SIFCO Industries, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2021; fiscal year ends September 30. SIFCO manufactures forged and machined components for aerospace, military, energy, and other markets. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
- Quarter: Revenue was $25.3 million, down 8.8% from $27.8 million. Gross profit was $3.3 million and gross margin 13.0%, versus $4.1 million and 14.9%. Operating income was $0.1 million; net income was $0.3 million, or $0.04 per diluted share, compared with $2.3 million, or $0.39 per diluted share.
- Nine months: Revenue was $75.3 million, down from $84.5 million. Gross profit was $10.0 million and gross margin 13.2%, versus $13.8 million and 16.3%. Operating income was $1.4 million; net income was $1.8 million, or $0.29 per diluted share, compared with $4.2 million, or $0.72 per diluted share.
- Cash flow: Operating activities provided $3.5 million over nine months, versus $2.3 million in the prior-year period. Investing activities used $1.8 million, including $5.9 million of capital expenditures and $4.1 million of insurance proceeds. Financing activities used $1.9 million. Cash declined to $0.2 million from $0.4 million at September 30, 2020.
- Debt and liquidity: Total debt was $22.6 million at June 30, 2021, versus $24.6 million at September 30, 2020. Revolver borrowings were $9.8 million. Reported availability under the credit facilities was $17.5 million; the combined facility commitment is $35.0 million. The company reported $52.7 million of current assets and $39.6 million of current liabilities.
- Other metrics: Nine-month Adjusted EBITDA, a non-GAAP measure, was $5.5 million versus $8.0 million. The company reported a nine-month effective tax rate of negative 79%, principally reflecting discrete tax benefits from adjustments to Italian deferred taxes; it retained a full valuation allowance on U.S. deferred tax assets.
Changes versus prior comparable periods
- Commercial aerospace weakness drove much of the revenue decline: nine-month commercial sales fell to $26.5 million from $35.0 million, while military sales were $48.8 million versus $49.6 million. Energy-related sales increased to $14.8 million from $9.9 million.
- Lower volume and reduced insurance recoveries contributed to lower gross profit and margins. Management also cited cost controls and the non-recurrence of a prior-year pension withdrawal liability charge as offsets.
- Quarterly military revenue rose to $18.9 million from $15.5 million, largely due to timing of munitions-program orders; commercial revenue fell to $6.5 million from $12.3 million.
- Nine-month net income declined despite the tax benefit, largely because of lower sales and lower insurance recoveries. Prior-year quarter results included a $1.7 million insurance recovery gain.
Outlook, risks, and unusual items
- Backlog was $78.1 million at June 30, 2021, down from $100.9 million a year earlier. Most remaining performance obligations were expected to be completed within 12 months, but orders may be modified or canceled and backlog may not translate into sales.
- Management expected remaining FY2021 capital expenditures of $0.5–$1.1 million, excluding fire-related spending, and an additional approximately $0.8–$1.0 million for Orange-site fire restoration, expected to be offset by insurance proceeds. A further $1.3 million of capital expenditures was committed at June 30.
- COVID-19 continued to weigh on commercial aerospace demand and create uncertainty for customers, suppliers, and liquidity. Management said a second employee furlough began in July 2021; employees affected by an earlier furlough had returned to work.
- The February 2021 credit amendments extended facility maturity to February 19, 2024. The fixed-charge coverage covenant is tested only under specified low-availability or default conditions; it was not required at quarter-end. A sustained revenue decline or deterioration in receivables or inventory could reduce borrowing availability and affect covenant compliance.
- The company received $4.6 million of fire-related cash proceeds in FY2021. It recognized $3.1 million in the income statement, including $0.5 million of business-interruption proceeds recorded in cost of goods sold; other proceeds were designated for restoration. A $0.3 million Italian loan forgiveness was recorded as a gain on debt extinguishment.
- The $5.0 million Paycheck Protection Program loan remained outstanding at June 30, 2021; the company had applied for forgiveness, but forgiveness was not assured.
- Contingencies include an Avco lawsuit alleging nonconforming forged pistons; SIFCO disputes the allegations and had not accrued a loss because it could not conclude a loss was probable or reasonably estimable. A previously recorded $0.3 million California wage-and-hour settlement liability was paid in March 2021.
- Management concluded disclosure controls were not effective because of a continuing material weakness involving insufficient review of controls over revenue, inventory, income taxes, and other matters at the Maniago location. Remediation was ongoing, with timing and cost not estimated and no assurance that planned actions will be sufficient.
Most important facts for investors to verify
- Whether commercial aerospace demand, revenue, and backlog stabilize or continue to decline, and how order timing affects reported sales.
- Whether the company sustains adequate revolver availability and meets applicable covenants as customer collections, collateral values, and liquidity evolve.
- Whether the PPP loan is forgiven and whether further fire-restoration costs are fully covered by insurance.
- Progress in remediating the Maniago control weakness, and any effect on the reliability of future financial reporting.
- Developments in the Avco litigation, U.S. deferred-tax valuation allowance, and pension funding requirements.