SIFCO Industries, Inc. — Q2 FY2021 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2021 is the second quarter of SIFCO’s fiscal year, which ends September 30. SIFCO manufactures forged and machined components for aerospace, military, energy and other markets and reports one business segment. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $24.9 | $30.5 | $49.9 | $56.7 |
| Gross profit / margin | $2.7 / 11.0% | $6.3 / 20.6% | $6.7 / 13.3% | $9.6 / 16.9% |
| Operating income (loss) | $(1.1) | $3.5 | $1.2 | $2.2 |
| Net income (loss) | $(1.5) | $3.3 | $1.5 | $1.9 |
| Diluted EPS | $(0.26) | $0.57 | $0.25 | $0.33 |
Q2 sales declined 18.6% year over year. Lower fixed-wing and commercial product/other sales outweighed growth in rotorcraft and energy components. For the six-month period, commercial revenue was $20.0 million and military revenue was $29.9 million. The six-month effective tax rate was (97)%, reflecting a discrete benefit from adjusting deferred taxes in Italy; the company maintained a full valuation allowance on U.S. deferred tax assets.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $5.8 million, versus cash used of $0.4 million a year earlier. Management attributed the improvement principally to lower working capital, including reduced receivables.
- Capital expenditures were $5.4 million; investing cash flow was a $1.3 million outflow after $4.1 million of insurance proceeds. Financing cash flow was a $4.6 million outflow, primarily reflecting net revolver repayments. Cash ended at $0.3 million.
- At March 31, total debt was $20.1 million, including $7.7 million drawn on the revolver; current maturities were $17.5 million. Total current assets were $50.6 million and current liabilities $39.2 million.
- Revolver availability was $18.1 million. A February 2021 amendment extended the credit facility maturity to February 19, 2024; combined maximum commitments remain $35 million. The fixed-charge coverage test was not required at quarter end because availability exceeded the applicable threshold.
- Operating lease liabilities were $16.6 million. Remaining performance obligations were $82.3 million, most expected to be completed within 12 months.
Changes, outlook and notable matters
- Six-month sales fell $6.8 million year over year. Management cited COVID-19-related pressure and timing of customer orders, including a munitions program; fixed-wing sales also reflected lower build rates in certain commercial programs. Energy sales increased with customer orders and market recovery.
- Lower volume and $1.3 million of idle costs at the Orange facility weighed on six-month gross profit; Q2 included $0.8 million of Orange idle costs. Cost reductions and the absence of a prior-year $0.8 million pension withdrawal charge partly offset pressure.
- Six-month results included a $2.5 million gain on insurance recoveries and $0.6 million of business-interruption insurance recorded as a reduction of cost of goods sold. The prior-year six-month period included $1.0 million of insurance gain. The fire claim was finalized; restoration of the final two presses was targeted for the end of Q3 FY2021, subject to delays and certification.
- Backlog was $82.3 million at March 31, 2021, down from $107.0 million a year earlier. Orders may be modified or cancelled with limited charges, and management cautioned backlog may not predict future sales.
- No full-year revenue or earnings guidance was provided. Management expected remaining FY2021 capital expenditures of $1.5–$2.0 million excluding fire-related spending, plus approximately $1.0–$1.5 million of additional fire-related capital expenditures, expected to be offset by insurance proceeds.
- Management described COVID-19 impacts as evolving and particularly uncertain for commercial aerospace. Risks include demand and customer payment changes, reduced borrowing-base capacity, customer concentration, commodity costs, pension funding, litigation, and access to financing.
- Disclosure controls were deemed ineffective because of a continuing material weakness in review of controls over revenue, inventory, income taxes and other matters at the Maniago location. Remediation includes added monitoring, training, external expertise and review controls; completion timing and costs were not estimated.
- The company was seeking forgiveness of its $4.8 million PPP loan; forgiveness was not assured. A California wage-and-hour settlement liability of $0.315 million was paid in March 2021. A separate forged-pistons lawsuit remained unresolved, with no loss accrued because management did not consider a loss probable or reasonably estimable.
Investor facts to verify
- Whether sales and margins recover as commercial aerospace demand and customer build rates change, and whether the reported backlog converts to revenue.
- Progress and costs in completing Orange press and building restoration, and the final economic effect of the insurance settlement.
- Revolver availability, borrowing-base collateral and covenant compliance as business conditions evolve; also the classification and repayment timing of current debt maturities.
- Outcome of the PPP forgiveness application and the status and potential exposure of the Avco litigation.
- Remediation of the Maniago internal-control material weakness and any resulting changes to reported financial information.