SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended December 31, 2016. SIFCO manufactures forged and machined components, primarily for aerospace and energy markets, and reports one business segment. Amounts below are in millions unless otherwise noted.
Financial results and liquidity
- Sales: $31.5, up 15.9% from $27.2 in the prior-year quarter. Military sales rose to $14.6 from $10.2; commercial sales were $16.9 versus $17.0.
- Profitability: Gross profit increased to $4.2 from $2.1; gross margin improved to 13.2% from 7.8%, primarily on higher volume. Operating loss narrowed to $1.7 from $4.2. Net loss was essentially unchanged at $2.6 ($0.48 per share) versus $2.6 ($0.48 per share).
- Costs and taxes: SG&A declined to $5.3 from $5.6. Interest expense rose to $0.7 from $0.4, including a debt-issuance-cost write-off. The effective tax rate was negative 14%, versus 43%; the filing attributes the current-period tax expense in part to a valuation allowance that prevented a tax benefit on U.S. losses.
- Cash flow: Operating activities used $0.8, compared with $8.3 provided in the prior-year quarter. The company cited a $2.6 net loss and $1.4 working-capital use, including a $1.6 increase in receivables. Investing activities used $0.4, including $0.5 of capital expenditures. Financing activities provided $1.7.
- Cash and working capital: Cash was $1.0 at December 31, up from $0.5 at September 30, 2016; approximately $0.9 was held by non-U.S. subsidiaries. Current assets were $59.2 and current liabilities $52.5. The filing classifies revolving borrowings as current because of lockbox and subjective acceleration provisions.
- Debt: Total debt was $40.7, versus $38.6 at September 30, 2016. Revolver borrowings were $25.3; the new term facility balance was $4.8. The amended secured credit facility provides up to $39.9, including a $35.0 revolver, and matures June 25, 2020. The company reported covenant compliance at quarter-end; minimum EBITDA and fixed-charge coverage tests are to begin September 30, 2017.
- Other balance-sheet items: Inventories were $27.2, down from $28.5; shareholders’ equity was $57.1, down from $60.4. Comprehensive loss was $3.4, including a $1.0 foreign-currency translation loss.
Changes and operating drivers
- Sales increased $4.3, led by a $2.5 increase in the Hellfire II missile program, higher energy-component volume, and customer build-demand changes in fixed-wing aircraft. Rotorcraft sales improved as a customer recovered from inventory destocking.
- Military sales increased $4.4, while commercial sales decreased $0.1. Sales mix shifted to 46.4% military and 53.6% commercial, from 37.4% and 62.6%, respectively.
- Cost of goods sold rose 9.0%, less than sales growth, but included higher excess-and-obsolescence charges, scrap expense, and costs associated with a voluntary layoff at the Maniago location.
- Adjusted EBITDA, a non-GAAP measure, was $2.0 versus negative $0.7. The reconciliation includes a $1.0 adjustment for Orange facility expansion costs; the company cautions that EBITDA measures are not substitutes for GAAP results or operating cash flow.
Outlook, risks, and notable matters
- No specific earnings or sales guidance is provided. Management expects fiscal 2017 capital expenditures of $4.0–$4.5, principally for production capability, cost reductions, and plant expansion. Management stated that expected operating cash flows and facility availability should provide adequate liquidity.
- Key business risks cited include aerospace and energy demand, military spending and reliance on major customers, commodity-price increases and cost recovery, competition, and pension-plan funding variability.
- Disclosure controls were deemed ineffective as of December 31, 2016 because previously identified material weaknesses remained. These include deficiencies in manual journal-entry approvals, Maniago business and IT controls, domestic IT controls, and financial-reporting, inventory, revenue, reconciliation, and cash-receipts controls. Remediation was in progress, with completion timing not estimated.
- The company is defending a California wage-and-hour class action. It had not concluded that a loss was probable and recorded no estimated loss; the ultimate outcome remains uncertain.
- After quarter-end, SIFCO notified approximately 24 employees at its Orange, California location of planned terminations to reduce costs; severance expense was not expected to be material. A new Maniago collective bargaining agreement was finalized in January 2017, effective January 1, 2016 through December 31, 2019.
- The filing gives inconsistent descriptions of whether the expected effect of the forthcoming revenue-recognition standard has been determined: the notes say it has not, while the MD&A says it has. The company plans adoption on October 1, 2018.
Important facts for investors to verify
- Whether improved gross margin and sales volumes are sustainable, particularly given program timing, customer build rates, and the Hellfire II contribution.
- Revolver availability and the implications of its current-liability classification, lockbox arrangement, and subjective acceleration clause.
- Progress in remediating the material weaknesses and the company’s ability to meet financial covenants when testing begins in September 2017.
- Future operating cash conversion, receivables collection, planned capital spending, and the effect of facility expansion costs.
- Developments in the California class action and any related potential financial exposure.
- Clarification of management’s assessment of the revenue-recognition standard’s financial-statement impact.