Notes to Consolidated Financial Statements
(Amounts in thousands, except per share data)
1. Summary of Significant Accounting Policies
A. DESCRIPTION OF BUSINESS
SIFCO Industries, Inc. and its subsidiaries are engaged in the production of forgings and machined components primarily in the Aerospace and Energy ("A&E") market. The Company’s operations are conducted in a single business segment, "SIFCO" or the "Company."
Impact of COVID-19 Pandemic
In March 2020, a novel strain of coronavirus ("COVID-19") was recognized as a pandemic by the World Health Organization and the outbreak subsequently became increasingly widespread in the United States and other countries in which the Company operates.
The Company has taken proactive steps to ensure the safety of its employees and customers as well as to preserve the Company’s financial flexibility. Immediate action was taken by the Company to minimize the spread of COVID-19 in its workplace and monitor the development of and responses to the COVID-19 pandemic and the impact it may have on the business. We have been following the guidance from the U.S. Centers for Disease Control to protect employees and prevent the spread at our plant locations. The actions implemented include: telework, alternate schedules, pre-shift temperature screenings, masks, social distancing, and enhanced cleaning protocols. The impact of the COVID-19 outbreak on the Company continues to evolve and the full magnitude the pandemic will have on the Company's financial condition, liquidity and future results is uncertain. Also uncertain is the timing, duration, shape and magnitude of recovery.
The resurgence of COVID-19 cases, and the continuation of restrictions, disruptions to travel, and businesses worldwide, may reduce customer demand and/or impair our ability to meet customer demands for products. Reduced demand for products or impaired ability to meet customer demand (including as a result of disruptions at our facilities, in the transportation of products, and/or in the operations of our vendors) could have a material adverse effect on our business, operations and financial performance. There continues to be significant uncertainty regarding the duration of the pandemic as well as the timing and scope of recovery in the commercial aerospace industry, with a return to pre-COVID-19 levels of activity not expected in commercial aerospace industry for several years. The Company expects to continue to assess the potential implications of these conditions on its operations and take actions to preserve liquidity, including certain cost reduction measures taken subsequent to the end of fiscal year 2020, including a furlough of employees at one of its locations, starting in late November 2020 and continuing through the balance of the calendar year, in response to market conditions and its impact of the COVID-19 pandemic on customers’ ordering schedules.
B. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The U.S. dollar is the functional currency for all the Company’s U.S. operations and its non-operating subsidiaries. For these operations, all gains and losses from completed currency transactions are included in income. The functional currency for the Company's other non-U.S. subsidiaries is the Euro. Assets and liabilities are translated into U.S. dollars at the rates of exchange at the end of the period, and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss in the consolidated statements of shareholders’ equity.
C. CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. A substantial majority of the Company’s cash and cash equivalent bank balances are within federally insured limits as of September 30, 2020 and 2019.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
D. CONCENTRATIONS OF CREDIT RISK
Receivables are presented net of allowance for doubtful accounts of $249 and $592 at September 30, 2020 and 2019, respectively. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company writes off accounts receivable when they become uncollectible. During fiscal 2020 and 2019, $263 and $33, respectively, of accounts receivable were written off against the allowance for doubtful accounts. Bad debt expense totaled $80 and $39 in fiscal 2020 and fiscal 2019, respectively.
Most of the Company’s receivables represent trade receivables due from manufacturers of turbine engines and aircraft components as well as turbine engine overhaul companies located throughout the world, including a significant concentration of U.S. based companies. In fiscal 2020, 47% of the Company’s consolidated net sales were from three of its largest customers; and 49% of the Company's consolidated net sales were from the four largest customers and their direct subcontractors, which individually accounted for 16%, 13%, 10% and 10%, of consolidated net sales, respectively. In fiscal 2019, 44% of the Company’s consolidated net sales were from three of its largest customers; and 50% of the Company's consolidated net sales were from four of the largest customers and their direct subcontractors which individually accounted for 14%, 13%, 12% and 11%, of consolidated net sales, respectively. Other than what has been disclosed, no other single customer or group represented greater than 10% of total net sales in fiscal 2020 and 2019.
At September 30, 2020, two of the Company’s largest customers had outstanding net accounts receivable which individually accounted for 30% of the total net accounts receivable; and three of the largest customers and their direct subcontractors had outstanding net accounts receivable which accounted for 13%, 13%, and 12% of total net accounts receivable, respectively. At September 30, 2019, two of the Company’s largest customers had outstanding net accounts receivable which individually accounted for 10% of total net accounts receivable; and three of the largest customers and their direct subcontractors had outstanding net accounts receivable which accounted for 15%, 14%, and 12% of total net accounts receivable, respectively. The Company performs ongoing credit evaluations of its customers’ financial conditions. The Company believes its allowance for doubtful accounts is sufficient based on the credit exposures outstanding at September 30, 2020.
E. INVENTORY VALUATION
For a portion of the Company's inventory, cost is determined using the last-in, first-out (“LIFO”) method. For approximately 47% and 27% of the Company’s inventories at September 30, 2020 and 2019, respectively, the LIFO method is used to value the Company’s inventories. The first-in, first-out (“FIFO”) method is used to value the remainder of the Company’s inventories, which are stated at the lower cost or net realizable value.
The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete and excess inventory each quarter and requires at a minimum that reserves be established based on an analysis of the age of the inventory. In addition, if the Company identifies specific obsolescence, other than that identified by the aging criteria, an additional reserve will be recognized. Specific obsolescence and excess reserve requirements may arise due to technological or market changes or based on cancellation of an order. The Company’s reserves for obsolete and excess inventory were $3,676 and $3,335 at September 30, 2020 and 2019, respectively.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is generally computed using the straight-line method. Depreciation is provided in amounts sufficient to amortize the cost of the assets over their estimated useful lives. Depreciation provisions are based on estimated useful lives: (i) buildings, including building improvements - 5 to 40 years; (ii) machinery and equipment, including office and computer equipment - 3 to 20 years; (iii) software - 3 to 7 years (included in machinery and equipment); and (iv) leasehold improvements - remaining life or length of the lease, whichever is less (included in buildings).
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Company's property, plant and equipment assets by major asset class at September 30 consist of:
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2020
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2019
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Property, plant and equipment:
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Land
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$
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1,000
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$
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964
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|
Buildings
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15,564
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|
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15,805
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Machinery and equipment
|
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91,461
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|
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82,379
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|
Total property, plant and equipment
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108,025
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99,148
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Less: Accumulated depreciation
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63,824
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59,538
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Property, plant and equipment, net
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$
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44,201
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$
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39,610
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|
The (gain) loss on disposal of operating assets is included as a separate line item in the accompanying consolidated statements of operations. Depreciation expense was $5,883 and $5,877 in fiscal 2020 and 2019, respectively.
G. ASSET IMPAIRMENT
The Company reviews the carrying value of its long-lived assets ("asset groups"), including property, plant and equipment, when events and circumstances indicate a triggering event has occurred. This review is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets. Under the Accounting Standard Codification ("ASC") 360 ("Topic 360"), if the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, then the long-lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
Fiscal 2020
The Company continuously monitors triggers to determine if further testing is necessary. In fiscal 2020, the Company evaluated triggers for asset impairment three times. During two of the three assessments, it was determined that there were no triggering events requiring further review of its assets groups. The fourth quarter assessment resulted in further evaluation. Certain qualitative factors, such as the reduction on future forecasted sales due to the reduction of committed orders by certain customers triggered a recoverability test on its Orange, California ("Orange") location. The result of management's analysis on the asset group's recoverability at year-end indicated that the long-lived assets, right-of-use assets and definite lived intangible assets were recoverable and did not require further review for impairment.
Fiscal 2019
The Company experienced three triggering events in fiscal 2019 requiring the review of two asset groups to determine if the carrying value of each asset group is recoverable. Certain qualitative factors were triggered at its Orange location. See Note 11, Commitments and Contingencies, of the consolidated financial statements, for further discussion on the evaluation of its long-lived assets as it relates to the Orange asset group. The Maniago, Italy ("Maniago") location triggered certain qualitative factors, which led to an assessment of its long-lived assets as of May 31, 2019 and September 30, 2019, respectively, due to the continued challenges on operating income trends for the respective asset group. The results of management's analysis on the asset group's recoverability at interim and at year-end, respectively, indicated that the long-lived assets and definite lived intangible assets were recoverable and did not require further review for impairment.
H. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill is subject to impairment testing if triggered in the interim, and if not, on an annual basis. The Company has selected July 31 as the annual impairment testing date. With the adoption of Accounting Standard Update ("ASU") 2017-04, Step 2 has been eliminated from the goodwill impairment test. The first step of the goodwill impairment test compares the fair value of a reporting unit (as defined) with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired. However, if the carrying amount exceeds the fair value, the Company should recognize an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. See Note 3, Goodwill and Intangibles, of the consolidated financial statements for further discussion of the July 31, 2020 and 2019 annual impairment test results and its interim goodwill test performed as of May 31, 2019 for one of its reporting units.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Intangible assets consist of identifiable intangibles acquired or recognized in the accounting for the acquisition of a business and include such items as a trade name, a non-compete agreement, below market lease, customer relationships and order backlog. Intangible assets are amortized over their useful lives ranging from one year to ten years. Identifiable intangible assets assessment for impairment is evaluated when events and circumstances warrant such a review, as noted within Note 1, Summary of Significant Accounting Policies - Asset Impairment, of the consolidated financial statements.
I. NET INCOME (LOSS) PER SHARE
The Company’s net income and loss per basic share has been computed based on the weighted-average number of common shares outstanding. Net income in the current period, per diluted share reflects the effect of the Company's outstanding restricted shares and performance shares under the treasury method. In the prior period, due to the net loss for each reporting period, zero restricted shares are included in the calculation of diluted earnings per share because the effect would be anti-dilutive. The dilutive effect is as follows:
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September 30,
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2020
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2019
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Net income (loss)
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$
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9,191
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|
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$
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(7,506)
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|
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Weighted-average common shares outstanding (basic)
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5,661
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|
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5,566
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Effect of dilutive securities:
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Restricted shares
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120
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—
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Performance shares
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10
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—
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Weighted-average common shares outstanding (diluted)
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5,791
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5,566
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Net income (loss) per share – basic:
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$
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1.62
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$
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(1.35)
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Net income (loss) per share – diluted:
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$
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1.59
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$
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(1.35)
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Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share
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207
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196
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J. REVENUE RECOGNITION
The Company recognizes revenue using the five-step revenue recognition model in which it depicts the transfer of goods to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The revenue standard also requires disclosure sufficient to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments and assets recognized from the cost to obtain or fulfill a contract.
Contract Balances
Contract assets on the consolidated balance sheets are recognized when a good is transferred to the customer and the Company does not have the contractual right to bill for the related performance obligations. In these instances, revenue recognized exceeds the amount billed to the customer and the right to payment is not solely subject to the passage of time. Amounts do not exceed their net realizable value. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payment from customers are received based on the terms established in the contract with the customer.
K. LEASES
The Company has implemented ASU 2016-02, "Leases (Topic 842)" and ASU 2018-11, "Leases (Topic 842) Targeted Improvements," (collectively with ASU 2016-02, "Topic 842"), which was adopted on October 1, 2019 using the cumulative-effect adjustment transition method. Significant changes to the Company's accounting policies as a result of adopting Topic 842 are referenced in Note 1, Summary of Significant Accounting Policies - Impact of Recently Adopted Accounting Standards and in Note 10, Leases.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
L. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
The Company adopted Topic 842 as of October 1, 2019, using the cumulative effective method. Under the transition method selected by the Company, leases that are not short-term in nature existing at, or entered on October 1, 2019 were required to be recognized and measured. Prior period amounts were not adjusted and continue to be reflected with the Company's historical accounting. The adoption of Topic 842 resulted in the Company recording right-of-use ("ROU") assets and operating lease liabilities of approximately $18,059 to the consolidated balance sheet as of October 1, 2019, with no related impact on the Company's consolidated statement of comprehensive income (loss) or consolidated statement of cash flows.
M. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and subsequent updates. ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The new guidance will replace the current incurred loss approach with an expected loss model. The new expected credit loss impairment model will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt instruments, net investments in leases, loan commitments and standby letters of credit. Upon initial recognition of the exposure, the expected credit loss model requires entities to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating expected credit losses. ASU 2016-13 does not prescribe a specific method to make the estimate, so its application will require significant judgment. ASU 2016-13 is effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. However, in November 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)," which defers the effective date for public filers that are considered smaller reporting companies ("SRC"), as defined by the Securities and Exchange Commission, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Because SIFCO is considered a SRC, the Company does not need to implement until October 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the Company's results within the consolidated statements of operations and financial condition.
In December 2019, ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" was issued to (i) reduce the complexity of the standard by removing certain exceptions to the general principles in Topic 740 and (ii) improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective beginning October 1, 2021. The Company continues to evaluate the effect adopting this ASU will have on the Company's results within the consolidated statements of operations and financial condition.
N. USE OF ESTIMATES
Accounting principles generally accepted in the U.S. require management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period in preparing these financial statements. Actual results could differ from those estimates.
O. RESEARCH AND DEVELOPMENT
Research and development costs are expensed as they are incurred. Research and development expenses were nominal in fiscal 2020 and 2019.
P. DEBT ISSUANCE COSTS
Debt issuance costs are capitalized and amortized over the life of the related debt. Amortization of debt issuance costs is included in interest expense in the consolidated statements of operations.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Q. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as shown on the consolidated balance sheets at September 30 are as follows:
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2020
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2019
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Foreign currency translation adjustment, net of income tax benefit of $0 and $0, respectively
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$
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(5,257)
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$
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(5,667)
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Net retirement plan liability adjustment, net of income tax benefit of $(3,758) and $(3,758), respectively
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(8,211)
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(7,642)
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Total accumulated other comprehensive loss
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$
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(13,468)
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|
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$
|
(13,309)
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The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive loss, net of tax:
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Foreign Currency Translation Adjustment
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Retirement Plan Liability Adjustment
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Accumulated Other Comprehensive Loss
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Balance at September 30, 2018
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$
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(4,955)
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|
$
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(3,674)
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$
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(8,629)
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Other comprehensive loss before reclassifications
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(712)
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(4,643)
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(5,355)
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Amounts reclassified from accumulated other comprehensive income
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—
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675
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675
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Net current-period other comprehensive loss
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(712)
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|
(3,968)
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|
(4,680)
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Balance at September 30, 2019
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(5,667)
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(7,642)
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(13,309)
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Other comprehensive income (loss) before reclassifications
|
410
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|
|
(1,560)
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|
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|
(1,150)
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|
Amounts reclassified from accumulated other comprehensive income
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—
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|
|
991
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|
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|
|
991
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|
Net current-period other comprehensive income (loss)
|
410
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|
|
(569)
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|
|
|
|
(159)
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Balance at September 30, 2020
|
$
|
(5,257)
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|
|
$
|
(8,211)
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|
|
|
|
$
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(13,468)
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|
The following table reflects the changes in accumulated other comprehensive loss related to the Company for September 30, 2020 and 2019:
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Amount reclassified from accumulated other comprehensive loss
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Details about accumulated other comprehensive loss components
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2020
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2019
|
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Affected line item in the Consolidated Statement of Operations
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Amortization of Retirement plan liability:
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Prior service costs
|
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$
|
—
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|
|
$
|
—
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|
|
|
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|
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(1)
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Net actuarial gain (loss)
|
|
(808)
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|
(4,214)
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|
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|
|
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(1)
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Settlements/curtailments
|
|
239
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|
|
246
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|
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|
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|
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(1)
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|
(569)
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|
|
(3,968)
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Total before taxes
|
|
|
—
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|
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—
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|
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Income tax expense
|
|
|
$
|
(569)
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|
|
$
|
(3,968)
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Net of taxes
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(1) These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 8, Retirement Benefit Plans, of the consolidated financial statements for further information.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
R. INCOME TAXES
The Company files a consolidated U.S. federal income tax return and tax returns in various state and local jurisdictions. The Company’s Irish and Italian subsidiaries also file tax returns in their respective jurisdictions.
The Company provides deferred income taxes for the temporary difference between the financial reporting basis and tax basis of the Company’s assets and liabilities. Such taxes are measured using the enacted tax rates that are assumed to be in effect when the differences reverse. Deductible temporary differences result principally from recording certain expenses in the financial statements in excess of amounts currently deductible for tax purposes. Taxable temporary differences result principally from tax depreciation in excess of book depreciation.
The Company evaluates for uncertain tax positions taken at each balance sheet date. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest cumulative benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax
authority. The Company's policy for interest and/or penalties related to underpayments of income taxes is to include interest and penalties in tax expenses.
The Company maintains a valuation allowance against its deferred tax assets when management believes it is more likely than not that all or a portion of a deferred tax asset may not be realized. Changes in valuation allowances are recorded in the period of change. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.
The Tax Cut and Jobs Act (the "Act") includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein minimum taxes are imposed on foreign income in excess of a deemed return on the tangible assets of foreign corporations. This income will effectively be taxed at a 10.5% tax rate. GILTI was effective for the Company starting in fiscal 2019. The Company has elected to account for GILTI as a component of tax expense in the period in which the Company is subject to the rules.
S. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.
Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 - Quoted market prices in active markets for identical assets or liabilities
Level 2 - Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3 - Unobservable inputs that are not corroborated by market data
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The book value of cash equivalents, accounts receivable, and accounts payable are considered to be representative of their fair values because of their short maturities. The carrying value of debt is considered to approximate the fair value based on the borrowing rates currently available to us for loans with similar terms and maturities. Fair value measurements of non-financial assets and non-financial liabilities are primarily used in goodwill, other intangible assets and long-lived assets impairment analysis, the valuation of acquired intangibles and in the valuation of assets held for sale. Goodwill and intangible assets are valued using Level 3 inputs.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
T. SHARE-BASED COMPENSATION
Share-based compensation is measured at the grant date, based on the calculated fair value of the award and the probability of meeting its performance condition, and is recognized as expense when it is probable that the performance conditions will be met over the requisite service period (generally the vesting period). Share-based expense includes expense related to restricted shares and performance shares issued under the Company's 2007 Long-Term Incentive Plan ("2007 Plan") and the Company's 2007 Plan Long-Term Incentive Plan (Amended and Restated as of November 16, 2016) (as further amended, the "2016 Plan"). The Company recognizes share-based expense within selling, general, and administrative expense.
U. GOING CONCERN
In accordance with ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. This evaluation requires management to perform two steps. First, management must evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern. Second, if management concludes that substantial doubt is raised, management is required to consider whether it has plans in place to alleviate that doubt. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Disclosures in the notes to the consolidated financial statements are required if management concludes that substantial doubt exists or that its plans alleviate the substantial doubt that was raised. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty. See Note 5, Debt, for further discussion regarding the Company's Credit Agreement, which matures in fewer than 12 months and management's plan related to going concern.
2. Inventories
Inventories at September 30 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Raw materials and supplies
|
$
|
6,548
|
|
|
$
|
4,512
|
|
Work-in-process
|
3,786
|
|
|
2,721
|
|
Finished goods
|
5,235
|
|
|
3,276
|
|
Total inventories
|
$
|
15,569
|
|
|
$
|
10,509
|
|
If the FIFO method had been used for the entire Company, inventories would have been $8,286 and $8,296 higher than reported at September 30, 2020 and 2019, respectively. LIFO benefit was $10 and $75 in fiscal 2020 and 2019, respectively.
There was no LIFO liquidation in fiscal 2020. In fiscal 2019, results showed a reduction of inventory resulting in liquidations of LIFO inventory quantities. The estimated liquidation of LIFO inventory quantities results in a projected increase in cost of goods sold of approximately $340 during fiscal 2019. These inventories were carried in prior periods at the then prevailing costs, which were accurate at the time, but differ from the current manufacturing cost and/or material costs.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
3. Goodwill and Intangible Assets
The Company’s intangible assets by major asset class subject to amortization as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
Weighted Average Life at September 30,
|
|
Original
Cost
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Currency Translation
|
|
Net Book
Value
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
8 years
|
|
$
|
1,876
|
|
|
$
|
1,729
|
|
|
$
|
—
|
|
|
$
|
(12)
|
|
|
$
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology asset
|
5 years
|
|
1,869
|
|
|
1,843
|
|
|
—
|
|
|
(24)
|
|
|
2
|
|
Customer relationships
|
10 years
|
|
13,589
|
|
|
11,833
|
|
|
—
|
|
|
(3)
|
|
|
1,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
$
|
17,334
|
|
|
$
|
15,405
|
|
|
$
|
—
|
|
|
$
|
(39)
|
|
|
$
|
1,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
8 years
|
|
$
|
1,876
|
|
|
$
|
1,503
|
|
|
$
|
—
|
|
|
$
|
(13)
|
|
|
$
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology asset
|
5 years
|
|
1,869
|
|
|
1,544
|
|
|
—
|
|
|
(28)
|
|
|
297
|
|
Customer relationships
|
10 years
|
|
13,589
|
|
|
10,859
|
|
|
—
|
|
|
(67)
|
|
|
2,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
$
|
17,334
|
|
|
$
|
13,906
|
|
|
$
|
—
|
|
|
$
|
(108)
|
|
|
$
|
3,320
|
|
The amortization expense on identifiable intangible assets for fiscal 2020 and 2019 was $1,497 and $1,648, respectively.
Amortization expense associated with the identified intangible assets is expected to be as follows:
|
|
|
|
|
|
|
Amortization
Expense
|
Fiscal year 2021
|
$
|
1,009
|
|
Fiscal year 2022
|
327
|
|
Fiscal year 2023
|
250
|
|
Fiscal year 2024
|
177
|
|
Fiscal year 2025
|
127
|
|
Goodwill is not amortized, but is subject to an annual impairment test. The Company tests its goodwill for impairment in the fourth fiscal quarter, and in interim periods if certain events occur indicating that the carrying amount of goodwill may be impaired.
The Company uses a fair value measurement approach which combines the income (discounted cash flow method) and market valuation (market comparable method) techniques for each of the Company’s reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparable, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions (Level 3 inputs).
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.
2020 Annual Goodwill Impairment Tests
SIFCO performed its annual impairment test as of July 31, 2020 for the Cleveland, Ohio ("Cleveland") reporting unit, it was determined that the fair value of the reporting unit exceeds the carrying value. No impairment charge as of September 30, 2020.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
2019 Annual Goodwill Impairment Tests
During the third quarter of fiscal 2019, management reviewed qualitative factors under ASC 350 ("Topic 350"), which triggered an interim goodwill assessment as of May 31, 2019 for its Maniago reporting unit. Certain qualitative factors, such as lower sales due to the soft energy market and continued under-performance relative to projected future operating results were factors that led the Company to perform an interim assessment of goodwill.
Upon completion of the interim impairment test performed in fiscal 2019 for the Maniago reporting unit, it was determined that the fair value of the reporting unit for Maniago did not exceed the carrying value, which resulted in a full write-down of the reporting unit's goodwill in the third quarter of fiscal 2019 in the amount of $8,294 (non-cash charge).
Upon completion of the annual impairment testing for the Cleveland reporting unit, it was determined that the fair value of the reporting unit exceeds the carrying value. As such, no additional impairment of goodwill existed as of September 30, 2019.
Goodwill is expected to be deductible for tax purposes. Changes in the net carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
$
|
12,020
|
|
Goodwill impairment adjustment
|
(8,294)
|
|
Currency translation
|
(233)
|
|
Balance at September 30, 2019
|
3,493
|
|
Goodwill impairment adjustment
|
—
|
|
Currency translation
|
—
|
|
Balance at September 30, 2020
|
$
|
3,493
|
|
|
|
|
|
|
|
|
|
|
|
4. Accrued Liabilities
Accrued liabilities at September 30 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Accrued employee compensation and benefits
|
$
|
5,476
|
|
|
$
|
4,238
|
|
|
|
|
|
|
|
|
|
Accrued workers’ compensation
|
546
|
|
|
181
|
|
|
|
|
|
|
|
|
|
Contract liabilities
|
636
|
|
|
382
|
|
|
|
|
|
Other accrued liabilities
|
1,632
|
|
|
756
|
|
Total accrued liabilities
|
$
|
8,290
|
|
|
$
|
5,557
|
|
5. Debt
Debt at September 30 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Revolving credit agreement
|
$
|
12,870
|
|
|
$
|
15,542
|
|
Foreign subsidiary borrowings
|
5,759
|
|
|
6,592
|
|
Capital lease obligations
|
80
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net of unamortized debt issuance cost $(20) and $(25)
|
5,911
|
|
|
1,108
|
|
Total debt
|
24,620
|
|
|
23,380
|
|
|
|
|
|
Less – current maturities
|
(20,014)
|
|
|
(21,328)
|
|
Total long-term debt
|
$
|
4,606
|
|
|
$
|
2,052
|
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Credit Agreement and Security Agreement of 2018
On August 8, 2018, the Company entered into an asset-based Credit Agreement ("Credit Agreement") and a Security Agreement (“Security Agreement”) with its current lender. The Credit Agreement matures on August 6, 2021 and is comprised of a senior secured revolving credit facility with a maximum borrowing of $30,000. The Credit Agreement also has an accordion feature, which allows the Company to increase maximum borrowings by up to $10,000 upon consent of the existing lender or upon additional lenders joining the Credit Agreement. The terms of the Credit Agreement contain both a lock box arrangement and subjective acceleration clause. As a result, the amount outstanding on the revolving credit facility is classified as a short-term liability. The proceeds from the Credit Agreement were used to pay fees and expenses incurred in connection with entering into the Credit Agreement and continue to be used for working capital purposes and general corporate purposes.
The Credit Agreement contains affirmative and negative covenants and events of defaults. As set forth in the Credit Agreement, the Company is required to maintain a fixed charge coverage ratio ("FCCR") of 1.1 to 1.0 any time the availability is equal to or less than 12.5% of the revolving commitment. In the event of a default, the Company may not be able to access the revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities. See discussion below regarding the Fourth Amendment (the "Fourth Amendment") to the Credit Agreement and Security Agreement discussion, which revises the provision related to FCCR.
On November 5, 2018, the Company entered into the First Amendment with its lender. The First Amendment retroactively amended certain definitions and provisions effective as of the original closing date to clarify the parties' original understanding.
On December 17, 2018, the Company entered into an Export Credit Agreement (the “Export Credit Agreement”) with its Lender. Pursuant to the terms of the Export Credit Agreement, the Lender will lend amounts to the Company on foreign receivables that are guaranteed by the Export-Import Bank of the United States of America. The Export Credit Agreement provides for a revolving commitment of $5,000, therefore increasing the maximum borrowing of the revolver to $35,000. The borrowings under the Export Credit Agreement will bear interest at (depending on the type of borrowing) the Prime or LIBOR Rate, plus the applicable margin as set forth in the Export Credit Agreement. The maturity date under the Export Credit Agreement is August 6, 2021 (or such earlier date as the revolving commitments under the Export Credit Agreement are reduced to zero or otherwise terminated). The Export Credit Agreement contains customary representations, warranties, covenants and events of default, including, without limitation, the affirmative covenants under the Company’s Credit Agreement dated August 8, 2018, as amended with the Lender. In connection with entering into the Export Credit Agreement, the Company also entered into the Second Amendment (the “Second Amendment”) to its Credit Agreement. The Second Amendment amends certain definitions and provisions to provide for the Company’s entrance into the Export Credit Agreement.
On March 29, 2019, the Company entered into a Third Amendment with its Lender. This amendment extended the time frame for when certain post-closing requirements would be satisfied by March 31, 2019 to June 30, 2019. These post-closing requirements were completed by June 30, 2019.
On September 20, 2019, the Company entered into a Fourth Amendment with its Lender. As previously stated, the Company is subject to certain customary loan covenants if availability is less than or equal to 12.5% of the revolving commitment for three or more business days in any consecutive 30 day period; however, the Fourth Amendment to the Credit Agreement resulted in the reduction of its availability from 12.5% of the revolving commitment to 10% of the lesser of the collateral or total revolving commitment, with a $2,000 floor through June 30, 2020. This previous requirement prior to the Fourth Amendment reset on July 1, 2020. As of September 30, 2020 and 2019, the total collateral was $26,964 and $24,000, respectively, and the revolving commitment was $35,000 for both periods. Total availability at September 30, 2020 and 2019 was $13,284 and $7,709, respectively, which exceed both the collateral and total commitment threshold. If availability had fallen short, the Company would be required to meet the FCCR covenant, which must not be less than 1.1 to 1.0. Because the availability was greater than the 12.5% of the revolving commitment as of September 30, 2020, the FCCR calculation was not required.
Amounts borrowed under the Credit Agreement are secured by substantially all the assets of the Company and its U.S. subsidiaries and a pledge of 66.67% of the stock of its first-tier non-U.S. subsidiaries. Borrowings will bear interest at the lender's established domestic rate or LIBOR, plus the applicable margin as set forth in the Credit Agreement. The revolver has a rate based on LIBOR plus a 1.50% spread, which was 1.7% and 3.6% at September 30, 2020 and 2019, respectively. The Export Credit Agreement has a rate based on LIBOR plus a 1.00% spread at September 30, 2020 and 1.25% spread at September 30, 2019, which was 1.2% and 3.4% at September 30, 2020 and 2019, respectively. The Company also has a commitment fee of 0.25% under the Credit Agreement to be incurred on the unused balance of the revolver.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Company's Credit Agreement is set to mature within the next twelve months. Absent being able to refinance, the reporting entity would not be able to meet its obligations within the next year. Although there is no assurance that management will be successful in completing such refinancing or that such refinancing will be on terms similar to the current Credit Agreement or otherwise satisfactory to management, management intends to refinance its Credit Agreement with its Lender and is deemed probable of being implemented which would mitigate any adverse conditions.
Foreign subsidiary borrowings
Foreign debt at September 30 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Term loan
|
$
|
2,670
|
|
|
$
|
2,318
|
|
Short-term borrowings
|
2,620
|
|
|
3,744
|
|
Factor
|
469
|
|
|
530
|
|
Total debt
|
$
|
5,759
|
|
|
$
|
6,592
|
|
|
|
|
|
Less – current maturities
|
(3,544)
|
|
|
(5,501)
|
|
Total long-term debt
|
$
|
2,215
|
|
|
$
|
1,091
|
|
|
|
|
|
Receivables pledged as collateral
|
$
|
1,859
|
|
|
$
|
672
|
|
Interest rates are based on Euribor rates plus spread which range from 1.0% to 4.2%. In December 2018, Maniago entered into a six month short-term debt arrangement with one of its lenders in the amount of $1,137, to be used for working capital purposes, which has been repaid as of the end of the fiscal year 2019. In September 2020, Maniago entered into a long-term term debt agreement in the amount of $1,465, which was used to repay existing debt and for working capital purposes. The long-term loan repayment schedule is over a 72 month period and has a rate based on EURIBOR plus 3.20% spread, which was 2.7% at September 30, 2020. To assist with the preservation of liquidity and uncertainty of COVID-19, subsequent to September 30, 2020, Maniago finalized with certain lenders a deferment of payments ranging between 6 to 12 months which has been reflected within the future minimum payment schedule.
The Company factors receivables from one of its customers. The factoring programs are uncommitted, whereby the Company offers receivables for sale to an unaffiliated financial institution, which are then subject to acceptance by the unaffiliated financial institution. Following the sale and transfer of the receivables to the unaffiliated financial institution, the receivables are not isolated from the Company, and effective control of the receivables is not passed to the unaffiliated financial institution, which does not have the right to pledge or sell the receivables. The Company accounts for the pledge of receivables under this agreement as short-term debt and continues to carry the receivables on its consolidated balance sheets.
Payments on long-term debt under the foreign term debt and other debt (excluding finance lease obligations, see Note 10, Leases, of the consolidated financial statements) over the next 5 years are as follows:
|
|
|
|
|
|
|
|
|
|
|
Minimum long-term debt payments
|
|
|
|
2021
|
|
$
|
3,995
|
|
2022
|
|
2,789
|
|
2023
|
|
595
|
|
2024
|
|
575
|
|
2025
|
|
381
|
|
thereafter
|
|
266
|
|
Total Minimum long-term debt payments
|
|
$
|
8,601
|
|
|
|
|
|
|
|
|
|
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Debt issuance costs
The Company incurred debt issuance costs as it pertains to the Credit Agreement in the amount of $212, and incurred additional costs in fiscal 2019 of $75 related to the First and Second Amendments, which are included in the consolidated balance sheet as a deferred charge in other current assets, net of amortization of $205 and $106 at September 30, 2020 and 2019, respectively.
Other
In response to the economic uncertainty created by the COVID-19 pandemic, as described above in Note 1, Summary of Significant Accounting Policies, and taking into consideration the Company’s market capitalization, status as a smaller reporting company, and uncertainties and volatility in, and disruptions to, the capital markets, as well as the terms of the Company’s Credit Agreement, the Company applied for and received funds under Paycheck Protection Program (or "PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). On April 10, 2020, the Company entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP Loan”). The PPP Loan to the Company was made through JPMorgan Chase Bank, N.A., a national banking association and the Company’s existing lender. The note has an aggregate principal amount of approximately $5,025 and a two year term. The interest rate on the PPP Loan is 0.98%, which was deferred for the first six months of the term of the loan. The promissory note evidencing the PPP Loan contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company. The loan proceeds were received on April 10, 2020 and were used for payroll, interest on mortgage obligations, rents on leases and utility payments. The Company repaid $261 of proceeds back to its lender, leaving a remaining balance of $4,764, of which $3,176 will be paid in the next twelve months and the remaining $1,588 in the following twelve months after, pending any forgiveness of such loan, as described below.
Under the terms of the CARES Act, PPP Loan recipients can apply for and potentially be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. Although the Company intends to file for forgiveness, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. As of September 30, 2020, the Company is waiting for further guidance regarding how to apply for the forgiveness for all or a portion of the PPP loan.
6. Revenue
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.
The following table represents a breakout of total revenue by customer type:.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Commercial revenue
|
|
$
|
48,335
|
|
|
$
|
54,999
|
|
Military revenue
|
|
65,238
|
|
|
57,455
|
|
Total
|
|
$
|
113,573
|
|
|
$
|
112,454
|
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The following table represents revenue by the various components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
Net Sales
|
|
2020
|
|
2019
|
Aerospace components for:
|
|
|
|
|
Fixed wing aircraft
|
|
$
|
52,039
|
|
|
$
|
52,895
|
|
Rotorcraft
|
|
31,454
|
|
|
23,602
|
|
Energy components for power generation units
|
|
16,682
|
|
|
17,646
|
|
Commercial product and other revenue
|
|
13,398
|
|
|
18,311
|
|
Total
|
|
$
|
113,573
|
|
|
$
|
112,454
|
|
The following table represents revenue by geographic region based on the Company's selling operation locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
Net Sales
|
|
2020
|
|
2019
|
North America
|
|
$
|
98,144
|
|
|
$
|
95,667
|
|
Europe
|
|
15,429
|
|
|
16,787
|
|
Total
|
|
$
|
113,573
|
|
|
$
|
112,454
|
|
In addition to the disaggregating revenue information provided above, approximately 59% and 56% of total net sales as of September 30, 2020 and 2019, respectively, was recognized on an over-time basis because of the continuous transfer of control to the customer, with the remainder recognized as a point in time.
Contract Balances
Generally, payment is due shortly after the shipment of goods. For performance obligations recognized at a point in time, a contract asset is not established as the billing and revenue recognition occur at the same time. For performance obligations recognized over time, a contract asset is established as revenue that is recognized prior to billing and shipment. Upon shipment and billing, the value of the contract asset is reversed and accounts receivable is recorded. In circumstances where prepayments are required and payment is made prior to satisfaction of performance obligations, a contract liability is established. If the satisfaction of the performance obligation occurs over time, the contract liability is reversed over the course of production. If the satisfaction of the performance obligation is point in time, the contract liability reverses upon shipment.
The following table contains a roll forward of contract assets and contract liabilities for the period ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets - Beginning balance, October 1, 2018
|
|
$
|
10,140
|
|
Additional revenue recognized over-time
|
|
62,499
|
|
Less amounts billed to the customers
|
|
(62,290)
|
|
Contract assets - Ending balance, September 30, 2019
|
|
$
|
10,349
|
|
Additional revenue recognized over-time
|
|
67,043
|
|
Less amounts billed to the customers
|
|
(65,395)
|
|
Contract assets - Ending balance, September 30, 2020
|
|
$
|
11,997
|
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities (included within Accrued liabilities) - Beginning balance, October 1, 2018
|
|
$
|
—
|
|
Payments received in advance of performance obligations
|
|
(2,000)
|
|
Performance obligations satisfied
|
|
1,618
|
|
Contract liabilities (included within Accrued liabilities) - Ending balance, September 30, 2019
|
|
$
|
(382)
|
|
Payments received in advance of performance obligations
|
|
(865)
|
|
Performance obligations satisfied
|
|
611
|
|
Contract liabilities (included within Accrued liabilities) - Ending balance, September 30, 2020
|
|
$
|
(636)
|
|
There were no impairment losses recorded on contract assets during the year ended September 30, 2020 and 2019, respectively.
Remaining performance obligations
As of September 30, 2020 and 2019, the Company has $91,135 and $117,600, respectively, of remaining performance obligations, the majority of which are anticipated to be completed within the next twelve months.
7. Income Taxes
The components of income (loss) before income tax benefit are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
|
|
2020
|
|
2019
|
|
|
U.S.
|
$
|
10,071
|
|
|
$
|
3,416
|
|
|
|
Non-U.S.
|
(1,091)
|
|
|
(11,623)
|
|
|
|
Income (loss) before income tax benefit
|
$
|
8,980
|
|
|
$
|
(8,207)
|
|
|
|
Income tax benefit consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
|
|
2020
|
|
2019
|
|
|
Current income tax provision (benefit):
|
|
|
|
|
|
U.S. federal
|
$
|
—
|
|
|
$
|
—
|
|
|
|
U.S. state and local
|
19
|
|
|
(27)
|
|
|
|
Non-U.S.
|
192
|
|
|
(109)
|
|
|
|
Total current tax provision (benefit)
|
211
|
|
|
(136)
|
|
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
U.S. federal
|
10
|
|
|
8
|
|
|
|
U.S. state and local
|
1
|
|
|
2
|
|
|
|
Non-U.S.
|
(433)
|
|
|
(575)
|
|
|
|
Total deferred tax provision (benefit)
|
(422)
|
|
|
(565)
|
|
|
|
Income tax benefit
|
$
|
(211)
|
|
|
$
|
(701)
|
|
|
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The income tax benefit in the accompanying consolidated statements of operations differs from amounts determined by using the statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
|
|
2020
|
|
2019
|
|
|
Income (loss) before income tax benefit
|
$
|
8,980
|
|
|
$
|
(8,207)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) at U.S. federal statutory rates
|
$
|
1,886
|
|
|
$
|
(1,723)
|
|
|
|
Tax effect of:
|
|
|
|
|
|
Foreign rate differential
|
—
|
|
|
1,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes
|
20
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Federal tax credits
|
(135)
|
|
|
(144)
|
|
|
|
Valuation allowance
|
(2,025)
|
|
|
(556)
|
|
|
|
|
|
|
|
|
|
Other
|
43
|
|
|
10
|
|
|
|
Income tax benefit
|
$
|
(211)
|
|
|
$
|
(701)
|
|
|
|
As described above, on March 27, 2020, the CARES Act was enacted and signed into law, which includes provisions relating to refundable payroll tax credits, deferral of certain payment requirements for the employer portion of Social Security taxes, net operating loss carryback periods and temporarily increasing the amount of net operating losses that corporations can use to offset income, alternative minimum tax ("AMT") credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not materially affect the Company’s fiscal 2020 income tax provision, deferred tax assets and liabilities, or related taxes payable. The Company continues to assess the future implications of these provisions within the CARES Act on its consolidated financial statements but does not expect the impact to be material.
Deferred tax assets and liabilities at September 30 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Net U.S. operating loss carryforwards
|
$
|
3,543
|
|
|
$
|
5,002
|
|
Net non-U.S. operating loss carryforwards
|
789
|
|
|
866
|
|
Employee benefits
|
2,688
|
|
|
2,456
|
|
Inventory reserves
|
1,049
|
|
|
970
|
|
Allowance for doubtful accounts
|
73
|
|
|
144
|
|
|
|
|
Intangibles
|
2,197
|
|
|
2,535
|
|
Foreign tax credits
|
1,724
|
|
|
1,724
|
|
Other tax credits
|
1,359
|
|
|
1,232
|
|
Other
|
1,171
|
|
|
918
|
|
Total deferred tax assets
|
14,593
|
|
|
15,847
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation
|
(8,653)
|
|
|
(8,135)
|
|
|
|
|
|
Prepaid expenses
|
(376)
|
|
|
(192)
|
|
Other
|
(1,635)
|
|
|
(1,681)
|
|
Total deferred tax liabilities
|
$
|
(10,664)
|
|
|
$
|
(10,008)
|
|
Net deferred tax assets
|
3,929
|
|
|
5,839
|
|
Valuation allowance
|
(5,329)
|
|
|
(7,557)
|
|
Net deferred tax liabilities
|
(1,400)
|
|
|
(1,718)
|
|
|
|
|
|
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
At September 30, 2020, the Company has a non-U.S. tax loss carryforward of approximately $6,141 related to the Company’s non-operating and Italian subsidiaries. The Company's non-operating subsidiary ceased operations in 2007 and therefore, a valuation allowance has been recorded against the deferred tax asset related to the Irish tax loss carryforward because it is unlikely that such operating loss can be utilized unless the Irish subsidiary resumes operations. Additionally, a valuation allowance has been recorded in fiscal 2020 against a portion of the deferred tax asset related to the Italian tax loss carryforward that was not considered realizable. The non-operating and Italian tax loss carryforwards do not expire.
The Company has $1,724 of foreign tax credit carryforwards that are subject to expiration in fiscal 2023-2028, $1,182 of U.S. general business tax credits that are subject to expiration in 2035-2040, and $12,943 of U.S. Federal tax loss carryforwards with $9,622 subject to expiration in fiscal 2037 and $3,321 that do not expire. A valuation allowance has been recorded against the deferred tax assets related to the foreign tax credit carryforwards, U.S. general business credits, and U.S. Federal tax loss carryforwards.
In addition, the Company has $178 of U.S. state tax credit carryforwards subject to expiration in fiscal 2022-2024 and $25,782 of U.S. state and local tax loss carryforwards subject to expiration in fiscal 2021-2039. The U.S. state tax credit carryforwards and U.S. state and local tax loss carryforwards have been fully offset by a valuation allowance.
As of fiscal 2020, the valuation allowance on the Company’s U.S. net deferred tax assets is $5,329. Each reporting period, the Company assesses available positive and negative evidence and estimate in determining the realizability of its deferred tax assets. Through fiscal 2019, the Company’s history of U.S. operating losses has resulted in significant negative evidence requiring a full valuation allowance to be recorded against the U.S. net deferred tax assets. Recent positive evidence includes profitable fiscal 2020 U.S. results, however, there continues to be uncertainty as a result of the ongoing COVID-19 pandemic. Accordingly, the Company has maintained a full valuation allowance on its U.S. net deferred tax assets in fiscal 2020. However, it is reasonably possible that sufficient positive evidence required to release all, or a portion, of the valuation allowance in the U.S. will exist within the next 12 months.
The Company reported liabilities for uncertain tax positions, excluding any related interest and penalties, of $22 for both fiscal 2020 and 2019. If recognized, $22 of the fiscal 2020 uncertain tax positions would impact the effective tax rate. As of September 30, 2020, the Company had accrued interest of $14 and recognized $1 for interest and penalties in operations. The Company classifies interest and penalties on uncertain tax positions as income tax expense. A summary of activity related to the Company’s uncertain tax position is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Balance at beginning of year
|
$
|
22
|
|
|
$
|
53
|
|
|
|
|
|
Decrease due to lapse of statute of limitations
|
—
|
|
|
(31)
|
|
|
|
|
|
Balance at end of year
|
$
|
22
|
|
|
$
|
22
|
|
The Company is subject to income taxes in the U.S. federal jurisdiction, Ireland, Italy and various states and local jurisdictions. The Company believes it has appropriate support for its federal income tax returns. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2017, state and local income tax examinations for fiscal years prior to 2014, or non-U.S. income tax examinations by tax authorities for fiscal years prior to 2007.
The Company does not record deferred taxes on the undistributed earnings of its non-U.S. subsidiaries as it does not expect the temporary differences related to those unremitted earnings to reverse in the foreseeable future. As of September 30, 2020, the Company's non-U.S. subsidiaries had accumulated deficits of approximately $485. Future distributions of accumulated earnings of the Company's non-U.S. subsidiaries may be subject to nominal withholding taxes.
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
8. Retirement Benefit Plans
Defined Benefit Plans
The Company and certain of its subsidiaries sponsor four defined benefit pension plans covering some of its employees. The Company’s funding policy for its defined benefit pension plans is based on an actuarially determined cost method allowable under Internal Revenue Service regulations. One of the defined benefit pension plans covers non-union employees of the Company’s U.S. operations who were hired prior to March 1, 2003. Benefit accruals ceased in March 2003. A second defined benefit plan covered employees at a business location that closed in December 2013, at which time benefits accruals ceased. The third defined pension plan covers one of the Company's union groups at the Cleveland location. See Notes 11 and 12, Commitment and Contingencies and Business information, for further discussion regarding its union status. Benefits accruals under this plan ceased in March 2020, when the then-current union disclaimed all interest in the bargaining unit. Curtailment occurred; however, there was no impact to consolidated financial statements. A new union has been certified and collective bargaining is underway. Such bargaining will determine whether benefit accruals under this plan will resume or whether retirement benefits will be provided through a defined contribution plan. The Company sponsors a fourth defined benefit plan for certain employees at its Maniago location. The plan is a severance entitlement payable to the Italian employees who qualified prior to December 27, 2006. The plan is considered an unfunded defined benefit plan and its liability is measured as the actuarial present value of the vested benefits to which the employees would be entitled if they separated at the consolidated balance sheet date.
The Company uses a September 30 measurement date for its U.S. defined benefit pension plans. Net pension expense, benefit obligations and plan assets for the Company-sponsored defined benefit pension plans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
September 30,
|
|
|
|
2020
|
|
2019
|
|
|
Service cost
|
$
|
341
|
|
|
$
|
299
|
|
|
|
Interest cost
|
832
|
|
|
1,055
|
|
|
|
Expected return on plan assets
|
(1,453)
|
|
|
(1,573)
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
752
|
|
|
429
|
|
|
|
|
|
|
|
|
|
Settlement cost
|
239
|
|
|
246
|
|
|
|
Net pension expense for defined benefit plans
|
$
|
711
|
|
|
$
|
456
|
|
|
|
The status of all defined benefit pension plans at September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Benefit obligations:
|
|
|
|
Benefit obligations at beginning of year
|
$
|
30,548
|
|
|
$
|
27,437
|
|
|
|
|
|
Service cost
|
341
|
|
|
299
|
|
Interest cost
|
832
|
|
|
1,055
|
|
Actuarial loss
|
2,037
|
|
|
3,691
|
|
Benefits paid
|
(1,965)
|
|
|
(1,914)
|
|
Currency translation
|
—
|
|
|
(20)
|
|
|
|
|
|
|
|
|
|
Benefit obligations at end of year
|
$
|
31,793
|
|
|
$
|
30,548
|
|
Plan assets:
|
|
|
|
Plan assets at beginning of year
|
$
|
20,970
|
|
|
$
|
22,052
|
|
Actual return on plan assets
|
1,930
|
|
|
622
|
|
|