SIFCO Industries, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; compared with the three months ended December 31, 2018. SIFCO manufactures forged and machined components primarily for aerospace and energy markets and reports one business segment. Amounts below are in U.S. dollars.
Financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $26.2 million | $29.1 million |
| Gross profit / margin | $3.3 million / 12.7% | $2.7 million / 9.4% |
| Operating loss | $1.3 million | $1.5 million |
| Net loss | $1.3 million | $1.3 million |
| Loss per diluted share | $0.24 | $0.23 |
| Operating cash flow | $(1.0) million | $0.4 million |
Cost of goods sold was $22.9 million, or 87.3% of sales, versus $26.3 million, or 90.6%. Adjusted EBITDA, a non-GAAP measure, was $0.7 million versus $0.3 million; the company cautions it should not be viewed as a substitute for GAAP results or cash flow.
Balance sheet, debt and liquidity
At December 31, 2019, cash was $0.4 million, all held by non-U.S. subsidiaries; current assets were $45.6 million and current liabilities were $45.9 million. Total debt was $23.4 million, including $16.6 million outstanding on the revolver; $21.4 million of debt was classified as current. Revolver availability was $7.0 million against a $35.0 million commitment. The facility matures August 6, 2021, is secured by substantially all U.S. company and subsidiary assets, and has a fixed-charge coverage covenant that applies if availability falls below specified thresholds. The covenant calculation was not required at quarter-end.
Operating lease adoption added $17.7 million of operating lease right-of-use assets and $17.8 million of operating lease liabilities at quarter-end. Capital expenditures were $2.3 million in the quarter.
Material changes and operating developments
- Sales fell 9.8%. Fixed-wing aircraft sales decreased $2.0 million, energy sales decreased $1.1 million, and commercial and other revenue decreased $1.5 million; rotorcraft sales rose $1.7 million, primarily on Black Hawk shipments.
- Management attributed lower sales to continued fire-related production delays at the Orange facility, reduced Boeing 737 production, C-130J program timing, Hellfire II shipment timing, and a softer energy market.
- Gross margin improved, primarily due to product mix and insurance proceeds offsetting some fire-related costs. Results included a $739,000 multi-employer pension-plan withdrawal liability charge in cost of goods sold. The comparable prior-year quarter included a $282,000 gain on asset disposal.
- Net loss was broadly unchanged year over year, while operating cash flow moved from cash provided to cash used, mainly reflecting working-capital needs, including higher inventory and supplier payments.
- On adopting lease accounting on October 1, 2019, SIFCO recorded approximately $18.1 million of lease assets and liabilities, with no adoption impact on earnings or cash flow.
Outlook, risks and contingencies
- Management expects FY2020 capital expenditures of $4.5–$6.5 million, excluding fire-related spending, plus approximately $5–$7 million of additional Orange fire-restoration capital expenditures, which it expects to be offset by insurance proceeds.
- Orange restoration was nearing completion for the building and two damaged presses. One restored press began operating in late December; the second was expected to start in March 2020. The company was still negotiating with its insurer over business-interruption recoveries and reported none realized in Q1.
- Remaining performance obligations were $119.5 million at December 31, 2019, the majority anticipated to be completed within 12 months; this is not company revenue guidance.
- Management said it was negotiating financing for its Maniago, Italy location. If additional financing is not obtained, Maniago may face difficulty meeting certain loan obligations. The filing states the U.S. operations have not guaranteed that debt.
- The company recorded an estimated additional $65,000 loss for a California wage-and-hour class action, bringing the disclosed reserve to $315,000. A separate Avco lawsuit alleges forged pistons failed material specifications; no damages amount was specified and no loss was recorded because it could not be reasonably estimated.
- Disclosure controls were deemed ineffective because of a continuing material weakness in segregation of duties and periodic IT access reviews for the Cleveland operation. Management described remediation efforts but could not estimate their completion time or cost.
Important facts for investors to verify
- Reconcile insurance proceeds: the cash-flow statement reports $3.5 million received, while the notes and MD&A state $4.5 million was received in Q1; the filing describes $3.5 million used for capital expenditures and $1.0 million offsetting operating costs.
- Track Orange restoration, production recovery, and the timing and amount of further insurance and business-interruption recoveries.
- Monitor Maniago refinancing, debt-service capacity, revolver availability, and covenant thresholds.
- Assess the effect of the Cleveland internal-control material weakness and progress toward remediation.
- Follow the Avco and California wage-and-hour litigation, pension funding needs, and the sustainability of sales and margins amid program timing and aerospace and energy market conditions.