10
The Company's Credit Agreement is set to mature in less than twelve months. As such, the Company’s plan is to refinance. However, there are no guarantees that the refinance will be with similar terms to the current Credit Agreement, and if the refinance does not occur, the Company would not be able to meet its debt obligations.
Foreign subsidiary borrowings
Foreign debt consists of:
| | | | | | | | | | | |
| December 31,
2020 | | September 30,
2020 |
| Term loan | $ | 2,783 | | | $ | 2,670 | |
| Short-term borrowings | 3,018 | | | 2,620 | |
| Factor | 2,082 | | | 469 | |
| Total debt | $ | 7,883 | | | $ | 5,759 | |
| | | |
| Less – current maturities | $ | (5,892) | | | (3,544) | |
| Total long-term debt | $ | 1,991 | | | $ | 2,215 | |
| | | |
| Receivables pledged as collateral | $ | 955 | | | $ | 1,859 | |
|
| | | | | | | |
| | June 30,
2020 | | September 30,
2019 |
| Term loan | $ | 1,890 |
| | $ | 2,318 |
|
| Short-term borrowings | 3,071 |
| | 3,744 |
|
| Factor | 198 |
| | 530 |
|
| Total debt | $ | 5,159 |
| | $ | 6,592 |
|
| | | | |
| Less – current maturities | (4,323 | ) | | (5,501 | ) |
| Total long-term debt | $ | 836 |
| | $ | 1,091 |
|
| | | | |
| Receivables pledged as collateral | $ | 1,322 |
| | $ | 672 |
|
Interest rates on foreign borrowings are based on Euribor rates which range from 1.0% to 4.2%. In December 2018, the Company entered into a six month short-term debt arrangement of $1,137 to be used for working capital purposes at Maniago, which was subsequently repaid in fiscal 2019. In September 2019, Maniago modified its repayment schedule for one tranche of its existing term debt by reducing its next two payments by approximately $96 and extending the loan for an additional six months in which the final payment will be made at that time (to be paid by October 2020). The Company continues to have discussions with its lenders and other potential partners to refinance certain debt obligations at its Maniago location to provide Maniago with sufficient future liquidity. If Maniago is unsuccessful in obtaining additional financing, it may experience challenges in meeting certain current loan obligations. This foreign debt is collateralized by Maniago’s assets. The Company has not pledged any assets as collateral or guaranteed Maniago’s debt. The consolidated condensed financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of the Maniago assets or the amounts and classifications of the Maniago liabilities that may result from the outcome of this uncertainty. Management believes that the actions presently being taken to obtain additional funding and implement its strategic plan will provide adequate liquidity to finance its Maniago operations.
The Company factors receivables from one1 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 condensed balance sheets.
Debt issuance costs
The Company incurred debt issuance costs as it pertains to the Credit Agreement in the amount of $212, and incurred additional costs in fiscal 2019 of $75 related to the First and Second Amendments, which is included in the consolidated condensed balance sheets as a deferred charge in other current assets, net of amortization of $180$229 and $106$205 at June 30,December 31, 2020 and September 30, 2019,2020, 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, of which $261 was repaid in fiscal 2020 and has a two year term. The interest rate on the PPP Loan is 0.98%, which shall bewas 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.default. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owingowed 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. As of June,December 31, 2020 and September 30, 2020, the CompanyPPP loan balance was $4,764.
repaid $261 proceeds back to its lender, leaving a remaining balance of $4,764 , of which $2,382 will be paid in the next twelve months and the remaining $2,382 in the following twelve months after.
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.Paycheck Protection Program. 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 June 30,December 31, 2020, the Company is waitingcontinues to wait for further guidance regarding how to applyapplication for the forgiveness for all or a portion of the PPP loan.
6.Income Taxes
On December 27, 2020, the Consolidated Appropriations Act, 2021 (the "Appropriations Act") was enacted in response to the COVID-19 pandemic. The Appropriations Act, among other things temporarily extends through December 31, 2025, certain expiring tax provisions. Additionally, the Appropriations Act enacts new provisions and extends certain provisions originated within the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), enacted on March 27, 2020. The CARES Act included provisions relating to refundable payroll tax credits, deferral of certain payment requirements for the employer portion of Social Security taxes, net operating loss carryback periods and temporarily increasing the amount of net operating losses that corporations can use to 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 Appropriations Act and CARES Act did not materially affect the Company’s first quarter of fiscal 2021 income tax provision, deferred tax assets and liabilities, or related taxes payable. The Company will continue to assess the implications of these and any new relief provisions on its consolidated condensed financial statements but does not expect the impact to be material.
For each interim reporting period, the Company makes an estimate of the effective tax rate it expects to be applicable for the full fiscal year for its operations. This estimated effective rate is used in providing for income taxes on a year-to-date basis. The Company’s effective tax rate through the first ninethree months of fiscal 20202021 was (2)(43)%, compared with 8%7% for the same period of fiscal 2019.2020. The decrease in the effective rate was primarily attributable to a discrete tax benefit recorded during the first three months of fiscal 2021 to adjust deferred taxes recorded in Italy, applied against year-to-date income. Additionally, the effective tax rate decreased as a result of changes in jurisdictional mix of income in fiscal 20202021 compared withto the same period of fiscal 2019.2020. The effective tax rate differs from the U.S. federal statutory rate due primarily to the valuation allowance against the Company’s U.S. deferred tax assets and income in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate.
As previously mentioned, the CARES Act was enacted and signed into law, which includes provisions relating to refundable payroll tax credits, deferral of certain payment requirements for the employer portion of Social Security taxes, net operating loss carryback periods and temporarily increasing the amount of net operating losses that corporations can use to offset income, alternative minimum tax ("AMT") credit refunds, modifications Recent positive evidence related to the potential or partial release of the Company's valuation allowance includes profitable U.S. results, however, there continues to be uncertainty as a result of the ongoing COVID-19 pandemic. As such, the Company has maintained a full valuation allowance on its U.S. net interest deduction limitations, and technical corrections todeferred tax depreciation methods for qualified improvement property. The CARES Act did not materially affectassets in the Company’s thirdfirst quarter of fiscal 2020 income tax provision, deferred tax assets and liabilities,2021. It is reasonably possible that sufficient positive evidence required to release all, or related taxes payable. The Company continues to assessa portion of the future implications of these provisionsvaluation allowance in the U.S. will exist within the CARES Act on its consolidated condensed financial statements but does not expect the impact to be material.next 12 months.
The Company is subject to income taxes in the U.S. federal jurisdiction, Ireland, Italy, and various state and local jurisdictions.
| |
7. | Retirement Benefit Plans |
7.Retirement Benefit Plans
The Company and certain of its subsidiaries sponsor defined benefit pension plans covering some of its employees. The components of net periodic benefit cost of the Company’s defined benefit plans are as follows:
| | | | | | | | | | | | | | | |
| | | Three Months Ended
December 31, |
| | | | | | 2020 | | 2019 |
| Service cost | | | | | $ | 26 | | | $ | 85 | |
| Interest cost | | | | | 175 | | | 208 | |
| Expected return on plan assets | | | | | (355) | | | (376) | |
| | | | | | | |
| Amortization of net loss | | | | | 211 | | | 188 | |
| | | | | | | |
| Net periodic cost | | | | | $ | 57 | | | $ | 105 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Nine Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Service cost | $ | 85 |
| | $ | 74 |
| | $ | 255 |
| | $ | 224 |
|
| Interest cost | 208 |
| | 264 |
| | 624 |
| | 791 |
|
| Expected return on plan assets | (363 | ) | | (393 | ) | | (1,090 | ) | | (1,180 | ) |
| Amortization of net loss | 188 |
| | 107 |
| | 564 |
| | 322 |
|
| Net periodic cost | $ | 118 |
| | $ | 52 |
| | $ | 353 |
| | $ | 157 |
|
During the ninethree months ended June 30,December 31, 2020 and 2019, the Company made $604$0 and $48$188 in contributions, respectively, to its defined benefit pension plans. The Company does not anticipateanticipates making $296 additional cash contributions to fund its defined benefit pension plans for the balance of fiscal 20202021 and will use carryover balances from previous periods that have been available for use as a credit to reduce the amount of cash contributions that the Company is required to make to certain defined benefit plans in fiscal 2020.2021. The Company's ability to elect to use such carryover balance will be determined based on the actual funded status of each defined benefit pension plan relative to the plan's minimum regulatory funding requirements. The Company does not anticipate making cash contributions above the minimum funding requirement to fund its defined benefit pension plans during the balance of fiscal 2020.2021.
On November 26, 2019, the Company ratified a new collective bargaining agreement with one of its bargaining units. Included within the agreement was a provision to withdraw from its existing multi-employer plan resulting in the imposition of a withdrawal liability. The withdrawal liability of $739 was recorded within the cost of goods sold line of the consolidated condensed statement of operations and is included in other long-term liabilities and the current portion (next four quarterly installments) in accrued liabilities of the consolidated condensed balance sheets, payable in quarterly installments over the next 20 years.
8.Stock-Based Compensation
| |
8. | Stock-Based Compensation |
The Company has awarded performance and restricted shares under its shareholder-approved amended and restatedthe Company's 2007 Long-Term Incentive Plan ("2007 Plan"), which was further amended and restated under the SIFCO Industries, Inc.Company's 2007 Long-Term Incentive Plan (Amended and Restated as of November 16, 2016) (the(as further amended, 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 Plan. The Amendment increased the number of shares available for award under the 2016 Plan by 550 shares. The aggregate number of shares that may be awarded by the Company was increased to under the 2016 Plan is 1,196 shares, less any shares previously awarded and subject to an adjustment for the forfeiture of any unvested shares, pursuant to the 2016 Plan.shares. In addition, shares that may be awarded are subject to individual recipient award limitations. The shares awarded under the 2016 Plan may be made in multiple forms, including stock options, stock appreciation rights, restricted or unrestricted stock, and performance related shares. Any such award is exercisable no later than ten years from the date of the 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 making 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 200% (for awards granted in fiscal 2020, the maximum is 150%) 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 share 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 where it has concluded it is probable that the performance criteria for that award will be met, while the Company is not currently recognizing compensation expense for two tranches of awards where it had concluded that it is not probable that the performance criteria for those awards will be met. During each future reporting period, such expense may be subject to adjustment based upon the Company's financial performance, which impacts the number of common shares that it expects to vest upon the completion of the performance period. The performance shares were valued at the closing market price of the Company’s common shares on the date of the grant. The vesting of such shares is determined at the end of the performance period.
During the first nine months of fiscal 2020, the Company granted 134 shares under the 2016 Plan to certain key employees. The awards were split into two tranches, 47 performance shares and 87 shares of time-based restricted shares, with a grant date fair value of $2.50 per share. The awards vest over three years.
The Company has awarded restricted shares to 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 the grant, and such value was recorded as unearned compensation. The unearned compensation is being amortized ratably over the restricted stock vesting period of one year or three years.
During the first nine months ofIn fiscal 2020,2021, the Company granted its non-employee directors 57 restricted120 shares under the 2016 Plan to certain key employees. The awards were split into 2 tranches, 71 performance shares and 49 shares of time-based restricted shares, with a grant date fair value of $4.39, which$3.74 per share. The awards vest over one year. One award for 61 restricted shares vested.three years.
If all outstanding share awards are ultimately earned and vest at the target number of shares, there are approximately 524572 shares that remain available for award at June 30,December 31, 2020. If any of the outstanding share awards are ultimately earned and vest at greater than the target number of shares, up to a maximum of 200% (decreased toor 150% for awards starting in fiscal 2020) of such target, then a fewer number of shares would be available for award.
Stock-based compensation under the 2016 Plan was $262$143 and $367$155 during the first ninethree months of fiscal 20202021 and 2019, respectively and $37 expense and $59 benefit during the third quarter of fiscal 2020, and 2019, respectively. As of June 30,December 31, 2020, there was $495$656 of total unrecognized compensation cost related to the performance shares and restricted shares awarded under the 2016 Plan. The Company expects to recognize this cost over the next 1.31.6 years.
9.Revenue
The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and other military applications; (ii) airframe applications for a variety of aircraft; (iii) industrial gas and steam turbine engines for power generation units; and (iv) other commercial applications.
The following table represents a breakout of total revenue by customer type:
| | | | | | | | | | | | | | | |
| | | Three Months Ended
December 31, |
| | | | | 2020 | | 2019 |
| Commercial revenue | | | | | $ | 10,753 | | | $ | 10,191 | |
| Military revenue | | | | | 14,325 | | | 16,016 | |
| Total | | | | | $ | 25,078 | | | $ | 26,207 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Nine Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | |
| Commercial revenue | $ | 12,266 |
| | $ | 14,713 |
| | $ | 34,954 |
| | $ | 41,213 |
|
| Military revenue | 15,511 |
| | 10,160 |
| | 49,567 |
| | 40,118 |
|
| Total | $ | 27,777 |
| | $ | 24,873 |
| | $ | 84,521 |
| | $ | 81,331 |
|
The following table represents revenue by the various components:
| | | | | | | | | | | | | | | |
| | | Three Months Ended
December 31, |
| Net Sales | | | | | 2020 | | 2019 |
| Aerospace components for: | | | | | | | |
| Fixed wing aircraft | | | | | $ | 9,790 | | | $ | 11,335 | |
| Rotorcraft | | | | | 7,731 | | | 6,848 | |
| Energy components for power generation units | | | | | 6,462 | | | 2,658 | |
| Commercial product and other revenue | | | | | 1,095 | | | 5,366 | |
| Total | | | | | $ | 25,078 | | | $ | 26,207 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Nine Months Ended
June 30, |
| Net Sales | 2020 | | 2019 | | 2020 | | 2019 |
| Aerospace components for: | | | | | | | |
| Fixed wing aircraft | $ | 13,730 |
| | $ | 12,557 |
| | $ | 39,130 |
| | $ | 38,949 |
|
| Rotorcraft | 8,687 |
| | 5,088 |
| | 22,348 |
| | 17,261 |
|
| Energy components for power generation units | 3,804 |
| | 4,887 |
| | 9,879 |
| | 13,347 |
|
| Commercial product and other revenue | 1,556 |
| | 2,341 |
| | 13,164 |
| | 11,774 |
|
| Total | $ | 27,777 |
| | $ | 24,873 |
| | $ | 84,521 |
| | $ | 81,331 |
|
The following table represents revenue by geographic region based on the Company's selling operation locations:
| | | | | | | | | | | | | | | |
| | | Three Months Ended
December 31, |
| Net Sales | | | | | 2020 | | 2019 |
| North America | | | | | 19,766 | | | 23,776 | |
| Europe | | | | | 5,312 | | | 2,431 | |
| Total | | | | | $ | 25,078 | | | $ | 26,207 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Nine Months Ended
June 30, |
| Net Sales | 2020 | | 2019 | | 2020 | | 2019 |
| North America | 24,261 |
| | 20,301 |
| | 75,532 |
| | 68,745 |
|
| Europe | 3,516 |
| | 4,572 |
| | 8,989 |
| | 12,586 |
|
| Total | $ | 27,777 |
| | $ | 24,873 |
| | $ | 84,521 |
| | $ | 81,331 |
|
In addition to the disaggregatingdisaggregated revenue information provided above, approximately 60%58% and 61% of total net sales as of June 30,December 31, 2020 areand 2019, respectively, was recognized on an over-time basis because of the continuous transfer of control to the customer, with the remainder recognized at a point in time.
Contract Balances
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 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 performance obligation occurs over-time, the contract liability is reversed over the course of production. If 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 June 30,December 31, 2020: |
| | | | |
| | | |
| Contract assets - Beginning balance, October 1, 2019 | | $ | 10,349 |
|
| Additional revenue recognized over-time | | 51,132 |
|
| Less amounts billed to the customers | | (48,347 | ) |
| Contract assets - Ending balance, June 30, 2020 | | $ | 13,134 |
|
| | | | | | | | |
| | |
| Contract assets - Beginning balance, October 1, 2020 | | $ | 11,997 | |
| Additional revenue recognized over-time | | 14,520 | |
| Less amounts billed to the customers | | (14,591) | |
| Contract assets - Ending balance, December 31, 2020 | | $ | 11,926 | |
| | | | | | | | |
| | |
| Contract liabilities (included within Accrued liabilities) - Beginning balance, October 1, 2020 | | $ | (636) | |
| Payments received in advance of performance obligations | | (155) | |
| Performance obligations satisfied | | 66 | |
| Contract liabilities (included within Accrued liabilities) - Ending balance, December 31, 2020 | | $ | (725) | |
|
| | | | |
| | | |
| Contract liabilities (included within Accrued liabilities) - Beginning balance, October 1, 2019 | | $ | (382 | ) |
| Payments received in advance of performance obligations | | — |
|
| Performance obligations satisfied | | 382 |
|
| Contract liabilities (included within Accrued liabilities) - Ending balance, June 30, 2020 | | $ | — |
|
There were no0 impairment losses recorded on contract assets as of JuneDecember 31, 2020 and September 30, 2020.
Remaining performance obligations
As of June 30,December 31, 2020, the Company has $100,880$81,533 of remaining performance obligations, the majority of which are anticipated to be completed within the next twelve months.
| |
10. | Commitments and Contingencies |
10. Commitments and Contingencies
In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters; however, it does not believe any such matters are material to its financial condition or results of operations. The Company maintains various liability insurance coverages to protect its assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it is possible that the Company’s future operating results could be affected by future costs of litigation.
A subsidiary of the Company, Quality Aluminum Forge, LLC ("Orange"), is currently a defendant in a lawsuit filed by Avco Corporation (“Avco”) in the Pennsylvania State Court, which was filed in August 2019, alleging that certain forged pistons delivered by the Orange plant failed to meet material specifications required by Avco. Avco also sued Arconic, Inc. (“Arconic”), which was the raw material supplier. No specific amount of damages was claimed by Avco and discovery has only recently begun.
Orange disagrees withdisputes 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 Rhode Island, which action was dismissed in connection with the movement of the matter to Pennsylvania State Court. Although the Company records reserves for legal disputes and other matters in accordance with 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 has not deemed it probable and 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 delay.closures and restrictions. Class action notices were sent at the end of September and there were no objections to the settlement. On February 4, 2021, the court issued a tentative ruling to grant final approval. The final approval hearing is scheduled for April 16, 2021. The Company previously recorded an estimated loss of $315, which was determined to be an adequate reservesreserve to cover the settlement.
During the quarter,fiscal 2020, the Company received notice from the International Association of Machinists and Aerospace Workers Union that they were disclaiming all interest in representing certain hourly employees at the Company’s Cleveland facility. Also, during the quarter,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 June 2020 and the National Labor Relations Board has certified the International Brotherhood of Boilermakers as the elected representative of the Company’s hourly production employees. The Company’s obligations will be more fully understood following the ratification of a collective bargaining agreement.
Recovery onIn the first quarter of fiscal 2021, the insurance claim related to the fire on December 26, 2018 at the Orange location continues in fiscal 2020.was finalized with the Company's insurance carrier. The Company continues to work diligently to restore the site back to full service as safely and quickly as possible. The 2500 ton press from storage that was placed in service in fiscal 2019 continues to run and the press located in Michigan was taken off-line at the end of November 2019, relocated to Orange and was placed into service in March 2020. Restoration is nearly complete for the structurefinal 2 of the manufacturing building and the presses damaged in the fire. The Company began running one restored press at the end of December 2019, while another restored press began running at the end of July 2020, allowing Orange to have 6 out of 8 presses in production going into the fourth quarter. Two of the six presses damaged in the fire, are still in the restoration process. The Company anticipates having those restored atwhich both continue to be on track to be completed by the end of fourththe second quarter of fiscal 2020.2021; however, no assurances can be made that the restoration will be completed within such timeframe. Restoration of the building structure is nearly complete.
DuringHaving finalized the first nine months of fiscal 2020, the Company received cash proceeds from insurance of $8,787 and, separately, theclaim with its insurance carrier, provided $713proceeds in the amount of proceeds directly$3,148 was received in December 2020. As noted in the table below, $3,099 was recognized within the consolidated condensed statements of operations and the balance was separately designated to the landlord for the continued restoration of the damaged building as prescribed under the lease arrangement. The table below reflects the receipt of proceeds and how they were expended as of June
30, 2020. 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 also maintainshas business interruption insurance coverage, and continues to work with the insurance company to reach an agreement on the recoverable amounts of business interruption expenses, of which $915$546 of the amount received was realized inreflected within the first nine monthscost of fiscal 2020.goods sold line within the consolidated condensed statement of operations.
| | | | | | | | |
| Balance sheet (Other receivables): | |
| September 30, 2020 | $ | 1,547 | |
| Cash proceeds | (3,998) | |
| Capital expenditures (equipment) | 2,495 | |
| | |
| Other expenses | 58 | |
| Business interruption | 546 | |
| December 31, 2020 | $ | 648 | |
|
| | | | |
| Balance sheet (Other receivables): | |
| | |
| September 30, 2019 | $ | 3,500 |
|
| | Cash proceeds | (8,787 | ) |
| | Capital expenditures (equipment) | 2,683 |
|
| | Other expenses | 1,689 |
|
| | Business interruption | 915 |
|
| June 30, 2020 | $ | — |
|
The tables below reflect how the proceeds received impacted the consolidated condensed statements of operations for the nine months ended and three months ended June 30,2020.December 31, 2020 and 2019, respectively.
| | | | | | | | | | | |
| Three Months Ended
December 31, 2020 |
| Balance without insurance proceeds | Insurance recoveries | Balance with insurance proceeds |
| | | |
| Cost of goods sold | $ | 21,759 | | (604) | | $ | 21,155 | |
| Gain on insurance proceeds received | $ | 0 | | (2,495) | | $ | (2,495) | |
| Income (loss) before income tax (benefit) expense | $ | (1,011) | | (3,099) | | $ | 2,088 | |
| | | | | | | | | | | |
| Three Months Ended
December 31, 2019 |
| Balance without insurance proceeds | Insurance recoveries | Balance with insurance proceeds |
| | | |
| Cost of goods sold | $ | 24,053 | | (1,170) | | $ | 22,883 | |
| | | |
| Income (loss) before income tax (benefit) expense | $ | (2,607) | | (1,170) | | $ | (1,437) | |
|
| | | | | | | | |
| | Nine Months Ended June 30, 2020 |
| | Balance without insurance proceeds | Insurance recoveries | Balance with insurance proceeds |
| Cost of goods sold | $ | 73,374 |
| (2,603 | ) | $ | 70,771 |
|
| Gain on insurance proceeds received | $ | — |
| (2,683 | ) | $ | (2,683 | ) |
| Income (loss) before income tax (benefit) expense | $ | (1,219 | ) | (5,286 | ) | $ | 4,067 |
|
| | | | | |
| Total Claim |
| Property & damage ** | $ | 20,364 | |
| Extra expense & mitigation expense | 4,404 | |
| Business interruption | 2,932 | |
| $ | 27,700 | |
**$3,640 of total was directed to Landlord for the restoration of the building as prescribed by the lease arrangement.
|
| | | | | | | | |
| | Three Months Ended June 30, 2020 |
| | Balance without insurance proceeds | Insurance recoveries | Balance with insurance proceeds |
| Cost of goods sold | $ | 23,944 |
| (316 | ) | $ | 23,628 |
|
| Gain on insurance proceeds received | $ | — |
| (1,683 | ) | $ | (1,683 | ) |
| Income (loss) before income tax (benefit) expense | $ | 284 |
| (1,999 | ) | $ | 2,283 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and includes assumptions concerning the Company’s operations, future results and prospects. 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 productsproduct in the Aerospace and Energy ("A&E")&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;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 turbineturboprop engines; (7) continued reliance on military spending, in general, and/or several major customers, in particular, for revenues; (8) the impact on future contributions to the Company’s defined benefit pension plans due to changes in actuarial assumptions, government regulations and the market value of plan assets; (9) stable governments, business conditions, laws, regulations and taxes in economies where business is conducted; (10) the ability to successfully integrate businesses that may be acquired into the Company’s operations; (11) cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners; (12) our exposure to additional risks as a result of our international business, including risks related to geopolitical and economic factors, suppliers, laws and regulations; (13) the ability to maintain a qualified workforce; (14) the adequacy and availability of our insurance coverage; (15) our ability to develop new products and technologies and maintain technologies, facilities, and equipment to win new competitions and meet the needs of our customers; (16) our ability to realize amounts in our backlog; (17) investigations, claims, disputes, enforcement actions, litigation and/or other legal proceedings; (18) extraordinary or force majeure events affecting the business or operations of our business; and (12)(19) the impact of the novel coronavirus ("COVID-19")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.
The Company is engaged in the production of forgings and machined components primarily for the A&E markets. The processes and services provided by the Company include forging, heat-treating, machining, subassembly, and test. The Company operates under one business segment.
The Company endeavors to plan and evaluate its business operations while taking into consideration certain factors including the following: (i) the projected build rate for commercial, business and military aircraft, as well as the engines that power such aircraft; (ii) the projected maintenance, repair and overhaul schedules for commercial, business and military aircraft, as well as the engines that power such aircraft; and (iii) the projected build rate and repair for industrial turbines.
The Company operates within a cost structure that includes a significant fixed component. Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage the fixed component of their respective cost structures. Conversely, the opposite effect is expected to occur at lower net sales and related production volumes.
A. Results of Operations
Overview
The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and other military applications; (ii) airframe applications for a variety of aircraft; (iii) industrial gas and steam turbine engines for power generation units; and (iv) other commercial applications.
Fire Restoration
Recovery onIn the first quarter of fiscal 2021, the insurance claim related to the fire on December 26, 2018 at the Orange location continues in fiscal 2020.was finalized with the Company's insurance carrier. The Company continues to work diligently to restore the site back to full service as safely and quickly as possible. The 2500 ton press from storage that was placed in service in fiscal 2019 continues to run and the press located in Michigan was taken off-line at the end of November 2019 relocated to Orange and placed in service in March 2020. Restoration is nearly complete for the structurefinal two of the manufacturing building andsix presses damaged in the fire. The Company began running one restored press atfire, which both continue to be on track to be completed by the end of December 2019, while another finished being restored at the end of July 2020. During the first nine monthssecond quarter of fiscal 2020,2021; however, no assurances can be made that the Companyrestoration will be completed within such timeframe. Restoration of the building structure is nearly complete.
Having finalized the claim with its insurance carrier, proceeds in the amount of $3.1 million was received cash proceeds from insurance of $8.8 million, of which $3.5in December 2020. The $3.1 million was recognized in fiscal 2019, $2.6 millionwithin the consolidated condensed statements of operations and the balance was used to offset expense incurred as a result of the fire and business interruption and $2.7 million used for capital; and, separately $0.7 million in proceeds from the insurance carrier went directlydesignated to the landlord for the continued restoration of the damaged building as prescribed under the lease arrangement. The table below reflects the receipt of proceeds and how they were expended as of June 30, 2020. 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 also maintainshas business interruption insurance coverage, and continues to work withof which $0.5 million of the insurance company to reach an agreement onamount received was reflected within the recoverable amountscost of business interruption expenses, which $0.9 million was realized ingoods sold line within the first nine monthsconsolidated condensed statement of fiscal 2020.operations.
|
| | | | |
| Balance sheet (Other receivables - dollars in millions): | |
| | |
| September 30, 2019 | $ | 3.5 |
|
| | Cash proceeds | (8.8 | ) |
| | Capital expenditures | 2.7 |
|
| | Other expenses | 1.7 |
|
| | Business interruption | 0.9 |
|
| June 30, 2020 | $ | — |
|
For further detail of how the consolidated condensed statements of operations and balance sheets were impacted for the nine and three months ended, refer to Note 10, Commitments and Contingencies.
COVID-19
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus wasSince being recognized as a pandemic by the World Health Organization andas a pandemic, the novel coronavirus ("COVID-19") outbreak becamecontinues to be widespread in the United States and other countries in which we operate. The Company has continued to take proactive steps to ensureCapital markets and economies worldwide have been negatively impacted by COVID-19 and it is still unclear how lasting and deep the safety of its employees and customers and to preserveeconomic impacts will be, specifically with the Company’s financial flexibility. We have enacted operating protocols to ensurecommercial aerospace industry. During the safety of our employees and adopted precautions in compliance with various regulatory orders and recommendations imposed in the jurisdictions in which we operate. We may decide to take further actions that we determine to be in the best interest of our employees and customers, or are required by federal, state or local authorities.
The A&E industry in which we operate has been impacted bythree months ended December 31, 2020, the COVID-19 pandemic had mixed effects on the Company’s results of operations. The Company continues to actively take measures to reduce costs by furloughing and laying off certain employees from one of its plant locations where reduced sales of commercial aerospace products have occurred, and it may continue to have adverse effects. As such, the Company continues to actively monitor and find ways to mitigate the impact of thisthe pandemic on this industry as well as the global economy continuesits operations and consider its ability to evolve. The extent of the pandemic’s effect on Company’s financial condition, liquidity and future results ofpivot its operations as well as the A&E industry generally, depends on future developments, which cannot be predicted at this time. These future developments include, without limitation, the scope and severity of the pandemic, mitigation actions taken in response to the pandemic, the length of time involved in resuming economic activity, and the impact on government programs and budgets. Reduced demand for products or impaired ability to meet customer demand as a result of the pandemic or future developments could have a material adverse effect on our business, operations and financial performance. Given the evolution of the COVID-19 pandemic and the varied global responses to curb its spread, the Company is not presently able to estimate the effects of the COVID-19 outbreak on its future results of operations, financial condition or liquidity.industries served.
Backlog of Orders
SIFCO’s total backlog at June 30,December 31, 2020 was $100.9$81.5 million, compared with $104.4$119.5 million as of June 30, 2019 and $117.6 million as of September 30,December 31, 2019. Orders may be subject to modification or cancellation by the customer with limited charges. Sales in the A&E markets continue to be impacted by the general economy, newly acquired part numbers won and continued sales recovery from the fire at Orange and may be affected by the COVID-19 pandemic, which has created increased pressure in these markets. If the COVID-19 pandemic continues to have a material impact on the A&E markets, including with regards to our more significant customers, it could materially affect our business and results of operations. Backlog may decline as customers adjust orders in response to the ongoing COVID-19 pandemic and its impact on their operations. Backlog information may not be indicative of future sales.
NineThree Months Ended June 30,December 31, 2020 compared with NineThree Months Ended June 30,December 31, 2019
Net Sales
Net sales comparative information for the first three months of fiscal 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Three Months Ended
December 31, | | Increase/ (Decrease) |
| Net Sales | 2020 | | 2019 | |
| Aerospace components for: | | | | | |
| Fixed wing aircraft | $ | 9.8 | | | $ | 11.3 | | | $ | (1.5) | |
| Rotorcraft | 7.7 | | | 6.8 | | | 0.9 | |
| Energy components for power generation units | 6.5 | | | 2.7 | | | 3.8 | |
| Commercial product and other revenue | 1.1 | | | 5.4 | | | (4.3) | |
| Total | $ | 25.1 | | | $ | 26.2 | | | $ | (1.1) | |
Net sales for the first ninethree months of fiscal 2020 increased2021 decreased $1.1 million to $84.5$25.1 million, compared with $81.3$26.2 million in the comparable period of fiscal 2019. Net sales comparative information for2020. Commercial products and other revenue decreased $4.3 million in the first ninethree months of fiscal 2020 and 2019 is as follows:
|
| | | | | | | | | | | |
| (Dollars in millions) | Nine Months Ended June 30, | | Increase/ (Decrease)
|
| Net Sales | 2020 | | 2019 | |
| Aerospace components for: | | | | | |
| Fixed wing aircraft | $ | 39.1 |
| | $ | 39.0 |
| | $ | 0.1 |
|
| Rotorcraft | 22.3 |
| | 17.2 |
| | 5.1 |
|
| Energy components for power generation units | 9.9 |
| | 13.3 |
| | (3.4 | ) |
| Commercial product and other revenue | 13.2 |
| | 11.8 |
| | 1.4 |
|
| Total | $ | 84.5 |
| | $ | 81.3 |
| | $ | 3.2 |
|
The increase of $5.1 million in rotorcraft sales in the first nine months of fiscal 20202021 compared to the same period in fiscal 20192020, primarily due to timing of orders for the Hellfire II missile program. The energy components for power generation units increased by $3.8 million primarily due to customer order increases. Fixed wing aircraft sales decreased $1.5 million due to timing of customer orders and a decrease in build rates in certain commercial programs, partially offset by increased military programs. The increase in rotorcraft sales is primarily due to increased shipments relating to certain military programs, such as the Black Hawk and CH53. Commercial products and other revenue increased $1.4 million in the first nine months of fiscal 2020 compared to the same period in fiscal 2019, primarily due to timing of shipments for the Hellfire II missile program and other ordnance work along with new product sales. Net sales in energy components for power generation units decreased by $3.4 million compared with the same period last year due to the continued softening of the energy market and some impact due to the global outbreak of COVID-19. In response to the outbreak of COVID-19, the Italian government restricted the operations of businesses within Italy, including the Company’s operations in Maniago, Italy ("Maniago"). The Company received an exemption from these government restrictions based on the nature of its operations, and temporarily reduced its operations in Maniago and undertook a temporary shutdown from March 17 through March 22 to perform a deep cleaning of the facility for employee safety due to the COVID-19 outbreak. Since the temporary cessation of operations in Maniago that occurred in March, Maniago has resumed operations and has experienced other disruptions, such as border closures to other countries, resulting in a delay in product shipments as of the end of June, which impacted the quarter by approximately $1.3 million. With countries subsequently beginning to reopen, Maniago expects to complete such shipments within the upcoming quarter.programs.
Commercial net sales were 41.4%42.9% of total net sales and military net sales were 58.6%57.1% of total net sales in the first ninethree months of fiscal 2020,2021, compared with 50.7%38.9% and 49.3%61.1%, respectively, in the comparable period in fiscal 2019. A shift in mix between commercial versus military sales in comparable periods is due to an increase in military programs, such as the Black Hawk program, partially offset by the decline in energy sales and continued delays in production due to the ongoing recovery efforts at the Orange location and the impact to the commercial aerospace industries due to COVID-19.2020. Military net sales increaseddecreased by $9.5$1.7 million to $49.6$14.3 million in the first ninethree months of fiscal 2020,2021, compared with $40.1$16.0 million in the comparable period of fiscal 2019,2020, primarily due to the timing of shipmentsorders for the Hellfire II missile program and other programs such as the Black Hawk and CH53.program. Commercial
net sales decreased $6.3increased $0.6 million to $34.9$10.8 million in the first ninethree months of fiscal 2020,2021, compared with $41.2$10.2 million in the comparable period of fiscal 20192020 primarily due to the continued business interruption createdan increase in energy components sales for power generation due to increased customer orders partially offset by the fire at the Orange location and timing related todecreased build rates in certain programs as they were impacted by COVID-19 and the soft energy market. commercial programs.
Cost of Goods Sold
Cost of goods sold decreased by $4.3$1.7 million, or 5.8%7.6%, to $70.8$21.2 million, or 83.7%84.4% of net sales, during the first ninethree months of fiscal 2020,2021, compared with $75.1$22.9 million or 92.4%87.3% of net sales, in the comparable period of fiscal 2019.2020. The decrease was due primarily to improved productivitycost controlling measures and the receiptnon-recurrence of $2.7 million in insurance proceeds related to business interruption and expense incurred related to the fire, partially offset by $1.7 million of unabsorbed costs related to the Orange location due to the fire and the one-time pension withdrawal liability charge of $0.8 million incurred for exitingin the prior year. Another contributing factor to the decrease was the Company received insurance recoveries related to business interruption of $0.5 million, which partially mitigated the $0.4 million of unabsorbed costs incurred from its multi-employer plan as further explained in Note 7, Retirement Benefit Plans.Orange location due to reduced production.
Gross Profit
Gross profit increased $7.5$0.6 million to $13.8$3.9 million during the first ninethree months of fiscal 2020,2021, compared with $6.2$3.3 million in the comparable period of fiscal 2019.2020. Gross margin percent of sales was 16.3%15.6% during the first ninethree months of fiscal 2020,2021, compared with 7.6%12.7% in the comparable period in fiscal 2019.2020. The increase in gross profit was primarily due to the reduced cost of goods sold as a percentage of sales, as outlined above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $10.4$3.8 million, or 12.3%15.3% of net sales during the first ninethree months of fiscal 2020,2021, compared with $11.4$4.2 million, or 14.0%16.1% of net sales in the comparable period of fiscal 2019.2020. The decrease in selling, general and administrative expenses is due to the continued cost reduction efforts by management in response to COVID-19 and other effects of the COVID-19 pandemic and its impact on operations such as reduced bank fees,lower wages related to a first quarter furlough at one location and less travel expense, lowerpartially offset by higher legal and professional costs (prior year included arbitration costs), lower equity compensation and commissions, partially offset by higher incentive compensation accrual of $0.5 million.commissions.
Amortization of Intangibles
Amortization of intangibles was $1.2$0.3 million in the first ninethree months of fiscal 2020 and2021, compared with $0.4 million in the comparable period of fiscal 2019, respectively.2020.
Other/General
The Company recorded operating income before taxes of $4.7$2.1 million in the first ninethree months of fiscal 2020,2021, compared with an operatinga loss before taxes of $9.9$1.4 million in the first ninethree months of fiscal 2019.2020.
The prior year's operating loss includes an $8.3 million non-cash charge related to the Maniago reporting unit as its goodwill was impaired.
In the first ninethree months ended June 30,December 31, 2020, results included $2.7a $2.5 million gain on insurance proceeds,recoveries, compared to a gain of $4.5 millionnone in the comparable period, both periods related to the net gain on insurance proceeds related to the fire at the Orange location.period.
Interest expense was $0.7$0.2 million in the first ninethree months of fiscal 2020,2021, compared to $0.8$0.3 million in the first ninethree months of fiscal 2019.2020.
The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first ninethree months of both fiscal 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted Average
Interest Rate
Three Months Ended
December 31, | | Weighted Average
Outstanding Balance
Three Months Ended
December 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revolving credit agreement | 1.5 | % | | 3.6 | % | | $ 10.8 million | | $ 15.8 million |
| Foreign term debt | 3.0 | % | | 2.4 | % | | $ 7.1 million | | $ 5.9 million |
| Other debt | 0.9 | % | | 0.9 | % | | $ 5.8 million | | $ 1.0 million |
|
| | | | | | | | | |
| | Weighted Average
Interest Rate
Nine Months Ended
June 30, | | Weighted Average
Outstanding Balance
Nine Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revolving credit agreement | 3.2 | % | | 4.1 | % | | $ 14.8 million | | $ 17.9 million |
| Foreign term debt | 3.9 | % | | 2.7 | % | | $ 5.5 million | | $ 7.2 million |
| Other debt | 0.4 | % | | — | % | | $ 6.1 million | | $ 0.0 million |
Income Taxes
The Company’s effective tax rate through the first ninethree months of fiscal 20202021 was (2%)(43)%, compared with 8%7% for the same period of fiscal 2019.2020. The decrease in the effective rate was primarily attributable to a discrete tax benefit recorded during the first three months of fiscal 2021 to adjust deferred taxes recorded in Italy, applied against year-to-date income. Additionally, the effective tax rate decreased as a result of changes in jurisdictional mix of income in fiscal 20202021 compared with the same period of fiscal 2019.2020. The effective tax rate differs from the U.S. federal statutory rate due primarily
to the valuation allowance against the Company’s U.S. deferred tax assets and income in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate.
Net Income (Loss)
Net income was $4.2$2.9 million during the first ninethree months of fiscal 2020,2021, compared with a net loss of $9.9$1.3 million in fiscal 2019,2020, respectively. The increase in income is primarily due to higher gross profit, attributed to continued improved productivity andcost saving activities, insurance proceedsrecoveries received in the first ninethree months of fiscal 20202021, the favorable tax benefit as described above, and lower selling, general and administrative expenses. Additionally, the Company did not experience a non-cash charge to goodwill as it did in the prior year.
Three Months Ended June 30, 2020 compared with Three Months Ended June 30, 2019
Net Sales
Net sales for the third quarter of fiscal 2020 increased 11.7% to $27.8 million, compared with $24.9 million in the comparable period of fiscal 2019. Net sales comparative information for the third quarter of fiscal 2020 and 2019 is as follows:
|
| | | | | | | | | | | |
| (Dollars in millions) | Three Months Ended
June 30, | | Increase (Decrease)
|
| Net Sales | 2020 | | 2019 | |
| Aerospace components for: | | | | | |
| Fixed wing aircraft | $ | 13.7 |
| | $ | 12.6 |
| | $ | 1.1 |
|
| Rotorcraft | 8.7 |
| | 5.1 |
| | 3.6 |
|
| Energy components for power generation units | 3.8 |
| | 4.9 |
| | (1.1 | ) |
| Commercial product and other revenue | 1.6 |
| | 2.3 |
| | (0.7 | ) |
| Total | $ | 27.8 |
| | $ | 24.9 |
| | $ | 2.9 |
|
The majority of the increase was attributed to a $3.6 million increase in rotorcraft sales in the third quarter of fiscal 2020 compared to the same period in fiscal 2019 and is primarily due to increased shipments relating to certain military programs, such as the Black Hawk and Apache. The $1.1 million increase in fixed wing aircraft sales is due to increased shipments coming from the Orange location as it increases its production and its capabilities are restored when compared to the same period in fiscal 2019. Net sales in energy components for power generation units decreased by $1.1 million compared with the same period last year due to the continued softening of the energy market and as previously discussed within the nine months management and analysis section and due to the global outbreak of COVID-19. Sales were impacted in the quarter by approximately $1.3 million attributable to the inability to ship to its customers due to border closures, which have subsequently reopened.
Commercial net sales were 44.2% of total net sales and military net sales were 55.8% of total net sales in the third quarter of fiscal 2020, compared with 59.2% and 40.8%, respectively, in the comparable period of fiscal 2019. Military net sales increased by $5.4 million to $15.5 million in the third quarter of fiscal 2020, compared with $10.1 million in the comparable period of fiscal 2019. Commercial net sales decreased $2.4 million to $12.3 million in the third quarter of fiscal 2020, compared with $14.7 million in the comparable period of fiscal 2019 primarily due to lower sales in the energy market.
Cost of Goods Sold
Cost of goods sold was $23.6 million, or 85.1% of net sales, during the third quarter of fiscal 2020, compared with $23.5 million or 94.4% of net sales, in the comparable period of fiscal 2019, primarily driven by improved productivity as the Orange location completes restoration on certain presses and receipt of insurance proceeds of $0.3 million related to extra expense coverage.
Gross Profit
Gross profit increased $2.8 million to $4.1 million during the third quarter of fiscal 2020, compared with $1.4 million in the comparable period of fiscal 2019. Gross margin was 14.9% during the third quarter of fiscal 2020, compared with 5.6% in the comparable period in fiscal 2019. The increase in gross margin was primarily due to higher sales volume, improved productivity and receipt of insurance proceeds related to extra expense from the Orange fire.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.9 million, or 10.3% of net sales, during the third quarter of fiscal 2020, compared with $3.5 million, or 14.0% of net sales, in the comparable period of fiscal 2019. The decrease is primarily due to a decrease in legal and professional costs of $0.3 million.
Amortization of Intangibles
Amortization of intangibles was $0.4 million for both the third quarter of fiscal 2020 and fiscal 2019, respectively.
Other/General
The Company recorded an operating income of $2.5 million in the third quarter of fiscal 2020, compared to an operating loss of $7.5 million in the third quarter of fiscal 2019.
Current period results include a $1.7 million gain in insurance proceeds compared to $3.3 million in the third quarter of fiscal 2019 related to insurance recovery from the damage that occurred related to the fire at the Orange location.
The results from the third quarter of the prior year include an $8.3 million non-cash charge related to the Maniago reporting unit as its goodwill was impaired.
Interest expense was $0.2 million in the third quarter of fiscal 2020 and fiscal 2019.
The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s Credit Agreement in the third quarter of both fiscal 2020 and 2019:
|
| | | | | | | | | |
| | Weighted Average
Interest Rate
Three Months Ended
June 30, | | Weighted Average
Outstanding Balance
Three Months Ended
June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revolving credit agreement | 2.0 | % | | 4.1 | % | | $ 12.5 million | | $ 12.5 million |
| Foreign term debt | 3.9 | % | | 2.9 | % | | $ 5.3 million | | $ 6.7 million |
| Other debt | 0.9 | % | | — | % | | $ 6.1 million | | $ 0.0 million |
Income Taxes
The Company's effective tax rate in the third quarter of fiscal 2020 was 2%, compared with 4% for the same period of fiscal 2019. The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income during the three months ended June 30, 2020 compared to the same period of fiscal 2019, partially offset by an increase in discrete tax. The effective tax rate differs from the U.S. Federal statutory rate due primarily to the valuation allowance against the Company's U.S. deferred tax assets and income in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate.
Net Income (Loss)
Net income was $2.3 million during the third quarter of fiscal 2020, compared with net loss of $7.4 million in the comparable period of fiscal 2019. Net income increased primarily due to higher sales and increased gross profit, lower selling, general and administrative expenses along with the gain on property recovered by insurance of $1.7 million as the Company continues to work through the restoration of the Orange location, while results from the third quarter of the prior year includes $8.3 million non-cash charge due to goodwill impairment at one of its reporting units.
Non-GAAP Financial Measures
Presented below is certain financial information based on the Company's EBITDA and Adjusted EBITDA. References to “EBITDA” mean earnings (losses) from continuing operations before interest, taxes, depreciation and amortization, and references to “Adjusted EBITDA” mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of net income to EBITDA and Adjusted EBITDA.
Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under generally accepted accounting principles in the United States of America (“GAAP”). The Company presents EBITDA and Adjusted EBITDA because management believes that they are useful indicators for evaluating operating performance and liquidity, including the Company’s ability to incur and service debt and it uses EBITDA to evaluate prospective acquisitions. Although the Company uses EBITDA and Adjusted EBITDA for the reasons noted above, the use of these non-GAAP financial measures as analytical tools has limitations. Therefore, reviewers of the Company’s financial information should not consider them in isolation, or as a substitute for analysis of the Company's results of operations as reported in accordance with GAAP. Some of these limitations include:
•Neither EBITDA nor Adjusted EBITDA reflects the interest expense, or the cash requirements necessary to service interest payments on indebtedness;
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor Adjusted EBITDA reflects any cash requirements for such replacements;
•The omission of the 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 income (loss), to measure operating performance. Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under GAAP, and neither should be considered as an alternative to net loss or cash flow from operations determined in accordance with GAAP. The Company’s calculation of EBITDA and Adjusted EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies.
The following table sets forth a reconciliation of net loss to EBITDA and Adjusted EBITDA:
| | | | | | | | | | | | | | | |
| Dollars in thousands | | | Three Months Ended |
| | | | December 31, |
| | | | | | 2020 | | 2019 |
| Net income (loss) | | | | | $ | 2,993 | | | $ | (1,342) | |
| Adjustments: | | | | | | | |
| Depreciation and amortization expense | | | | | 1,825 | | | 1,856 | |
| Interest expense, net | | | | | 165 | | | 251 | |
| Income tax benefit | | | | | (905) | | | (95) | |
| EBITDA | | | | | 4,078 | | | 670 | |
| Adjustments: | | | | | | | |
| Foreign currency exchange loss, net (1) | | | | | 7 | | | 1 | |
| Other income, net (2) | | | | | 62 | | | (108) | |
| | | | | | | |
| Gain on insurance recoveries (3) | | | | | (2,495) | | | — | |
| | | | | | | |
| | | | | | | |
| Equity compensation (4) | | | | | 143 | | | 155 | |
| | | | | | | |
| | | | | | | |
| LIFO impact (5) | | | | | 128 | | | 22 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Adjusted EBITDA | | | | | $ | 1,923 | | | $ | 740 | |
|
| | | | | | | | | | | | | | | |
| Dollars in thousands | Three Months Ended | | Nine Months Ended |
| | June 30, | | June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Net income (loss) | $ | 2,250 |
| | $ | (7,370 | ) | | $ | 4,168 |
| | $ | (9,911 | ) |
| Adjustments: | | | | | | | |
| Depreciation and amortization expense | 1,845 |
| | 1,896 |
| | 5,576 |
| | 5,735 |
|
| Interest expense, net | 183 |
| | 229 |
| | 697 |
| | 835 |
|
| Income tax (benefit) | 33 |
| | (336 | ) | | (101 | ) | | (816 | ) |
| EBITDA | 4,311 |
| | (5,581 | ) | | 10,340 |
| | (4,157 | ) |
| Adjustments: | | | | | | | |
| Foreign currency exchange loss (gain), net (1) | 12 |
| | (3 | ) | | 12 |
| | (4 | ) |
| Other income, net (2) | 27 |
| | (15 | ) | | (58 | ) | | (50 | ) |
| Loss (gain) on disposal and impairment of assets (3) | 55 |
| | — |
| | 98 |
| | (282 | ) |
| Gain on insurance proceeds received (4) | (1,683 | ) | | (3,304 | ) | | (2,683 | ) | | (4,468 | ) |
| Equity compensation (5) | 37 |
| | (59 | ) | | 262 |
| | 367 |
|
| LIFO impact (6) | (5 | ) | | 154 |
| | (16 | ) | | 98 |
|
| Goodwill impairment (7) | — |
| | 8,294 |
| | — |
| | 8,294 |
|
| Adjusted EBITDA | $ | 2,754 |
| | $ | (514 | ) | | $ | 7,955 |
| | $ | (202 | ) |
| |
(1) | Represents the gain or loss from changes in the exchange rates between the functional currency and the foreign currency in which the transaction is denominated. |
| |
(2) | Represents miscellaneous non-operating income or expense, such as pension costs or grant income. |
| |
(3) | Represents the difference between the proceeds from the sale of operating equipment and the carrying values shown on the Company’s books or asset impairment of long-lived assets. |
| |
(4) | Represents the difference between the insurance proceeds received for the damaged property and the carrying values shown on the Company's books for the assets that were damaged in the fire at the Orange location. |
| |
(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) due to granting of awards, awards not vesting and/or forfeitures. |
| |
(6) | Represents the change in the reserve for inventories for which cost is determined using the last-in, first-out (“LIFO”) method. |
| |
(7) | Represents non-cash charge of goodwill impairment experienced at its reporting unit level. |
(2)Represents miscellaneous non-operating income or expense, such as pension costs or grant income. (3)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 the equity-based compensation expense recognized by the Company under the 2016 Plan due to granting of awards, awards not vesting and/or forfeitures.
(5)Represents the change in the reserve for inventories for which cost is determined using the last-in, first-out (“LIFO”) method.
B. Liquidity and Capital Resources
Historically, the main sources of liquidity 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 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 impact of the COVID-19 on the commercial airline industry. As the impact of the COVID-19 pandemic on the economy and the Company's operations continues to evolve, the Company and management will continue to assess liquidity needs.
Cash and cash equivalents were both $0.3was $1.2 million at June 30,December 31, 2020 and $0.4 million at September 30, 2019.2020. At June 30,December 31, 2020, the majority of the $0.3$0.8 million 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.
Historically, the main sources of liquidity have been cash flows from operations and borrowings under our Credit Agreement. However, the continued impact of the COVID-19 pandemic (and the rapidly changing U.S. and global market and economic conditions due to the COVID-19 outbreak) is highly uncertain, with disruptions 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 a decrease in demand for our products as a result of the COVID-19 pandemic. Since the start of the pandemic, management has continued to evaluate 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 obtained 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 and management will continue to assess liquidity needs.
Operating Activities
The Company’s operating activities provided $2.3$3.1 million of cash in the first ninethree months of fiscal 2020,2021, compared with providingusage of cash of $9.4$1.0 million in the first ninethree months of fiscal 2019.2020. The cash provided in fiscal 2021 was primarily due to net income of $2.9 million and $1.4 million decrease in working capital, partially offset by $1.2 million in non-cash items, such as gain on insurance recovery and deferred income taxes, depreciation and amortization, equity based compensation, and LIFO effect. The cash provided from working capital was primarily due to decrease in receivables due to customer collections and decreased accrued liabilities.
The Company’s operating activities used $1.0 million of cash in the first three months of fiscal 2020. The cash used by operating activities in the first ninethree months of fiscal 2020 was primarily due to net incomean increase in working capital of $4.2$1.4 million and $2.9net loss of $1.3 million, inpartially offset by $1.8 million of non-cash items such as depreciation and amortization equity based compensation, deferred income taxes and LIFO effect, partially offset by the use of working capital of $4.8 million (increase in inventory of $4.6 million, $2.8 million in contract assets, net accruals of $1.7 million offset by $4.3 million decrease in receivables). The use of cash from working capital was primarily due to increase in inventories to support orders and customer adjustments for the remaining fiscal 2020 and payments to suppliers and disbursements related to the fire recovery, partially offset by decreased receivables resulting from improved collections.
The Company’s operating activities provided $9.4 million of cash in the first nine months of fiscal 2019. The cash provided by operating activities in the first nine months of fiscal 2019 was primarily due to a reduction in working capital of $9.8 million, a result in non-cash items such as the goodwill impairment charge of $8.3 million, depreciation and amortization of $5.7$1.9 million, and other non-cash items, such as equity based compensation, deferred income taxes and LIFO effect, partially offset by a gain on insurance recovery combined with a disposaleffect. The use of asset of $4.8 million and a net loss of $9.9 million. The increase in cash
from working capital was primarily due to decreased receivables dueincrease in inventories and payments to collections,suppliers, partially offset by timing of payments to suppliers.decreased receivables resulting from collections.
Investing Activities
Cash used for investing activities was $1.3$0.3 million in the first ninethree months of fiscal 2020,2021, which includes $6.2$3.5 million of insurance proceeds received duerecovery on the damaged property related to the fire at the Orange location, fire, compared with cash usedprovided for investing activities of $1.2 million in the first ninethree months of fiscal 2019.2020. Capital expenditures were $3.7 million, of which $3.2 million related to the continued restoration of the Orange location as a result of the fire. In addition to the $7.4$3.7 million expendedspent for capital expenditures during the first ninethree months of fiscal 2020, $2.62021, $1.6 million was committed for future capital expenditures as of June 30,December 31, 2020. The Company anticipates that the total fiscal 20202021 capital expenditures will be within the range of $4.0$2.5 million to $5.0$4.5 million (exclusive of fire related expenditures) and will relate principally to the further enhancement of production and product offering capabilities and operating cost reductions. Separate from the amounts given above, the Company anticipates incurring additional costs in fiscal 20202021 of approximately $4.5$1.0 million to $6.5$1.5 million in capital expenditures at the Orange location as the result of the fire and resulting damage that took place. These costs are expected to be offset by the insurance proceeds approximately of which $8.8 million of insurance proceeds have been received as of June 30, 2020. Of the proceeds received, $6.2 million have been used towards capital expenditures and the remaining $2.6 million received is offsetting operating costs.received.
Financing Activities
Cash used by financing activities was $1.1$2.1 million in the first ninethree months of fiscal 2020,2021, compared with cash used by financing activities of $8.7$0.2 million in the first ninethree months of fiscal 2019.
As discussed in Note 5, Debt, of the consolidated condensed statementsthe Company received cash proceeds of $5.0 million as it relates to the Paycheck Protection Program (or "PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and made repayments of $0.8 million of long-term debt, which $0.5 million were from the Company's foreign term loan, compared with repayments of $1.1 million in the comparable period.
In August 2018, the Company entered into an asset-based Credit Agreement ("Credit Agreement") and Security Agreement ("Security Agreement") with a lender. See Note 5, Debt, of the consolidated condensed statements for further discussion related to the Credit Agreement and the First, Second, Third and Fourth Amendment to the Credit Agreement.2020.
The Company had net repayments from the revolver under the Credit Agreement of $4.2 million and $8.6$3.7 million in the first ninethree months of fiscal 20202021 and fiscal 2019, respectively.
Amounts borrowed under the Credit Agreement are secured by substantially all the assetsnet borrowings 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 rates or LIBOR, plus the applicable margin as set forth$1.1 million in the Credit Agreement. The revolver has a rate based on LIBOR plus 1.5% spread, which was 1.7% at June 30, 2020 and the Export Credit Agreement as discussed in Note 5, Debt, has a ratefirst three months of fiscal 2020.
based on LIBOR plus 1.0% spread, which was 1.2% at June 30, 2020. The Company also has a commitment fee of 0.25% under the Credit Agreement to be incurred on the unused balance of the revolver.
As the Company’s Credit Agreement is asset-based, a sustained significant decrease in revenue in the U.S. or excessive aging of the underlying receivables as a result of the impact of the COVID-19 pandemic could materially affect the collateral capacity limitation of the availability under the Credit Agreement and could impact our ability to comply with covenants in our Credit Agreement.
Under the Company's Credit Agreement, the Company is subject to certain customary loan covenants regarding availability as discussed in Note 5, Debt. The availability at June 30,December 31, 2020 was $13.5$16.8 million. If availability had fallen short, the Company would be required to meet the fixed charge coverage ratio ("FCCR") covenant, which must not be less than 1.1 to 1.0. In the event of a default, we may not be able to access our revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities. Because the availability was greater than the 10%12.5% of the Revolving Commitment as of June 30,December 31, 2020, the FCCR calculation was not required.
As the Company’s Credit Agreement is asset-based, a sustained significant decrease in revenue in the U.S. or excessive aging of the underlying receivables as a result of the impact of the COVID-19 pandemic could materially affect the collateral capacity limitation of the availability under the Credit Agreement and could impact our ability to comply with covenants in our Credit Agreement.
Future cash flows from the Company’s operations may be used to pay down amounts outstanding under the Credit Agreement and its foreign related debts. The Company believes it has adequate cash/liquidity available to finance its operations from the combination of (i) the Company’s expected cash flows from operations and (ii) funds available under the Credit Agreement for its domestic locations and (iii) funds received pursuant to the Paycheck Protection Program Loan.locations. The Company continueswas able to seek alternatives with its lenders and other potential partners to refinancedefer payments for certain debt obligations at its Maniago location to provide Maniago with sufficient future liquidity. If ManiagoThe Company's current Credit Agreement is unsuccessful in obtaining additional financing, it may experience certain challenges in meeting certain obligations. This foreign debtset to mature within the next twelve months. As such, the Company’s plan is collateralized by Maniago’s assets. The U.S. operations ofto refinance. However, there are no guarantees that the refinance will be with similar terms to the current Credit Agreement, and if the refinance does not occur, the Company havewould not pledged any assets as collateral or guaranteed Maniago’s debt. The consolidated condensed financial statements do not include any adjustmentsbe able to reflect the possible future effect on the recoverability and classification of the Maniago assets or the amounts and classifications of the Maniago liabilities that may result from the outcome of this uncertainty. Management believes that the actions presently being taken to obtain additional funding and implementmeet its strategic plan will provide adequate liquidity to finance Maniago operations.debt obligations.
Additionally, the tighteningcredit and capital markets has seen significant volatility. 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. Critical Accounting Policies and Estimates
The Company's disclosures of critical accounting policies in its Annual Report on Form 10-K for the year ended September 30, 2019 have not materially changed since that report was filed, except for the following:
Effective October 1, 2019, the Company adopted ASC 842 Leases ("Topic 842"). Prior to the adoption of Topic 842, operating leases were maintained as off balance sheet arrangements. 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 Company determines if a contract contains a lease when 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 right of use ("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 condensed balance sheets. Finance leases are included in property, plant, and equipment, current maturities of long-term debt and long-term debt on the consolidated condensed balance sheets.
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.
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.
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.
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 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.
D. Impact of Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and subsequent updates. ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance will replace the current incurred loss approach with an expected loss model. The new expected credit loss impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt instruments, net investments in leases, loan commitments and standby letters of credit. Upon initial recognition of the exposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical
information, current information and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the estimate, so its application will require significant judgment. ASU 2016-13 is effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. However, in November 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)," which defers the effective date for public filers that are considered smaller reporting companies ("SRC"), as defined by the Securities and Exchange Commission, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Because SIFCO is considered a SRC, the Company does not need to implement until October 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the Company's results within the consolidated condensed 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 for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020.October 1, 2021. The Company is currently in the process of evaluating the impact of adoption of the rules on the Company's financial condition, results of operations and disclosure.
E. Recently Adopted Accounting Standards
For recently adopted accounting standards refer to Note 1, Summary of Significant Accounting Policies - Recently Adopted Accounting Standards for further detail.
Item 4. Controls and Procedures
As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s disclosure controls and procedures include components of the Company’s internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of June 30,December 31, 2020 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were not effective, as a result of the continuing existence
of the material weakness in the Company's internal controls over financial reporting described in Item 9A of the Company's 20192020 Annual Report on Form 10-K.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
The following material weakness related to our control environment existed as of June 30,December 31, 2020.
Key•Insufficient review of specific controls around segregation of dutiesassociated with revenue, inventory and periodic access reviews within IT general and application controls forincome taxes at the Cleveland operation were not designed or operating effectively.Maniago location.
The control environment deficiencies described above could have resulted in a failure to prevent or detect a material misstatement in our financial statements due to the omission of information or inappropriate conclusions regarding information required to be recorded, processed, summarized, and reported in the Company’s SEC reports. Notwithstanding the identified material weakness, management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
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 weakness:
Implement robust security and access reviews at a level of precision necessary to ensure they are timely and appropriate. The Company is making progress by utilizing external assistance. •Using a risk-based approach, management will implement detectiveadditional monitoring controls through increased oversight and monitoring business processtraining local management to 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 further mitigate IT risks over financial reporting.prevent and detect material errors on a timely basis.
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 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 continue to make meaningful progress on our remediation plan during fiscal year 2020,2021, 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
No material changes in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) occurred during the period covered by this Quarterly Report on Form 10‑Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Items 1A, 2, 3, 4 and 5 are not applicable or the answer to such items is negative; therefore, the items have been omitted and no reference is required in this Quarterly Report.
Item 1. 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 information regarding our outstanding material legal proceedings, see Note 10, Commitments and Contingencies.
Item 1A. Risk Factors
The Company is subject to various risks and uncertainties, including, without limitation, (1) the impact on business conditions in general, and on the demand for products 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 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; (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 turbine engines; (7) continued reliance on military spending, in general, and/or several major customers, in particular, for revenues; (8) the impact on future contributions to the Company’s defined benefit pension plans due to changes in actuarial assumptions, government regulations and the market value of plan assets; (9) stable governments, business conditions, laws, regulations and taxes in economies where business is conducted; (10) the ability to successfully integrate businesses that may be acquired into the Company’s operations; and (11) extraordinary or force majeure events affecting the business or operations of our business, any of which could have a material effect on us. Investors should consider the risks described below and all of the other information set forth in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes and “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in evaluating our business and prospects. If any of the risks described herein occurs, our business, financial condition or results of operations could be negatively affected. Additional risks and uncertainties, including risks not currently known or that are currently deemed immaterial may also adversely affect our business financial conditions or results of operations.
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 operate. While we are actively monitoring the pandemic and taking 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 include the duration of the outbreak, the severity of the disease, and the actions, or perception of actions that may be taken, to contain or treat its impact, including declarations of 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. 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. Although the Company intends to apply for forgiveness of all or a portion of its PPP Loan proceeds, we make no representations that we will qualify for forgiveness of all or part of the PPP Loan. 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. 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.
Item 6. (a) Exhibits
The following exhibits are filed with this report or are incorporated herein by reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934 (Asterisk denotes exhibits filed with this report.)
|
| | | | | | | |
Exhibit
No.
| | Description |
| 2.1 | | |
| 2.2 | | |
| 3.1 | | |
| 3.2 | | |
| 9.1 | | |
| 9.2 | | |
| 9.3 | | |
| | | | | | | | |
| 9.4 | | |
10.19.5* | | |
| 10.1 | | |
| 10.2 | | |
| 10.3 | | |
| 10.4 | | |
| 10.5 | | |
| 10.6 | | |
| 10.7 | | |
10.8 | | |
|
| 10.8 | | |
10.9 | | |
10.1010.9 | | |
10.1110.10 | | |
10.1210.11 | | |
10.1310.12 | | |
10.18 | | |
10.1910.13 | | 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 |
10.2010.14 | | |
10.2110.15 | | 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 |
10.2210.16 | | 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 |
10.2310.17 | | 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 |
10.2410.18 | | 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 |
10.2510.19 | | |
| | | | | | | | |
10.2610.20 | | |
14.110.21 | | |
| 14.1 | | |
| *31.1 | | |
| *31.2 | | |
| *32.1 | | |
| *32.2 | | |
| *101 | | The following financial information from SIFCO Industries, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30,December 31, 2020 filed with the SEC on August 6, 2020,February 5, 2021, formatted in XBRL includes: (i) Consolidated Condensed Statements of Operations for the fiscal periods ended June 30,December 31, 2020 and 2019, (ii) Consolidated Condensed Statements of Comprehensive Income for the fiscal periods ended June 30,December 31, 2020 and 2019, (iii) Consolidated Condensed Balance Sheets at June 30,December 31, 2020 and September 30, 2019,2020, (iv) Consolidated Condensed Statements of Cash Flow for the fiscal periods ended June 30,December 31, 2020 and 2019, (iv) Consolidated Condensed Statements of Shareholders' Equity for the periods June 30,December 31, 2020 and 2019, and (v) the Notes to the Consolidated Condensed Financial Statements. |
| *104 | | Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained with Exhibit 101 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | SIFCO Industries, Inc. |
| | (Registrant) |
| | |
| Date: February 5, 2021 | | SIFCO Industries, Inc. |
| | (Registrant) |
| | |
Date: August 6, 2020 | | /s/ Peter W. Knapper |
| | Peter W. Knapper |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
Date: August 6, 2020February 5, 2021 | | /s/ Thomas R. Kubera |
| | Thomas R. Kubera |
| | Chief Financial Officer |
| | (Principal Financial Officer) |