SIFCO Industries, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended March 31, 2013; fiscal year ends September 30. Unless stated otherwise, financial amounts are in millions of dollars. SIFCO manufactures and services metal components, principally for aerospace and power-generation markets. Continuing operations comprise the Forged Components Group and Turbine Component Services and Repair Group. The Applied Surface Concepts business was sold in December 2012 and is reported as discontinued operations.
Key financial results
| Metric | Three months ended March 31, 2013 | Prior-year quarter | Six months ended March 31, 2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales from continuing operations | $29.594 | $30.143 | $58.294 | $54.869 |
| Gross margin | $5.713; 19.3% | $5.799; 19.2% | $11.398; 19.6% | $10.585; 19.3% |
| Operating income | $1.959; 6.6% margin | $2.252; 7.5% margin | $3.406; 5.8% margin | $3.427; 6.2% margin |
| Income from continuing operations | $1.469 | $1.452 | $2.390 | $2.285 |
| Net income | $1.435 | $1.724 | $4.850 | $2.910 |
| Diluted EPS | $0.27 | $0.32 | $0.90 | $0.55 |
| Adjusted EBITDA, non-GAAP | $3.579 | $4.695 | $7.095 | $8.210 |
- Cash flow: Continuing-operations operating cash flow was $0.041 million for the six months, versus $3.635 million a year earlier. Including discontinued operations, operating activities used $0.194 million. Capital expenditures were $1.782 million; cash ended at $5.644 million, down from $7.176 million at September 30, 2012.
- Liquidity and debt: Current assets were $51.235 million and current liabilities $19.412 million at March 31. Total debt was $14.457 million, compared with $21.683 million at September 30; $4.368 million was current. The company had $5.089 million outstanding on its revolving facility and reported compliance with loan covenants.
- Dividends and investment: Six-month dividends paid were $1.073 million. Fiscal 2013 capital spending was projected at $3.5–$4.5 million, principally to expand Forge Group production capabilities; $0.6 million was committed at quarter-end.
Material changes and business drivers
- Quarterly continuing-operations sales decreased 1.8%; six-month sales increased 6.2%. The six-month growth was primarily from a $4.6 million increase in Forge Group sales, including increased aerospace volumes and the contribution from the QAF acquisition.
- Forge Group six-month sales rose 9.1% to $55.5 million and operating income increased to $7.3 million from $5.8 million. Favorable material pricing and higher volume helped, partly offset by lower labor efficiency and higher overhead and compensation costs. Its backlog was $102.5 million, down from $106.0 million at September 30; $85.4 million was scheduled for delivery within 12 months.
- Repair Group six-month sales fell 29.2% to $2.8 million. Its operating loss widened to $1.1 million from $0.5 million, as lower volume weighed on a cost base with significant fixed costs. Backlog was $1.2 million, with $0.5 million scheduled within 12 months.
- Six-month net income included $2.460 million of discontinued-operations income, largely reflecting a $2.328 million after-tax gain on the ASC sale. The sale generated approximately $8.1 million net proceeds; $0.980 million was held in escrow. The proceeds and a $1.1 million dividend from ASC’s non-U.S. subsidiaries were used to reduce revolving debt.
- Corporate unallocated expense increased to $2.8 million for the six months, primarily due to $0.8 million of non-recurring executive severance expense. A $0.191 million pension settlement expense was also recorded.
Outlook, risks and contingencies
- Management gave no specific revenue or earnings guidance. It stated that it expects adequate liquidity for U.S. operations from operating cash flows and available credit. Most reported cash was held by a non-operating Irish subsidiary, and transfers to the parent could be subject to statutory restrictions, adverse tax consequences or other limitations.
- The company cited uncertainty in aerospace and power-generation demand, military spending and reliance on major customers; competition and replacement of lost business; metals pricing and ability to recover cost increases; development and licensing of turbine repair processes; pension funding; and successful introduction of new products and integration of acquisitions.
- Backlog orders may be modified or cancelled, generally with limited charges. Management cautioned that shorter raw-material lead times could change customer ordering patterns, so backlog changes may not predict subsequent sales.
- A $2.368 million non-interest-bearing seller promissory note was due in November 2013. The credit facilities are secured and subject to leverage and fixed-charge-coverage covenants. The company reported compliance at March 31.
- Federal tax returns for fiscal 2010 and 2011 and amended returns for fiscal 2008 and 2009 were under IRS review; outcomes were unknown. Recorded uncertain-tax-position liabilities were $0.141 million.
Important facts for investors to verify
- Whether Forge backlog converts to sales, given cancellation rights and changing customer order patterns.
- Whether Repair Group volumes and profitability recover enough to absorb its fixed-cost base.
- Working-capital needs: receivables and inventories increased, while continuing-operations operating cash flow was nearly break-even.
- Cash accessibility from the Irish subsidiary and remaining revolver availability, along with payment of the November 2013 seller note and ongoing covenant compliance.
- Final resolution of the ASC sale escrow and pending IRS reviews, and the impact of pension contributions and planned capital spending on liquidity.