SIFCO Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended March 31, 2012. Dollar amounts are in thousands unless stated otherwise. SIFCO manufactures forged components, repairs turbine components, and provides selective plating services, primarily serving aerospace and power-generation markets.
Financial performance
| Metric | Three months ended Mar. 31, 2012 | Prior year | Six months ended Mar. 31, 2012 | Prior year |
|---|---|---|---|---|
| Net sales | $34,079 | $26,804 | $62,589 | $48,200 |
| Operating income | $2,712 | $2,923 | $4,393 | $4,665 |
| Net income | $1,724 | $1,995 | $2,910 | $3,201 |
| Diluted earnings per share | $0.32 | $0.38 | $0.55 | $0.60 |
| EBITDA (non-GAAP) | $4,422 | $4,420 | $7,902 | $6,895 |
| Adjusted EBITDA (non-GAAP) | $5,341 | $4,861 | $9,567 | $7,672 |
- Sales rose 27.1% in the quarter and 29.9% year to date, substantially reflecting acquired forging operations. Net income declined 13.6% in the quarter and 9.1% year to date.
- Operating margin was approximately 8.0% in the quarter versus 10.9% a year earlier, and 7.0% year to date versus 9.7%. Gross margin was approximately 21.9% and 22.3%, respectively, compared with 25.8% and 24.7% in the comparable periods.
- Quarterly EBITDA was essentially flat despite higher sales; EBITDA margin declined to 13.0% from 16.5%. Year-to-date EBITDA margin was 12.6% versus 14.3%. Adjusted EBITDA margin was 15.7% versus 18.1% in the quarter and 15.3% versus 15.9% year to date. These are non-GAAP measures; the company cautions they are not substitutes for GAAP results or cash flow.
Cash flow, balance sheet and liquidity
- Cash from operations was $4,118 for the six months, down from $7,407. Inventory increased $4,442, a significant use of operating cash. Capital expenditures were $1,262.
- Cash and equivalents were $7,009 at March 31, 2012, versus $6,431 at September 30, 2011; substantially all cash was held by non-U.S. subsidiaries, and distributions to the parent may have adverse tax consequences.
- Total debt was $24,713, compared with $1,216 at September 30, 2011; cash exceeded debt at the prior date, while debt exceeded cash by about $17.7 million at March 31. The increase primarily funded the QAF acquisition. Current assets were $51,487 and current liabilities $16,970.
- 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 after the swap was 2.9%; the revolver rate varies with leverage. Debt is secured by substantially all U.S. assets and a pledge of 65% of non-U.S. subsidiary stock. SIFCO reported compliance with covenants at quarter-end.
- Operating cash flow plus available cash and revolving credit were expected by management to be adequate to finance U.S. and non-U.S. operations.
Segments and material changes
- Forged Components: Six-month sales increased to $50.9 million from $36.3 million; operating income rose to $5.8 million from $5.2 million. Results included QAF, acquired in October 2011, and T&W Forge, acquired in December 2010. Higher labor and other manufacturing costs, weaker labor efficiency, product mix, and acquisition-related amortization pressured costs and margins.
- Turbine Component Services and Repair: Six-month sales fell 19.1% to $4.0 million and the segment recorded an operating loss of $0.5 million, versus income of $0.2 million. Lower volumes were insufficient to absorb its largely fixed cost base.
- Applied Surface Concepts: Six-month sales increased 11.6% to $7.7 million and operating income improved to $0.7 million from $0.6 million, supported by higher sales volumes and pricing.
- QAF was purchased for approximately $24.8 million, subject to adjustments. Purchase accounting remained preliminary; reported goodwill included $3.5 million from the acquisition, and acquired intangible assets were $8.8 million.
- Backlog in Forged Components was $103.8 million at March 31, up from $92.2 million at September 30; $84.1 million was scheduled for delivery within 12 months. Orders may be modified or cancelled with limited charges, and longer raw-material lead times may affect order timing, so backlog is not necessarily predictive of future sales.
Outlook, risks and other notable matters
- No specific revenue or earnings guidance was provided. SIFCO expected fiscal 2012 capital expenditures of $2.0–$3.5 million, principally to expand Forged Components production capacity.
- Management identified demand in aerospace and power generation, economic and credit conditions, competition, metals and commodity prices, military spending and reliance on major customers, pension funding, and successful integration of acquisitions among the factors that could affect results.
- The company anticipated completing integration of QAF systems and internal controls into its control environment during fiscal 2012. Management stated disclosure controls were effective as of March 31, 2012; acquired operations continued to use their existing systems and much of their existing control environment during integration.
- Defined-benefit pension contributions were $420 through March 31; a further $618 was anticipated during the remainder of fiscal 2012.
Investor verification priorities
- Assess how much sales growth and backlog reflect acquisitions versus organic demand, and whether backlog converts to shipments given cancellation rights and changing customer order patterns.
- Monitor Forge Group manufacturing costs, labor efficiency, margins, and the Repair Group’s volume and fixed-cost absorption.
- Track inventory growth, operating cash generation, debt balances, covenant headroom, and access to cash held by non-U.S. subsidiaries.
- Review final QAF purchase-price allocation, acquisition integration progress, and related amortization and control risks.
- Confirm the reported period-end common shares outstanding: the filing cover states 5,323,416, while the balance-sheet text reports 5,350 thousand outstanding shares.