SIFCO Industries, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018; comparisons are with FY2017. SIFCO manufactures forged and machined components primarily for aerospace and energy markets and reports one operating segment. Amounts are in U.S. dollars.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $111.2 million | $121.5 million |
| Gross profit / margin | $10.1 million / 9.1% | $13.4 million / 11.0% |
| Operating loss | $5.9 million | $11.5 million |
| Net loss | $7.2 million | $14.2 million |
| Net loss per share | $1.30 | $2.59 |
| Adjusted EBITDA (non-GAAP) | $3.0 million | $6.2 million |
| Cash provided by operations | $1.3 million | $12.0 million |
| Capital expenditures | $2.8 million | $2.3 million |
Energy power-generation sales fell $13.3 million to $20.8 million, the principal driver of the revenue decline. Rotorcraft sales rose $2.3 million; fixed-wing sales fell $1.3 million. Commercial sales, including energy, were $58.7 million, while military sales were $52.5 million. Lower sales volume and an Alliance inventory write-down reduced gross profit and margin. The smaller net loss largely reflected lower prior-year impairment and SG&A costs and a gain on the Irish building sale, partly offset by weaker gross profit.
Financial position and liquidity
- Cash was $1.3 million at year-end, down from $1.4 million. Operating cash generation declined substantially year over year; FY2018 investing activities provided $0.7 million, including asset-sale proceeds, and financing activities used $2.1 million.
- Total debt was $29.5 million, including $21.3 million drawn on the revolver. The company reported $8.4 million of revolver availability. The new senior secured, asset-based revolving facility has a $30 million maximum, matures August 2021, and bears interest at LIBOR plus 1.75% (3.85% at year-end). Borrowings are secured by substantially all U.S. company assets and a pledge of 66.67% of first-tier foreign subsidiary stock.
- The revolver is classified as current because of its lockbox arrangement and subjective acceleration clause. A subsequent amendment clarified the fixed-charge coverage covenant; the lender waived the August 2018 test, and SIFCO reported covenant compliance at September 30, 2018. The FCCR is generally 1.1:1 when specified availability/default conditions apply.
- Shareholders’ equity was $44.2 million, down from $50.1 million. Pension liability was $5.3 million. No cash dividends were declared in FY2018 or FY2017.
Outlook, risks and notable items
- Management forecast FY2019 capital expenditures of $3.8–$4.2 million, primarily for production capabilities and cost reductions. No revenue or earnings guidance is provided.
- Backlog increased to $99.7 million from $76.0 million; $73.7 million was scheduled for delivery in FY2019 versus $70.4 million scheduled in FY2018. Orders may be changed or cancelled, and backlog may not predict future sales.
- Management cited a soft energy market and changing aircraft program build rates. Three customers and their direct subcontractors represented 38% of FY2018 sales; the company says losing major-customer business could materially harm results. Other risks include metal-price recovery, defense spending, competition, and pension funding assumptions.
- On October 1, 2018, SIFCO planned to adopt the new revenue standard using the modified retrospective method. It expected a $2.3–$3.1 million increase to opening retained earnings, net of tax, and a corresponding contract asset, with no expected cash-flow effect. Certain qualifying military and commercial forgings will move to over-time revenue recognition.
- The Alliance facility closed in October 2017. The Irish building sale generated a $1.5 million gain in FY2018. SIFCO sold the remaining Alliance building and land after year-end; approximately $287,000 of net proceeds was expected to be recorded as a FY2019 gain, with proceeds intended to reduce revolver debt.
- Management reported material weaknesses in internal control over financial reporting involving IT access/segregation controls in domestic operations and IT general controls in Maniago. Disclosure controls and internal controls were deemed ineffective at year-end. Management stated the weaknesses did not adversely affect reported results; remediation work was ongoing, with no completion timetable or cost estimate.
- Contingencies include an Avco lawsuit alleging forged pistons failed material specifications; no damages amount was specified and no reserve was recorded because the loss was not estimable. The filing says routine legal matters are not believed material. OSHA penalties of $127,000 were assessed in FY2017; $32,000 remained expected to be paid in FY2019.
Investor verification points
- Track whether sales, gross margin and operating cash flow recover, particularly as energy demand remains weak.
- Confirm revolver availability, covenant compliance, and use of Alliance sale proceeds to reduce borrowings.
- Monitor remediation and independent validation of the disclosed material weaknesses, especially IT controls.
- Compare actual FY2019 capital spending and revenue-standard adoption effects with management’s estimates.
- Assess major-customer concentration, backlog conversion/cancellations, and the outcome or updated reserve assessment for the Avco litigation.