SIFCO Industries, Inc. — Form 10-Q Summary
Business and period: SIFCO manufactures forgings and machined components, primarily for aerospace and energy markets, and reports as one segment. This unaudited filing covers the third quarter and first nine months of fiscal 2016, ended June 30, 2016. Unless noted, amounts below are in millions of dollars.
Financial results
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $31.0 | $28.7 | $87.2 | $73.4 |
| Gross profit / margin | $3.0 / 9.7% | $5.0 / 17.3% | $8.7 / 9.9% | $11.7 / 15.9% |
| Operating loss | $(1.8) | $(1.5) | $(6.2) | $(4.7) |
| Net loss | $(1.1) | $(1.0) | $(3.9) | $(2.5) |
| Net loss per share | $(0.19) | $(0.19) | $(0.72) | $(0.45) |
- Nine-month revenue rose 18.8%, chiefly because the July 2015 C*Blade acquisition contributed $15.2 million in sales. Q3 sales increased 8.0%, including $5.2 million from C*Blade.
- Sales mix shifted: nine-month energy revenue rose $16.2 million, while rotorcraft revenue fell $4.7 million and commercial/other revenue fell $2.4 million. Fixed-wing sales rose $4.7 million.
- Gross margin fell materially in both comparisons. Management cited product mix, customer build-rate changes, higher labor and benefits, and unabsorbed costs. Nine-month cost of goods sold also included $0.3 million of acquisition inventory accounting adjustments.
- Nine-month SG&A declined to $12.9 million from $14.8 million, reflecting the absence of prior-year acquisition transaction and severance costs and lower incentive compensation, partly offset by C*Blade costs and higher audit, ERP, and executive-search costs.
- Nine-month interest expense increased to $1.3 million from $0.2 million, primarily due to acquisition-related borrowing. The nine-month effective tax rate was 45%, versus 30%, with tax credits and discrete tax benefits contributing to the rate.
Cash, debt, and liquidity
- Continuing-operations operating cash flow was $11.4 million for the first nine months, versus $2.5 million used in the prior-year period. Management attributed the improvement mainly to lower receivables and extended supplier payment terms, partly offset by higher inventory; reported cash generation included non-cash items.
- Investing activities used $1.8 million, including $2.0 million of capital expenditures. Financing activities used $9.5 million. Cash increased to $0.8 million from $0.7 million at September 30, 2015.
- Total debt was $39.4 million at June 30, 2016, compared with $48.9 million at September 30, 2015; $9.5 million was classified as current. Long-term debt was $29.9 million. Cash was limited relative to debt.
- The revolving facility had a $20.0 million maximum commitment and $11.7 million drawn at June 30, subject to facility terms. Borrowings are secured by substantially all U.S. company and subsidiary assets and a pledge of 65% of non-U.S. subsidiary stock. A swap covered $8.6 million of variable-rate term debt; management estimated that a 100-basis-point rate move would change annual interest expense by about $0.3 million, assuming debt balances stayed constant.
- After quarter-end, on August 5, 2016, the lender waived compliance with loan covenants as of June 30 and amended covenants for future periods. Management stated it believed operating cash flows and credit-facility funds would provide adequate liquidity.
Outlook, developments, and risks
- Management expected fiscal 2016 capital expenditures of $2.5–$3.0 million, principally for production capabilities, cost reductions, and plant expansion; $0.1 million was committed after June 30.
- The company notified employees in July that production at its Colorado Springs facility would cease in fiscal Q4, with closure expected in fiscal Q1 2017. Severance costs were being finalized and were not expected to be material.
- An interim goodwill impairment test for the Orange, California reporting unit and analysis of the C*Blade reporting unit found estimated fair values above carrying values; no impairment was recorded. Management cautioned that actual results may differ from valuation assumptions and could lead to future impairment.
- Management cited exposure to aerospace and energy demand, aircraft and turbine build rates, military spending and major customers, competition, commodity costs, product development, pension assumptions, foreign jurisdictions, and acquisition integration.
- Disclosure controls were deemed ineffective as of June 30 due to continuing material weaknesses, including journal-entry approvals, system-generated report controls, account reconciliations, cash application, revenue recording, and corporate monitoring of plants. Remediation was underway, but management could not estimate its completion time.
- The filing identifies ordinary-course legal matters but says they were not believed material; future litigation costs could affect results. No quantified legal contingency was provided.
Investor facts to verify
- Progress on covenant compliance under the amended credit terms, borrowing availability, and the company’s ability to generate cash while carrying substantial debt.
- Whether gross margins recover and how much of sales growth reflects C*Blade versus underlying demand and product mix.
- Completion and financial effects of the Colorado Springs closure, including final severance costs.
- Remediation of the disclosed internal-control material weaknesses and any subsequent changes in control effectiveness.
- Performance of the Orange and C*Blade reporting units against the assumptions used in goodwill valuation tests.