SIFCO Industries, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended March 31, 2015; fiscal year ends September 30. SIFCO manufactures forgings and machined components, primarily for aerospace and energy markets, and reports one operating segment. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $24.6 | $29.0 | $44.7 | $55.7 |
| Gross profit / margin | $3.7 / 15.0% | $6.3 / 21.7% | $6.7 / 15.0% | $11.9 / 21.3% |
| Operating income (loss) | $(1.3) | $2.3 | $(3.3) | $3.9 |
| Continuing-operations income (loss), net of tax | $(0.9) | $1.5 | $(2.2) | $2.7 |
| Net income (loss) | $(0.1) | $1.4 | $(1.5) | $2.4 |
| Diluted EPS | $(0.01) | $0.26 | $(0.27) | $0.44 |
| Adjusted EBITDA (non-GAAP) | $2.2 | $4.2 | $2.9 | $7.8 |
For the six months, continuing-operations cash flow was $(2.3), versus $8.5 provided in the prior-year period; capital expenditures were $4.6. Cash at March 31 was $4.7, compared with $4.6 at September 30, 2014. Total debt was $17.6 ($14.6 revolving credit and $3.0 term loan), up from $10.4 at September 30, 2014. Shareholders’ equity was $75.8. Nearly all cash was held by the non-operating Irish subsidiary, and distributions to the parent may have adverse tax consequences.
Changes and drivers
- Six-month sales declined 19.8%; Q2 sales fell 15.3%. Lower aircraft sales reflected program build-rate changes, including V-22 and C130, and raw-material delays. Energy sales declined after a major customer closed its facility. New ordnance-related commercial sales partly offset the decreases.
- Gross margin fell as lower production reduced fixed-cost absorption, product mix changed, and costs rose on a new aerospace program. Cost reductions and a roughly $0.4 million workers’ compensation reserve-related expense reduction provided partial offsets.
- Six-month SG&A rose to $8.9 from $6.9, including approximately $1.0 million of executive severance, higher transaction-related legal and professional fees, ERP consulting, plant-expansion costs, and an increased bad-debt reserve. The company disclosed a definitive agreement to acquire C Blade S.p.A.; the filing does not state that the acquisition had closed.
- Discontinued operations contributed $0.7 million after tax for the six months, including a $0.8 million after-tax gain from the January sale of the Repair Group’s land and building for $1.4 million net proceeds. Continuing operations remained loss-making.
Liquidity, outlook, and risks
- Management expected FY2015 capital expenditures of $11–$12 million, principally for production capabilities, cost reductions, and a new ERP system; $0.8 million was committed at March 31. The filing gives no earnings or revenue forecast.
- Management stated that expected operating cash flows and funds available under the credit agreement should provide adequate liquidity. The company was in compliance with debt covenants at March 31. Variable-rate debt exposure was estimated to change quarterly interest expense by $0.1 million for a 100-basis-point rate move, assuming balances remained constant.
- Risk factors include aerospace and energy demand, military spending and reliance on major customers, commodity costs and recovery, raw-material availability, execution of new programs and ERP implementation, pension funding, and acquisition integration.
- Disclosure controls were assessed as ineffective because of continuing material weaknesses involving IT segregation of duties at one facility and the precision of inventory-related reviews and reconciliations. Management expected remediation during FY2015; some actions remained incomplete, undocumented, or untested.
- Other notable items: the company changed its workers’ compensation reserve estimation process, reducing expense by approximately $0.4 million in the first half; the interest-rate swap matured in December 2014. The filing describes routine legal matters but says it cannot estimate potential future costs.
Key facts for investors to verify
- Whether sales and gross margins recover as aircraft build rates, raw-material availability, and the energy customer situation change.
- Whether operating cash flow improves and inventory growth and capital spending remain supportable without materially higher revolver borrowing.
- The status, financing, and expected effects of the C Blade acquisition agreement.
- Progress in remediating the disclosed internal-control material weaknesses and whether controls are tested and effective.
- The terms and tax implications of accessing cash held in Ireland, and continued compliance with credit covenants.