SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2015. SIFCO manufactures forged and machined components, primarily for aerospace and energy markets, and reports one business segment. The Repair Group is reported as discontinued operations.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales | $28.7 million, down 7.4% from $31.0 million | $73.4 million, down 15.3% from $86.7 million |
| Gross profit / margin | $5.0 million / 17.3%, versus $7.0 million / 22.7% | $11.7 million / 15.9%, versus $18.6 million / 21.4% |
| Operating income (loss) | $(1.5) million, versus $2.6 million | $(4.7) million, versus $6.4 million |
| Net income (loss) | $(1.0) million, or $(0.19) per diluted share; prior year $1.9 million, or $0.36 | $(2.5) million, or $(0.45) per diluted share; prior year $4.3 million, or $0.79 |
For the nine-month period, operating cash flow from continuing operations was a use of $2.5 million, versus $13.3 million provided a year earlier. Capital expenditures were $7.2 million. Cash and cash equivalents were $22.8 million at June 30, compared with $4.6 million at September 30, 2014.
Total debt was $38.9 million at June 30, including $19.2 million drawn on the revolver and a $20.0 million term loan; total debt was $10.4 million at September 30, 2014. The new term loan is presented net of $0.3 million of issuance costs. Shareholders’ equity was $75.3 million. Management said expected operating cash flow and available credit provided adequate liquidity.
Adjusted EBITDA, a non-GAAP measure defined by the company, was $3.2 million for the quarter versus $5.0 million a year earlier, and $6.1 million for the nine months versus $12.8 million. The company cautions that this measure is not a substitute for GAAP results or operating cash flow.
Drivers of change and material developments
- Sales declines reflected lower aerospace volumes, including changes in V-22 and C130 build rates and delays in raw-material availability. Energy sales also fell after a major customer closed its facility. Nine-month sales by category declined $3.6 million in fixed-wing aerospace, $4.8 million in rotorcraft, and $6.5 million in energy; commercial product and other revenue rose $1.6 million.
- Lower volume reduced fixed-cost absorption; mix, scrap, inventory shrink and obsolescence, and costs for a new aerospace program also pressured gross margin.
- SG&A rose to $5.9 million from $3.9 million in the quarter and to $14.8 million from $10.5 million for nine months. Increases included C Blade transaction-related professional fees, executive severance, ERP consulting and plant expansion costs. A customer bankruptcy also increased the bad-debt reserve.
- Inventory rose to $27.5 million from $18.9 million at September 30, largely due to customer delays. Management expected the inventory to support fourth-quarter sales.
- On June 26, SIFCO entered a new five-year credit agreement: a $20.0 million term loan and a revolver initially capped at $25.0 million, declining to $20.0 million on January 1, 2016. The term loan requires quarterly principal payments of about $0.7 million beginning September 30, 2015. Financial covenants begin September 30, 2015; none were required to be met at June 30.
- On July 1, 2015, SIFCO completed its acquisition of C Blade for approximately $17.2 million in cash, net of assumed current indebtedness, subject to purchase-price adjustments. Purchase-price accounting was not complete at filing.
Outlook, risks and unusual items
- Fiscal 2015 capital expenditures were expected to total $7.0–$9.0 million; $0.7 million was committed at June 30. No revenue or earnings guidance was provided.
- Management cited demand and build rates in aerospace and energy, military spending and customer concentration, raw-material costs and availability, competition, pension assumptions, and acquisition integration among key uncertainties.
- A change in workers’ compensation administrator and reserve-estimation process reduced expense by approximately $0.4 million in the first nine months. The company also recorded immaterial prior-quarter corrections in Q3, increasing reported cost of goods sold by 3.0% and SG&A by 2.9% for the quarter.
- The Repair Group property sale generated $1.4 million of proceeds and contributed an approximately $0.8 million after-tax gain in discontinued operations for the nine months.
- Management concluded disclosure controls were not effective at June 30 because material weaknesses remained, including reconciliation-review timeliness and precision, inventory-related controls, and segregation of IT duties at one facility. Remediation and testing were underway.
- The company noted a possible tax benefit of up to $1.4 million if deferred taxes reverse following the C Blade acquisition and use of Irish subsidiary earnings; the timing and amount were uncertain. A 100-basis-point interest-rate change was estimated to change quarterly interest expense by approximately $0.1 million, assuming debt balances stayed constant.
Important facts for investors to verify
- Final C Blade purchase accounting, working-capital adjustments, funding, and integration performance.
- Whether the inventory build converts to fourth-quarter sales and cash, and whether operating margins recover.
- Compliance with the new credit agreement’s covenants, borrowing availability after the revolver reduction, and debt-service capacity.
- Progress in remediating and testing material weaknesses, including the inventory and reconciliation controls related to Q3 corrections.
- Whether the potential Irish tax benefit is realized and how the acquisition affects cash, taxes, and liquidity.