SIF

SIFCO Industries Inc. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2011, and the six-month period ended on the same date. SIFCO Industries, Inc. operates in three reportable segments: Aerospace Component Manufacturing, Turbine Component Services and Repair, and Applied Surface Concepts. The reporting period includes the results of the T&W Forge acquisition completed on December 10, 2010.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 34.8% in the quarter and 17.0% for the six-month period compared to the prior year, driven primarily by the T&W Forge acquisition and increased demand in the power generation and small aircraft turbine sectors.
• Profitability: Net income rose 99% in the quarter ($2.0M vs $1.0M) and 6% for the six-month period ($3.2M vs $3.0M). Operating income increased 117% in the quarter.
• Acquisition Impact: The acquisition of T&W Forge added significant intangible assets ($9.7M net) and goodwill ($3.5M), resulting in $0.7M of amortization expense in the first six months of 2011, which was not present in the prior year.
• Liquidity: Cash and cash equivalents decreased by $11.3 million to $7.5 million, primarily due to the $22.6 million cash outflow for the T&W Forge acquisition, partially offset by operating cash flows and borrowings.
• Inventory: Inventories increased to $10.9 million from $6.3 million at the prior fiscal year-end, reflecting the acquisition and increased raw material purchases.

Guidance, Outlook, and Risks

• Capital Expenditures: Management anticipates total fiscal 2011 capital expenditures to be in the range of $3.0 million to $4.0 million, focused on expanding the Aerospace Component Manufacturing Group's production capabilities.
• Backlog: The Aerospace Component Manufacturing Group backlog increased to $91.3 million (from $71.2 million), with $73.1 million scheduled for delivery in the next 12 months. Management notes that lengthening lead times for raw materials may cause customers to order further in advance, inflating backlog figures.
• Debt Covenants: The company entered a new $30.0 million revolving credit agreement in December 2010. As of March 31, 2011, the company was in compliance with all covenants, including leverage and fixed charge coverage ratios.
• Risks: Key risks include reliance on military spending and major customers, global economic conditions affecting aerospace build rates, commodity price increases, and the ability to successfully integrate acquired businesses.
• Unusual Items: The financial results include the impact of the T&W Forge acquisition. Pro forma information suggests that if the acquisition had occurred on October 1, 2009, net income for the six months ended March 31, 2011, would have been $4.1 million.

Investor Verification Checklist

• Acquisition Integration: Verify the progress of integrating T&W Forge's systems and internal controls, which management expects to complete by the end of fiscal 2011.
• Intangible Amortization: Monitor the impact of the $1.9 million expected amortization expense for fiscal 2011 related to the T&W Forge acquisition on future operating margins.
• Raw Material Lead Times: Assess the impact of lengthening lead times for aerospace-grade steel and titanium on production schedules and potential customer order cancellations.
• Debt Utilization: Track the utilization of the new $30.0 million credit facility, as the company borrowed $11.7 million to fund the acquisition, reducing the available liquidity buffer.
• Pension Contributions: Review the company's plan to make an additional $455,000 in contributions to defined benefit pension plans for the remainder of fiscal 2011.