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 June 30, 2017
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, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
ý
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨     
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 June 30, 2017 was 5,595,779.



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 
 June 30,

Nine Months Ended 
 June 30,
 
2017

2016

2017

2016
Net sales
$
30,167


$
31,004


$
92,942


$
87,240

Cost of goods sold
26,599


28,009


81,546


78,574

Gross profit
3,568


2,995


11,396


8,666

Selling, general and administrative expenses
3,918


4,157


13,617


12,907

Asset impairment
4,366

 
—

 
4,366

 
—

Amortization of intangible assets
579


633


1,744


1,961

(Gain) loss on disposal of operating assets
3


—


(3
)

32

Operating loss
(5,298
)

(1,795
)

(8,328
)

(6,234
)
Interest income
(12
)

(9
)

(42
)

(41
)
Interest expense
464


428


1,682


1,273

Foreign currency exchange loss (gain), net
(6
)

(8
)

11


27

Other income, net
(110
)

(107
)

(324
)

(322
)
Loss from operations before income tax expense (benefit)
(5,634
)

(2,099
)

(9,655
)

(7,171
)
Income tax expense (benefit)
568


(1,049
)

812


(3,224
)
Net loss
$
(6,202
)

$
(1,050
)

$
(10,467
)

$
(3,947
)
















Net loss per share







Basic
$
(1.13
)

$
(0.19
)

$
(1.91
)

$
(0.72
)
Diluted
$
(1.13
)

$
(0.19
)

$
(1.91
)

$
(0.72
)












Weighted-average number of common shares (basic)
5,499


5,466


5,480


5,460

Weighted-average number of common shares (diluted)
5,499


5,466


5,480


5,460

See notes to unaudited consolidated condensed financial statements.

2



SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Comprehensive Loss
(Unaudited)
(Amounts in thousands)
 
Three Months Ended 
 June 30,
 
Nine Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(6,202
)
 
$
(1,050
)
 
$
(10,467
)
 
$
(3,947
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
1,132

 
(443
)
 
329

 
(128
)
Retirement plan liability adjustment, net of tax
217

 
134

 
665

 
390

Interest rate swap agreement adjustment, net of tax
(1
)
 
(50
)
 
30

 
(50
)
Comprehensive loss
$
(4,854
)
 
$
(1,409
)
 
$
(9,443
)
 
$
(3,735
)
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)
 
 
June 30, 
 2017
 
September 30, 
 2016
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,099

 
$
471

Receivables, net of allowance for doubtful accounts of $328 and $706, respectively
26,408

 
25,158

Inventories, net
23,798

 
28,496

Refundable income taxes
319

 
1,773

Prepaid expenses and other current assets
1,863

 
2,177

Assets held for sale
1,447

 
—

Total current assets
54,934

 
58,075

Property, plant and equipment, net
42,219

 
48,958

Intangible assets, net
7,131

 
11,138

Goodwill
11,874

 
11,748

Other assets
284

 
538

Total assets
$
116,442

 
$
130,457

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
7,545

 
$
18,258

Revolving credit agreement
20,387

 
12,751

Accounts payable
14,048

 
14,520

Accrued liabilities
5,325

 
5,234

Total current liabilities
47,305

 
50,763

Long-term debt, net of current maturities
6,241

 
7,623

Deferred income taxes
3,144

 
2,929

Pension liability
7,917

 
8,341

Other long-term liabilities
458

 
431

Shareholders’ equity:
 
 
 
Serial preferred shares, no par value, authorized 1,000 shares
—

 
—

Common shares, par value $1 per share, authorized 10,000 shares; issued and outstanding shares – 5,596 at June 30, 2017 and 5,525 at September 30, 2016
5,596

 
5,525

Additional paid-in capital
9,598

 
9,219

Retained earnings
48,009

 
58,476

Accumulated other comprehensive loss
(11,826
)
 
(12,850
)
Total shareholders’ equity
51,377

 
60,370

Total liabilities and shareholders’ equity
$
116,442

 
$
130,457

See notes to unaudited consolidated condensed financial statements.

4



SIFCO Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited, Amounts in thousands)

Nine Months Ended 
 June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(10,467
)
 
$
(3,947
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,526

 
8,021

Amortization and write-off of debt issuance cost
382

 
109

(Gain) loss on disposal of operating assets
(3
)
 
32

Asset impairment
4,366

 
—

LIFO expense (benefit)
204

 
(144
)
Share transactions under company stock plan
450

 
(406
)
Purchase price inventory adjustment
—

 
266

Other
—

 
(101
)
Other long-term liabilities
295

 
201

Deferred income taxes
185

 
619

Changes in operating assets and liabilities:
 
 
 
Receivables
(1,062
)
 
6,660

Inventories
4,595

 
(1,555
)
Refundable taxes
1,455

 
(91
)
Prepaid expenses and other current assets
626

 
(268
)
Other assets
255

 
32

Accounts payable
(1,172
)
 
2,534

Other accrued liabilities
(500
)
 
(79
)
Accrued income and other taxes
542

 
(508
)
Net cash provided by operating activities
7,677

 
11,375

Cash flows from investing activities:
 
 
 
Acquisition of business
—

 
270

Proceeds from disposal of operating assets
70

 
—

Capital expenditures
(1,598
)
 
(2,034
)
Net cash used for investing activities
(1,528
)
 
(1,764
)
Cash flows from financing activities:
 
 
 
Payments on long term debt
(13,659
)
 
(3,866
)
Proceeds from revolving credit agreement
63,628

 
35,533

Repayments of revolving credit agreement
(55,992
)
 
(40,320
)
Payment of debt issue costs
(498
)
 
—

Short-term debt borrowings
2,649

 
1,904

Short-term debt repayments
(1,650
)
 
(2,728
)
Net cash used for financing activities
(5,522
)
 
(9,477
)
Increase in cash and cash equivalents
627

 
134

Cash and cash equivalents at the beginning of the period
471

 
667

Effect of exchange rate changes on cash and cash equivalents
1

 
18

Cash and cash equivalents at the end of the period
$
1,099

 
$
819

Supplemental disclosure of cash flow information of operations:
 
 
 
Cash paid for interest
$
(1,224
)
 
$
(1,059
)
Cash refund for income taxes, net
1,425

 
2,885

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 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, with the exception of the following:

Restructuring Costs
On May 31, 2017, the Company approved the decision to close its Alliance, Ohio ("Alliance") manufacturing plant as disclosed in the June 1, 2017 Form 8-K, as amended on July 17, 2017. The closure is a result of decreased sales from a key customer, which led to the reduction in sales volumes at this location. This closure falls in line with management's key strategic initiatives to make organizational and operational changes needed to improve profitability. Orders after September 30, 2017 will be processed and manufactured by its Cleveland, Ohio ("Cleveland") location. Alliance will continue to manufacture products through September 30, 2017. As a result of the announcement of the decision to close Alliance, $ 4,430 non-cash costs were incurred, of which $4,366 relates to asset impairment discussed below and $ 64 accelerated depreciation of assets due to useful lives been reassessed as of June 30, 2017. The remaining estimated exit costs are to be expensed as incurred, which include workforce reduction costs and accelerated depreciation costs totaling approximately $ 413 .

Asset Impairment
The announcement of the decision to close Alliance resulted in a triggering event, requiring an interim impairment analysis to be performed by the Company. In accordance with Accounting Standard Codification ("ASC") 360 and ASC 350, the Company performed an interim impairment test of Alliance's goodwill and an impairment test of Alliance's long-lived assets.

As required by ASC 360, an impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The Company used May 31, 2017 as the triggering date to evaluate the carrying values and test for recoverability of the Alliance machinery and equipment, customer list and trade name. The fair value of the assets was estimated using Level 2 and Level 3 inputs based on the orderly liquidation value as determined by a third party appraisal (a decision to sell has not been determined) and undiscounted cash flows. As a result of the analysis, the Company recorded an asset impairment charge at Alliance of $ 4,366 , which is labeled as asset impairment in the consolidated condensed statement of operations; $ 2,077 of the total impairment charge related to machinery and equipment and the remaining $ 2,289 related to intangible assets.

As noted above, the announcement of the decision to close Alliance and the transfer of future orders to the Cleveland plant resulted in the re-allocation of goodwill from the Alliance reporting unit to the Cleveland reporting unit. This triggering event requires an interim impairment test to be performed at the Cleveland reporting unit as of May 31, 2017 as required by ASC 350. The carrying value of the reporting unit, inclusive of assigned goodwill, was compared to its fair value using the market and income approach to estimate the fair value of this reporting unit.  Significant assumptions inherent in the valuation methodologies for goodwill were employed and include, but are not limited to, prospective financial information, growth rates, terminal value and discount rates

6



and requires the Company to make certain assumptions and estimates regarding industry economic factors and future profitability of its business. When performing the income and market approach for the reporting unit, SIFCO incorporated the use of projected financial information and a discount rate that was developed using market participant based assumptions.  The cash flow projections are based on five-year financial forecasts developed by management that include revenue projections, capital spending trends, and investment in working capital to support anticipated revenue growth.  The selected discount rate considers the risk and nature of the reporting unit's cash flows and ratios of return that market participants would require to invest their capital in our plant. 

Although the Company believes its assumptions are reasonable, actual results may vary significantly and may expose the Company to material impairment charges in the future.  The methodology for determining fair values was consistent for the periods presented. 
Based on this quantitative test, we determined that the fair value (using Level 3 inputs) of this reporting unit exceeded the carrying value; as such there was no goodwill impairment.

Asset Held for Sale
As noted within the Company's 2016 Form 10-K, the Company's Irish subsidiary sold its operating business in June 2007, but retained ownership of its Cork, Ireland building. This property is subject to a lease arrangement with the acquirer of the business that expires in June 2027. At June 30, 2017, the Company has a formal plan to sell the Irish building which represents the assets held for sale in the consolidated condensed balance sheets. The Company expects to sell this asset within the next 12 months.
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. Due to the net loss for each reporting period, zero restricted shares are included because the effect would be anti-dilutive. The dilutive effect of the Company’s restricted shares and performance shares were as follows:
 
Three Months Ended 
 June 30,
 
Nine Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(6,202
)
 
$
(1,050
)
 
$
(10,467
)
 
$
(3,947
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (basic)
5,499

 
5,466

 
5,480

 
5,460

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted shares
—

 
—

 
—

 
—

Weighted-average common shares outstanding (diluted)
5,499

 
5,466

 
5,480

 
5,460

 
 
 
 
 
 
 
 
Net loss per share – basic:
$
(1.13
)
 
$
(0.19
)
 
(1.91
)
 
(0.72
)
 
 
 
 
 
 
 
 
Net loss per share – diluted:
$
(1.13
)
 
(0.19
)
 
$
(1.91
)
 
$
(0.72
)
 
 
 
 
 
 
 
 
Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share
98

 
38

 
93

 
23


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 was designated as a cash flow hedge. The agreement was canceled as part of the debt modification on November 9, 2016, as further discussed in Note 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 5 - Debt, below) on November 9, 2016, the Company entered a new interest rate swap on November 30, 2016 to reduce risk related to the variable debt over the life of the new term loan. At June 30, 2017, the Company held one interest rate swap agreement with a notional amount of $ 4,302 . 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 June 30, 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 nominal and $ 30 liability at June 30, 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 is executing a bottom

7



up approach to analyze the standard's impact on its revenues by looking at historical policies and practices and identifying the differences from applying the new standard to its revenue streams. The Company has determined that many of its long-term agreements contain variable consideration clauses and is in the process of quantifying the impact to its consolidated condensed 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 standard requires a modified retrospective transition for capital and operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial adoption. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact on 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 share-based payments. The ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has considered the potential implications of adoption of the ASU and due to the valuation allowance recorded at June 30, 2017 and September 30, 2016 in the U.S., the Company does not expect a material impact from a tax perspective. The Company is still evaluating other non-tax components it may have on its consolidated 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 believe that this ASU would 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 does not expect the adoption of this ASU to have a material 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 would need to disclose if the practical expedient was used. The Company is currently evaluating the impact it may have on its consolidated condensed financial statements and it does not plan to early adopt the ASU.

In May 2017, the FASB issued ASU 2017-09, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on October 1, 2018, with early adoption

8



permitted. This new guidance is not expected to have an impact on the Company’s consolidated condensed financial statements as it is not the Company’s practice to change either the terms or conditions of share-based payment awards once they are granted.

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 adopted the standard in its second quarter of fiscal 2017.
2.
Inventories
Inventories consist of:
 
June 30, 
 2017
 
September 30, 
 2016
Raw materials and supplies
$
6,580

 
$
7,724

Work-in-process
8,826

 
10,459

Finished goods
8,392

 
10,313

Total inventories
$
23,798

 
$
28,496

Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for 36% and 44% of the Company’s inventories at June 30, 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 $8,231 and $8,026 higher than reported at June 30, 2017 and September 30, 2016 , respectively.
3.
Intangibles

The Company’s intangible assets by major asset class subject to amortization as of:
June 30, 2017
Weighted Average Life,
 
Original
Cost
 
Accumulated
Amortization
 
Impairment
 
Currency Translation
 
Net Book
Value
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trade name
8 years
 
$
2,776

 
$
1,496

 
$
310

 
$
3

 
$
973

Non-compete agreement
5 years
 
1,600

 
1,579

 
—

 
—

 
21

Technology asset
5 years
 
1,869

 
643

 
—

 
7

 
1,233

Customer relationships
10 years
 
15,568

 
8,701

 
1,979

 
16

 
4,904

Total intangible assets
 
 
$
21,813

 
$
12,419

 
$
2,289

 
$
26

 
$
7,131

 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
 

 
 
 
 
 
 
 
 
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trade name
8 years
 
$
2,776

 
$
1,240

 
$
—

 
$
9

 
$
1,545

Non-compete agreement
5 years
 
1,600

 
1,547

 
—

 
—

 
53

Below market lease
5 years
 
900

 
900

 
—

 
—

 
—

Technology asset
5 years
 
1,869

 
389

 
—

 
37

 
1,517

Customer relationships
10 years
 
15,568

 
7,571

 
—

 
26

 
8,023

Total intangible assets
 
 
$
22,713

 
$
11,647

 
$
—

 
$
72

 
$
11,138


The amortization expense on identifiable intangible assets for the nine months ended fiscal 2017 and 2016 was $ 1,744 and $ 1,961 , respectively and $ 579 and $633 for the three months ended 2017 and 2016, respectively.


9



Amortization expense associated with the identified intangible assets is expected to be as follows:
 
Amortization
Expense
Fiscal year 2017 (July 1 to September 30, 2017)
$
416

Fiscal year 2018
1,660

Fiscal year 2019
1,643

Fiscal year 2020
1,503

Fiscal year 2021
1,004


See Note 1 for further discussion on asset impairment charges incurred as of June 30, 2017 due to the approval for the decision to close Alliance.
4.     Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
 
June 30, 
 2017
 
September 30, 
 2016
Foreign currency translation adjustment
$
(5,295
)
 
$
(5,623
)
Retirement plan liability adjustment, net of tax
(6,531
)
 
(7,197
)
Interest rate swap agreement adjustment, net of tax
—

 
(30
)
Total accumulated other comprehensive loss
$
(11,826
)
 
$
(12,850
)
5.     Debt
Debt consists of:  

June 30, 
 2017

September 30, 
 2016
Revolving credit agreement
$
20,387


$
12,751

Foreign subsidiary borrowings
9,158

 
9,540

Capital lease obligations
377

 
153

 
 
 
 
Term loan
4,302


16,429

   Less: unamortized debt issuance cost
(51
)
 
(241
)
Term loan less unamortized debt issuance cost
4,251

 
16,188

Total debt
34,173

 
38,632

 
 
 
 
Less – current maturities
(27,932
)

(31,009
)
Total long-term debt
$
6,241


$
7,623

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 consisted of secured loans in an aggregate principal amount of up to $39,871 . The Credit Facility was 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 , which commenced 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 2015 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 a participating Lender.
Borrowings bear interest at the LIBOR rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin as set forth 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 4.6% at June 30, 2017 and the term loan has a rate of 5.3% at June 30, 2017, which was based on LIBOR plus a 4.25% spread. This rate becomes an

10



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 the maintenance of a minimum fixed charge coverage ratio to commence on September 30, 2017. On August 4, 2017, the Company entered into its Second Amendment Agreement ("Second Amendment") with its lender to (i) amend certain definitions within its Credit Facility to, among other things, effect the changes described herein and to reset the Fixed Charge Coverage Ratio (as defined in the Credit Facility) to build to a trailing four quarters in each of the fiscal 2018 quarters, commencing with the quarter ended December 31, 2017; (ii) replace certain of its financial covenants outlined in the description of Credit Facility and amend its financial covenants with a revised minimum EBITDA for the four fiscal quarters ending September 30, 2017 and to maintain a fixed charge coverage ratio commencing on December 31, 2017; (iii) reduce its maximum revolving amount of $35,000 to $30,000 ; and (iv) the Company must use its cash proceeds from the sale of the Irish building discussed in Note 1 Asset Held for Sale to reduce the Term Facility by $ 700 and use the remaining proceeds to reduce the revolver. The Second Amendment, as described above, waived compliance requirements with its loan covenants as of June 30, 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 June 30, 2017 and September 30, 2016, the total foreign debt borrowings (excluding capital leases) were $ 9,158 and $ 9,540 , respectively, of which $ 6,481 and $5,833 , respectively is the current portion. Current debt as of June 30, 2017 and September 30, 2016, consist of $ 3,856 and $ 3,262 of short-term borrowings, $ 1,483 and $ 2,014 is the current portion of long-term debt, and $ 1,142 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. The carrying value of the receivables pledged as collateral were $ 1,790 and $ 1,156 at June 30, 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:
 
 
Minimum long-term debt payments
 
 
 
2017 (July 1 to September 30, 2017)
 
$
671

2018
 
2,269

2019
 
2,153

2020
 
3,117

2021
 
256

 Total minimum long-term debt payments
 
$
8,466






11



Debt issuance costs
The Company incurred debt issuance costs related to 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 $ 10 at June 30, 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 $ 232 at June 30, 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:  
 
Capital Leases
2017 (July 1 to September 30, 2017)
$
27

2018
123

2019
113

2020
66

2021
66

Thereafter
15

Total minimum lease payments
$
410

 Less: Amount representing interest
$
(33
)
Present value of minimum lease payments
$
377


Amortization of the cost of equipment under capital leases is included in depreciation expense. Assets recorded under capital leases consist of the following:
 
June 30, 
 2017
 
September 30, 
 2016
Machinery and equipment
$
541

 
$
250

Accumulated depreciation
(131
)
 
(60
)
6. 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 nine months of fiscal 2017 was (10)% , compared with 45% 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 $ 568 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.

12



7.
Retirement Benefit Plans
The Company and certain of its subsidiaries sponsor defined benefit pension plans covering some of its employees. The components of net periodic benefit cost of the Company’s defined benefit plans are as follows:
 
Three Months Ended 
 June 30,
 
Nine Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
78

 
$
69

 
$
235

 
$
209

Interest cost
221

 
256

 
662

 
767

Expected return on plan assets
(404
)
 
(407
)
 
(1,211
)
 
(1,222
)
Amortization of net loss
215

 
210

 
646

 
630

Net periodic cost
$
110

 
$
128

 
$
332

 
$
384

During the nine months ended June 30, 2017 and 2016, the Company made no contributions to its defined benefit pension plans. The Company has carryover balances from previous periods that have been 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 making cash contributions above the minimum funding requirement to fund its defined benefit pension plans during the balance of fiscal 2017.
8.
Stock-Based Compensation
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 nine months of fiscal 2017, one award for 10 performance shares under the 2007 Plan vested, of which 4 performance shares were tendered back to the Company to cover payroll taxes. 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 . 24 performance shares and 7 restricted shares were forfeited.
The Company has awarded restricted shares to its directors, officers, and other employees of the Company. The restricted shares were valued at the closing market price of the Company’s common shares on the date of the grant, and such value was recorded as unearned compensation. The unearned compensation is being amortized ratably over the restricted stock vesting period of one year or three years.
During the first nine months 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 391 shares that remain available for award at June 30, 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.

13



Stock-based compensation under the 2007 Plan was $484 expense and $236 benefit during the first nine months of fiscal 2017 and 2016, respectively and expense of $139 and $ 228 for the third quarter of fiscal 2017 and 2016, respectively. As of June 30, 2017 , there was $962 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 1.8 years.
9.
Commitments and Contingencies
In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters; however, it does not believe any such matters are material to its financial condition or results of operations. The Company maintains various liability insurance coverages to protect its assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it is possible that the Company’s future operating results could be affected by future costs of litigation.
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, the 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.
10.
Subsequent Events
On August 4, 2017, the Company entered into its Second Amendment with its lender. See Note 5 Debt for further discussion on the Second Amendment.
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.

14



The Company operates within a cost structure that includes a significant fixed component. Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage the fixed component of their respective cost structures. Conversely, the opposite effect is expected to occur at lower net sales and related production volumes.
A. Results of Operations
Overview
The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and armored military vehicles; (ii) airframe applications for a variety of aircraft; (iii) industrial gas and steam turbine engines for power generation units; and (iv) other commercial applications. In June 2017, the Company announced the decision to close the Alliance, Ohio ("Alliance") location. The closure is a result of decreased sales from a key customer. This closure falls in line with management's key strategic initiatives to make organizational and operational changes needed to improve profitability. Orders after September 30, 2017 will be processed and manufactured by its Cleveland, Ohio ("Cleveland") location. Alliance will continue to manufacture product through September 30, 2017. As a result of the announcement of the decision to close Alliance, $4.5 million of non-cash costs were incurred, of which $4.4 million relates to asset impairment discussed below within the nine months and three months sections and $0.1 million accelerated depreciation of assets due to useful lives being reassessed as of June 30, 2017. The remaining estimated exit costs are to be expensed as incurred, which include workforce reduction costs and accelerated depreciation costs totaling approximately $0.4 million.

Nine Months Ended June 30, 2017 compared with Nine Months Ended June 30, 2016

Net Sales
Net sales for the first nine months of fiscal 2017 increased 6.5% to $92.9 million, compared with $87.2 million in the comparable period of fiscal 2016. Net sales comparative information for the first nine months of fiscal 2017 and 2016 is as follows:
(Dollars in millions)
Nine Months Ended
June 30,
 
Increase/(Decrease)

Net Sales
2017
 
2016
 
Aerospace components for:
 
 
 
 
 
Fixed wing aircraft
$
43.9

 
$
45.8

 
$
(1.9
)
Rotorcraft
15.2

 
13.9

 
1.3

Energy components for power generation units
26.0

 
23.1

 
2.9

Commercial product and other revenue
7.8

 
4.4

 
3.4

Total
$
92.9

 
$
87.2

 
$
5.7

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. Energy components for power generation units increased by $2.9 million compared with the same period last year mainly due to higher market demand of turbine engine components at our Maniago location partially offset by lower demand of our largest customer at the Alliance location. Rotorcraft sales increased to $15.2 million in the first nine months of fiscal 2017 from $13.9 million in the comparable period of fiscal 2016 due to a customer's inventory destocking efforts which impacted fiscal 2016. The decrease in fixed wing aircraft sales is primarily due to changes in build demand of Rolls Royce AE Engines due to a buffering plan for a customer plant closure, and a decline in demand of the 737NG, 777 and V2500 programs.
Commercial net sales were 59.3% of total net sales and military net sales were 40.7% of total net sales in the first nine months of fiscal 2017, compared with 62.4% and 37.6%, respectively, in the comparable period in fiscal 2016.  Military net sales increased by $5.0 million to $37.8 million in the first nine months of fiscal 2017, compared with $32.8 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 a destocking program which impacted the fiscal 2016 period.  Commercial net sales increased $0.7 million to $55.1 million in the first nine months of fiscal 2017, compared with $54.4 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 $3.0 million, or 3.8%, to $81.5 million, or 87.7% of net sales, during the first nine months of fiscal 2017, compared with $78.6 million or 90.1% of net sales, in the comparable period of fiscal 2016. The increase was due primarily to higher volumes as previously mentioned, $0.4 million increase in scrap expense and $0.3 million in employee severance charges.


15



Gross Profit
Gross profit increased $2.7 million to $11.4 million during the first nine months of fiscal 2017, compared with $8.7 million in the comparable period of fiscal 2016. Gross margin percent of sales was 12.3% during the first nine months of fiscal 2017, compared with 9.9% in the comparable period in fiscal 2016. The increase in gross profit was primarily due to higher sales volume partially offset by higher scrap expense and employee severance charges.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $13.6 million, or 14.7% of net sales during the first nine months of fiscal 2017, compared with $12.9 million, or 14.8% of net sales in the comparable period of fiscal 2016. The increase in selling, general and administrative expenses is primarily due to $1.4 million in higher expansion costs related to one of the Company's plant locations, $0.7 million in higher long-term incentive compensation, and higher retention costs of $0.2 million, partially offset by lower legal and professional expense, $1.2 million, due to higher expenses in fiscal 2016 with the late filing of SIFCO's fiscal 2015 annual report on Form 10-K and lower information technology expenses in the current year, $0.6 million.
Amortization of Intangibles and Asset Impairment of Long-lived Assets
Amortization of intangibles decreased $0.2 million to $1.7 million during the first nine months of fiscal 2017, compared with $2.0 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.

There were asset impairment charges of long-lived assets of $4.4 million during the first nine months of fiscal 2017, $2.1 million relates to machinery and equipment and $2.3 million relates to definite-lived intangible assets. As further discussed in Note 1, the Company announced the decision to close Alliance during the quarter, which resulted in the impairment of these assets.
Other/General
Interest expense increased $0.4 million to $1.7 million in the first nine months of fiscal 2017, compared with $1.3 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 5 - 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 nine 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:
 
Weighted Average
Interest Rate
Nine Months Ended
June 30,
 
Weighted Average
Outstanding Balance
Nine Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Revolving credit agreement
4.6
%
 
3.7
%
 
$ 21.7 million
 
$ 14.1 million
Term note
5.0
%
 
3.5
%
 
$ 6.3 million
 
$ 18.6 million
Foreign term debt
2.9
%
 
2.5
%
 
$ 9.6 million
 
$ 12.4 million
Other income, net, consists principally of $0.3 million of rental income earned from the lease of the Company's Cork, Ireland facility in both the first nine months of fiscal 2017 and 2016. See Note 1 - Summary of Significant Accounting Policies for further discussion on Irish building being classified as asset held for sale at June 30, 2017.
Income Taxes
The Company’s effective tax rate in the first nine months of fiscal 2017 was (10)%, compared with 45% 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 $568 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 $10.5 million during the first nine months of fiscal 2017, compared with net loss of $3.9 million in the comparable period of fiscal 2016.  Net loss increased primarily due to the asset impairment charges, plant expansion costs, tax expense of $0.8 million due to a full valuation allowance compared with a tax benefit of $3.2 million and the items noted above.

16



Three Months June 30, 2017 compared with Three Months Ended June 30, 2016

Net Sales
Net sales for the third quarter of fiscal 2017 decreased 2.7% to $30.2 million, compared with $31.0 million in the comparable period of fiscal 2016. Net sales comparative information for the third quarter of fiscal 2017 and 2016 is as follows:
(Dollars in millions)
Three Months Ended
June 30,
 
Increase (Decrease)

Net Sales
2017
 
2016
 
Aerospace components for:
 
 
 
 
 
Fixed wing aircraft
$
12.3

 
$
16.4

 
$
(4.1
)
Rotorcraft
4.7

 
4.8

 
(0.1
)
Energy components for power generation units
10.4

 
8.6

 
1.8

Commercial product and other revenue
2.8

 
1.2

 
1.6

Total
$
30.2

 
$
31.0

 
$
(0.8
)
Total net sales for the Company decreased $0.8 million in the third quarter of fiscal 2017 compared with the comparable period of fiscal 2016. The decrease in fixed wing aircraft sales is primarily due to Rolls Royce AE engine procurement timing, availability of raw material which caused a gap in production and a decline in demand of the 737NG and 777 programs. Energy components for power generation units increased by $1.8 million compared to the same period last year due to higher market demand of turbine engine components at our Maniago location partially offset by lower demand of our largest customer in Alliance. Commercial product and other revenue increased mainly due to the timing of the orders with the Hellfire II missile program.
Commercial net sales were 65.1% of total net sales and military net sales were 34.9% of total net sales in the third quarter of fiscal 2017, compared with 60.9% and 39.1%, respectively, in the comparable period of fiscal 2016.  Military net sales decreased by $1.6 million to $10.5 million in the third quarter of fiscal 2017, compared with $12.1 million in the comparable period of fiscal 2016, primarily due to Rolls Royce AE engine procurement timing partially offset by timing of orders with the Hellfire II.  Commercial net sales increased $0.8 million to $19.7 million in the third quarter of fiscal 2017, compared with $18.9 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 decreased by $1.4 million, or 5.0% to $26.6 million, or 88.2% of net sales, during the third quarter of fiscal 2017, compared with $28.0 million or 90.3% of net sales, in the comparable period of fiscal 2016. The decrease was due primarily to lower volumes as previously mentioned.
Gross Profit
Gross profit increased $0.6 million to $3.6 million during the third quarter of fiscal 2017, compared with $3.0 million in the comparable period of fiscal 2016. Gross margin was 11.8% during the third quarter of fiscal 2017, compared with 9.7% in the comparable period in fiscal 2016. The increase in gross profit was primarily due to product mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3.9 million, or 13.0% of net sales, during the third quarter of fiscal 2017, compared with $4.2 million, or 13.4% of net sales, in the comparable period of fiscal 2016. The decrease in selling, general and administrative expenses is primarily due to $0.1 million in lower long-term incentive compensation, $0.1 million of lower legal and professional fees and $0.1 million lower in information technology expenses.
Amortization of Intangibles and Asset Impairment of Long-lived Assets
Amortization of intangibles was $0.6 million during the third quarter of fiscal 2017 and fiscal 2016.

There were asset impairment charges of long-lived assets of $4.4 million during the third quarter of fiscal 2017, $2.1 million relates to machinery and equipment and $2.3 million relates to definite-lived intangible assets. As further discussed in Note 1, the Company announced the decision to close Alliance during the quarter, which resulted in the impairment of these assets.
Other/General
Interest expense was $0.4 million in the third quarter of fiscal 2017 and 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 third quarter of both fiscal 2017 and 2016:

17



 
Weighted Average
Interest Rate
Three Months Ended
June 30,
 
Weighted Average
Outstanding Balance
Three Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Revolving credit agreement
4.8
%
 
4.4
%
 
$ 19.8 million
 
$ 13.4 million
Term note
5.8
%
 
3.9
%
 
$ 4.6 million
 
$ 17.9 million
Foreign term debt
2.8
%
 
2.5
%
 
$ 9.1 million
 
$ 11.2 million
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 third quarter of fiscal 2017 and 2016. See Note 1 - Summary of Significant Accounting Policies for further discussion on Irish building being classified as asset held for sale at June 30, 2017.
Income Taxes
The Company’s effective tax rate in the third quarter of fiscal 2017 is (8)%, compared with 50% 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 and a discrete tax benefit recorded during the third quarter of fiscal 2016 related to a reduction in the reserve for uncertain tax positions. 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 $6.2 million during the third quarter of fiscal 2017, compared with net loss of $1.0 million in the comparable period of fiscal 2016. Net loss increased primarily due to the asset impairment incurred in the third quarter.
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:
•
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.




18



The following table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA:
Dollars in thousands
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(6,202
)
 
$
(1,050
)
 
$
(10,467
)
 
$
(3,947
)
Adjustments:
 
 
 
 
 
 
 
Depreciation and amortization expense
2,587

 
2,655

 
7,526

 
8,021

Interest expense, net
452

 
419

 
1,640

 
1,232

Income tax expense (benefit)
568

 
(1,049
)
 
812

 
(3,224
)
EBITDA
(2,595
)
 
975

 
(489
)
 
2,082

Adjustments:
 
 
 
 
 
 
 
Foreign currency exchange loss, net (1)
(6
)
 
(8
)
 
11

 
27

Other income, net (2)
(110
)
 
(107
)
 
(324
)
 
(322
)
(Gain) loss on disposal of operating assets (3)
3

 
—

 
(3
)
 
32

Inventory purchase accounting adjustments (4)
—

 
—

 
—

 
266

Equity compensation (5)
139

 
227

 
484

 
(236
)
Acquisition transaction-related expenses (6)
—

 
—

 
—

 
(94
)
LIFO impact (7)
(21
)
 
(136
)
 
204

 
(144
)
Orange expansion (8)
288

 
388

 
2,171

 
775

Impairment of long-lived assets (9)
4,366

 
—

 
4,366

 
—

Executive search (10)
—

 
—

 
—

 
223

Adjusted EBITDA
$
2,064

 
$
1,339

 
$
6,420

 
$
2,609

(1)
Represents the gain or loss from changes in the exchange rates between the functional currency and the foreign currency in which the transaction is denominated.
(2)
Represents miscellaneous non-operating income or expense, primarily rental income from the Company's Irish subsidiary.
(3)
Represents the difference between the proceeds from the sale of operating equipment and the carrying value shown on the Company’s books.
(4)
Represents accounting adjustments to value inventory at fair market value associated with the acquisition of a business that was charged to cost of goods sold when the inventory was sold.
(5)
Represents the equity-based compensation benefit and expense recognized by the Company under its 2007 Long-Term Incentive Plan due to granting of awards, awards not vesting and/or forfeitures.
(6)
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.
(7)
Represents the increase in the reserve for inventories for which cost is determined using the last-in, first-out (“LIFO”) method.
(8)
Represents costs related to expansion of one of the plant locations that are required to be expensed as incurred.
(9)
Represents impairment charge of long-lived assets incurred at Alliance. See Note 1 within Item 1 of the consolidated condensed financial statements for further discussion.
(10)
Represents cost incurred for executive search as mentioned in its Form 8-K filing on March 18, 2016.

B. Liquidity and Capital Resources
Cash and cash equivalents were $1.1 million at June 30, 2017 compared with $0.5 million at September 30, 2016. At June 30, 2017, approximately $0.7 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 $7.7 million of cash in the first nine months of fiscal 2017, compared with $11.4 million of cash provided by operating activities in the first nine months of fiscal 2016. The cash provided by operating activities in the first nine months of fiscal 2017 was primarily due to depreciation and amortization of $7.5 million, asset impairment of $4.4 million, a net reduction of working capital of $4.7 million, and $1.5 million of other non-cash items, such as equity based compensation and LIFO effect, partially offset by net loss of $10.5 million. The cash provided for working capital was primarily due to a $4.6 million decrease in inventory as a result of management's focus on inventory management.

19



The Company’s operating activities provided $11.4 million of cash in the first nine months of fiscal 2016.  The cash provided by operating activities from operations in the first nine months of fiscal 2016 was primarily due to a $3.9 million net loss offset by a $6.7 million reduction of working capital plus non-cash items.  Cash provided by working capital is primarily due to a $6.7 million decrease in accounts receivable due to timing of sales and collections from customers and $2.5 million from extended accounts payable terms partially offset by a $1.6 million increase in inventories. The Company benefited from $8.6 million of 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 $1.5 million in the first nine months of fiscal 2017, compared with $1.8 million in the first nine months of fiscal 2016. In addition to the $1.6 million expended during the first nine months of fiscal 2017, $0.3 million was committed for future capital expense as of June 30, 2017. The Company anticipates that total fiscal 2017 capital expenditures will be within the range of $2.2 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 $5.5 million in the first nine months of fiscal 2017, compared with cash used for financing activities of $9.5 million in the first nine 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 consisted of senior secured loans in the aggregate principal amount of up to $39.9 million. The Credit Facility was comprised of (i) a senior secured revolving credit facility of a maximum borrowing amount of $35.0 million, including swing line loans and letters of credit provided by the Lender and (ii) 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 5 - 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 bears interest at the LIBOR rate, prime rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case, plus the applicable margin as set forth in the 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 4.6% at June 30, 2017 and the term loan has a rate of 5.3% at June 30, 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 the maintenance of a minimum fixed charge coverage ratio to commence on September 30, 2017. In the event of a default, we may not be able to access our revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities. On August 4, 2017, the Company entered into its Second Amendment Agreement ("Second Amendment") with its lender to (i) amend certain definitions within its Credit Facility to, among other things, effect the changes described herein and to reset the Fixed Charge Coverage Ratio (as defined in the Credit Facility) to build to a trailing four quarters in each of the fiscal 2018 quarters, commencing with the quarter ended December 31, 2017; (ii) replace certain of its financial covenants outlined in the description of Credit Facility and amend its financial covenants with a revised minimum EBITDA for the four fiscal quarters ending September 30, 2017 and to maintain a fixed charge coverage ratio commencing on December 31, 2017; (iii) reduce its maximum revolving amount of $35,000 to $30,000 ; and (iv) the Company must use its cash proceeds from the sale of the Irish building discussed in Note 1 Asset Held for Sale to reduce the Term Facility by $ 700 and use the remaining proceeds to reduce the revolver. The Second Amendment, as described above, waived compliance requirements with its loan covenants as of June 30, 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

20



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 related to 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 5 - 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. Critical Accounting Policies and Estimates

The Company's disclosures of critical accounting policies in its Annual Report on Form 10-K for the year ended September 30, 2016 have not materially changed since that report was filed, with the exception of the following:

Restructuring Costs
On May 31, 2017, the Company approved the decision to close Alliance as disclosed in the June 1, 2017 Form 8-K, as amended on July 17, 2017. The closure is a result of decreased sales from a key customer. This closure falls in line with management's key strategic initiatives to make organizational and operational changes needed to improve profitability. Orders after September 30, 2017 will be processed and manufactured by Cleveland. Alliance will continue to manufacture products through September 30, 2017. As a result of the announcement of the decision to close Alliance, $ 4,430 non-cash costs were incurred, of which $4,366 relates to asset impairment discussed below and $ 64 accelerated depreciation of assets due to useful lives been reassessed as of June 30, 2017. The remaining estimated exit costs are to be expensed as incurred, which include workforce reduction costs and accelerated depreciation costs totaling approximately $ 413 .

Asset Impairment
The announcement of the decision to close Alliance resulted in a triggering event, requiring an interim impairment analysis to be performed by the Company. In accordance with Accounting Standard Codification ("ASC") 360 and ASC 350, the Company performed an interim impairment test of Alliance's goodwill and an impairment test of Alliance's long-lived assets.

As required by ASC 360, an impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The Company used May 31, 2017 as the triggering date to evaluate the carrying values and test for recoverability of the Alliance machinery and equipment, customer list and trade name. The fair value of the assets was estimated using Level 2 and Level 3 inputs based on the orderly liquidation value as determined by a third party appraisal (a decision to sell has not been determined) and undiscounted cash flows. As a result of the analysis, the Company recorded an asset impairment charge at Alliance of $ 4,366 , which is labeled as asset impairment in the consolidated condensed statement of operations; $ 2,077 of the total impairment charge related to machinery and equipment and the remaining $ 2,289 related to intangible assets.

As noted above, the announcement of the decision to close Alliance and the transfer of future orders to the Cleveland resulted in the re-allocation of goodwill from the Alliance reporting unit to the Cleveland reporting unit. This triggering event requires an interim impairment test to be performed at the Cleveland reporting unit as of May 31, 2017 as required by ASC 350.  The carrying value of the reporting unit, inclusive of assigned goodwill, was compared to their respective fair value using the market and income approach to estimate the fair value of this reporting unit.  Significant assumptions inherent in the valuation methodologies for goodwill were employed and include, but are not limited to, prospective financial information, growth rates, terminal value and discount rates and requires the Company to make certain assumptions and estimates regarding industry economic factors and future profitability of its business. When performing the income and market approach for the reporting unit, SIFCO incorporated the use of projected financial information and a discount rate that was developed using market participant based assumptions.  The cash flow projections are based on five-year financial forecasts developed by management that include revenue projections, capital spending trends, and investment in working capital to support anticipated revenue growth.  The selected discount rate considers the risk and nature of the reporting unit's cash flows and ratios of return that market participants would require to invest their capital in our plant. 

21



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 (using Level 3 inputs) of this reporting unit exceeded the carrying value; as such there was no goodwill impairment.

Asset Held for Sale
As noted within the Company's 2016 Form 10-K, the Company's Irish subsidiary sold its operating business in June 2007, but retained ownership of its Cork, Ireland building. This property is subject to a lease arrangement with the acquirer of the business that expires in June 2027. At June 30, 2017, the Company has a formal plan to sell the Irish building which represents the assets held for sale in the consolidated condensed balance sheets. The company expects to sell this asset within the next 12 months.

D. 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 executing a bottom up approach to analyze the standard's impact on its revenues by looking at historical policies and practices and identifying the differences from applying the new standard to its revenue stream. The Company has determined that many of its long-term agreements contain variable consideration clauses and is in the process of quantifying the impact to its consolidated condensed 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 standard requires a modified retrospective transition for capital and operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial adoption. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of ASU 2016-02 and has not yet determined its impact on 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 share-based payments. The ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has considered the potential implications of adoption of the ASU and due to the valuation allowance recorded at June 30, 2017 and September 30, 2016 in the U.S., the Company does not expect a material impact from a tax perspective. The Company is still evaluating other non-tax components it may have on its consolidated 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 would 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 does not expect the adoption of this ASU to have a material impact on its consolidated condensed financial statements.

22



In March 2017, the FASB issued ASU 2017-07, which relates to pension related costs that require an entity to report the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs. The other components of the net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside of any subtotal of operating income. Additionally, only the service cost component will be eligible for capitalization in assets. The ASU is effective for October 1, 2018, early adoption is permitted and the ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively for the capitalization of the service cost component. The amendment allows for a practical expedient that permits an employer to use the amounts disclosed in its pension and other post-retirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company would need to disclose if the practical expedient was used. The Company is currently evaluating the impact it may have on its consolidated condensed financial statements and it does not plan to early adopt the ASU.

In May 2017, the FASB issued ASU 2017-09, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on October 1, 2018, with early adoption permitted. This new guidance is not expected to have an impact on the Company’s consolidated condensed financial statements as it is not the Company’s practice to change either the terms or conditions of share-based payment awards once they are granted.

E. 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 adopted the standard in its second quarter of fiscal 2017.
Item 4. Controls and Procedures
As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s disclosure controls and procedures include components of the Company’s internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of June 30, 2017 (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.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. The following material weakness related to our control environment existed as of June 30, 2017.
In fiscal 2016, the Company identified the following material weaknesses:
•
Inadequate journal entry approval controls related to manual journal entries, allowing the posting of unapproved manual journal entries.
•
Key controls within business and IT processes were not designed and operating effectively at Maniago.
•
Key controls within IT general and application controls, including controls related to the testing of completeness and accuracy of system-generated reports, for domestic operations were not operating effectively.

23



•
Multiple key controls within financial reporting, inventory, revenue, account reconciliations and cash receipts application process for certain domestic locations were not operating effectively.
The control environment deficiency described above could have resulted in a failure to prevent or detect a material misstatement in our financial statements due to the omission of information or inappropriate conclusions regarding information required to be recorded, processed, summarized, and reported in the Company’s SEC reports. Notwithstanding the identified material weakness, management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Remediation Plan for Material Weakness in Internal Control over Financial Reporting
Management and the Company’s Board of Directors are committed to improving the Company’s overall system of internal controls over financial reporting. 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, 2016, as set forth above.
To address the material weakness identified in our control environment, the Company is taking the following actions to remediate the material weaknesses:
•
Implement a query to review potential unapproved manual entries.
•
Continue to evaluate the Company’s Maniago key business processes and IT general controls. The Company does not expect to have these controls at Maniago fully remediated this fiscal year.
•
Implement security and access reviews to ensure they are timely and appropriate, and expanding the segregation of duties review. The Company is making progress, but does not expect to completely remediate its IT control deficiencies in the current fiscal year.
•
The Company reviewed its key controls and has provided training to its employees with respect to remediating control deficiencies for financial reporting, inventory, revenue, account reconciliation and cash receipt application. In fiscal 2017, the Company has also upgraded its Finance staff and implemented enhanced monitoring controls.

We continue to review and make necessary changes to our internal control environment, as well as policies and procedures, to improve the overall effectiveness of internal control over financial reporting. Although we expect to make meaningful progress in our remediation plan during 2017, we cannot estimate how long it will take to complete the process or the costs of actions required. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluation of our internal control over financial reporting.

Changes in Internal Control over Financial Reporting and other Remediation
Except as for the remediation items 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, and 4 are not applicable or the answer to such items is negative; therefore, the items have been omitted and no reference is required in this Quarterly Report.
Item 1. Legal Proceedings
In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters and does not believe any such matters are material to its financial condition or results of operations. The Company maintains various liability insurance coverages to protect its assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it is possible that the Company’s future operating results could be affected by future costs of litigation. For a more complete description of our outstanding material legal proceedings, see Note 9 - Commitments and Contingencies.
Item 5. Other Information
On August 4, 2017, the Company entered into the Second Amendment Agreement to its Credit Facility, as further described under Part I – Financial Information – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – B. Liquidity and Capital Resources of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. The Second Amendment is included as Exhibit 10.16 to this Quarterly Report on Form 10-Q.

24



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
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
9.3
 
Voting Trust Agreement dated January 31, 2017, filed as Exhibit 9.3 to the Company's Form 10-Q dated December 31, 2016 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
 
Change in Control Agreement and Separation Agreement between the Company and Peter W. Knapper, effective June 29, 2016, filed as Exhibit 10.2 to the Company's Form 8-K dated June 17, 2016, 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, filed as Exhibit 10.6 to the Company's Form 10-Q dated May 16, 2016, and incorporated herein by reference
10.7
 
Form of SIFCO Industries, Inc. Long-term incentive plan restricted share award, filed as Exhibit 10.7 to the Company's Form 10-Q dated May 16, 2016, and incorporated herein by reference
10.8
 
Award agreement, dated June 1, 2016, between the SIFCO Industries, Inc. and Salvatore Incanno, filed as Exhibit 10.1 to the Company's Form 8-K dated June 3, 2016, and incorporated herein by reference
10.9
 
Award agreement between the Company and Peter W. Knapper, granted June 29, 2016, filed as Exhibit 10.1 to the Company's Form 8-K dated June 17, 2016, and incorporated herein by reference
10.10
 
Amended and Restated Credit and Security Agreement, dated November 9, 2016, by and among SIFCO Industries, Inc., the Lenders named therein and KeyBank National Association, as Lead Arranger, Sole Book Runner, Administrative Agent, Swing Line Lender and Issuing Lender, filed as Exhibit 10.1 to the Company's Form 8-K dated November 15, 2016, and incorporated herein by reference
10.11
 
First Amendment to the Amended and Restated Credit and Security Agreement, dated February 16, 2017, by and among SIFCO Industries, Inc., the Lenders named therein; KeyBank National Association, as Lead Arranger, Sole Book Runner, Administrative Agent, Swing Line Lender and Issuing Lender; and Presidential Financial Corporation, as Assignee, and incorporated herein by reference
10.12
 
Amendment and Restatement to the SIFCO Industries, Inc. 2007 Long-Term Incentive Plan, filed as Exhibit A of the Company’s Proxy and Notice of 2017 Annual Meeting to Shareholders dated December 6, 2016, and incorporated herein by reference

25



10.13
 
Form of SIFCO Industries, Inc. Long-term incentive plan performance share award, filed as Exhibit 10.15 to the Company's Form 10-Q dated January 31, 2017, and incorporated herein by reference
10.14
 
Form of SIFCO Industries, Inc. Long-term incentive plan restricted share award, filed as Exhibit 10.16 to the Company's Form 10-Q dated January 31, 2017, and incorporated herein by reference
10.15
 
Form of SIFCO Industries, Inc. Long-term incentive plan restricted share award, filed as Exhibit 10.17 to the Company's Form 10-Q dated January 31, 2017, and incorporated herein by reference
*10.16
 
Second Amendment to the Amended and Restated Credit and Security Agreement, dated August 4, 2017, by and among SIFCO Industries, Inc., the Lenders named therein; KeyBank National Association, as Lead Arranger, Sole Book Runner, Administrative Agent, Swing Line Lender and Issuing Lender; and Presidential Financial Corporation, as Assignee
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 June 30, 2017 filed with the SEC on August 9, 2017, formatted in XBRL includes: (i) Consolidated Condensed Statements of Operations for the fiscal periods ended June 30, 2017 and 2016, (ii) Consolidated Condensed Statements of Comprehensive Income for the fiscal periods ended June 30, 2017 and 2016, (iii) Consolidated Condensed Balance Sheets at June 30, 2017 and September 30, 2016, (iv) Consolidated Condensed Statements of Cash Flow for the fiscal periods ended June 30, 2017 and 2016, and (iv) the Notes to the Consolidated Condensed Financial Statements.


26



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: August 9, 2017
 
/s/ Peter W. Knapper
 
 
Peter W. Knapper
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date: August 9, 2017
 
/s/ Thomas R. Kubera
 
 
Thomas R. Kubera
 
 
Interim Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 

27


SECOND AMENDMENT AGREEMENT
This SECOND AMENDMENT AGREEMENT (this “Amendment”) is made as of the 4 th  day of August, 2017 among:
(a)    SIFCO INDUSTRIES, INC., an Ohio corporation (the “Borrower”);

(b)    the Lenders, as defined in the Credit Agreement, as hereinafter defined; and

(c)    KEYBANK NATIONAL ASSOCIATION, as the administrative agent for the Lenders under the Credit Agreement (the “Administrative Agent”).

WHEREAS, the Borrower, the Administrative Agent and the Lenders are parties to that certain Amended and Restated Credit and Security Agreement, dated as of November 9, 2016 (as amended and as the same may from time to time be further amended, restated or otherwise modified, the “Credit Agreement”);

WHEREAS, the Borrower, the Administrative Agent and the Lenders desire to amend the Credit Agreement to modify certain provisions thereof and add certain provisions thereto;

WHEREAS, each capitalized term used herein and defined in the Credit Agreement, but not otherwise defined herein, shall have the meaning given such term in the Credit Agreement; and

WHEREAS, unless otherwise specifically provided herein, the provisions of the Credit Agreement revised herein are amended effective as of the date of this Amendment;

NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Borrower, the Administrative Agent and the Lenders agree as follows:

1.     Amendment to Definitions in the Credit Agreement . Section 1.1 of the Credit Agreement is hereby amended to delete the definitions of “Availability Block”, “Fixed Charge Coverage Ratio”, “Maximum Revolving Amount” and “Total Commitment Amount” therefrom and to insert in place thereof, respectively, the following:

“Availability Block” means (a) for the period from the Second Amendment Effective Date through the Availability Block Increase Termination Date, an amount equal to Four Million Dollars ($4,000,000), and (b) at all times thereafter, an amount equal to Three Million Dollars ($3,000,000).

“Fixed Charge Coverage Ratio” means, as determined for the most recently completed four fiscal quarters of the Borrower, on a Consolidated basis, the ratio of (a) the total of (i) Consolidated EBITDA, minus (ii) Consolidated Unfunded Capital Expenditures, minus (iii) Consolidated Income Tax Expense paid in cash, minus (iv) Capital Distributions paid in cash; to (b) Consolidated Fixed Charges; provided that, notwithstanding the foregoing



(A) for the fiscal quarter ending December 31, 2017, the Fixed Charge Coverage Ratio shall be measured for the most recently completed fiscal quarter, (B) for the fiscal quarter ending March 31, 2018, the Fixed Charge Coverage Ratio shall be measured for the most recently completed two fiscal quarters, (C) for the fiscal quarter ending June 30, 2018, the Fixed Charge Coverage Ratio shall be measured for the most recently completed three fiscal quarters, and (D) for the fiscal quarter ending September 30, 2018 and each fiscal quarter thereafter, the Fixed Charge Coverage Ratio shall be measured for the most recently completed four fiscal quarters.

“Maximum Revolving Amount” means Thirty Million Dollars ($30,000,000), as such amount may be decreased pursuant to Section 2.9(e) hereof.

“Total Commitment Amount” means the sum of (a) the Maximum Revolving Amount, plus (b) the principal outstanding on the Term Loan, as such amount may be decreased pursuant to Section 2.9(e) hereof.

2.     Amendment to Definition of “Borrowing Base” . The definition of “ Borrowing Base ” is hereby amended to delete subpart (d) therefrom and to insert in place thereof the following:

(d)    the Availability Block; minus

3.     Amendment to Definition of “Permitted Foreign Subsidiary Loans, Guaranties and Investments” . The definition of “Permitted Foreign Subsidiary Loans, Guaranties and Investments” is hereby amended to delete subpart (c) therefrom and to insert in place thereof the following:

(c)    [Reserved]; and

4.     Deletion of Definition in the Credit Agreement . The Credit Agreement is hereby amended to delete the definition of “Availability Block Period” therefrom.

5.     Additions to Definitions in the Credit Agreement . Section 1.1 of the Credit Agreement is hereby amended to add the following new definitions thereto:

“Availability Block Increase Termination Date” means the date on which the Administrative Agent shall have received, and conducted, without undue delay, a satisfactory review (as confirmed by the Administrative Agent in writing to the Borrower) of all of the following:

(a)    the projected financial statements of the Companies delivered pursuant to Section 5.3(k) hereof for the 2018 fiscal year of the Borrower;

(b)    the report provided by the Financial Consultant pursuant to Section 5.35 hereof; and


2

(c)    the Consolidated financial statements of the Companies delivered pursuant to Section 5.3(b) hereof (and the accompanying Compliance Certificate) for the calendar month ending March 31, 2018, which shall evidence compliance with the Fixed Charge Coverage Ratio as set forth in Section 5.7(a) hereof.

“Financial Consultant” means that term as defined in Section 5.35 hereof.

“Irish Real Estate” means that certain real estate owned by SIFCO Turbine Components Services LLC, located at 1st floor, 6 Lapp’s Quay, Cork, T12 VY7W, Ireland.

“Second Amendment Effective Date” means August 4, 2017.

6.     Amendment to Financial Covenant Provisions . Section 5.7 of the Credit Agreement is hereby amended to delete subsections (a) and (b) therefrom and to insert in place thereof, respectively, the following:

(a)     Fixed Charge Coverage Ratio . The Borrower shall not suffer or permit at any time the Fixed Charge Coverage Ratio to be less than 1.10 to 1.00 on December 31, 2017 and thereafter.

(b)     Minimum EBITDA . The Borrower shall not suffer or permit Consolidated EBITDA to be less than One Million Dollars ($1,000,000) for the most recently completed four fiscal quarters ending September 30, 2017.

7.     Amendment to Covenant Provisions . Article V of the Credit Agreement is hereby amended to delete Section 5.29 therefrom and to insert in place thereof the following new Section 5.29, and to add the following new Sections 5.34, 5.35 and 5.36 at the end thereof:

Section 5.29. [ Reserved ].

Section 5.34. Sale of Irish Real Estate . The Borrower shall, (a) on or before September 15, 2017, deliver to the Administrative Agent a copy of a letter of intent or purchase agreement which shall provide for the sale of the Irish Real Estate (such sale to be on terms reasonably satisfactory to the Administrative Agent), and (b) on or before November 30, 2017, consummate the sale of the Irish Real Estate, with the proceeds thereof (net of costs, expenses and taxes, including any taxes related to repatriation of funds) to be applied:

(i)    first, to the payments of principal on the Term Loan in the inverse order of their respective maturities, in an aggregate amount equal to Seven Hundred Thousand Dollars ($700,000); and

(ii)    second, to any outstanding Revolving Loans, without a permanent reduction to the Maximum Revolving Amount.


3

Section 5.35. Financial Consultant . The Borrower shall, on or prior to August 4, 2017, retain an outside financial consultant, mutually acceptable to the Administrative Agent and the Borrower (the “Financial Consultant”), to:

(a)    review and approve the projected financial statements of the Companies, to be delivered pursuant to Section 5.3(k) hereof for the fiscal year ending December 31, 2018, and any detailed assumptions, including, but not limited to, standard costs, backlog and capital expenditures;

(b)    prepare and/or review and approve a rolling thirteen (13) week cash flow projection model of the Companies, prepared on a consolidated and consolidating (in accordance with GAAP) basis, consistent with GAAP and in form and detail reasonably satisfactory to the Administrative Agent;

(c)    prepare a summary overview of the operations conducted at the plant of the Companies located in Orange, California, including commentary on any related improvements that can be made or are implemented and achievable; and

(d)    otherwise review and evaluate (the scope to be satisfactory to the Administrative Agent) the financial condition of the Companies.

The Borrower hereby agrees to pay all fees, costs and expenses of the Financial Consultant for all work related to the Companies. The Borrower also agrees (i) that the Administrative Agent, the Lenders and the Financial Consultant may communicate directly with each other on all matters pertaining to or related in any way to the engagement or findings of the Financial Consultant regarding the Companies, their financial condition or otherwise, and (ii) to fully cooperate with the Administrative Agent, the Lenders and the Financial Consultant with respect to matters pertaining to or related to the engagement or findings of the Financial Consultant. The Borrower hereby waives any right to confidentiality or privacy obligations of the Financial Consultant, the Administrative Agent and the Lenders, and waives and releases any claims that it may have against the Administrative Agent or the Lenders with respect to any communications among any of the Administrative Agent, the Lenders and the Financial Consultant.

Section 5.36. Conference Calls . Commencing on August 7, 2017 at approximately 5:00 P.M. (Eastern time), and continuing as frequently as the Administrative Agent may reasonably request, but no less frequently than every other Monday thereafter (or any other time and date as may be mutually agreeable to the Administrative Agent and the Borrower), the Borrower shall make itself available for conference calls with the Administrative Agent and the Lenders in order to respond to any questions with respect to the progress of the work conducted by the Financial Consultant pursuant to Section 5.35 hereof, and the financial condition of the Companies or any other matters related to the Companies.


4

8.     Amendment to Schedule 1 . The Credit Agreement is hereby amended to delete Schedule 1 (Commitments of Lenders) therefrom and to insert in place thereof a new Schedule 1 in the form of Schedule 1 hereto.

9.     Closing Deliveries . Concurrently with the execution of this Amendment, the Borrower shall:

(a)    pay an amendment fee to the Administrative Agent, for the benefit of the Lenders, in the amount of Sixty Thousand Dollars ($60,000);

(b)    cause each Guarantor of Payment to execute the attached Guarantor Acknowledgment and Agreement; and

(c)    pay all legal fees and expenses of the Administrative Agent in connection with this Amendment and any other Loan Documents.

10.     Representations and Warranties . The Borrower hereby represents and warrants to the Administrative Agent and the Lenders that (a) the Borrower has the legal power and authority to execute and deliver this Amendment; (b) the officers executing this Amendment have been duly authorized to execute and deliver the same and bind the Borrower with respect to the provisions hereof; (c) the execution and delivery hereof by the Borrower and the performance and observance by the Borrower of the provisions hereof do not violate or conflict with the Organizational Documents of the Borrower or any material law applicable to the Borrower or result in a breach of any provision of or constitute a default under any other material agreement, instrument or document binding upon or enforceable against the Borrower; (d) no Default or Event of Default exists, nor will any occur immediately after the execution and delivery of this Amendment or by the performance or observance of any provision hereof; (e) each of the representations and warranties contained in the Loan Documents is true and correct in all material respects as of the Second Amendment Effective Date as if made on the Second Amendment Effective Date, except to the extent that any such representation or warranty expressly states that it relates to an earlier date (in which case such representation or warranty is true and correct in all material respects as of such earlier date); (f) the Borrower is not aware of any claim or offset against, or defense or counterclaim to, the Borrower’s obligations or liabilities under the Credit Agreement or any other Related Writing; and (g) this Amendment constitutes a valid and binding obligation of the Borrower in every respect, enforceable in accordance with its terms, except as enforceability thereof may be limited by bankruptcy, insolvency, moratorium and similar laws and by equitable principles, whether considered at law or in equity.

11.     References to Credit Agreement and Ratification . Each reference to the Credit Agreement that is made in the Credit Agreement or any other Related Writing shall hereafter be construed as a reference to the Credit Agreement as amended hereby. Except as otherwise specifically provided herein, all terms and provisions of the Credit Agreement are confirmed and ratified and shall remain in full force and effect and be unaffected hereby. This Amendment is a Loan Document.


5

12.     Counterparts . This Amendment may be executed in any number of counterparts, by different parties hereto in separate counterparts and by facsimile or other electronic signature, each of which, when so executed and delivered, shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement.

13.     Headings . The headings, captions and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment.

14.     Severability . Any provision of this Amendment that shall be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

15.     Governing Law . The rights and obligations of all parties hereto shall be governed by the laws of the State of Ohio, without regard to principles of conflicts of laws.

[Remainder of page intentionally left blank.]




6

JURY TRIAL WAIVER . THE BORROWER , THE ADMINISTRATIVE AGENT AND THE LENDERS, TO THE EXTENT PERMITTED BY LAW, EACH HEREBY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG THE BORROWER , THE ADMINISTRATIVE AGENT AND THE LENDERS, OR ANY THEREOF, ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AMENDMENT OR ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. THIS WAIVER SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY THE ABILITY OF THE ADMINISTRATIVE AGENT OR THE LENDERS TO PURSUE REMEDIES PURSUANT TO ANY CONFESSION OF JUDGMENT OR COGNOVIT PROVISION CONTAINED IN ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT AMONG THE BORROWER, THE ADMINISTRATIVE AGENT AND THE LENDERS.

IN WITNESS WHEREOF, the parties have executed and delivered this Amendment in Cleveland, Ohio as of the date first set forth above.

 
SIFCO INDUSTRIES, INC.

By: /s/ Peter Knapper     
Peter Knapper
President and Chief Executive Officer
 
 
 
KEYBANK NATIONAL ASSOCIATION
   as the Administrative Agent  and as a Lender

By: /s/Michael P. Gutia    
Michael P. Gutia
Vice President

Signature Page to
Second Amendment Agreement


 
PRESIDENTIAL FINANCIAL CORPORATION

By: /s/Dennis Schlesner    
Dennis Schlesner
President




Signature Page to
Second Amendment Agreement

GUARANTOR ACKNOWLEDGMENT AND AGREEMENT

The undersigned consent and agree to and acknowledge the terms of the foregoing Second Amendment Agreement dated as of August 4, 2017. The undersigned further agree that the obligations of the undersigned pursuant to the Guaranty of Payment executed by the undersigned are hereby ratified and shall remain in full force and effect and be unaffected hereby.

The undersigned hereby waive and release the Administrative Agent and the Lenders and their respective directors, officers, employees, attorneys, affiliates and subsidiaries from any and all claims, offsets, defenses and counterclaims of any kind or nature, absolute and contingent, of which the undersigned are aware or should be aware, such waiver and release being with full knowledge and understanding of the circumstances and effect thereof and after having consulted legal counsel with respect thereto.

JURY TRIAL WAIVER . THE UNDERSIGNED, TO THE EXTENT PERMITTED BY LAW, HEREBY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG THE BORROWER , THE ADMINISTRATIVE AGENT, THE LENDERS AND THE UNDERSIGNED, OR ANY THEREOF, ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS GUARANTOR ACKNOWLEDGMENT AND AGREEMENT, THE AMENDMENT OR ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. THIS WAIVER SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY THE ABILITY OF THE ADMINISTRATIVE AGENT AND LENDERS TO PURSUE REMEDIES PURSUANT TO ANY CONFESSION OF JUDGMENT OR COGNOVIT PROVISION CONTAINED IN ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT AMONG THE BORROWER , THE ADMINISTRATIVE AGENT, LENDERS AND THE UNDERSIGNED.

 
GENERAL ALUMINUM FORGINGS, LLC
T & W FORGE, LLC
QUALITY ALUMINUM FORGE, LLC

By: /s/Peter Knapper    
Peter Knapper
President


Signature Page to
Guarantor Acknowledgment and Agreement

SCHEDULE 1

COMMITMENTS OF LENDERS

LENDERS
REVOLVING CREDIT
COMMITMENT
PERCENTAGE
REVOLVING
CREDIT
COMMITMENT
AMOUNT
TERM LOAN
COMMITMENT
PERCENTAGE
TERM LOAN
COMMITMENT
AMOUNT
MAXIMUM AMOUNT
KeyBank National Association
62.1474508300000%
$18,644,235.25
62.1474508300000%
$2,573,122.00
$21,217,357.25
Presidential Financial Corporation
37.8525491700000%
$11,355,764.75
37.8525491700000%
$1,567,228.03
$12,922,992.78


Total Commitment Amount
100%
$30,000,000
100%
$4,140,350.03


$34,140,350.03


S-1


Exhibit 31.1
CERTIFICATION
OF THE CHIEF EXECUTIVE OFFICER
RULE 13A-14(A) / 15D-14(A)
I, Peter W. Knapper, 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: August 9, 2017
 
/s/ Peter W. Knapper
 
 
Peter W. Knapper
 
 
President and Chief Executive Officer




Exhibit 31.2
CERTIFICATION
OF THE CHIEF FINANCIAL OFFICER
RULE 13A-14(A) / 15D-14(A)
I, Thomas R. Kubera, 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: August 9, 2017
 
/s/ Thomas R. Kubera
 
 
Thomas R. Kubera
 
 
Interim 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 June 30, 2017 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: August 9, 2017
 
/s/ Peter W. Knapper
 
 
Peter W. Knapper
 
 
President and Chief Executive 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.




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 June 30, 2017 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: August 9, 2017
 
/s/ Thomas R. Kubera
 
 
Thomas R. Kubera
 
 
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.