Summary of Significant Accounting Policies

A. DESCRIPTION OF BUSINESS

SIFCO Industries, Inc. and its subsidiaries are engaged in the production of forgings and machined components primarily in the Aerospace and Energy ("A&E") market. The Company’s operations are conducted in a single business segment, "SIFCO" or "Company," previously referenced as SIFCO Forged Components, during fiscal 2014. In July 2015, SIFCO completed the acquisition of all of the outstanding equity of C Blade S.p.A. Forging & Manufacturing (“C*Blade”), located in Maniago, Italy, from Riello Investimenti Partners SGR S.p.A., Giorgio Visentini, Giorgio Frassini, Giancarlo Sclabi and Matteo Talmassons. Financial information relating to the Company's acquisition is referenced in Note 12. In fiscal 2013, the Company had two additional segments: Turbine Component Services and Repair ("Repair Group"), which was discontinued in fiscal 2013, as discussed more fully in Note 13, and Applied Surface Concepts ("ASC"), which was divested in fiscal 2013, as discussed more fully in Note 13.

B. PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The U.S. dollar is the functional currency for all the Company’s U.S. operations and its Irish subsidiary. For these operations, all gains and losses from completed currency transactions are included in income currently. The functional currency for the Company's other non-U.S. subsidiaries is the Euro. Assets and liabilities are translated into U.S. dollars at the rates of exchange at the end of the period, and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss in the consolidated statements of shareholders’ equity.

C. CASH EQUIVALENTS

The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. A substantial majority of the Company’s cash and cash equivalent bank balances exceed federally insured limits at September 30, 2015 and 2014.

D. CONCENTRATIONS OF CREDIT RISK

Receivables are presented net of allowance for doubtful accounts of $1,127 and $333 at September 30, 2015 and 2014, respectively. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company writes off accounts receivable when they become uncollectible. During fiscal 2015 and 2014, $0 and $158, respectively, of accounts receivable were written off against the allowance for doubtful accounts. Bad debt expense totaled $487, $9 and $81 in fiscal 2015, 2014 and 2013, respectively.

Most of the Company’s receivables represent trade receivables due from manufacturers of turbine engines and aircraft components as well as turbine engine overhaul companies located throughout the world, including a significant concentration of U.S. based companies. In fiscal 2015, 12% of the Company’s consolidated net sales were from one of its largest customers; and 38% of the Company's consolidated net sales were from the two largest customers and their direct subcontractors which individually accounted for 22% and 16%. In fiscal 2014, 37% of the Company’s consolidated net sales were from three of its largest customers which individually accounted for 14%, 12%, and 11% of consolidated net sales; and 50% of the Company's consolidated net sales were from three of the largest customers and their direct subcontractors which individually accounted for 24%, 15%, and 11%. In fiscal 2013, 39% of the Company’s consolidated net sales were from three major customers who individually accounted for 16%, 13%, and 10% of consolidated net sales; and 60% of the Company's consolidated net sales were from four of the largest customers and their direct subcontractors which individually accounted for 21%, 16%, 13%, and 10%. No other single customer or group represented greater than 10% of total net sales in fiscal 2015, 2014 and 2013.

At September 30, 2015, one of the Company’s largest customers had outstanding net accounts receivable which individually accounted for 11% of the total net accounts receivable; and two of the largest customers and direct subcontractors had outstanding net accounts receivable which accounted for 18% and 16% of total net accounts receivable, respectively. At September 30, 2014, two of the Company’s largest customers had outstanding net accounts receivable which accounted for 13% and 10% of total net accounts receivable, respectively; and two of the largest customers and direct subcontractors had outstanding net accounts receivable which accounted for 27% and 14% of total, net receivables, respectively. The Company performs ongoing credit evaluations of its customers’ financial conditions. The Company believes its allowance for doubtful accounts is sufficient based on the credit exposures outstanding at September 30, 2015.

E. INVENTORY VALUATION

Inventories are stated at the lower of cost or market. For a portion of the Company's inventory, cost is determined using the last-in, first-out (“LIFO”) method. For approximately 38% and 40% of the Company’s inventories at September 30, 2015 and 2014, respectively, the LIFO method is used to value the Company’s inventories. The first-in, first-out (“FIFO”) method is used to value the remainder of the Company’s inventories.

The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete and excess inventory each quarter, and requires at a minimum that reserves be established based on an analysis of the age of the inventory. In addition, if the Company identifies specific obsolescence, other than that identified by the aging criteria, an additional reserve will be recognized. Specific obsolescence and excess reserve requirements may arise due to technological or market changes, or based on cancellation of an order. The Company’s reserves for obsolete and excess inventory were $3,022 and $1,407 at September 30, 2015 and 2014, respectively.

F. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation is generally computed using the straight-line method. Depreciation is provided in amounts sufficient to amortize the cost of the assets over their estimated useful lives. Depreciation provisions are based on estimated useful lives: (i) buildings, including building improvements - 5 to 40 years; (ii) machinery and equipment, including office and computer equipment - 3 to 20 years; (iii) software - 3 to 7 years (included in machinery and equipment); and (iv) leasehold improvements - remaining life or length of the lease (included in buildings).

The Company's property, plant and equipment assets by major asset class at September 30 consist of:



	2015		2014
Property, plant and equipment :
Land	$	975	$	469
Buildings	15,446		11,546
Machinery and equipment	80,687		61,587
Total property, plant and equipment	97,108		73,602
Accumulated depreciation	42,243		36,454
Property, plant and equipment, net	$	54,865	$	37,148

The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, at least annually or when events and circumstances warrant such a review. This review is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets. If the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, then the long-lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Asset impairment charges of $72 were recorded in fiscal 2013 related to certain machinery and equipment. The gain/loss on disposal of operating assets is included as a separate line item in the accompanying consolidated statements of operations. The machinery and equipment was determined to be impaired, therefore, the carrying value of such assets was reduced to its net realizable value. Depreciation expense was $6,048, $4,735 and $3,649 in fiscal 2015, 2014 and 2013, respectively.

The Company’s Irish subsidiary sold its operating business in June 2007, but retained ownership of its Cork, Ireland facility. This property is subject to a lease arrangement with the acquirer of the business that expires in June 2027. Rental income is earned in quarterly installments of $103. At September 30, 2015 and 2014, the carrying value of the property was $1,570 and $1,643, respectively. Rental income of $413, $413 and $413 was recognized in fiscal 2015, 2014 and 2013, respectively, and is recorded in other income, net on the consolidated statements of operations.

G. GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price paid over the fair value of the net assets of an acquired business. Goodwill is subject to annual impairment testing and the Company has selected July 31 as the annual impairment testing date. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If so, then a two-step impairment test is used to identify potential goodwill impairment. The first step of the goodwill impairment test compares the fair value of a reporting unit (as defined) with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired, and the second step of the goodwill impairment test is not required. The second step measures the amount of impairment, if any, by comparing the carrying value of the goodwill associated with a reporting unit to the implied fair value of the goodwill derived from the estimated overall fair value of the reporting unit and the individual fair values of the other assets and liabilities of the reporting unit.

Intangible assets consist of identifiable intangibles acquired or recognized in the accounting for the acquisition of a business and include such items as a trade name, a non-compete agreement, below market lease, customer relationships and order backlog. Intangible assets are amortized over their useful lives ranging from one year to ten years.

H. NET INCOME (LOSS) PER SHARE

The Company’s net income (loss) per basic share has been computed based on the weighted-average number of common shares outstanding. Net income (loss) per diluted share reflects the effect of the Company’s outstanding stock options, restricted shares and performance shares under the treasury stock method.

The dilutive effect of the Company’s stock options, restricted shares and performance shares were as follows:



	September 30,
	2015			2014			2013
Income (loss) from continuing operations	$	(3,581	)	$	5,603		$	9,758
Income (loss) from discontinued operations, net of tax	709			(580		)	476
Net income (loss)	$	(2,872	)	$	5,023		$	10,234

Weighted-average common shares outstanding (basic)	5,438			5,402			5,363
Effect of dilutive securities:
Stock options	—			—			1
Restricted shares	—			18			12
Performance shares	—			4			25
Weighted-average common shares outstanding (diluted)	5,438			5,424			5,401
Net income (loss) per share – basic
Continuing operations	$	(0.66	)	$	1.04		$	1.82
Discontinued operations	0.13			(0.11		)	0.09
Net income (loss)	$	(0.53	)	$	0.93		$	1.91
Net income (loss) per share – diluted:
Continuing operations	$	(0.66	)	$	1.03		$	1.81
Discontinued operations	0.13			(0.11		)	0.09
Net income (loss)	$	(0.53	)	$	0.92		$	1.90
Anti-dilutive weighted-average common shares excluded from calculation of diluted earnings per share	27			18			47

I. REVENUE RECOGNITION

Revenue is generally recognized for products shipped or services performed when the following criteria are met: 1.) persuasive evidence of an arrangement exists; 2.) delivery has occurred; 3.) an established sales price has been set with the customer; and 4.) collectibility of the amounts due from the sale is reasonably assured.

J. CAPITAL LEASE OBLIGATIONS

Capital leases are accounted for as the acquisition of an asset and the commitment of an obligation by the lessee and as a sale or financing by the lessor. All other leases are accounted for as operating leases.

K. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS

In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which expands upon the guidance on the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. This guidance requires retrospective application and is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company has elected to early adopt the ASU. The effect of the ASU did not impact prior periods as there were no previous debt issuance costs. See Note 5 for further disclosure.

In August 2015, the FASB issued ASU 2015-15, "Interest - Imputation of Interest (Subtopic 835-30)," clarifies the previously issued ASU 2015-03, which does not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company has elected to early adopt the ASU. The effect of the ASU did not impact prior periods as there were no previous debt issuance costs. See Note 5 for further disclosure.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period-Adjustments." The current guidance under generally accepted accounting principles in the United States of America ("GAAP") requires that during the measurement period, the acquirer retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Those adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. The acquirer also must revise comparative information for prior periods presented in financial statements as needed, including revising depreciation, amortization, or other income effects as a result of changes made to provisional amounts. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in this ASU eliminate the requirement to retrospectively account for those adjustments. This amendment is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. The Company has adopted the new ASU as of September 30, 2015 and there was no impact to the consolidated financial statements due to the measurement period and the acquisition date of C*Blade occuring within the same accounting period.

L. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS

In January 2015, the FASB issued ASU No. 2015-01, "Income Statement-Extraordinary and Unusual Items (Subtopic 225-20)," which eliminates the extraordinary items concept from GAAP. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The ASU is effective for the Company on October 1, 2016. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-04, "Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement," which identifies and determines whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. If a cloud computing arrangement does not contain a software license, it should be accounted for as a service contract. This ASU is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Company's consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. As described in this update, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out ("LIFO"). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of the adoption of this guidance on the Company's consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers ASU 2014-09, issued in May 2014 by the FASB. The ASU provides a one year deferral of the effective date. This ASU is effective for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of this guidance on the Company's consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes," which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The ASU will be effective for the Company for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently considering whether it will early adopt ASU 2015-17 in the next reporting period, as is permitted under the standard.

M. USE OF ESTIMATES

Accounting principles generally accepted in the U.S. require management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period in preparing these financial statements. Actual results could differ from those estimates. In fiscal 2015, the Company changed how it estimates its workers' compensation reserve. The Company uses a third party actuary to evaluate its reserves annually. Effective in the first quarter of fiscal 2015, the Company changed to a new third party administrator that also evaluates the reserve on a monthly basis. The change in administrators resulted in a reduction in the Company's reserve and a corresponding decrease in expense of approximately $400. The change is reflected in the Company's fiscal 2015 results.

N. DERIVATIVE FINANCIAL INSTRUMENTS

The Company periodically uses interest rate swap agreements to reduce risk related to variable-rate debt, which is subject to changes in market rates of interest. Interest rate swaps are designated as a cash flow hedges. At September 30, 2014, the Company held one interest rate swap with a notional amount of $4,000. The interest rate swap matured as of December 31, 2014. Cash flows related to the interest rate swap agreement are included in interest expense. The Company’s interest rate swap agreement and its variable-rate term debt were based upon LIBOR. During the first quarter of fiscal 2015, in fiscal 2014, and 2013 the Company’s interest rate swap agreement qualified as a fully effective cash flow hedge against the Company’s variable-rate term note interest risk. As of September 30, 2015, no interest rate swap agreements were in place.

O. RESEARCH AND DEVELOPMENT

Research and development costs are expensed as they are incurred. Research and development expense was nominal in fiscal 2015, 2014 and 2013.

P. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss as shown on the consolidated balance sheets at September 30 are as follows:



	2015			2014			2013
Foreign currency translation adjustment, net of income tax benefit of $0, $0 and $0, respectively	$	(5,731	)	$	(5,851	)	$	(5,851	)
Net retirement plan liability adjustment, net of income tax benefit of ($3,758), ($2,909) and ($2,409), respectively	(6,257		)	(4,757		)	(3,866		)
Interest rate swap agreement, net of income tax benefit of $0, $1 and $16, respectively	—			(5		)	(26		)
Total accumulated other comprehensive loss	$	(11,988	)	$	(10,613	)	$	(9,743	)

The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive loss, net of tax:



	Foreign Currency Translation Adjustment			Retirement Plan Liability adjustment			Interest rates swap adjustment			Accumulated Other Comprehensive Loss
Balance at September 30, 2013	$	(5,851	)	$	(3,866	)	$	(26	)	$	(9,743	)
Other comprehensive income (loss) before reclassifications				(1,179		)	21			(1,158		)
Amounts reclassified from accumulated other comprehensive income	—			288			—			288
Net current-period other comprehensive income	$	—		$	(891	)	$	21		$	(870	)

Balance at September 30, 2014	$	(5,851	)	$	(4,757	)	$	(5	)	$	(10,613	)
Other comprehensive income (loss) before reclassifications	120			(1,846		)	5			(1,721		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			346			—			346
Net current-period other comprehensive income	120			(1,500		)	5			(1,375		)
Balance at September 30, 2015	$	(5,731	)	$	(6,257	)	$	—		$	(11,988	)

The following table reflects the changes in accumulated other comprehensive loss related to the Company for September 30, 2015 and 2014:



	Amount reclassified from accumulated other comprehensive loss
Details about accumulated other comprehensive loss components	2015			2014			Affected line item in the Consolidated Statement of Operations

Amortization of Retirement plan liability:
Prior service costs	$	—		$	—		(1)
Net actuarial loss	545			450			(1)
Settlements/curtailments	—			—			(1)
	545			450			Total before taxes
	(199		)	(162		)	Income tax benefit (expense)
	$	346		$	288		Net of taxes

(1) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See Note 7 - Retirement benefit plans for further information.

Q. INCOME TAXES

The Company files a consolidated U.S. federal income tax return and tax returns in various state and local jurisdictions. The Company’s Irish and Italian subsidiaries also file tax returns in the respective jurisdictions. As of September 30, 2015, the Company changed its assertion regarding the potential U.S. Federal taxation of undistributed earnings of its foreign subsidiaries due to the change in structure that occurred upon the acquisition of C*Blade, described in Note 12. As a result of this change in assertion, the Company reversed $992 of deferred income taxes on the cumulative earnings of its non U.S. subsidiary that had been accrued as of June 30, 2015.

The Company provides deferred income taxes for the temporary difference between the financial reporting basis and tax basis of the Company’s assets and liabilities. Such taxes are measured using the enacted tax rates that are assumed to be in effect when the differences reverse. Deferred tax assets result principally from recording certain expenses in the financial statements in excess of amounts currently deductible for tax purposes. Deferred tax liabilities result principally from tax depreciation in excess of book depreciation.

The Company evaluates at each balance sheet date for uncertain tax positions taken. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest cumulative benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company's policy for interest and/or penalties related to underpayments of income taxes is to include interest and penalties in tax expenses.

The Company maintains a valuation allowance against its deferred tax assets when management believes it is more likely than not that all or a portion of a deferred tax asset may not be realized. Changes in valuation allowances are included in the income tax provision in the period of change. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.

In September 2013, the Internal Revenue Service issued final regulations governing the income tax treatment of acquisitions, dispositions, and repairs of tangible property. Taxpayers are required to follow the new regulations in taxable years beginning on or after January 1, 2014. Management has assessed the impact of the regulations and determined it does not have a material impact to the Company’s consolidated financial statements.

R. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.

Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1 - Quoted market prices in active markets for identical assets or liabilities

Level 2 - Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3 - Unobservable inputs that are not corroborated by market data

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The book value of cash equivalents, accounts receivable, accounts payable, and revolving credit facilities are considered to be representative of their fair values because of their short maturities.

S. SHARE-BASED COMPENSATION

Share-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period). Share-based expense includes expense related to restricted shares and performance shares issued under the Company's 2007 Long-Term Incentive Plan. The Company recognizes share-based expense within selling, general, and administrative expense.

T. RECLASSIFICATIONS

Certain amounts in prior years may have been reclassified to conform to the 2015 consolidated financial statement presentation.

During fiscal 2015, the Company revised the classification of certain department expenses between cost of goods sold and selling, general, and administrative line items. The effect of this revision had no impact on total operating income, but it revised the total of cost of goods sold for fiscal 2014 and 2013 from $93,729 to $94,325 and from $87,986 to $88,643, respectively. Selling, general, and administrative expenses were revised for fiscal 2014 and 2013 from $15,680 to $15,084 and from $12,262 to $11,605, respectively.