SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2019, in fiscal 2019. SIFCO manufactures forged and machined components primarily for aerospace and energy markets and reports one business segment. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Net sales | $27.4; down 1.5% year over year | $56.5; up 8.5% year over year as reported |
| Gross profit / margin | $2.1 / 7.6%, versus $2.5 / 9.1% | $4.8 / 8.6%, versus $4.6 / 8.8% |
| Operating loss | $0.9, versus $1.7 | $2.5, versus $2.8 |
| Net loss / loss per share | $1.3 / $0.23, versus $2.0 / $0.37 | $2.5 / $0.46, versus $2.9 / $0.53 |
| Operating cash flow | Not separately presented in the filing summary | $5.0, versus $1.4 |
| Capital expenditures | Not separately presented | $3.8 cash outflow |
Quarterly cost of goods sold was $25.3 million, or 92.3% of sales, compared with 90.9% a year earlier. Six-month cost of goods sold was $51.6 million, or 91.5% of sales, versus 91.2%. Six-month adjusted EBITDA was $0.3 million, compared with $0.4 million; this is a non-GAAP measure and should not be treated as a substitute for GAAP results or operating cash flow.
At March 31, cash was $1.9 million; current assets were $45.9 million and current liabilities $43.2 million. Total debt was $26.2 million, including $18.6 million drawn on the revolving facility. Revolver availability was $9.1 million. The revolving facility matures August 6, 2021; its balance is classified as current because of its terms, including a lock-box arrangement and subjective acceleration clause. The company reported that its fixed-charge coverage ratio covenant was not required to be tested at quarter-end because availability exceeded the trigger.
Changes and business drivers
- Quarterly sales declined mainly from lower fixed-wing aircraft and energy sales, partly offset by rotorcraft and other commercial product sales. The Orange facility fire delayed production and deliveries; management also cited reduced Boeing 737 and Airbus A320 production and a soft energy market.
- For the six months, military sales rose to $30.0 million from $23.0 million, primarily on Hellfire II program timing. Commercial sales fell to $26.5 million from $29.0 million, reflecting the fire disruption and weaker energy sales. Other commercial product revenue also benefited from Hellfire II program timing.
- Quarterly net loss improved year over year, but results included a $1.2 million gain on insurance proceeds for fire-damaged property. Six-month results included that gain and a $0.3 million gain on the Alliance property and equipment sale. The company has not recognized a business-interruption insurance recovery.
- Revenue comparisons are affected by adoption of Topic 606 on October 1, 2018 using the modified retrospective method; prior-year figures were not restated. The standard changed the timing of recognition for certain contracts, and the company reported that about 60% of sales at March 31 were recognized over time. For the six months, Topic 606 reduced reported sales by $1.4 million and improved reported net income by $0.6 million versus the previous accounting method.
- Cash from operations improved, with collections and working-capital movements contributing. Financing cash flows included net revolver repayments of $2.6 million. The cash-flow statement reports investing cash used of $1.2 million; MD&A describes $0.7 million used, an apparent inconsistency to verify.
Outlook, risks, and unusual items
- Management expected fiscal 2019 capital expenditures of $3.1 million to $5.1 million for production capability and cost reductions, plus a separate estimated $13.6 million to $15.6 million of Orange fire-related capital expenditures, expected to be offset by insurance proceeds. The filing says an additional $4.1 million in insurance proceeds was received after March 31.
- The company reported $94.1 million of remaining performance obligations at March 31, most expected to be completed within twelve months; this is not necessarily equivalent to future-period revenue guidance.
- The December 2018 Orange fire damaged one of three buildings and six of eight presses at that site. The company was working with its insurer on business-interruption coverage; no such recovery had been recorded. Management found the remaining undamaged long-lived assets recoverable.
- Key risks cited include aerospace and energy demand, military spending and customer concentration, commodity prices and cost recovery, competition, execution of new products and acquisitions, pension funding, and access to credit. Credit availability and covenant compliance remain relevant to liquidity.
- Disclosure controls and procedures were deemed ineffective as of March 31 because material weaknesses persisted: IT access and segregation-of-duties controls in domestic operations, IT controls at Maniago, and review controls over certain manual accounting calculations and disclosures. Management was pursuing remediation, which could extend beyond fiscal 2019.
- A subsidiary faces an Avco lawsuit alleging forged pistons failed material specifications. No damages amount was specified, discovery had not occurred, and no loss reserve was recorded because management said it could not reasonably estimate a loss.
Important facts for investors to verify
- Progress restoring Orange production, actual fire-related spending, and the timing and amount of business-interruption insurance recoveries.
- Revolver availability, borrowing-base terms, covenant triggers, and debt maturities, including the current classification of the revolver.
- Underlying sales and margins after accounting for Topic 606’s changed recognition timing and the nonrecurring insurance and asset-sale gains.
- Whether cash generation can support the planned capital spending and debt reduction while maintaining adequate liquidity.
- Remediation of the disclosed material weaknesses and any subsequent changes in control effectiveness.
- Developments in the Avco litigation and whether the company can estimate or recognize any related exposure.
- The investing cash-flow and MD&A discrepancy: the cash-flow statement reports $1.2 million used, while MD&A reports $0.7 million used.