Notes to Unaudited Consolidated Condensed Financial Statements

(Amounts in thousands, except per share data)

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 for the period. 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 2016 Annual Report on Form 10-K. The year-end consolidated condensed balance sheet data was derived from audited financial statements and disclosures required by accounting principles generally accepted accounting in the United States ("U.S."). 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 2016 Annual Report on Form 10-K.

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 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:

(a) Due to a loss for the period, zero restricted shares are included because the effect would be anti-dilutive.

D. Derivative Financial Instruments

The Company entered an interest rate swap agreement on March 29, 2016 to reduce risk related to variable-rate debt, which was subject to changes in market rates of interest. The interest rate swap is designated as a cash flow hedge. The agreement was canceled as part of the debt modification on November 9, 2016, as further discussed in Note 4 - Debt. The Company accounted for the interest rate swap termination by recording the loss in accumulated other comprehensive loss as of December 31, 2016. The amount incurred in interest expense was nominal. As part of the new Credit Facility (described further in Note 4 - Debt, below) on November 9, 2016, the Company entered into a new interest rate swap on November 30, 2016 to reduce risk related to the variable debt over the life of the new term loan. At March 31, 2017, the Company held one interest rate swap agreement with a notional amount of $ 4,546 . 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, 2017 and September 30, 2016, the Company’s interest rate swap agreement qualified as a fully effective cash flow hedge against the Company’s variable-rate term note. The mark-to-market valuation was a $2 and $ 30 liability at March 31, 2017 and September 30, 2016, respectively.

E. Impact of Recently Issued Accounting Standards

In May 2014, and as subsequently updated (Accounting Standard Update ("ASU") 2016-20 being most recent), the Financial Accounting Standards Board ("FASB") issued new accounting guidance that creates a single revenue recognition model, while clarifying the principles for recognizing revenue. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods. The Company will adopt the new guidance on October 1, 2018. The Company has started a bottoms up approach to analyze the standard's impact on its revenues by looking at historical policies and practices and identifying the differences from applying the new standard to its revenue streams. The Company has not determined the effect of the standard to its consolidated condensed financial statements.

In March 2016, the FASB issued ASU 2016-09, 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 has considered the potential implications of adoption of the ASU and due to the valuation allowance recorded at September 30, 2016 in the U.S., the Company does not expect a material impact from a tax perspective. The Company is still evaluating other non-tax components it may have on its consolidated condensed financial statements.

In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated condensed financial statements, together with evaluating the adoption date.

In November 2016, the FASB issued ASU 2016-18 requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is currently evaluating its plans regarding the adoption, but does not feel that this ASU is expected to have a material impact to the consolidated condensed statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations, which clarified existing guidance on the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Early adoption is permitted and the guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. The Company is currently evaluating the potential impact on its consolidated condensed financial statements.

In March 2017, the FASB issued ASU 2017-07, which relates to pension related costs that require an entity to report the following service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs. The other components of the net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside of any subtotal of operating income. Additionally, only the service cost component will be eligible for capitalization in assets. The ASU is effective for October 1, 2018, early adoption is permitted and the ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively for the capitalization of the service cost component. The amendment allows for a practical expedient that permits an employer to use the amounts disclosed in its pension and other post-retirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company will need to disclose that the practical expedient was used. The Company is currently evaluating the impact it may have on its consolidated condensed financial statements, together with evaluating the adoption date.

F. Recently Adopted Accounting Standards

In January 2017, the FASB issued ASU 2017-04, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The Company performs Step 1 of the annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the fair value, an entity should recognize

an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU must be applied prospectively and is effective for any annual and interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company has elected to early adopt.

Inventories consist of:

Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for 35% and 44% of the Company’s inventories at March 31, 2017 and September 30, 2016, 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 $8,252 and $8,026 higher than reported at March 31, 2017 and September 30, 2016 , respectively.

The components of accumulated other comprehensive loss are as follows:

	March 31,   2017				September 30,   2016
Foreign currency translation adjustment	$	(6,426	)		$	(5,623	)
Retirement plan liability adjustment, net of tax	(6,748		)		(7,197		)
Interest rate swap agreement adjustment, net of tax	(2		)		(30		)
Total accumulated other comprehensive loss	$	(13,176	)		$	(12,850	)

Debt consists of:  

On November 9, 2016, the Company entered into an Amended and Restated Credit and Security Agreement ("Credit Facility") with its Lender. The Credit Facility matures on June 25, 2020 and consists of secured loans in an aggregate principal amount of up to $39,871 . The Credit Facility is comprised of (i) a senior secured revolving credit facility of a maximum borrowing amount of $ 35,000 , including swing line loans and letters of credit provided by the Lender and (ii) senior secured term loan facility in the amount of $ 4,871 (the "Term Facility"). The new Term Facility is repayable in monthly installments of $ 81 beginning December 1, 2016. The terms of the Credit Facility contain both a lockbox arrangement and subjective acceleration clause. As a result, the amounts outstanding on the revolving credit facility are classified as a short-term liability. The amounts borrowed under the Amended and Restated Agreement were used to repay the amounts outstanding under the Company's previous Credit Agreement, for working capital, for general corporate purposes and to pay fees and expenses associated with this transaction. In connection

with entering into the Credit Facility, the Company terminated its interest rate swap agreement with the Lender, as referenced in Note 1 - D. Derivative Financial Instruments. The Company entered into its First Amendment Agreement ("First Amendment") to the Credit Facility on February 16, 2017. The First Amendment assigned its Lender as Administrative Agent and assigned a portion of its Credit Facility to participating Lender.

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 Amended and Restated Agreement. The revolver has a rate based on LIBOR plus a 3.75% spread and a prime rate, which resulted in a weighted average rate of 4.7% at March 31, 2017 and the term loan has a rate of 5.1% at March 31, 2017, which was based on LIBOR plus a 4.25% spread. This rate becomes an effective fixed rate of  5.8%  after giving effect to the interest rate swap agreement. There is also a commitment fee ranging from 0.15% to 0.375% to be incurred on the unused balance.

Under the Company's Credit Facility, the Company is subject to certain customary loan covenants. These include, without limitation, covenants that require maintenance of certain specified financial ratios, including that the Company meeting a minimum EBITDA and maintain a minimum fixed charge coverage ratio (to start on September 30, 2017). The Company was in compliance with its loan covenants as of March 31, 2017 .

On June 26, 2015, the Company entered a Credit and Security Agreement (the "2015 Credit Agreement") with its Lender. The credit facility was 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 were secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 65% of the stock of its non-U.S. subsidiaries. The term loan was repayable in quarterly installments of $714 starting September 30, 2015. The amounts borrowed under the 2015 Credit Agreement were used to repay the Company's previous revolver and term note, to fund the acquisition of the Maniago, Italy location and for working capital and general corporate purposes. The 2015 Credit Agreement also had an accordion feature, which allowed the Company to increase the availability by up to $ 15,000 upon consent of the existing lenders or upon additional lenders being joined to the facility. Borrowings bore interest at the LIBOR rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin as set forth in the Credit Agreement.

Foreign subsidiary borrowings

As of March 31, 2017 and September 30, 2016, the total foreign debt borrowings (excluding capital leases) were $ 9,168 and $ 9,540 , respectively, of which $ 6,322 and $5,833 , respectively is the current portion. Current debt as of March 31, 2017 and September 30, 2016, consist of $ 4,043 and $ 3,262 of short-term borrowings, $ 1,575 and $ 2,014 is the current portion of long-term debt, and $ 704 and $ 557 of factoring. Interest rates on the term note are based on Euribor rates which range from 1.0% to 4.0% . The factoring programs are uncommitted, whereby the Company offers receivables for sale to an unaffiliated financial institution, which are then subject to acceptance by the unaffiliated financial institution. Following the sale and transfer of the receivables to the unaffiliated financial institution, the receivables are not isolated from the Company, and effective control of the receivables is not passed to the unaffiliated financial institution, which does not have the right to pledge or sell the receivables. The Company accounts for the pledge of receivables under this agreement as short-term debt and continues to carry the receivables on its consolidated condensed balance sheet. There was $704 and $ 557 of short-term borrowings relating to this agreement at March 31, 2017 and September 30, 2016, respectively, classified within short-term debt. The carrying value of the receivables pledged as collateral were $ 1,131 and $ 1,156 at March 31, 2017 and September 30, 2016.

Future payment schedule

Payments on long-term debt under the Credit Facility and foreign subsidiary borrowings (excluding capital lease obligations, see below) for the remainder of this fiscal year and each of the four succeeding fiscal years are as follows:

Debt issuance costs

The Company incurred debt issuance costs in connection with its 2015 Credit Agreement in the amount of  $724 . However, with the Credit Facility, the Company incurred an additional $ 498 of costs in November 2016 and wrote off $241 of debt issuance costs as of December 31, 2016 due to debt modification accounting for deferred financing costs as it relates to the term note, which is included in interest expense in the accompanying consolidated condensed financial statements. Total debt issuance cost in the amount of $786 is split between the Term facility and the revolving credit facility. The portion noted above within debt table relates to the Term facility in the amount of $61 , net of amortization of $ 6 at March 31, 2017. The remaining $ 725  of debt issuance cost relates to the revolving credit facility. This portion is shown in the consolidated condensed balance sheet as a deferred charge in other current assets, which was reclassed from other long-term assets due to the classification of the revolving credit facility noted above, net of amortization of $ 181 at March 31, 2017.

Capital leases

The Company entered into new capital leases for equipment in the first quarter of fiscal 2017 . The minimum rental commitments under non-cancelable leases are for the remainder of this fiscal year and each of the succeeding fiscal years are as follows:  

Amortization of the cost of equipment under capital leases is included in depreciation expense. Assets recorded under capital leases consist of the following:

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 2017 was (6)% , compared with 43% for the same period of fiscal 2016. This decrease is primarily attributable to year-to-date U.S. loss with no tax benefit due to a valuation allowance in fiscal 2017. Additionally, in fiscal 2016, the effective tax rate was higher in comparison to fiscal 2017 driven by discrete tax benefits of $ 461 primarily related to tax 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 the valuation allowance against the Company's U.S. deferred tax assets and income in foreign jurisdictions that are taxed at different rates that the U.S. statutory tax rate.

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.

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:

During the six months ended March 31, 2017 and 2016, the Company made no contributions to its defined benefit pension plans. The Company has carryover balances from previous periods that may be available for use as a credit to reduce the amount of contributions that the Company is required to make to certain defined benefit plans in fiscal 2017. The Company's ability to elect to use such carryover balance will be determined based on the actual funded status of each defined benefit pension plan relative to the plan's minimum regulatory funding requirements. The Company does not anticipate in making additional cash contributions to fund its defined benefit pension plans during the balance of fiscal 2017.

The Company, with the approval of its shareholders on January 25, 2017, amended and restated its 2007 Long-Term Incentive Plan ("2007 Plan") to the 2016 Long-Term Incentive Plan ("2016 Plan"). The amendment increased the aggregate number of shares that may be awarded under the 2016 Plan to 646 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 2016 Plan may be made in multiple forms, including stock options, stock appreciation rights, restricted or unrestricted stock, and performance related shares. Any such award is exercisable no later than ten years from the date of the grant.

The performance shares that have been awarded under both plans generally provide for the vesting of the Company’s common shares upon the Company achieving certain defined financial performance objectives during a period up to three years following the making of such award. The ultimate number of common shares of the Company that may be earned pursuant to an award ranges from a minimum of 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 2017, one award for 5 performance shares under the 2007 Plan vested, of which 2 performance shares were tendered back to the Company to cover payroll costs. For the fiscal 2017 award, the Company granted 107 shares under the 2007 Plan to certain key employees. The award was split into two tranches, 69 performance shares and 38 shares of time-based restricted shares, with a grant date fair value of $7.45 . The award vests over three years .

The Company has awarded restricted shares to its directors, officers, and other employees of the Company. The restricted shares were valued at the closing market price of the Company’s common shares on the date of the grant, and such value was recorded as unearned compensation. The unearned compensation is being amortized ratably over the restricted stock vesting period of one year or three years.

During the first six months of fiscal 2017, the company granted its non-employee directors 33 restricted shares under the 2016 Plan, with a grant date fair value of $8.05 , which vest over one year . One award for 29 restricted shares vested.

If all outstanding share awards are ultimately earned and vest at the target number of shares, there are approximately 363 shares that remain available for award at March 31, 2017 . 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 $345 expense and $464 benefit during the first six months of fiscal 2017 and 2016, respectively and expense of $187 for the second quarter of fiscal 2017 and a benefit of $ 810 for the second quarter of fiscal 2016. As of March 31, 2017 , there was $1,315 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 2.0 years.

In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters; however, it does not believe any such matters are material to its financial condition or results of operations. The Company maintains various liability insurance coverages to protect its assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it is possible that the Company’s future operating results could be affected by future costs of litigation.

The Company is currently a defendant in a class action lawsuit filed in the Superior Court of California, County of Orange, alleging violations of California wage-and-hour laws, rules and regulations pertaining primarily to failure to accurately calculate and pay hourly and overtime wages; failure to provide meal periods; failure to authorize and permit rest periods; failure to indemnify necessary expenditures; failure to timely pay wages; and unfair competition. Although the Company records reserves for legal disputes and other matters in accordance with generally accepted accounting principles in the United States of America, ("GAAP"), the ultimate outcomes of these types of matters are inherently uncertain. Actual results may differ significantly from current estimates. Given the current status of this matter, Company has not concluded that a loss is probable, as such an estimate of a loss has not been recorded.

The Company's Cleveland, Ohio location had an Occupational Safety and Health Administration ("OSHA") inspection at the facility on September 1, 2016. This inspection resulted in OSHA issuing citations to the location. Since the inspection, SIFCO has abated or is in the process of abating all issues identified. These findings resulted in penalties to be assessed in the amount of $ 127 as of March 31, 2017.

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 products 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 and repair for industrial turbines.

The Company operates within a cost structure that includes a significant fixed component. Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage the fixed component of their respective cost structures. Conversely, the opposite effect is expected to occur at lower net sales and related production volumes.

A. Results of Operations

Six Months Ended March 31, 2017 compared with Six Months Ended March 31, 2016

Overview

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

Net sales for the first six months of fiscal 2017 increased 11.6% to $62.8 million, compared with $56.2 million in the comparable period of fiscal 2016. Net sales comparative information for the first six months of fiscal 2017 and 2016 is as follows:

The increase in fixed wing aircraft sales is primarily due to changes in build demand of Rolls Royce AE Engines due to a buffering plan for a customer plant closure, and changes in build demand of SAAB for the Boeing 787 and UTAS Troy for the JSF F35. These increases were partially offset by a decline in demand of the 737NG and V2500 programs. Energy components for power generation units increased by $1.8 million compared with the same period last year mainly due to higher market demand of turbine engines at our Maniago location. Rotorcraft sales increased to $10.5 million in the first six months of fiscal 2017 from $9.1 million in the comparable period of fiscal 2016 due to our customer's recovery from inventory destocking efforts in the first six months of 2016. The increase in commercial product and other revenue sales is largely driven by an increase in the Hellfire II missile program due to the timing of orders.

Commercial net sales were 56.6% of total net sales and military net sales were 43.4% of total net sales in the first six months of fiscal 2017, compared with 62.2% and 37.8%, respectively, in the comparable period in fiscal 2016.  Military net sales increased by $6.1 million to $27.3 million in the first six months of fiscal 2017, compared with $21.2 million in the comparable period of fiscal 2016, primarily due to the Hellfire II missile program, a customer's buffering plan for a plant closure and recovery from inventory destocking.  Commercial net sales increased $0.6 million to $35.6 million in the first six months of fiscal 2017, compared with $35.0 million in the comparable period of fiscal 2016 primarily due to the changes in build rates to the programs mentioned above. 

Cost of Goods Sold

Cost of goods sold increased by $4.4 million, or 8.7%, to $54.9 million, or 87.5% of net sales, during the first half of fiscal 2017, compared with $50.6 million or 89.9% of net sales, in the comparable period of fiscal 2016. The increase was due primarily to higher volumes as previously mentioned, as well as higher cycle count adjustments, $0.4 million, employee severance charges $0.3 million and lower of cost or market charges, $0.2 million.

Gross Profit

Gross profit increased $2.2 million to $7.8 million during the first six months of fiscal 2017, compared with $5.7 million in the comparable period of fiscal 2016. Gross margin percent of sales was 12.5% during the first six months of fiscal 2017, compared with 10.1% in the comparable period in fiscal 2016. The increase in gross profit was primarily due to higher sales volume.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $9.7 million, or 15.5% of net sales during the first six months of fiscal 2017, compared with $8.8 million, or 15.6% of net sales in the comparable period of fiscal 2016. The increase in selling, general and administrative expenses is primarily due to higher expansion costs related to one of the Company's plant locations, $1.5 million, higher long-term incentive compensation, $0.8 million, higher retention costs of $0.3 million, partially offset by lower legal and professional expense, $1.2 million, associated with the late filing of SIFCO's fiscal 2015 annual report on Form 10-K and lower information technology expenses in the current year, $0.5 million.

Amortization of Intangibles

Amortization of intangibles decreased $0.2 million to $1.1 million during the first six months of fiscal 2017, compared with $1.3 million in the comparable period of fiscal 2016. The decrease was due to the completion of the estimated useful life assigned to a below-market lease and non-compete agreement at one of the Company’s locations in the prior period.

Other/General

Interest expense increased $0.4 million to $1.2 million in the first six months of fiscal 2017, compared with $0.8 million in the same period in fiscal 2016. The increase is primarily due to a $0.2 million write-off of deferred financing costs associated with the Company’s Amended and Restated Agreement with its lender and higher interest expense related to increased borrowing on the Company's revolving credit facility. See Note 4 - Debt - for further information.

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 2017 and 2016. The Company entered into an interest rate swap as discussed in Note 1 of the notes to the unaudited consolidated condensed statements. The interest rate swap in the prior year was entered into at the end of March 2016:

Other income, net, consists principally of $0.2 million of rental income earned from the lease of the Company's Cork, Ireland facility in both the first six months of fiscal 2017 and 2016.

Income Taxes

The Company’s effective tax rate in the first six months of fiscal 2017 was (6)%, compared with 43% in the comparable period in fiscal 2016. This decrease is primarily attributable to a year-to-date U.S. loss with no tax benefit due to a valuation allowance in fiscal 2017. Additionally, in fiscal 2016, the effective tax rate was higher in comparison to fiscal 2017 driven by discrete tax benefits of $461 primarily related to tax 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 primarily due to the valuation allowance against the Company’s U.S. deferred tax assets and income in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate.

Net Loss

Net loss was $4.3 million during the first six months of fiscal 2017, compared with net loss of $2.9 million in the comparable period of fiscal 2016.  Net loss increased primarily due to the items noted above.

Three Months March 31, 2017 compared with Three Months Ended March 31, 2016

Total net sales for the Company increased $2.2 million in the second quarter of fiscal 2017 compared with the comparable period of fiscal 2016. The increase in fixed wing aircraft sales is primarily due to changes in build demand of SAAB for the Boeing 787, UTAS Troy for the JSF F35 and Hamilton Sundstrand for military spares. These increases were partially offset by a decline in demand of the 737NG and V2500 programs. Rotorcraft sales increased due to our customer's recovery from inventory destocking

efforts in the second quarter of 2016. Energy components for power generation units increased by $0.3 million compared to the same period last year due to higher market demand of turbine engines at our Maniago location. Commercial product and other revenue decreased mainly due to the timing of the orders with the Hellfire II missile program.

Commercial net sales were 59.5% of total net sales and military net sales were 40.5% of total net sales in the second quarter of fiscal 2017, compared with 61.9% and 38.1%, respectively, in the comparable period of fiscal 2016.  Military net sales increased by $1.6 million to $12.7 million in the second quarter of fiscal 2017, compared with $11.1 million in the comparable period of fiscal 2016, primarily due to the change in build rates for the JSF F35, spares and a customer's buffering plan for a plant closure and recovery from inventory destocking.  Commercial net sales increased $0.6 million to $18.6 million in the second quarter of fiscal 2017, compared with $18.0 million in the comparable period of fiscal 2016 primarily due to the changes in build rates to the programs mentioned above. 

Cost of Goods Sold

Cost of goods sold increased by $2.1 million, or 8.3% to $27.6 million, or 88.3% of net sales, during the second quarter of fiscal 2017, compared with $25.5 million or 87.7% of net sales, in the comparable period of fiscal 2016. The increase was due primarily to higher volumes as previously mentioned, as well as inventory cycle count adjustments, $0.2 million, lower of cost or market charges of $0.2 million and employee severance costs of $0.1 million, partially offset by lower excess and obsolescence charges, $0.3 million, as a result of the Company’s efforts to reduce inventory.

Gross Profit

Gross profit increased $0.1 million to $3.7 million during the second quarter of fiscal 2017, compared with $3.6 million in the comparable period of fiscal 2016. Gross margin was 11.7% during the second quarter of fiscal 2017, compared with 12.3% in the comparable period in fiscal 2016. The increase in gross profit was primarily due to higher sales volume, partially offset by inventory adjustments and severance costs as mentioned above.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $4.4 million, or 14.0% of net sales, during the second quarter of fiscal 2017, compared with $3.1 million, or 10.8% of net sales, in the comparable period of fiscal 2016. The increase in selling, general and administrative expenses is primarily due to higher long-term incentive compensation of $1.0 million, higher spending associated with the expansion of one of the Company’s plant locations, $0.7 million, partially offset by lower legal and professional fees of $0.5 million, associated with the late filing of SIFCO's fiscal 2015 annual report on Form 10-K.

Amortization of Intangibles

Amortization of intangibles was $0.6 million during the second quarter of fiscal 2017 and fiscal 2016.

Other/General

Interest expense was $0.5 million in the second quarter of fiscal 2017, compared with $0.4 million in the same period in fiscal 2016.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the second quarter of both fiscal 2017 and 2016:

Other income, net, consists principally of $0.1 million of rental income earned from the lease of the Company's Cork, Ireland facility in both the second quarter of fiscal 2017 and 2016.

Income Taxes

The Company’s effective tax rate in the second quarter of fiscal 2017 is 5%, compared with 44% in the comparable period in fiscal 2016. This decrease is primarily attributable to a U.S. loss with no tax benefit due to a valuation allowance in fiscal 2017. Additionally, in fiscal 2016, the effective tax rate was higher in comparison to fiscal 2017 primarily related 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 the valuation allowance against the

Company’s U.S. deferred tax assets and income in foreign jurisdictions that are taxed at different rates than the U.S. statutory tax rate.

Net Loss

Net loss was $1.7 million during the second quarter of fiscal 2017, compared with net loss of $0.3 million in the comparable period of fiscal 2016. Net loss increased primarily due to the items noted above.

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 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:

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:

B. Liquidity and Capital Resources

Cash and cash equivalents were $1.4 million at March 31, 2017 compared with $0.5 million at September 30, 2016. At March 31, 2017, approximately $0.9 million of the Company’s cash and cash equivalents was in the possession of its non-U.S. subsidiaries.

Operating Activities

The Company’s operating activities from operations provided $5.3 million of cash in the first six months of fiscal 2017, compared with $11.8 million of cash provided by operating activities in the first six months of fiscal 2016. The cash provided by operating activities from operations in the first six months of fiscal 2017 was primarily due to depreciation and amortization of $4.9 million, a net source of working capital of $3.5 million, and $1.1 million of other non-cash items, such as equity based compensation and LIFO effect, partially offset by net loss of $4.3 million. The cash provided for working capital was primarily due to a $2.6 million decrease in inventory as a result of management's focus on inventory management.

The Company’s operating activities from operations provided $11.8 million of cash in the first six months of fiscal 2016. 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 was primarily due to a $6.4 million decrease in accounts receivable and $4.8 million from extended accounts payable partially offset by the net loss of $2.9 million. The Company also

benefited from $4.6 million on non-cash items, such as depreciation and amortization expense, LIFO effect and equity-based compensation expense.

Investing Activities

Cash used for investing activities of operations was $0.9 million in the first six months of fiscal 2017, compared with $1.2 million in the first six months of fiscal 2016. In addition to the $0.9 million expended during the first six months of fiscal 2017, $0.3 million was committed for future capital expense as of March 31, 2017. The Company anticipates that total fiscal 2017 capital expenditures will be within the range of $2.0 million to $2.5 million and will relate principally to the further enhancement of production and product offering capabilities, operating cost reductions and expansion of one of the Company’s plant locations.

Financing Activities

Cash used by financing activities was $3.5 million in the first six months of fiscal 2017, compared with cash used for financing activities of $10.3 million in the first six months of fiscal 2016.

On November 9, 2016, the Company entered into an Amended and Restated Credit and Security agreement (“Credit Facility”) with its Lender. The new Credit Facility matures on June 25, 2020 and consists of senior secured loans in the aggregate principal amount of up to $39.9 million. The Credit Facility is comprised of (i) a senior secured revolving credit facility of a maximum borrowing amount of $35.0 million, including swing line loans and letters of credit provided by the Lender and (ii) senior secured term loan facility in the amount of $4.9 million (the “Term Facility”). The new Term Facility is repayable in monthly installments of $0.1 million which began December 1, 2016. The terms of the Credit Facility contain both a lockbox arrangement and a subjective acceleration clause. As a result, the amounts outstanding on the revolving credit facility are classified as a short term liability. The amounts borrowed under the Credit Facility were used to repay the amounts previously outstanding under the Company’s existing Credit Agreement as of September 30, 2016 and for working capital, general corporate purposes and to pay fees and expenses associated with this transaction. In connection with entering into the Credit Facility, the Company terminated its interest rate swap agreement with the Lender. See Note 4 - Debt - for further discussion. The Company entered into its First Amendment Agreement ("First Amendment") to the Credit Facility on February 16, 2017. The First Amendment assigned its Lender as Administrative Agent and assigned portion of its Credit Facility to another participating Lender.

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 Amended and Restated Agreement. The revolver has a rate based on LIBOR plus a 3.75% spread and a prime rate which resulted in a weighted average rate of 4.7% at March 31, 2017 and the term loan has a rate of 5.1% at March 31, 2017, which was based on LIBOR plus a 4.25% spread. This rate becomes an effective fixed rate of  5.8%  after giving effect to the interest rate swap agreement. There is also a commitment fee ranging from 0.15% to 0.375% to be incurred on the unused balance.

Under the Company's Credit Facility, the Company is subject to certain customary loan covenants. These include, without limitation, covenants that require maintenance of certain specified financial ratios, including that the Company meeting a minimum EBITDA and maintaining a minimum fixed charge coverage ratio (to start on September 30, 2017). In the event of a default, we may not be able to access our revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities.

The Company was in compliance with loan covenants required to be met as of March 31, 2017 .

Prior to the new Credit Facility, on June 26, 2015, the Company entered a Credit and Security Agreement (the "2015 Credit Agreement") with its Lender. The credit facility was comprised of (i) a five -year revolving credit facility with a maximum borrowing amount of up to $25.0 million, which reduced to $20.0 million on January 1, 2016, and (ii) a five -year term loan of $20.0 million.  Amounts borrowed under the credit facility were secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 65% of the stock of its non-U.S. subsidiaries. The term loan was repayable in quarterly installments of $714 starting September 30, 2015. The amounts borrowed under the 2015 Credit Agreement were used to repay the Company's previous revolver and term note, to fund the acquisition of the Maniago, Italy location and for working capital and general corporate purposes. The 2015 Credit Agreement also had an accordion feature, which allowed the Company to increase the availability by up to $15.0 million upon consent of the existing lenders or upon additional lenders being joined to the facility. Borrowings bore interest at the LIBOR rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin as set forth in the 2015 Credit Agreement.

The Company incurred debt issuance costs in connection with its 2015 Credit Agree ment in the amount of $0.7 million. However, with the Credit Facility, the Company incurred an additional $0.5 million of costs and wrote off $0.2 million of debt issuance costs as it relates to the term note. See Note 4 - Debt - for further discussion.

Future cash flows from the Company’s operations will be used to pay down amounts outstanding under the Amended and Restated 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 Facility.

C. Impact of Recently Issued Accounting Standards

In May 2014, and as subsequently updated (Accounting Standards Update ("ASU") 2016-20 being most recent), the Financial Accounting Standards Board ("FASB") issued new accounting guidance that creates a single revenue recognition model, while clarifying the principles for recognizing revenue. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods. The Company will adopt the new guidance on October 1, 2018. The Company is planning a bottoms up approach to analyze the standard's impact on its revenues by looking at historical policies and practices and identifying the differences from applying the new standard to its revenue stream. The Company has not determined the effect of the standard to its consolidated condensed financial statements.

In March 2016, the FASB issued ASU 2016-09, 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 has considered the potential implications of adoption of the ASU and due to the valuation allowance recorded at September 30, 2016 in the U.S., the Company does not expect a material impact from a tax perspective. The Company is still evaluating other non-tax components it may have on its consolidated condensed financial statements.

In October 2016, the FASB issued ASU 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated condensed financial statements together with evaluating the adoption date.

In November 2016, the FASB issued ASU 2016-18 requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is currently evaluating its plans regarding the adoption, but does not feel that this ASU is expected to have a material impact to the consolidated condensed statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations, which clarified existing guidance on the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Early adoption is permitted and the guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. The Company is currently evaluating the potential impact on its consolidated condensed financial statements.

In March 2017, the FASB issued ASU 2017-07, which relates to pension related costs that require an entity to report the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs. The other components of the net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside of any subtotal of operating income. Additionally, only the service cost component will be eligible for capitalization in assets. The ASU is effective for October 1, 2018, early adoption is permitted and the ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively for the capitalization of the service cost component. The amendment allows for a practical expedient that permits an employer to use the amounts disclosed in its pension and other post-retirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company will need to disclose that the practical expedient was used. The Company is currently evaluating the impact it may have on its consolidated condensed financial statements, together with evaluating the adoption date.

D. Recently Adopted Accounting Standards

In January 2017, the FASB issued ASU 2017-04, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The Company performs Step 1 of the annual or interim goodwill impairment test by comparing

the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the fair value, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU must be applied prospectively and is effective for any annual and interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company has elected to early adopt.