) (3) 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 | |
2.1 | | |
| 2.2 | |
2.2 | | |
| 3.1 | |
3.1 | | |
| 3.2 | |
3.2 | | |
| *4.1 | | |
| 9.1 | | |
| 9.2 | | |
9.2 | | |
| 9.3 | | |
9.3 | | |
| 9.4 | | |
| 10.1 | | |
| 10.2 | | |
10.2 | | |
| 10.3 | | |
10.3 | | |
| 10.4 | | |
10.4 | | |
| 10.5 | | |
10.5 | | |
| 10.6 | | |
10.6 | | |
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Exhibit
No.
10.7 | | Description |
10.7 | | Equity RetentionCredit Agreement, dated June 1, 2016, betweenAugust 8, 2018, by and among SIFCO Industries, Inc. and Salvatore Incanno,Lender named therein and J.P. Morgan Chase Bank, N.A., filed as Exhibit 10.1 to the Company’s Form 8-K dated June 3, 2016, and incorporated herein by reference |
| | |
10.8 | | |
| | |
10.9 | | |
| 10.8 | | |
10.10 | | Amendment and Restatement Credit and Security Agreement, dated November 9, 2016, by and among SIFCO Industries, Inc., the Lenders named therein and KeyBank National Association, as Lead Arranger, Sole Book Runner, Administrative Agent, Swing Line Lender and Issuing Lender, filed as Exhibit 10.1 to the Company’s Form 8-K dated November 15, 2016, and incorporated herein by reference |
| | |
10.11 | | First Amendment to the Amended and Restated Credit and Security Agreement, dated February 16, 2017, by and among SIFCO Industries, Inc., the Lenders named therein; KeyBank National Association, as Lead Arranger, Sole Book Runner, Administrative Agent, Swing Line Lender and Issuing Lender; and Presidential Financial Corporation, as Assignee, and incorporated herein by reference |
| |
10.12 | | Second Amendment to the Amended and Restated Credit and Security Agreement, dated August 4, 2017, by and among SIFCO Industries, Inc., the Lenders named therein; KeyBank National Association, as Lead Arranger, Sole Book Runner, Administrative Agent, Swing Line Lender and Issuing Lender; and Presidential Financial Corporation, as Assignee, and incorporated herein by reference |
| | |
10.13 | | |
| 10.9 | | |
10.14 | | |
| 10.10 | | |
10.15 | | |
| 10.11 | | |
10.16 | | |
| 10.12 | | |
14.110.13 | | First Amendment to Credit Agreement, dated November 5, 2018, by and among SIFCO Industries, Inc., T & W Forge, LLC, Quality Aluminum Forge, LLC, and JPMorgan Chase Bank, N.A., a national banking association, filed as Exhibit 10.1 to the Company's Form 8-K dated November 8, 2018, and incorporated herein by reference
|
| 10.14 | | |
| 10.15 | | Second Amendment to Credit Agreement, dated December 17, 2018, by and among SIFCO Industries, Inc., T&W Forge, LLC., Quality Aluminum Forge, LLC., and JPMorgan Chase Bank, N.A., a national banking association, filed as exhibit 10.2 to the Company's Form 8-K dated December 19, 2018, and incorporated herein by reference |
| 10.16 | | Export Credit Agreement, dated December 17, 2018, by and among SIFCO Industries, Inc., T & W Forge, LLC, Quality Aluminum Forge, LLC, and JPMorgan Chase Bank, N.A., a national banking association filed as Exhibit 10.1 to the Company's Form 8-K dated December 19, 2018 and incorporated herein by reference |
| 10.17 | | Third Amendment to Credit Agreement, dated March 29, 2019, by and among SIFCO Industries, Inc., Quality Aluminum Forge, LLC., and JPMorgan Chase Bank, N.A., a national banking association, filed as exhibit 10.19 to the Company's Form 10-Q dated May 10, 2019 |
| 10.18 | | Fourth Amendment to Credit Agreement, dated March 29, 2019, by and among SIFCO Industries, Inc., Quality Aluminum Forge, LLC., and JPMorgan Chase Bank, N.A., a national banking association, filed as exhibit 10.1 to the Company's Form 8-K dated September 24, 2019 |
| 10.19 | | |
| 10.20 | | |
| *10.21 | | |
| 14.1 | | |
| *21.1 | |
*21.1 | | |
| *23.1 | | |
*23.1 | | |
| *31.1 | | |
*31.1 | | |
| *31.2 | |
*31.2 | | |
| *32.1 | |
*32.1 | | |
| *32.2 | |
*32.2 | | |
| | | | | | | | |
| *101 | | |
*101 | | The following financial information from SIFCO Industries, Inc. Report on Form 10-K for the year ended September 30, 20172020 filed with the SEC on December 20, 2017,23, 2020, formatted in XBRL includes: (i) Consolidated Statements of Operations for the years ended September 30, 20172020 and 2016,2019, (ii) Consolidated Statements of Comprehensive Income for the years ended September 30, 20172020 and 2016,2019, (iii) Consolidated Balance Sheets at September 30, 20172020 and 2016,2019, (iv) Consolidated Statements of Cash Flow for the years ended September 30, 20172020 and 2016,2019, (vi) Consolidated Statements of Shareholders’ Equity for the years ended September 30, 20172020 and 20162019 and (v) the Notes to the Consolidated 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 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
| |
| By: /s/ Thomas R. Kubera |
| | Thomas R. Kubera |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
| SIFCO Industries, Inc. | Date: December 23, 2020 |
| |
| By: /s/ Thomas R. Kubera |
| | Thomas R. Kubera |
| | Interim Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
| | Date: December 20, 2017 |
| | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on December 20, 201723, 2020 by the following persons on behalf of the Registrant in the capacities indicated.
| | | | | | | | | | | |
| /s/ Norman E. Wells, Jr. | | /s/ Peter W. Knapper |
| Norman E. Wells, Jr. | | Peter W. Knapper |
| Chairman of the Board | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | |
| /s/ Jeffrey P. Gotschall | | /s/ Donald C. Molten, Jr. |
| Jeffrey P. Gotschall | | Donald C. Molten, Jr. |
| Director | | Director |
| | |
| /s/ Alayne L. Reitman | | /s/ Mark J. Silk |
| Alayne L. Reitman | | Mark J. Silk |
| Director | | Director |
| | | |
| /s/ Norman E. Wells, Jr. | | /s/ Peter W. Knapper |
| Norman E. Wells, Jr. | | Peter W. Knapper |
| Chairman of the Board | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | |
| /s/ Jeffrey P. Gotschall | | /s/ Donald C. Molten, Jr. |
| Jeffrey P. Gotschall | | Donald C. Molten, Jr. |
| Director | | Director |
| | |
| /s/ Alayne L. Reitman | | /s/ Mark J. Silk |
| Alayne L. Reitman | | Mark J. Silk |
| Director | | Director |
| | | |
| /s/ Hudson D. Smith | | /s/ Thomas R. Kubera |
| Hudson D. Smith | | Thomas R. Kubera |
| Director | | Interim Chief Financial Officer |
| | and Corporate Controller (Principal Financial Officer) |
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| (Principal Accounting Officer) |
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