SIFCO Industries, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011; comparative period is FY2010. This is an annual filing, not a standalone fourth-quarter filing. SIFCO manufactures forged metal components, repairs turbine-engine components, and provides selective plating services and products.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $107.4 million | $83.3 million |
| Operating income | $10.9 million | $7.9 million |
| Net income | $7.4 million | $5.4 million |
| Diluted EPS | $1.40 | $1.00 |
| Operating margin | 10.1% | 9.5% |
| Net margin | 6.9% | 6.4% |
| Cash from operations | $10.2 million | $9.9 million |
| Capital expenditures | $3.3 million | $6.7 million |
- Revenue rose 28.9%; the Forge Group generated $84.1 million, ASC $14.2 million, and Repair $9.0 million. Forge revenue growth substantially reflected the December 2010 acquisition of T&W Forge.
- At September 30, 2011, cash and cash equivalents were $6.4 million, versus $18.7 million a year earlier; short-term investments were zero, down from $3.0 million. Current assets were $39.7 million and current liabilities $14.4 million.
- Total debt was approximately $1.2 million, including $1.184 million drawn under the revolving facility. The company reported compliance with its loan covenants.
- Shareholders’ equity was $53.4 million; total assets were $80.0 million. Cash flow from operations remained strong, while cash declined mainly in connection with the acquisition and other investing activity.
Material changes and quarterly trend
- The T&W Forge acquisition closed December 10, 2010 for approximately $22.6 million. It added power-generation forging sales and $1.9 million of FY2011 intangible-asset amortization.
- Forge operating income increased to $13.0 million from $9.9 million. ASC operating income improved to $1.0 million from $0.2 million; Repair reported a $0.3 million operating loss versus near breakeven.
- Unaudited FY2011 fourth-quarter revenue was $30.3 million and net income $2.2 million, compared with $22.6 million and $1.4 million, respectively, in Q4 FY2010.
- Forge backlog at year-end was $92.2 million, including $74.3 million scheduled for FY2012, compared with $71.2 million a year earlier. Management cautioned that orders may be modified or cancelled and backlog may not predict future sales. Repair backlog declined to $1.2 million, including $0.9 million on hold; ASC had no material backlog.
Outlook, risks, and notable items
- Management described the commercial aerospace outlook as cautiously optimistic, military demand as relatively stable but exposed to defense-spending changes, and long-term energy-market prospects as favorable. It anticipated FY2012 capital spending of $3.0–$4.0 million and said operating cash flow, cash reserves, and available credit should meet working-capital needs through FY2012.
- After year-end, on October 28, 2011, SIFCO acquired Quality Aluminum Forge for approximately $24.0 million, subject to adjustments; purchase accounting was not yet complete. The credit agreement was amended to provide up to $40 million: a $10 million term loan and a $30 million revolver.
- Customer concentration is significant: four customers generated approximately 49% of FY2011 sales, with another 18% from their direct subcontractors. The Forge Group’s three largest customers and their direct subcontractors accounted for 70% of its sales.
- Other risks include dependence on aerospace, defense, energy, and oil-and-gas demand; raw-material availability and price recovery; OEM control of repair approvals; competition; foreign-currency and international-business exposure; and pension-plan assumptions and funding. The defined-benefit plans had $24.0 million of obligations against $16.6 million of assets, and management expected approximately $1.0 million of FY2012 contributions.
- A $0.20-per-share special dividend was declared in FY2011, requiring approximately $1.1 million cash payment in FY2012. Management does not necessarily anticipate regular annual dividends.
- FY2011 included a $0.2 million Repair Group long-lived-asset impairment charge. The company reported no material routine litigation matters. The independent auditor gave an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective. The auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- How much of FY2011 growth and profitability is attributable to the T&W acquisition versus organic demand, and how QAF affects subsequent results and leverage.
- Whether Forge backlog converts to revenue, given cancellation provisions, longer raw-material lead times, and the large share of backlog expected for FY2012 delivery.
- Customer concentration, especially exposure to major aerospace and engine customers and their subcontractors.
- Availability and practical accessibility of cash held by non-U.S. subsidiaries, including tax or legal restrictions on repatriation.
- Compliance with covenants and liquidity after the QAF acquisition, the expanded credit facility, the special dividend, and expected pension contributions.
- Progress in integrating acquired operations into SIFCO’s systems and internal-control environment, which management expected to complete during FY2012.