SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2018. SIFCO manufactures forged and machined components primarily for aerospace and energy markets and reports one business segment. Comparisons are with the corresponding 2017 periods.
Financial performance
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Net sales | $27.8 million, down 11.2% | $52.0 million, down 17.1% |
| Gross profit / margin | $2.5 million / 9.1%; prior year $3.7 million / 11.7% | $4.6 million / 8.8%; prior year $7.8 million / 12.5% |
| Operating loss | $1.7 million; prior year $1.3 million | $2.8 million; prior year $3.0 million |
| Net loss / loss per share | $2.0 million / $0.37; prior year $1.7 million / $0.30 | $2.9 million / $0.53; prior year $4.3 million / $0.78 |
| Operating cash flow | $1.4 million for six months, versus $5.3 million in 2017 |
Margins and cost drivers: Six-month cost of goods sold was 91.2% of sales, versus 87.5% a year earlier. Lower volume and mix and a $0.6 million Alliance-related inventory charge pressured gross profit. Lower labor, utility and SG&A costs provided offsets. Quarterly SG&A fell to $3.9 million, partly due to lower plant expansion costs, but included a $0.2 million charge for an uncollectible customer note.
Cash, liquidity and debt: Cash was $0.9 million at March 31, down from $1.4 million at September 30, 2017; about $0.8 million was held by non-U.S. subsidiaries. Total debt was $28.3 million, down from $31.3 million. Current assets were $49.1 million and current liabilities $44.6 million. Six-month investing cash flow was positive $1.5 million, including $3.0 million of asset-sale proceeds and $1.6 million of capital expenditures; financing cash flow used $3.4 million. Management said expected operating cash flows and available Credit Facility funds should provide adequate liquidity.
The revolving facility had a $30 million maximum after an amendment and matures June 25, 2020. Borrowings were subject to financial covenants; SIFCO reported compliance at March 31, 2018. The revolver’s weighted-average rate for the six-month period was 5.5%. The filing classifies revolver borrowings as current, citing facility terms.
Other measures: Six-month Adjusted EBITDA, a non-GAAP measure, was $0.4 million versus $4.4 million in 2017; second-quarter Adjusted EBITDA was $0.5 million versus $2.4 million. The company cautions that EBITDA and Adjusted EBITDA are not substitutes for GAAP results or operating cash flow.
Material changes and unusual items
- Sales declines reflected lower fixed-wing aircraft program demand/build rates, lower energy sales, Alliance’s closure, and timing of Hellfire II orders. Six-month commercial sales fell to $29.0 million from $35.6 million; military sales fell to $23.0 million from $27.3 million.
- The Alliance, Ohio location closed in October 2017; production was moved to Cleveland. Remaining Alliance building and equipment, valued at $1.0 million, remained held for sale, with a sale expected during fiscal 2018.
- The Cork, Ireland building sale closed in December 2017 for approximately $3.1 million. Approximately $2.4 million of net proceeds was applied to debt. The six-month statements report a $1.4 million gain on disposal of operating assets.
- The six-month net loss improved year over year, principally due to lower SG&A, the asset-sale gain and tax benefits, partly offset by lower gross profit. Second-quarter net loss worsened year over year.
- The U.S. Tax Cuts and Jobs Act tax effects remained provisional. The company reported a 7% effective tax rate for the first six months and released $0.3 million of U.S. valuation allowance; it had not yet elected an accounting method for GILTI.
Outlook, risks and contingencies
- No earnings or revenue guidance was provided. Management anticipated fiscal 2018 capital expenditures of $3.5–$4.0 million, with $1.1 million additionally committed at March 31, to support production capabilities and cost reductions.
- Management cited demand and build rates in aerospace and energy, reliance on military spending and major customers, competitive conditions, metals costs and recovery, pension funding, foreign-market conditions, and execution of new products or acquisitions as risks.
- Disclosure controls were deemed ineffective because of continuing material weaknesses: domestic IT controls, business and IT controls at the Maniago operation, and accounting-resource limitations affecting timely analysis of a complex accounting matter. Remediation was ongoing; management could not estimate completion timing or cost and said additional steps might be needed.
- The company reported ordinary-course legal matters and an employee wage-and-hour class action. It recorded a $0.4 million estimated loss at September 30, 2017; an additional $11,000 was incurred and $391,000 paid in fiscal 2018.
- Revenue guidance adoption was planned for October 1, 2018. The company was assessing variable consideration and contracts that could require revenue recognition over time; most revenue was then recognized at a point in time. Lease accounting adoption was planned for October 1, 2019 and was expected to add right-of-use assets and lease liabilities.
- After quarter-end, on May 4, 2018, the company entered into a change-in-control and separation agreement with its interim CFO/chief accounting officer, providing specified severance benefits after a qualifying termination.
Important facts for investors to verify
- Whether sales volumes, gross margins and operating cash generation stabilize as customer build rates and program orders change.
- Ongoing covenant compliance, revolver availability, borrowing costs and the company’s ability to meet near-term debt obligations.
- Progress and effectiveness of internal-control remediation, particularly at Maniago and in domestic IT controls.
- Completion and proceeds of the planned Alliance asset sale, and final tax effects of the Irish property sale and Tax Act.
- The quantified financial and systems impact of the new revenue-recognition standard, including variable-consideration contracts.