SIFCO Industries, Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended March 31, 2017; fiscal year ends September 30. Unaudited results. SIFCO manufactures forged and machined components, primarily for aerospace and energy markets, and reports one business segment. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Quarter ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Net sales | $31.3 vs. $29.1 (+7.7%) | $62.8 vs. $56.2 (+11.6%) |
| Gross profit / margin | $3.7 / 11.7%; prior-year margin 12.3% | $7.8 / 12.5%; prior-year margin 10.1% |
| Operating loss | $(1.3) vs. $(0.2) | $(3.0) vs. $(4.4) |
| Net loss | $(1.7) vs. $(0.3); diluted loss per share $(0.30) vs. $(0.05) | $(4.3) vs. $(2.9); diluted loss per share $(0.78) vs. $(0.53) |
| Operating cash flow | $5.3 for six months, compared with $11.8 in the prior-year period |
Quarterly sales growth reflected higher fixed-wing aircraft, rotorcraft and energy demand, partly offset by lower commercial product and other revenue. For the six months, aerospace fixed-wing, rotorcraft, energy and other revenue all increased. Military sales rose to $27.3 from $21.2; commercial sales were $35.6 versus $35.0.
For the six months, cost of goods sold was 87.5% of sales versus 89.9%, lifting gross margin. In the second quarter, cost of goods sold rose to 88.3% of sales from 87.7%, and gross margin declined. Higher SG&A—especially incentive compensation and costs tied to a plant expansion—contributed to the larger net loss. Six-month interest expense increased to $1.2 from $0.8, reflecting higher revolver borrowing and financing-cost write-offs.
Balance sheet, debt and liquidity
- At March 31, cash was $1.4, compared with $0.5 at September 30, 2016; about $0.9 was held by non-U.S. subsidiaries. Current assets were $57.0 and current liabilities $50.3.
- Total debt was $35.6, down from $38.6 at September 30, 2016. Revolver borrowings were $21.6, up from $12.8; long-term debt, net of current maturities, was $6.7. Revolver balances are classified as current because of the facility’s lockbox and subjective acceleration provisions.
- The secured credit facility matures June 25, 2020, with a maximum $35.0 revolving facility and a $4.9 term loan. The company reported covenant compliance at March 31; a minimum fixed-charge coverage covenant was to begin September 30, 2017. Revolver interest was weighted at 4.7% at quarter-end; the term loan’s 5.1% rate was effectively fixed at 5.8% after the swap.
- Operating cash flow was supported by a $2.6 inventory reduction and other working-capital sources, but was below the prior year, when working-capital releases were larger. Capital expenditures were $1.0; financing activities used $3.5. Cash increased by $0.9 during the six months.
Outlook, risks and notable items
- Management forecast fiscal 2017 capital expenditures of $2.0–$2.5, primarily for production capability, cost reductions and plant expansion; $0.3 was committed at March 31. Management expected no additional defined-benefit pension contributions during the remainder of fiscal 2017 and said operating cash flow and facility availability should provide adequate liquidity.
- No earnings or revenue guidance was provided. Management noted that results depend on aircraft and turbine build rates and maintenance demand, with a significant fixed-cost base. Risks include aerospace and energy market conditions, military spending and major-customer reliance, commodity costs and recovery, competition, pension funding, and execution of acquisitions.
- Six-month results included $0.3 of employee severance, $0.4 of cycle-count adjustments and $0.2 of lower-of-cost-or-market charges. Adjusted EBITDA, a non-GAAP measure, was $4.4 for six months versus $1.3; it included $1.9 of plant-expansion costs as an adjustment. The measure has limitations and is not a substitute for GAAP results or cash flow.
- A California wage-and-hour class action remained pending; the company had not concluded a loss was probable and recorded no estimated loss. OSHA citations at the Cleveland facility resulted in $127,000 of penalties as of March 31; remediation was underway or completed.
- Management concluded disclosure controls were ineffective because previously identified material weaknesses in internal control over financial reporting continued. Remediation was underway, but management did not estimate when it would be complete and did not expect all IT-control deficiencies to be remedied in fiscal 2017.
- The U.S. valuation allowance meant the year-to-date U.S. loss generated no tax benefit; the six-month effective tax rate was negative 6%.
Key facts for investors to verify
- Progress and independent evidence of remediation of the material weaknesses and improvement in disclosure controls.
- Revolver availability, borrowing-base restrictions and compliance with financial covenants, particularly as fixed-charge coverage testing begins.
- Whether sales growth and inventory management translate into sustained gross-margin improvement and cash generation, apart from working-capital timing.
- Plant-expansion spending, incentive compensation and other adjustments underlying adjusted EBITDA, alongside GAAP losses.
- Developments in the wage-and-hour litigation and OSHA remediation, and any resulting cash costs or reserve changes.