SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014. Amounts below are in millions of dollars unless stated otherwise. SIFCO manufactures forged and machined metal components, principally for aerospace and energy markets, and reports one segment: SIFCO Forged Components.
Financial performance
| Metric | Three months ended June 30, 2014 | Prior-year quarter | Nine months ended June 30, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $31.0 | $28.7 | $86.7 | $84.1 |
| Gross profit / margin | $7.2 / 23.1% | $7.7 / 26.9% | $19.0 / 21.9% | $19.5 / 23.2% |
| Operating income | $2.6 | $4.1 | $6.4 | $8.5 |
| Income from continuing operations | $2.0 | $2.9 | $4.6 | $5.8 |
| Net income | $1.9 | $2.5 | $4.3 | $7.3 |
| Diluted EPS | $0.36 | $0.46 | $0.79 | $1.36 |
- Quarterly sales rose 8.1%, but gross profit fell 7.2%; management attributed the lower gross margin primarily to product mix and higher overhead, including employee-benefit costs. SG&A rose to $4.1 million from $3.1 million, with higher legal and professional costs, accelerated computer depreciation related to a planned ERP system, and the GAF acquisition among the cited factors.
- Nine-month sales increased 3.1%. Fixed-wing aerospace sales rose, primarily reflecting the GAF acquisition, while lower rotorcraft demand—particularly in Black Hawk and V-22 programs—and the timing of energy-component sales partly offset growth. A new ordnance program supported commercial-products sales.
- Nine-month continuing-operations income declined to $4.6 million from $5.8 million. Net income fell mainly because prior-year results included a gain on the ASC sale and current-period results included higher SG&A. Discontinued operations recorded a $0.4 million loss in 2014 versus $1.5 million of income in 2013.
- Nine-month operating cash flow from continuing operations was $13.3 million, versus $2.2 million a year earlier. Capital expenditures were $8.3 million versus $2.5 million. Cash and cash equivalents were $4.6 million at June 30, 2014, compared with $4.5 million at September 30, 2013.
Balance sheet, debt and liquidity
- Total debt was $6.5 million at June 30, 2014, down from $11.8 million at September 30, 2013. It comprised $2.0 million outstanding under the revolving credit agreement and a $4.5 million term loan. The company repaid the seller promissory note in November 2013.
- The credit facility permits up to $40 million of borrowing, including a $30 million revolving loan and $10 million term loan, and is secured by substantially all U.S. company assets and a pledge of 65% of the Irish subsidiary’s stock. The company reported compliance with its loan covenants.
- Management said expected operating cash flows and credit-facility availability provide adequate liquidity. However, essentially all reported cash was held by a non-operating Irish subsidiary; transfers to the company may be subject to statutory restrictions, adverse tax consequences, or other limitations.
- Capital spending included ERP implementation and a Cleveland plant investment expected to reduce operating costs. Fiscal 2014 capital expenditures were forecast at $12–$13 million; $2.6 million of additional spending was committed at June 30.
Outlook, risks and notable items
- The filing provides capital-expenditure expectations but no specific revenue or earnings guidance. Management noted that higher sales volumes can improve operating income because the business has significant fixed costs.
- Principal risks cited include aerospace and energy demand and economic conditions; military spending and reliance on major customers; competition and replacing lost business; metals and commodity costs and the ability to recover increases; product development and market acceptance; pension funding; political, regulatory and tax conditions; and successful integration of acquisitions.
- SIFCO exited its Repair Group business in 2013 and had previously divested Applied Surface Concepts. Repair Group closure costs totaled $0.959 million, of which $0.274 million was incurred in the first nine months of fiscal 2014; $0.701 million had been paid by June 30, 2014. Fiscal 2014 discontinued-operations losses included remaining Repair Group costs.
- The nine-month effective tax rate was 29%, versus 32% a year earlier, and included $0.158 million of prior-year foreign tax credits and a $0.110 million reduction in the uncertain-tax-position reserve. The research credit had expired at December 31, 2013.
- Management reported disclosure controls were effective as of June 30, 2014, with no material change in internal control over financial reporting during the quarter. The filing identifies forthcoming accounting standards on discontinued operations, revenue recognition and stock compensation; the revenue standard’s impact was still being assessed.
Important facts for investors to verify
- Whether the weaker gross margin and higher SG&A persist, and whether planned plant and ERP investments deliver expected cost savings.
- Future demand and customer/program trends, particularly military rotorcraft and energy components, and the contribution from GAF and the new ordnance program.
- Cash accessibility given its concentration in the Irish subsidiary, remaining revolver availability, and continued compliance with credit covenants.
- Actual fiscal 2014 capital spending versus the $12–$13 million forecast, and any further Repair Group closure costs or cash requirements.
- The sustainability of reported earnings after separating continuing operations from discontinued operations and prior-period ASC sale gains, and the effects of tax credits and other tax-rate items.