SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise. SIFCO manufactures forged and machined components primarily for aerospace and energy markets.
Financial performance
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $30.5 | $27.4 | $56.7 | $56.5 |
| Gross profit | $6.3 | $2.1 | $9.6 | $4.8 |
| Gross margin | 20.6% | 7.6% | 16.9% | 8.6% |
| Operating income (loss) | $3.5 | $(0.9) | $2.2 | $(2.5) |
| Net income (loss) | $3.3 | $(1.3) | $1.9 | $(2.5) |
| Diluted earnings (loss) per share | $0.57 | $(0.23) | $0.33 | $(0.46) |
| Operating cash flow | Not provided separately | Not provided separately | $(0.4) | $5.0 |
Second-quarter sales rose 11.5% year over year, while first-half sales were nearly flat. First-half military revenue increased to $34.1 million from $30.0 million; commercial revenue declined to $22.7 million from $26.5 million. The company attributed improved profitability mainly to productivity, sales volume in the quarter, and insurance recoveries related to the Orange plant fire. The reported results include a $1.0 million insurance gain in both the quarter and first half; cost of goods sold also benefited from insurance recoveries for fire-related expenses and business interruption. These items make reported earnings less indicative of underlying performance.
First-half operating cash use of $0.4 million compared with $5.0 million provided a year earlier, primarily reflecting working-capital investment, including higher inventory and contract assets. Capital expenditures were $4.6 million. Cash and cash equivalents were $0.3 million at March 31, 2020, versus $0.3 million at September 30, 2019.
Balance sheet, debt and liquidity
- At March 31, 2020, current assets were $49.9 million and current liabilities were $46.7 million. Receivables were $21.7 million; contract assets were $12.5 million; and inventory was $13.4 million.
- Total debt was $24.0 million, including $17.2 million drawn on the revolving facility. The balance sheet classified $22.1 million as current debt and $1.9 million as long-term debt. Revolver availability was $8.0 million; the fixed-charge coverage covenant was not required to be tested because availability exceeded the applicable threshold.
- The $35 million revolving commitment matures August 6, 2021. Borrowings are secured principally by U.S. company assets. The company cautioned that falling sales or slower customer collections could reduce borrowing capacity and affect covenant compliance.
- Adoption of lease accounting added operating lease right-of-use assets of $17.7 million and operating lease liabilities of $17.8 million at March 31, 2020; prior-period amounts were not restated.
- On April 10, 2020, after quarter-end, the company received a $5.025 million Paycheck Protection Program loan. The unsecured loan has a two-year term, a 0.98% interest rate, and interest deferred for the first six months. Proceeds were designated for eligible payroll, mortgage interest, rent and utility costs.
Business developments, outlook and risks
- COVID-19: Management said the pandemic’s eventual effect on results, financial condition and liquidity could not be estimated. The company experienced reduced operations and a temporary shutdown at its Maniago, Italy facility from March 17–22, followed by limited production; management estimated approximately $0.6 million of delayed shipments in the quarter. The filing describes risks of weaker commercial aerospace and energy demand, operational disruption, customer order changes, and collection or financing pressure.
- Orange fire restoration: Restoration continued after the December 2018 fire. One restored press was operating; another was expected to start in June 2020, and two of six damaged presses remained to be restored, anticipated in the fourth quarter of 2020. The company had received $6.8 million in insurance proceeds through March 31, including $0.9 million for business interruption in the first half. Additional recoveries beyond recognized losses would be recorded only when realized or realizable.
- Orders and spending: Backlog was $107.0 million at March 31, compared with $94.1 million a year earlier and $117.6 million at September 30, 2019. Orders may be modified or canceled, and management cautioned backlog may not predict future sales. Fiscal 2020 capital expenditures were expected at $4.5–$6.5 million, excluding an additional estimated $5.0–$7.0 million of fire-related spending, expected to be offset by insurance proceeds.
- Foreign subsidiary financing: The company continued seeking financing alternatives for Maniago. It warned that failure to obtain additional financing could challenge the subsidiary’s ability to meet obligations. Maniago debt is secured by its assets; U.S. operations have not guaranteed that debt.
- Other items: A $0.739 million withdrawal liability from exiting a multi-employer pension plan is payable in quarterly installments over 20 years. A product-specification lawsuit against subsidiary Quality Aluminum Forge has no stated damages; no reserve was recorded because the company could not reasonably estimate an amount. A California wage-and-hour class action settlement had adequate reserves recorded, but court approval was postponed due to COVID-19.
- Controls: Management concluded disclosure controls were not effective because of a continuing material weakness involving segregation of duties and periodic access reviews for IT general and application controls at the Cleveland operation. Remediation was ongoing, with no completion timetable or cost estimate provided.
Key facts for investors to verify
- How much of earnings and gross-margin improvement reflects recurring productivity and volume versus fire-insurance proceeds and other unusual items.
- Whether COVID-19, commercial aerospace demand weakness, and customer order changes affect sales, backlog, collections, and revolver availability.
- Progress on Orange press restoration, remaining fire-related costs, and the timing and amount of further insurance recoveries.
- Maniago’s refinancing and liquidity position, and the status of its near-term debt obligations.
- Whether the company remediates the disclosed material weakness in internal controls, and whether further legal, pension, or other liabilities emerge.