SIFCO Industries, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended December 31, 2012; filed February 11, 2013. Amounts below are in millions of dollars unless noted. Results are unaudited.
Business context and results
SIFCO manufactures forged components, principally for aerospace and power generation, and provides turbine-component repair services. Its continuing operations comprise the Forged Components Group and the Turbine Component Services and Repair Group. The quarter’s comparison is affected by the October 2011 acquisition of Quality Aluminum Forge (QAF), whose results were included in the prior-year quarter only from its acquisition date. SIFCO sold its Applied Surface Concepts (ASC) business in December 2012; ASC is reported as discontinued operations.
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales from continuing operations | $28.700 | $24.726 |
| Operating income | $1.447 | $1.175 |
| Income from continuing operations | $0.921 | $0.833 |
| Income from discontinued operations, net of tax | $2.494 | $0.353 |
| Net income | $3.415 | $1.186 |
| Diluted earnings per share | $0.63 | $0.22 |
| Operating cash flow, continuing operations | $2.770 | $1.327 |
Financial condition and cash flow
- Continuing-operations sales rose 16.1%. Operating margin was approximately 5.0%, versus 4.8% a year earlier. Cost of goods sold was $23.015 million, about 80.2% of sales; SG&A was $3.804 million. Interest expense was $0.106 million and the income tax provision was $0.495 million (35% effective rate, compared with 31%).
- Q1 net income included a $4.014 million pretax ASC sale gain, or $2.362 million after tax. Excluding discontinued operations, continuing-operations income was $0.921 million. The filing also reports adjusted EBITDA of $3.710 million versus $3.644 million, a non-GAAP measure that excludes specified items, including $0.813 million of non-recurring severance expense.
- Cash and equivalents were $5.549 million at December 31, down from $7.176 million at September 30, 2012. Cash from operating activities was $2.770 million for continuing operations and cash used by discontinued operations was $0.235 million. Continuing-operations investing used $0.608 million; continuing-operations financing used $12.217 million. The cash-flow statement reports a $1.614 million decrease in cash, including exchange-rate effects.
- At December 31, total debt was $10.550 million, including $4.356 million current maturities, compared with $21.683 million at September 30. The decrease largely followed use of ASC divestiture proceeds to repay revolving borrowings. Debt includes a $7.500 million term loan and a $2.356 million seller note due November 2013.
- Total current assets were $46.527 million and current liabilities were $20.160 million. Nearly all cash was held by a non-operating Irish subsidiary; distributions to the parent may face statutory restrictions, adverse tax consequences, or other limitations. Management said expected U.S. operating cash flows and available credit were adequate to finance U.S. operations. The company was in compliance with its loan covenants at quarter-end.
Material changes and segment performance
- Forged Components: Sales increased 21.0% to $27.445 million and operating income rose to $3.548 million from $2.186 million. Higher volume, including QAF-related sales, favorable material pricing, and improved material utilization helped performance. Higher labor and overhead costs, including reduced labor efficiency, partly offset those gains. Backlog was $104.2 million, down from $106.0 million at September 30; orders may be modified or cancelled, and management cautioned that changing customer order timing could reduce backlog without necessarily indicating lower future sales.
- Turbine Component Services and Repair: Sales fell 38.4% to $1.255 million; the operating loss widened to $0.544 million from $0.133 million. Lower volume against a largely fixed cost base was the principal factor. Backlog was $0.9 million.
- Corporate costs: Unallocated expenses rose to $1.557 million from $0.878 million, mainly due to $0.813 million of non-recurring severance related to an executive officer’s departure.
- ASC divestiture: SIFCO received approximately $8.114 million net of transaction fees and placed $0.994 million in escrow pending working-capital and indemnification matters. A separate $1.1 million dividend from ASC non-U.S. subsidiaries was also used to repay revolving debt. No assets or liabilities were held for sale at quarter-end.
Outlook, risks, and other matters
- Management anticipated FY2013 capital expenditures of $3.5–$4.5 million, principally to expand Forged Components production; $0.9 million was committed at December 31 in addition to $0.7 million spent during the quarter. No specific revenue or earnings guidance was provided.
- Key risks cited include aerospace and power-generation demand, military spending and reliance on major customers, competition, commodity-price increases and recovery, development and licensing of repair processes, pension funding needs, and successful integration of acquisitions. The filing notes that interim results are not necessarily indicative of full-year results.
- A $7.5 million notional interest-rate swap qualified as a fully effective cash-flow hedge during the quarter. The term loan’s effective rate after the swap was 2.9%; the revolving-rate borrowing rate was 1.25% at quarter-end.
- The IRS was reviewing the fiscal 2011 federal return and an amended fiscal 2008 return; outcomes were unknown. Recorded uncertain-tax-position liabilities were $0.122 million. Management concluded disclosure controls were effective and reported no material quarter-end change in internal control over financial reporting.
Most important facts for investors to verify
- How much of reported net-income growth reflects the one-time, after-tax ASC sale gain rather than continuing operations.
- Whether Forged Components’ volume and margin improvement persists, and whether backlog trends translate into deliveries given order-change and cancellation provisions.
- Whether the Repair Group can restore sales and improve results against its fixed-cost base.
- Cash accessibility from the Irish subsidiary, remaining escrow proceeds, and the use of divestiture cash to reduce debt.
- Progress on FY2013 capital spending, pension contributions, the November 2013 seller-note repayment, and compliance with credit covenants.