Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SIFCO is engaged in the production of forgings and machined components primarily for the A&E markets. The processes and services include forging, heat-treating and machining. The Company operates under one business segment.
The Company endeavors to 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 build rate for industrial steam and gas turbine engines; and (iii) the projected maintenance, repair and overhaul schedules for commercial, business and military aircraft, as well as the engines that power such aircraft.
The Company operates within a cost structure that includes a significant fixed component. Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage the fixed component of their respective cost structures. Conversely, the opposite effect is expected to occur at lower net sales and related production volumes.
A. Results of Operations
Overview
In June 2017, the Company announced the decision to close its Alliance facility and consolidate its sales due to decreased sales from a key customer and consolidate operations to Cleveland to improve utilization and reduce fixed costs. This closure falls in line with management's key strategic initiatives to make organizational and operational changes needed to improve profitability. Orders after September 30, 2017 are being processed and manufactured at Cleveland. Alliance continued to manufacture product through September 30, 2017 and the closure was completed in October 2017. As a result of the decision to close Alliance, $5.1 million of non-cash costs were incurred, of which $4.8 million relates to asset impairment discussed below and $0.3 million of accelerated depreciation of assets as of September 30, 2017. The remaining estimated exit costs are to be expensed as incurred, which include workforce reduction costs. Workforce reduction costs incurred at September 30, 2017 of approximately $0.2 million, of which a nominal amount was paid by September 30, 2017 and the remainder is expected to be paid in the first quarter of fiscal 2018. Certain machinery and equipment and the land and building were classified as assets held for sale as of September 30, 2017.
The Ireland building located in Cork, Ireland is classified as an asset held for sale as of September 30, 2017. A contract with a buyer has been signed subsequent to September 30, 2017 as further discussed in Note 12,
Subsequent Events,
of the consolidated financial statements.
Fiscal Year 2017 Compared with Fiscal Year 2016
Net Sales
The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and armored military vehicles; (ii) airframe applications for a variety of aircraft; (iii) industrial gas and steam turbine engines for power generation units; and (iv) other commercial applications. Net sales comparative information for fiscal 2017 and 2016, respectively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Years Ended
September 30,
|
|
Increase
(Decrease)
|
Net Sales
|
2017
|
|
2016
|
|
Aerospace components for:
|
|
|
|
|
|
Fixed wing aircraft
|
$
|
58.3
|
|
|
$
|
63.0
|
|
|
$
|
(4.7
|
)
|
Rotorcraft
|
19.7
|
|
|
18.5
|
|
|
1.2
|
|
Energy components for power generation units
|
34.1
|
|
|
29.2
|
|
|
4.9
|
|
Commercial product and other revenue
|
9.4
|
|
|
8.4
|
|
|
1.0
|
|
Total
|
$
|
121.5
|
|
|
$
|
119.1
|
|
|
$
|
2.4
|
|
Net sales in fiscal 2017 increased 2.0%, or $2.4 million to $121.5 million, compared with $119.1 million in fiscal 2016. Energy components for power generation units increased by $4.9 million compared with the same period last year mainly due to higher market demand of turbine engine components at our Maniago location partially offset by lower demand from our largest customer at the Alliance location. Rotorcraft sales increased to $19.7 million in fiscal 2017 from $18.5 million in the comparable period of fiscal 2016 due to a customer's inventory destocking efforts which impacted fiscal 2016. The increase in commercial product and other revenue sales is largely driven by an increase in the Hellfire II missile program and the timing of of related orders. The decrease in fixed wing aircraft sales is primarily due to changes in build demand of Rolls Royce AE Engines due to a buffering plan for a customer plant closure, and a decline in demand of the 737NG, 777 and V2500 programs.
The Company's aerospace components have both military and commercial applications. Commercial net sales were 59.9% of total net sales and military net sales were 40.1% of total net sales in fiscal 2017, compared with 60.9% and 39.1%, respectively, in the comparable period in fiscal 2016. Commercial net sales increased $0.3 million to $72.8 million in fiscal 2017, compared to $72.5 million in fiscal 2016. Military net sales increased $2.1 million to $48.7 million in fiscal 2017, compared to $46.6 million in fiscal 2016 primarily due to an increase in the Hellfire II missile program, partially off-set by a decrease to a customer's buffering plan for a plant closure and a destocking program which impacted the fiscal 2016 period.
Cost of Goods Sold
Cost of goods sold increased by $1.1 million, or 1.0%, to $108.1 million, or 89.0% of net sales, during fiscal 2017, compared with $107.0 million or 89.9% of net sales in the comparable period of fiscal 2016. The increase was due primarily to higher volumes as previously mentioned, $0.5 million increase in excess and obsolescence charges and $0.5 million in employee severance charges.
Gross Profit
Gross profit increased by $1.3 million, or 10.6%, to $13.4 million during fiscal 2017, compared with $12.1 million in fiscal 2016. Gross margin percent of sales was 11.0% during fiscal 2017, compared with 10.1% in fiscal 2016. The increase in gross profit was primarily due to higher sales volume offset partially by higher excess and obsolescence charges of $0.5 million and $0.5 million in employee severance charges.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $17.8 million, or 14.6% of net sales, during fiscal 2017, compared to $17.4 million, or 14.6% of net sales, in fiscal 2016. The increase in selling, general and administrative expenses is primarily due to $0.9 million in higher long-term equity compensation in fiscal 2017 as compared to an expense reversal in fiscal 2016, $0.8 million in higher expansion costs related to one of the Company's plant locations, $0.3 million in higher depreciation expense associated with the accelerated depreciation of software used at Alliance, partially offset by lower legal and professional expense of $1.2 million due to higher expenses in fiscal 2016 associated with the late filing of of SIFCO's fiscal 2015 annual report on Form 10-K and $0.6 million lower information technology expenses in fiscal 2017.
Amortization of Intangibles and Goodwill Impairment
Amortization of intangibles decreased $0.4 million to $2.2 million during fiscal 2017, compared with $2.6 million in the comparable period of fiscal 2016. The decrease was due to the completion of the estimated useful life assigned to the below market leases and non-compete agreement at one of the Company's locations in the prior period.
There were asset impairment charges of long-lived assets of $5.0 million during fiscal 2017, of which $2.7 million related to machinery and equipment and $2.3 million related to definite-lived intangible assets. As further discussed in Note 1,
Summary of Account Policies,
of the consolidated financial statements, the Company's announcement of the Alliance closure resulted in the above impairment charges.
After performing its annual goodwill impairment test in the fourth quarter of fiscal 2016, it was determined that $4.2 million of goodwill associated with the Orange, California reporting unit was impaired as the carrying value of the reporting unit exceeded its fair value. This is further referenced in Note 3,
Goodwill and Intangible Assets
, of the consolidated financial statements.
Other/General
Interest expense increased to $2.2 million during fiscal 2017, compared with $1.7 million in fiscal 2016. The increase is primarily due to a $0.3 million write-off of deferred financing costs associated with the Company’s Amended and Restated Credit and Security Agreement and Second Amendment with its lender in November 2016 and its Second Amendment in August 2017 and higher interest expense related to a higher interest rate on the Company's revolving credit facility. See Note 5,
Debt,
of the consolidated financial statements for further information.
The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreements in fiscal 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Interest Rate
Years Ended September 30,
|
|
Weighted Average
Outstanding Balance
Years Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revolving credit agreement
|
4.8
|
%
|
|
3.9
|
%
|
|
$ 21.2 million
|
|
$ 14.0 million
|
Term note
|
5.3
|
%
|
|
3.8
|
%
|
|
$ 5.8 million
|
|
$ 18.2 million
|
Foreign term debt
|
2.8
|
%
|
|
2.5
|
%
|
|
$ 9.3 million
|
|
$ 11.7 million
|
Other income, (net) was $0.6 million during fiscal 2017, compared with $0.4 million in the comparable period of fiscal 2016. The amount principally consists of rental income earned from the lease of the Cork, Ireland facility for both fiscal 2017 and 2016.
The Company believes that inflation did not materially affect its results of operations in either fiscal 2017 or 2016 and does not expect inflation to be a significant factor in fiscal 2018.
Income Taxes
The Company’s effective tax rate in fiscal 2017 was (8)%, compared with 15% in fiscal 2016. This change is primarily attributed to jurisdictional mix of income with an increase in the U.S. loss in fiscal year 2017 compared with fiscal year 2016 where no associated tax benefit can be realized in either year due to the valuation allowance.
The effective tax rate differs from the U.S. federal statutory rate in fiscal 2017 due primarily to current year losses incurred in the U.S. where no associated tax benefit can be realized due to the valuation allowance and income in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate. In fiscal 2016, the effective tax rate differed from the U.S. federal statutory rate due primarily to (i) the establishment of a valuation allowance in the U.S., and (ii) current year losses incurred in the U.S. where no associated tax benefit can be realized due to the valuation allowance.
Net Loss
Net loss was $14.2 million during fiscal 2017, compared with net loss of $11.3 million in fiscal 2016. Results decreased primarily due to increased excess and obsolescence and severance charges, impairment charges, higher interest expense incurred and lower income tax benefits as noted above.
Non-GAAP Financial Measures
Presented below is certain financial information based on our EBITDA and Adjusted EBITDA. References to “EBITDA” mean earnings from continuing operations before interest, taxes, depreciation and amortization, and references to “Adjusted EBITDA” mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of net income to EBITDA and Adjusted EBITDA.
Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under generally accepted accounting principles in the United States of America (“GAAP”). The Company presents EBITDA and Adjusted EBITDA because it believes that they are useful indicators for evaluating operating performance and liquidity, including the Company’s ability to incur and service debt and it uses EBITDA to evaluate prospective acquisitions. Although the Company uses EBITDA and Adjusted EBITDA for the reasons noted above, the use of these non-GAAP financial measures as analytical tools has limitations. Therefore, reviewers of the Company’s financial information should not consider them in isolation, or as a substitute for analysis of the Company's results of operations as reported in accordance with GAAP. Some of these limitations include:
|
|
•
|
Neither EBITDA nor Adjusted EBITDA reflects the interest expense, or the cash requirements necessary to service interest payments, on indebtedness;
|
|
|
•
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor Adjusted EBITDA reflects any cash requirements for such replacements;
|
|
|
•
|
The omission of the substantial amortization expense associated with the Company’s intangible assets further limits the usefulness of EBITDA and Adjusted EBITDA; and
|
|
|
•
|
Neither EBITDA nor Adjusted EBITDA includes the payment of taxes, which is a necessary element of operations.
|
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to the Company to invest in the growth of its businesses. Management compensates for these limitations by not viewing EBITDA or Adjusted EBITDA in isolation and specifically by using other GAAP measures, such as net income (loss), net sales, and operating profit (loss), to measure operating performance. The Company’s calculation of EBITDA and Adjusted EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies.
The following table sets forth a reconciliation of net loss to EBITDA and Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Years Ended September 30,
|
|
2017
|
|
2016
|
Net loss
|
$
|
(14,209
|
)
|
|
$
|
(11,335
|
)
|
Adjustments:
|
|
|
|
Depreciation and amortization expense
|
9,988
|
|
|
10,766
|
|
Interest expense, net
|
2,152
|
|
|
1,664
|
|
Income tax expense (benefit)
|
1,069
|
|
|
(1,998
|
)
|
EBITDA
|
(1,000
|
)
|
|
(903
|
)
|
Adjustments:
|
|
|
|
Foreign currency exchange loss, net (1)
|
47
|
|
|
33
|
|
Other income, net (2)
|
(593
|
)
|
|
(429
|
)
|
(Gain)/loss on disposal of operating assets (3)
|
(3
|
)
|
|
31
|
|
Inventory purchase accounting adjustments (4)
|
—
|
|
|
266
|
|
Equity compensation expense (income) (5)
|
404
|
|
|
(474
|
)
|
Pension settlement/curtailment (benefit) expense (6)
|
(48
|
)
|
|
223
|
|
Acquisition transaction-related expenses (7)
|
—
|
|
|
(94
|
)
|
LIFO impact (8)
|
293
|
|
|
(482
|
)
|
Orange expansion (9)
|
2,170
|
|
|
1,419
|
|
Executive search (10)
|
—
|
|
|
223
|
|
Asset impairment charges (11)
|
4,960
|
|
|
4,164
|
|
Adjusted EBITDA
|
$
|
6,230
|
|
|
$
|
3,977
|
|
|
|
(1)
|
Represents the gain or loss from changes in the exchange rates between the functional currency and the foreign currency in which the transaction is denominated.
|
|
|
(2)
|
Represents miscellaneous non-operating income or expense, primarily rental income from the Company's Irish subsidiary.
|
|
|
(3)
|
Represents the difference between the proceeds from the sale of operating equipment and the carrying value shown on the Company’s books.
|
|
|
(4)
|
Represents accounting adjustments to value inventory at fair market value associated with the acquisition of a business that was charged to cost of goods sold when the inventory was sold.
|
|
|
(5)
|
Represents the equity-based compensation benefit and expense recognized by the Company under its 2016 and 2007 Long-term Incentive Plan due to granting of awards, awards not vesting and/or forfeitures.
|
|
|
(6)
|
Represents expense (benefit) incurred by a defined benefit pension plan related to settlement of pension obligations.
|
|
|
(7)
|
Represents transaction-related costs such as legal, financial, tax due diligence expenses, valuation services, costs, and executive travel that are required to be expensed as incurred.
|
|
|
(8)
|
Represents the increase (decrease) in the reserve for inventories for which cost is determined using the last in, first out ("LIFO") method.
|
|
|
(9)
|
Represents costs related to expansion of one of the plant locations that are required to be expensed as incurred.
|
|
|
(10)
|
Represents costs incurred for executive search fees as mentioned in its Form 8-K filing on March 18, 2016.
|
|
|
(11)
|
Represents long-lived and definite-lived intangible asset impairment from the Alliance reporting unit in fiscal 2017 and goodwill impairment charge incurred at the Orange reporting unit in fiscal 2016. See Note 1,
Summary of Significant Accounting Policies - Asset Impairment
, and Note 3,
Goodwill and Intangible Assets,
of the consolidated financial statements for further discussion.
|
B. Liquidity and Capital Resources
Cash and cash equivalents increased to $1.4 million at September 30, 2017 compared with $0.5 million at September 30, 2016. The increase is primarily due to the receipt of rental income from its Ireland location and timing of cash receipts between years. At September 30, 2017 and 2016, approximately $0.9 million and $0.3 million, respectively, of the Company’s cash and cash equivalents were in the possession of its non-U.S. subsidiaries. Distributions from the Company’s non-U.S. subsidiaries to the Company may be subject to adverse tax consequences.
Operating Activities
The Company’s operating activities from continuing operations provided $12.0 million of cash in fiscal 2017, compared with $12.3 million in fiscal 2016. The cash provided by operating activities in fiscal 2017 was due to $9.4 million of cash generated through working capital management, $16.8 million of non-cash items such as depreciation and amortization expense, asset impairment charge, amortization and write-offs of debt issuance costs and equity compensation, partially offset by the Company’s net loss of $14.2 million. Cash provided by working capital was generated by a $8.1 million decrease in inventories as the Company focused on increasing inventory turns, reductions in current assets, such as prepaid expenses and the receipt of refundable income taxes, partially offset by a $2.3 million reduction in accounts payable. Cash provided by operating activities in 2016 was due to $7.9 million of cash generated through working capital management, $15.7 million of non-cash items such as depreciation and amortization expense, goodwill impairment charge, LIFO expense and equity compensation, partially offset by net loss of $11.3 million. Cash provided by working capital in 2016 was primarily due to a $10.9 million decrease in accounts receivable due to improved collections of customer receivables, partially offset by a $3.2 million reduction in accrued liabilities.
Investing Activities
Cash used for investing activities of operations was $2.3 million in fiscal 2017, compared with $2.1 million in fiscal 2016. Capital expenditures were $2.3 million in both fiscal 2017 and fiscal 2016. Expenditures in fiscal 2017 were used primarily for the expansion of our operating plant in Orange, California, and for maintenance capital. Capital commitments at September 30, 2017 were $0.5 million. The Company anticipates that total fiscal 2018 capital expenditures will be within the range of $3.5 to $4.0 million and will relate principally to the further enhancement of production and product offering capabilities and operating cost reductions.
Financing Activities
Cash used for financing activities was $8.8 million in fiscal 2017, compared with $10.4 million of cash used for financing activities in fiscal 2016.
The Company had repayments of $12.4 million (includes $11.6 million of term loan repayment after entering into the November 9, 2016 Amended and Restated Credit and Security Agreement ("Credit Facility")) under its term loan and repayments of $1.9 million under its foreign long-term loan in fiscal 2017, compared with repayments under its term loan of $2.8 million and $2.4 million under is foreign long-term loan in fiscal 2016. The principal reason for the term loan repayment was due to the modification of the debt structure, as further discussed below.
The Company had net borrowings under its revolving credit facility of $5.8 million in fiscal 2017, compared with net repayments of $3.7 million in fiscal 2016. The net borrowings in fiscal 2017 were used to repay long-term debt and fund operations. The net repayments in fiscal 2016 were attributed to improvements in working capital.
On November 9, 2016, the Company entered into a Credit Facility with its Lender. The new Credit Facility matures on June 25, 2020 and consisted of senior secured loans in the aggregate principal amount of up to $39.9 million. The Credit Facility was comprised of (i) a senior secured revolving credit facility of a maximum borrowing amount of $35.0 million, including swing line loans and letters of credit provided by the Lender and (ii) a senior secured term loan facility in the amount of $4.9 million (the “Term Facility”). The new Term Facility is repayable in monthly installments of $0.1 million which began December 1, 2016. The terms of the Credit Facility contain both a lockbox arrangement and a subjective acceleration clause. As a result, the amounts outstanding on the revolving credit facility are classified as a short term liability. The amounts borrowed under the Credit Facility were used to repay the amounts previously outstanding under the Company’s existing Credit Agreement as of September 30, 2016 and for working capital, general corporate purposes and to pay fees and expenses associated with this transaction.
In the prior year, the Company had the Credit and Security Agreement (the "2015 Credit Agreement") in place with its Lender until it entered into the above Credit Facility. The 2015 Credit Agreement was comprised of (i) a five-year revolving credit facility with a maximum borrowing amount of up to $25.0 million, which reduced to $20.0 million on January 1, 2016, and (ii) a five-year term loan of $20.0 million. Amounts borrowed under the 2015 Credit Agreement were secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 65% of the stock of its non-U.S. subsidiaries. The term loan was repayable in quarterly installments of $0.7 million starting September 30, 2015. The amounts borrowed under the 2015 Credit Agreement were used to repay the Company's previous revolver and term note, to fund the acquisition of Maniago and for working capital and general corporate purposes. The 2015 Credit Agreement also had an accordion feature, which allowed the Company to increase the availability by up to $15.0 million upon consent of the existing lenders or upon additional lenders being joined to the facility. Borrowings bore interest at the LIBOR rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin as set forth in the 2015 Credit Agreement.
Borrowings bears interest at the LIBOR rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin as set forth in the Credit Facility. The revolver has a rate based on LIBOR plus a 3.75% spread and a prime rate which resulted in a weighted average rate of 4.8% and 3.9% at September 30, 2017 and 2016, respectively and the term loan has a rate of 5.5% and 3.8% at September 30, 2017 and 2016, respectively, which was based on LIBOR plus a 4.25% spread. This rate becomes an effective fixed rate of 5.8% and 3.9% at September 30, 2017 and 2016, respectively, after giving effect to the interest rate swap agreement. There is also a commitment fee ranging from 0.15% to 0.375% to be incurred on the unused balance.
In connection with entering into the Credit Facility, the Company terminated its interest rate swap agreement with the Lender and entered into a new swap agreement as more fully discussed in Note 1,
Summary of Accounting Principles - Derivative Financial Instruments,
of the consolidated financial statements.
The Company entered into its First Amendment Agreement ("First Amendment") to the Credit Facility on February 16, 2017. The First Amendment assigned its Lender as Administrative Agent and assigned a portion of its Credit Facility to another participating Lender.
Under the Company's Credit Facility, the Company is subject to certain customary loan covenants. These include, without limitation, covenants that require maintenance of certain specified financial ratios, including that the Company meeting a minimum EBITDA and the maintenance of a minimum fixed charge coverage ratio to commence on September 30, 2017. In the event of a default, we may not be able to access our revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities. On August 4, 2017, the Company entered into its Second Amendment Agreement ("Second Amendment") with its Lender to (i) amend certain definitions within its Credit Facility to, among other things, effect the changes described herein and to reset the Fixed Charge Coverage Ratio (as defined in the Credit Facility) to build to a trailing four quarters in each of the fiscal 2018 quarters, commencing with the quarter ended December 31, 2017; (ii) replace certain of its financial covenants outlined in the description of Credit Facility and amend its financial covenants with a revised minimum EBITDA for the four fiscal quarters ending September 30, 2017 and to maintain a fixed charge coverage ratio commencing on December 31, 2017; (iii) reduce its maximum revolving amount of $35.0 million to $30.0 million; and (iv) the Company must use its cash proceeds from the sale of the Irish building discussed in Note 1,
Summary of Significant Accounting Policies - Asset Held for Sale
,
of the consolidated financial statements to reduce the Term Facility by $0.7 million and use the remaining proceeds to reduce the revolver. On November 28, 2017, the Company obtained a consent letter from its Lender which extended to December 31, 2017 the date to consummate such sale of the Irish property. The Company is in compliance with its loan covenants as of September 30, 2017.
The Company incurred debt issuance costs and certain costs were written-off during fiscal 2017.
See Note 5,
Debt,
of the consolidated financial statements for further discussion.
Future cash flows from the Company’s operations will be used to pay down amounts outstanding under the Credit Facility. The Company believes it has adequate cash/liquidity available to finance its operations from the combination of (i) the Company’s expected cash flows from operations and (ii) funds available under the Credit Facility.
C. Off-Balance Sheet Arrangements
In the normal course of business, the Company is party to certain arrangements that are not reflected in the Consolidated Balance Sheets. These include operating and capital leases as described more fully in Note 9,
Commitments and Contingencies
, of the consolidated financial statements, which primarily relate to facilities and machinery and equipment and an interest rate swap agreement that the Company entered into with its Lender, as described more fully in Note 1,
Summary of Significant Accounting Policies - Derivatives Financial Instruments,
of the consolidated financial statements. The Company does not have obligations that meet the definition of an off-balance sheet arrangement that have had, or are reasonably likely to have, a material effect on the Company’s financial condition or results of operations.
D. Critical Accounting Policies and Estimates
Allowances for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of certain customers to make required payments. The Company evaluates the adequacy of its allowances for doubtful accounts each quarter based on the customers’ credit-worthiness, current economic trends or market conditions, past collection history, aging of outstanding accounts receivable and specific identified risks. As these factors change, the Company’s allowances for doubtful accounts may change in subsequent periods. Historically, losses have been within management’s expectations and have not been significant.
Inventories
The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete and excess inventory each quarter. The Company maintains a formal policy, which requires at a minimum, that a reserve be established based on an analysis of the age of the inventory. In addition, if the Company learns of specific obsolescence, other than that identified by the aging criteria, an additional reserve will be recognized as well. Specific obsolescence may arise due to a technological or market change, or based on cancellation of an order. Management’s judgment is necessary in determining the realizable value of these products to arrive at the proper allowance for obsolete and excess inventory.
Restructuring Charges
The Company’s policy is to recognize restructuring costs in accordance with the accounting rules related to exit or disposal activities and compensation and non-retirement post-employment benefits. Detailed documentation is maintained and updated to ensure that accruals are properly supported. If management determines that there is a change in estimate, the accruals are adjusted to reflect this change.
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, when events and circumstances warrant such a review. This review involves judgment and is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets and which the Company considers a critical accounting estimate. If the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, then the long-lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
In projecting future undiscounted cash flows, the Company relies on internal budgets and forecasts, and projected proceeds upon disposal of long-lived assets. The Company’s budgets and forecasts are based on historical results and anticipated future market conditions, such as the general business climate and the effectiveness of competition. The Company believes that its estimates of future undiscounted cash flows and fair value are reasonable; however, changes in estimates of such undiscounted cash flows and fair value could change the Company’s estimates of fair value, which could result in future impairment charges.
Impairment of Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. The determination of the fair value of assets and liabilities acquired typically involves obtaining independent appraisals of certain tangible and intangible assets and may require management to make certain assumptions and estimates regarding future events. Goodwill is not amortized, but is subject to an annual impairment test or more frequently if events or changes in circumstances indicate that goodwill may be impaired.
Goodwill is tested for impairment annually as of July 31. If circumstances change during interim periods between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company will test goodwill for impairment. Factors which would necessitate an interim goodwill impairment assessment include a sustained decline in the Company's stock price, prolonged negative industry or economic trends, or significant under-performance relative to expected historical or projected future operating results. Management uses judgment to determine whether to use a qualitative analysis or a quantitative fair value measurement for its goodwill impairment testing. The Company's fair value measurement approach combines the income and market valuation techniques for each of the Company’s reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparables, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions.
In January 2017, the Financial Accounting Standards Board ("FASB") issued an Accounting Standard Update ("ASU") removing step two from the goodwill impairment test. If a reporting unit fails the quantitative impairment test, impairment expense is immediately recorded as the difference between the reporting unit's fair value and carrying value. The Company adopted this standard effective March 31, 2017. Refer to Note 1,
Summary of Significant Accounting Policies - Goodwill and Intangible Assets
, of the consolidated financial statements for details.
2017 Interim and Annual Goodwill Impairment Test
In the interim, certain qualitative factors triggered an impairment analysis of goodwill, primarily due to under-performance relative to projected future operating results at the Alliance Reporting unit. When the Company made the decision to close the Alliance facility and move its business to the Cleveland reporting unit, it resulted in the reallocation of $3.5 million of goodwill from the Alliance to the Cleveland reporting unit. The Company considered this to be a triggering event and performed a goodwill impairment analysis of the Cleveland reporting unit as of May 31, 2017.
As of July 31, 2017, the annual goodwill impairment test date for fiscal 2017, goodwill existed at two of the Company's reporting units, Cleveland, Ohio and Maniago, Italy.
No impairment charges were identified in connection with our interim and annual goodwill impairment test with respect to any of the identified reporting units. The fair values of the reporting units were in excess of our carrying values. Refer to Note 3,
Goodwill and Intangible Assets,
of the consolidated financial statements for further details.
2016 Annual Goodwill Impairment Test
In performing our annual goodwill impairment test in the fourth quarter of 2016, it was determined that $4.2 million of goodwill associated with the Orange reporting unit was impaired as the carrying value of the reporting unit exceeded its fair value.
Defined Benefit Pension Plan Expense
The Company maintains three defined benefit pension plans in accordance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). The amounts recognized in the consolidated financial statements for pension benefits under these three defined benefit pension plans are determined on an actuarial basis utilizing various assumptions. The following table illustrates the sensitivity to change in the assumed discount rate and expected long-rate of return on assets for the Company's pension plans as of September 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Fiscal 2017 Benefits Expense
|
|
Impact on September 30, 2017 Projected Benefit Obligation for Pension Plans
|
Change in Assumptions
|
|
|
|
|
(In thousands)
|
25 basis point decrease in discount rate
|
|
$
|
47
|
|
|
$
|
744
|
|
25 basis point increase in discount rate
|
|
$
|
(47
|
)
|
|
$
|
(744
|
)
|
100 basis point decrease in expected long-term rate of return on assets
|
|
$
|
205
|
|
|
$
|
—
|
|
100 basis point increase in expected long-term rate of return on assets
|
|
$
|
(205
|
)
|
|
$
|
—
|
|
The discussion that follows provides information on the significant assumptions/elements associated with these defined benefit pension plans.
The Company determines the expected return on plan assets principally based on (i) the expected return for the various asset classes in the respective plans’ investment portfolios and (ii) the targeted allocation of the respective plans’ assets. The expected return on plan assets is developed using historical asset return performance as well as current and anticipated market conditions such as inflation, interest rates and market performance. Should the actual rate of return differ materially from the assumed/expected rate, the Company could experience a material adverse effect on the funded status of its plans and, accordingly, on its related future net pension expense.
The discount rate for each plan is determined, as of the fiscal year end measurement date, using prevailing market spot-rates (from an appropriate yield curve) with maturities corresponding to the expected timing/date of the future defined benefit payment amounts for each of the respective plans. Such corresponding spot-rates are used to discount future years’ projected defined benefit payment amounts back to the fiscal year end measurement date as a present value. A composite discount rate is then developed for each plan by determining the single rate of discount that will produce the same present value as that obtained by applying the annual spot-rates. The discount rate may be further revised if the market environment indicates that the above methodology generates a discount rate that does not accurately reflect the prevailing interest rates as of the fiscal year end measurement date. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the Citigroup Pension Discount Yield Curve and the BPS&M Discount Curve.
As of September 30, 2017 and 2016, SIFCO used the following assumptions:
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
2017
|
|
2016
|
Discount rate for expenses
|
3.1
|
%
|
|
3.8
|
%
|
Expected return on assets
|
7.9
|
%
|
|
8.0
|
%
|
Deferred Tax Valuation Allowance
The Company accounts for deferred taxes in accordance with the provisions of the Accounting Standards Codification guidance related to accounting for income taxes, whereby the Company recognizes an income tax benefit related to income tax credits, loss carryforwards and deductible temporary differences between financial reporting basis and tax reporting basis.
A high degree of judgment is required to determine the extent a valuation allowance should be provided against deferred tax assets. On a quarterly basis, the Company assesses the likelihood of realization of its deferred tax assets considering all available evidence, both positive and negative. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. It is generally difficult to outweigh objectively verifiable negative evidence of recent financial reporting losses. Based on the weight of available evidence, the Company determines if it is more likely than not that its deferred tax assets will be realized in the future.
As a result of losses incurred in recent years, the Company entered into a three year cumulative loss position in the U.S. jurisdiction during the fourth quarter of fiscal 2016, and remains in a cumulative loss position at the conclusion of fiscal year 2017. Accordingly, the Company maintained its valuation allowance on its U.S. deferred tax assets as of the fourth quarter of fiscal year 2017.
Uncertain Tax Positions
The calculation of the Company's tax liabilities also involves considering uncertainties in the application of complex tax regulations. SIFCO recognizes liabilities for uncertain income tax positions based on its estimate of whether it is more likely than not that additional taxes will be required and it reports related interest and penalties as income taxes. Refer to Note 6,
Income Taxes,
of the consolidated financial statements.
E. Impact of Newly Issued Accounting Standards
In May 2017, the FASB issued ASU 2017-09, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on October 1, 2018, with early adoption permitted. This new guidance is not expected to have an impact on the Company’s consolidated financial statements as it is not the Company’s practice to change either the terms or conditions of share-based payment awards once they are granted.
In March 2017, the FASB issued ASU 2017-07, which relates to pension related costs that require an entity to report the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs. The other components of the net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside of any subtotal of operating income. Additionally, only the service cost component will be eligible for capitalization in assets. The ASU is effective for the Company beginning October 1, 2018. Early adoption is permitted and the ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively for the capitalization of the service cost component. The amendment allows for a practical expedient that permits an employer to use the amounts disclosed in its pension and other post-retirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company would need to disclose if the practical expedient was used. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements and it does not plan to early adopt the ASU.
In January 2017, the FASB issued ASU 2017-01, Business Combinations, which clarified existing guidance on the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Early adoption is permitted and the guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18 requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is currently evaluating its plans regarding the adoption, but does not believe that this ASU would have a material impact to the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements together with evaluating the adoption date.
In August 2016, the FASB issued ASU 2016-15, which amends certain cash flow issues which apply to all entities required to present a statement of cash flow. The amendments are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements together with evaluating the adoption date.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which makes a number of changes meant to simplify and improve accounting for share-based payments. The ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has considered the potential implications of adoption of the ASU and is in the process of evaluating some components of the guidance. Due the Company having recorded a domestic valuation allowance at September 30, 2017 and September 30, 2016, the Company does not expect a material impact to the consolidated financial statements from a tax perspective.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact to its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” The ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” This ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs, along
with subsequent updates, will apply to all companies for fiscal years beginning after December 15, 2017, that enter into contracts with customers to transfer goods or services. The Company will adopt the new guidance on October 1, 2018. The Company is executing a bottom up approach to analyze the standard's impact on its revenues by looking at historical policies and practices and identifying the differences from applying the new standard to its revenue streams. The Company has determined that many of its long-term agreements contain variable consideration clauses and is in the process of quantifying the impact to its consolidated financial statements. In addition, some of the Company's agreements have clauses which may require the Company to recognize revenue over time. The majority of the Company's current revenue is recognized at a point-in-time. As such, SIFCO continues to evaluate the impact of the standard on its financial reporting, disclosures, and related systems and internal controls.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
SIFCO Industries, Inc.
We have audited the accompanying consolidated
balance sheets of SIFCO Industries, Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of September 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for the years then ended. Our audits of the basic consolidated financial statements included the financial statement schedule
listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SIFCO Industries, Inc. and subsidiaries as of September 30, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
December 20, 2017
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
121,458
|
|
|
$
|
119,121
|
|
Cost of goods sold
|
|
108,094
|
|
|
107,039
|
|
Gross profit
|
|
13,364
|
|
|
12,082
|
|
Selling, general and administrative expenses
|
|
17,773
|
|
|
17,359
|
|
Goodwill impairment
|
|
—
|
|
|
4,164
|
|
Amortization of intangible assets
|
|
2,168
|
|
|
2,593
|
|
Loss on disposal or impairment of operating assets
|
|
4,957
|
|
|
31
|
|
Operating loss
|
|
(11,534
|
)
|
|
(12,065
|
)
|
Interest income
|
|
(56
|
)
|
|
(51
|
)
|
Interest expense
|
|
2,208
|
|
|
1,715
|
|
Foreign currency exchange loss, net
|
|
47
|
|
|
33
|
|
Other income, net
|
|
(593
|
)
|
|
(429
|
)
|
Loss from operations before income tax expense (benefit)
|
|
(13,140
|
)
|
|
(13,333
|
)
|
Income tax expense (benefit)
|
|
1,069
|
|
|
(1,998
|
)
|
Net loss
|
|
$
|
(14,209
|
)
|
|
$
|
(11,335
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
Basic
|
|
$
|
(2.59
|
)
|
|
$
|
(2.07
|
)
|
Diluted
|
|
$
|
(2.59
|
)
|
|
$
|
(2.07
|
)
|
|
|
|
|
|
Weighted-average number of common shares (basic)
|
|
5,487
|
|
|
5,475
|
|
Weighted-average number of common shares (diluted)
|
|
5,487
|
|
|
5,475
|
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
2017
|
|
2016
|
Net loss
|
|
$
|
(14,209
|
)
|
|
$
|
(11,335
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
Foreign currency translation adjustment, net of tax $0 and $0, respectively
|
|
1,016
|
|
|
108
|
|
Retirement plan liability adjustment, net of tax $0 and $0, respectively
|
|
2,549
|
|
|
(940
|
)
|
Interest rate swap agreement adjustment, net of tax $0 and $0, respectively
|
|
34
|
|
|
(30
|
)
|
Comprehensive loss
|
|
$
|
(10,610
|
)
|
|
$
|
(12,197
|
)
|
See notes to the consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,399
|
|
|
$
|
471
|
|
Receivables, net of allowance for doubtful accounts of $330 and $706, respectively
|
|
25,894
|
|
|
25,158
|
|
Inventories, net
|
|
20,381
|
|
|
28,496
|
|
Refundable income taxes
|
|
292
|
|
|
1,773
|
|
Prepaid expenses and other current assets
|
|
1,644
|
|
|
2,177
|
|
Current assets of business held for sale
|
|
2,524
|
|
|
—
|
|
Total current assets
|
|
52,134
|
|
|
58,075
|
|
Property, plant and equipment, net
|
|
39,508
|
|
|
48,958
|
|
Intangible assets, net
|
|
6,814
|
|
|
11,138
|
|
Goodwill
|
|
12,170
|
|
|
11,748
|
|
Other assets
|
|
261
|
|
|
538
|
|
Total assets
|
|
$
|
110,887
|
|
|
$
|
130,457
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
7,560
|
|
|
$
|
18,258
|
|
Revolver
|
|
18,557
|
|
|
12,751
|
|
Accounts payable
|
|
12,817
|
|
|
14,520
|
|
Accrued liabilities
|
|
6,791
|
|
|
5,234
|
|
Total current liabilities
|
|
45,725
|
|
|
50,763
|
|
Long-term debt, net of current maturities
|
|
5,151
|
|
|
7,623
|
|
Deferred income taxes
|
|
3,266
|
|
|
2,929
|
|
Pension liability
|
|
6,184
|
|
|
8,341
|
|
Other long-term liabilities
|
|
430
|
|
|
431
|
|
Shareholders’ equity:
|
|
|
|
|
Serial preferred shares, no par value, authorized 1,000 shares
|
|
—
|
|
|
—
|
|
Common shares, par value $1 per share, authorized 10,000 shares; issued and outstanding shares – 5,596 at September 30, 2017 and 5,525 at September 30, 2016
|
|
5,596
|
|
|
5,525
|
|
Additional paid-in capital
|
|
9,519
|
|
|
9,219
|
|
Retained earnings
|
|
44,267
|
|
|
58,476
|
|
Accumulated other comprehensive loss
|
|
(9,251
|
)
|
|
(12,850
|
)
|
Total shareholders’ equity
|
|
50,131
|
|
|
60,370
|
|
Total liabilities and shareholders’ equity
|
|
$
|
110,887
|
|
|
$
|
130,457
|
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Years Ended September 30,
|
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
|
$
|
(14,209
|
)
|
|
$
|
(11,335
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
9,988
|
|
|
10,766
|
|
Amortization and write-off of debt issuance costs
|
|
519
|
|
|
145
|
|
Loss on disposal of operating assets or impairment of operating assets
|
|
4,957
|
|
|
31
|
|
LIFO expense (income)
|
|
293
|
|
|
(482
|
)
|
Share transactions under employee stock plan
|
|
371
|
|
|
(502
|
)
|
Deferred income taxes
|
|
228
|
|
|
850
|
|
Purchase price inventory adjustment
|
|
—
|
|
|
266
|
|
Other
|
|
—
|
|
|
(101
|
)
|
Goodwill impairment
|
|
—
|
|
|
4,164
|
|
Other long-term liabilities
|
|
408
|
|
|
605
|
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
Receivables
|
|
(294
|
)
|
|
10,892
|
|
Inventories
|
|
8,093
|
|
|
(314
|
)
|
Refundable income taxes
|
|
1,482
|
|
|
743
|
|
Prepaid expenses and other current assets
|
|
1,493
|
|
|
(572
|
)
|
Other assets
|
|
(433
|
)
|
|
(76
|
)
|
Accounts payable
|
|
(2,315
|
)
|
|
424
|
|
Accrued liabilities
|
|
1,414
|
|
|
(3,223
|
)
|
Net cash provided by operating activities
|
|
11,995
|
|
|
12,281
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Acquisition of business
|
|
—
|
|
|
275
|
|
Proceeds from disposal of property, plant and equipment
|
|
70
|
|
|
—
|
|
Capital expenditures
|
|
(2,339
|
)
|
|
(2,349
|
)
|
Net cash used for investing activities
|
|
(2,269
|
)
|
|
(2,074
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Repayments of term note
|
|
(14,332
|
)
|
|
(5,192
|
)
|
Proceeds from revolving credit agreement
|
|
85,934
|
|
|
46,917
|
|
Repayments of revolving credit agreement
|
|
(80,128
|
)
|
|
(50,667
|
)
|
Proceeds from short-term debt borrowings
|
|
3,429
|
|
|
1,904
|
|
Repayments of short-term debt borrowings
|
|
(3,143
|
)
|
|
(3,384
|
)
|
Payments for debt financing
|
|
(562
|
)
|
|
—
|
|
Net cash used for financing activities
|
|
(8,802
|
)
|
|
(10,422
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
924
|
|
|
(215
|
)
|
Cash and cash equivalents at beginning of year
|
|
471
|
|
|
667
|
|
Effects of exchange rate changes on cash and cash equivalents
|
|
4
|
|
|
19
|
|
Cash and cash equivalents at end of year
|
|
$
|
1,399
|
|
|
$
|
471
|
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Supplemental disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Years Ended September 30,
|
|
|
2017
|
|
2016
|
Cash (paid) received during the year:
|
|
|
|
|
Cash paid for interest
|
|
$
|
(1,564
|
)
|
|
$
|
(1,420
|
)
|
Cash income tax refunds received, net
|
|
$
|
1,343
|
|
|
$
|
2,897
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
Capital expenditures funded by capital lease borrowings
|
|
$
|
288
|
|
|
$
|
—
|
|
Additions to property, plant & equipment - incurred but not yet paid
|
|
$
|
667
|
|
|
$
|
256
|
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
Shareholders’
Equity
|
Balance - September 30, 2015
|
|
$
|
5,468
|
|
|
$
|
9,778
|
|
|
$
|
69,811
|
|
|
$
|
(11,988
|
)
|
|
$
|
73,069
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
—
|
|
|
—
|
|
|
(11,335
|
)
|
|
(862
|
)
|
|
(12,197
|
)
|
Performance and restricted share expense
|
|
—
|
|
|
(474
|
)
|
|
—
|
|
|
—
|
|
|
(474
|
)
|
Share transactions under employee stock plans
|
|
57
|
|
|
(85
|
)
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
Balance - September 30, 2016
|
|
5,525
|
|
|
9,219
|
|
|
58,476
|
|
|
(12,850
|
)
|
|
60,370
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
—
|
|
|
—
|
|
|
(14,209
|
)
|
|
3,599
|
|
|
(10,610
|
)
|
Performance and restricted share benefit
|
|
—
|
|
|
404
|
|
|
—
|
|
|
—
|
|
|
404
|
|
Share transactions under employee stock plans
|
|
71
|
|
|
(104
|
)
|
|
—
|
|
|
—
|
|
|
(33
|
)
|
Balance - September 30, 2017
|
|
$
|
5,596
|
|
|
$
|
9,519
|
|
|
$
|
44,267
|
|
|
$
|
(9,251
|
)
|
|
$
|
50,131
|
|
See notes to consolidated financial statements.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in thousands, except per share data)
1. Summary of Significant Accounting Policies
A. DESCRIPTION OF BUSINESS
SIFCO Industries, Inc. and its subsidiaries are engaged in the production of forgings and machined components primarily in the Aerospace and Energy ("A&E") market. The Company’s operations are conducted in a
single
business segment, "SIFCO" or the "Company."
B. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The U.S. dollar is the functional currency for all the Company’s U.S. operations and its Irish subsidiary. For these operations, all gains and losses from completed currency transactions are included in income currently. The functional currency for the Company's other non-U.S. subsidiaries is the Euro. Assets and liabilities are translated into U.S. dollars at the rates of exchange at the end of the period, and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss in the consolidated statements of shareholders’ equity.
C. CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. A substantial majority of the Company’s cash and cash equivalent bank balances exceed federally insured limits as of September 30, 2017; however, were within federally insured limits at September 30, 2016.
D. CONCENTRATIONS OF CREDIT RISK
Receivables are presented net of allowance for doubtful accounts of
$330
and
$706
at September 30, 2017 and 2016, respectively. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company writes off accounts receivable when they become uncollectible. During fiscal 2017 and 2016,
$461
and
$581
, respectively, of accounts receivable were written off against the allowance for doubtful accounts. Bad debt expense totaled
$77
and
$359
in fiscal 2017 and fiscal 2016, respectively.
Most of the Company’s receivables represent trade receivables due from manufacturers of turbine engines and aircraft components as well as turbine engine overhaul companies located throughout the world, including a significant concentration of U.S. based companies. In fiscal 2017,
22%
of the Company’s consolidated net sales were from
two
of its largest customers; and
35%
of the Company's consolidated net sales were from the
three
largest customers and their direct subcontractors, which individually accounted for
13%
,
11%
and
11%
, of consolidated net sales, respectively. In fiscal 2016,
21%
of the Company’s consolidated net sales were from
two
of its largest customers; and
46%
of the Company's consolidated net sales were from
four
of the largest customers and their direct subcontractors which individually accounted for
12%
,
12%
,
11%
and
11%
, of consolidated net sales, respectively. No other single customer or group represented greater than
10%
of total net sales in fiscal 2017 and 2016.
At September 30, 2017,
one
of the Company’s largest customers had outstanding net accounts receivable which individually accounted for
10%
of the total net accounts receivable; and
three
of the largest customers and direct subcontractors had outstanding net accounts receivable which accounted for
13%
,
10%
and
10%
of total net accounts receivable, respectively. At September 30, 2016,
two
of the Company’s largest customers had outstanding net accounts receivable which accounted for
14%
and
11%
of total net accounts receivable; and
four
of the largest customers and direct subcontractors had outstanding net accounts receivable which accounted for
15%
,
13%
,
12%
and
11%
of total, net receivables, respectively. The Company performs ongoing credit evaluations of its customers’ financial conditions. The Company believes its allowance for doubtful accounts is sufficient based on the credit exposures outstanding at September 30, 2017.
E. INVENTORY VALUATION
Inventories are stated at the lower of cost or market. For a portion of the Company's inventory, cost is determined using the last-in, first-out (“LIFO”) method. For approximately
38%
and
44%
of the Company’s inventories at September 30, 2017 and 2016, respectively, the LIFO method is used to value the Company’s inventories. The first-in, first-out (“FIFO”) method is used to value the remainder of the Company’s inventories.
The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete and excess inventory each quarter, and requires at a minimum that reserves be established based on an analysis of the age of the inventory. In addition, if the Company identifies specific obsolescence, other than that identified by the aging criteria, an additional
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –
(Continued)
reserve will be recognized. Specific obsolescence and excess reserve requirements may arise due to technological or market changes, or based on cancellation of an order. The Company’s reserves for obsolete and excess inventory were
$3,859
and
$3,308
at September 30, 2017 and 2016, respectively.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is generally computed using the straight-line method. Depreciation is provided in amounts sufficient to amortize the cost of the assets over their estimated useful lives. Depreciation provisions are based on estimated useful lives: (i) buildings, including building improvements -
5
to
40
years; (ii) machinery and equipment, including office and computer equipment -
3
to
20
years; (iii) software -
3
to
7
years (included in machinery and equipment); and (iv) leasehold improvements - remaining life or length of the lease (included in buildings).
The Company's property, plant and equipment assets by major asset class at September 30 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Property, plant and equipment:
|
|
|
|
|
Land
|
|
$
|
1,005
|
|
|
$
|
979
|
|
Buildings
|
|
15,084
|
|
|
15,393
|
|
Machinery and equipment
|
|
75,080
|
|
|
82,665
|
|
Total property, plant and equipment
|
|
91,169
|
|
|
99,037
|
|
Accumulated depreciation
|
|
51,661
|
|
|
50,079
|
|
Property, plant and equipment, net
|
|
$
|
39,508
|
|
|
$
|
48,958
|
|
The loss on disposal of operating assets is included as a separate line item in the accompanying consolidated statements of operations. Depreciation expense was
$7,820
and
$8,173
in fiscal 2017 and 2016, respectively.
G. ASSET IMPAIRMENT
The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, when events and circumstances indicate a triggering event has occured. This review is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets. If the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, then the long-lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
In the announcement made in the third quarter of fiscal 2017, the Company decided to close the Alliance, Ohio ("Alliance") plant and transfer future orders to the Cleveland, Ohio ("Cleveland") plant resulted in a triggering event, requiring an impairment analysis to be performed by the Company in accordance with Accounting Standard Codification ("ASC") 360
Property, Plant and Equipment
.
As required by ASC 360, an impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The Company used May 31, 2017 as the triggering date to evaluate the carrying values and test for recoverability of the Alliance machinery and equipment, customer list and trade name as this was the date of when the decision to close Alliance was approved. The fair value of the assets was estimated using Level 2 and Level 3 inputs based on the orderly liquidation value as determined by a third party appraisal and undiscounted cash flows. As a result, the Company recorded asset impairment charges of
$4,786
, which is labeled as asset impairment in the consolidated statements of operations included within loss on disposal or impairment of operating assets; $
2,497
of the total impairment charge related to machinery and equipment and the remaining
$2,289
related to intangible assets. The Company also impaired assets totaling $
174
related to development of an ERP solution for one of its operating plants. There were no long-lived asset impairment charges in fiscal 2016.
H. ASSETS HELD FOR SALE
The Company’s Irish subsidiary sold its operating business in June 2007, but retained ownership of its Cork, Ireland facility. This property is subject to a lease arrangement with the acquirer of the business that expires in June 2027. Rental income is earned in quarterly installments of
$103
. At September 30, 2017, the net carrying value of the property was
$1,447
, which was reclassed to asset held for sale. At September 30, 2016, the carrying value of the property was
$1,496
(accumulated depreciation of
$1,437
). Rental income of
$413
was recognized in each of fiscal years 2017 and 2016, respectively, and is recorded in other income, net on the consolidated statements of operations.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –
(Continued)
At June 30, 2017, the Company met the requirements of ASC 360 - asset held for sale classification for the Irish building. A formal plan was in place to sell the property in its current condition. At September 30, 2017, the Company had a buyer who agreed to specified terms. Refer to Note 8
Subsequent Events
for further discussion. As such, the net book value of
$1,447
represents a portion of the asset held for sale amount on the consolidated balance sheets as of September 30, 2017. No loss on sale of asset was recorded in the statement of operations under the loss on disposal or impairment of operating assets line due to the carrying amount of the property being less than the fair value less expected costs to sell. The remaining assets held for sale balance of $
1,077
pertains to the Alliance building and certain machinery and equipment that meet the asset held for sale classification at September 30, 2017 due to the circumstances of the closure of Alliance and expected plan to sell. As previously stated, there was an initial impairment recorded within the consolidated statements of operations included within loss on disposal or impairment of operating assets for the Alliance assets that brought the fair value of the assets held for sale to its orderly liquidation value.
Both the Irish property and the Alliance building and machinery and equipment are recorded as assets held for sale in the consolidated balance sheets. The Company expects to sell these assets within the next 12 months.
I. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill is subject to impairment testing if triggered in the interim, if not, on an annual basis. The Company has selected July 31 as the annual impairment testing date. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. Since the adoption of Accounting Standard Update ("ASU") 2017-04, Step 2 has been eliminated from the goodwill impairment test. The first step of the goodwill impairment test compares the fair value of a reporting unit (as defined) with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired. However, if the carrying amount exceeds the fair value, the Company should recognize an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. See Note 3,
Goodwill and Intangibles
, of the consolidated financial statements for further discussion of the interim goodwill test performed as of May 31, 2017 for one of its reporting units and as of July 31, 2017 annual impairment test results.
Intangible assets consist of identifiable intangibles acquired or recognized in the accounting for the acquisition of a business and include such items as a trade name, a non-compete agreement, below market lease, customer relationships and order backlog. Intangible assets are amortized over their useful lives ranging from
one year
to
ten years
. Identifiable intangible assets assessment for impairment is evaluated when events and circumstances warrant such a review, as noted within Note 1,
Summary of Significant Accounting Policies - Asset Impairment
.
J. NET LOSS PER SHARE
The Company’s net loss per basic share has been computed based on the weighted-average number of common shares outstanding. Due to the net loss for each reporting period,
zero
restricted shares are included because the effect would be anti-dilutive. The dilutive effect of the Company’s restricted shares and performance shares were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
Net loss
|
|
$
|
(14,209
|
)
|
|
$
|
(11,335
|
)
|
|
|
|
|
|
Weighted-average common shares outstanding (basic and diluted)
|
|
5,487
|
|
|
5,475
|
|
|
|
|
|
|
Net loss per share – basic and diluted:
|
|
|
|
|
Net loss per share
|
|
$
|
(2.59
|
)
|
|
$
|
(2.07
|
)
|
|
|
|
|
|
Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share
|
|
93
|
|
|
32
|
|
K. REVENUE RECOGNITION
Revenue is generally recognized from the sale of products shipped when the title and risk of loss passes to the customer, which is generally at the time of shipment. Substantially all product sales are made pursuant to a firm, fixed-price purchase orders or supply agreement demand forecasts received from customers. Provisions for estimated returns and uncollectible accounts provisions are provided for in the same period as the related revenues are recorded and are principally based on historical results modified, as appropriate, by the most current information available. Due to uncertainties in the estimation process, it is possible that actual results may vary from the estimates.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –
(Continued)
L. CAPITAL LEASE OBLIGATIONS
Capital leases are accounted for as the acquisition of an asset and the commitment of an obligation by the lessee and as a sale or financing by the lessor. All other leases are accounted for as operating leases.
M. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-04, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The Company performs Step 1 of the annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the fair value, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU must be applied prospectively and is effective for any annual and interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company adopted the standard in its second quarter of fiscal 2017 and there was no impact to the consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern," which is intended to define the Company's responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures, regardless of the Company's performance or financial position. In connection with preparing financial statements for each annual and interim reporting period, an entity's management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. The Company adopted this standard effective September 30, 2017 and there was no impact to the consolidated financial statements.
N. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In May 2017, the FASB issued ASU 2017-09, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on October 1, 2018, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements and it does not plan to early adopt the ASU.
In March 2017, the FASB issued ASU 2017-07, which relates to pension related costs that require an entity to report the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs. The other components of the net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside of any subtotal of operating income. Additionally, only the service cost component will be eligible for capitalization in assets. The ASU is effective for October 1, 2018, early adoption is permitted and the ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively for the capitalization of the service cost component. The amendment allows for a practical expedient that permits an employer to use the amounts disclosed in its pension and other post-retirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company would need to disclose if the practical expedient was used. The Company is currently evaluating the impact it may have on its consolidated financial statements and it does not plan to early adopt the ASU.
In January 2017, the FASB issued ASU 2017-01, Business Combinations, which clarified existing guidance on the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Early adoption is permitted and the guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18 requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –
(Continued)
currently evaluating its plans regarding the adoption, but does not expect that this ASU would have a material impact to the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements together with evaluating the adoption date.
In August 2016, the FASB issued ASU 2016-15, which amends certain cash flow issues which apply to all entities required to present a statement of cash flow. The amendments are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements together with evaluating the adoption date.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which makes a number of changes meant to simplify and improve accounting for share-based payments. The ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has considered the potential implications of adoption of the ASU and due to the valuation allowance recorded at September 30, 2017 and September 30, 2016 in the U.S., the Company does not expect a material impact from a tax perspective. The Company is still evaluating other non-tax components it may have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact to its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” The ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” This ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs, along with subsequent updates, apply to all companies that enter into contracts with customers to transfer goods or services, and are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. The Company will adopt the new guidance on October 1, 2018. The Company is executing a bottom up approach to analyze the standard's impact on its revenues by looking at historical policies and practices and identifying the differences from applying the new standard to its revenue streams. The Company has determined that many of its long-term agreements contain variable consideration clauses and is in the process of quantifying the impact to its consolidated financial statements. In addition, some of the Company's agreements have clauses which may require the Company to recognize revenue over time. The majority of the Company's current revenue is recognized at a point-in-time. As such, SIFCO continues to evaluate the impact of the standard on its financial reporting, disclosures and related systems and internal controls.
O. USE OF ESTIMATES
Accounting principles generally accepted in the U.S. require management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period in preparing these financial statements. Actual results could differ from those estimates.
P. DERIVATIVE FINANCIAL INSTRUMENTS
The Company entered an interest rate swap agreement on March 29, 2016 to reduce risk related to variable-rate debt, which was subject to changes in market rates of interest. The interest rate swap was designated as a cash flow hedge. The agreement was canceled as part of the debt modification on November 9, 2016, as further discussed in Note 5,
Debt
, of the consolidated financial statements. The Company accounted for the interest rate swap termination by recording the loss in accumulated other comprehensive
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –
(Continued)
loss as of December 31, 2016. The amount incurred in interest expense was nominal. As part of the new Credit Facility (described further in Note 5,
Debt
, of the consolidated financial statements) on November 9, 2016, the Company entered a new interest rate swap on November 30, 2016 to reduce risk related to the variable debt over the life of the new term loan. At September 30, 2017, the Company held
one
interest rate swap agreement with a notional amount of $
4,059
. Cash flows related to the interest rate swap agreement are included in interest expense. The Company’s interest rate swap agreement and its variable-rate term debt were based upon LIBOR. At September 30, 2017 and 2016, the Company’s interest rate swap agreement qualified as a fully effective cash flow hedge against the Company’s variable-rate term note. The mark-to-market valuation was a
$4
asset and a
$30
liability at September 30, 2017 and September 30, 2016, respectively.
Q. RESEARCH AND DEVELOPMENT
Research and development costs are expensed as they are incurred. Research and development expense was nominal in fiscal 2017 and 2016.
R. DEFERRED FINANCING COSTS
Debt issuance costs are capitalized and amortized over the life of the related debt. Amortization of deferred financing costs is included in interest expense in the consolidated statements of operations.
S.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as shown on the consolidated balance sheets at September 30 are as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Foreign currency translation adjustment, net of income tax benefit of $0 and $0, respectively
|
$
|
(4,607
|
)
|
|
$
|
(5,623
|
)
|
Net retirement plan liability adjustment, net of income tax benefit of ($3,758) and ($3,758), respectively
|
(4,648
|
)
|
|
(7,197
|
)
|
Interest rate swap agreement, net of income tax benefit of $0 and $0, respectively
|
4
|
|
|
(30
|
)
|
Total accumulated other comprehensive loss
|
$
|
(9,251
|
)
|
|
$
|
(12,850
|
)
|
The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
Retirement Plan Liability Adjustment
|
|
Interest Rates Swap Adjustment
|
|
Accumulated Other Comprehensive Loss
|
Balance at September 30, 2015
|
$
|
(5,731
|
)
|
|
$
|
(6,257
|
)
|
|
$
|
—
|
|
|
$
|
(11,988
|
)
|
Other comprehensive income (loss) before reclassifications
|
108
|
|
|
(1,991
|
)
|
|
(30
|
)
|
|
(1,913
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
1,051
|
|
|
—
|
|
|
1,051
|
|
Net current-period other comprehensive loss
|
$
|
108
|
|
|
$
|
(940
|
)
|
|
$
|
(30
|
)
|
|
$
|
(862
|
)
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
$
|
(5,623
|
)
|
|
$
|
(7,197
|
)
|
|
$
|
(30
|
)
|
|
$
|
(12,850
|
)
|
Other comprehensive income (loss) before reclassifications
|
1,016
|
|
|
1,655
|
|
|
28
|
|
|
2,699
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
894
|
|
|
6
|
|
|
900
|
|
Net current-period other comprehensive loss
|
1,016
|
|
|
2,549
|
|
|
34
|
|
|
3,599
|
|
Balance at September 30, 2017
|
$
|
(4,607
|
)
|
|
$
|
(4,648
|
)
|
|
$
|
4
|
|
|
$
|
(9,251
|
)
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –
(Continued)
The following table reflects the changes in accumulated other comprehensive loss related to the Company for September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from accumulated other comprehensive loss
|
|
|
Details about accumulated other comprehensive loss components
|
|
2017
|
|
2016
|
|
Affected line item in the Consolidated Statement of Operations
|
|
|
|
|
|
|
|
Amortization of Retirement plan liability:
|
|
|
|
|
|
|
Prior service costs
|
|
$
|
15
|
|
|
$
|
—
|
|
|
(1)
|
Net actuarial loss
|
|
927
|
|
|
828
|
|
|
(1)
|
Settlements/curtailments
|
|
(48
|
)
|
|
223
|
|
|
(1)
|
|
|
894
|
|
|
1,051
|
|
|
Total before taxes
|
|
|
—
|
|
|
—
|
|
|
Income tax expense
|
|
|
$
|
894
|
|
|
$
|
1,051
|
|
|
Net of taxes
|
|
|
|
|
|
|
|
(1) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See Note 7,
Retirement Benefit Plans
, of the consolidated financial statements for further information.
T. INCOME TAXES
The Company files a consolidated U.S. federal income tax return and tax returns in various state and local jurisdictions. The Company’s Irish and Italian subsidiaries also file tax returns in the respective jurisdictions.
The Company provides deferred income taxes for the temporary difference between the financial reporting basis and tax basis of the Company’s assets and liabilities. Such taxes are measured using the enacted tax rates that are assumed to be in effect when the differences reverse. Deductible temporary differences result principally from recording certain expenses in the financial statements in excess of amounts currently deductible for tax purposes. Taxable temporary differences result principally from tax depreciation in excess of book depreciation.
The Company evaluates for uncertain tax positions taken at each balance sheet date. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest cumulative benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company's policy for interest and/or penalties related to underpayments of income taxes is to include interest and penalties in tax expenses.
The Company maintains a valuation allowance against its deferred tax assets when management believes it is more likely than not that all or a portion of a deferred tax asset may not be realized. Changes in valuation allowances are recorded in the period of change. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.
U. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –
(Continued)
Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 - Quoted market prices in active markets for identical assets or liabilities
Level 2 - Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3 - Unobservable inputs that are not corroborated by market data
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The book value of cash equivalents, accounts receivable, accounts payable, and revolving credit facilities are considered to be representative of their fair values because of their short maturities. Fair value measurements of non-financial assets and non-financial liabilities are primarily used in goodwill, other intangible assets and long-lived assets impairment analysis, the valuation of acquired intangibles and in the valuation of assets held for sale. Goodwill and intangible assets are valued using Level 3 inputs.
V. SHARE-BASED COMPENSATION
Share-based compensation is measured at the grant date, based on the calculated fair value of the award and the probability of meeting its performance condition, and is recognized as expense when it is probable that the performance conditions will be met over the requisite service period (generally the vesting period). Share-based expense includes expense related to restricted shares and performance shares issued under the Company's 2007 Long-Term Incentive Plan ("2007 Plan") and the 2016 Long-Term Incentive Plan ("2016 Plan"). The Company recognizes share-based expense within selling, general, and administrative expense.
W. SHIPPING AND HANDLING COSTS
The Company classifies all amounts billed to customers for shipping and handling as revenue and reflects shipping and handling costs in cost of sales.
X. RESTRUCTURING CHARGES
The Company’s policy is to recognize restructuring costs in accordance with the accounting rules related to exit or disposal activities and compensation and non-retirement post-employment benefits. Detailed documentation is maintained and updated to ensure that accruals are properly supported. If management determines that there is a change in estimate, the accruals are adjusted to reflect this change.
Y. RECLASSIFICATIONS
Certain amounts in prior years, as appropriate, have been reclassified to conform to the 2017 consolidated financial statement presentation.
In fiscal 2017, the Company revised its classification within the consolidated balance sheet. It reclassified the prior year balance of
$12,751
from current maturities of long-term debt to the revolver line. The Company revised its classification within the consolidated cash flows as it relates to short-term borrowings from a net presentation to a gross presentation.
In fiscal 2017, Note 6,
Income Taxes
, of the consolidated financial statements includes revisions to certain prior year amounts to conform to current year disclosures.
2.
Inventories
Inventories at September 30 consist of:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Raw materials and supplies
|
$
|
6,108
|
|
|
$
|
7,724
|
|
Work-in-process
|
7,650
|
|
|
10,459
|
|
Finished goods
|
6,623
|
|
|
10,313
|
|
Total inventories
|
$
|
20,381
|
|
|
$
|
28,496
|
|
If the FIFO method had been used for the entire Company, inventories would have been
$8,319
and
$8,026
higher than reported at
September 30, 2017
and
2016
, respectively. LIFO expense was
$293
in fiscal 2017 and LIFO income was
$482
in fiscal 2016, respectively.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements –
(Continued)
3. Goodwill and Intangible Assets
The Company’s intangible assets by major asset class subject to amortization as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Weighted Average Life at September 30,
|
|
Original
Cost
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Currency Translation
|
|
Net Book
Value
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
8 years
|
|
$
|
2,776
|
|
|
$
|
1,564
|
|
|
$
|
310
|
|
|
$
|
19
|
|
|
$
|
921
|
|
Non-compete agreement
|
5 years
|
|
1,600
|
|
|
1,584
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Technology asset
|
5 years
|
|
1,869
|
|
|
749
|
|
|
—
|
|
|
50
|
|
|
1,170
|
|
Customer relationships
|
10 years
|
|
15,568
|
|
|
8,946
|
|
|
1,979
|
|
|
64
|
|
|
4,707
|
|
Total intangible assets
|
|
|
$
|
21,813
|
|
|
$
|
12,843
|
|
|
$
|
2,289
|
|
|
$
|
133
|
|
|
$
|
6,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
8 years
|
|
$
|
2,776
|
|
|
$
|
1,240
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
1,545
|
|
Non-compete agreement
|
5 years
|
|
1,600
|
|
|
1,547
|
|
|
—
|
|
|
—
|
|
|
53
|
|
Technology asset
|
5 years
|
|
1,869
|
|
|
389
|
|
|
—
|
|
|
37
|
|
|
1,517
|
|
Customer relationships
|
10 years
|
|
15,568
|
|
|
7,571
|
|
|
—
|
|
|
26
|
|
|
8,023
|
|
Total intangible assets
|
|
|
$
|
21,813
|
|
|
$
|
10,747
|
|
|
$
|
—
|
|
|
$
|
72
|
|
|
$
|
11,138
|
|