SIFCO Industries, Inc. — Q3 FY2012 Form 10-Q
Reporting period: Three and nine months ended June 30, 2012. Unless otherwise noted, financial figures are in millions of dollars. The quarter is fiscal Q3. Comparisons are with the corresponding 2011 periods; the October 2011 Quality Aluminum Forge (QAF) acquisition affects comparability.
Business context and financial performance
SIFCO manufactures forged components, repairs turbine components, and provides selective plating services. Its three segments are Forged Components, Turbine Component Services and Repair, and Applied Surface Concepts.
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $31.0 | $28.9 | $93.6 | $77.1 |
| Operating income | $3.3 | $2.8 | $7.7 | $7.5 |
| Net income | $2.4 | $2.1 | $5.4 | $5.3 |
| Diluted EPS | $0.46 | $0.39 | $1.00 | $0.99 |
| Operating margin | 10.6% | 9.7% | 8.2% | 9.7% |
Quarterly sales rose 7.2%, operating income 18.1%, and net income 18.3%. For the nine months, sales rose 21.4%, while operating income increased 3.1% and net income 1.6%. Nine-month cost of goods sold was 76.6% of sales versus 75.7% a year earlier, and SG&A and intangible amortization also increased. Management attributed manufacturing cost pressure in the Forge Group partly to product mix and lower labor efficiency. Q3 net income margin was approximately 7.9%, compared with 7.1%.
By segment, nine-month Forged Components sales grew to $76.5 million from $59.5 million, with operating income of $9.9 million versus $8.6 million; QAF contributed to growth. Repair Group sales declined to $5.6 million from $7.0 million and it recorded an $0.9 million operating loss, versus $0.1 million income. Applied Surface Concepts sales increased to $11.4 million from $10.6 million, while operating income was approximately $0.9 million in both periods.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $4.6 million, down from $8.4 million. Inventory growth used $5.6 million of cash; accounts payable and accrued liabilities together decreased $1.0 million on the cash flow statement.
- Investing activities used $26.7 million, including $24.9 million for acquisitions; capital expenditures were $1.8 million. Financing activities provided $22.8 million.
- Cash was $7.1 million at June 30, 2012, versus $6.4 million at September 30, 2011. Current assets were $52.8 million and current liabilities $14.8 million. Almost all cash was held by non-U.S. subsidiaries; distributions to the U.S. could have adverse tax consequences.
- Total debt was $25.1 million, compared with $1.2 million at September 30, 2011. Debt included $14.3 million under the revolver, an $8.5 million term loan, and a $2.3 million seller note. The company reported compliance with loan covenants.
- The $40 million credit facility comprises a $30 million revolving loan and a $10 million term loan, secured by substantially all U.S. company assets and a pledge of 65% of non-U.S. subsidiary stock. The term loan’s effective rate was 2.9% after a swap; revolving borrowing rates vary with leverage.
Material changes, outlook, and risks
- The October 2011 QAF acquisition had an adjusted purchase price of $24.9 million and was funded with bank borrowings and a $2.4 million non-interest-bearing seller note due November 2013. The acquisition increased goodwill and intangible assets and adds amortization expense. Reported year-over-year results are not fully comparable because acquired operations are included for different portions of each period.
- Forge Group backlog was $107.7 million at June 30, of which $87.7 million was scheduled for delivery in the next 12 months, up from total backlog of $92.2 million at September 30, 2011. Orders may be modified or canceled with limited charges; longer raw-material lead times may also inflate backlog without indicating equivalent future sales.
- Management expected fiscal 2012 capital expenditures of $2.5–$3.0 million, principally to expand Forge Group production capabilities. No specific earnings or revenue guidance is provided.
- Management said liquidity was adequate for U.S. operations through U.S. cash flows and credit availability, and for non-U.S. operations through locally held cash. It expects U.S. operating cash flows to repay borrowings.
- Key risks identified include aerospace and power-generation demand, military spending and customer concentration, commodity costs and recovery, competition, repair-process development and licensing, pension funding, foreign-market conditions, and integrating acquisitions. Repair Group results remain vulnerable to low volumes given its fixed-cost base.
- The company reported effective disclosure controls as of June 30, 2012. QAF was still using its prior systems and internal-control environment; integration was expected to be substantially complete during fiscal 2012.
Important facts for investors to verify
- How much of sales and backlog growth reflects QAF and other acquired operations versus organic demand, and whether backlog converts to shipments given cancellation rights and longer lead times.
- Whether Forge Group can improve labor efficiency and sustain margins amid mix and overhead pressures.
- Whether Repair Group can raise volumes enough to cover its fixed-cost base.
- Working-capital requirements, especially inventory, and the pace of operating cash-flow recovery.
- Debt reduction, covenant headroom, variable-rate exposure, and the availability and tax implications of cash held overseas.
- QAF integration progress, acquisition-related amortization, and the accuracy of pro forma comparisons.