# Sifco Industries Inc: Form 10-K for the period ended Sep 30, 2022

- Company: [Sifco Industries Inc](/companies/sif.md) (CIK 90168)
- Form: 10-K
- Filed: 2022-12-23
- Accepted by EDGAR: Dec 22, 2022, 19:58 ET
- Period: 2022-09-30
- Accession: 0000090168-22-000053
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/90168/000009016822000053/sif-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/90168/000009016822000053/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 12 months, 2021-10-01 to 2022-09-30 | $83.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 12 months, 2021-10-01 to 2022-09-30 | $85.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 12 months, 2021-10-01 to 2022-09-30 | −$1.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 12 months, 2021-10-01 to 2022-09-30 | $11.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 12 months, 2021-10-01 to 2022-09-30 | −$14.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 12 months, 2021-10-01 to 2022-09-30 | $645.0k | us-gaap:InterestExpense |
| Income tax | 12 months, 2021-10-01 to 2022-09-30 | −$43.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 12 months, 2021-10-01 to 2022-09-30 | −$9.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 12 months, 2021-10-01 to 2022-09-30 | −$1.65 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 12 months, 2021-10-01 to 2022-09-30 | −$1.65 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 12 months, 2021-10-01 to 2022-09-30 | 5,830,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 12 months, 2021-10-01 to 2022-09-30 | $298.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 12 months, 2021-10-01 to 2022-09-30 | $3.2m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2022-09-30 | $1.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $38.8m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $97.3m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $32.6m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2022-09-30 | $3.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-09-30 | $4.4m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2022-09-30 | $11.2m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2022-09-30 | $40.7m | us-gaap:StockholdersEquity |

## Business

As filed, 20,258 characters.

### A. The Company

SIFCO Industries, Inc. ("SIFCO," "Company," "we" or "our"), an Ohio corporation, was incorporated in 1916. The executive offices of the Company are located at 970 East 64th Street, Cleveland, Ohio 44103, and its telephone number is (216) 881-8600.

SIFCO is engaged in the production of forgings, sub-assemblies, and machined components primarily for the Aerospace and Energy ("A&E") markets. The processes and services include forging, heat-treating, chemical processing and machining. The Company's operations are conducted in a single business segment. Information relating to the Company's financial results is set forth in the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

### Impact of COVID-19 & Other Factors

The lingering impact and residual effects of the coronavirus ("COVID-19") pandemic, along with other factors, such as ongoing geopolitical tensions, have created strains on supply chains, and general economic conditions. While the exact timing and pace of recovery in our markets continues to be indeterminable, there are indications that commercial air travel is steadily recovering in certain areas. The long-term outlook remains positive given the nature of the industry, there continues to be uncertainty with respect to when commercial air traffic will return to pre-COVID-19 levels. Given the fluidity of the situation, it is still unclear how lasting and deep the ongoing economic impacts of COVID-19 will last.

During fiscal 2022, the effects of COVID-19 continued to have an impact on the Company’s results of operations. The Company has been impacted by delays in receiving orders and obtaining materials required to produce certain products. As sales volumes have fluctuated, the Company has taken measures to reduce costs by furloughing certain of its employees from time to time at one of its plant locations. Additionally, our operations are subject to global economic and geopolitical risks. For example, while the Company does not have a presence in these regions, the ongoing conflict between Russia and Ukraine has impacted economic activity as well as the availability and price of raw materials and energy. The Company continues to actively monitor these factors and find ways to mitigate the impact on its operations.

### B. Principal Products and Services

### Operations

SIFCO is a manufacturer of forgings and machined components for the A&E markets. We provide our customers with envelope and precision forgings, rough and finished machined components, as well as sub-assemblies. SIFCO services both original equipment manufacturers ("OEM") and aftermarket customers with products that range in size from approximately 2 to 1,200 pounds. The Company's strategic vision is to build a leading A&E company positioned for long-term, stable growth and profitability.

SIFCO's long-term plan is to have a balance comprised of military and commercial aerospace revenues, supplemented with energy, commercial space, and adjacent market components. In fiscal 2022, commercial and military revenues accounted for 47.4% and 52.6% of revenues, respectively, compared with 36.7% in commercial revenues and 63.3% in military revenues in fiscal 2021. The Company's capabilities are focused on supplying critical components, consisting primarily of steel, high temperature alloys, nickel alloys, titanium and aluminum.

SIFCO operates from multiple locations. SIFCO manufacturing facilities are located in Cleveland, Ohio ("Cleveland"); Orange, California ("Orange"); and Maniago, Italy ("Maniago"). SIFCO's operations are AS 9100D and/or ISO 9001:2015 certified and the Company also holds multiple National Aerospace and Defense Contractors Accreditation Program (“NADCAP”) certifications and site approvals from key OEM customers. During fiscal year 2022, the Company was subject to a NADCAP audit in Orange pursuant to which maintenance issues were identified that required remediation in order to meet the requisite qualifications for NADCAP Certification. The Company temporarily lost NADCAP Certification at its Orange location in the third quarter of fiscal 2022 and was required to outsource the process that required such certification to a third party. The Company has since regained such NADCAP Certification in Orange in the first quarter of fiscal 2023 and has been able to fully resume operations.

The Company's success is not dependent on patents, trademarks, licenses or franchises.

### Raw Materials

While the effects from the COVID-19 pandemic disrupted the global supply chain and availability of raw materials, SIFCO generally has multiple sources for its raw materials, which consist primarily of high-quality metals essential to its business. Suppliers of such materials are located principally in North America and Europe. SIFCO generally does not depend on a single source for the supply of its materials. Due to the limited supply of certain raw materials, some material is provided by a small number of suppliers; however, SIFCO believes that its sources are adequate for its business. The Company has experienced delays in the supply chain, which could effect our ability to timely obtain materials and components from our suppliers in the quantities we require or on favorable terms. As a result of supply chain disruptions and inflationary pressures, the Company has experienced increases in pricing for raw materials which could effect our customer demand and cost. However, SIFCO believes that its ability to pass through raw material costs on certain contractual agreements and discrete orders limits this exposure. For those contractual agreements, in which pass through pricing is not permissible, a material adverse effect upon the profitability of one or more of the affected contracts, future period financial reporting and performance may result.

### Products

SIFCO’s products are made primarily of steel, high temperature alloys, nickel alloy, titanium and aluminum. SIFCO's product offerings include: OEM and aftermarket components for aircraft and industrial gas turbine engines; steam turbine blades; structural airframe components; aircraft landing gear components; aircraft wheels and brakes; critical rotating components for helicopters; and commercial/industrial products. SIFCO also provides heat-treatment, surface-treatment, non-destructive testing and select machining and sub-assembly of forged components.

### Industry

The performance of the domestic and international air transport industry, the energy industry, as well as government defense spending, directly and significantly impact the performance of SIFCO. The impact of COVID-19 continues to be assessed by the Company as it has significantly impacted the commercial aerospace industry through the ongoing disruption of global travel, which remains uncertain. Therefore, as the effects of the pandemic continue to be fluid and ever changing, the shape and speed of recovery for the commercial aerospace industry remain uncertain. While demand for travel declined at a rapid pace beginning in the second half of our fiscal 2020 and has remained depressed compared to pre-pandemic levels, commercial air travel has progressively shown signs of recovery in recent months with increasing air traffic, primarily in certain domestic markets. The recovery in international commercial air travel has been slower with international travel moderately recovered from COVID-19 pandemic lows. The exact pace and timing of the commercial air travel recovery remains uncertain and is expected to continue to be uneven depending on factors such as trends in the number of COVID-19 infections (e.g., impact of new variants of COVID-19 resurfacing), the continued efficacy and public acceptance of vaccines and easing of quarantines and travel restrictions, among other factors.

- SIFCO supplies new and spare components to the U.S. military for aircraft, helicopters, vehicles, and munitions. The Company's top programs include Blackhawk (H60), V-22, C-130 and F-35. The defense budget in the United States varies from year to year, driven by defense procurement policy and government budget constraints. Coming out of the pandemic, the defense aerospace market has been impacted by COVID overproduction and build rates. Uncertainty may arise if the government reprioritizes funding as a result of, among other factors, potential changes in the threat environment, defense spending levels, government priorities, political leadership, procurement strategy, military strategy and planning, and broader changes in social, economic or political demands or priorities. Certain programs in which the Company participates have seen favorable trends, which are expected to continue.
- SIFCO supplies new and spare components for commercial aircraft, principally for large aircraft produced by Boeing and Airbus. As the pandemic has continued, the decrease in passenger air travel demand has impacted and continues to impact our customers' orders for new aircraft. Current estimates regarding the return of passenger air traffic to pre-COVID-19 levels is another two to four years as recovery has been extremely uneven. Increases in domestic leisure travel has led to some recovery and domestic business travel is expected to pick-up later into 2023, while international travel continues to lag as individual countries and regions have experienced varied recovery from, and resurgences in, the spread of COVID-19. Therefore, build rates, particularly the Boeing 777-9 (formerly 777X), 787, 737 Max and the Airbus A350, declined and partially rebounded in 2022, but not as quickly as previously anticipated.
- SIFCO supplies new and spare components to the energy industry, particularly the industrial gas and steam turbine markets. While alternative energy markets continue to strengthen, oil and gas prices are expected to rebound given rising gas prices from historic lows. As such, it's currently anticipated that purchases of parts and supplies within the industry will increase. SIFCO has positioned itself to be less dependent on OEM production, but with flexibility to address the demand cycle in this segment as well as continuing to support the aftermarket.
- SIFCO also supplies components to the commercial space industry, which is rapidly evolving. An increasing number of commercial companies are participating in the space launch and reentry industry, which brings continuous development, innovation in technologies, and new approaches in this market. We believe there is an opportunity for SIFCO to gain an increased market share as this industry continues to evolve and grow.

### Competition

SIFCO competes with numerous companies, both in and tangential to the A&E industry, of which fifteen are known by SIFCO. SIFCO competes with both U.S. and non-U.S. suppliers of forgings, some of which are significantly larger than SIFCO; however, our competitors range from companies focused on the A&E markets to large diversified corporations that may also have business interests outside of the A&E markets to smaller companies that offer a limited portfolio of products in this market. SIFCO believes that it has an advantage and distinguishes itself in the primary markets it serves due to its: (i) demonstrated A&E expertise; (ii) focus on quality and customer service; (iii) operating initiatives such as SMART (Streamlined Manufacturing Activities to Reduce Time/Cost) and Six Sigma; and (iv) broad range of capabilities and offerings. As customers establish and utilize new facilities throughout the world, SIFCO will continue to encounter non-U.S. competition. SIFCO believes it can expand its market share by (i) continuing to increase capacity utilization; (ii) broadening its product lines through investment in equipment that expands its manufacturing capabilities; and (iii) developing new customers in markets where the participants require similar technical competence and service as those in the A&E industries. See further discussion of the risks relating to competition SIFCO faces in Item 1A. *Risk Factors.*

### Government Contracts

Companies, such as SIFCO, that supply equipment and products to the U.S. military are subject to certain risks related to commercial relationships with the U.S. government and its agencies. Under the terms of these agreements, it is possible for demand and build rates to fluctuate or for the U.S. government to terminate existing contracts.

### Customers

During fiscal 2022, SIFCO had one direct customer that accounted for 11% of consolidated net sales; and 23% of the Company's consolidated net sales were from two customers and their direct subcontractors, which individually accounted for 12% and 11% of net sales, respectively. SIFCO believes that the loss of sales to such customers would result in a material adverse impact on the business. However, SIFCO has maintained a business relationship with these customers for many years and is currently conducting business with them under multi-year agreements. Although there is no assurance that these relationships will continue, as one or more major customers have reduced their purchases, SIFCO has generally been successful in gaining new business, thereby avoiding a material adverse impact on the Company. SIFCO relies on its ability to adapt its services and operations to changing requirements of the market in general and its customers in particular. No material part of SIFCO’s business is seasonal. For additional financial information about geographic areas, refer to Note 12, *Business Information,* of the consolidated financial statements.

### Backlog of Orders

SIFCO’s total backlog as of September 30, 2022 increased to $81.9 million, compared with $77.2 million as of September 30, 2021. Orders for delivery scheduled in the upcoming fiscal year 2023 increased to $65.5 million compared with $59.3 million scheduled in fiscal 2022. Orders may be subject to modification or cancellation by the customer with limited charges. The increase in total backlog as of September 30, 2022 compared with the previous year is primarily due to timing of annual awards and SIFCO's customers adjusting orders due to recovery within the commercial airline industry. The continuing uncertainty regarding the COVID-19 pandemic and its impact on the commercial airline industry is expected and may continue to impact sales order backlog growth in that market into fiscal 2024. Backlog information may not be indicative of future sales.

### C. Regulatory Matters

The Company is subject to a number of domestic and foreign regulations relating to our operations worldwide and is required to comply with various environmental, health, and employee safety laws and regulations. The Company believes that it is in compliance with these laws and regulations. Historically, compliance with such laws and regulations have not had, and are not presently expected to have a material effect on capital expenditures, earnings or competitive position of the Company or its subsidiaries under existing regulations and interpretations. Nevertheless, the Company cannot guarantee that, in the future, it will not incur additional costs for compliance or that such costs will not be material.

### D. Human Capital Management

SIFCO employed approximately 378 full-time employees at the beginning of fiscal 2022, which decreased to approximately 348 employees at the end of fiscal 2022. In response to the impact of COVID-19 on the commercial aerospace industry (including declines in revenues of our customers), during fiscal 2022, the Company experienced one shutdown at its Orange facility, which primarily manufactures commercial aerospace product. While the Company has brought back the workforce subject to the shutdown, the Company has experienced a decrease in the number of employees.

The Company’s employees include full-time, part-time, and temporary employees. Approximately 67% of our employees were located within the U.S. and 33% of our employees were located in Italy. Approximately 65% of our workforce within the U.S. is composed of skilled and unskilled labor, and the remaining population includes management, corporate, administrative and support staff.

The Company is a party to collective bargaining agreements ("CBA") with certain employees within the Cleveland location. The Company ratified its CBA with one such bargaining unit in December 2019 and ratified its CBA with the second bargaining unit in December 2021. The Maniago location is party to the National Collective Agreement in Metalworking, which renewed in February 2021.

The skills, experience and industry knowledge of our employees significantly benefit our operations and performance. There are several ways in which we attract, develop, and retain highly qualified talent and measure the ongoing effectiveness of our human capital management practices, including by making the safety and health of our employees a top priority. The Company is focused on ensuring the health of our employees through the implementation of standards, controls, and inspections to help ensure that our operations and premises comply with national and local regulations. In addition, the Company conducts annual employee development reviews, identifies growth opportunities, which include employee rotations, and engages employees in continuous improvement activities.

During fiscal 2022, we experienced increased turnover, along with a shortage of applicants to fill staffing requirements at our U.S. locations due to the current labor shortage affecting most businesses across the United States. While this has adversely affected our operating efficiency, quality and delivery continue to meet or exceed customer standards as reflected in our customer scorecards. The steps we have taken to attract and retain labor include attending hiring events, broadening our recruitment platforms, paying retention bonuses, offering enhanced wages and paying sign-on bonuses.

We continue to implement, maintain, and, to the extent needed, update or modify, procedures and protocols developed in response to the COVID-19 pandemic to minimize the risk to the health and safety of our employees continuing to operate our facilities and provide products to our customers on a timely basis. We have consistently been able to meet our customers' demands for our products, while at the same time making the necessary investments to ensure that we prioritize the health, safety and welfare of our employees

### E. Non-U.S. Operations

The Company's products are distributed in the U.S. as well as non-U.S. markets.

Financial information about the Company's U.S. and non-U.S. operations is set forth in Note 12, *Business Information,* of the consolidated financial statements.

### F. Available Information

The Company files annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Securities Exchange Act of 1934, as amended. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that are filed by the Company at http://www.sec.gov.

In addition, our annual reports on Form 10-K, as well as our quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to all of the foregoing reports, are made available free of charge on or through the “Investor Relations” section of our website at www.sifco.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.

Information relating to our corporate governance at SIFCO, including the Audit Committee, Corporate Governance and Nominating Committee and Compensation Committee Charters, as well as the Corporate Governance Guidelines and Policies and the Code of Conduct & Ethics adopted by our Board of Directors, is available free of charge on or through the “Investor Relations” section of our website at www.sifco.com. References to our website or the SEC’s website do not constitute incorporation by reference of the information contained on such websites, and such information is not part of this Form 10-K.

## Risk factors

As filed, 50,989 characters.

Set forth below are material risks and uncertainties that could negatively affect our business and financial condition and could cause our actual results to differ materially from those expressed in forward-looking statements contained in this report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and financial condition. We face risks related to the COVID-19 pandemic, its affects, and actions in response thereto, which have exacerbated or could further exacerbate conditions in our risk factors noted below.

### Risks Related to Our Business and Operations

***We are subject to the cyclical nature of the A&E industries and the continuing or further downturn in these industries could adversely impact the demand for our products.***

The commercial aerospace industry is historically driven by the demand from commercial airlines for new aircraft. Demand for commercial aircraft is influenced by airline industry profitability, trends in airline passenger traffic, the state of U.S. and world economies, the ability of aircraft purchasers to obtain required financing and numerous other factors including the effects of terrorism, health and safety concerns and environmental constraints imposed upon aircraft operators. The commercial aerospace industry has been significantly impacted by the COVID-19 pandemic and may continue to be negatively impacted for a prolonged period of time and the magnitude of the impacts of the COVID-19 pandemic on this industry cannot be fully understood at this time. We have experienced changes in demand from our customers in this market and the reduction in demand for commercial aircraft will adversely impact our net sales and operating results.

In addition to the near term impact of the COVID-19 pandemic on the commercial aerospace industry, there is risk that the industry implements longer-term strategies involving reduced capacity, shifting route patterns, and mitigation strategies related to impacts from COVID-19 and the risk of future public health crises. Furthermore, airlines may experience reduced demand due to reluctance by the flying public to travel due to travel restrictions and/or social distancing requirements. As a result, there is significant uncertainty with respect to when commercial air traffic levels will fully recover, and whether and at what point capacity will return to and/or exceed pre-COVID-19 levels. The COVID-19 pandemic also has increased uncertainty with respect to global trade volumes, which could put negative pressure on cargo traffic levels. Any of these factors would have a significant impact on the demand within the commercial aerospace industry. In addition, a lengthy period of reduced industry-wide demand for commercial aircraft could put additional pressure on our suppliers, resulting in increased procurement costs and/or additional supply chain disruption. To the extent that the COVID-19 pandemic or its aftermath further impacts demand for our products and services or impairs the viability of some of our customers and/or suppliers, our financial condition, results of operations, and cash flows could be adversely affected, and those impacts could be material.

The military aerospace cycle is highly dependent on U.S. and foreign government funding; as well as the effects of terrorism, a changing global political environment, U.S. foreign policy, the retirement of older aircraft and technological improvements to new engines. Accordingly, the timing, duration and severity of cyclical upturns and downturns cannot be forecast with certainty. Downturns or reductions in demand could have a material adverse effect on our business.

The energy industry is also cyclical in nature. Demand for our new and spare components in this industry is, in turn, driven by the global demand for energy, which is affected by, among other factors, the state of the world economies, the political environments of numerous countries and environmental constraints. The availability of alternative energy to oil and gas, and related prices, also have a large impact on demand. Reductions in demand for products in this market could have a material adverse effect on our business.

Cyclical declines or sustained weakness in these markets could have a material adverse effect on our business.

***Government spending priorities and terms may change in a manner adverse to our business.***

At times, our supplying of products to the U.S. military has been adversely affected by significant changes in U.S. defense and national security budgets. Budget changes that result in a decline in overall spending, program delays, program cancellations or a slowing of new program starts on programs in which we participate could materially adversely affect our business, prospects, financial condition or results of operations. Future levels of expenditures and authorizations for defense-related programs by the U.S. government may decrease, remain constant or shift to programs in areas where we do not currently provide products, thereby reducing the chances that we will be awarded new contracts.

SIFCO has contracts for programs where the period of performance may exceed one year. Congress and certain foreign governments must usually approve funds for a given program each fiscal year and may significantly reduce funding of a program in a particular year. Significant reductions in these appropriations or the amount of new defense contracts awarded may affect our ability to complete contracts, obtain new work and grow our business. At times when there are perceived threats to national security, U.S. defense spending can increase; at other times, defense spending can decrease. Future levels of defense spending are uncertain and subject to congressional debate. Any reduction in future U.S. defense spending levels could adversely impact our sales, operating profit and cash flow.

Furthermore, business conducted pursuant to U.S. government contracts is subject to extensive procurement regulations and other unique risks. New procurement regulations, or changes to existing requirements, could increase compliance costs or otherwise have a material impact on the operating margins of the portion of our business derived from contracts with the U.S. government. The U.S. government contracting party may modify, curtail, or terminate its contracts and subcontracts with the company without prior notice either at its convenience or for default based on performance, and funding pursuant to our U.S. government contracts may be reduced or withheld as a part of the appropriations process due to fiscal constraints or due to changes in foreign or domestic policy strategy.

***Failure to retain existing contracts or win new contracts under competitive bidding processes may adversely affect our sales.***

SIFCO obtains most of its contracts through a competitive bidding process, and substantially all of the business that we expect to seek in the foreseeable future likely will be subject to a competitive bidding process. Competitive bidding presents a number of risks, including:

a. the need to compete against companies or teams of companies with more financial and marketing resources and more experience in bidding on and performing major contracts than we have;

b. the need to compete against companies or teams of companies that may be long-term, entrenched incumbents for a particular contract for which we are competing and that have, as a result, greater domain expertise and better customer relations;

c. the need to compete to retain existing contracts that have in the past been awarded to us on a sole-source basis or that have been incumbent for a long time;

d. the award of contracts to providers offering solutions at the “lowest price technically acceptable,” which may lower the profit we may generate under a contract awarded using this pricing method or prevent us from submitting a bid for such work due to us deeming such work to be unprofitable;

e. the reduction of margins achievable under any contracts awarded to us;

f. the need to bid on some programs in advance of the completion of their specifications, which may result in unforeseen technological difficulties or increased costs that lower our profitability;

g. the substantial cost and managerial time and effort, including design, development and marketing activities, necessary to prepare bids and proposals for contracts that may not be awarded to us;

h. the need to develop, introduce and implement new and enhanced solutions to our customers’ needs;

i. the need to locate and contract with teaming partners and subcontractors;

j. the need to accurately estimate the resources and cost structure that will be required to perform any contract that we are awarded; and

k. long term agreements - changes in our cost profile over the life of a long-term agreement.

If SIFCO wins a contract, and upon expiration, the customer requires further services of the type provided by the contract, there is frequently a competitive rebidding process. There can be no assurance that we will win any particular bid, that we will win the contract at the same profit margin, or that we will be able to replace business lost upon expiration or completion of a contract.

If SIFCO is unable to consistently retain existing contracts or win new contract awards, our business, prospects, financial condition and results of operations may be adversely affected.

***The Company may not receive the full amounts estimated under the contracts in our total backlog, which could reduce our sales in future periods below the levels anticipated, and which makes backlog an uncertain indicator of future operating results.***

As of September 30, 2022, our total backlog was $81.9 million. Orders may be canceled and scope adjustments may occur, and we may not realize the full amounts of sales that we anticipate in our backlog numbers. Further, there is no assurance that our customers will purchase all the orders represented in our backlog, due in part to the U.S. government’s ability to modify, curtail or terminate major programs. Additionally, the timing of receipt of orders, if any, on contracts included in our backlog could change. The failure to realize amounts reflected in our backlog could materially adversely affect our business, financial condition and results of operations in future periods.

### SIFCO business is dependent on a small number of direct and indirect customers.

A substantial portion of SIFCO's business is conducted with a relatively small number of large direct and indirect customers. In fiscal 2022, one direct customer accounted for approximately 11% percent of our consolidated net sales and two direct customers and their direct subcontractors accounted for approximately 23% of the Company’s consolidated net sales. A financial hardship experienced by any one of these key customers, the loss of any of them or a reduction in or substantial delay of orders from any of them could have a material adverse effect on our business.

***The Company's failure to identify, attract and retain qualified personnel could adversely affect our existing business, financial condition and results of operations.***

SIFCO may not be able to identify, attract or retain qualified technical personnel, sales and customer service personnel, employees with expertise in forging, or management personnel to supervise such activities. We may also not attract and retain employees who share the Company's core values, who can maintain and grow our existing business, and who are suited to work in a public company environment, which could adversely affect our financial condition and results of operations.

***The Company's business could be negatively affected by cybersecurity threats, information systems interruptions, intrusions or new software implementations and other disruptions.***

SIFCO faces cyber threats, as well as the potential for business disruptions associated with information technology failures and interruptions, new software implementation, and damaging weather or other acts of nature, and pandemics or other public health crises, which may adversely affect our business.

Although we continue to review and enhance our systems and cybersecurity controls, SIFCO has experienced and expects to continue to experience cybersecurity threats, including threats to our information technology infrastructure and attempts to gain access to the Company’s sensitive information, as do our customers, suppliers and subcontractors. Although we maintain information security policies and procedures to prevent, detect, and mitigate these threats, information system disruptions, equipment failures or cybersecurity attacks, such as unauthorized access, malicious software and other intrusions, could still occur and may lead to potential data corruption, exposure of proprietary and confidential information. Further, while SIFCO works cooperatively with its customers, suppliers and subcontractors to seek to minimize the impacts of cyber threats, other security threats or business disruptions, in addition to our internal processes, procedures and systems, it must also rely on the safeguards put in place by those entities.

Any intrusion, disruption, breach or similar event may cause operational stoppages, fines, penalties, diminished competitive advantages through reputational damages and increased operational costs. The costs related to cyber or other security threats or disruptions may not be fully mitigated by insurance or other means.

In connection with the COVID-19 pandemic, we provided for remote work for certain of our employees, which may increase our vulnerability to cyber and other information technology risks. In addition to existing risks, any adoption or deployment of new technologies via acquisitions or internal initiatives may increase our exposure to risks, breaches, or failures, which could materially adversely affect our results of operations or financial condition. Furthermore, the Company may have access to sensitive, confidential, or personal data or information that may be subject to privacy and security laws, regulations, or other contractually-imposed controls. Despite our use of reasonable and appropriate controls, material security breaches, theft, misplaced, lost or corrupted data, programming, or employee errors and/or malfeasance could lead to the compromise or improper use of such sensitive, confidential, or personal data or information, resulting in possible negative consequences, such as fines, ransom demands, penalties, loss of reputation, competitiveness or customers, or other negative consequences resulting in adverse impacts to our results of operations or financial condition.

***SIFCO relies on our suppliers to meet the quality and delivery expectations of our customers.***

The ability to deliver SIFCO's products on schedule is dependent upon a variety of factors, including execution of internal performance plans, availability of raw materials, internal and supplier produced parts and structures, conversion of raw materials into parts and assemblies, and performance of suppliers and others. We rely on numerous third-party suppliers for raw materials and a large proportion of the components used in our production process. Certain of these raw materials and components are available only from single sources or a limited number of suppliers, or similarly, customers’ specifications may require SIFCO to obtain raw materials and/or components from a single source or certain suppliers. Many of our suppliers are small companies with limited financial resources and manufacturing capabilities. We do not currently have the ability to manufacture these components ourselves. Consequently, we risk disruptions in our supply of key products and components if our suppliers fail or are unable to perform because of shortages in raw materials, operational problems, strikes, natural disasters, health crises (such as the COVID-19 or other pandemics) or other factors. We have and may continue to experience delays in the delivery of such products as a result of increased demands and pressures on the supply chain, customs, labor issues, geopolitical pressures, disruptions associated with the COVID-19 or other pandemics, changes in political, economic, and social conditions, weather, laws and regulations. Unfavorable fluctuations in price, international trade policies, quality, delivery, and availability of these products could continue to adversely affect the Company's ability to meet demands of customers and cause negative impacts to the Company's cost structure, profitability and its cash flow. It is unclear how our supply chain could be further impacted by COVID-19, including the spread of new variants, and there are many unknowns including how long we will be impacted, the severity of the impacts and the probability of a recurrence of COVID-19 or similar regional or global pandemics. If we were unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain could adversely affect our sales, earnings, financial condition, and liquidity.

We may have disputes with our vendors arising from, among other things, the quality of products and services or customer concerns about the vendor. If any of our vendors fail to timely meet their contractual obligations or have regulatory compliance or other problems, our ability to fulfill our obligations may be jeopardized. Economic downturns can adversely affect a vendor’s ability to manufacture or deliver products. Further, vendors may also be enjoined from manufacturing and distributing products to us as a result of litigation filed by third parties, including intellectual property litigation. If SIFCO were to experience difficulty in obtaining certain products, there could be an adverse effect on its results of operations and on its customer relationships and our reputation. Additionally, our key vendors could also increase pricing of their products, which could negatively affect our ability to win contracts by offering competitive prices.

Any material supply disruptions could adversely affect our ability to perform our obligations under our contracts and could result in cancellation of contracts or purchase orders, penalties, delays in realizing revenues, and payment delays, as well as adversely affect our ongoing product cost structure.

***Failure to perform by our subcontractors could materially and adversely affect our contract performance and its ability to obtain future business.***

The performance of contracts often involves subcontractors, upon which we rely to complete delivery of products to our customers. SIFCO may have disputes with subcontractors. A failure by a subcontractor to satisfactorily deliver products can adversely affect our ability to perform our obligations as a prime contractor. Any subcontractor performance deficiencies could result in the customer terminating our contract for default, which could expose us to liability for excess costs of re-procurement by the customer and have a material adverse effect on our ability to compete for other contracts.

***The Company's future success depends on the ability to meet the needs of its customer requirements in a timely manner.***

The Company believes that the commercial A&E markets in which we operate require sophisticated manufacturing and system-integration techniques and capabilities using composite and metallic materials. The Company’s success depends to a significant extent on our ability to acquire, develop, execute and maintain such sophisticated techniques and capabilities to meet the needs of our customers and to bring those products to market quickly and at cost-effective prices. If we are unable to acquire and/or develop, execute and maintain such techniques and capabilities, we may experience an adverse effect to our business, financial condition or results of operation.

***The Company faces certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or indemnity.***

We are exposed to liabilities that are unique to the products we provide. While we maintain insurance for certain risks, the amount of insurance or indemnity may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs from an accident or incident. It also is not possible for SIFCO to obtain insurance to protect against all operational risks and liabilities. Substantial claims resulting from an incident in excess of the indemnification we receive and our insurance coverage would harm our financial condition, results of operations and cash flows. Moreover, any accident or incident for which we are liable, even if fully insured, could negatively affect our standing with our customers and the public, thereby making it more difficult for us to compete effectively, and could significantly impact the cost and availability of adequate insurance in the future.

***The Company's business is subject to risks associated with international operations.***

SIFCO has operations in Maniago, Italy and operates internationally. A number of risks inherent in international operations could have a material adverse effect on our results of operations, including:

a. fluctuations in U.S. dollar value arising from transactions denominated in foreign currencies and the translation of certain foreign currency subsidiary balances;

b. difficulties in staffing and managing multi-national operations;

c. general economic and political uncertainties and potential for social unrest in countries in which we or our customers operate;

d. other deterioration of economic conditions, including the effect of inflation on our customers and suppliers;

e. limitations on our ability to enforce legal rights and remedies;

f. restrictions on the repatriation of funds;

g. changes in trade policies, laws, regulations, political leadership and environment, and/or security risks;

h. tariff regulations;

i. difficulties in obtaining export and import licenses and compliance with export/import controls and regulations;

j. the risk of government financed competition;

k. compliance with a variety of international laws as well as U.S. regulations, rules and practices affecting the activities of companies abroad; and

l. difficulties in managing and staffing international operations and the required infrastructure costs, including legal, tax, accounting, and information technology.

***We operate in a highly competitive and price sensitive industry, and customer pricing pressures could reduce the demand and/or price for our products and services.***

The end-user markets SIFCO serves are highly competitive and price sensitive. We compete globally with a number of domestic and international companies that have substantially greater manufacturing, purchasing, marketing and financial resources than we do. Many of SIFCO's customers have the in-house capability to fulfill their manufacturing requirements. SIFCO's larger competitors may be able to vie more effectively for very large-scale contracts than we can by providing different or greater capabilities or benefits such as technical qualifications, past performance on large-scale contracts, geographic presence, price and availability of key professional personnel. If SIFCO is unable to successfully compete for new business, our net sales growth and operating margins may decline. Competitive pricing pressures may have an adverse effect on our financial condition and operating results. Further, there can be no assurance that competition from existing or potential competitors will not have a material adverse effect on our financial results. If SIFCO does not continue to compete effectively and win contracts, our future business, financial condition, results of operations and our ability to meet its financial obligations may be materially compromised.

***The Company uses estimates when pricing contracts and any changes in such estimates could have an adverse effect on our profitability and our overall financial performance.***

When agreeing to contractual terms, some of which extend for multiple years, SIFCO makes assumptions and projections about future conditions and events. These projections assess the productivity and availability of labor, complexity of the work to be performed, cost and availability of materials, impact of delayed performance and timing of product deliveries. Contract pricing requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and costs at completion is complicated and subject to many variables. For example, assumptions are made regarding the length of time to complete a contract since costs also include expected increases in wages, prices for materials and allocated fixed costs. Similarly, assumptions are made regarding the future impact of our efficiency initiatives and cost reduction efforts. Incentives, awards or penalties related to performance on contracts are considered in estimating revenue and profit rates and are recorded when there is sufficient information to assess anticipated performance. Suppliers' assertions are also assessed and considered in estimating costs and profit rates.

Because of the significance of the judgment and estimation processes described above, it is possible that materially different amounts could be obtained if different assumptions were used or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may have a material adverse effect upon the profitability of one or more of the affected contracts, future period financial reporting and performance, as pass through pricing is not always permissible.

### Our technologies could become obsolete, reducing our revenues and profitability.

Technologies related to our products have undergone, and in the future may undergo, significant changes and the future of our business will depend in large part upon the continuing relevance of our forging capabilities. SIFCO could encounter competition from new or revised technologies that render its technologies and equipment less profitable or obsolete in our chosen markets and our operating results may suffer.

***If the Company fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately or timely report its financial results. As a result, current and potential shareholders could lose confidence in the Company's financial reporting, which would harm the business and the trading price of its common stock.***

The Sarbanes-Oxley Act, among other things, requires that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluations and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant management efforts. Our testing has, as described below, and in the future may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner, the market price of our stock could decline if investors and others lose confidence in the reliability of our financial statements and we could be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.

As further described in Item 9A in our Annual Report on Form 10-K, for the fiscal year ended September 30, 2022, management determined that SIFCO’s internal control over financial reporting and its disclosure controls and procedures were not effective. Management identified a material weakness related to lack of precise review controls associated with the valuation of inventory at the Orange location and long-lived asset impairment triggering event indicators in the fourth quarter at the Orange location. Until remediated, this material weakness could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. As with any internal control deficiency, there can be no assurance that our remedial measures will be successful or otherwise sufficient to address the material weakness. If the Company is unable to remediate the material weakness, or is otherwise unable to maintain effective internal control over financial reporting or disclosure controls and procedures, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, the Company’s ability to record, process and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected, which could subject the Company to litigation or investigations requiring management resources and payment of legal and other expenses, including civil penalties, negatively affect investor confidence in our financial statements and adversely impact our stock price.

***Labor disruptions by our employees or personnel turnover and/or shortage could adversely affect our business.***

As of September 30, 2022, we employed approximately 348 people. We face competition for management and employees from other companies and organizations. At various points since the start of the COVID-19 pandemic, we furloughed or terminated portions of our workforce as a result of the negative impact the pandemic and its effects had on the demand for our products and services. Although we took measures to maintain good relationships with our workforce, there can be no assurance that the act of furloughing or terminating our employees did not damage employee relations or our ability to attract and retain talent at all levels. As the demand for employees returns to pre-COVID-19 levels, if we continue to experience increased turnover and/or are unable to quickly hire employees and subsequently retain our workforce, or we experience a significant or prolonged work stoppage in such an environment, we may experience increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees, and our ability to secure new work and our results of operations and financial condition could be adversely affected. Additionally, two of our locations are parties to collective bargaining agreements. Although we have not experienced any material labor-related work stoppage and consider our relations with our employees to be good, labor stoppages may occur in the future. If the unionized workers were to engage in a strike or other work stoppage, or if SIFCO is unable to negotiate acceptable collective bargaining agreements with the unions, or if other employees were to become unionized, we could experience a significant disruption of our operations, higher ongoing labor costs and possible loss of customer contracts, which could have an adverse effect on our business and results of operations.

***The price and availability of oil and other energy sources worldwide could adversely impact our results of operations. Unexpected pricing of fuel or a shortage of, or disruption in, the supply of fuel or other energy sources could have a material adverse effect on our and our customers' business, results of operations and financial condition.***

Our results of operations can be directly affected, positively and negatively, by volatility in the cost and availability of energy, which is subject to global supply and demand and other factors beyond our control. The ongoing conflict between Russia and Ukraine has impacted global energy markets, particularly in Europe, leading to high volatility and increasing prices for crude oil, natural gas and other energy supplies. Our customers' businesses are significantly impacted by the availability and pricing of fuel. Weather-related events, natural disasters, terrorism, wars, political disruption or instability involving oil-producing countries, changes in governmental or cartel policy concerning crude oil or aircraft fuel production, labor strikes, cyberattacks or other events affecting refinery production, transportation, taxes, marketing, environmental concerns, market manipulation, price speculation and other unpredictable events may drive actual or perceived fuel supply shortages. In particular, the recent conflict between Russia and Ukraine has caused shortages in the availability of fuel. In the event that the supply of natural gas from Russia stops or is significantly reduced, there may be supply disruptions, increased prices, shutdowns of manufacturing facilities, or further rationing of energy supply within countries where we and/or our customers do business, which could have a material adverse impact on our and our customers' business or results of operations in those countries.

### Risks Related to Financial Matters

***Global economic conditions may adversely impact our business, operating results or financial condition.***

Disruption and volatility in global financial markets may lead to increased rates of default and bankruptcy and may negatively impact consumer and business spending levels. Since 2020, the widespread public health crisis caused by the COVID-19 outbreak has adversely impacted the economies and financial markets as well as various industries worldwide, resulting in a downturn that has adversely impacted many businesses, including ours. The ongoing pandemic and other events could adversely affect our business, operating results or financial condition. Current or potential customers may delay or decrease spending on our products and services as their business and/or budgets are impacted by economic conditions. The inability of current and potential customers to pay SIFCO for its products and services may adversely affect its earnings and cash flows.

Further, we are exposed to fluctuations in inflation, which could negatively affect our business, financial condition and results of operation. The United States and other jurisdictions have recently experienced high levels of inflation. If the inflation rate continues to increase, it will likely affect our expenses, including, but not limited to, employee compensation and labor expenses and increased costs for supplies, and we may not be successful in offsetting such cost increases.

We cannot predict changes in worldwide or regional economic conditions and government policies, as such conditions are highly volatile and beyond our control. If these conditions deteriorate for extended periods, however, our business, results of operations and financial condition could be materially adversely affected.

***Our indebtedness and restrictive covenants under our credit facilities could limit our operational and financial flexibility.***

We have incurred indebtedness, and may incur additional debt in the future. Our ability to make interest and scheduled principal payments and operate within restrictive covenants could be adversely impacted by changes in the availability, terms and cost of capital, changes in interest rates or changes in our credit ratings or our outlook. These changes could increase our cost of business, limiting our ability to pursue acquisition opportunities, react to market conditions and meet operational and capital needs, thereby placing us at a competitive disadvantage.

***The funding and costs associated with our pension plans and significant changes in key estimates and assumptions, such as discount rates and assumed long-term returns on assets, actual investment returns on our pension plan assets, and legislative and regulatory actions could affect our earnings, equity and contributions to our pension plans in future periods.***

Certain of the Company's employees are covered by its noncontributory defined benefit pension plans (“Plans”). The impact of these Plans on our earnings may be volatile in that the amount of expense we record and may materially change from year to year because those calculations are sensitive to changes in several key economic assumptions, including discount rates, inflation, expected return on plan assets, retirement rates and mortality rates. These pension costs are dependent on significant judgment in the use of various estimates and assumptions, particularly with respect to the discount rate and expected long-term rates of return on plan assets. Changes to these estimates and assumptions could have a material adverse effect on our financial position, results of operations or cash flows. Differences between actual investment returns and our assumed long-term returns on assets will result in changes in future pension expense and the funded status of our Plans, and could increase future funding of the Plans. Changes in these factors affect our plan funding, cash flows, earnings, and shareholders’ equity. Additionally, the Company contributed to a multi-employer retirement plan. While the Company withdrew from this plan to mitigate future costs, the Company may be subject to liability in connection with such withdrawal (see Note 8, *Retirement Benefit Plans).*

***Market volatility and adverse capital or credit market conditions may affect our ability to access cost-effective sources of funding and may expose SIFCO to risks associated with the financial viability of suppliers.***

The financial markets can experience high levels of volatility and disruption, reducing the availability of credit for certain issuers and the financial markets have undergone significant volatility in reaction to the COVID-19 pandemic and various economic factors.

The tightening of the credit market and standards, as well as capital market volatility, could negatively impact our ability to obtain additional debt financing on terms equivalent to our existing Credit Agreement. Capital market uncertainty and volatility, together with the Company’s market capitalization and status as a smaller reporting company, could also negatively impact our ability to obtain capital market financing or bank financing on favorable terms, or at all, which could have a material adverse effect on our financial position, results of operations or cash flows.

Tightening credit markets could also adversely affect our suppliers' ability to obtain financing. Delays in suppliers' ability to obtain financing, or the unavailability of financing, could negatively affect their ability to perform their contracts with SIFCO and cause our inability to meet our contract obligations. The inability of our suppliers to obtain financing could also result in the need for us to transition to alternate suppliers, which could result in significant incremental costs and delays.

***A write-off of all or part of our goodwill or other intangible assets could adversely affect our operating results and net worth.***

Goodwill and other intangible assets are a component of our assets. At September 30, 2022, goodwill was $3.5 million and other intangible assets were $0.5 million of our total assets of $97.3 million. We may have to write off all or part of our goodwill or other intangible assets if their value becomes impaired. Although this write-off would be a non-cash charge, it could reduce our earnings and our financial condition.

### General Risks

***Our business is subject to risks associated with widespread public health crises, including the current COVID-19 pandemic.***

In March 2020, the outbreak of 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 we conduct business. While we continue to actively monitor the pandemic and take steps to mitigate the risks posed by its spread, there is no guarantee that our efforts will mitigate the adverse impacts of COVID-19 or will be effective. Uncertain factors relating to the COVID-19 pandemic continue to include the duration of the outbreak, the severity of the disease, and the actions taken, or perception of actions that may be taken, to contain or treat its impact, including declarations and/or re-instituting states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/or other similar restrictions and limitations. We have continued to see a prolonged impact on the economy, our industry, and our business, with increased challenges for customers, labor shortages, supply chain disruptions, and increasing inflation, among others.

The pandemic has affected and is expected to continue to affect certain elements of our operations and business. As a result, we have been operating in industries which have been significantly impacted by the COVID-19 pandemic. As a result of the ongoing impacts of the pandemic, we have experienced, and may in the future experience, production site shutdowns, and workplace disruptions and restrictions on the movement of people, raw materials and goods, both at our own facilities and at the facilities operated by our customers and suppliers. Further or a more prolonged suspension of operations or delayed recovery in our operations, and/or any similar suspension of operations or delayed recovery at one or more of our key suppliers, or the failure of any of our key suppliers, would result in further challenges to our business, leading to a further material adverse effect on our business, financial condition, results of operations, and cash flows.

We have experienced and expect to continue to experience unpredictable changes in demand from the markets we serve. The A&E industries have been negatively impacted by the COVID-19 pandemic and its effects as a result of various restrictions on air travel and concern regarding air travel during a pandemic. These factors have caused reductions in demand for commercial aircraft, which have adversely impacted our net sales and operating results and may continue to do so for an extended period of time. Further, an overall reduction in business activity as a result of the disruption has led to a continued softening of the energy market. If the pandemic continues and/or conditions worsen, we may experience additional adverse impacts on our operations, costs, customer orders, and collections of accounts receivable, which may be material. While we are unable to predict the magnitude of the impact of these factors at this time, the loss of, or significant reduction in, purchases by our large customers could have a material adverse effect on our business, financial condition, and results of operations.

Additionally, the pandemic could lead to an extended disruption of economic activity whereby the impact on our consolidated results of operations, financial position and cash flows could be material. While the potential economic impact brought by and the duration of the coronavirus outbreak may be difficult to assess or predict, the continuation of a widespread pandemic could result in significant or sustained disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. While the Company believes it has adequate cash/liquidity available to finance its operations, our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, depends on our future performance, which is subject to general economic, financial, competitive and other factors (including the continued impact of COVID-19) beyond our control. In addition, while we believe we have taken appropriate steps to maintain a safe workplace to protect our employees from contracting and spreading the coronavirus, we may not be able to prevent the spread of the virus among our employees, face litigation or other proceedings making claims related to unsafe working conditions, inadequate protection of our employees or other claims. Any of these claims, even if without merit, could result in costly litigation or divert management's attention and resources. Furthermore, we may face a sustained disruption to our operations due to one or more of the factors described above.

The impact of the COVID-19 pandemic and its effects may also exacerbate other risks and uncertainties the Company faces or may face. The impact depends on the severity and duration of the current COVID-19 pandemic and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict.

### The price of our common stock may fluctuate significantly.

An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock.

Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares or at all. The market price of our common stock could fluctuate significantly for various reasons, which include:

a. our quarterly or annual earnings or those of our competitors or our significant customers;

b. the public’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission;

c. changes in earnings estimates or recommendations by research analysts who track the stocks of our competitors;

d. new laws or regulations or new interpretations of laws or regulations applicable to our business;

e. changes in accounting standards, policies, guidance, interpretations or principles;

f. changes in general conditions in the domestic and global economies or financial markets, including those resulting from war, incidents of terrorism, health crises (such as the ongoing COVID-19 pandemic) or responses to such events;

g. litigation involving our company or investigations or audits by regulators into the operations of our company or our competitors;

h. strategic action by our competitors;

i. sales of common stock by our directors, executive officers and significant shareholders; and

j. our stock being closely held by insider holdings and is thinly traded which impacts price volatility.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our common stock, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. If litigation is instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources.

***Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability and cash flow.***

SIFCO is subject to income taxes in the United States, Italy and Ireland. Significant judgment is required in determining our provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Changes in applicable income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates or changes in the taxability of certain sales or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. In addition, the final results of any tax audits or related litigation could be materially different from our related historical income tax provisions and accruals. Additionally, changes in our tax rate as a result of changes in our overall profitability, changes in tax legislation, changes in the valuation of deferred tax assets and liabilities, changes in differences between financial reporting income and taxable income, the examination of previously filed tax returns by taxing authorities and continuing assessments of our tax exposures can also impact our tax liabilities and affect our income tax expense, profitability and cash flow.

***Damage or destruction of our facilities caused by storms, earthquakes or other causes could adversely affect our financial results and financial condition.***

We have operations located in regions of the world that may be exposed to damaging storms, earthquakes and other natural disasters as well as other events outside of our control, such as fires, floods and other catastrophic events. We maintain standard property casualty insurance coverage for our properties and may be able to recover costs associated with certain natural disasters through insurance; however, even if covered by insurance, any significant damage or destruction of our facilities due to such events could result in our inability to meet customer delivery schedules and may result in the loss of customers and significant additional costs to SIFCO. Thus, any significant damage or destruction of our properties could have a material adverse effect on our business, financial condition or results of operations.

***The occurrence of litigation where we could be named as a defendant is unpredictable.***

From time to time, we are involved in various legal and other proceedings that are incidental to the conduct of our business. While we believe no current proceedings, if adversely determined, could have a material adverse effect on our financial results, no assurances can be given. Any such claims may divert financial and management resources that would otherwise be used to benefit our operations and could have a material adverse effect on our financial results.

***Our operations are subject to environmental laws, and complying with those laws may cause us to incur significant costs.***

Our operations and facilities are subject to numerous stringent environmental laws and regulations. Although we believe that we are in compliance with these laws and regulations, future changes in these laws, regulations or interpretations of them, or changes in the nature of our operations may require us to make significant capital expenditures to ensure compliance.

## Properties

As filed, 1,174 characters.

The Company’s property, plant and equipment include the facilities described below and a substantial quantity of machinery and equipment, most of which consists of industry specific machinery and equipment using special dies, jigs, tools and fixtures and in many instances having automatic control features and special adaptations. In general, the Company’s property, plant and equipment are in good operating condition, are well maintained, and its facilities are in regular use. The Company considers its investment in property, plant and equipment as of September 30, 2022 suitable and adequate given the current product offerings for the respective operations in the current business environment. The square footage numbers set forth in the following paragraph are approximations:

- SIFCO operates and manufactures in multiple facilities—(i) an owned 280,000 square foot facility located in Cleveland, Ohio, which is also the site of the Company’s corporate headquarters, (ii) leased facilities aggregating approximately 70,500 square feet located in Orange, California, and (iii) owned facilities aggregating approximately 91,000 square feet located in Maniago, Italy.

## Legal proceedings

As filed, 767 characters.

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. See Note 11, *Commitments and Contingencies,* of the consolidated financial statements for more information regarding the legal proceedings in which the Company is involved.

## Management's discussion and analysis

As filed, 42,427 characters.

SIFCO is engaged in the production of forgings and machined and sub-assembled components primarily for the A&E markets. The processes and services include forging, heat-treating, chemical processing and machining. The Company operates under one business segment.

When planning and evaluating its business operations, the Company takes into consideration certain factors, including the following: (i) the projected build rate for commercial, business and military aircraft, as well as the engines that power such aircraft; (ii) the projected build rate for industrial steam and gas turbine engines; and (iii) the projected maintenance, repair and overhaul schedules for commercial, business and military aircraft, as well as the engines that power such aircraft.

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

### A. Results of Operations

### Overview

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.

### Impact of COVID-19 & Other Factors

As previously noted, the lingering impact and residual effects of the COVID-19 pandemic, along with other factors such as ongoing geopolitical tensions, continue to impact the United States and other countries in which the Company operates, including strains on supply chains and inflationary impacts. During fiscal 2022, the ongoing impact of the COVID-19 pandemic continued to effect the Company’s results of operations. Given the long lead times for certain of the Company's products, the Company has continued to see an impact related to the effects of COVID-19 on orders and deliveries in fiscal 2022. While the exact timing and pace of recovery in our markets continues to be indeterminable, there are indications that commercial air travel is steadily recovering. While the long-term outlook remains positive given the nature of the industry, there continues to be uncertainty with the respect to when commercial air traffic will return to pre-COVID-19 levels. Given the fluidity of the situation, it is still unclear how lasting and deep the ongoing economic impacts of COVID-19 will last.

In response to the uncertain environment created by the COVID-19 pandemic and its effects, the Company has, at various points in fiscal 2022 and prior periods, taken measures to reduce costs by furloughing and laying off certain of its employees from one of its plant locations that has experienced reduced sales of commercial aerospace products. Such employees have since returned to work.

Additionally, our operations are subject to global economic and geopolitical risks. For example, while the Company does not have a presence in these regions, the ongoing conflict between Russia and Ukraine has impacted economic activity as well as the availability and price of raw materials and energy. The Company continues to actively monitor these factors and find ways to mitigate the impact on its operations.

### Fiscal Year 2022 Compared with Fiscal Year 2021

### Net Sales

Net sales comparative information for fiscal 2022 and 2021, respectively, is as follows:

*(Dollars in millions)*

| Net Sales Aerospace components for: | Years Ended September 30, 2022 | 2021 | Increase (Decrease) |
| --- | ---: | ---: | ---: |
| Fixed wing aircraft | $39.5 | $38.5 | $1.0 |
| Rotorcraft | 15.6 | 27.2 | (11.6) |
| Energy components for power generation units | 17.4 | 20.4 | (3.0) |
| Commercial product and other revenue | 11.4 | 13.5 | (2.1) |
| Total | $83.9 | $99.6 | $(15.7) |

Net sales in fiscal 2022 decreased 15.8%, or $15.7 million to $83.9 million, compared with $99.6 million in fiscal 2021. Given the long lead times for certain of the Company's products, the Company has seen a greater impact related to the effects of COVID-19 on orders and deliveries in fiscal 2022 than in fiscal 2021. Fixed wing aircraft sales increased $1.0 million compared with the same period last year due to timing of customer orders, an increase in build rates in certain commercial programs and sales for military programs. Rotorcraft sales decreased $11.6 million in fiscal 2022 compared to the same period in fiscal 2021 primarily due to a timing change in requirements after advance ordering from customers in fiscal 2021 to help the overall supply chain through the effects of the COVID-19 pandemic. The energy components for power generation units decreased $3.0 million compared with the same period last year due to customer order reductions.

Commercial net sales were 47.4% of total net sales and military net sales were 52.6% of total net sales in fiscal 2022, compared with 36.7% and 63.3%, respectively, in the comparable period in fiscal 2021. Commercial net sales (which includes energy components) increased $3.2 million to $39.8 million in fiscal 2022, compared to $36.6 million in fiscal 2021 primarily due to the increase in build rates in the commercial aerospace industry. Military net sales decreased $18.9 million to $44.1 million in fiscal 2022, compared to $63.0 million in fiscal 2021 primarily due to timing of orders related to certain military programs as a result of advance ordering in fiscal 2021 and lower munition program volumes, such as H60 and Hellfire missile due to timing.

### Cost of Goods Sold

Cost of goods sold ("COGS") decreased by $2.6 million, or 3.0%, to $85.8 million, or 102.2% of net sales, during fiscal 2022, compared with $88.4 million or 88.7% of net sales in the comparable period of fiscal 2021. The decrease was primarily due to lower volume from the military and munitions programs, increased raw material pricing and outside processing costs, inventory write down to net realizable value ("NRV") of $1.5 million and idle expense of $3.1 million partially offset by cost controlling measures including lower payroll costs of $1.8 million. Net sales decreased at a greater rate than COGS, leading COGS as a percent of net sales to be greater in fiscal 2022 than in fiscal 2021. This was primarily a result of the Company recording idle expense of $3.1 million, an inventory write down to NRV of $1.5 million, and experiencing increased outside processing and raw material costs. Prior year results included $2.1 million of idle expense and $0.3 million of inventory write down to NRV.

### Gross Profit (Loss)

Gross profit (loss) decreased by $13.1 million, or 116.6%, to a loss of $1.9 million during fiscal 2022, compared with $11.2 million profit in fiscal 2021. Gross margin percent of sales was (2.2%) during fiscal 2022, compared with 11.3% in fiscal 2021, primarily due to lower volume, inventory write down to NRV of $1.5 million and incremental idle costs of $1.0 million, higher raw material prices, and outside processing costs in fiscal 2022 compared with the prior year, partially offset by lower payroll.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses were $11.9 million, or 14.2% of net sales, during fiscal 2022, compared with $13.5 million, or 13.5% of net sales, in fiscal 2021. The decrease in selling, general and administrative expenses is due to the continued cost reduction efforts by management, including lower wages, commissions and travel expenses, partially offset by higher legal and professional costs.

### Amortization of Intangibles

Amortization of intangibles decreased $0.7 million to $0.3 million during fiscal 2022, compared with $1.0 million in the comparable period of fiscal 2021. Such decrease was primarily due to certain intangible assets that were fully amortized during fiscal 2022.

### Other/General

The Company recorded an operating loss of $14.1 million during fiscal 2022, compared with an operating loss of $1.1 million in fiscal 2021.

Included in the current year results, the Company recognized a gain on extinguishment of debt related to the PPP loan, that was forgiven by the SBA, for $5.1 million. See Note 5, *Debt* for further discussion. Prior year results included a gain on insurance recoveries of $2.4 million a gain on debt extinguishment of $0.3 million due to partial loan forgiveness at the Company's Maniago location.

Interest expense was $0.6 million in fiscal 2022 and fiscal 2021. See Note 5, *Debt,* of the consolidated financial statements for further information.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreements in fiscal 2022 and 2021:

|  | Weighted Average Interest Rate Years Ended September 30, 2022 | 2021 | Weighted Average Outstanding Balance Years Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | --- | --- |
| Revolving credit agreement | 2.6% | 1.5% | $ 10.4 million | $ 9.1 million |
| Foreign term debt | 2.8% | 3.5% | $ 6.2 million | $ 7.0 million |
| Other debt | 0.7% | 0.9% | $ 1.9 million | $ 5.7 million |

The Company believes that inflation did not materially impact its results of operations in either fiscal 2022 or 2021. However, the Company does expect inflationary pressures to have some impact in fiscal 2023.

### Income Taxes

The Company’s effective tax rate in fiscal 2022 was 0.4% compared with 62.2% in fiscal 2021. The decrease in the effective tax rate in fiscal 2022 is primarily attributable to tax benefits from adjusting deferred taxes recorded in Italy applied against a year-to-date loss in fiscal 2021 which was non-recurring in fiscal 2022 and changes in jurisdictional mix of income in fiscal 2022 compared with the same period in fiscal 2021. 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 Income (Loss)

Net loss was $9.6 million during fiscal 2022, compared with net loss of $0.7 million in fiscal 2021. The decrease in income in the current period was primarily due to lower volume, increased inventory write down to NRV, higher idle expense, raw material prices as a result of supply chain constraints, excess and obsolete costs, and outside processing expenses, partially offset by the gain on debt extinguishment of debt related to the PPP loan and lower payroll and selling, general and administrative expenses.

### Non-GAAP Financial Measures

Presented below is certain financial information based on our EBITDA and Adjusted EBITDA. References to “EBITDA” mean earnings (losses) from 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 (loss) to EBITDA and Adjusted EBITDA.

Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under generally accepted accounting principles in the United States of America (“GAAP”). The Company presents EBITDA and Adjusted EBITDA because it believes that they are useful indicators for evaluating operating performance and liquidity, including the Company’s ability to incur and service debt and it uses EBITDA to evaluate prospective acquisitions. Although the Company uses EBITDA and Adjusted EBITDA for the reasons noted above, the use of these non-GAAP financial measures as analytical tools has limitations. Therefore, reviewers of the Company’s financial information should not consider them in isolation, or as a substitute for analysis of the Company's results of operations as reported in accordance with GAAP. Some of these limitations include:

- Neither EBITDA nor Adjusted EBITDA reflects the interest expense, or the cash requirements necessary to service interest payments, on indebtedness;
- Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor Adjusted EBITDA reflects any cash requirements for such replacements;
- The omission of the substantial amortization expense associated with the Company’s intangible assets further limits the usefulness of EBITDA and Adjusted EBITDA; and
- Neither EBITDA nor Adjusted EBITDA includes the payment of taxes, which is a necessary element of operations.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to the Company to invest in the growth of its businesses. Management compensates for these limitations by not viewing EBITDA or Adjusted EBITDA in isolation and specifically by using other GAAP measures, such as net income (loss), net sales, and operating profit (loss), to measure operating performance. The Company’s calculation of EBITDA and Adjusted EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies.

The following table sets forth a reconciliation of net loss to EBITDA and Adjusted EBITDA:

*(Dollars in thousands)*

|  | Years Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net loss | $(9,640) | $(743) |
| Adjustments: |  |  |
| Depreciation and amortization expense | 6,348 | 7,662 |
| Interest expense, net | 646 | 638 |
| Income tax benefit | (43) | (1,222) |
| EBITDA | (2,689) | 6,335 |
| Adjustments: |  |  |
| Foreign currency exchange loss, net (1) | 15 | 23 |
| Other (income) loss, net (2) | (149) | 215 |
| (Gain) loss on disposal of assets (3) | (7) | 209 |
| Gain on insurance recoveries (4) | — | (2,397) |
| Gain on debt extinguishment (5) | (5,106) | (287) |
| Equity compensation expense (6) | 428 | 469 |
| Pension settlement/curtailment benefit (7) | 208 | 274 |
| LIFO impact (8) | 729 | 924 |
| Adjusted EBITDA | $(6,571) | $5,765 |

(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, such as pension costs or grant income.

(3) Represents the difference between the proceeds from the sale of operating equipment and the carrying value shown on the Company's books or asset impairment of long-lived assets.

(4) Represents the difference between the insurance proceeds received for the damaged property and the carrying values shown on the Company's books for the assets that were damaged in the fire at the Orange location that occurred in December 2018.

(5) Represents the gain on extinguishment of debt and interest for the amount forgiven by the SBA as it relates to the PPP loan in fiscal 2022 and term debt forgiveness as is relates to foreign borrowings in fiscal 2021.

(6) Represents the equity-based compensation expense recognized by the Company under the 2016 Plan due to granting of awards, awards not vesting and/or forfeitures.

(7) Represents expense incurred by its defined benefit pension plans related to settlement of pension obligations.

(8) Represents the change in the reserve for inventories for which cost is determined using the last-in, first-out (“LIFO”) method.

Reference to the above activities can be found in the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

### B. Liquidity and Capital Resources

Historically, the main sources of liquidity of the Company have been cash flows from operations and borrowings under our Credit Agreement (as defined below under "Financing Activities"). The ongoing impact and magnitude of the COVID-19 pandemic remain uncertain (including the pandemic's continued effects on the global economy and potential for market disruptions) with the commercial aerospace industry. Along with the global disruption in travel and, further, the pandemic and responses to the various resurgences and continued spread of the pandemic continue to cause interruptions to the business of our customers and suppliers, which in turn is likely to impact our business operations and results as well as our liquidity and capital resources. The Company's liquidity could be negatively affected by customers extending payment terms to the Company and/or the decrease in demand for our products as a result of COVID-19 on the commercial airline industry. As the impact of the COVID-19 pandemic on the economy and the Company's operations continues to evolve, the Company management will continue to assess and actively manage liquidity. See "Results of Operation - COVID-19" for further discussion on the impact of the pandemic.

Cash and cash equivalents increased to $1.2 million at September 30, 2022 compared with $0.3 million at September 30, 2021. At September 30, 2022 and 2021, cash included financing proceeds for capital investment and a nominal amount, respectively, of the Company’s cash and cash equivalents were in the possession of its non-U.S. subsidiaries. Distributions from the Company’s non-U.S. subsidiaries to the Company may be subject to adverse tax consequences.

### Operating Activities

The Company’s operating activities provided $0.3 million of cash in fiscal 2022, compared with $3.9 million in fiscal 2021. The cash provided by operating activities in fiscal 2022 was primarily due to non-cash items, such as depreciation and amortization of $6.3 million, inventory write down to NRV $1.5 million, LIFO effect of $0.7 million, equity based compensation of $0.3 million and source of working capital of $6.0 million, partially offset by the forgiveness of the PPP loan of $5.1 million and net loss of $9.6 million. The source of cash from working capital of $6.0 million was primarily due to reductions in receivables due to lower sales and improved collections as well as decreases in inventories, partially offset by payments to suppliers.

The Company’s operating activities provided $3.9 million of cash in fiscal 2021. The cash provided by operating activities in fiscal 2021 was primarily due to non-cash items, such as depreciation and amortization of $7.7 million, LIFO effect of $0.9 million, inventory write down to NRV $0.3 million, equity based compensation, and source of working capital of $1.4 million, partially offset by a net gain on insurance recovery combined with loss on disposal of assets of $2.2 million and deferred income taxes of $1.3 million and net loss of $0.7 million. The source of cash from working capital of $1.4 million was primarily due to reductions in receivables due to lower sales and improved collections as well as decreases in inventories, partially offset by payments to suppliers and disbursements related to the fire recovery.

### Investing Activities

Cash used for investing activities was $3.2 million in fiscal 2022, compared with $0.9 million in fiscal 2021. Fiscal 2022 expenditures were used primarily for manufacturing enhancement and maintenance capital. Fiscal 2021 included $4.1 million in proceeds received from insurance recovery on the damaged property related to the fire at the Orange location. Expenditures in fiscal 2021were used primarily for the restoration of the Orange location as a result of the fire, which were completed as of September 30, 2021. Capital commitments at September 30, 2022 were $1.6 million. The Company anticipates the total fiscal 2023 capital expenditures will be within the range of $3.5 million to $5.5 million and will relate principally to the further enhancement of production and product offering capabilities and operating cost reductions.

### Financing Activities

Cash provided by financing activities was $3.7 million in fiscal 2022 compared to cash used by financing activities of $3.1 million in fiscal 2021.

As discussed in Note 5, *Debt*, the Company amended the Credit Agreement and the Export Agreement on March 23, 2022. The combined maximum borrowings remain unchanged at $35.0 million. The Sixth Amendment (the "Sixth Amendment") to the Credit Agreement (as amended, the "Credit Agreement") consists of a senior secured revolving credit facility with a maximum borrowing of $28.0 million, previously $30.0 million. The revolving commitment through the Second Amendment (the "Second Amendment") of the Export Credit Agreement, which lends amounts to the Company on foreign receivables increased its revolving commitment from $5.0 million to $7.0 million. The Sixth Amendment, among other things, (i) revises the fixed coverage ratio to exclude the first $1,500 of unfunded capital expenditures through April 20, 2023, (ii) increases the letter of credit sub-limit from $2,000 to $3,000, (iii) modifies the reference rate from the London interbank offered rate ("LIBOR") to the secured overnight financing rate ("SOFR") and (iv) revises the property, plant and equipment component of the borrowing base under the Credit Agreement.

As discussed in Note 5, *Debt*, the Company's Maniago, Italy location obtained borrowings from two separate lenders during fiscal 2022. The first loan was for $1.2 million with repayment terms of six years. A second loan with a five year term was obtained in the amount of $1.0 million. The proceeds of the first loan is to be used for working capital purposes, the proceeds of the second loan are earmarked for capital investment. The Company repaid $1.2 million of its Company's foreign term loans in 2022.

In addition to the two loans entered into in fiscal 2022, in the prior year, the Company received cash proceeds of $1.0 million from two new loans related to the Maniago location. A total of $0.4 million in cash was used to repay the Company's foreign term loans.

The Company had net borrowings under its revolving credit facility of $2.2 million in fiscal 2022 and net repayments of $3.9 million in fiscal 2021. 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 SOFR, plus the applicable margin as set forth in the Credit Agreement. The revolver has a rate based on SOFR plus a 2.25% spread, which was 4.86% at September 30, 2022 and the Export Credit Agreement, as discussed in Note 5, *Debt,* of the consolidated financial statements, has a rate based on SOFR plus a 1.75% spread, which was 4.36% at September 30, 2022. The Company also has a commitment fee of 0.25% under the Credit Agreement to be incurred on the unused balance of the revolver.

As the Company’s Credit Agreement is asset-based, a sustained significant decrease in revenue in the U.S. or excessive aging of the underlying receivables as a result of the impact of the COVID-19 pandemic could materially affect the collateral capacity limitation of the availability under the Credit Agreement and could impact our ability to comply with covenants in our Credit Agreement.

Under the Company's Credit Agreement, the Company is subject to certain customary loan covenants regarding availability as discussed in Note 5, *Debt,* of the consolidated financial statements. The availability at September 30, 2022 was $9.4 million. If the availability had fallen short, the Company would be required to meet the fixed charge coverage ratio ("FCCR") covenant, which must not be less than 1.1 to 1.0. 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. Because the availability was greater than the 10.0% of the Revolving Commitment as of September 30, 2022, the FCCR calculation was not required.

Future cash flows from the Company’s operations may be used to pay down amounts outstanding under the Credit Agreement and its foreign related debts. The Company believes it has adequate cash/liquidity available to finance its operations from the combination of (i) the Company’s expected cash flows from operations and (ii) funds available under the Credit Agreement for its domestic locations. The Company was able to defer payments for certain debt obligations at its Maniago location along with obtaining new financing in the current year to provide Maniago with sufficient liquidity.

Additionally, the credit and capital markets saw significant volatility during the course of the pandemic. Tightening of the credit market and standards, as well as capital market volatility, could negatively impact our ability to obtain additional debt financing on terms equivalent to our existing Credit Agreement, in the event the Company seeks additional liquidity sources as a result of the continued impact of COVID-19. Capital market uncertainty and volatility, together with the Company’s market capitalization and status as a smaller reporting company, could also negatively impact our ability to obtain equity financing.

### C. Off-Balance Sheet Arrangements

In the normal course of business, the Company may be party to certain arrangements that are not reflected in the Consolidated Balance Sheets. The Company does not have obligations that meet the definition of an off-balance sheet arrangement that have had, or are reasonably likely to have, a material effect on the Company’s financial condition or results of operations.

### D. Critical Accounting Policies and Estimates

### Allowances for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of certain customers to make required payments. The Company evaluates the adequacy of its allowances for doubtful accounts each quarter based on the customers’ credit-worthiness, current economic trends or market conditions, past collection history, aging of outstanding accounts receivable and specific identified risks. As these factors change, the Company’s allowances for doubtful accounts may change in subsequent periods. Historically, losses have been within management’s expectations and have not been significant.

### Inventories

Approximately 42% of the Company's inventory is valued using the last-in, first-out (“LIFO”) method with the remaining valued using the first-in, first-out ("FIFO") method stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion.

The Company evaluates obsolete and excess inventory on a quarterly basis. The Company maintains a formal policy, which requires at a minimum, that amounts are written down based on an analysis of the age of the inventory. In addition, if the Company learns of specific obsolescence, other than that identified by the aging criteria, an additional write down will be recognized. Specific obsolescence may arise due to a technological or market change or based on cancellation of an order.

Management’s judgment is necessary in determining the net realizable value of these products to arrive at the proper write down for obsolete and excess inventory.

### 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.

### Impairment of Long-Lived Assets

The Company reviews the carrying value of its long-lived assets when events and circumstances warrant such a review. This review involves judgment and is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets and which the Company considers a critical accounting estimate. The Company would assess the fair value of the asset group and compare it to its carrying value. Under the Accounting Standard Codification ("ASC") 360 ("Topic 360"), if the carrying value of a long-lived asset or asset group is greater than the estimated undiscounted future cash flows, then the long-lived asset or asset group is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset or asset group exceeds its fair value.

In projecting future undiscounted cash flows, the Company relies on internal budgets and forecasts, and projected proceeds upon disposal of long-lived assets. The Company’s budgets and forecasts are based on historical results and anticipated future market conditions, such as the general business climate and the effectiveness of competition. The Company believes that its estimates of future undiscounted cash flows and fair value are reasonable; however, changes in estimates of such undiscounted cash flows and fair value could change the Company’s estimates, which could result in future impairment charges.

#### 2022 Long-Lived Asset Recoverability Tests

In the third and fourth quarters, certain qualitative factors, including operating results, at the Orange, California ("Orange") location, triggered recoverability tests. The results of both 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.

#### 2021 Long-Lived Asset Recoverability Tests

In the fourth quarter, certain qualitative factors, including operating results, at the Orange location, triggered a recoverability test. The results 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.

### Impairment of Goodwill

Goodwill is tested for impairment annually as of July 31. If circumstances change during interim periods between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company will test goodwill for impairment. Factors that would necessitate an interim goodwill impairment assessment include a sustained decline in the Company's stock price, prolonged negative industry or economic trends, or significant under-performance relative to expected, historical or projected future operating results. Management uses judgment to determine whether to use a qualitative analysis or a quantitative fair value measurement for its goodwill impairment testing. The Company's fair value measurement approach combines the income and market valuation techniques for each of the Company’s reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparables, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions.

As permitted, if the reporting unit fails the impairment test, the Financial Accounting Standards Board ("FASB") issued an Accounting Standard Update ("ASU") removing step two from the goodwill impairment test. If a reporting unit fails the quantitative impairment test, impairment expense is immediately recorded as the difference between the reporting unit's fair value and carrying value. The Company adopted this standard effective March 31, 2017.

#### 2022 Annual Goodwill Impairment Tests

SIFCO performed its annual test as of July 31, 2022. Goodwill existed at one of the Company's reporting units, Cleveland, Ohio as of September 30, 2022. No impairment charge was identified in connection with the annual goodwill impairment test with respect to the Cleveland reporting unit. Refer to Note 3, *Goodwill and Intangible Assets,* of the consolidated financial statements for further details.

#### 2021 Annual Goodwill Impairment Tests

SIFCO performed its annual test as of July 31, 2021. Goodwill existed at one of the Company's reporting units, Cleveland, Ohio as of September 30, 2021. No impairment charge was identified in connection with the annual goodwill impairment test with respect to the Cleveland reporting unit. Refer to Note 3, *Goodwill and Intangible Assets,* of the consolidated financial statements for further details.

### Defined Benefit Pension Plan Expense

The Company maintains three defined benefit pension plans in accordance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). The amounts recognized in the consolidated financial statements for pension benefits under these three defined benefit pension plans are determined on an actuarial basis utilizing various assumptions. The following table illustrates the sensitivity to change in the assumed discount rate and expected long-rate of return on assets for the Company's pension plans as of September 30, 2022.

*(In thousands)*

| Change in Assumptions | Impact on Fiscal 2022 Benefits Expense | Impact on September 30, 2022 Projected Benefit Obligation for Pension Plans |
| --- | ---: | ---: |
| 25 basis point decrease in discount rate | $22 | $553 |
| 25 basis point increase in discount rate | $(22) | $(553) |
| 100 basis point decrease in expected long-term rate of return on assets | $211 | $— |
| 100 basis point increase in expected long-term rate of return on assets | $(211) | $— |

The discussion that follows provides information on the significant assumptions/elements associated with these defined benefit pension plans.

The Company determines the expected return on plan assets principally based on (i) the expected return for the various asset classes in the respective plans’ investment portfolios and (ii) the targeted allocation of the respective plans’ assets. The expected return on plan assets is developed using historical asset return performance as well as current and anticipated market conditions such as inflation, interest rates and market performance. Should the actual rate of return differ materially from the assumed/expected rate, the Company could experience a material adverse effect on the funded status of its plans and, accordingly, on its related future net pension expense.

The discount rate for each plan is determined, as of the fiscal year end measurement date, using prevailing market spot-rates (from an appropriate yield curve) with maturities corresponding to the expected timing/date of the future defined benefit payment amounts for each of the respective plans. Such corresponding spot-rates are used to discount future years’ projected defined benefit payment amounts back to the fiscal year end measurement date as a present value. A composite discount rate is then developed for each plan by determining the single rate of discount that will produce the same present value as that obtained by applying the annual spot-rates. The discount rate may be further revised if the market environment indicates that the above methodology generates a discount rate that does not accurately reflect the prevailing interest rates as of the fiscal year end measurement date. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the USI Consulting Group Pension Discount Curve.

As of September 30, 2022 and 2021, SIFCO used the following assumptions:

|  | Years Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Discount rate for expenses | 2.9% | 3.1% |
| Expected return on assets | 6.4% | 7.0% |

### Deferred Tax Valuation Allowance

The Company accounts for deferred taxes in accordance with the provisions of the Accounting Standards Codification guidance related to accounting for income taxes, whereby the Company recognizes an income tax benefit related to income tax credits, loss carryforwards and deductible temporary differences between financial reporting basis and tax reporting basis.

A high degree of judgment is required to determine the extent a valuation allowance should be provided against deferred tax assets. On a quarterly basis, the Company assesses the likelihood of realization of its deferred tax assets considering all available evidence, both positive and negative. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. It is generally difficult to outweigh objectively verifiable negative evidence of recent financial reporting losses. Based on the weight of available evidence, the Company determines if it is more likely than not that its deferred tax assets will be realized in the future.

As a result of losses incurred in recent years, the Company entered into a three-year cumulative loss position in the U.S. jurisdiction during the fourth quarter of fiscal 2016 and remains in a cumulative loss position at the conclusion of fiscal 2022. Accordingly, the Company maintained its valuation allowance on its U.S. deferred tax assets as of the fourth quarter of fiscal year 2022.

### Uncertain Tax Positions

The calculation of the Company's tax liabilities also involves considering uncertainties in the application of complex tax regulations. SIFCO recognizes liabilities for uncertain income tax positions based on its estimate of whether it is more likely than not that additional taxes will be required, and it reports related interest and penalties as income taxes. Refer to Note 7, *Income Taxes*, of the consolidated financial statements.

### E. 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 qualify as a smaller reporting company ("SRC"), as defined by the Securities and Exchange Commission, to fiscal years 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 March 2020, the FASB issued ASU 2020-04, *"Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,"* which is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This ASU, along with recently issued ASU 2021-01, which further clarifies the scope of Topic 848, is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022. ASU 2020-04 was effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company has not applied any optional expedients and exceptions to date, and will continue to evaluate the impact of the guidance and whether it will apply the optional expedients and exceptions.

## Controls and procedures

As filed, 5,561 characters.

### Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company’s SEC reports was recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company's internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. If the Company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if the Company experiences difficulties in their implementation, the Company's business and financial results could be harmed, and the Company could fail to meet its financial reporting obligations.

### Management’s Report on Internal Control over Financial Reporting

Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of September 30, 2022. In making this assessment, our management used the criteria for effective internal control over financial reporting described in the 2013 “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that due to the material weakness described below, our internal control over financial reporting was not effective as of September 30, 2022. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Notwithstanding the identified material weakness described below, management does not believe that these deficiencies had an adverse effect on our reported operating results or financial condition and management has determined that the financial statements and other information included in this report and other periodic filings present fairly in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with accounting principles generally accepted in the United States ("GAAP").

The Company identified the following material weakness:

- Lack of precise review controls associated with the valuation of inventory at the Orange location and long-lived asset impairment triggering event indicators in the fourth quarter at the Orange location

### 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.

To address the material weakness identified in our control environment, the Company is taking the following actions to remediate the material weakness:

- Using a risk-based approach, management will implement additional monitoring controls through increased oversight and training local management to execute additional controls in detecting material errors.

With the oversight of senior management and the Company's Board of Directors, the Company continues to take steps and additional measures to remediate the underlying causes of the identified material weakness, including but not limited to continuing to strengthen organizational structure including holding individuals accountable for their internal control responsibilities.

Although we expect to make meaningful progress on our remediation plan during fiscal year 2023, we cannot estimate how long it will take to complete the process or the costs of actions required. There is no assurance that the aforementioned plans will be sufficient and that additional steps may not be necessary.

### Changes in Internal Control over Financial Reporting and other Remediation

As of September 30, 2022, no material changes in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Dec 23, 2022.
Source: SEC EDGAR, the filing index for accession 0000090168-22-000053. Last ingested by Listed: Oct 24, 2026, 14:54 ET. No prices; not investment advice.