SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2017. SIFCO manufactures forged and machined components, primarily for aerospace and energy markets, and reports one business segment. Amounts below are in U.S. dollars; financial-statement amounts are generally in thousands unless stated otherwise.
Financial performance
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Nine months ended June 30, 2017 | Nine months ended June 30, 2016 |
|---|---|---|---|---|
| Net sales | $30.2 million | $31.0 million | $92.9 million | $87.2 million |
| Gross profit / margin | $3.6 million / 11.8% | $3.0 million / 9.7% | $11.4 million / 12.3% | $8.7 million / 9.9% |
| Operating loss | $(5.3) million | $(1.8) million | $(8.3) million | $(6.2) million |
| Net loss | $(6.2) million | $(1.1) million | $(10.5) million | $(3.9) million |
| Net loss per share, basic and diluted | $(1.13) | $(0.19) | $(1.91) | $(0.72) |
Cash flow, nine months: Operating activities provided $7.7 million, down from $11.4 million. Investing activities used $1.5 million, including $1.6 million of capital expenditures; financing activities used $5.5 million. Cash increased by $0.6 million to $1.1 million. Management cited lower inventories as a major source of working-capital cash, alongside noncash depreciation and impairment charges.
Liquidity and debt at June 30, 2017: Cash was $1.1 million; current assets were $54.9 million and current liabilities $47.3 million. Total debt was $34.2 million, including $20.4 million outstanding on the revolving facility. The revolving facility’s balance is classified as current under its terms. The revolving rate was approximately 4.6%; the term loan rate was 5.3%, or an effective 5.8% after the interest-rate swap. SIFCO reported $0.3 million of committed future capital expenditures and expected fiscal 2017 capital expenditures of $2.2–$2.5 million.
Material changes and unusual items
- Nine-month sales rose 6.5%, while third-quarter sales fell 2.7%. Year-to-date growth included higher energy-component, rotorcraft and commercial/other sales; fixed-wing sales declined. Third-quarter weakness was driven principally by lower fixed-wing sales, partly offset by energy and Hellfire II-related sales.
- Gross margin improved in both comparisons. Management attributed the year-to-date improvement to higher sales volume, partly offset by scrap and severance costs; third-quarter improvement primarily reflected product mix.
- The decision to close the Alliance, Ohio plant followed reduced sales from a key customer. Alliance was to continue production through September 30, 2017, with subsequent orders transferred to Cleveland. The quarter included a $4.4 million noncash impairment charge—$2.1 million for machinery and equipment and $2.3 million for intangible assets—and $64,000 of accelerated depreciation. Approximately $413,000 of additional workforce-reduction and accelerated-depreciation costs remained to be expensed as incurred. No goodwill impairment was recorded.
- The nine-month net loss also reflected a $0.8 million income-tax expense, versus a $3.2 million tax benefit in the prior-year period. The U.S. loss generated no tax benefit because of a valuation allowance against U.S. deferred tax assets.
Outlook, financing, and risks
- On August 4, 2017, after quarter-end, SIFCO amended its credit facility. The amendment waived covenant-compliance requirements as of June 30, 2017, revised EBITDA and fixed-charge coverage requirements, deferred the fixed-charge coverage test to begin December 31, 2017, and reduced maximum revolver availability from $35 million to $30 million. Proceeds from the planned sale of the Cork, Ireland building must be applied first to reduce the term facility by $700,000, with remaining proceeds applied to the revolver. The company expected to sell the building within 12 months; it was recorded as a $1.4 million asset held for sale.
- Management said expected operating cash flows and available credit were adequate to finance operations. However, covenant compliance and access to the revolver remain important: the filing warns that a default could restrict access to the facility and affect working capital, capital spending, and investment in new business.
- No specific sales or earnings guidance was provided. Management’s fiscal 2017 capital-expenditure outlook was $2.2–$2.5 million. It noted that the business has significant fixed costs, making results sensitive to production and sales volumes.
- Key risks identified include aerospace and energy demand, military spending and reliance on major customers, competition and replacement of lost business, metals and commodity costs, aircraft build rates, pension funding, and successful integration of acquisitions.
- Disclosure controls were deemed ineffective as of June 30, 2017 because previously identified material weaknesses remained, involving manual journal-entry approvals, Maniago business and IT controls, domestic IT controls, and financial-reporting, inventory, revenue, reconciliation and cash-receipt processes. Management was implementing remediation but did not expect all weaknesses to be corrected in fiscal 2017.
- A California wage-and-hour class action was pending; SIFCO had not concluded a loss was probable and recorded no estimate. An OSHA inspection at the Cleveland facility resulted in penalties assessed at $127,000 as of March 31, 2017; the company said issues had been abated or were being addressed.
Important facts for investors to verify
- Progress and costs of the Alliance closure, including whether production transfers to Cleveland as planned and whether additional exit costs exceed the estimated $413,000.
- Compliance with amended lender covenants, availability under the reduced $30 million revolver, and application of any Cork property-sale proceeds.
- Whether sales and margins recover amid customer concentration, changing aircraft-program demand, and variable order timing.
- Cash generation and working-capital sustainability, particularly after the inventory reduction that supported year-to-date operating cash flow.
- Remediation of internal-control material weaknesses and the outcome or potential exposure of the California litigation and OSHA matters.