SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; filed August 6, 2020. SIFCO manufactures forged and machined components primarily for aerospace and energy markets. Figures below are in millions of dollars except per-share data and where noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $27.8 | $24.9 | $84.5 | $81.3 |
| Gross profit / margin | $4.1 / 14.9% | $1.4 / 5.6% | $13.8 / 16.3% | $6.2 / 7.6% |
| Operating income (loss) | $2.5 | ($7.5) | $4.7 | ($9.9) |
| Net income (loss) | $2.3 | ($7.4) | $4.2 | ($9.9) |
| Diluted EPS | $0.39 | ($1.32) | $0.72 | ($1.78) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.3 | $9.4 |
- Q3 operating margin was approximately 9.0%; nine-month operating margin was approximately 5.6%. The filing attributes improved profitability to productivity, sales volume, cost reduction, and insurance recoveries.
- For the nine months, cash used in investing activities was $1.3 million and cash used in financing activities was $1.1 million. Capital expenditures were $7.4 million. Cash declined by $0.1 million to $0.3 million.
- At June 30, total debt was $22.5 million, including $11.3 million drawn on the revolver. Revolver availability was $13.5 million; the facility commitment is $35 million and matures August 2021. Cash was $0.3 million. Current assets were $49.3 million and current liabilities were $42.1 million.
- Shareholders’ equity was $41.3 million. Operating lease liabilities were $17.5 million, recognized following adoption of the lease accounting standard.
Material changes and business drivers
- Q3 sales increased 11.7% year over year, led by military rotorcraft programs; nine-month sales rose 3.9%. Military revenue was $15.5 million in Q3 and $49.6 million for the nine months. Commercial revenue was $12.3 million and $35.0 million, respectively.
- Nine-month military sales increased $9.5 million, while commercial sales declined $6.3 million. Energy sales fell amid a soft market and pandemic effects. Border closures delayed approximately $1.3 million of Maniago shipments, which management expected to ship in the following quarter.
- Gross margin improved substantially from the prior year. Prior-year results included an $8.3 million non-cash goodwill impairment; current-period results also include insurance-related benefits. Nine-month insurance gain recognized in earnings was $2.7 million, versus $4.5 million in the prior-year period.
- Backlog was $100.9 million at June 30, down from $104.4 million a year earlier and $117.6 million at September 30, 2019. Orders may be modified or canceled, and backlog may not predict future sales.
Outlook, risks, and unusual items
- Management said the full financial, operating, and liquidity effects of COVID-19 could not be estimated. Risks include reduced commercial aerospace demand, customer order changes or payment delays, supplier and facility disruptions, and reduced access to financing. Management reported temporary Maniago operating disruption and delayed shipments.
- The Orange facility fire restoration was nearing completion, but two damaged presses remained under restoration; management expected restoration by fiscal year-end. Six of eight presses were in production going into Q4. The company continued to pursue insurance recovery, including business-interruption amounts.
- Management anticipated fiscal 2020 capital spending of $4.0–$5.0 million excluding fire-related expenditures, plus approximately $4.5–$6.5 million of fire-related spending expected to be offset by insurance proceeds. It reported $2.6 million committed for future capital expenditures at June 30.
- The company received a $5.025 million Paycheck Protection Program loan at 0.98%, repaid $0.261 million, and reported a remaining balance of $4.764 million. It intended to seek forgiveness but had not received assurance of forgiveness and was awaiting application guidance.
- Management continued to seek financing for its Maniago subsidiary. The subsidiary may face difficulty meeting certain loan obligations if additional financing is not obtained; the U.S. parent has not guaranteed that debt. Management believed its actions would provide adequate liquidity, but the filing describes uncertainty around that assessment.
- A $0.739 million withdrawal liability associated with exiting a multi-employer pension plan is payable over 20 years. The company reported pension liabilities of $8.6 million and said it did not anticipate additional pension contributions for the balance of fiscal 2020, subject to plan funding requirements.
- Disclosure controls were deemed ineffective because of an ongoing material weakness involving segregation of duties and periodic access reviews in IT controls at the Cleveland operation. Remediation was in progress; timing and cost were not estimated.
- Contingencies include an Avco lawsuit concerning alleged product specification failures, for which no loss estimate was recorded, and a California wage-and-hour class action settlement that received preliminary court approval in July 2020; reserves had been recorded.
Investor verification points
- Track commercial aerospace demand, customer orders, backlog conversion, and whether the delayed Maniago shipments were completed.
- Verify Orange restoration completion, production capacity, and the timing and amount of further insurance recoveries.
- Monitor cash generation, working-capital needs, revolver availability and covenants, debt maturities, and refinancing progress for Maniago.
- Confirm PPP loan forgiveness or repayment requirements and the final financial effect of the loan.
- Assess progress in remediating the Cleveland IT-control material weakness and any subsequent developments in the lawsuits and pension obligations.