Item 1. Business
Item 1. Business
A. The Company
SIFCO Industries, Inc. ("SIFCO," "Company," "we" or "our"), an Ohio corporation, was incorporated in 1916. The executive offices of the Company are located at 970 East 64th Street, Cleveland, Ohio 44103, and its telephone number is (216) 881-8600.
SIFCO is engaged in the production of forgings, sub-assemblies, and machined components primarily for the Aerospace and Energy ("A&E") markets. The processes and services include forging, heat-treating and machining. The Company's operations are conducted in a single business segment. Information relating to the Company's financial results is set forth in the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
COVID-19 Pandemic
In March 2020, a novel strain of coronavirus ("COVID-19") was recognized as a pandemic by the World Health Organization and the outbreak subsequently became increasingly widespread in the United States and other countries in which the Company operates. As a result of the pandemic, governments around the world implemented stringent measures to help control the spread of the virus, including quarantines, “stay at home” orders, travel restrictions, and other measures. During this time, we took proactive measures to ensure the safety of our employees and customers as well as to preserve the Company's financial flexibility. The full impact of the COVID-19 outbreak on the Company continues to evolve and the full extent of the effects of the pandemic on the Company's financial condition, liquidity and future results is uncertain. Also uncertain is the timing, duration, shape and magnitude of recovery. While a number of the markets in which the Company operates have reopened, other markets, while open, have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing renewed or extended quarantines or other restrictions.
B. Principal Products and Services
Operations
SIFCO is a manufacturer of forgings and machining components for the A&E markets. We provide our customers with envelope and precision forgings, rough and machined components, as well as sub-assemblies. SIFCO services both original equipment manufacturers ("OEM") and aftermarket customers with products that range in size from approximately 2 to 1,200 pounds. The Company's strategic vision is to build a leading A&E company positioned for long-term, stable growth and profitability.
SIFCO's long-term plan is to have a balance comprised of military and commercial aerospace revenues, supplemented with energy components. In fiscal 2020, commercial and military revenues accounted for 42.6% and 57.4% of revenues, respectively, compared with 48.9% in commercial revenues and 51.1% in military revenues in fiscal 2019. The Company's capabilities are focused on supplying critical components, consisting primarily of steel, high temperature alloys, titanium and aluminum.
SIFCO operates from multiple locations. SIFCO manufacturing facilities are located in Cleveland, Ohio ("Cleveland"); Orange, California ("Orange"); and Maniago, Italy ("Maniago"). SIFCO's operations are AS 9100D and/or ISO 9001:2015 certified and the Company also holds multiple NADCAP certifications and site approvals from key OEM customers.
The Company's success is not dependent on patents, trademarks, licenses or franchises.
Raw Materials
SIFCO generally has multiple sources for its raw materials, which consist primarily of high-quality metals essential to its business. Suppliers of such materials are located principally in North America and Europe. SIFCO generally does not depend on a single source for the supply of its materials. Due to the limited supply of certain raw materials, some material is provided by a small number of suppliers; however, SIFCO believes that its sources are adequate for its business.
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Products
SIFCO’s products are made primarily of steel, stainless steel, nickel alloy, titanium and aluminum. SIFCO's product offerings include: OEM and aftermarket components for aircraft and industrial gas turbine engines; steam turbine blades; structural airframe components; aircraft landing gear components; aircraft wheels and brakes; critical rotating components for helicopters; and commercial/industrial products. SIFCO also provides heat-treatment, surface-treatment, non-destructive testing and select machining and sub-assembly of forged components.
Industry
The performance of the domestic and international air transport industry, the energy industry, and government defense spending, directly and significantly impacts the performance of SIFCO. The impact of COVID-19 continues to be assessed by the Company. It has significantly impacted the commercial aerospace industry through the ongoing disruption of global travel, which continues to remain depressed. Therefore, as the outbreak and responses continue to be fluid and ever changing, the shape and speed of recovery for the commercial aerospace industry remain uncertain.
• SIFCO supplies new and spare components for the U.S. military for aircraft, helicopters, vehicles, and munitions. The defense budget in the United States varies from year to year, driven by defense procurement policy and government budget constraints. The defense aerospace market has been impacted by the COVID-19 pandemic less than the commercial aerospace. Uncertainty may arise if the government reprioritizes funding, such as potentially shifting funds to fight the pandemic or aid in recovery. Certain programs in which the Company participates have been favorable and are expected to continue.
• SIFCO supplies new and spare components for commercial aircraft, principally for large aircraft produced by Boeing and Airbus. As the pandemic has continued, the decrease in passenger air travel demand has impacted and continues to impact our customers' orders for new aircraft. Current estimates regarding the return of passenger air traffic to pre-COVID-19 levels is three to five years. Build rates, particularly the Boeing 777X, 787, 737 Max and the Airbus A320/A321neo and A350, have declined as a result of the impacts of COVID-19 on commercial air travel.
• SIFCO supplies new and spare components to the energy industry, particularly the industrial gas and steam turbine markets. The industrial gas and steam turbine markets have experienced a downturn in demand for new units in the near term. While alternative energy markets continue to strengthen, oil and gas prices are expected to rebound from historic lows. As such, it's currently anticipated that purchases of parts and supplies within the industry will increase. SIFCO has positioned itself to support OEM production in a more limited role, but with flexibility to address the demand cycle in this segment as well as continuing to support the aftermarket.
Competition
SIFCO competes with numerous companies, approximately fifteen of which are known by SIFCO. SIFCO competes with both U.S. and non-U.S. suppliers of forgings, some of which are significantly larger than SIFCO; however, our competitors range from companies focused on the A&E markets to large diversified corporations that may also have business interests outside of the A&E markets to smaller companies that offer a limited portfolio of products in this market. SIFCO believes that it has an advantage and distinguishes itself in the primary markets it serves due to its: (i) demonstrated A&E expertise; (ii) focus on quality and customer service; (iii) operating initiatives such as SMART (Streamlined Manufacturing Activities to Reduce Time/Cost) and Six Sigma; and (iv) broad range of capabilities and offerings. As customers establish new facilities throughout the world, SIFCO will continue to encounter non-U.S. competition. SIFCO believes it can expand its market share by (i) continuing to increase capacity utilization; (ii) broadening its product lines through investment in equipment that expands its manufacturing capabilities; and (iii) developing new customers in markets where the participants require similar technical competence and service as those in the A&E industries. See further discussion of the risks relating to competition SIFCO faces in Item 1A. Risk Factors .
Government Contracts
Companies, such as SIFCO, that supply equipment and products to the U.S. military are subject to certain risks related to commercial relationships with the U.S. government and its agencies. Under the terms of these agreements, it is possible for demand and build rate to fluctuate or for the U.S. government to terminate existing contracts.
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Customers
During fiscal 2020, SIFCO had three customers that accounted for 47% of consolidated net sales; and 49% of the Company's consolidated net sales were from four customers and their direct subcontractors, which individually accounted for 16%, 13%, 10% and 10% of net sales. SIFCO believes that the loss of sales to such customers would result in a material adverse impact on the business. However, SIFCO has maintained a business relationship with these customers for many years and is currently conducting business with them under multi-year agreements. Although there is no assurance that these relationships will continue, historically, as one or more major customers have reduced their purchases, SIFCO has generally been successful in gaining new business, thereby avoiding a material adverse impact on the Company. SIFCO relies on its ability to adapt its services and operations to changing requirements of the market in general and its customers in particular. No material part of SIFCO’s business is seasonal. For additional financial information about geographic areas, refer to Note 12, Business Information, of the consolidated financial statements.
Backlog of Orders
SIFCO’s total backlog as of September 30, 2020 decreased to $91.1 million, compared with $117.6 million as of September 30, 2019. Orders for delivery scheduled in the upcoming fiscal year 2021 decreased to $63.6 million compared with $93.8 million scheduled in fiscal 2020. Orders may be subject to modification or cancellation by the customer with limited charges. The decrease in total backlog as of September 30, 2020 compared with the previous year is primarily due to timing of annual awards and SIFCO's customers adjusting orders as a result of impacts of COVID-19 on the commercial airline industry. The continuing uncertainty regarding the COVID-19 pandemic and its duration and impact on the commercial airline industry is expected and may continue to impact sales order backlog growth in that market into fiscal 2021. Backlog information may not be indicative of future sales.
C. Regulatory Matters
The Company is subject to a number of domestic and foreign regulations relating to our operations worldwide and is required to comply with various environmental, health, and employee safety laws and regulations. The Company believes that it is in compliance with these laws and regulations. Historically, compliance with such laws and regulations have not had, and are not presently expected to have a material effect on capital expenditures, earnings or competitive position of the Company or its subsidiaries under existing regulations and interpretations. Nevertheless, the Company cannot guarantee that, in the future, it will not incur additional costs for compliance or that such costs will not be material.
D. Employees
The number of SIFCO employees were approximately 434 at the beginning of fiscal 2020 and increased to approximately 446 employees at the end of fiscal 2020. The increase in employee headcount is a result of increasing production at the Orange location as a result of the progress in the restoration from the fire incident that occurred in fiscal 2019. The Company’s employees include full-time, part-time, and temporary employees. Approximately 73% of our employees were located within the U.S. and 27% of our employees were located in Italy. Approximately 64% of our workforce within the U.S. is composed of skilled and unskilled labor, and the remaining population includes management, corporate, administrative and support staff.
The Company is a party to collective bargaining agreements ("CBA") with certain employees within the Cleveland location. The Cleveland location has two bargaining units; the Company ratified its CBA with one such unit in December 2019. The second bargaining unit received notice in the second quarter of fiscal 2020 from the International Association of Machinists and Aerospace Workers Union that they were disclaiming all interest in representing such unit. In the same quarter, the International Brotherhood of Boilermakers Union filed a petition to represent such unit. In June 2020, the National Labor Relations Board certified the International Brotherhood of Boilermakers as the elected representative of the Company’s second bargaining unit. Negotiations with this second bargaining group are ongoing and there have been no work disruptions as the Company continues to operate per the terms of the previous contract. The Company’s obligations will be more fully understood following the ratification of a collective bargaining agreement. The Maniago location is party to the National Collective Agreement in Metalworking, which expired in December 2019. Negotiations have been ongoing regarding such agreement; however, until an agreement is reached, Maniago will continue to apply existing terms of its most recent contract.
The skills, experience and industry knowledge of our employees significantly benefit our operations and performance. There are several ways in which we attract, develop, and retain highly qualified talent, including by making the safety and health of our employees a top priority. In response to the COVID-19 pandemic, we developed, implemented, and have maintained procedures and protocols to minimize the risk to the health and safety of our employees while allowing us to continue to operate our facilities and provide our products to our customers on a timely basis. Included among these procedures were providing for remote work where practicable and implementing protocols for social distancing, disinfecting, sanitation and
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mask-wearing. Throughout the pandemic, we have consistently been able to meet our customers' demands for our products, while at the same time making the necessary investments to ensure that we prioritize the health, safety and welfare of our employees.
E. Non-U.S. Operations
The Company's products are distributed in the U.S. as well as non-U.S. markets.
Financial information about the Company's U.S. and non-U.S. operations is set forth in Note 12, Business Information, of the consolidated financial statements.
F. Available Information
The Company files annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Securities Exchange Act of 1934, as amended. The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that are filed by the Company at http://www.sec.gov.
In addition, our annual reports on Form 10-K, as well as our quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to all of the foregoing reports, are made available free of charge on or through the “Investor Relations” section of our website at www.sifco.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.
Information relating to our corporate governance at SIFCO, including the Audit Committee, Corporate Governance and Nominating Committee and Compensation Committee Charters, as well as the Corporate Governance Guidelines and Policies and the Code of Conduct & Ethics adopted by our Board of Directors, is available free of charge on or through the “Investor Relations” section of our website at www.sifco.com . References to our website or the SEC’s website do not constitute incorporation by reference of the information contained on such websites, and such information is not part of this Form 10-K.