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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
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Commission File Number: 1-5978
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SIFCO Industries, Inc.
(Exact name of registrant as specified in its charter)
Ohio 34-0553950
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
970 East 64th Street, Cleveland, Ohio 44103
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(Address of principal executive offices) (Zip Code)
(216) 881-8600
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(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
----- -----
As of July 31, 2002, the issuer had 5,207,733 shares of common stock
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Nine Months
Ended Ended
June 30 June 30
------------------------ ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 20,167 $ 27,676 $ 61,252 $ 80,587
Operating expenses:
Cost of goods sold--products and services 17,417 22,068 53,749 65,678
Cost of goods sold--inventory impairment charges 72 102 3,221 419
Selling, general and administrative expenses 3,369 3,578 10,361 9,927
Asset impairment charges --- --- 1,380 ---
---------- ---------- ---------- ----------
Total operating expenses 20,858 25,748 68,711 76,024
---------- ---------- ---------- ----------
Operating income (loss) (691) 1,928 (7,459) 4,563
Interest income (36) (181) (201) (358)
Interest expense 219 343 648 895
Foreign currency exchange loss (gain), net (149) (416) 3 (414)
Other income, net (60) (31) (207) (72)
---------- ---------- ---------- ----------
Income (loss) before income tax provision (665) 2,213 (7,702) 4,512
Income tax provision (benefit) (214) 704 (2,228) 1,706
---------- ---------- ---------- ----------
Net income (loss) $ (451) $ 1,509 $ (5,474) $ 2,806
========== ========== ========== ==========
Net income (loss) per share (basic) $ (0.09) $ 0.29 $ (1.05) $ 0.55
Net income (loss) per share (diluted) $ (0.09) $ 0.29 $ (1.05) $ 0.54
Weighted-average number of common shares (basic) 5,208 5,137 5,217 5,136
Weighted-average number of common shares (diluted) 5,233 5,164 5,239 5,156
See accompanying notes to unaudited consolidated condensed financial statements.
-2-
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands, except per share data)
June 30 September 30
2002 2001
-------- --------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,902 $ 13,787
Receivables, net 14,691 18,705
Inventories 14,267 18,013
Deferred income taxes 1,709 1,709
Prepaid expenses and other current assets 2,241 578
-------- --------
Total current assets 40,810 52,792
PROPERTY, PLANT AND EQUIPMENT, NET 29,827 29,383
OTHER ASSETS:
Funds held by trustee for capital project --- 92
Goodwill and other intangible assets, net 2,595 3,558
Other assets 1,013 771
-------- --------
Total other assets 3,608 4,421
-------- --------
Total assets $ 74,245 $ 86,596
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,440 $ 1,430
Accounts payable 5,107 6,717
Other accrued liabilities 4,960 7,702
-------- --------
Total current liabilities 11,507 15,849
LONG-TERM DEBT--NET OF CURRENT MATURITIES 11,713 15,107
OTHER LONG-TERM LIABILITIES 5,695 6,266
SHAREHOLDERS' EQUITY:
Serial preferred shares, no par value --- ---
Common shares, par value $1 per share 5,308 5,308
Additional paid-in capital 6,784 6,783
Retained earnings 40,141 45,615
Accumulated other comprehensive loss (5,920) (7,423)
Unearned compensation--restricted common shares (391) (460)
Common shares held in treasury at cost (592) (449)
-------- --------
Total shareholders' equity 45,330 49,374
-------- --------
Total liabilities and shareholders' equity $ 74,245 $ 86,596
======== ========
See accompanying notes to unaudited consolidated condensed financial statements.
-3-
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended
June 30
----------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,474) $ 2,806
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,650 3,360
Loss (gain) on disposal of property and equipment (5) 34
Deferred income taxes (9) ---
Inventory and asset impairment charges 4,601 419
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Receivables 4,014 443
Inventories 525 (1,055)
Prepaid expenses and other current assets (1,663) (165)
Other assets (427) (101)
Accounts payable (1,610) (228)
Accrued liabilities (3,308) 912
Other long-term liabilities 1,419 (732)
-------- --------
Net cash provided by operating activities 1,713 5,693
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,324) (2,557)
Decrease in funds held by trustee for capital project 92 228
Proceeds from sale of property, plant and equipment 24 ---
Other 68 (42)
-------- --------
Net cash used for investing activities (4,140) (2,371)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit agreement 19,379 23,282
Repayments of revolving credit agreement (21,633) (17,370)
Repayments of long-term debt (1,130) (1,120)
Repurchase of common shares (143) ---
Issuance of common shares 69 13
-------- --------
Net cash provided by (used for) financing activities (3,458) 4,805
Increase (decrease) in cash and cash equivalents (5,885) 8,127
Cash and cash equivalents at the beginning of the period 13,787 4,687
Effect of exchange rate changes on cash and cash equivalents --- (379)
-------- --------
Cash and cash equivalents at the end of the period $ 7,902 $ 12,435
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 656 $ 785
Cash paid for income taxes, net 800 384
See accompanying notes to unaudited consolidated condensed financial statements.
-4-
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands)
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated condensed financial statements included herein
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. In the
opinion of management, all adjustments, which include only normal recurring
adjustments necessary for a fair presentation of the results of operations,
financial position, and cash flows for the periods presented, have been
included. These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the SIFCO Industries, Inc. ("Company") fiscal 2001 Annual Report on
Form 10-K. The results of operations for any interim period are not necessarily
indicative of the results to be expected for other interim periods or the full
year. Certain prior period amounts have been reclassified in order to conform to
current period classifications.
2. INVENTORIES
Inventories consist of:
June 30 September 30
2002 2001
------- -------
Raw materials and supplies $ 4,511 $ 5,714
Work-in-process 4,233 5,905
Finished goods 5,523 6,394
------- -------
Total inventories $14,267 $18,013
======= =======
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method for 38% and 35% of the Company's
inventories, at June 30, 2002 and September 30, 2001, respectively. The
first-in, first-out (FIFO) method is used for the remainder of the inventories.
If the FIFO method had been used for the entire Company, inventories would have
been $2,935 and $2,884 higher than reported at June 30, 2002 and September 30,
2001, respectively.
3. COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Total comprehensive income (loss) is as follows:
Three Months Ended Nine Months Ended
June 30 June 30
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income (loss) $(451) $1,509 $(5,474) $2,806
Foreign currency translation adjustment 143 (912) 89 (907)
Cumulative effect adjustment of interest rate
swap agreement, net of tax --- --- --- 135
Interest rate swap adjustment (76) 24 22 (256)
Currency exchange contract adjustment 1,889 (118) 1,466 (204)
Minimum pension liability adjustment --- --- (74) ---
------- ------- ------- -------
Total comprehensive income (loss) $1,505 $503 $(3,971) $1,574
======= ======= ======= =======
-5-
The components of accumulated other comprehensive loss are as follows:
June 30 September 30
2002 2001
--------------------
Foreign currency translation adjustment $(7,030) $(7,119)
Interest rate swap adjustment (282) (304)
Currency exchange contract adjustment 1,466 ---
Minimum pension liability adjustment (74) ---
------- -------
Total accumulated other comprehensive loss $(5,920) $(7,423)
======= =======
4. BUSINESS SEGMENTS
The Company identifies reportable segments based upon distinct products
manufactured and services provided. The Turbine Component Services and Repair
Group ("Repair Group") consists primarily of the repair and remanufacture of jet
engine (aerospace) turbine components. The Repair Group is also involved in the
repair of industrial land-based gas turbine components and precision machining
for aerospace applications. The Aerospace Component Manufacturing Group consists
of the production, heat treatment and some machining of forgings in various
alloys utilizing a variety of processes for application in the aerospace
industry as well as several other industrial markets. The Metal Finishing Group
is a provider of a specialized electroplating process called brush plating,
which is used to apply metal coatings to a selective area of a component. The
Company's reportable segments are separately managed.
Segment information is as follows:
Three Months Ended Nine Months Ended
June 30 June 30
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales:
Turbine Component Services and Repair Group $ 9,059 $ 13,534 $ 28,210 $ 42,052
Aerospace Component Manufacturing Group 8,525 11,542 25,365 30,839
Metal Finishing Group 2,583 2,600 7,677 7,696
-------- -------- -------- --------
Consolidated net sales $ 20,167 $ 27,676 $ 61,252 $ 80,587
======== ======== ======== ========
Operating income (loss):
Turbine Component Services and Repair Group $ (1,148) $ 810 $ (7,315) $ 2,523
Aerospace Component Manufacturing Group 575 1,261 177 2,311
Metal Finishing Group 271 429 943 1,213
Corporate unallocated expenses (389) (572) (1,264) (1,484)
-------- -------- -------- --------
Consolidated operating income (loss) (691) 1,928 (7,459) 4,563
Interest expense, net 183 162 447 537
Foreign currency exchange loss (gain), net (149) (416) 3 (414)
Other (income) expense, net (60) (31) (207) (72)
-------- -------- -------- --------
Consolidated income (loss) before income tax provision $ (665) $ 2,213 $ (7,702) $ 4,512
======== ======== ======== ========
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations may contain various forward-looking statements and includes
assumptions concerning the Company's operations, future results and prospects.
These forward-looking statements are based on current expectations and are
subject to risk and uncertainties. In connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides this cautionary statement identifying important economic, political and
technological factors, among others, the absence or effect of which could cause
the actual results or events to differ materially from those set forth in or
implied by the forward-looking statements and related assumptions. Such factors
include the following: (1) future business environment, including capital and
consumer spending; (2) competitive factors, including the ability to replace
business which may be lost due to increased direct involvement by the jet engine
manufacturers in turbine component services and repair markets; (3) successful
procurement of new repair process licenses; (4) fluctuating foreign currency
(euros) exchange rates; (5) successful development and market introductions of
new products, including an advanced coating technology and the continued
development of land-based turbine repair processes; (6) regressive pricing
pressures on the Company's products or services, with productivity improvements
as the primary way to maintain margins; (7) success with the further development
of strategic alliances, including joint ventures, with certain jet engine
manufacturers for turbine component repair services; (8) the long-term impact on
the aerospace industry of the September 11, 2001 terrorist attacks on the United
States, including collection risks due to the failure of airlines/engine
over-haul companies and other aerospace related industries, reduced number of
aircraft in service, and accelerated declining use of older model jet engines
such as the JT8D; (9) successful replacement of declining demand for repair
services for turboprop engine components with component repair services for
small turbojet engines utilized in the regional airline market; (10) stability
of government laws and regulations, including taxes; and (11) stable governments
and business conditions in economies where business is conducted.
SIFCO Industries, Inc. and its subsidiaries engage in the production and sale of
a variety of metalworking processes, services and products produced primarily to
the specific design requirements of its customers. The processes and services
include forging, heat treating, coating, welding, machining and brush plating.
The products include forgings, machined forged parts and other machined metal
parts, remanufactured component parts for turbine engines, and brush plating
solutions and equipment.
A. RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2002 COMPARED WITH NINE MONTHS ENDED JUNE 30, 2001
Net sales in the first nine months of fiscal 2002 decreased 24.0% to $61.3
million, compared with $80.6 million for the comparable period in fiscal 2001.
Loss before income tax benefit in the first nine months of fiscal 2002 was $7.7
million, compared with income before income tax provision of $4.5 million for
the comparable period in fiscal 2001. For the first nine months of fiscal 2002
the Company incurred a net loss of $5.5 million, or $1.05 per share (diluted),
compared with net income of $2.8 million, or $0.54 per share (diluted) for the
comparable period in fiscal 2001.
TURBINE COMPONENT SERVICES AND REPAIR GROUP ("REPAIR GROUP")
The Repair Group had net sales of $28.2 million in the first nine months of
fiscal 2002, down $13.8 million, or 32.9%, from $42.1 million in the comparable
fiscal 2001 period. Component repair sales were down $8.0 million in the first
nine months of fiscal 2002 compared to the same period in 2001. Demand for
component repairs for virtually all models of large jet engines, especially the
older models, was down in the first nine months of fiscal 2002 compared to the
same period in fiscal 2001. The continued retirement and reduced utilization of
older generation aircraft that negatively impacted the Company in fiscal 2001
was accelerated/exacerbated during the first nine months of fiscal 2002 as a
direct consequence of the September 11, 2001 terrorist attacks on the United
States, as many airlines chose to reduce capacity by retiring many of the older
aircraft in their fleets. In addition, the impact of the terrorist attacks on
the commercial airline industry in general has also resulted in the reduced
demand for repairs of newer model engines due to reduced commercial flight
demand, which determines the need for such repairs. Revenues associated with the
demand for replacement parts that complement component repair services provided
to customers were down $5.8 million in the first nine months of fiscal 2002,
compared to the same period in 2001 due principally to the reduced component
repair volumes in general.
-7-
During the first nine months of fiscal 2002, the Repair Group's selling, general
and administrative expenses increased $1.1 million to $5.6 million, or 19.7% of
net sales, from $4.5 million, or 10.7% of net sales, in the same period in
fiscal 2001. Included in the $5.6 million of selling, general and administrative
expenses for the first nine months of fiscal 2002 were the $1.4 million of
charges related to the goodwill and equipment impairments. The remaining $4.2
million of selling, general and administrative expenses for the first nine
months of fiscal 2002 represented 14.8% of net sales and reflected a $0.6
million reduction in the Repair Group's provision for doubtful accounts and a
$0.3 million increase in a contingency reserve related to a vendor dispute, when
compared to the same period in 2001. In addition, during the first nine months
of fiscal 2002, the Company incurred $0.2 million of severance charges
associated with the reduction of the Repair Group's capacity for the repairing
of components related to older generation jet engines, principally JT8D.
Operating income (loss) in the first nine months of fiscal 2002 decreased $9.8
million to a $7.3 million loss from $2.5 million of income in the same period in
fiscal 2001. Included in the decreased operating results for the first nine
months of fiscal 2002 were charges aggregating $4.1 million related to inventory
write-down ($2.7 million), the impairment of goodwill ($0.7 million) and the
impairment of equipment ($0.7 million). During the first nine months of fiscal
2002, the Repair group performed an evaluation of its existing operations in
light of the current and anticipated impacts of the September 11, 2001 terrorist
attacks on its business. The principal result of this evaluation process was the
decision to optimize/rationalize the Repair Group's multiple operations by
reducing certain of its capacity for repairing components related to older
generation jet engines, principally the JT8D. As a result of this decision, the
Repair Group recognized, during the first nine months of fiscal 2002, the
aforementioned charges. In addition, the company increased by $0.3 million, a
contingency reserve related to a vendor dispute. The remaining $5.2 million
decrease in operating results during the first nine months of fiscal 2002,
compared to the same period in fiscal 2001, was primarily due to the negative
impact on operating income of the significantly reduced sales volumes for
component repair services and related replacement parts. The Company will
continue to evaluate the need for additional optimization/rationalization of
operations to the extent that the demand for component repair services do not
recover in the future.
AEROSPACE COMPONENT MANUFACTURING GROUP ("ACM GROUP")
Net sales in the first nine months of fiscal 2002 declined 17.8% to $25.4
million, compared with $30.8 million in the same fiscal 2001 period.
Approximately $5.2 million of this decrease in net sales is attributable to a
decrease in the number of AE series new generation jet engines built by
Rolls-Royce Corporation for business and regional jets, as well as military
transport and surveillance aircraft, as a direct consequence of reduced flight
schedules, cancellation of aircraft orders, workforce reductions, and declining
financial performance of the airline industry as a consequence of the September
11, 2001 terrorist attacks on the United States. As a consequence of the overall
decline in the airline industry, net sales of commercial aircraft airframe
components declined approximately $1.8 million in the first nine months of
fiscal 2002, compared with the same period in fiscal 2001. Net sales in the
first nine months of fiscal 2002 were also negatively impacted by a $0.7 million
reduction in selling prices to the ACM Group's largest customer, Rolls-Royce
Corporation, that was implemented during the first quarter of fiscal 2002. Net
sales of non-aerospace components in the first nine months of fiscal 2002
declined by approximately $0.5 million. These decreases in net sales were
partially offset by an approximately $2.6 million increase in shipments of
military airframe and engine components during the first nine months of fiscal
2002, compared with the same period in fiscal 2001.
Selling, general and administrative expenses in the first nine months of fiscal
2002 were $2.7 million. The primary factor impacting the ACM Group's selling,
general and administrative expenses in the first nine months of fiscal 2002 is a
$0.9 million charge incurred in connection with the settlement, during the
second quarter of fiscal 2002, of an employment action and a related claim that
the Company had filed against its insurance carrier for its failure to provide
coverage. Selling, general and administrative expenses before this legal
contingency accrual were $1.9 million in the first nine months of fiscal 2002,
compared with $1.7 million in the first nine months of fiscal 2001. Selling,
general and administrative expenses were negatively impacted in the first nine
months of fiscal 2002 by a $0.1 million increase in the ACM Group's provision
for doubtful accounts and higher variable selling expense due to product mix and
higher employee benefit expenses, offset by lower travel and other discretionary
expenses.
The ACM Group's operating income in the first nine months of fiscal 2002 was
$0.2 million. The primary factor impacting the ACM Group's operating results in
the first nine months of fiscal 2002 is the $0.9 million legal contingency
accrual mentioned above. For the first nine months of fiscal 2002, the ACM
Group's operating income before legal contingency accrual was $1.0 million, or
4.0% of net sales, compared with $2.3 million, or 7.5% of net sales in the same
fiscal 2001 period. The ACM Group's operating income in the first nine months of
fiscal 2002 also was negatively impacted by a $0.7
-8-
million reduction in selling prices to Rolls-Royce Corporation, its largest
customer, that was implemented during the first quarter of fiscal 2002 and is
expected to affect future periods. The remaining $0.7 million decrease in
operating income during the first nine months of fiscal 2002, compared to the
same period in fiscal 2001, was primarily due to the negative impact on
operating income of the reduced net sales levels. Operating income as a
percentage of net sales was also negatively impacted in the first nine months of
fiscal 2002 by the interplay between overall lower net sales and fixed
manufacturing costs, offset in part by lower material cost due to product mix
consisting of a greater percentage of products made from lower cost materials.
Due to the overall declining financial performance of the airline industry in
response to the September 11, 2001 terrorist attacks on the United States, the
ACM Group's backlog as of June 30, 2002 decreased to $24.7 million, compared
with $28.0 million as of September 30, 2001. Approximately $2.5 million is
scheduled for delivery beyond the next twelve months. All orders are subject to
modification or cancellation by the customer with limited charges. The ACM Group
believes that backlog may not necessarily be indicative of actual sales for any
succeeding period.
METAL FINISHING GROUP
Net sales were $7.7 million in the first nine months of both fiscal 2002 and
2001. In the first nine months of fiscal 2002 product net sales, consisting of
brush plating equipment and solutions, declined 10.7% to $4.3 million, compared
with $4.8 million in the same fiscal 2001 period. Product net sales continued
the decline that began in the first quarter of fiscal 2002 due to the overall
weakness in most of the industries served by the Metal Finishing Group,
including the aerospace, power generation, petroleum, steel, railroad, and pulp
and paper industries. In the first nine months of fiscal 2002, contract service
net sales increased 17.1% to $3.3 million, compared with $2.8 million in the
comparable fiscal 2001 period.
Selling, general and administrative expenses were $2.2 million in the first nine
months of both fiscal 2002 and 2001. In the first nine months of fiscal 2002,
selling, general and administrative expenses benefited from lower advertising
and travel expenditures, offset by higher compensation and other administrative
expenses. The Metal Finishing Group does not necessarily anticipate experiencing
similar levels of expenditures for advertising and travel in future periods as
economic conditions within the industries served by the Metal Finishing Group
improve.
The Metal Finishing Group's operating income in the first nine months of fiscal
2002 was $0.9 million, or 12.3% of net sales, compared with $1.2 million, or
15.8% of net sales, in the comparable period in fiscal 2001. Operating income in
the first nine months of fiscal 2002 compared with the same period in fiscal
2001 was negatively impacted by a shift in the mix of contract service sales
toward smaller contracts that, by their nature, are less efficient. Operating
income in the first nine months of fiscal 2002 was also negatively impacted by
additional fixed costs associated with a new service facility that opened in
fiscal 2002 that has not reached full operating levels.
CORPORATE UNALLOCATED EXPENSES
Corporate unallocated expenses, consisting of corporate salaries and employee
benefits, legal and professional and other corporate expenses, were $1.3 million
in the first nine months of fiscal 2002, compared with $1.5 million in the
comparable period in fiscal 2001. In the first nine months of fiscal 2002, lower
expenses related to legal and professional expense, management incentive expense
and public company expenses had a $0.4 million favorable impact on corporate
unallocated expenses. During the same time period, higher compensation, employee
benefit and consulting expenses, totaling $0.2 million, partially offset these
decreases. The Company does not necessarily anticipate experiencing similar
legal and professional expense levels in future periods. The decrease in
management incentive expense is attributable to the financial performance of the
Company, while the decline in public company expenses is in part the result of
the reduction in the size of the Company's Board of Directors.
OTHER/GENERAL
Interest income was $0.2 million in the first nine months of fiscal 2002,
compared with $0.4 in the comparable period of fiscal 2001. The reduction in
interest income is attributable to lower average cash and cash equivalent
balances outstanding and lower interest rates during the first nine months of
fiscal 2002, compared with the comparable period in fiscal 2001. Interest
expense in the first nine months of fiscal 2002 was $0.6 million, compared with
$0.9 million in the first nine months of fiscal 2001. The decrease in interest
expense is attributable to overall lower borrowings outstanding under the
Company's revolving credit agreement, as well as lower interest rates.
-9-
Foreign currency exchange loss was minimal in the first nine months of fiscal
2002, compared with foreign currency exchange income of $0.4 million in the
comparable period of fiscal 2001. Effective October 1, 2001, the Company changed
the functional currency of its Irish subsidiary from the euro to the U.S.
dollar. The functional currency was changed because a substantial majority of
the subsidiary's transactions are now denominated in U.S. dollars. Other income
increased $0.1 million in the first nine months of fiscal 2002, compared with
the same period in fiscal 2001, due to an increase in the amount of income from
Irish government grants that was recognized by the Company's Irish subsidiary,
as well as a one-time gain from the sale of the ACM Group's interest in certain
natural gas wells.
The Company's consolidated income tax benefit of $2.2 million results in an
effective income tax benefit rate of 28.9% in the first nine months of fiscal
2002. The Company did not recognize in the first nine months of fiscal 2002 a
U.S. income tax benefit for losses incurred by certain of the Company's non-U.S.
subsidiaries, as such losses reduce the accumulated earnings of a subsidiary,
but do not currently reduce any U.S. income taxes.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001
Net sales in the third quarter of fiscal 2002 decreased 27.1% to $20.2 million,
compared with $27.7 million for the comparable period in fiscal 2001. Loss
before income tax benefit was $0.7 million in the third quarter of fiscal 2002,
compared with income before income tax provision of $2.2 million for the
comparable period in fiscal 2001. In the third quarter of fiscal 2002 the
Company incurred a net loss of $0.5 million, or $0.09 per share (diluted),
compared with net income of $1.5 million, or $0.29 per share (diluted), for the
comparable period in fiscal 2001.
TURBINE COMPONENT SERVICES AND REPAIR GROUP ("REPAIR GROUP")
The Repair Group had net sales of $9.1 million in the third quarter of fiscal
2002, down $4.5 million, or 33.1%, from $13.5 million in the comparable fiscal
2001 period. Component repair sales were down $3.1 million in the third quarter
of fiscal 2002 compared to the same period in fiscal 2001. Demand for component
repairs for virtually all models of large jet engines, especially the older
models, was down in the third quarter of fiscal 2002 compared to the same period
in fiscal 2001. The continued retirement and reduced utilization of older
generation aircraft that negatively impacted the Company in fiscal 2001 was
accelerated/exacerbated during the third quarter of fiscal 2002 as a direct
consequence of the September 11, 2001 terrorist attacks on the United States, as
many airlines chose to reduce capacity by retiring many of the older aircraft in
their fleets. In addition, the impact of the terrorist attacks on the commercial
airline industry in general has also resulted in the reduced demand for repairs
of newer model engines due to reduced commercial flight demand, which determines
the need for such repairs. Revenues associated with the demand for replacement
parts that complement repair services provided to customers were down $1.4
million in the third quarter of fiscal 2002 compared to the same period in
fiscal 2001 due principally to the reduced component repair volumes in general.
During the third quarter of fiscal 2002, the Repair Group's selling, general and
administrative expenses decreased $0.2 million to $1.5 million, or 17.0% of net
sales, from $1.7 million, or 12.5% of net sales, in the same period in fiscal
2001. Selling, general and administrative expenses for the third quarter of
fiscal 2002 reflected a $0.3 million increase in a contingency reserve related
to a vendor dispute offset by a $0.4 million reduction in the Repair Group's
provision for doubtful accounts, when compared to the same period in fiscal
2001.
Operating income (loss) in the third quarter of fiscal 2002 decreased $2.0
million to a $1.2 million loss from $0.8 million of income in the same period in
fiscal 2001. Included in the decreased operating results for the third quarter
of fiscal 2002 was a $0.3 million increase in a contingency reserve related to a
vendor dispute, offset by a $0.4 million reduction in the Repair Group's
provision for doubtful accounts when compared to the same period in fiscal 2001.
The remaining decrease in operating results during the third quarter of fiscal
2002, compared to the same period in fiscal 2001, was primarily due to the
negative impact on operating income of the significantly reduced sales volumes
for component repair services and related replacement parts.
AEROSPACE COMPONENT MANUFACTURING GROUP ("ACM GROUP")
Net sales in the third quarter of fiscal 2002 decreased 26.1% to $8.5 million,
compared with $11.5 million in the same fiscal 2001 period. Approximately $1.4
million of this decrease in net sales is attributable to a decrease in the
number of AE series new generation jet engines built by Rolls-Royce Corporation
for business and regional jets, as well as military
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transport and surveillance aircraft, as a direct consequence of the reduced
flight schedules, cancellation of aircraft orders, workforce reductions, and
declining financial performance of the airline industry as a consequence of the
September 11, 2001 terrorist attacks on the United States. As a consequence of
the overall decline in the airline industry net sales of commercial aircraft
airframe components declined approximately $0.8 million, while net sales of
large jet engine components declined approximately $0.3 million in the third
quarter of fiscal 2002, compared with the same period in fiscal 2001. Net sales
in the third quarter of fiscal 2002 were also negatively impacted by a $0.3
million reduction in selling prices to the ACM Group's largest customer,
Rolls-Royce Corporation, that was implemented during the first quarter of fiscal
2002.
Selling, general and administrative expenses in the third quarter of fiscal 2002
were $0.7 million, compared with $0.6 million in the third quarter of fiscal
2001. The primary factor impacting the ACM Group's selling, general and
administrative expenses in the third quarter of fiscal 2002 is a $0.1 million
increase in its provision for doubtful accounts.
The ACM Group's operating income in the third quarter of fiscal 2002 was $0.6
million, or 6.7% of net sales, compared with $1.3 million, or 10.9% of net
sales, in the same fiscal 2001 period. Operating income was negatively impacted
in the third quarter of fiscal 2002 by a $0.3 million reduction in selling
prices to Rolls-Royce Corporation, its largest customer, that was implemented
during the first quarter of fiscal 2002 and is expected to impact future
periods. Third quarter fiscal 2002 operating income was also negatively impacted
by a $0.1 million increase in the ACM Group's provision for doubtful accounts.
The remaining $0.3 million decrease in operating income during the third quarter
of fiscal 2002, compared with the same period in fiscal 2001, was primarily due
to the negative impact on operating income of the reduced net sales levels.
Operating income as a percentage of net sales was negatively impacted in the
third quarter of fiscal 2002 by the interplay between overall lower net sales
and fixed manufacturing costs, offset by lower material cost due to product mix
consisting of a greater percentage of products made from lower cost materials.
METAL FINISHING GROUP
Net sales in the third quarters of both fiscal 2002 and 2001 were $2.6 million.
In the third quarter of fiscal 2002, product net sales, consisting of brush
plating equipment and solutions, declined 7.5% to $1.4 million, compared with
$1.6 million in the same fiscal 2001 period. Product net sales continued the
decline that began in the first quarter of fiscal 2002 due to the overall
weakness in most of the industries served by the Metal Finishing Group,
including the aerospace, power generation, petroleum, steel, railroad, and pulp
and paper industries. Contract service net sales increased 10.7% to $1.1 million
in the third quarter of fiscal 2002, compared with $1.0 million in the third
quarter of fiscal 2001. During the third quarter of fiscal 2002, declines in
sales to commercial customers were offset by increased sales to military
customers.
Selling, general and administrative expenses were $0.7 million in the third
quarters of both fiscal 2002 and 2001. In the third quarter of fiscal 2002,
selling, general and administrative expenses benefited from lower advertising
expenditures and variable selling expense, offset by higher compensation and
employee benefit expenses.
The Metal Finishing Group's operating income in the third quarter of fiscal 2002
was $0.3 million, or 10.5% of net sales, compared with $0.4 million, or 16.5% of
net sales, in the comparable period in fiscal 2001. Operating income in the
third quarter of fiscal 2002, compared with the same period in fiscal 2001 was
negatively impacted by a shift in the mix of contract service sales toward
smaller contracts that, by their nature, are less efficient. Operating income in
the third quarter of fiscal 2002 was also negatively impacted by additional
fixed costs associated with a new service facility that opened in fiscal 2002
that has not reached full operating levels.
CORPORATE UNALLOCATED EXPENSES
Corporate unallocated expenses, consisting of corporate salaries, employee
benefits, legal and professional and other corporate expenses, were $0.4 million
in the third quarter of fiscal 2002, compared with $0.6 million in the
comparable period in fiscal 2001. In the third quarter of fiscal 2002, lower
expenses related to legal and professional expense, management incentive
expense, travel and public company expenses had a $0.2 million favorable impact
on corporate unallocated expenses. The Company does not necessarily anticipate
experiencing similar legal and professional and travel expense levels in future
periods. The decrease in management incentive expense is attributable to the
financial performance of the Company, while the decline in public company
expenses is in part the result of the reduction in the size of the Company's
Board of Directors.
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OTHER/GENERAL
Interest income was $0.04 million in the third quarter of fiscal 2002, compared
with $0.2 million in the comparable period of fiscal 2001. The reduction in
interest income is attributable to lower average cash and cash equivalent
balances outstanding and lower interest rates during the third quarter of fiscal
2002, compared with the comparable period in fiscal 2001. Interest expense in
the third quarter of fiscal 2002 was $0.2 million, compared with $0.3 million in
the third quarter of fiscal 2001. The decrease in interest expense is
attributable to overall lower borrowings outstanding under the Company's
revolving credit agreement, as well as lower interest rates.
Foreign currency exchange income was $0.1 million in the third quarter of fiscal
2002, compared with $0.4 million in the comparable period of fiscal 2001.
Effective October 1, 2001, the Company changed the functional currency of its
Irish subsidiary from the euro to the U.S. dollar. The functional currency was
changed because a substantial majority of the subsidiary's transactions are now
denominated in U.S. dollars.
The Company's consolidated income tax benefit of $0.2 million results in an
effective income tax benefit rate of 32.2% in the third quarter of fiscal 2002.
The Company did not recognize in third quarter of fiscal 2002 a U.S. income tax
benefit for losses incurred by certain of the Company's non-U.S. subsidiaries,
as such losses reduce the accumulated earnings of a subsidiary, but do not
currently reduce any U.S. income taxes.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased during the first nine months of fiscal 2002
to $7.9 million from $13.8 million at September 30, 2001. At present,
essentially all of the Company's cash and cash equivalents are in the possession
of its non-U.S. subsidiaries and relate to undistributed earnings of these
non-U.S. subsidiaries. During the first nine months of fiscal 2002, the Company
received a distribution of $2.5 million from one of its non-U.S. subsidiaries.
This distribution was utilized to repay a portion of the outstanding balance
under the Company's revolving credit agreement.
Cash flow activity for the first nine months of fiscal 2002 is presented in the
Consolidated Condensed Statement of Cash Flows. Cash was provided by a $1.9
million decrease in the ACM Group's accounts receivable due to lower sales, a
$1.9 million decrease in the Repair Group's accounts receivable due to lower
sales, as well as by a decrease of $0.2 million in the Metal Finishing Group's
accounts receivable. ACM Group inventories decreased $0.8 million in the first
nine months of fiscal 2002, while the Repair Group's inventories increased $0.2
million in the same period. The consolidated $4.9 million decrease in accounts
payable and accrued liabilities is due primarily to the recognition of a $2.2
million income tax benefit, an $0.8 million payment of fiscal 2001 income taxes,
the payment of fiscal 2001 incentives, and lower overall operating expenses and
inventory purchases due to lower net sales during the first nine months of
fiscal 2002. Working capital was $29.3 million at June 30, 2002, compared with
$36.9 million at September 30, 2001. The current ratio was 3.5 and 3.3 at June
30, 2002 and September 30, 2001, respectively.
Capital expenditures were $4.3 million in the first nine months of fiscal 2002,
compared with $2.6 million in the comparable period in fiscal 2001. The Company
anticipates making a total of $5.0 million of capital expenditures during fiscal
2002. These capital expenditures primarily consist of expenditures that will
expand and diversify the Repair Group's turbine repair capabilities, including
land-based turbine repair, provide other new equipment and upgrade existing
equipment.
The Company's long-term debt as a percentage of equity at June 30, 2002 was
25.8%, compared with 30.6% at September 30, 2001. At June 30, 2002, the Company
had $2.7 million outstanding against its $10.0 million revolving credit
agreement.
During the first nine months of fiscal 2002, the Company repurchased 29,300
shares of its Common Shares. The total number of shares repurchased under the
Company's 100,000 Common Share repurchase program, approved by the Board of
Directors, is 100,000. No dividends were declared during the first nine months
of fiscal 2002.
The Company believes that the funds available under its revolving credit
facility and anticipated funds generated from its operations will be adequate to
meet its liquidity requirements through the foreseeable future.
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C. EFFECTS OF FOREIGN CURRENCY AND INFLATION
The Company operates internationally and enters into transactions denominated in
non-U.S. dollar currencies. As a result, the Company is subject to the
variability that arises from exchange rate movements. The impact of changes in
exchange rates on the operating results of the Company was discussed previously.
The Company believes that inflation has not materially affected its results of
operations in the first nine months of fiscal 2002 and does not expect inflation
to be a significant factor for the balance of fiscal 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is subject to foreign currency
and interest rate risk. The risks primarily relate to the sale of the Company's
products in transactions denominated in non-U.S. dollar currencies (primarily
the euro); the payment, in local currency, of wages and other costs related to
the Company's non-U.S. operations; and changes in interest rates on the
Company's long-term debt obligations. The Company does not hold or issue
financial instruments for trading purposes.
FOREIGN CURRENCY RISK
The U.S. dollar is the functional currency for all of the Company's U.S.
operations. Effective October 1, 2001, the Company changed the functional
currency of its Irish subsidiary from the euro to the U.S. dollar. The
functional currency was changed because a substantial majority of the
subsidiary's transactions are now denominated in U.S. dollars. For these
operations, all gains and losses from completed currency transactions are
included in income currently. For the Company's other non-U.S. subsidiaries, the
functional currency is the local currency. Assets and liabilities are translated
into U.S. dollars at the rates of exchange at the end of the period and revenues
and expenses are translated using average rates of exchange. Foreign currency
translation adjustments are reported as a component of accumulated other
comprehensive income.
Historically, the Company has been able to mitigate the impact of foreign
currency risk by means of hedging such risk through the use of foreign currency
exchange contracts. However, such risk is mitigated only for the periods for
which the Company has foreign currency exchange contracts in effect, and only to
the extent of the U.S. dollar amounts of such contracts. At June 30, 2002, the
Company had several forward exchange contracts outstanding for durations of up
to twelve months to purchase foreign currencies aggregating U.S. $15.2 million.
A ten percent strengthening in the value of the U.S. dollar, relative to the
currencies in which the forward exchange contracts outstanding at June 30, 2002
are denominated, would result in a $1.7 million decrease in the value of the
forward exchange contracts.
INTEREST RATE RISK
The Company's primary interest rate risk exposure results from the variable
interest rate mechanisms associated with the Company's long-term debt consisting
of a term note payable to the Company's bank, revolving credit agreement and
industrial development variable rate demand revenue bonds. This interest rate
exposure is managed in part by an interest rate swap agreement to fix the
interest rate on the term note payable to the Company's bank. If interest rates
were to increase 100 basis points (1%) from June 30, 2002 rates, and assuming no
changes in the amounts outstanding under the revolving credit agreement and
industrial development variable rate demand revenue bonds, the additional annual
interest expense to the Company would be approximately $0.1 million.
The Company's sensitivity analyses of the effects of changes in interest rates
do not consider the impact of a potential change in the level of variable rate
borrowings or derivative instruments outstanding that could take place if these
hypothetical conditions prevail.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3.1 Third Amended Articles of Incorporation of SIFCO
Industries, Inc., filed as Exhibit 3(a) of the
Company's Form 10-Q dated March 31, 2002, and
incorporated herein by reference
3.2 SIFCO Industries, Inc. Amended and Restated Code of
Regulations dated January 29, 2002, filed as
Exhibit 3(b) of the Company's Form 10-Q dated March
31, 2002, and incorporated herein by reference
4.1 Amended and Restated Reimbursement Agreement dated
April 30, 2002 Between SIFCO Industries, Inc. and
National City Bank, filed as Exhibit 4(a) of the
Company's Form 10-Q dated March 31, 2002, and
incorporated herein by reference
4.2 Amended and Restated Credit Agreement Between SIFCO
Industries, Inc. and National City Bank dated April
30, 2002, filed as Exhibit 4(b) of the Company's
Form 10-Q dated March 31, 2002, and incorporated
herein by reference
4.3 Promissory Note (Term Note) dated April 14, 1998
Between SIFCO Industries, Inc. and National City
Bank, filed as Exhibit 4(c) of the Company's Form
10-Q dated March 31, 2002, and incorporated herein
by reference
4.4 Loan Agreement Between Hillsborough County
Industrial Development Authority and SIFCO
Industries, Inc., dated as of May 1, 1998, filed as
Exhibit 4(d) of the Company's Form 10-Q dated March
31, 2002, and incorporated herein by reference
10.1 1989 Key Employee Stock Option Plan, filed as
Exhibit B of the Company's Form S-8 dated January
9, 1990 and incorporated herein by reference
10.2 Deferred Compensation Program for Directors and
Executive Officers (as amended and restated April
26, 1984), filed as Exhibit 10(b) of the Company's
Form 10-Q dated March 31, 2002, and incorporated
herein by reference
10.3 SIFCO Industries, Inc. 1998 Long-term Incentive
Plan, filed as Appendix A of the Company's Schedule
14A dated December 21, 1998, and incorporated
herein by reference
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10.4 SIFCO Industries, Inc. 1995 Stock Option Plan,
filed as Exhibit 10(d) of the Company's Form 10-Q
dated March 31, 2002, and incorporated herein by
reference
99.1 Certification of Chief Financial Officer pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Executive Officer pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the Company filed one Current Report on
Form 8-K on June 27, 2002 in connection with a change in its certifying
accountant.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
SIFCO Industries, Inc.
(Registrant)
Date August 9, 2002 /s/ Jeffrey P. Gotschall
------------------------
Jeffrey P. Gotschall
Chairman and
Chief Executive Officer
Date August 9, 2002 /s/ Frank A. Cappello
-----------------------
Frank A. Cappello
Vice President-Finance
(Principal Financial Officer)
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