SIFCO Industries, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016; comparisons are with fiscal 2015. SIFCO manufactures forged and machined components, primarily for aerospace and energy markets, and reports one business segment. The filing provides annual results, not standalone fourth-quarter figures.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $119.1 million | $109.3 million |
| Gross profit / margin | $12.1 million / 10.1% | $15.7 million / 14.4% |
| Operating loss | $12.1 million | $5.7 million |
| Net loss | $11.3 million | $2.9 million |
| Net loss per diluted share | $2.07 | $0.53 |
| Cash from continuing operations | $12.3 million provided | $1.3 million used |
| Capital expenditures | $2.3 million | $8.8 million |
| Total debt at September 30 | $38.6 million | $48.9 million |
| Cash and cash equivalents at September 30 | $0.5 million | $0.7 million |
- Sales rose 9.0%, largely because FY2016 included a full year of Maniago, acquired in July 2015; the acquisition contributed about $12.6 million of sales growth. Energy-component sales increased $13.8 million, while rotorcraft sales declined $4.7 million and commercial/other sales declined $3.6 million.
- Commercial sales were 60.9% of revenue, up from 56.9%; military sales were 39.1%, down from 43.1%. The commercial share increase was principally related to energy sales and Maniago.
- Gross profit fell despite higher sales: cost of goods sold increased 14.4%, driven mainly by Maniago and higher benefit costs, while product mix and customer build-rate changes pressured margins. SG&A declined to $17.4 million from $19.2 million, partly because FY2015 included acquisition transaction and severance costs.
- FY2016 included a $4.2 million goodwill impairment for the Orange, California reporting unit. Reported continuing-operations loss also reflected higher interest expense ($1.7 million versus $0.6 million) and a $2.0 million income tax benefit. A $3.3 million valuation allowance was established against U.S. deferred tax assets.
- Adjusted EBITDA, a non-GAAP measure, was $4.0 million versus $8.7 million; GAAP EBITDA was negative $0.9 million versus positive $2.8 million. Management cautions that these measures have limitations and should not replace GAAP results.
Liquidity, debt and capital resources
- Operating cash flow improved to $12.3 million, supported by $7.9 million of cash generated through working-capital management, particularly a $10.9 million decrease in receivables. Financing activities used $10.4 million, including debt repayments; cash decreased by approximately $0.2 million.
- At year-end, current assets were $58.1 million and current liabilities were $50.8 million. The balance sheet classified $31.0 million of debt as current following the November 2016 refinancing terms, including a lockbox arrangement and subjective acceleration clause.
- On November 9, 2016, SIFCO entered into a secured credit facility of up to $39.9 million, comprising a $35.0 million revolving facility and a $4.9 million term loan, maturing June 25, 2020. The agreement includes minimum adjusted EBITDA and fixed-charge coverage covenants, restrictions on capital spending and other activities, and events of default that can accelerate repayment. Any defaults under the prior facility were waived upon closing of the new agreement.
- Management said expected operating cash flows and credit-facility availability were adequate to finance operations. The company paid no dividend in FY2016 and said it expects to retain most earnings. It forecast FY2017 capital expenditures of $7.0–$8.0 million.
Outlook, risks and unusual items
- Management described commercial aerospace demand and aircraft backlogs as strong, while near-term industrial gas-turbine growth was expected to be flat; it anticipated continued strength in energy maintenance, repair and overhaul. These are market observations, not quantified company guidance.
- Backlog was $92.5 million at September 30, 2016, down from $94.8 million a year earlier; orders scheduled for delivery in the upcoming fiscal year increased to $84.3 million from $78.1 million. Orders may be modified or cancelled with limited charges, and backlog may not predict future sales. The total backlog decline was attributed primarily to the loss of low-margin accounts.
- Customer concentration is material: two customers represented 21% of sales, and the four largest customers and their direct subcontractors represented 46%. Management warned that losing major customer sales could materially harm the business.
- Other stated risks include sensitivity to aerospace, defense and energy demand; customer build rates; competition and limited pricing power; metal-price recovery; pension assumptions and funding; acquisition integration; and access to credit and liquidity.
- Management reported material weaknesses in internal control over financial reporting, including manual journal-entry approvals, Maniago business and IT controls, domestic IT controls, and controls over financial reporting, inventory, revenue, reconciliations and cash receipts. Disclosure controls were deemed ineffective at year-end. Management described remediation efforts but could not estimate the time to completion.
- The independent auditor gave an unqualified opinion on the financial statements, but was not engaged to audit internal control over financial reporting. Routine legal matters were not believed material; future litigation costs could nevertheless affect results.
Investor verification priorities
- Assess whether the new credit facility’s covenants, current-debt classification and available borrowing capacity support liquidity needs, particularly given low cash and the sizeable current debt balance.
- Track remediation and independent validation of the disclosed material weaknesses, especially at Maniago and in revenue, inventory and IT controls.
- Determine whether Orange’s operating performance and cost-saving measures improve after the $4.2 million goodwill impairment, and whether additional impairment risk remains.
- Separate organic sales and margin trends from the full-year Maniago contribution; monitor product mix, customer build rates and the conversion of backlog into sales.
- Monitor customer concentration, pension funding status, deferred-tax-asset realizability and compliance with the new facility’s financial covenants.