SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, the three months ended December 31, 2011; comparisons are with the three months ended December 31, 2010. The company manufactures and services forged metal components, turbine engine components, and selective-plating products and services. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $28.51 | $21.40 |
| Gross profit / gross margin | $6.47 / 22.7% | $4.98 / 23.3% |
| Operating income / margin | $1.68 / 5.9% | $1.74 / 8.1% |
| Net income | $1.19 | $1.21 |
| Diluted earnings per share | $0.22 | $0.23 |
| Cash provided by operating activities | $1.29 | $2.05 |
Revenue rose 33.2%, while net income was nearly flat. Operating income declined despite higher sales; acquired-asset amortization, inventory fair-value step-up costs, and higher labor, outside-work, and overhead costs weighed on results. The effective tax rate was 32%, versus 35%.
Segment sales and operating income were: Forged Components, $22.69 million and $2.19 million (prior year $15.69 million and $2.07 million); Turbine Component Services and Repair, $2.04 million and a $0.13 million loss (prior year $2.40 million and $0.06 million income); Applied Surface Concepts, $3.78 million and $0.35 million (prior year $3.31 million and $0.22 million).
Balance sheet, cash flow, and financing
- At December 31, 2011, cash was $6.78 million, current assets $47.14 million, and current liabilities $13.67 million. Total assets were $103.87 million, up from $80.01 million at September 30, 2011. Cash was held almost entirely by non-U.S. subsidiaries and may be subject to distribution restrictions or adverse tax consequences.
- Total debt was approximately $26.7 million, compared with $1.2 million at September 30, 2011; cash less debt was approximately $19.9 million net debt. The increase principally financed the QAF acquisition. The company reported compliance with loan covenants at quarter-end.
- Operating cash flow declined to $1.29 million. The filing cites cash uses including a $3.2 million inventory increase and a $2.0 million decrease in accounts payable and accrued liabilities, partly offset by collections and other working-capital movements. Investing outflow was $25.34 million, including $24.81 million for the QAF acquisition and $0.53 million of capital expenditures. Financing provided $24.43 million.
- The amended credit facility provides up to $40 million: a $10 million five-year term loan and a $30 million revolving facility. The term loan’s effective rate was 2.9% after the interest-rate swap; revolver pricing is LIBOR plus 0.75%–1.75%, depending on leverage. A $2.4 million seller note is non-interest-bearing and due November 2013.
Material changes, outlook, and risks
- On October 28, 2011, SIFCO acquired the forging business and substantially all related operating assets of GEL Industries’ Quality Aluminum Forge (QAF) for approximately $24.8 million. Purchase-price allocation was preliminary. QAF and the earlier T&W Forge acquisition contributed to higher Forge Group sales and expanded goodwill and intangible assets; amortization expense increased to $0.82 million from $0.06 million.
- Forge Group backlog was $110.3 million at December 31, 2011, including $90.9 million scheduled for delivery within 12 months; $15.8 million related to QAF. Orders may be modified or cancelled with limited charges, and management cautioned that longer raw-material lead times may increase backlog without indicating equivalent future sales.
- Management expected fiscal 2012 capital expenditures of $3.0–$4.5 million, principally to expand Forge Group production capacity, and stated that operating cash flow, cash reserves, and available revolver capacity should meet working-capital needs through fiscal year-end. No earnings or revenue guidance was provided.
- Management identified exposure to aerospace and power-generation demand, military spending and major customers, commodity-price increases and cost recovery, pension funding, foreign-market conditions, repair-process development and licensing, and successful integration of acquisitions. The company anticipated an additional $0.97 million of pension contributions during the balance of fiscal 2012.
- Disclosure controls were judged effective at quarter-end. QAF continued to use its existing systems and much of its prior control environment; integration into SIFCO’s controls was expected to be substantially complete during fiscal 2012.
Important facts for investors to verify
- Final QAF purchase-price allocation, integration progress, and the acquisition’s contribution to recurring earnings and cash generation.
- Whether backlog converts to sales, given cancellation rights, lead-time changes, and customer inventory adjustments.
- Debt, revolver availability, covenant headroom, and the accessibility of cash held by non-U.S. subsidiaries.
- Inventory growth, operating cash-flow trends, and the planned capital expenditures and pension contributions.
- Repair Group’s return to profitability and whether acquired-business amortization and other acquisition-related costs continue to pressure margins.