SIFCO Industries, Inc. — Fiscal 2021 First Quarter 10-Q
Reporting period: Three months ended December 31, 2020; comparisons are with the three months ended December 31, 2019. SIFCO manufactures forged and machined components primarily for aerospace and energy markets and reports one business segment. Unless stated otherwise, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $25.08 | $26.21 |
| Gross profit / gross margin | $3.92 / 15.6% | $3.32 / 12.7% |
| Operating income (loss) | $2.32 | $(1.29) |
| Net income (loss) | $2.99 | $(1.34) |
| Diluted EPS | $0.51 | $(0.24) |
| Operating cash flow | $3.12 | $(0.97) |
| Capital expenditures | $3.71 | $2.30 |
Reported earnings included a $2.50 gain on insurance recoveries and $0.60 of business-interruption recoveries recorded through cost of goods sold. The filing’s presentation shows a pre-tax loss of $1.01 before the insurance recoveries, versus reported pre-tax income of $2.09. Adjusted EBITDA, a non-GAAP measure, was $1.92 versus $0.74.
Cost of goods sold fell 7.6% to $21.16, or 84.4% of sales, from 87.3% of sales. Management attributed the improvement to cost controls, the absence of a prior-year $0.8 pension withdrawal liability charge, and insurance proceeds, partly offset by costs from reduced production at the Orange facility. SG&A declined to $3.83 from $4.21.
Cash and cash equivalents were $1.18 at December 31, 2020, versus $0.43 at September 30, 2020. Working capital was approximately $13.09, based on current assets of $53.33 and current liabilities of $40.24. Total debt was $22.79, including $9.15 outstanding on the revolver; current debt maturities were $10.15, in addition to the separately presented revolver. Revolver availability was $16.77. Cash flow from operations improved from the prior-year use of cash, while investing activities used $0.26 and financing activities used $2.14.
Changes versus the prior period
- Sales declined 4.3%. Fixed-wing aerospace sales fell $1.5 and commercial product and other revenue fell $4.3, partly offset by $3.8 higher energy-component sales and $0.9 higher rotorcraft sales.
- Military sales decreased to $14.3 from $16.0, primarily due to timing of Hellfire II orders; commercial sales increased to $10.8 from $10.2. Commercial and military sales represented 42.9% and 57.1% of total sales, respectively.
- Net income improved from a loss to a profit, reflecting higher gross profit, lower SG&A, insurance recoveries, and a tax benefit. The insurance-related gains and tax benefit materially affect comparability.
- Backlog was $81.5 at December 31, 2020, down from $119.5 a year earlier.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management said COVID-19 continued to pressure commercial aerospace demand and described mixed effects on the quarter. The company furloughed and laid off some employees at a location affected by reduced commercial aerospace sales. Management warned that customer payment extensions or weaker demand could pressure liquidity.
- The $35.0 asset-based credit facility matures August 6, 2021. SIFCO planned to refinance, but said there was no assurance of refinancing on similar terms; failure to refinance would leave it unable to meet debt obligations. The facility is secured by substantially all U.S. company and subsidiary assets. Availability exceeded the threshold that would trigger the fixed-charge coverage test at quarter-end.
- Management estimated fiscal 2021 capital expenditures of $2.5–$4.5, excluding fire-related spending, plus approximately $1.0–$1.5 of additional Orange fire-restoration expenditures expected to be offset by insurance. A further $1.6 of capital expenditures was committed at quarter-end. The final two damaged presses were targeted for restoration by the end of fiscal Q2, but completion was not assured.
- Remaining performance obligations were $81.5, most expected to be completed within 12 months. Orders may be changed or canceled with limited charges; backlog may not predict future sales.
- The $5.03 Paycheck Protection Program loan had a $4.76 balance at quarter-end. SIFCO intended to seek forgiveness but had not received a determination and gave no assurance forgiveness would be granted.
- A California wage-and-hour class-action settlement had a $0.315 recorded reserve; final approval was pending, with a hearing scheduled for April 16, 2021. A separate customer lawsuit over forged pistons had no recorded charge because the company did not consider a loss probable or reasonably estimable. A union had been certified to represent Cleveland hourly production employees; obligations depend in part on a collective bargaining agreement.
- Disclosure controls were assessed as ineffective due to a continuing material weakness involving insufficient review of revenue, inventory, and income-tax controls at the Maniago location. Remediation was underway, but timing and cost were not estimated and completion was not assured.
- The effective tax rate was negative 43%, primarily due to a discrete benefit from adjusting Italian deferred taxes and changes in the jurisdictional mix of income. SIFCO maintained a full valuation allowance on U.S. net deferred tax assets, while noting that a release might become possible within 12 months.
Important facts for investors to verify
- Progress and terms of refinancing the credit facility before its August 2021 maturity, including continued borrowing availability and covenant compliance.
- Underlying operating performance excluding fire-related insurance recoveries, and the sustainability of cost reductions and improved gross margin.
- COVID-19 effects on commercial aerospace demand, customer orders and collections, and the conversion of backlog into sales.
- Completion of Orange press and building restoration, remaining costs, and receipt and accounting for related insurance proceeds.
- Remediation of the Maniago internal-control material weakness and any effect on future financial reporting.
- PPP loan forgiveness status, the California settlement’s final approval, and developments in the Avco litigation and union negotiations.