SIFCO Industries, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2018; fiscal year ends September 30. SIFCO manufactures forgings and machined components, primarily for aerospace and energy markets.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $28.7 million | $30.2 million | $80.7 million | $92.9 million |
| Gross profit / margin | $3.3 million / 11.4% | $3.6 million / 11.8% | $7.8 million / 9.7% | $11.4 million / 12.3% |
| Operating loss | $1.4 million | $5.3 million | $4.2 million | $8.3 million |
| Net loss | $1.5 million | $6.2 million | $4.5 million | $10.5 million |
| Net loss per diluted share | $0.28 | $1.13 | $0.81 | $1.91 |
| Adjusted EBITDA | $1.7 million | $2.1 million | $2.1 million | $6.4 million |
For the nine months, operating cash flow was $0.7 million, versus $7.7 million a year earlier. Investing activities provided $1.2 million, including $3.0 million of proceeds from the Cork building sale, while capital expenditures were $1.8 million. Cash and cash equivalents were $1.7 million at June 30, including approximately $1.2 million held by non-U.S. subsidiaries.
Total debt was $29.8 million, compared with $31.3 million at September 30, 2017. The balance sheet showed $19.5 million drawn on the revolver and $6.1 million of current maturities of long-term debt. The revolver’s weighted-average rate was 5.7% at June 30; the term loan rate was 6.3%. Management reported compliance with loan covenants at quarter-end and said it believed operating cash flow and available credit would provide adequate liquidity.
Changes and drivers
- Nine-month sales fell 13.1%. Energy power-generation sales declined $9.7 million, reflecting a soft market, reduced demand from a major customer and the Alliance closure. Commercial and other revenue fell $3.4 million, partly due to timing on the Hellfire II program.
- Q3 sales declined 4.9%; a $5.8 million decline in energy sales was partly offset by stronger fixed-wing and rotorcraft sales. Military sales increased in Q3, while commercial sales decreased.
- Nine-month gross margin fell to 9.7% from 12.3%, mainly due to lower volume and mix and an Alliance inventory write-down. Lower SG&A, including the absence of $2.2 million of prior-year plant expansion costs, and lower amortization helped reduce the reported net loss.
- The smaller year-over-year net losses also reflect comparison with the prior-year $4.4 million long-lived-asset impairment. Current-period results included a $1.5 million gain on the Cork property sale and a $0.4 million charge to remeasure Alliance assets held for sale.
Outlook, risks and notable items
- Management expected FY2018 capital expenditures of $2.0 million to $3.5 million, principally for production capabilities and cost reductions; $1.4 million was committed for future capital expenditures at June 30. The filing does not provide revenue or earnings guidance.
- On August 8, 2018, after quarter-end, SIFCO entered a new asset-based revolving credit agreement with a $30 million maximum commitment, an accordion feature of up to $10 million subject to lender conditions, and maturity in August 2021. The agreement includes a 1.1:1.0 fixed-charge-coverage requirement when availability is at or below 12.5% of the commitment; substantially all U.S. assets secure the facility.
- Disclosure controls were assessed as ineffective at June 30 due to continuing material weaknesses: domestic IT controls, business and IT controls at the Maniago location, and insufficient accounting resources for timely evaluation of a complex accounting matter. Management described remediation efforts but could not estimate completion timing or costs.
- Risks cited include aerospace and energy demand, reliance on major customers and military spending, commodity-cost recovery, fixed-cost exposure to lower production volumes, pension funding, foreign-market conditions and access to credit. Revenue-standard adoption was planned for October 1, 2018; management anticipated that some contracts may require revenue recognition over time and said the impact remained under evaluation.
- The Cork sale generated approximately $3.1 million in proceeds; $2.4 million of net proceeds was applied to debt. The July 2018 Alliance auction generated approximately $0.5 million net proceeds for assets sold; results were preliminary, and approximately $0.1 million of assets remained to be sold.
Important facts for investors to verify
- Whether sales, gross margins and operating cash generation recover, particularly in energy markets and after the Alliance closure.
- Available borrowing capacity, covenant headroom, interest costs and the terms and borrowing-base mechanics of the new August 2021 credit facility.
- Progress and effectiveness of remediation for the disclosed material weaknesses in internal control.
- Final Alliance auction proceeds and remaining asset-sale timing, as well as the final accounting effects of tax-law changes and adoption of the new revenue standard.
- Whether the reported improvement in net loss is sustainable apart from prior-period impairment comparisons, property-sale gains and discrete tax benefits.