SIFCO Industries, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015; filed January 29, 2016. SIFCO manufactures forgings and machined components primarily for aerospace and energy customers. Results include C*Blade, acquired July 1, 2015, from the acquisition date. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $109.3 million | $119.7 million |
| Gross profit / margin | $15.7 million / 14.4% | $25.3 million / 21.2% |
| Operating income (loss) | $(5.7) million | $8.1 million |
| Continuing-operations income (loss), net of tax | $(3.6) million | $5.6 million |
| Net income (loss) | $(2.9) million | $5.0 million |
| Diluted earnings (loss) per share | $(0.53) | $0.92 |
| Operating cash flow from continuing operations | $(1.3) million | $11.0 million |
| Cash and cash equivalents at year-end | $0.7 million | $4.6 million |
- Sales fell 8.7%. Lower military aircraft program volumes, raw-material delays and reduced energy sales after a customer facility closure outweighed higher commercial/other sales and $6.0 million of C*Blade sales.
- Gross profit declined 37.9%. Management cited lower volume and fixed-cost absorption, product mix, higher scrap and inventory shrink, and costs on a new aerospace program.
- SG&A rose to $19.2 million from $15.1 million, reflecting acquisition-related costs, executive severance, ERP support, plant expansion costs and higher bad-debt expense, partly offset by lower incentive compensation.
- Adjusted EBITDA, a non-GAAP measure, was $8.7 million versus $17.6 million. FY2015 adjustments included $2.7 million of acquisition costs, $1.0 million of severance and other specified items; it should not be treated as cash available for investment or debt service.
- Working capital used $6.6 million of cash, including a $3.6 million inventory increase associated with delayed customer releases and a $3.3 million receivables increase driven by collection timing.
- Investing cash outflow was $25.8 million, including $17.0 million for C*Blade and $8.8 million in capital expenditures. Financing activities provided $22.5 million; cash fell by $3.6 million during the year.
- Year-end debt was $48.9 million, including $16.5 million drawn on the revolver, $19.3 million on the term loan and $13.2 million of foreign subsidiary borrowings. Current maturities were $10.5 million; long-term debt, net of current maturities, was $38.4 million. Debt is primarily variable-rate and secured by substantially all U.S. company assets, with a pledge of 65% of non-U.S. subsidiary stock.
- Current assets were $71.5 million and current liabilities $33.2 million. The company reported $0.7 million in cash and relied on operating cash flows and available credit for liquidity.
- Backlog increased to $94.8 million from $86.7 million, largely due to C*Blade; $78.1 million was scheduled for FY2016 delivery. Orders may be canceled or changed and backlog is not a certain indicator of future sales.
Material changes and unusual items
- C*Blade added an Italian steam- and gas-turbine blade business, increased the workforce to approximately 593 from 465, and contributed $6.0 million in sales and $0.2 million in operating income after acquisition. The acquisition used $17.0 million in cash and assumed debt and other liabilities.
- Commercial sales were 56.9% of FY2015 revenue and military sales 43.1%, compared with 55.9% and 44.1%, respectively, in FY2014. United Technologies and Boeing, together with their direct subcontractors, represented 38% of sales.
- Discontinued operations contributed $0.7 million of after-tax income, primarily from the $0.8 million after-tax gain on sale of the Repair Group property. FY2014 discontinued operations recorded a $0.6 million loss.
- The company changed its estimate of workers’ compensation reserves after changing administrators, reducing expense by approximately $0.4 million. It also recorded $0.6 million of bad-debt expense in FY2015, including a $0.4 million increase in the reserve associated with customer credit issues.
- No cash dividend was declared for FY2015; FY2014’s $0.20-per-share dividend was paid in FY2015. The board may determine future dividends at its discretion, and credit covenants constrain dividend capacity.
Outlook, risks and controls
- No formal revenue or earnings guidance is provided. Management expected FY2016 capital expenditures of $4–$5 million and said it expected to remain in compliance with credit covenants during FY2016. It also noted continued customer pricing pressure and anticipated flat near-term industrial gas-turbine market growth, with stronger maintenance, repair and overhaul demand.
- The lender waived certain non-financial covenant matters for FY2015; the company reported covenant compliance at September 30, 2015 after the waiver. Management cautioned that weaker aerospace or energy demand and lower sales could threaten future financial-covenant compliance. A 100-basis-point rate change was estimated to change annual interest expense by approximately $0.4 million, assuming debt balances stayed constant.
- Internal control over financial reporting was ineffective at year-end, and the auditor issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements. Material weaknesses involved ERP-related journal-entry and system-report controls, account reconciliations, cash application, revenue recognition/tooling transactions, and corporate monitoring of operating locations. The company was remediating these deficiencies but could not estimate the completion timetable.
- The delayed 10-K filing resulted in an NYSE MKT notice that the company was below certain continued-listing standards. SIFCO was developing a compliance plan, subject to exchange acceptance.
- Other notable risks include dependence on a small number of customers, cyclical aerospace and energy markets, defense-budget shifts, supply availability and commodity costs, acquisition integration, pension assumptions and funding, international operations and foreign exchange, and competition and contract-margin pressure. The filing reports no material pending legal proceedings.
Most important facts for investors to verify
- Progress and independent validation of remediation of the material weaknesses, and the company’s ability to file future reports on time and maintain exchange listing compliance.
- Current borrowing availability, covenant headroom and compliance after the FY2015 waiver, including the revolver’s reduction from $25 million to $20 million on January 1, 2016.
- Whether operating cash flow recovers as delayed-release inventory converts to sales and receivables are collected.
- C*Blade’s ongoing contribution, integration costs, and exposure to foreign-currency, Italian labor and market risks.
- Customer concentration and the effects of the customer facility closure, military program build rates, raw-material availability and pricing pressure on margins and backlog conversion.
- Any subsequent updates to the Alliance facility lease, which expired in December 2015 and was on a month-to-month arrangement, and C*Blade labor-agreement negotiations, which were ongoing after its December 2015 expiration.