SIFCO Industries, Inc. — Q3 FY2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended June 30, 2013 (fiscal year ending September 30). SIFCO manufactures forged metal components, principally for aerospace and power generation, and provides turbine-component repair services. Its continuing operations comprise SIFCO Forged Components (Forge Group) and Turbine Component Services and Repair (Repair Group). Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Continuing net sales | $30.3 | $27.3 | $88.6 | $82.1 |
| Gross margin | $7.5 (24.9%) | $6.3 (23.1%) | $18.9 (21.4%) | $16.9 (20.5%) |
| Operating income | $3.6 | $2.9 | $7.0 | $6.3 |
| Income from continuing operations | $2.6 | $2.1 | $4.9 | $4.4 |
| Discontinued operations, net of tax | $(0.1) | $0.3 | $2.4 | $1.0 |
| Net income | $2.5 | $2.4 | $7.3 | $5.4 |
| Diluted EPS | $0.46 | $0.46 | $1.36 | $1.00 |
Q3 continuing sales rose 11.0% and continuing income rose 21.7%; net income was nearly unchanged because discontinued operations recorded a loss versus prior-year income. For the nine months, continuing sales increased 7.8%, continuing income increased 12.6%, and net income increased 36.9%, principally reflecting the gain on the sale of Applied Surface Concepts (ASC). Q3 gross margin improved, while reported operating costs included higher manufacturing, corporate, and compensation-related expenses.
Segments. Nine-month Forge Group sales rose 10.0% to $84.1 million and operating income increased to $12.7 million from $9.9 million. Growth reflected higher aerospace and power-generation sales, including QAF acquisition contribution; favorable material pricing, lower LIFO expense, and lower intangible amortization also helped. Repair Group sales fell 21.1% to $4.5 million; its operating loss widened to $1.7 million from $0.9 million, as lower volume left fixed costs underabsorbed. Corporate unallocated expenses rose to $4.0 million from $2.7 million, including $0.8 million of non-recurring severance costs.
Cash flow and liquidity. For the nine months, continuing operating activities generated $3.0 million, down from $4.0 million. The filing attributes cash use largely to working-capital increases, including receivables and inventories and lower accounts payable. Capital expenditures were $2.8 million; management expected full-year FY2013 spending of $3.5–$4.5 million, principally for Forge Group capacity. Cash declined to $4.6 million at June 30 from $7.2 million at September 30, 2012. The company said essentially all cash was held by its non-operating Irish subsidiary and distributions may face statutory, tax, or other limitations.
Debt totaled $11.5 million at June 30, comprising $2.6 million outstanding on the revolving facility, a $6.5 million term loan, and a $2.4 million seller note; $4.4 million was classified as current. The seller note was due November 2013. The $30 million revolving facility is part of a $40 million credit agreement; borrowings are secured and subject to financial covenants. SIFCO reported compliance with covenants at June 30 and said U.S. liquidity was expected from operating cash flows and credit availability. The term debt’s effective rate after the swap was 2.9%; the swap notional was $6.5 million.
Other metrics. Forge Group backlog was $103.9 million at June 30, versus $106.0 million at September 30, 2012; $84.9 million was scheduled for delivery in the following 12 months, compared with $87.8 million. Backlog orders may be modified or canceled, and the company cautioned that shorter raw-material lead times could cause customers to delay orders. Nine-month Adjusted EBITDA, a non-GAAP measure, was $12.3 million versus $13.3 million; Q3 was $5.2 million versus $5.1 million.
Material changes, outlook, and risks
- ASC was divested in December 2012 for net cash proceeds of approximately $8.1 million, with $0.98 million held in escrow through June 2014. The sale generated a $3.98 million pretax gain (approximately $2.33 million after tax), included in nine-month discontinued operations.
- After quarter-end, on July 23, 2013, SIFCO acquired the General Aluminium Forgings business for approximately $4.5 million cash, subject to adjustments, and assumed certain current operating liabilities. Purchase-price accounting was not complete. The credit agreement was amended to add the new subsidiary as a borrower.
- The collective bargaining agreement at the T&W forging facility expired July 31, 2013; negotiations were ongoing at the filing date.
- Management cited exposure to aerospace and power-generation demand, military spending and major customers, competition, metals costs and cost recovery, repair-process development and licensing, pension funding, acquisition integration, and economic, regulatory, and geopolitical conditions. No specific earnings or revenue guidance was provided.
- FY2013 pension contributions were $0.67 million through June 30; a further $0.129 million was anticipated for the remainder of the year. IRS reviews of federal returns for fiscal 2010–2011 and amended returns for 2008–2009 were unresolved; uncertain-tax-position liabilities were $0.18 million.
- Management concluded disclosure controls were effective as of June 30, 2013 and reported no quarter changes in internal control over financial reporting expected to materially affect it.
Important facts for investors to verify
- Whether Repair Group sales and losses improve, and whether Forge Group’s volume and margins remain strong as manufacturing costs rise.
- Cash accessibility: nearly all reported cash was held in the Irish subsidiary, while the seller note was due in November 2013 and the company had substantial current debt maturities.
- Completion and terms of the General Aluminium Forgings purchase accounting, its integration, and the effect on debt, cash flows, and operating results.
- Progress and outcome of T&W labor negotiations, tax examinations, and the ASC indemnification escrow release.
- Backlog conversion and cancellation risk, capital spending against the stated range, and compliance with credit-agreement covenants.