SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2014; fiscal year ends September 30. Financial statements are unaudited. SIFCO manufactures and sells forged and machined metal components and related services, primarily for aerospace and energy markets, and reports one segment: SIFCO Forged Components.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Mar. 31, 2014 | Prior year | Six months ended Mar. 31, 2014 | Prior year |
|---|---|---|---|---|
| Net sales | $29.0 | $28.0 | $55.7 | $55.4 |
| Gross profit | $6.3 | $5.9 | $11.9 | $11.8 |
| Operating income | $2.3 | $2.5 | $3.9 | $4.3 |
| Income from continuing operations | $1.5 | $1.8 | $2.7 | $2.9 |
| Net income | $1.4 | $1.4 | $2.4 | $4.9 |
| Diluted EPS | $0.26 | $0.27 | $0.44 | $0.90 |
- Second-quarter sales rose 3.7%; gross margin improved to 21.7% from 21.1%, attributed primarily to product mix. SG&A increased to $3.4 million from $3.0 million, and continuing-operations income declined to $1.5 million from $1.8 million.
- For the six-month period, sales were nearly flat and gross profit was slightly higher, but operating income and continuing-operations income declined. Net income fell 51.1%, mainly because the prior-year period included a $2.5 million after-tax gain on the sale of Applied Surface Concepts (ASC); the current period included losses from discontinued operations.
- Six-month continuing-operations EBITDA was $7.5 million versus $7.4 million; Adjusted EBITDA, a non-GAAP measure, was $7.8 million versus $7.9 million.
Cash flow, liquidity, and debt
- Continuing-operations operating cash flow was $8.5 million in the first six months, compared with cash used of $1.1 million a year earlier. Cash and cash equivalents were $4.5 million at March 31, 2014, essentially unchanged from September 30, 2013.
- Capital expenditures were $3.7 million, versus $1.6 million in the prior-year period. The company had a further $4.5 million committed at quarter-end and expected fiscal 2014 capital expenditures of $12–13 million, principally for production capabilities and an ERP system.
- Long-term debt was $6.6 million, including $2.0 million of current maturities, down from total debt of $11.8 million at September 30, 2013. The company repaid the seller promissory note in November 2013. Its revolving facility allows up to $30 million in borrowings within a $40 million credit agreement; borrowings bear variable rates. A swap effectively fixes the term-loan rate at 2.9%. The company reported compliance with all loan covenants.
- Management stated that expected operating cash flows and available credit were adequate to fund operations. Nearly all reported cash was held by a non-operating Irish subsidiary; distributions may be subject to statutory restrictions, adverse tax consequences, or other limitations.
Business developments, outlook, and risks
- Results include General Aluminum Forgings (GAF), acquired in July 2013 for approximately $4.4 million. Sales gains in fixed-wing aerospace were attributed largely to GAF. Lower Black Hawk and V-22 rotorcraft demand partly offset gains; energy-component sales varied with the timing of customer orders. New ordnance-program sales supported commercial and other revenue.
- SIFCO exited the Repair Group business in 2013 as part of its focus on aerospace and energy. Repair Group results produced a $0.3 million after-tax loss in the first six months of 2014, including shutdown and remaining operating costs; the company reported $0.3 million of workforce-reduction costs for the period. The prior-year comparison includes the ASC sale gain.
- First-half SG&A included a $0.8 million non-recurring severance charge for a former executive, as well as higher compensation, professional costs, accelerated depreciation on computer assets ahead of the planned ERP installation, and GAF-related costs. The second-quarter cost of goods sold was affected by die-repair work and unusually high utility costs associated with cold weather.
- The company gave no earnings or sales forecast in the provided filing text. It cited risks including aerospace and energy demand, military spending and dependence on major customers, commodity-price increases and recovery, competition, product development, pension funding assumptions, and acquisition integration. The second-quarter tax rate was 36% versus 29% a year earlier; management noted the current period did not reflect the research credit, which had expired at December 31, 2013.
- Management concluded disclosure controls were effective as of March 31, 2014 and reported no material quarter-specific change in internal control over financial reporting.
Important facts for investors to verify
- Whether the planned $12–13 million fiscal 2014 capital program and ERP implementation proceed as expected, and how they affect cash flow and costs.
- Whether rotorcraft demand and energy-component order timing improve, and how much sales growth is attributable to GAF versus underlying demand.
- The remaining cash availability and practical transferability of funds held by the Irish subsidiary, plus revolving-credit availability and covenant headroom.
- Further costs, asset-sale proceeds, or liabilities related to the Repair Group exit, and the comparability of earnings given the prior-year ASC divestiture gain.
- Potential effects of customer concentration, military spending, commodity costs, pension assumptions, and the expired research credit.