SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019. SIFCO manufactures forged and machined components, primarily for aerospace and energy markets. Amounts below are in U.S. dollars; financial statement amounts are presented in millions unless stated otherwise.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales, 2019 / 2018 | $24.9 / $28.7 | $81.3 / $80.7 |
| Gross profit, 2019 / 2018 | $1.4 / $3.3 | $6.2 / $7.8 |
| Gross margin, 2019 / 2018 | 5.6% / 11.4% | 7.6% / 9.7% |
| Operating loss, 2019 / 2018 | $7.5 / $1.4 | $9.9 / $4.2 |
| Net loss, 2019 / 2018 | $7.4 / $1.5 | $9.9 / $4.5 |
| Net loss per diluted share, 2019 / 2018 | $1.32 / $0.28 | $1.78 / $0.81 |
Quarterly sales fell 13.3%; nine-month sales increased 1.0%. In the quarter, fixed-wing revenue declined $3.5 million, principally from Orange facility fire-related production and delivery delays and lower C-130J sales. Nine-month military sales rose to $40.1 million, while commercial sales declined to $41.2 million. Lower energy-market demand also weighed on results.
The quarter included an $8.3 million non-cash goodwill impairment for the Maniago reporting unit, reflecting a soft energy market and continued underperformance against projected results. Insurance recoveries associated with the Orange fire produced a $3.3 million quarterly gain; the nine-month net gain on insurance proceeds was $4.5 million. These items materially affect reported losses.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $9.4 million, versus $0.7 million in 2018. Management attributed the improvement largely to working-capital reduction, including receivables collections, and non-cash charges; it should not be read as equivalent to recurring earnings.
- Investing cash outflow was $1.1 million, including $7.0 million of capital expenditures and $5.6 million of insurance proceeds. Financing cash outflow was $8.8 million. Cash declined to $0.7 million from $1.3 million at September 30, 2018; all cash was held by non-U.S. subsidiaries and distributions may have adverse tax consequences.
- At June 30, total debt was $20.7 million, including $12.7 million under the revolver; current maturities and revolver were classified as current liabilities. Total current liabilities were $41.4 million, versus current assets of $44.0 million. Shareholders’ equity was $38.1 million.
- The asset-based revolving facility matures August 2021, with a stated maximum commitment of $30 million plus a $5 million export-credit commitment. The filing reports approximately $10.1 million of unused availability in one place, but also cites $12.7 million as availability elsewhere. The fixed-charge coverage covenant was not required to be tested at quarter-end; it applies under specified low-availability or default conditions.
Changes, outlook and risks
- Gross margin weakened year over year, with fire-related unabsorbed costs and lower quarterly volume contributing; nine-month cost of goods sold rose to 92.4% of sales from 90.3%.
- The December 2018 fire damaged one of three buildings at the Orange facility, which housed six of the site’s eight presses. SIFCO reported $8.2 million of insurance proceeds received through June 30 and was still negotiating recovery of business-interruption costs. Management said remaining long-lived assets were recoverable.
- Management projected fiscal 2019 capital expenditures of $4.5–$6.5 million, excluding fire-related spending, plus approximately $6.5–$9.0 million for Orange restoration, expected to be offset by insurance proceeds. The filing also reported $7.0 million already spent on capital expenditures in the first nine months and $3.3 million committed for future expenditures.
- Remaining performance obligations were $104.4 million at June 30, most expected to be completed within 12 months; this is not a revenue or earnings forecast.
- Revenue standard Topic 606 was adopted October 1, 2018. It moved certain contracts to over-time recognition and resulted in a $3.6 million opening retained-earnings increase. About 56% of net sales at June 30 were recognized over time; prior-year comparisons were not restated.
- Disclosure controls and procedures were deemed ineffective because material weaknesses remained, including IT access and control deficiencies in domestic operations and Maniago, and insufficiently precise review controls over certain calculations and disclosures. Management described remediation efforts but cautioned they could extend beyond fiscal 2019 and may require additional steps.
- Contingencies include an Avco lawsuit alleging forged pistons failed material specifications and a California wage-and-hour class action. SIFCO recorded no loss for either because it said a reasonable estimate could not be established. The filing also cites general exposure to aerospace and energy demand, customer concentration, commodity costs, pension funding, and credit availability.
Important facts for investors to verify
- Reconcile revolver availability: the filing gives approximately $10.1 million in one section and $12.7 million in another.
- Track Orange restoration, production recovery, and additional business-interruption insurance proceeds; only a portion of the potential fire-related costs had been recovered or settled.
- Assess whether operating cash generation is sustainable after the substantial working-capital contribution and how planned capital spending will be funded.
- Monitor energy-market conditions, Maniago performance, and the risk of further impairment charges given the estimates used in goodwill valuation.
- Follow remediation of the disclosed material weaknesses and developments in the Avco and California litigation.