SIFCO Industries, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020; comparison is fiscal 2019. SIFCO manufactures forgings, machined components and sub-assemblies primarily for aerospace and energy markets. It reports one business segment.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $113.6 million | $112.5 million |
| Gross profit / margin | $20.0 million / 17.6% | $10.6 million / 9.5% |
| Operating income (loss) | $10.1 million | ($7.0 million) |
| Net income (loss) | $9.2 million; diluted EPS $1.59 | ($7.5 million); diluted EPS ($1.35) |
| Cash from operating activities | $0.4 million | $5.7 million |
| Capital expenditures | $9.0 million | $9.4 million |
Adjusted EBITDA, a non-GAAP measure, was $12.2 million versus $1.7 million. Cash and cash equivalents were $0.4 million at year-end. Total debt was $24.6 million, including $12.9 million outstanding under the revolver; reported current maturities of long-term debt were $7.1 million. Revolver availability was $13.3 million. Current assets of $55.2 million exceeded current liabilities of $43.3 million.
Changes and operating drivers
- Sales increased 1.0%, as military revenue rose to $65.2 million from $57.5 million, offsetting commercial revenue falling to $48.3 million from $55.0 million. Rotorcraft sales increased $7.9 million, largely on military programs; commercial products and other revenue declined $4.9 million.
- Gross margin improved with better productivity and product mix, including as more presses returned to service at the Orange facility. SG&A declined to $14.0 million from $15.3 million.
- Reported earnings benefited materially from Orange-fire insurance recoveries: $5.9 million was recorded as an operating gain and $3.1 million as a reduction of cost of goods sold in FY2020. FY2019 included $12.0 million of recognized insurance recoveries and an $8.3 million non-cash goodwill impairment charge.
- Operating cash flow declined despite the return to net income, primarily reflecting a $10.5 million working-capital increase, including higher inventories and supplier payments.
Outlook, risks and unusual items
- COVID-19 sharply disrupted commercial aerospace demand and customer build rates. Management said pre-pandemic commercial aerospace activity could take several years to return; it cited estimates of three to five years for passenger traffic. Military demand was less affected and supported FY2020 results. Energy markets remained soft.
- Backlog fell to $91.1 million from $117.6 million; orders scheduled for FY2021 fell to $63.6 million from $93.8 million. Orders may be changed or canceled, so backlog is not assured future revenue.
- The August 2021 credit-agreement maturity falls within 12 months of issuance. Management intended to refinance with its existing lender and considered refinancing probable, but disclosed that without refinancing the Company would be unable to meet obligations over the following year. PPP loan principal remaining was $4.8 million; forgiveness was not assured.
- Management forecast FY2021 capital expenditures of $4.0–$6.0 million, excluding an additional $2.0–$3.5 million expected for Orange fire restoration, which it expected to fund with insurance proceeds. A $3.1 million final insurance installment was received December 3, 2020. Employee furloughs at one location began in late November 2020 and were expected to continue through calendar year-end.
- A material weakness in financial reporting controls remained at September 30, 2020, involving insufficient review of revenue, inventory and income-tax controls at the Maniago location. Management was pursuing remediation. A prior Cleveland IT-controls weakness was reported as remediated.
- Other matters include a product-specification lawsuit with no damages amount specified and no reserve recorded because the Company could not reasonably estimate the loss; a California wage-and-hour class action settlement had preliminary court approval, with a $65,000 additional FY2020 accrual. Union negotiations were ongoing at Cleveland and Maniago. The Company also recorded a $0.8 million multi-employer pension withdrawal charge; further liability could arise in a mass withdrawal.
Most important facts for investors to verify
- Progress, terms and completion of refinancing before the August 2021 credit-agreement maturity, and ongoing borrowing availability and covenant compliance.
- Commercial aerospace order recovery, customer cancellations and the conversion of the $91.1 million backlog into sales.
- Cash generation and working-capital trends, given low year-end cash and the FY2020 operating cash-flow decline.
- Insurance funding and completion of Orange restoration, and the extent to which reported profitability depends on fire-related recoveries.
- Remediation and independent testing of the Maniago control weakness, as well as the outcomes and financial exposure of litigation, union negotiations and PPP forgiveness.