UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q  
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 1-5978
 
SIFCO Industries, Inc.
(Exact name of registrant as specified in its charter)  
 
 
Ohio
 
34-0553950
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
970 East 64th Street, Cleveland Ohio
 
44103
(Address of principal executive offices)
 
(Zip Code)
(216) 881-8600
(Registrant’s telephone number, including area code)  
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
 ¨

 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
The number of the Registrant’s Common Shares outstanding at March 31, 2016 was 5,466,063.



Part I. Financial Information
Item 1. Financial Statements
SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited)
(Amounts in thousands, except per share data)

Three Months Ended 
 March 31,

Six Months Ended 
 March 31,
 
2016

2015

2016

2015
Net sales
$
29,075


$
24,615


$
56,237


$
44,695

Cost of goods sold
25,513


20,914


50,566


37,992

Gross profit
3,562


3,701


5,671


6,703

Selling, general and administrative expenses
3,130


4,486


8,750


8,930

Amortization of intangible assets
613


520


1,328


1,040

Loss on disposal of operating assets
30


2


32


2

Operating loss
(211
)

(1,307
)

(4,439
)

(3,269
)
Interest income
(22
)

(3
)

(32
)

(7
)
Interest expense
436


48


845


108

Foreign currency exchange (gain) loss, net
20


(48
)

34


(57
)
Other income, net
(107
)

(107
)

(214
)

(214
)
Loss from continuing operations before income tax benefit
(538
)

(1,197
)

(5,072
)

(3,099
)
Income tax benefit
(239
)

(334
)

(2,175
)

(894
)
Loss from continuing operations
(299
)

(863
)

(2,897
)

(2,205
)
Income from discontinued operations, net of tax
—


799


—


736

Net loss
$
(299
)

$
(64
)

$
(2,897
)

$
(1,469
)
















Loss per share from continuing operations







Basic
$
(0.05
)

$
(0.16
)

$
(0.53
)

$
(0.41
)
Diluted
$
(0.05
)

$
(0.16
)

$
(0.53
)

$
(0.41
)








Income per share from discontinued operations, net of tax







Basic
$
—


$
0.15


$
—


$
0.14

Diluted
$
—


$
0.15


$
—


$
0.14









Net loss per share







Basic
$
(0.05
)

$
(0.01
)

$
(0.53
)

$
(0.27
)
Diluted
$
(0.05
)

$
(0.01
)

$
(0.53
)

$
(0.27
)












Weighted-average number of common shares (basic)
5,464


5,438


5,458


5,430

Weighted-average number of common shares (diluted)
5,464


5,446


5,458


5,447

See notes to unaudited consolidated condensed financial statements.

2



SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Comprehensive Income (Loss)
(Unaudited)
(Amounts in thousands)
 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(299
)
 
$
(64
)
 
$
(2,897
)
 
$
(1,469
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
762

 
—

 
315

 
—

Retirement plan liability adjustment
210

 
132

 
403

 
261

Interest rate swap agreement adjustment
—

 
—

 
—

 
5

Comprehensive income (loss)
$
673

 
$
68

 
$
(2,179
)
 
$
(1,203
)
See notes to unaudited consolidated condensed financial statements.

3



SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Amounts in thousands, except per share data)
 
 
March 31, 
 2016
 
September 30, 
 2015
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
952

 
$
667

Receivables, net of allowance for doubtful accounts of $727 and $1,127, respectively
29,698

 
36,024

Inventories, net
28,134

 
27,943

Refundable income taxes
3,890

 
2,516

Deferred income taxes
2,818

 
2,785

Prepaid expenses and other current assets
1,926

 
1,600

Total current assets
67,418

 
71,535

Property, plant and equipment, net
52,025

 
54,865

Intangible assets, net
12,456

 
13,265

Goodwill
15,895

 
16,480

Other assets
462

 
544

Total assets
$
148,256

 
$
156,689

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
10,955

 
$
10,503

Accounts payable
18,830

 
14,201

Accrued liabilities
9,051

 
8,446

Total current liabilities
38,836

 
33,150

Long-term debt, net of current maturities
27,913

 
38,426

Deferred income taxes
4,296

 
4,849

Pension liability
6,508

 
6,743

Other long-term liabilities
454

 
452

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 – 5,495 at March 31, 2016 and 5,468 at September 30, 2015
5,495

 
5,468

Additional paid-in capital
9,109

 
9,778

Retained earnings
66,915

 
69,811

Accumulated other comprehensive loss
(11,270
)
 
(11,988
)
Total shareholders’ equity
70,249

 
73,069

Total liabilities and shareholders’ equity
$
148,256

 
$
156,689

See notes to unaudited consolidated condensed financial statements.

4



SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
 
Six Months Ended 
 March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(2,897
)
 
$
(1,469
)
Income from discontinued operations, net of tax
—

 
(736
)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
5,366

 
3,535

Amortization on debt issuance cost
72

 
—

Loss on disposal of operating assets
32

 
2

LIFO (income) expense
(8
)
 
185

Share transactions under company stock plan
(642
)
 
365

Purchase price inventory adjustment
266

 
—

Other long-term liabilities
160

 
(68
)
Deferred income taxes
(642
)
 
(2
)
Changes in operating assets and liabilities:
 
 
 
Receivables
6,439

 
2,670

Inventories
(375
)
 
(6,927
)
Refundable taxes
(1,374
)
 
(1,392
)
Prepaid expenses and other current assets
(317
)
 
(1,424
)
Other assets
315

 
(22
)
Accounts payable
4,809

 
1,617

Other accrued liabilities
722

 
1,259

Accrued income and other taxes
(163
)
 
101

Net cash provided by (used for) operating activities of continuing operations
11,763

 
(2,306
)
Net cash used for operating activities of discontinued operations
—

 
(479
)
Cash flows from investing activities:
 
 
 
Proceeds from disposal of operating assets
—

 
2

Capital expenditures
(1,176
)
 
(4,604
)
Net cash used for investing activities of continuing operations
(1,176
)
 
(4,602
)
Net cash provided by investing activities of discontinued operations
—

 
1,422

Cash flows from financing activities:
 
 
 
Payments on long term debt
(2,561
)
 
(1,000
)
Proceeds from revolving credit agreement
19,369

 
27,154

Repayments of revolving credit agreement
(27,536
)
 
(19,008
)
Short-term debt borrowings
1,450

 
—

Short-term debt repayments
(1,047
)
 
—

Cash dividends paid
—

 
(1,090
)
Net cash provided by (used for) financing activities of continuing operations
(10,325
)
 
6,056

Increase in cash and cash equivalents
262

 
91

Cash and cash equivalents at the beginning of the period
667

 
4,596

Effect of exchange rate changes on cash and cash equivalents
23

 
—

Cash and cash equivalents at the end of the period
$
952

 
$
4,687

Supplemental disclosure of cash flow information of continuing operations:
 
 
 
Cash paid for interest
$
(736
)
 
$
(103
)
Cash paid for income taxes, net
(185
)
 
(817
)
See notes to unaudited consolidated condensed financial statements.

5



SIFCO Industries, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
(Amounts in thousands, except per share data)
1.
Summary of Significant Accounting Policies
A. Principles of Consolidation
The accompanying unaudited consolidated condensed financial statements include the accounts of SIFCO Industries, Inc. and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated.
The U.S. dollar is the functional currency for all of 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 unaudited consolidated condensed financial statements.
These unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s fiscal 2015 Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results to be expected for other interim periods or the full year.
B. Accounting Policies
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company's fiscal 2015 Annual Report on Form 10-K, with the exception of the following.

Goodwill and Intangible Assets
As a result of financial performance that was lower than expected, the Company performed an interim impairment test at its Orange, California reporting unit and performed a financial analysis of its C*Blade reporting unit in Maniago, Italy as of March 31, 2016.  The carrying values at both reporting units, inclusive of assigned goodwill, were compared to their respective fair values and the income approach was used to estimate the fair value of these reporting units.  Significant assumptions inherent in the valuation methodologies for goodwill were employed and include, but are not limited to, prospective financial information, growth rates, terminal value and discount rates and requires the Company to make certain assumptions and estimates regarding industry economic factors and future profitability of its business.
 
When performing the income approach for each reporting unit, SIFCO incorporated the use of projected financial information and a discount rate that are developed using market participant based assumptions.  The cash flow projections are based on five-year financial forecasts developed by management that include revenue projections, capital spending trends, and investment in working capital to support anticipated revenue growth.  The selected discount rate considers the risk and nature of the respective reporting unit's cash flows and ratios of return that market participants would require to invest their capital in our plants. 

Although the Company believes its assumptions are reasonable, actual results may vary significantly and may expose the Company to material impairment charges in the future.  The methodology for determining fair values was consistent for the periods presented. 

Based on this quantitative test, we determined that the fair value of these reporting units exceeded their carrying value, and therefore Step 2 of the two-step goodwill impairment test was unnecessary.







6



C. 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. Net loss per diluted share reflects the effect of the Company’s outstanding stock options, restricted shares and performance shares under the treasury stock method. The dilutive effect of the Company’s restricted shares and performance shares were as follows:
 
Three Months Ended 
March 31,
 
Six Months Ended 
 March 31,
 
2016
 
2015
 
2016
 
2015
Loss from continuing operations
$
(299
)
 
$
(863
)
 
$
(2,897
)
 
$
(2,205
)
Income from discontinued operations, net of tax
—

 
799

 
—

 
736

Net loss
$
(299
)
 
$
(64
)
 
$
(2,897
)
 
$
(1,469
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (basic)
5,464

 
5,438

 
5,458

 
5,430

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted shares
—

 
6

 
—

 
16

Performance shares
—

 
2

 
—

 
1

Weighted-average common shares outstanding (diluted)
5,464

 
5,446

 
5,458

 
5,447

 
 
 
 
 
 
 
 
Net loss per share – basic
 
 
 
 
 
 
 
Continuing operations
$
(0.05
)
 
$
(0.16
)
 
$
(0.53
)
 
$
(0.41
)
Discontinued operations
—

 
0.15

 
—

 
0.14

Net loss
$
(0.05
)
 
$
(0.01
)
 
$
(0.53
)
 
$
(0.27
)
 
 
 
 
 
 
 
 
Net loss per share – diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.05
)
 
$
(0.16
)
 
$
(0.53
)
 
$
(0.41
)
Discontinued operations
—

 
0.15

 
—

 
0.14

Net loss
$
(0.05
)
 
$
(0.01
)
 
$
(0.53
)
 
$
(0.27
)
 
 
 
 
 
 
 
 
Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share
17

 
20

 
15

 
14


D. Derivative Financial Instruments
The Company entered into an interest rate swap agreement to reduce risk related to variable-rate debt, which was subject to changes in market rates of interest. The interest rate swap is designated as a cash flow hedge. At March 31, 2016, the Company held one interest rate swap agreement with a notional amount of $ 8,929 . 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 March 31, 2016, the Company’s interest rate swap agreement qualified as a fully effective cash flow hedge against the Company’s variable-rate term note and its fair value is $0 at March 31, 2016.

E. Impact to Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 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. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Companies have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. The Company is currently evaluating the requirements of these standards and have not yet determined the impact on our condensed 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

7



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 have not yet determined its impact on our condensed consolidated financial statements.

On March 30, 2016, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which makes a number of changes meant to simplify and improve accounting for shared-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 is currently considering early adoption of ASU 2016-09 in the next reporting period, as is permitted under the standard and has not yet determined the impact on our condensed consolidated financial statements.
2.
Inventories
Inventories consist of:
 
March 31, 
 2016
 
September 30, 
 2015
Raw materials and supplies
$
6,444

 
$
7,212

Work-in-process
13,112

 
11,088

Finished goods
8,578

 
9,643

Total inventories
$
28,134

 
$
27,943

Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for 39% and 38% of the Company’s inventories at March 31, 2016 and September 30, 2015, respectively. The first-in, first-out (“FIFO”) method is used for the remainder of the inventories. If the FIFO method had been used for the inventories for which cost is determined using the LIFO method, inventories would have been $8,501 and $8,508 higher than reported at March 31, 2016 and September 30, 2015 , respectively.
3.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
 
March 31, 
 2016
 
September 30, 
 2015
Foreign currency translation adjustment, net of tax
$
(5,416
)
 
$
(5,731
)
Retirement plan liability adjustment, net of tax
(5,854
)
 
(6,257
)
Total accumulated other comprehensive loss
$
(11,270
)
 
$
(11,988
)
4.
Long-Term Debt
Long-term debt consists of:  

March 31, 
 2016

September 30, 
 2015
Revolving credit agreement
$
8,333


$
16,500

Foreign subsidiary borrowings
12,770

 
13,197

Capital lease obligations
181

 
252

 
 
 
 
Term loan
17,857


19,286

   Less: unamortized debt issuance cost
(273
)
 
(306
)
Term loan less unamortized debt issuance cost
17,584

 
18,980

Total Debt
38,868

 
48,929

 
 
 
 
Less – current maturities
(10,955
)

(10,503
)
Total long-term debt
$
27,913


$
38,426

On June 26, 2015 the Company entered into a new Credit and Security Agreement (the "Credit Agreement") with a new lender. The new credit facility is comprised of (i) a five year revolving credit facility with a maximum borrowing amount of up to $25,000 , which reduced to $20,000 on January 1, 2016, and (ii) a five year term loan of $20,000 .  Amounts borrowed under the credit facility are secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 65% of the stock of its non-U.S. subsidiaries. The new term loan is repayable in quarterly installments of $714 starting September 30, 2015. The amounts borrowed under the Credit Agreement were used to repay the Company's previous revolver and term note, to fund the acquisition

8



of C*Blade S.p.A. Forging & Manufacturing ("C*Blade" - see Note 8) and for working capital and general corporate purposes. The Credit Agreement also has an accordion feature, which allows the Company to increase the availability by up to $ 15,000 upon consent of the existing lenders or upon additional lenders being joined to the facility. Borrowings will bear interest at the LIBOR rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin as set forth in the Credit Agreement.

The revolver has a rate based on LIBOR plus 2.75% spread and a prime rate which resulted in a weighted average rate of 3.4% at March 31, 2016 and the term loan has a rate based on LIBOR plus 2.75% spread which was 3.3% at March 31, 2016. The new loans are subject to certain customary financial covenants including, without limitation, covenants that require the Company to not exceed a maximum debt to EBITDA ratio and to maintain a minimum fixed charge coverage ratio. There is also a commitment fee ranging from 0.15% to 0.35% to be incurred on the unused balance. The Company was in compliance with loan covenants required to be met as of March 31, 2016 . The Company expects to remain in compliance throughout fiscal 2016.

As of March 31, 2016, the total foreign debt borrowings was $ 12,770 , of which $ 2,268 is the current portion. Interest rates range from 1.0% to 4.0% Euribor rate. The remaining $ 5,776 consists of short term borrowings and the factoring of a portion the Company's trade receivables. The factoring programs are uncommitted, whereby the Company offers receivables for sale to an unaffiliated financial institution, which are then subject to acceptance by the unaffiliated financial institution. Following the sale and transfer of the receivables to the unaffiliated financial institution, the receivables are not isolated from the Company, and effective control of the receivables is not passed to the unaffiliated financial institution, which does not have the right to pledge or sell the receivables. The Company accounts for the sale of receivables under this agreement as short-term debt and continues to carry the receivables on its consolidated condensed balance sheets. There was $990 of short-term borrowings relating to this agreement at March 31, 2016 classified within short-term debt. The carrying value of the receivables pledged as collateral was $ 1,668 at March 31, 2016.
5. Income Taxes
For each interim reporting period, the Company makes an estimate of the effective tax rate it expects to be applicable for the full fiscal year for its continuing operations. This estimated effective rate is used in providing for income taxes on a year-to-date basis. The Company’s effective tax rate through the first six months of fiscal 2016 was 43% , compared with 29% for the same period of fiscal 2015. This increase is primarily attributable to an increase in U.S federal tax credits applied against forecasted domestic results in fiscal 2016 as well as discrete tax benefits of $ 461 primarily related to the tax effects of legislation enacted during the first quarter of fiscal 2016, applied against a year-to-date loss. The effective tax rate differs from the U.S. federal statutory rate due primarily to (i) application of U.S. tax credits (ii) income and losses in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate, and (iii) the tax effects of legislation enacted during the year.

The Company is subject to income taxes in the U.S. federal jurisdiction, Ireland, Italy, and various state and local jurisdictions. The Company believes it has appropriate support for its federal income tax returns.
6.
Retirement Benefit Plans
The Company and certain of its subsidiaries sponsor defined benefit pension plans covering some of its employees. The components of net periodic benefit cost of the Company’s defined benefit plans are as follows:
 
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
 
2016
 
2015
 
2016
 
2015
Service cost
$
69

 
$
37

 
$
139

 
$
73

Interest cost
256

 
244

 
512

 
487

Expected return on plan assets
(407
)
 
(418
)
 
(815
)
 
(835
)
Amortization of net loss
210

 
136

 
420

 
273

Net periodic cost
$
128

 
$
(1
)
 
$
256

 
$
(2
)
During the six months ended March 31, 2016 and 2015, the Company made no contributions to its defined benefit pension plans. The Company does not anticipate making any additional contributions to fund its defined benefit pension plans during the balance of fiscal 2016.

9



7.
Stock-Based Compensation
The Company has awarded performance and restricted shares under its shareholder approved 2007 Long-Term Incentive Plan (“2007 Plan”). The aggregate number of shares that may be awarded under the 2007 Plan is 600 less any shares previously awarded and subject to an adjustment for the forfeiture of any unvested shares. In addition, shares that may be awarded are subject to individual recipient award limitations. The shares awarded under the 2007 Plan may be made in multiple forms, including stock options, stock appreciation rights, restricted or unrestricted stock, and performance related shares. Any such award is exercisable no later than ten years from the date of the grant.
The performance shares that have been awarded under the 2007 Plan generally provide for the vesting of the Company’s common shares upon the Company achieving certain defined financial performance objectives during a period up to three years following the making of such award. The ultimate number of common shares of the Company that may be earned pursuant to an award ranges from a minimum of no shares to a maximum of 150% of the initial target number of performance shares awarded, depending on the level of the Company’s achievement of its financial performance objectives.
With respect to such performance shares, compensation expense is being accrued. During each future reporting period, such expense may be subject to adjustment based upon the Company's financial performance, which impacts the number of common shares that it expects to vest upon the completion of the performance period. The performance shares were valued at the closing market price of the Company’s common shares on the date of the grant. The vesting of such shares is determined at the end of the performance period.
During the first six months of fiscal 2016, 91 performance shares were granted under the 2007 Plan with a grant date fair value of $10.50 . The shares vest over a three year performance period.
The Company has awarded restricted shares to its directors, officers, and other employees of the Company. The restricted shares were valued at the closing market price of the Company’s common shares on the date of the grant, and such value was recorded as unearned compensation. The unearned compensation is being amortized ratably over the restricted stock vesting period of one year.
During the first six months of fiscal 2016, 29 restricted shares were granted with a grant date fair value of $ 9.45 and 11 restricted shares vested under the 2007 Plan. The shares vest over a one year service period.
If all outstanding share awards are ultimately earned and vest at the target number of shares, there are approximately 200 shares that remain available for award at March 31, 2016 . If any of the outstanding share awards are ultimately earned and vest at greater than the target number of shares, up to a maximum of 150% of such target, then a fewer number of shares would be available for award.
Stock-based compensation under the 2007 Plan was $464 benefit and $400 expense during the first six months of fiscal 2016 and 2015, respectively and a benefit of $ 810 and $ 129 for both the second quarter of fiscal 2016 and 2015, respectively. The Company reversed portions of its long-term incentive accruals in the current period. As of March 31, 2016 , there was $1,243 of total unrecognized compensation cost related to the performance shares and restricted shares awarded under the 2007 Plan. The Company expects to recognize this cost over the next 2.5 years.
8.
Business Acquisition
On July 1, 2015, the Company completed the acquisition of all of the outstanding equity of C*Blade S.p.A. Forging & Manufacturing, from Riello Investimenti Partners SGR S.p.A., Giorgio Visentini, Giorgio Frassini, Giancarlo Sclabi and Matteo Talmassons. The forging business operates at two facilities located in Maniago, Italy. The purchase price for the forging business and the assumption of debt was approximately $ 16,719 , after a $ 275 purchase price adjustment received and recorded in the first quarter of fiscal 2016 related to certain adjustments principally related to the final working capital level and indebtedness adjustment.
The Company has substantially completed the purchase accounting related to the C*Blade acquisition.
Changes in the net carrying amount of goodwill was as follows:
Balance at September 30, 2015
$
16,480

Goodwill purchase price adjustment
(767
)
Currency translation
182

Balance at March 31, 2016
$
15,895


10



The results of operation of C*Blade are included in the Company’s unaudited consolidated condensed statements of operations for the three months ended and six months ended March 31, 2016. The following unaudited pro forma information presents a summary of the results of operations for the Company including C*Blade as if the acquisition had occurred on October 1, 2014:  
 
Three Months Ended March 31, 2015 (unaudited)
 
Six Months Ended March 31, 2015 (unaudited)
Net sales
$
29,379

 
55,125

Net loss
$
(160
)
 
(848
)
Net loss per share (basic)
$
(0.03
)
 
(0.16
)
Net loss per share (diluted)
$
(0.03
)
 
(0.16
)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and includes assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides this cautionary statement identifying important economic, political and technological factors, among others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (1) the impact on business conditions in general, and on the demand for product in the Aerospace and Energy ("A&E") industries in particular, of the global economic outlook, including the continuation of military spending at or near current levels and the availability of capital and liquidity from banks and other providers of credit; (2) the future business environment, including capital and consumer spending; (3) competitive factors, including the ability to replace business that may be lost; (4) metals and commodities price increases and the Company’s ability to recover such price increases; (5) successful development and market introduction of new products and services; (6) continued reliance on consumer acceptance of regional and business aircraft powered by more fuel efficient turboprop engines; (7) continued reliance on military spending, in general, and/or several major customers, in particular, for revenues; (8) the impact on future contributions to the Company’s defined benefit pension plans due to changes in actuarial assumptions, government regulations and the market value of plan assets; (9) stable governments, business conditions, laws, regulations and taxes in economies where business is conducted; and (10) the ability to successfully integrate businesses that may be acquired into the Company’s operations.

The Company 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 maintenance, repair and overhaul schedules for commercial, business and military aircraft, as well as the engines that power such aircraft; and (iii) the projected build rate for industrial turbines.
The Company operates within a cost structure that includes a significant fixed component. Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage the fixed component of their respective cost structures. Conversely, the opposite effect is expected to occur at lower net sales and related production volumes.
A. Results of Operations
Non-GAAP Financial Measures
Presented below is certain financial information based on the Company's EBITDA and Adjusted EBITDA. References to “EBITDA” mean earnings (losses) from continuing operations before interest, taxes, depreciation and amortization, and references to “Adjusted EBITDA” mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of net income to EBITDA and Adjusted EBITDA.

Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under generally accepted accounting principles in the United States of America (“GAAP”). The Company presents EBITDA and Adjusted EBITDA because 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

11



the Company’s financial information should not consider them in isolation, or as a substitute for analysis of the Company's results of operations as reported in accordance with GAAP. Some of these limitations include:
•
Neither EBITDA nor Adjusted EBITDA reflects the interest expense, or the cash requirements necessary to service interest payments on indebtedness;
•
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor Adjusted EBITDA reflects any cash requirements for such replacements;
•
The omission of the substantial amortization expense associated with the Company’s intangible assets further limits the usefulness of EBITDA and Adjusted EBITDA; and
•
Neither EBITDA nor Adjusted EBITDA includes the payment of taxes, which is a necessary element of operations.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to the Company to invest in the growth of its businesses. Management compensates for these limitations by not viewing EBITDA or Adjusted EBITDA in isolation and specifically by using other GAAP measures, such as net income (loss), net sales, and operating income (loss), to measure operating performance. Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under GAAP, and neither should be considered as an alternative to net loss or cash flow from operations determined in accordance with GAAP. The Company’s calculation of EBITDA and Adjusted EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies.

The following table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA:  
Dollars in thousands
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(299
)
 
$
(64
)
 
$
(2,897
)
 
$
(1,469
)
Less: Income from discontinued operations, net of tax
—

 
799

 
—

 
736

Loss from continuing operations
(299
)
 
(863
)
 
(2,897
)
 
(2,205
)
Adjustments:
 
 
 
 
 
 
 
Depreciation and amortization expense
2,588

 
1,820

 
5,366

 
3,535

Interest expense, net
414

 
45

 
813

 
101

Income tax benefit
(239
)
 
(334
)
 
(2,175
)
 
(894
)
EBITDA
2,464

 
668

 
1,107

 
537

Adjustments:
 
 
 
 
 
 
 
Foreign currency exchange (gain) loss, net (1)
20

 
(48
)
 
34

 
(57
)
Other income, net (2)
(107
)
 
(107
)
 
(214
)
 
(214
)
Loss on disposal of operating assets (3)
30

 
2

 
32

 
2

Inventory purchase accounting adjustments (4)
—

 
—

 
266

 
—

Non-recurring severance expense (5)
—

 
964

 
—

 
964

Equity compensation expense (benefit) (6)
(810
)
 
(129
)
 
(464
)
 
400

Acquisition transaction-related expenses (7)
(5
)
 
513

 
(94
)
 
767

LIFO impact (8)
(41
)
 
155

 
(8
)
 
185

Orange expansion (9)
210

 
147

 
387

 
289

Executive search (10)
224

 
—

 
224

 
—

Adjusted EBITDA
$
1,985

 
$
2,165

 
$
1,270

 
$
2,873

(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 severance expense related to the departure of an executive officer. Included in the $964 is $233 of equity based compensation expense recognized by the Company under its 2007 Long-term Incentive Plan.

12



(6)
Represents the equity-based compensation expense (benefit) recognized by the Company under its 2007 Long-Term Incentive Plan.
(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 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 as mentioned in its Form 8-K filing on March 18, 2016.
Six Months Ended March 31, 2016 compared with Six Months Ended March 31, 2015
Overview
The Company completed the acquisition of all of the outstanding equity and assumed debt of C Blade S.p.A. Forging & Manufacturing (“C*Blade”) in July, 2015. The Company's results for the first six months of fiscal 2016 include the results of C*Blade.

Net Sales
Net sales for the first six months of fiscal 2016 increased 25.8% to $56.2 million, compared to $44.7 million in the comparable period of fiscal 2015. 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 the first six months of fiscal 2016 and 2015 is as follows:
(Dollars in millions)
Six Months Ended
March 31,
 
Increase
(Decrease)
Net Sales
2016
 
2015
 
Aerospace components for:
 
 
 
 
 
Fixed wing aircraft
$
29.4

 
$
24.8

 
$
4.6

Rotorcraft
9.1

 
11.3

 
(2.2
)
Energy components for power generation units
14.5

 
3.3

 
11.2

Commercial product and other revenue
3.2

 
5.3

 
(2.1
)
Total
$
56.2

 
$
44.7

 
$
11.5

Overall, net sales for the Company increased $11.5 million in the first six months of fiscal 2016 compared to the same period of fiscal 2015. The increase in sales is primarily attributed to $10.0 million in net sales attributable to the acquisition of C*Blade, which is included within energy components. The increase in fixed wing aircraft and decrease of rotorcraft sales are primarily due to changes in build rates and spare requirements in programs such as the Boeing 777, the V-22, the F-16 and the H-60, which are driving the changes in volume compared to the comparable period. Commercial product and other revenue decreased $2.1 million to $3.2 million in the first six months of fiscal 2016 due primarily to a decrease of $1.0 million in a military ordnance program as a result of timing of customer order placement in the current period.
Commercial net sales were 62.2% of total net sales and military net sales were 37.8% of total net sales in the first six months of fiscal 2016, compared to 56.7% and 43.3%, respectively, in the comparable period in fiscal 2015.  Commercial net sales increased $9.7 million to $35.0 million in the first six months of fiscal 2016, compared to $25.3 million in the comparable period of fiscal 2015, primarily attributed to the acquisition of C*Blade as noted above. Military net sales increased $1.8 million to $21.2 million in the first six months of fiscal 2016, compared to $19.4 million in the comparable period of fiscal 2015, primarily due to the changes in build rates to the programs mentioned above. 
Cost of Goods Sold
Cost of goods sold increased by $12.6 million, or 33.1%, to $50.6 million during the first six months of fiscal 2016, compared to $38.0 million in the comparable period of fiscal 2015, primarily due to (i) $9.8 million attributed to the acquisition of C*Blade, which includes $0.3 million of adjustments to fair value related to purchase accounting guidelines, (ii) increase in commercial sales as noted above, and (iv) $0.6 million in labor and benefits compared to in the prior period.
Gross Profit
Gross profit decreased $1.0 million to $5.7 million during the first six months of fiscal 2016, compared to $6.7 million in the comparable period of fiscal 2015. Gross margin percent to sales was 10.1% during the first six months of fiscal 2016, compared with 15.0% in the comparable period in fiscal 2015. This was due primarily to a change in sales mix as noted above and higher labor and benefits charges.

13



Selling, General and Administrative Expenses
Selling, general and administrative expenses were $8.8 million, or 15.6% of net sales, during the first six months of fiscal 2016, compared to $8.9 million, or 20.0% of net sales, in the comparable period of fiscal 2015. The change is primarily due to an increase of $1.6 million of legal and professional fees primarily associated with the late filing of SIFCO's fiscal 2015 annual report on Form 10-K, the inclusion of $0.8 million related to C*Blade, $0.3 million related to the Company's Enterprise Resource Planning ("ERP") system, and $0.2 million related to the search for a new CEO as disclosed in the Company's Form 8-K filing on March 18, 2016. These increased costs were offset by $1.2 million reduction in compensation, commissions and benefit costs and the reversal of long-term incentive compensation and incentive accruals. One time charges in fiscal 2015 of $1.0 million in severance charges and $0.9 million of legal & professional fees primarily associated with transactional costs related to the acquisition of C*Blade were not incurred in fiscal 2016.
Amortization of Intangibles
Amortization of intangibles increased $0.3 million to $1.3 million during the first six months of fiscal 2016, compared to $1.0 million in the comparable period of fiscal 2015. The increase is primarily due to the amortization of intangible assets from the acquisition of C*Blade.
Other/General
Interest expense increased $0.7 million to $0.8 million in the first six months of fiscal 2016, compared to $0.1 million in the same period in fiscal 2015. The increase is primarily due to the increased borrowing in connection with the acquisition of the C*Blade business.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first six months of both fiscal 2016 and 2015. The Company entered into an interest rate swap as discussed in Note 1 of the notes to the unaudited consolidated condensed statements on March 31, 2016. The interest rate swap in prior year matured during the first six months of fiscal 2015:
 
Weighted Average
Interest Rate
Six Months Ended
March 31,
 
Weighted Average
Outstanding Balance
Six Months Ended
March 31,
 
2016
 
2015
 
2016
 
2015
Revolving credit agreement
3.4
%
 
1.1
%
 
$ 14.6 million
 
$ 9.4 million
Term note
3.3
%
 
2.4
%
 
$ 18.9 million
 
$ 3.6 million
Foreign term debt
2.5
%
 
—
%
 
$ 12.4 million
 
$ 0.0 million
Other income, net, consists principally of $0.2 million of rental income earned from the lease of the Company's Cork, Ireland facility for both the first six months of fiscal 2016 and 2015.
Income Taxes
The Company’s effective tax rate in the first six months of fiscal 2016 was 43%, compared to 29% in the comparable period in fiscal 2015. This increase is primarily attributed to an increase in U.S federal tax credits applied against forecasted domestic results in fiscal 2016 as well as discrete tax benefits of $0.5 million primarily related to tax effects of legislation enacted during the first quarter of fiscal 2016, applied against a year-to-date loss. The effective tax rate differs from the U.S. federal statutory rate due primarily to (i) application of U.S. tax credits, (ii) income and losses in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate, and (iii) the tax effects of legislation enacted during the quarter.

Loss from Continuing Operations
Loss from continuing operations, net of tax, was $2.9 million, or 5.2% of net sales, during the first six months of fiscal 2016, compared to loss from continuing operations, net of tax of $2.2 million, or 4.9% of net sales, in the comparable period of fiscal 2015.

Income from Discontinued Operations
The Company did not incur costs in the first six months of fiscal 2016. Included in the first six months of fiscal 2015 was $0.7 million, which includes the after-tax gain on the sale of the building and land of the Repair Group.

Net Loss
Net loss was $2.9 million, or 5.2% of net sales, during the first six months of fiscal 2016, compared to net loss of $1.5 million, or 3.3% of net sales, in the comparable period of fiscal 2015.  Net loss increased primarily due to the items noted above.

14



Three Months March 31, 2016 compared with Three Months Ended March 31, 2015
Overview
The Company's results for the second quarter of fiscal 2016 include the results of C*Blade.
Net Sales
Net sales for the second quarter of fiscal 2016 increased 18.1% to $29.1 million, compared to $24.6 million in the comparable period of fiscal 2015. Net sales comparative information for the second quarter of fiscal 2016 and 2015 is as follows:
(Dollars in millions)
Three Months Ended
March 31,
 
Increase
(Decrease)
Net Sales
2016
 
2015
 
Aerospace components for:
 
 
 
 
 
Fixed wing aircraft
$
15.5

 
$
13.7

 
$
1.8

Rotorcraft
4.6

 
6.2

 
(1.6
)
Energy components for power generation units
7.5

 
2.1

 
5.4

Commercial product and other revenue
1.5

 
2.6

 
(1.1
)
Total
$
29.1

 
$
24.6

 
$
4.5

Overall, net sales for the Company increased $4.5 million in the second quarter of fiscal 2016 compared to the comparable period of fiscal 2015. The increase in sales is primarily attributed to $5.0 million in net sales attributable to the acquisition of C*Blade, which is included within energy components. The increase in fixed wing aircraft and decrease of rotorcraft sales are primarily due to changes in build rates and spare requirements in programs such as the Boeing 777, the V-22, the F-16, and the H-60, which are driving the changes in volume compared to the comparable period. Commercial product and other revenue decreased $1.1 million to $1.5 million in the second quarter of fiscal 2016 compared to $2.6 million in the comparable period of fiscal 2015 due primarily, to a decrease of $1.0 million in a military ordnance program.
Commercial net sales were 61.9% of total net sales and military net sales were 38.1% of total net sales in the second quarter of fiscal 2016, compared to 57.9% and 42.1%, respectively, in the comparable period in fiscal 2015.  Commercial net sales increased $3.8 million to $18.0 million in the second quarter of fiscal 2016, compared to $14.2 million in the comparable period of fiscal 2015, primarily attributed to the acquisition of C*Blade as noted above. Military net sales increased $0.7 million to $11.1 million in the second quarter of fiscal 2016, compared to $10.4 million in the comparable period of fiscal 2015, primarily due to the changes in build rates to the programs mentioned above. 
Cost of Goods Sold
Cost of goods sold increased by $4.6 million, or 22.0% to $25.5 million during the second quarter of fiscal 2016, compared to $20.9 million in the comparable period of fiscal 2015. $4.5 million of the increase was primarily due to the acquisition of C*Blade.
Gross Profit
Gross profit decreased $0.1 million to $3.6 million during the second quarter of fiscal 2016, compared to $3.7 million in the comparable period of fiscal 2015. Gross margin was 12.3% during the second quarter of fiscal 2016, compared with 15.0% in the comparable period in fiscal 2015. The decrease in gross margin was primarily due to the change in sales mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3.1 million, or 10.8% of net sales, during the second quarter of fiscal 2016, compared to $4.5 million, or 18.2% of net sales, in the comparable period of fiscal 2015. The change is primarily due to an increase of $0.6 million of legal and professional fees primarily associated with the late filing of SIFCO's fiscal 2015 annual report on Form 10-K, the inclusion of $0.4 million related to C*Blade, $0.2 million related to the search for a new CEO as disclosed in the Company's Form 8-K filing on March 18, 2016, and $0.1 million increase in Information Technology consultant costs as a result of ongoing costs related to SIFCO's ERP system. These increased costs were offset by $1.0 million reduction in compensation, commissions and benefit costs and the reversal of long-term incentive compensation and incentive accruals. One time charges in the second quarter of fiscal 2015 of $1.0 million severance charges and $0.5 million of legal & professional fees primarily associated with transactional costs related to the acquisition of C*Blade were note incurred in fiscal 2016.
Amortization of Intangibles
Amortization of intangibles increased $0.1 million to $0.6 million during the second quarter of fiscal 2016, compared to $0.5 million in the comparable period of fiscal 2015. The increase is primarily due to the amortization of new intangible assets acquired from the acquisition of C*Blade.

15



Other/General
Interest expense was $0.4 million in the second quarter of fiscal 2016, compared to a nominal amount in the same period in fiscal 2015. The increase is primarily due to the new credit agreement entered into in July 2015, in connection with the acquisition of the C*Blade business.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first quarter of both fiscal 2016 and 2015:
 
Weighted Average
Interest Rate
Three Months Ended
March 31,
 
Weighted Average
Outstanding Balance
Three Months Ended
March 31,
 
2016
 
2015
 
2016
 
2015
Revolving credit agreement
3.6
%
 
1.0
%
 
$ 12.6 million
 
$ 10.6 million
Term note
3.4
%
 
2.3
%
 
$ 18.6 million
 
$ 3.3 million
Foreign term debt
2.3
%
 
—
%
 
$ 12.4 million
 
$ 0.0 million
Other income, net, consists principally of $0.1 million of rental income earned from the lease of the Company's Cork, Ireland facility for both the second quarter of fiscal 2016 and 2015.
Income Taxes
The Company’s effective tax rate in the second quarter of fiscal 2016 was 44%, compared to 28% in the comparable period in fiscal 2015. This increase is primarily attributed to an increase in U.S federal tax credits applied against forecasted domestic results in fiscal 2016 due to tax effects of legislation enacted during fiscal 2016. The effective tax rate differs from the U.S. federal statutory rate due primarily to application of U.S. tax credits and income and losses in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate.

Income from Discontinued Operations
The Company did not incur costs in the second quarter of fiscal 2016. Income from discontinued operations, net of tax, was $0.8 million during the second quarter of fiscal 2015, which consists of the sale of the building and land of the Repair Group.
Net Loss
Net loss was $0.3 million during the second quarter of fiscal 2016, compared to net loss of $0.1 million, in the comparable period of fiscal 2015.  The increase in loss experienced is primarily due to decreased gross margin as noted above.
B. Liquidity and Capital Resources
Cash and cash equivalents were $1.0 million at March 31, 2016 compared with $0.7 million at September 30, 2015. At March 31, 2016, approximately $0.9 million of the Company’s cash and cash equivalents was in the possession of its non-U.S subsidiaries. Distributions from the Company’s foreign subsidiaries to the Company may be subject to adverse tax consequences.
Operating Activities
The Company’s operating activities from continuing operations provided $11.8 million of cash in the first six months of fiscal 2016, compared with $2.3 million of cash used by operating activities from continuing operations in the first six months of fiscal 2015.  The cash provided by operating activities from continuing operations in the first six months of fiscal 2016 was primarily due to a $10.1 million reduction of working capital.  Cash provided by working capital is primarily due to a $6.4 million decrease in accounts receivable due to timing of sales and collection from customers and $4.8 million from extended accounts payable terms partially offset by the net loss of $2.9 million. The Company also benefited from $4.6 million of non-cash items, such as depreciation and amortization expense, LIFO effect and equity-based compensation expense. 

The Company’s operating activities from continuing operations used $2.3 million of cash in the first six months of fiscal 2015. The cash used by operating activities of continuing operations in the first six months of 2015 was primarily due to $1.5 million net loss and use of $4.1 million in working capital, partially offset by $4.0 million from the impact of non-cash items such as depreciation and amortization expense, LIFO effect and equity based compensation expense. The increase in non-cash items compared to the prior period is primarily due to an increase in depreciation expense related to the implementation of the new ERP system and the completion of the large capital investment at the Cleveland plant location. The use of working capital is primarily due to factors resulting from normal business conditions of the Company, including (i) increased inventory to support anticipated growth in the business, (ii) the relative timing of sales and collections from customers, and (iii) the relative timing of payments to suppliers.


16



Investing Activities
Cash used for investing activities of continuing operations was $1.2 million in the first six months of fiscal 2016, compared to $4.6 million in the first six months of fiscal 2015. The decrease is attributed to the reduced spending on the Company's ERP installation and completion of the prior year's Cleveland plant investment project. In addition to the $1.2 million expended during the first half of fiscal 2016, $0.1 million was committed for future capital expense as of March 31, 2016. The Company anticipates that total fiscal 2016 capital expenditures will be within the range of $2.5 to $3.5 million and will relate principally to the further enhancement of production and product offering capabilities, operating cost reductions and expansion to one of the Company's plant locations.

In the first six months of fiscal 2015, the sale of the land and building of the Repair Group was completed and the Company received cash proceeds of $1.4 million, net of transaction fees. The proceeds from this sale was used to pay down the Company's revolving credit facility.

Financing Activities
Cash used for financing activities was $10.3 million in the first six months of fiscal 2016, compared to $6.1 million of cash provided by financing activities in the first six months of fiscal 2015.

The Company had net repayments under its revolving credit facility of $8.2 million in the first six months of fiscal 2016, compared to net borrowings of $8.1 million in the first six months of fiscal 2015. The decrease in net borrowings from the revolving credit facility was due to the management of the Company's working capital requirements offset from prior year activities that resulted in the funding of the capital expenditures completed in the first quarter of fiscal 2015 and the cash dividend of $0.20 per common share, which resulted in a cash expenditure of $1.1 million during the first quarter of fiscal 2015.

The Company had repayments under its term loan of $1.4 million and under its foreign long-term loan of $1.1 million in the first six months of fiscal 2016, compared to repayments under its term loan of $1.0 million in the first six months of fiscal 2015.
On June 26, 2015 the Company entered into a new Credit and Security Agreement (the "Credit Agreement") with its lender. The new credit facility is 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 credit facility are secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 65% of the stock of its non-U.S. subsidiaries. The new term loan is repayable in quarterly installments of $0.7 million starting September 30, 2015. The amounts borrowed under the Credit Agreement were used to repay the Company's existing revolver and term note, to fund the acquisition of C*Blade on July 1, 2015, as referenced in Note 8 of the consolidated condensed financial statements and for working capital and general corporate purposes. The new Credit Agreement also has an accordion feature, which allows 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 will bear interest at the LIBOR rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company in each case, plus the applicable margin as set forth in the Credit Agreement. With the Credit Agreement, the Company incurred debt issuance costs of $0.7 million.
The revolver has a rate based on LIBOR plus 2.75% spread and a prime rate which resulted in a weighted average rate of 3.4% at March 31, 2016 and the term loan has a rate based on LIBOR plus 2.75% spread which was 3.4% at March 31, 2016. The term loan has a variable interest rate, which becomes an effective fixed rate after giving effect to an interest rate swap agreement entered into on March 31, 2016. There is also a commitment fee ranging from 0.15% to 0.35%, to be incurred on the unused balance. These bank loans are subject to certain customary financial covenants including, without limitation, covenants that require the Company to not exceed a maximum leverage ratio and to maintain a minimum fixed charge coverage ratio. The Company was in compliance with loan covenants required to be met as of March 31, 2016 . The Company expects to remain in compliance throughout fiscal 2016.
Future cash flows from the Company’s operations will be used to pay down amounts outstanding under the Credit Agreement. The Company believes it has adequate cash/liquidity available to finance its operations from the combination of (i) the Company’s expected cash flows from operations and (ii) funds available under the Credit Agreement.

17



C. Critical Accounting Policies and Estimates

The Company's disclosures of critical accounting estimates in its Annual Report on Form 10-K for the year ended September 30, 2015 have not materially changed since that report was filed, with the exception of the following:

Derivative Financial Instruments
The Company entered into an interest rate swap agreement to reduce risk related to variable-rate debt, which was subject to changes in market rates of interest. The interest rate swap is designated as a cash flow hedge. At March 31, 2016, the Company held one interest rate swap agreement with a notional amount of $8,929. 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 March 31, 2016, the Company’s interest rate swap agreement qualified as a fully effective cash flow hedge against the Company’s variable-rate term note.


D. Impact of Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 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. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Companies have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. The Company is currently evaluating the requirements of these standards and have not yet determined the impact on our condensed 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 have not yet determined its impact on our condensed consolidated financial statements.

On March 30, 2016, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which makes a number of changes meant to simplify and improve accounting for shared-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 is currently considering early adoption of ASU 2016-09 in the next reporting period, as is permitted under the standard and has not yet determined the impact on our condensed consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk

Interest payable on the Company's revolving credit facility and term loan is based on the LIBOR rate, prime rate, or the eurocurrency March 31, 2016, the Company had $17.9 million outstanding on the term loan and $8.3 million was drawn on the revolving credit facility. The Company entered into one interest rate swap agreement on March 31, 2016 for the notional amount of $8.9 million. The term loan has a variable interest rate, which becomes an effective fixed rate after giving effect to the interest rate swap agreement. The balance of the borrowings remain subject to variable interest rates.

If interest rates were to increase or decrease 100 basis points (1%) from the March 31, 2016 weighted average rate, and assuming no change in the amount outstanding under the term note and the revolving credit facility, the impact to the Company's interest expense on its variable rate debt would be approximately $0.2 million annually.

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Item 4. Controls and Procedures
As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to insure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s disclosure controls and procedures include components of the Company’s internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of March 31, 2016 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were not effective, as a result of the continuing existence of the material weaknesses in the Company's internal controls over financial reporting described in Item 9A of the Company's Annual Report.
The Company is in the process of designing and implementing improved controls to remediate the material weaknesses that continued to exist as of March 31, 2016.
In fiscal 2015, the Company installed a new, complex ERP system at the corporate office and two plant locations. The complexity of the system and lack of adequate training contributed to the following material weaknesses:
•
Inadequate journal entry approval controls related to manual journal entries allowed the posting of unapproved manual journal entries, and
•
Lack of effective execution of controls related to the testing of completeness and accuracy of system-generated reports.
Significant accounting personnel turnover throughout the year contributed to the following material weaknesses:
•
Lack of proper reconciliations performed and the precision and sufficiency of reconciliation reviews performed, and
•
Improper application of cash receipts to outstanding receivables balances.

In addition, a material weakness was identified for the lack of processes and controls related to the recording of tooling sales and sales returned for re-work at one location.
Finally, a material weakness was identified related to the ineffectiveness of monitoring controls in place over our plant locations by the Corporate office.
Remediation Plan for Material Weakness in Internal Control over Financial Reporting
Management and the Company's Board of Directors are committed to improving the Company's overall system of internal controls over financial reporting. The Company is in the process of designing and implementing additional controls and improving existing controls to remediate the material weaknesses that existed as of September 30, 2015, as set forth above.
With respect to the monitoring of manual journal entries, the Company is instituting automated methods to direct all manual journal entries to an appropriate approver.
With respect to the completeness and accuracy of system-generated reports, the Company is enhancing its control environment related to the segregation of duties that led to the need to perform additional manual testing on system generated reports, and enhancing activity level control testing of system generated reports, as necessary.
With respect to monitoring controls of the operating locations, the Company has implemented a reporting change in its finance organization whereby the site controllers now also report to the Corporate Controller. The Company is also evaluating other organizational and control changes to strengthen its monitoring controls.
With respect to the precision of reviews around account reconciliations, management has implemented additional procedures to enhance the precision of reviews, including additional policies and training for those executing the controls. Additionally, the Company is adopting enhanced controls on spreadsheets used in the preparation of reconciliations and is evaluating the need for additional controls to improve the reconciliation process.
With respect to the application of cash receipts, the Company is training the appropriate personnel in the timely and accurate application of cash receipts and has implemented monitoring controls to ensure these procedures are followed.

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With respect to revenue recognition, the Company is educating its sales, operations and accounting staff on the proper recognition of revenue, has updated its policies and procedures to incorporate these guidelines and is evaluating the need for enhanced controls, as necessary.
The actions that we are taking are subject to ongoing senior management review as well as audit committee oversight. The Company continues to makes progress and it plans to complete this remediation as quickly as possible, however, at this time, are not able to estimate how long it will take.
Changes in Internal Control over Financial Reporting and other Remediation
Except as described in Item 4 related to prior year findings, there have been no changes in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Part II. Other Information
Items 1A, 3, 4 and 5 are not applicable or the answer to such items is negative; therefore, the items have been omitted and no reference is required in this Quarterly Report.
Item 1. Legal Proceedings
In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters and does not believe any such matters are material to its financial condition or results of operations. The Company maintains various liability insurance coverages to protect its assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it is possible that the Company’s future operating results could be affected by future costs of litigation.
Item 6. (a) Exhibits
The following exhibits are filed with this report or are incorporated herein by reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934 (Asterisk denotes exhibits filed with this report.).
Exhibit
No.
 
Description
2.1
 
Stock Purchase Agreement between Riello Investimenti Partners SGR S.p.A., Giorgio Visentini, Giorgio Frassini, Giancarlo Sclabi and Matteo Talmassons and SIFCO Italy Holdings S.R.L (a wholly-owned subsidiary of SIFCO Industries Inc.) dated March 16, 2015 filed as Exhibit 2.1 to the Company’s Form 8-K dated July 2, 2015, and incorporated herein by reference
2.2
 
Amendment to the Stock Purchase Agreement Riello Investimenti Partners SGR S.p.A., Giorgio Visentini, Giorgio Frassini, Giancarlo Sclabi and Matteo Talmassons and SIFCO Italy Holdings S.R.L (a wholly-owned subsidiary of SIFCO Industries Inc.) dated June 30, 2015 filed as Exhibit 2.2 to the Company’s Form 8-K dated July 2, 2015, and incorporated herein by reference
3.1
 
Third Amended Articles of Incorporation of SIFCO Industries, Inc., filed as Exhibit 3(a) of the Company’s Form 10-Q dated March 31, 2002, and incorporated herein by reference
3.2
 
SIFCO Industries, Inc. Amended and Restated Code of Regulations dated January 28, 2016, filed as Exhibit 3.2 of the Company’s Form 10-K dated September 30, 2015, and incorporated herein by reference
4.1
 
Credit and Security Agreement among Fifth Third Bank and SIFCO Industries, Inc. (and subsidiaries) dated December 10, 2010, filed as Exhibit 4.23 to the Company’s Form 8-K dated December 10, 2010 and incorporated herein by reference
4.2
 
First Amendment and Joinder to Credit and Security Agreement among Fifth Third Bank and SIFCO Industries, Inc. (and subsidiaries) dated October 28, 2011, filed as Exhibit 4.2 to the Company’s Form 8-K dated October 28, 2011 and incorporated herein by reference
4.3
 
Second Amendment and Joinder to Credit and Security Agreement among Fifth Third Bank and SIFCO Industries, Inc. (and subsidiaries) dated July 23, 2013, filed as Exhibit 4.3 to the Company’s Form 8-K dated July 23, 2013 and incorporated herein by reference
4.4
 
Third Amendment and Joinder to Credit and Security Agreement among Fifth Third Bank and SIFCO Industries, Inc. (and subsidiaries) dated September 25, 2014, filed as Exhibit 99.1 to the Company’s Form 8-K dated September 29, 2014 and incorporated herein by reference
4.5
 
Credit and Security Agreement among KeyBank National Association and SIFCO Industries, Inc. (and subsidiaries) dated June 26, 2015, filed as Exhibit 4.1 to the Company’s Form 8-K dated July 2, 2015 and incorporated herein by reference

21




Exhibit
No.
 
Description
9.1
 
Voting Trust Agreement dated January 31, 2013, filed as Exhibit 9.1 to the Company’s Form 10-Q dated December 31, 2012 and incorporated herein by reference
9.2
 
Voting Trust Extension Agreement dated January 15, 2015, filed as Exhibit 9.2 to the Company's Form 10-Q dated December 31, 2014 and incorporated herein by reference
10.1
 
SIFCO Industries, Inc. 2007 Long-Term Incentive Plan, filed as Exhibit A of the Company’s Proxy and Notice of 2008 Annual Meeting to Shareholders dated December 14, 2007, and incorporated herein by reference
10.2
 
Letter Agreement between the Company and Jeffrey P. Gotschall, dated August 12, 2009 filed as Exhibit 10.1 of the Company’s Form 8-K dated August 12, 2009 and incorporated herein by reference
10.3
 
Amendment No. 1 to the SIFCO Industries, Inc. 2007 Long-Term Incentive Plan, filed as Exhibit A of the Company’s Proxy and Notice of 2011 Annual Meeting to Shareholders dated December 15, 2010, and incorporated herein by reference
10.4
 
Separation agreement between the Company and James P. Woidke, dated February 27, 2015, filed as Exhibit 10.1 to the Company's Form 8-K dated March 2, 2015, and incorporated herein by reference
10.5
 
Change in Control Agreement between the Company and Salvatore Incanno, dated May 11, 2015, filed as Exhibit 10.1 to the Company's Form 8-K dated May 11, 2015, and incorporated herein by reference
10.6*
 
Form of SIFCO Industries, Inc. Long-term incentive plan performance share award incorporated herein

10.7*
 
Form of SIFCO Industries, Inc. Long-term incentive plan restricted share award incorporated herein
14.1
 
Code of Ethics, filed as Exhibit 14.1 of the Company’s Form 10-K dated September 30, 2003, and incorporated herein by reference
*31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a)
*31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a)
*32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
*32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
*101
 
The following financial information from SIFCO Industries, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 16, 2016, formatted in XBRL includes: (i) Consolidated Condensed Statements of Operations for the fiscal periods ended March 31, 2016 and 2015, (ii) Consolidated Condensed Statements of Comprehensive Income for the fiscal periods ended March 31, 2016 and 2015, (iii) Consolidated Condensed Balance Sheets at March 31, 2016 and September 30, 2015, (iv) Consolidated Condensed Statements of Cash Flow for the fiscal periods ended March 31, 2016 and 2015, and (iv) the Notes to the Consolidated Condensed Financial Statements.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
SIFCO Industries, Inc.
 
 
(Registrant)
 
 
 
Date: May 16, 2016
 
/s/ Michael S. Lipscomb
 
 
Michael S. Lipscomb
 
 
Chief Executive Officer and Chairman of the Board
 
 
(Principal Executive Officer)
 
 
 
Date: May 16, 2016
 
/s/ Salvatore Incanno
 
 
Salvatore Incanno
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 

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Ex. 10.6


SIFCO INDUSTRIES, INC. 2007 LONG-TERM INCENTIVE PLAN

Performance Share Award Agreement


THIS PERFORMANCE SHARE AWARD AGREEMENT (“ Award Agreement ”) is made and entered into effective as of (“ Grant Date ”) by and between SIFCO INDUSTRIES, INC., an Ohio corporation (the “ Company ”), and , an Employee of the Company (the “ Grantee ”).
In recognition of the value of Grantee’s service as a key employee of the Company and/or its Affiliates, the Committee hereby awards the Grantee Performance Shares under the Plan, subject to the following terms and conditions. Unless otherwise defined herein, capitalized terms shall have the meanings ascribed to them in the SIFCO Industries, Inc. 2007 Long-Term Incentive Plan (the “ Plan” ).
1. Award . Subject to the conditions set forth herein, the Company hereby grants to Grantee, as of the Grant Date specified above, an Award of Performance Shares (“ PSs ”) which may be earned in accordance with Section 2. This represents the maximum number of Performance Shares that can be earned. Your target number of Performance Shares, awarded at 100% performance to goal, is .
2. Performance Vesting . Subject to Sections 4, 5 and 6, the Company shall deliver to Grantee one share of Stock for each whole Performance Share that is earned in accordance with the following schedule:
Peer Group Percentile of
Performance
Measure Achieved
Vested PSs for
EBITDA Goal
  75 th  or higher
150%
         63 rd
125%
50 th

100%
       4 3 rd
75%
   35 th

50%
         34 th  or lower
—%
3. Delivery of Shares . The number of shares of Stock that Grantee earns, if any, as a result of the vesting of Grantee’s PSs under Sections 2 will be delivered to Grantee within the Specified Date. Before such delivery, the Committee shall certify in writing the number of Performance Shares that you have earned. No fractional shares will be delivered pursuant to this Award.
4. Employment Termination . Except as provided in Sections 5 and 6, if Grantee incurs a Separation from Service before the end of the Performance Period, this Award of Performance Shares shall be forfeited on the date of such Separation from Service. In the event that Grantee is re-employed by the Company during the same Performance Period and after no more than twelve consecutive months of Separation from Service, Grantee’s Award will be reinstated.

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At the conclusion of the Performance Period, the number of PSs earned will be prorated to reflect the number of full months of service completed during the Performance Period.
5. Retirement, Death or Disability . If Grantee’s Separation from Service occurs during the Performance Period, because of Grantee’s retirement on or after the age of 65, death or Disability, Grantee will be entitled to a prorated portion of the PSs earned in accordance with Section 2, determined at the end of the Performance Period based on the ratio of the number of days Grantee is employed during the Performance Period to the total number of days in the Performance Period. It is the intention of the Company and Grantee that this provision comply with Treasury Regulation Section 1.162-27(e)(2)(i), and that no PSs will vest and no shares of Stock will be delivered unless the Performance Measures are met as specified in Section 2 of this Award Agreement. Any payouts/deliveries of Stock due as a result of Grantee’s death shall be paid to Grantee’s estate (or Grantee’s designated beneficiary) within the Specified Date after the end of the Performance Period as specified in Section 3 hereof.
6. Change in Control .
(a) In General. Unless previously forfeited, or limited pursuant to Section 6(b), the Award shall vest in full if (i) a Corporate Transaction occurs, and (ii) either (x) Grantee incurs a Separation from Service within twelve months following such Corporate Transaction, other than a Separation from Service by the Company for Cause or a Separation from Service by Grantee other than as a result of a reduction in Grantee’s title, duties or compensation, a proposed relocation of Grantee, or Grantee’s death or Disability; or (y) the Company does not survive as a standalone entity following such Corporate Transaction, or the Award is terminated in connection with the Corporate Transaction.
(b) Preclusion of Vesting in Certain Instances . Notwithstanding any other provision of this Award Agreement or of any other agreement, contract, or understanding heretofore or hereafter entered into by a Grantee with the Company or any Affiliate, except an agreement, contract, or understanding that expressly addresses Section 280G or Section 4999 of the Code (an “ Other Agreement ”), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Grantee (including groups or classes of Grantees or beneficiaries of which the Grantee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Grantee (a “ Benefit Arrangement ”), if the Grantee is a “disqualified individual,” as defined in Section 280G(c) of the Code, any PS held by the Grantee and any right to receive any payment or other benefit under this Award Agreement shall not become vested (i) to the extent that such right to vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Grantee under this Award Agreement, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Grantee under this Award Agreement to be considered a “parachute payment” within the meaning of Section 280G(b)(2) of the Code as then in effect (a “ Parachute Payment ”) and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Grantee from the Company under this Award Agreement, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Grantee without causing any such payment or benefit to be considered a Parachute Payment.

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(c) Time and Form of Payment. Within 70 days after the close of the Corporate Transaction, the Company shall deliver, at its sole discretion, either (i) one share of stock for each vested PS, or (ii) the cash equivalent of one share of stock for each vested PS, which payout/delivery shall be in lieu of any payout/delivery under Section 2; provided that if such 70-day period begins in one calendar year and end in another, the Grantee shall not have the right to designate the year of payment; and, provided further, that the cash equivalent shall be determined using the imputed value as of the close of the Corporate Transaction. The Company and Grantee acknowledge that Treasury Regulation Section 1.162-27(e)(2)(v) applies to this Corporate Transaction situation.
(d) Award Agreement Controls. Only the provisions of this Section 6, and not the provisions of any other change in control agreement or other agreement containing change in control provisions, shall apply to the Award.
7. Transferability . The PSs shall not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner, whether by the operation of law or otherwise. Any attempted transfer of the PSs prohibited by this Section 7 shall be null and void.
8. Adjustments . The PSs shall be subject to adjustment in accordance with the Plan.
9. Withholding . Grantee is responsible for all applicable federal, state and local income and employment taxes (including taxes of any foreign jurisdiction) which the Company is required to withhold at any time with respect to the PSs to satisfy its minimum statutory withholding requirements. Such payment shall be made in full at Grantee’s election, by check made payable to the Company, or by Grantee’s tender of shares of Stock payable under this Award. Shares of Stock tendered as payment of required withholding shall be valued at Fair Market Value on the date such withholding obligation arises or at the imputed value as of the close of the Corporate Transaction if the stock ceases to exist as a result of a Corporate Transaction.
10. Miscellaneous .
(a)      Disclaimer of Rights . Nothing contained herein shall constitute an obligation for continued employment.
(b)      Rights Unsecured . Grantee only has the Company’s unfunded, unsecured promise to pay pursuant to the terms of this Award. Grantee’s rights shall be that of an unsecured general creditor of the Company and Grantee shall not have any security interest in any assets of the Company.
(c)      Adjustment for Dividends. Upon the declaration of any dividend on shares of Stock of the Company to shareholders of record as of a date after the end of the Performance Period but before the issuance of a stock certificate representing the earned Award, the number of PSs shall be increased by the number obtained by dividing (x) the aggregate amount of the dividend that would be payable to Grantee if each of Grantee’s PSs were issued and outstanding and entitled to dividends on the dividend shareholder of record date, by (y) the Fair Market Value of the Company’s common stock on the shareholder of record date.
(d)      Terms of Plan . The Award is subject to the terms and conditions set forth in the Plan, which are incorporated into and shall be deemed to be a part of this Award, without regard

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to whether such terms and conditions are otherwise set forth in this Award. In the event that there is any inconsistency between the provisions of this Award and of the Plan, the provisions of the Plan shall govern.
(e)      Severability . If any term, provision, covenant or restriction contained herein is held by a court or a federal regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions contained herein shall remain in full force and effect, and shall in no way be affected, impaired or invalidated.
(f)      Controlling Law . The Award shall be construed, interpreted and applied in accordance with the laws of the State of Ohio, without giving effect to the choice of law provisions thereof. Grantee agrees to irrevocably submit any dispute arising out of or relating to this Award to the exclusive concurrent jurisdiction of the state and federal courts located in Cleveland, Ohio. Grantee also irrevocably waives to the fullest extent permitted by applicable law, any objection Grantee may now or hereafter have to the laying of venue of any such dispute brought in such court or any defense of inconvenient forum for the maintenance of such dispute, and agrees to accept service of legal process from the courts of Ohio.
(g)      Section 409A Compliance . To the extent applicable, it is intended that this Award and the Plan comply with Section 409A. This Award and the Plan shall be interpreted and administered in a manner consistent with this intent, and any provision that would cause the Award or the Plan to fail to satisfy Section 409A shall have no force and effect unless or until amended to comply with Section 409A (which amendment may be retroactive to the extent permitted by Section 409A and may be made by the Company without Grantee’s consent).
(h)      Headings . Section and other headings contained in this Award Agreement are for reference purposes only and are in no way intended to describe, interpret, defined or limit the scope, extent or intent of the Award or any provision hereof or of the Plan.
11. Definitions . As used herein the following terms shall be defined as set forth below:
(a)      “ Performance Measure ” means SIFCO Industries, Inc.’s Consolidated EBITDA Margin. The performance goal for the Performance Measure for the Performance Period is EBITDA Margin equal to the 50 th percentile of the Performance Peer Group.
The Performance Measure achieved may be evaluated and adjusted as provided in Sections 13.6.5 and 13.6.6 of the Plan.
(b)      “Performance Peer Group” means the Global Industry Classification Standard (“GICS”) Aerospace and Defense group of companies with revenues greater than $50 million.
(c)      “EBITDA Margin” means earnings from continuing operations before interest, taxes, depreciation and amortization, adjusted for LIFO, and then divided by Net Sales.
(d)      “ Performance Period ” means the Company’s three (3) consecutive fiscal years commencing with the fiscal year beginning October 1, ______, and ending with the fiscal year ending September 30, ________.

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(e)      “ Specified Date ” means any day during the period that begins on , and that ends on .
(f)      “ Target Award ” means the number of PSs earned if the EBITDA Margin Performance Measure is achieved at the 50 th percentile of the Performance Peer Group, as specified in Section 2.
IN WITNESS WHEREOF, the Company and Grantee have executed this Award Agreement as of , but on the actual dates specified below.

 
SIFCO INDUSTRIES, INC.


By:                                                       
Printed Name:
Title:
Date:                                                    
 
 
 
GRANTEE :


Signature:                                              
Printed Name:
Date:                                                     


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Ex. 10.7


AWARD AGREEMENT
This Award Agreement (the “Agreement”) is made as of the _____ day of ________, between SIFCO Industries, Inc., an Ohio corporation (the “Company”), and, a member of the Board of Directors of the Company (the “Director”).
WHEREAS, the Company has heretofore adopted the SIFCO Industries, Inc. 2007 Long-Term Incentive Plan (the “Plan”); and
WHEREAS, it is a requirement of the Plan that an Award Agreement be executed to evidence the Restricted Stock granted to the Director.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto have agreed, and do hereby agree as follows:
1. Grant and Issuance of Restricted Stock . The Company hereby grants to the Director _____ shares of the common stock, par value $1.00 per share, of the Company (the “Restricted Stock”) on the terms and conditions set forth herein and in the Plan. The Company shall cause the Restricted Stock to be evidenced by a book entry account maintained by the Company’s stock transfer agent (the “Transfer Agent”). Simultaneous with the execution of this Agreement, the Director shall deliver to the Company an executed stock power, the form of which is attached hereto as Exhibit “A.” Upon the date the Restricted Stock is evidenced in a book entry account maintained by the Transfer Agent, the Director shall be a shareholder with respect to the Restricted Stock and shall have all of the rights of a shareholder with respect to the Restricted Stock, including the right to vote the Restricted Stock and to receive any dividends and other distributions paid with respect to the Restricted Stock. The executed stock power shall be held by the Company

1



in its control for the account of the Director until the restrictions set forth in Section 2(a) of this Agreement lapse and the Director's right to the Restricted Stock vests pursuant to Section 2(b) of this Agreement (at which time the Restricted Stock shall be delivered to the Director) or, if earlier, until the Restricted Stock is forfeited to the Company and cancelled as provided in Section 2(c) of this Agreement.
2.      Restrictions on and Vesting of the Restricted Stock .
(a)      Except as otherwise provided in this Agreement, none of the Restricted Stock held in a book entry account maintained by the Transfer Agent (including any Restricted Stock issuable, but not yet issued) with respect to which the vesting requirements set forth in Section 2(b) of this Agreement have not been satisfied may be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of. In the event that the Director purports or attempts to sell, exchange, transfer, pledge, hypothecate or otherwise dispose of any of his Restricted Stock in contravention of the previous sentence, then (i) such purported transfer, encumbrance or disposition shall be null and void, and (ii) all of such disposed (or purportedly disposed) Restricted Stock shall be immediately forfeited to the Company without notice for no consideration.
(b)      The Director’s right to the Restricted Stock shall vest, and the restrictions set forth in Section 2(a) of this Agreement will lapse, on the earliest of (i) the day immediately preceding the one year anniversary of the date of this Agreement, provided that the Director is a member of the Board as of such date, (ii) the date the Director ceases to be a member of the Board due to his death or disability or (iii) the day immediately preceding the date of a Corporate Transaction (as defined in the Plan), provided that the Director is a member of the Board as of such date (the “Vesting Date”).

2



(c)      In the event that the Director resigns from the Board (other than by reason of disability) or is removed from the Board, in either case prior to the Vesting Date, the Restricted Stock shall be immediately and automatically forfeited to the Company without notice for no consideration.
3.      Taxes . The Company shall have the right to require a person entitled to receive the Restricted Stock to pay the Company the amount of any taxes which the Company is or will be required to withhold with respect to such Restricted Stock (either upon vesting or upon the filing of any election under Section 83(b) of the Code with respect to the Restricted Stock) before such Restricted Stock is evidenced by a book entry account.
4.      Delivery of Restricted Stock . Entry of the Restricted Stock in a book entry account maintained by the Transfer Agent, pursuant to this Agreement may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any applicable requirements of any federal, state or local law or regulation or any administrative or quasi-administrative requirement applicable to the sale, issuance, delivery or distribution of the Restricted Stock. The Committee may, in its sole discretion, require the Director to furnish the Company with appropriate representations and a written investment letter prior to the entry of the Restricted Stock in a book entry account maintained by the Transfer Agent.
5.      No Right to Board Membership . Nothing in this Agreement shall confer upon the Director any right to continue to serve on the Board or interfere with or restrict in any way with the right of the Company to remove him or her from the Board for any reason whatsoever.
6.      Acknowledgement . Director acknowledges that neither the Company nor any of the Company’s affiliates, officer, members, Directors, agents or representatives has provided or is providing the undersigned with tax advice regarding the receipt, vesting and ownership of the

3



Restricted Stock subject to this Agreement or any other matter, and the Company has urged the Director to consult with his or her own tax advisor with respect to the income taxation consequences of receiving, holding and disposing of the Restricted Stock subject to this Agreement.
7.      Incorporation of Provisions of the Plan . All of the provisions of the Plan pursuant to which the Restricted Stock is granted are hereby incorporated by reference and made a part hereof as if specifically set forth herein, and to the extent of any conflict between this Agreement and the terms contained in the Plan, the Plan shall control. To the extent any capitalized terms are not otherwise defined herein, they shall have the meanings set forth in the Plan.
8.      Invalidity of Provisions . The invalidity or unenforceability of any provision of this Agreement as a result of a violation of any state or federal law, or of the rules or regulations of any governmental regulatory body, shall not affect the validity or enforceability of the remainder of this Agreement.
9.      Waiver and Modification . The provisions of this Agreement may not be waived or modified unless such waiver or modification is in writing and signed by the parties hereto.
10.      Interpretation . All decisions or interpretations made by the Committee with regard to any question arising under the Plan or this Agreement as provided by Section 3.1 of the Plan, shall be binding and conclusive on the Company and the Director.
11.      Multiple Counterparts . This Agreement may be signed in multiple counterparts, all of which together shall constitute an original agreement. The execution by one party of any counterpart shall be sufficient execution by that party, whether or not the same counterpart has been executed by any other party.

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Ex. 10.7


12.      Governing Law . This Agreement shall be governed by the laws of the State of Ohio.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed, and the Director has hereunto set his or her hand, all as of the day and year first above written.


 
 
 
SIFCO INDUSTRIES, INC.
 
 
 
 
 
 
By:
 
 
 
 
 
Its:
Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 Director Signature
 
 
 
 
 
 


5
Ex. 10.7



Exhibit “A”
Stock Power

FOR VALUE RECEIVED , _________ hereby sells, assigns and transfers unto SIFCO Industries, Inc. _________, ________ ( _____ ) shares of common stock, no par value, of SIFCO Industries, Inc. (the “Company”), evidenced in a book entry account maintained by the Company’s stock transfer agent, and does hereby irrevocably constitute and appoint the Secretary of the Company to transfer the said stock on the books of the within named corporation with full power of substitution in the premises.


 
 
 
 
 
Dated:
 
 
 
 
 
 
 
Director Signature
 
 
 
 
 
 











Exhibit 31.1
CERTIFICATION
OF THE CHIEF EXECUTIVE OFFICER
RULE 13A-14(A) / 15D-14(A)
I, Michael S. Lipscomb, certify that:
1.
I have read this Quarterly Report on Form 10-Q of SIFCO Industries, Inc.
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
d.
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: May 16, 2016
 
/s/ Michael S. Lipscomb
 
 
Michael S. Lipscomb
 
 
Chief Executive Officer and Chairman of the Board




Exhibit 31.2
CERTIFICATION
OF THE CHIEF FINANCIAL OFFICER
RULE 13A-14(A) / 15D-14(A)
I, Salvatore Incanno, certify that:
1.
I have read this Quarterly Report on Form 10-Q of SIFCO Industries, Inc.
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
d.
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 16, 2016
 
/s/ Salvatore Incanno
 
 
Salvatore Incanno
 
 
Chief Financial Officer
 
 
 




Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of SIFCO Industries, Inc. (“Company”) on Form 10-Q for the quarter ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (“Report”), the undersigned officer of the Company certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
Date: May 16, 2016
 
/s/ Michael S. Lipscomb
 
 
Michael S. Lipscomb
 
 
Chief Executive Officer and Chairman of the Board
This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by SIFCO Industries, Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that SIFCO Industries, Inc. specifically incorporates it by reference.
A signed original of this written statement required by Section 906 has been provided to SIFCO Industries, Inc. and will be retained by SIFCO Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.




Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of SIFCO Industries, Inc. (“Company”) on Form 10-Q for the quarter ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (“Report”), the undersigned officer of the Company certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
Date: May 16, 2016
 
/s/ Salvatore Incanno
 
 
Salvatore Incanno
 
 
Chief Financial Officer
 
 
 
This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by SIFCO Industries, Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that SIFCO Industries, Inc. specifically incorporates it by reference.
A signed original of this written statement required by Section 906 has been provided to SIFCO Industries, Inc. and will be retained by SIFCO Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.