SIFCO Industries, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended June 30, 2011; compared with the periods ended June 30, 2010. Unless otherwise noted, amounts are in millions of dollars. SIFCO manufactures forged and machined components, provides turbine-component repair services, and sells selective-plating products and services.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Net sales | $28.875 | $19.481 | $77.075 | $60.669 |
| Operating income | $2.790 | $1.361 | $7.455 | $5.790 |
| Net income | $2.064 | $0.984 | $5.265 | $4.001 |
| Diluted EPS | $0.39 | $0.18 | $0.99 | $0.75 |
| Operating margin | 9.7% | 7.0% | 9.7% | 9.5% |
Sales rose 48.2% in Q3 and 27.0% year to date; net income increased to $2.1 million and $5.3 million, respectively. Gross margin was approximately 23.5% in Q3 versus 22.0% a year earlier, and 24.3% year to date versus 23.8%. The filing attributes operating improvement principally to higher sales volumes, including the T&W Forge acquisition; intangible amortization and higher raw-material costs partly offset the gains.
- Segment performance, nine months: Aerospace Component Manufacturing (ACM) sales were $59.5 million versus $45.2 million, with operating income of $8.6 million versus $7.2 million. Turbine Component Services and Repair sales were $7.0 million versus $6.6 million and operating income was $0.1 million. Applied Surface Concepts sales were $10.6 million versus $8.9 million and operating income was $0.9 million versus $0.1 million.
- Cash flow: Operating activities provided $8.4 million, down from $10.6 million. Investing used $21.9 million, including $22.6 million for the acquisition, partly offset by investment maturities; capital expenditures were $2.4 million. Financing provided $1.3 million, including $23.0 million of revolver proceeds and $20.8 million of repayments.
- Balance sheet and liquidity: June 30 cash was $6.5 million, down from $18.7 million at September 30, 2010; short-term investments fell from $3.0 million to zero. Total debt was $2.234 million ($2.177 million long-term and $0.057 million current), versus $0.143 million at September 30. Current assets were $37.8 million and current liabilities $14.0 million. Nearly all cash was held by non-U.S. subsidiaries and distributions may face statutory, tax, or other limitations.
- Other items: The nine-month effective tax rate was estimated at 32%, versus 35% in the prior period. The company paid $0.789 million in dividends. It contributed $0.504 million to pension plans and expects an additional $0.253 million of contributions in the rest of fiscal 2011.
Material changes and business developments
SIFCO acquired T&W Forge’s forging business and related operating assets on December 10, 2010, for approximately $22.6 million, funded with $11.0 million of cash and $11.7 million of revolver borrowings. T&W Forge added power-generation component sales and accounted for 12% of consolidated sales in the first nine months. Acquisition-related assets include $9.1 million of net intangible assets and $3.5 million of goodwill; reported results include T&W Forge only from the acquisition date. Management provided unaudited pro forma results assuming acquisition at the start of the prior comparable periods.
ACM sales gains included acquired T&W Forge business and increased small turbine-engine spare-part demand, while small-aircraft airframe sales were weak year to date and military-only component sales declined year to date. Applied Surface Concepts benefited from higher product and contract-service volumes, improved margins, and favorable currency translation. Repair Group results remained near break-even, which management attributed to low volumes relative to fixed costs.
Outlook, risks, and controls
- Management expected fiscal 2011 capital expenditures of $3.0–$3.5 million, principally to expand ACM production capacity. It stated that operating cash flows, cash reserves, and revolver availability should cover working-capital needs through fiscal year-end.
- ACM backlog was $93.2 million at June 30, up from $71.2 million at September 30; $73.5 million was scheduled for delivery within 12 months. Orders may be modified or cancelled with limited charges. Management cautioned that longer raw-material lead times could shift customer ordering earlier, so backlog growth may not predict subsequent sales.
- The new five-year revolving facility has a $30.0 million maximum, is secured by substantially all company and U.S. subsidiary assets and a pledge of 65% of non-U.S. subsidiary stock, and includes leverage and fixed-charge-coverage covenants. The June 30 rate was 1.25%; the company reported covenant compliance.
- Risks cited include aerospace and power-generation demand and economic conditions; customer and military-program concentration; raw-material cost increases and recovery; repair-process development and licensing; pension funding; foreign-market conditions; and integration of acquired businesses.
- Management reported disclosure controls effective as of June 30. It said implementation of a new enterprise system addressed the control issues underlying a material internal-control weakness reported at September 30, 2010. Integration of T&W Forge systems and controls into SIFCO’s environment was still expected to be completed during fiscal 2011.
Important facts for investors to verify
- How much of sales and backlog growth reflects T&W Forge versus organic demand, and whether acquired operations meet expected performance.
- Whether ACM backlog converts to revenue, given customer cancellation rights and potentially earlier ordering caused by raw-material lead times.
- Cash accessibility and liquidity, including the location of cash, remaining revolver capacity, and covenant headroom.
- Effects of raw-material costs, product mix, acquisition-related amortization, and pension contributions on future margins and cash flow.
- Completion of T&W Forge control integration and the status of the prior-period internal-control remediation.