Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________________ to _____________________
Commission file number 1-5978
SIFCO INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0553950
- -------------------------------------------------------- --------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
970 East 64th Street, Cleveland Ohio 44103
- -------------------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(216) 881-8600
----------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and 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
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
--- ---
The number of the Registrant's Common Shares outstanding at April 30, 2003 was
5,127,733.
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 ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 18,430 $ 20,747 $ 35,854 $ 41,085
Operating expenses:
Cost of goods sold 17,048 18,410 33,983 39,481
Selling, general and administrative expenses 4,175 4,074 7,149 8,372
------------ ------------- ------------ -----------
Total operating expenses 21,223 22,484 41,132 47,853
------------ ------------- ------------ -----------
Operating loss (2,793) (1,737) (5,278) (6,768)
Interest income (13) (73) (45) (165)
Interest expense 217 203 414 429
Foreign currency exchange loss, net 40 47 227 152
Other income, net (39) (37) (64) (147)
------------ ------------- ------------ -----------
Loss before income tax provision (benefit) (2,998) (1,877) (5,810) (7,037)
Income tax provision (benefit) 16 (544) 30 (2,014)
------------ ------------- ------------ -----------
Net loss $ (3,014) $ (1,333) (5,840) (5,023)
------------ ------------- ------------ -----------
Net loss per share (basic) $ (0.57) $ (0.26) $ (1.11) $ (0.96)
Net loss per share (diluted) $ (0.57) $ (0.26) $ (1.11) $ (0.96)
Weighted-average number of common shares (basic) 5,258 5,214 5,258 5,221
Weighted-average number of common shares (diluted) 5,258 5,232 5,258 5,241
See notes to unaudited consolidated condensed financial statements.
2
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, SEPTEMBER 30,
2003 2002
------------------ -------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,590 $ 7,583
Receivables, net 14,020 14,505
Inventories 11,090 10,701
Refundable income taxes 1,423 1,423
Prepaid expenses and other current assets 1,337 1,501
------------------ -------------------
Total current assets 32,460 35,713
Property, plant and equipment, net 26,846 29,106
Other assets:
Goodwill, net 2,574 2,574
Other assets 1,117 946
------------------ -------------------
Total other assets 3,691 3,520
------------------ -------------------
Total assets $ 62,997 $ 68,339
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,440 $ 1,440
Accounts payable 4,718 4,130
Accrued liabilities 10,273 9,618
------------------ -------------------
Total current liabilities 16,431 15,188
Long-term debt, net of current maturities 11,137 11,093
Other long-term liabilities 3,693 4,323
Shareholders' equity:
Serial preferred shares, no par value, authorized 1,000 shares --- ---
Common shares, par value $1 per share, authorized 10,000 shares;
issued 5,338 and 5,358 shares at March 31, 2003 and
September 30, 2002, respectively; outstanding 5,258 shares 5,338 5,358
Additional paid-in capital 6,838 6,936
Retained earnings 27,789 33,629
Accumulated other comprehensive loss (7,264) (7,034)
Unearned compensation - restricted common shares (491) (562)
Common shares held in treasury at cost, 80 and 100 shares at
March 31, 2003 and September 30, 2002, respectively (474) (592)
------------------ -------------------
Total shareholders' equity 31,736 37,735
------------------ -------------------
Total liabilities and shareholders' equity $ 62,997 $ 68,339
------------------ -------------------
See notes to unaudited consolidated condensed financial statements.
3
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------ -------------
Cash flows from operating activities:
Net loss $ (5,840) $ (5,023)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 2,184 2,449
Loss on disposal of property, plant and equipment (2) (5)
Deferred income taxes 22 29
Asset impairment charges 1,175 4,088
Changes in operating assets and liabilities:
Receivables 484 3,457
Inventories (389) 507
Prepaid expenses and other current assets 164 87
Other assets (171) (364)
Accounts payable 589 (1,474)
Accrued liabilities 655 (2,972)
Other long-term liabilities (948) (438)
------------ -------------
Net cash provided (used) by operating activities (2,077) 341
Cash flows from investing activities:
Capital expenditures (1,106) (3,107)
Decrease in funds held by trustee for capital project --- 92
Proceeds from sale of property, plant and equipment 15 24
Other 60 (55)
------------ -------------
Net cash used for investing activities (1,031) (3,046)
Cash flows from financing activities:
Proceeds from revolving credit agreement 12,458 12,770
Repayments of revolving credit agreement (11,814) (14,983)
Repayments of long-term debt (600) (600)
Repurchase of common shares --- (143)
Share transactions under employee stock plan 71 46
------------ -------------
Net cash used for financing activities 115 (2,910)
------------ -------------
Decrease in cash and cash equivalents (2,993) (5,615)
Cash and cash equivalents at the beginning of the period 7,583 13,787
------------ -------------
Cash and cash equivalents at the end of the period $ 4,590 $ 8,172
------------ -------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ (380) $ (452)
Cash recovered from (paid for) income taxes, net 10 (764)
See notes to unaudited consolidated condensed financial statements.
4
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
The unaudited consolidated condensed financial statements included herein
include the accounts of SIFCO Industries, Inc. and its wholly owned subsidiaries
(the "Company"). 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 unaudited consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's fiscal 2002 Annual Report
on Form 10-K/A. 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.
B. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". This standard is effective for fiscal years beginning after
December 15, 2001. The Company adopted this standard on October 1, 2002, the
beginning of the first quarter of the Company's fiscal year 2003. The standard
changes financial accounting and reporting for acquired goodwill and indefinite
life intangible assets. SFAS No. 142 provides that intangible assets with finite
useful lives will continue to be amortized and goodwill and intangible assets
with indefinite lives will not be amortized, but rather will be tested for
impairment upon adoption and on an annual basis thereafter. The Company
completed the initial impairment test and concluded that goodwill was not
impaired as of October 1, 2002. Other than the cessation of goodwill
amortization, the adoption of SFAS No. 142 did not have an impact on the
Company's financial position or results of operations.
The following table presents pro forma net loss and net loss per share
information, as if SFAS No. 142 had been adopted on October 1, 2001.
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ -----------------------------
2003 2002 2003 2002
------------- -------------- ------------ --------------
Net loss as reported $ (3,014) $ (1,333) $ (5,840) $ (5,023)
Goodwill amortization --- 21 --- 50
Trademark amortization --- 2 --- 4
------------- -------------- ------------ --------------
Pro forma net loss $ (3,014) $ (1,310) $ (5,840) $ (4,969)
============= ============== ============ ==============
Basic loss per share:
Net loss as reported $ (0.57) $ (0.26) $ (1.11) $ (0.96)
Goodwill amortization --- 0.01 --- 0.01
Trademark amortization --- --- --- ---
------------- -------------- ------------ --------------
Pro forma net loss $ (0.57) $ (0.25) $ (1.11) $ (0.95)
============= ============== ============ ==============
Diluted loss per share:
Net loss as reported $ (0.57) $ (0.26) $ (1.11) $ (0.96)
Goodwill amortization --- 0.01 --- 0.01
Trademark amortization --- --- --- ---
------------- -------------- ------------ --------------
Pro forma net loss $ (0.57) $ (0.25) $ (1.11) $ (0.95)
============= ============== ============ ==============
5
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This standard addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement cost. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. This standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period incurred. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002 and was adopted by the Company
effective October 1, 2002. The adoption of this standard did not have a material
impact on the Company's financial position or results of operations.
In September 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement superceded SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of" and the
accounting and reporting provisions of Accounting Principals Board Opinion No.
30, "Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", related to the disposal of a segment of a business.
This statement amends certain provisions of Accounting Research bulletin No. 51,
"Consolidated Financial Statements". SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001 and was adopted by the Company effective
October 1, 2002. The adoption of this standard did not have a material impact on
the Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This standard addresses financial and
accounting and reporting for costs associated with exit or disposal activities
and replaces Emerging Issues Task Force No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF No. 94-3"). SFAS
No. 146 requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF No. 94-3, a
liability for exit costs is recognized at the date of an entity's commitment to
an exit plan. Beginning January 1, 2003, the Company recognizes liabilities
associated with exit or disposal activities as they are incurred in accordance
with SFAS No. 146.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an Amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
compensation. It also requires prominent disclosure in the significant
accounting policy note of both annual and interim financial statements of the
method of accounting for stock-based compensation and the related pro forma
disclosures when the intrinsic value method continues to be used. The statement
is effective for fiscal years beginning after December 15, 2002, and disclosure
provisions are effective for the first fiscal quarters beginning after December
15, 2002. Early application of the disclosure provisions is encouraged. The
Company adopted the disclosure provisions of SFAS 148 in the quarter ended
December 31, 2002. The adoption of this standard did not have a material impact
on the Company's financial position and results of operations.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003. The Company has not yet determined the impact, if
any, of adopting this standard.
6
C. STOCK-BASED COMPENSATION
The Company employs the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). The following pro forma information regarding net income and earnings
per share was determined as if the Company had accounted for its stock options
under the fair value method prescribed by SFAS No. 123. For purposes of pro
forma disclosure, the estimated fair value of the stock options is amortized
over the options' vesting period. The pro forma information is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- --------------------------
2003 2002 2003 2002
------------- ------------ ----------- -----------
Net loss as reported $ (3,014) $ (1,333) $ (5,840) $ (5,023)
Add: Stock-based compensation expense
included in reported net loss, net of
related tax effects --- --- --- ---
Less: Stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects 34 25 69 50
------------- ------------ ----------- -----------
Pro forma net loss as if the fair value based
method had been applied to all awards $ (3,048) $ (1,358) (5,909) $ (5,073)
============= ============ =========== ===========
Net loss per share:
Basic - as reported $ (0.57) $ (0.26) $ (1.11) $ (0.96)
Basic - pro forma $ (0.58) $ (0.26) $ (1.12) $ (0.97)
Diluted - as reported $ (0.57) $ (0.26) $ (1.11) $ (0.96)
Diluted - pro forma $ (0.58) $ (0.26) $ (1.12) $ (0.97)
2. INVENTORIES
Inventories consist of:
MARCH 31, SEPTEMBER 30,
2003 2002
--------------- ----------------
Raw materials and supplies $ 3,279 $ 3,411
Work-in-process 3,745 3,525
Finished goods 4,066 3,765
--------------- ----------------
Total inventories $ 11,090 $ 10,701
=============== ================
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out ("LIFO") method for 36% and 35% of the Company's
inventories, at March 31, 2003 and September 30, 2002, respectively. The
first-in, first-out ("FIFO") method is used for the majority of the remainder of
the inventories. If the FIFO method had been used for the inventories for which
cost is determined using the LIFO method, inventories would have been $3,141 and
$3,114 higher than reported at March 31, 2003 and September 30, 2002,
respectively.
3. LONG-TERM DEBT
In February 2003, the Company entered into an agreement with its lending bank to
amend certain provisions of its credit agreements. The amendment waives the
interest coverage ratio covenant through the period ended December 31, 2003. The
amendment modifies certain other financial covenants and the corresponding
interest rate. As a consequence, the term note's three-month LIBOR based
effective borrowing rate increased to 9.49%, the revolving credit agreement's
borrowing rate increased to the bank's base rate plus 0.5% and the commitment
fee on the standby letter of credit backing up the industrial development bond
increased to 2.75% effective February 13, 2003. Also, the revolving credit
agreement was reduced to $6.0 million, subject to sufficiency of collateral.
7
In May 2003, the Company entered into an agreement with its lending bank to
amend certain provisions of its credit agreements. The amendment waives the
interest coverage ratio covenant through the period ended December 31, 2004 and
extends the maturity date of the Company's $6.0 million revolving credit
agreement to June 30, 2004. This amendment also provides for the reduction of
borrowing availability subject to the passage of time or the occurrence of a
certain event.
4. COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Total comprehensive loss is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- ----------------------------
2003 2002 2003 2002
-=========== =========== ============ ============
Net loss $ (3,014) $ (1,333) $ (5,840) $ (5,023)
Foreign currency translation adjustment 3 (20) 67 (54)
Unrealized loss on interest rate swap agreement,
net of income tax provision of $12 and $22 in
2003 and $29 and $50 in 2002, respectively
24 58 43 98
Currency exchange contract adjustment (500) (8) (340) (423)
Minimum pension liability adjustment --- --- --- (74)
------------ ----------- ------------ ------------
Total comprehensive loss $ (3,487) $ (1,303) $ (6,070) $ (5,476)
-=========== =========== ============ ============
The components of accumulated other comprehensive loss are as follows:
MARCH 31, SEPTEMBER 30,
2003 2002
------------ --------------
Foreign currency translation adjustment $ (6,940) $ (7,007)
Interest rate swap agreement adjustment (515) (558)
Currency exchange contract adjustment 695 1,035
Minimum pension liability adjustment (504) (504)
------------ --------------
Total accumulated other comprehensive loss $ (7,264) $ (7,034)
------------ --------------
5. 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) and heavy industrial turbine engine components. The Repair
Group is also involved in precision component 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. The
Metal Finishing Group is a provider of specialized selective electrochemical
metal finishing processes and services used to apply metal coatings to a
selective area of a component. The Company's reportable segments are separately
managed.
8
Segment information is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ------------------------------
2003 2002 2003 2002
============ =========== ============ =============
Net sales:
Turbine Component Services and Repair Group $ 9,511 $ 9,539 17,960 19,151
Aerospace Component Manufacturing Group 6,174 8,704 13,179 16,840
Metal Finishing Group 2,745 2,504 4,715 5,094
------------ ----------- ------------ -------------
Consolidated net sales $ 18,430 $ 20,747 35,854 41,085
============ =========== ============ =============
Operating loss:
Turbine Component Services and Repair Group $ (2,497) $ (883) (4,358) (6,167)
Aerospace Component Manufacturing Group (288) (691) (389) (398)
Metal Finishing Group 417 307 285 672
Corporate unallocated expenses (425) (470) (816) (875)
------------ ----------- ------------ -------------
Consolidated operating loss (2,793) (1,737) (5,278) (6,768)
Interest expense, net 204 130 369 264
Foreign currency exchange loss, net 40 47 227 152
Other income, net (39) (37) (64) (147)
------------ ----------- ------------ -------------
Consolidated loss before income tax
provision (benefit) $ (2,998) $ (1,877) (5,810) (7,037)
============ =========== ============ =============
All of the Company's net goodwill of $2,574 at March 31, 2003 and September 30,
2002 is attributable to the Company's Metal Finishing Group.
6. RETIREMENT BENEFIT PLAN
The Company and certain of its subsidiaries sponsor defined benefit pension
plans covering most of its employees. In January 2003, the Company's Board of
Directors adopted a resolution effective February 28, 2003, to cease the accrual
of future benefits under the SIFCO Industries, Inc. Salaried Retirement Plan
("Plan"), which covers substantially all non-union employees of the Company's
U.S. operations. The Plan will otherwise continue. Because the unrecognized
actuarial losses exceeded the curtailment gain, there was no income or expense
recognized during the first six months ended March 31, 2003 related to these
changes.
7. ASSET IMPAIRMENT AND OTHER CHARGES
During fiscal 2002, the Company's Repair Group incurred charges related to
severance and other employee benefits to be paid to approximately 76 personnel
associated with the reduction of certain of its capacity for the repairing of
jet engine turbine components. As of September 30, 2002, the Company had a
severance accrual of $752. During the first six months of fiscal 2003, severance
and other employee benefit payments totaling approximately $543 were made in
connection with this reduction.
During the second quarter of fiscal 2003, as a result of the current downturn in
the commercial aviation industry and the resulting reduction in demand for third
party jet engine turbine component repair services, such as those provided by
the Company, the Repair Group decided to cease operations at one of its
component repair facilities and to optimize its remaining component repair
capacity through consolidation of operations. The Company anticipates completing
these actions by September 2003. As a result of this decision, the Repair Group
anticipates incurring $657 of severance and other employee benefit charges to be
paid to 60 personnel, of which the Repair Group incurred $171 during the second
quarter of fiscal 2003, and which is recorded in selling, general and
administrative expenses in the Consolidated Condensed Statements of Operations.
As of March 31, 2003, no payments have been made for these expenses and none of
the personnel have been terminated. In connection with these decisions, asset
impairment charges totaling $1,175 related to machinery and equipment were
recorded in selling, general and administrative expenses in the Consolidated
Condensed Statements of Operations during the second quarter of fiscal 2003. The
machinery and equipment write-downs relate to items that are expected to be
disposed as a consequence of the Repair Group's decision to cease operations at
one facility and to consolidate other operations. Fair value of these assets was
determined based on estimated cash flows.
9
The following table summarizes the remaining liabilities for qualified exit
costs at March 31, 2003 and activity for the six month period then ended:
BALANCE AT TOTAL 2003 2003 BALANCE AT
SEPTEMBER 30, 2003 CASH NON-CASH MARCH 31,
2002 CHARGES PAYMENTS CHARGES 2003
------------ ----------- ----------- ------------ ------------
Severance and other employee benefits $ 752 $ 171 $ 543 $ --- $ 380
Asset impairments --- 1,175 --- 1,175 ---
------------ ----------- ----------- ------------ ------------
Total $ 752 $ 1,346 $ 543 $ 1,175 $ 380
------------ ----------- ----------- ------------ ------------
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 certain repair materials and new repair process licenses from jet
engine manufacturers and/or the Federal Aviation Administration; (4) fluctuating
foreign currency (primarily Euro) exchange rates; (5) successful development and
market introductions of new products, including an advanced coating technology
and the continued development of heavy industrial turbine repair processes; (6)
regressive pricing pressures on the Company's products and services, with
productivity improvements as the primary means to maintain margins; (7) success
with the further development of strategic alliances with certain turbine 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
overhaul companies and other aerospace related industries; reduced number of
aircraft in service; and the 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 business and regional aircraft
markets; (10) continued reliance on several major customers for revenues; (11)
the Company's ability to continue to have access to its revolving credit
facility, including the Company's ability to (i) continue to comply with the
terms of its credit agreements, including financial covenants, (ii) continue to
enter into amendments to its credit agreement containing financial covenants,
which it and its bank lender find mutually acceptable, or (iii) continue to
obtain waivers from its bank lender with respect to its compliance with the
covenants contained in its credit agreement; (12) the difficulty in predicting
the timing and outcome of legal proceedings; and (13) stable governments,
business conditions, laws, regulations and taxes 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 selective
electrochemical metal finishing. The products include forgings, machined forged
parts and other machined metal parts, remanufactured component parts for turbine
engines, and selective electrochemical metal finishing solutions and equipment.
A. RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2003 COMPARED WITH SIX MONTHS ENDED MARCH 31, 2002
Net sales in the first six months of fiscal 2003 decreased 12.7% to $35.9
million, compared with $41.1 million for the comparable period in fiscal 2002.
Loss before income tax provision in the first six months of fiscal 2003 was $5.8
million, compared with loss before income tax benefit of $7.0 million for the
comparable period in fiscal 2002. For the first six months of fiscal 2003 the
Company incurred a net loss of $5.8 million, or $1.11 per share (diluted),
compared with a net loss of $5.0 million, or $0.96 per share (diluted) for the
comparable period in fiscal 2002.
10
TURBINE COMPONENT SERVICES AND REPAIR GROUP ("REPAIR GROUP")
The Repair Group had net sales of $18.0 million in the first six months of
fiscal 2003, down $1.2 million, or 6.2%, from $19.2 million in the comparable
fiscal 2002 period. Component manufacturing and repair sales were down $1.6
million in the first six months of fiscal 2003, compared with the same period in
fiscal 2002. Demand for precision component machining and for component repairs
for large jet engines was down in the first six months of fiscal 2003, compared
with the same period in fiscal 2002, which reflects a reduction in component
repairs for older model large jet engines partially offset by increased demand
for component repairs for newer model large jet engines. The reduced utilization
of older generation aircraft that negatively impacted the Company in fiscal 2002
continued during the first six months of fiscal 2003. Despite the increase in
component repairs for newer model large jet engines, the commercial airline
industry in general continues to experience reduced commercial flight demand,
which determines the need for component repairs to newer model jet engines.
Higher demand for component repairs for small jet engines and heavy industrial
turbine engines partially offset the decline in demand for component repairs for
large jet engines. Revenues associated with the demand for replacement parts,
which often complement component repair services provided to customers, were up
$0.4 million in the first six months of fiscal 2003, compared with the same
period in fiscal 2002.
During the first six months of fiscal 2003, the Repair Group's selling, general
and administrative expenses decreased $0.3 million to $3.7 million, or 20.5% of
net sales, from $4.0 million, or 21.0% of net sales, in the same period in
fiscal 2002. Included in the $4.0 million of selling, general and administrative
expenses for the first six months of fiscal 2002 were $1.4 million of charges
related to goodwill and the impairment of equipment, and $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.
Included in the $3.7 million of selling, general and administrative expenses for
the first six months of fiscal 2003 were $1.2 million of charges related to
impairment of equipment and $0.2 million of severance charges related to the
further consolidation of the Repair Group's operation during fiscal 2003. The
remaining selling, general and administrative expenses of $2.3 million, or 13.0%
of net sales, for the first six months of fiscal 2003 were $0.2 million less
than the remaining $2.5 million, or 12.9% of net sales, of such expenses in the
same period in fiscal 2002.
The Repair Group's operating loss in the first six months of fiscal 2003
decreased $1.8 million to $4.4 million from a $6.2 million loss in the same
period in fiscal 2002. Included in the operating loss for the first six months
of fiscal 2002 were charges aggregating $4.1 million related to inventory
write-downs ($2.7 million), the impairment of goodwill ($0.7 million) the
impairment of equipment ($0.7 million), and the $0.2 million of severance
charges. During the first quarter of fiscal 2002, the Repair Group performed an
evaluation of its existing operations in light of the anticipated impacts on its
business of the September 11, 2001 terrorist attacks. The principal result of
this evaluation process was the decision to optimize the Repair Group's multiple
operations by reducing certain of its capacity for the repairing of components
related to older generation jet engines, principally the JT8D. As a result of
this decision, the Repair Group recognized, during the first six months of
fiscal 2002, the aforementioned charges. Included in the operating loss for the
first six months of fiscal 2003 were charges aggregating $1.2 million related to
the impairment of equipment and $0.2 million of severance charges. The Repair
Group's $3.0 million operating loss, before the $1.4 million of aforementioned
impairment and severance charges, during the first six months of fiscal 2003 is
an increase of $1.1 million, when compared to the $1.9 million operating loss,
before the $4.3 million of aforementioned impairment and severance charges,
during the first six months of fiscal 2002. The increased operating loss was
primarily due to the negative impact on margins of the reduced sales volumes for
component manufacturing and repair services, which was partially offset by
improved margins on increased volumes of replacement parts.
During the first six months of fiscal 2003, the euro had strengthened against
the U.S. dollar when compared to the same period in fiscal 2002. The Repair
Group's non-U.S. operations have a significant portion of its operating costs
denominated in euros and, therefore, as the euro strengthens, such costs are
negatively impacted. During the first six months of fiscal 2003, the Repair
Group was able to hedge much of its exposure to the strengthening euro thereby
mitigating the negative impact on its operating results. Such exposure is
currently hedged through the end of the third quarter of fiscal 2003. Had the
Repair Group not hedged such exposure, its operating loss would have been
greater by approximately $1.0 million during the first six months of fiscal
2003.
In an effort to curtail the Repair Group's operating losses, which stem
primarily from its current excess capacity for component repairs, the Company
announced in March of 2003 its plans to cease operations at its Tampa, Florida
component repair facility and to continue to optimize its remaining component
repair capacity through consolidation of operations and other productivity
improvement efforts.
11
AEROSPACE COMPONENT MANUFACTURING GROUP ("ACM GROUP")
Net sales in the first six months of fiscal 2003 decreased 21.7% to $13.2
million, compared with $16.8 million in the same fiscal 2002 period.
Approximately $1.5 million of this decrease in net sales is attributable to a
decline in the net sales of commercial aircraft airframe components, as a direct
consequence of reduced flight schedules, cancellation of aircraft orders,
workforce reductions, and continued declining financial performance of the
airline industry. Net sales of military airframe and engine components in the
first six months of fiscal 2003 declined $1.8 million, compared with the same
period of fiscal 2002. Net sales of components for large commercial jet engines
declined $0.3 million in the first six months of fiscal 2003, compared with the
same period in fiscal 2002. Net sales of engine components for small jet
engines, consisting primarily of the AE series latest generation jet engines
built by Rolls-Royce Corporation for business and regional jets, as well as
military transport and surveillance aircraft, increased $0.3 million in the
first six months of fiscal 2003, compared with the same period in fiscal 2002.
Net sales of non-aerospace related products declined $0.3 million in the first
six months of fiscal 2003, compared with the same period in fiscal 2002.
Selling, general, and administrative expenses in the first six months of fiscal
2003 were $1.1 million, or 8.4% of net sales, compared with $2.0 million, or
11.9% of net sales, in the comparable period in fiscal 2002. The primary factor
impacting the ACM Group's selling, general and administrative expenses in the
first six months of fiscal 2002 was 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 in the first six months of fiscal 2002 before this legal contingency
accrual were $1.1 million. Selling, general and administrative expenses were
favorably impacted in the first six months of fiscal 2003 by a reduction in the
ACM Group's variable selling expense due to product mix.
The ACM Group's operating loss was $0.4 million in both the first six months of
fiscal 2003 and 2002. Operating results in the first six months of fiscal 2002
were negatively impacted by the $0.9 million legal contingency accrual discussed
above. The interplay between overall lower net sales in relation to fixed
manufacturing, selling, general and administrative expenses resulted in a $1.1
million negative impact on operating results in the first six months of fiscal
2003. Operating results were favorably impacted in the first six months of
fiscal 2003 by a $0.3 million decrease in variable tooling expense and by a $0.1
million decrease in variable selling expense due to product mix.
The ACM Group's backlog as of March 31, 2003, was $24.4 million, compared with
$24.9 million as of September 30, 2002. At March 31, 2003, $21.5 million of the
total backlog is scheduled for delivery over the next twelve months and $0.1
million is on hold. All orders are subject to modification or cancellation by
the customer with limited charges. The ACM Group believes that the backlog may
not be indicative of actual sales for any succeeding period.
METAL FINISHING GROUP
Net sales in the first six months of fiscal 2003 decreased 7.4% to $4.7 million,
compared with $5.1 million in the comparable fiscal 2002 period. In the first
six months of fiscal 2003, product net sales, consisting of selective
electrochemical metal finishing equipment and solutions, declined 4.7% to $2.7
million, compared with $2.8 million in the comparable period in fiscal 2002.
Declines in net sales in the first six months of fiscal 2003 of selective
electrochemical finishing equipment and solutions to aerospace and medical
customers were partially offset by increased net sales to military customers. In
the first six months of fiscal 2003, contract service net sales decreased 12.5%
to $1.9 million, compared with $2.2 million in the comparable period in fiscal
2002. Contract service net sales benefited in the first six months of fiscal
2002 from several large one-time contracts. Contract service net sales in the
first six months of fiscal 2003 were negatively impacted by declines in net
sales to customers in the power generation and petroleum industries, offset in
part by increases in net sales to a customer in the automotive industry.
Selling, general and administrative expenses were $1.5 million in both the first
six months of fiscal 2003 and 2002, or 32.8% and 29.0% of net sales,
respectively. In the first six months of fiscal 2003, selling, general and
administrative expenses were negatively impacted by higher employee compensation
and marketing related expenses, offset in part by lower employee incentive
expense.
The Metal Finishing operating income in the first six months of fiscal 2003 was
$0.3 million, compared with operating income of $0.7 million in the comparable
period of fiscal 2002. Operating income in the first six months of fiscal 2003
was negatively impacted by a $0.1 million increase in employee compensation,
compared with the comparable period of fiscal 2002. This was offset by a
decrease in employee incentive expense of $0.2 million in the first six months
of fiscal 2003, compared with the comparable period of fiscal 2002. The
remaining $0.5 million decrease in operating income in the first six months of
fiscal 2003, compared with the same period in fiscal 2002, is attributable
primarily to the negative impact on
12
operating income of the interplay between overall lower net sales volume in
relation to fixed manufacturing, selling, general and administrative expenses.
CORPORATE UNALLOCATED EXPENSES
Corporate unallocated expenses, consisting of corporate salaries and benefits,
legal and professional and other corporate expenses, were $0.8 million in the
first six months of fiscal 2003, compared with $0.9 million in the comparable
period in fiscal 2002. In the first six months of fiscal 2003, corporate
unallocated expenses benefited from lower consulting and legal and professional
expense.
OTHER/GENERAL
Interest income was $0.05 million in the first six months of fiscal 2003,
compared with $0.2 million in the comparable period in fiscal 2002. The
reduction in interest income is attributable to lower average cash and cash
equivalent balances outstanding and to lower interest rates available from
short-term investments during the first six months of fiscal 2003, compared with
the comparable period in fiscal 2002. Interest expense was $0.4 million in both
the first six months of fiscal 2003 and 2002. The decline in the weighted
average term note outstanding balance in the first six months of fiscal 2003,
compared with the comparable period in fiscal 2002, was offset by an increase in
the weighted average interest rates payable under the term note. The decrease in
interest rates payable under the Company's revolving credit agreement was offset
by the increase in the weighted average outstanding balance during the first six
months of fiscal 2003, compared with the comparable period in fiscal 2002.
Foreign currency exchange loss was $0.2 million in the first six months of
fiscal 2003 and fiscal 2002. The effect of foreign currency exchange rate
fluctuations on the Company's unamortized portion of deferred grant revenue
included in accrued liabilities, which is payable in a foreign currency,
accounts for a substantial portion of the foreign currency exchange loss in the
first six months of fiscal 2003.
In the first six months of fiscal 2003, the income tax benefit related to the
Company's U.S. and non-U.S. losses was offset by a valuation allowance based
upon an assessment of the Company's ability to realize such benefits. In
assessing the Company's ability to realize its net deferred tax assets,
management considered whether it is more likely than not that some portion or
all of its net deferred tax assets may not be realized. Management considered
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Future reversal of
the valuation allowance will be achieved either when the tax benefit is realized
or when it has been determined that it is more likely than not that the benefit
will be realized through future taxable income.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 2002
Net sales in the second quarter of fiscal 2003 decreased 11.2% to $18.4 million,
compared with $20.7 million in the comparable period in fiscal 2002. Loss before
income tax provision was $3.0 million in the second quarter of fiscal 2003,
compared with a loss before income tax benefit of $1.9 million in the comparable
period in fiscal 2002. In the second quarter of fiscal 2003, the Company
incurred a net loss of $3.0 million, or $0.57 per share (diluted), compared with
a net loss of $1.3 million, or $0.26 per share (diluted) in the comparable
period in fiscal 2002.
TURBINE COMPONENT SERVICES AND REPAIR GROUP ("REPAIR GROUP")
The Repair Group had net sales of $9.5 million in the second quarter of both
fiscal 2003 and 2002. Component manufacturing and repair sales were down $0.4
million in the second quarter of fiscal 2003 compared with the same period in
fiscal 2002. Demand for precision component machining was down in the second
quarter of fiscal 2003 compared with the same period in fiscal 2002. Demand for
component repairs for large jet engines was up slightly in the second quarter of
fiscal 2003 compared with the same period in fiscal 2002, which reflects an
increase in component repairs for newer model jet engines partially offset by a
reduced demand for component repairs for the older model jet engines. Despite
this modest increase in component repair sales for large jet engines, there
continues to be a reduced utilization of older generation aircraft that
negatively impacted the Company in fiscal 2002. In addition, the commercial
airline industry in general continues to experience reduced commercial flight
demand, which determines the need for component repairs for newer model jet
engines. Demand for component repairs to small jet engines and heavy industrial
turbine engines was comparable in the second quarter of fiscal 2003 compared to
the same period in fiscal 2002. Revenues associated with the demand for
replacement parts, which often complement repair services provided to customers,
were up $0.3 million in the second quarter of fiscal 2003 compared with the same
period in fiscal 2002.
13
During the second quarter of fiscal 2003, the Repair Group's selling, general
and administrative expenses increased $1.1 million to $2.5 million, or 26.3% of
net sales, from $1.4 million, or 15.0% of net sales, in the same period in
fiscal 2002. In the second quarter of fiscal 2003, the Company incurred charges
aggregating $1.2 million related to the impairment of equipment, and $0.2
million of severance charges related to the further consolidation of the Repair
Group's operations during fiscal 2003. In the second quarter of fiscal 2002, the
Company incurred $0.1 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. The remaining selling, general and administrative
expenses of $1.2 million, or 12.1% of net sales, for the second quarter of
fiscal 2003 were $0.1 million less than the remaining $1.3 million, or 13.6% of
net sales, of such expenses in the same period in fiscal 2002.
The Repair Group's operating loss in the second quarter of fiscal 2003 increased
$1.6 million to a $2.5 million loss from a $0.9 million loss in the same period
in fiscal 2002. Included in operating loss for the second quarter of fiscal 2003
were the charges aggregating $1.2 million related to the impairment of
equipment, and $0.2 million of severance charges, compared with $0.1 million of
severance charges in the comparable period of fiscal 2002. The Repair Group's
operating loss before the aforementioned severance and impairment charges was
$1.1 million in the second quarter of fiscal 2003, compared with $0.7 million in
the comparable period of fiscal 2002. The increase in operating loss during the
second quarter of fiscal 2003 compared to the same period in fiscal 2002 was
primarily due to the negative impact on margins of the reduced sales volumes for
component manufacturing and repair services, which was partially offset by
improved margins on increased volumes of replacement parts.
During the second quarter of fiscal 2003, the euro had strengthened against the
U.S. dollar when compared to the same period in fiscal 2002. The Repair Group's
non-U.S. operations have a significant portion of its operating costs
denominated in euros and, therefore, as the euro strengthens, such costs are
negatively impacted. During the second quarter of fiscal 2003, the Repair Group
was able to hedge much of its exposure to the strengthening euro thereby
mitigating the negative impact on its operating results. Such exposure is
currently hedged through the end of the third quarter of fiscal 2003. Had the
Repair Group not hedged such exposure, its operating loss would have been
greater by approximately $0.4 million during the second quarter of fiscal 2003.
In an effort to curtail the Repair Group's operating losses, which stem
primarily from its current excess capacity for component repairs, the Company
announced in March of 2003 its plans to cease operations at its Tampa, Florida
component repair facility and to continue to optimize its remaining component
repair capacity through consolidation of operations and other productivity
improvement efforts.
AEROSPACE COMPONENT MANUFACTURING GROUP ("ACM GROUP")
Net sales in the second quarter of fiscal 2003 decreased 29.1% to $6.2 million,
compared with $8.7 million in the same fiscal 2002 period. Approximately $1.6
million of this decrease in net sales is attributable to a decline in the net
sales of military airframe and engine components due to the timing of military
related procurement. Net sales of commercial aircraft airframe components
declined $0.6 million as a direct consequence of reduced flight schedules,
cancellation of aircraft orders, workforce reductions, and continued declining
financial performance of the airline industry. Net sales of engine components
for small jet engines, consisting primarily of the AE series latest generation
jet engines built by Rolls Royce Corporation for business and regional jets, as
well as military transport and surveillance aircraft, increased $0.1 million in
the second quarter of fiscal 2003, compared with the same period in fiscal 2002.
Net sales of non-aerospace related products decreased $0.2 million in the second
quarter of fiscal 2003, compared with the same period in fiscal 2002.
Selling, general and administrative expenses were $0.5 million in the second
quarter of fiscal 2003, compared with $1.4 million in the comparable period in
fiscal 2002. The primary factor impacting the ACM Group's selling, general and
administrative expenses in the second quarter of fiscal 2002 was 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 failure to provide coverage. Selling,
general and administrative expenses in the second quarter of fiscal 2002 before
this legal contingency accrual were $0.6 million. Selling, general and
administrative expenses were favorably impacted in the second quarter of fiscal
2003 by a decrease in the ACM Group's bad debt expense, compared with the
comparable period in fiscal 2002.
The ACM Group's operating loss in the second quarter of fiscal 2003 was $0.3
million, compared with an operating loss of $0.7 million in the same period in
fiscal 2002. Operating results in the second quarter of fiscal 2002 were
negatively impacted by the $0.9 million legal contingency accrual discussed
above. The interplay between overall lower net sales in relation to fixed
manufacturing, selling, general and administrative expenses resulted in a $0.8
million negative impact on operating results in the second quarter of fiscal
2003. Operating results were favorably impacted in the second quarter of
14
fiscal 2003 by $0.1 million due to lower material cost as a result of product
mix consisting of a greater percentage of products made from lower cost
materials than in the comparable period in fiscal 2002. Operating results were
also favorably impacted in the second quarter of fiscal 2003 by a $0.2 decrease
in variable tooling expense and by a $0.1 decrease in bad debt expense.
METAL FINISHING GROUP
Net sales in the second quarter of fiscal 2003 increased 9.6% to $2.7 million,
compared with $2.5 million in the comparable fiscal 2002 period. In the second
quarter of fiscal 2003, product net sales, consisting of selective
electrochemical metal finishing equipment and solutions, increased 9.2% to $1.6
million, compared with $1.4 million in the comparable period in fiscal 2002.
Product net sales were impacted favorably in the second quarter of fiscal 2003
by net sales to customers in the military and medical markets. In the second
quarter of fiscal 2003, contract service net sales increased 8.4% to $1.1
million, compared with $1.0 million in the comparable fiscal 2002 period.
Contract services net sales benefited in the second quarter of fiscal 2003 from
net sales to customers in the automotive and military markets, offset in part by
continued weakness in many of the other industries served by the Metal Finishing
Group, including the power generation and petroleum industries.
Selling, general and administrative expenses were $0.8 million, or 28.3% of net
sales, in the second quarter of fiscal 2003, compared with $0.7 million, or
29.5% of net sales, in the comparable period of fiscal 2002. In the second
quarter of fiscal 2003, selling, general and administrative expenses were
negatively impacted primarily by higher compensation and marketing related
expenses, offset in part by lower employee incentive expenses.
The Metal Finishing Group's operating income in the second quarter of fiscal
2003 was $0.4 million, compared with operating income of $0.3 million in the
comparable period of fiscal 2002. This is attributable primarily to a decrease
in employee incentive expense of $0.1 million in the second quarter of fiscal
2003, compared with the comparable period of fiscal 2002.
CORPORATE UNALLOCATED EXPENSES
Corporate unallocated expenses, consisting of corporate salaries and benefits,
legal and professional and other corporate expenses, were $0.4 million in the
second quarter of fiscal 2003, compared with $0.5 million in the comparable
period of fiscal 2002. In the second quarter of fiscal 2003, corporate
unallocated expenses benefited from lower consulting and public company
expenses.
OTHER GENERAL
Interest income was $0.01 million in the second quarter of fiscal 2003, compared
with $0.07 million in the comparable period of fiscal 2002. The reduction in
interest income is attributable to lower average cash and cash equivalent
balances outstanding and to lower interest rates available from short-term
investments during the second quarter of fiscal 2003, compared with the
comparable period in fiscal 2002. Interest expense was $0.2 million in both the
second quarter of fiscal 2003 and 2002. The overall decrease in the weighted
average outstanding balances under the Company's indebtedness was offset by an
increase the weighted average interest rate payable under the term note during
the second quarter of fiscal 2003, compared with the comparable period in fiscal
2002.
In the second quarter of fiscal 2003, the income tax benefit related to the
Company's U.S. and non-U.S. losses was offset by a valuation allowance based
upon an assessment of the Company's ability to realize such benefits. In
assessing the Company's ability to realize its net deferred tax assets,
management considered whether it is more likely than not that some portion or
all of its net deferred tax assets may not be realized. Management considered
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Future reversal of
the valuation allowance will be achieved either when the tax benefit is realized
or when it has been determined that it is more likely than not that the benefit
will be realized through future taxable income.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $4.6 million at March 31, 2003 from $7.6
million at September 30, 2002. 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. During the first six months of fiscal 2003,
the Company received a distribution of $1.5 million from its non-U.S.
subsidiaries. This distribution was utilized to repay a portion of the
outstanding balance under the Company's revolving credit agreement. Effective
October 1, 2000, the Company began to provide U.S. income taxes on the
undistributed earnings of its non-U.S. subsidiaries, in anticipation that
distributions from such earnings, to the extent they
15
may occur in the future, would result in an additional income tax liability.
Distributions from the Company's non-U.S. subsidiaries to the Company may be
subject to statutory restrictions, adverse tax consequences or other
limitations.
Cash flow activity for the first six months of fiscal 2003 is presented in the
Consolidated Condensed Statement of Cash Flows. During the first six months of
fiscal 2003, cash was provided by a $1.0 million decrease in the ACM Group's
accounts receivable due to lower sales. This was offset in part by a $0.4
million and $0.1 million increase in the Repair Group's and Metal Finishing
Group's accounts receivables, respectively. Both ACM Group and Repair Group
inventories increased $0.2 million in the first six months of fiscal 2003. The
$1.2 million net increase in consolidated accounts payable and accrued
liabilities is attributable to (i) a $0.5 million increase in the ACM Group's
accounts payable and accrued liabilities due primarily to the impact of extended
payment terms from vendors and the timing of related increases in compensation
and property tax accruals; (ii) a $0.9 million increase in the Repair Group's
accounts payable and accrued liabilities attributable primarily to the effect of
foreign currency exchange rate fluctuations on the company's unamortized current
portion of deferred grant revenues, which are payable in a foreign currency, and
an increase in purchases of inventory to support the sale ofreplacement parts;
and (iii) a $0.2 million decrease in Corporate accrued liabilities attributable
to the payment of legal and professional fees. Working capital was $16.0 million
at March 31, 2003, compared with $20.5 million at September 30, 2002. The
current ratio was 2.0 and 2.4 at March 31, 2003 and September 30, 2002,
respectively.
Capital expenditures were $1.1 million in the first six months of fiscal 2003,
compared with $3.1 million in the comparable period in fiscal 2002. Capital
expenditures in the first six months of fiscal 2003 consisted primarily of
equipment to expand and diversify the Repair Group's repair capabilities,
including heavy industrial turbine engine component repair. The Company
anticipates that total fiscal 2003 capital expenditures will not exceed $2.3
million and will be concentrated in the Repair Group. At March 31, 2003, the
Company had outstanding commitments for capital expenditures totaling $0.7
million.
The Company and certain of its subsidiaries sponsor defined benefit pension
plans covering most of its employees. In January 2003, the Company's Board of
Directors adopted a resolution effective February 28, 2003, to cease the accrual
of future benefits under the SIFCO Industries, Inc. Salaried Retirement Plan
("Plan"), which covers substantially all non-union employees of the Company's
U.S. operations. The Plan will otherwise continue. Because the unrecognized
actuarial losses exceeded the curtailment gain, there was no income or expense
recognized during the six months ended March 31, 2003 related to these changes.
In conjunction with the changes to the Plan, the Company made certain
enhancements to its defined contribution plan that is available to substantially
all non-union U.S. employees of the Company and its U.S. subsidiaries.
At March 31, 2003, the Company has a 15-year industrial development bond, which
was issued with an original face amount of $4.1 million and was used to expand
the Repair Group's Tampa, Florida facility. The interest rate is reset weekly,
based on prevailing tax-exempt money market rates. The interest rate at March
31, 2003 was 1.29%. The outstanding balance of the industrial development bond
at March 31, 2003 was $3.2 million. The bank's commitment fee on the standby
letter of credit backing up the industrial development bond was 2.75% at March
31, 2003.
At March 31, 2003, the Company has a term note payable in quarterly installments
of $0.3 million through February 2005, with the remaining balance of $3.9
million due May 1, 2005. The term note has a variable interest rate, which after
giving effect to an interest rate swap agreement with the same bank, becomes an
effective fixed rate note, subject to adjustment based upon the level of certain
financial ratios. At March 31, 2003, the term note's three-month LIBOR based
effective borrowing rate was 9.49%. The outstanding balance of the term note at
March 31, 2003 was $6.3 million.
At March 31, 2003, the Company has a $6.0 million revolving credit agreement,
subject to sufficiency of collateral, that expires on March 31, 2004 and bears
interest at the bank's base rate plus 0.5%. The interest rate was 4.75% at March
31, 2003. A 0.375% commitment fee is incurred on the unused balance of the
revolving credit agreement. At March 31, 2003, the outstanding balance under the
revolving credit agreement was $3.0 million.
Under its credit agreements, the Company is subject to certain customary
covenants. These include, without limitation, covenants (as defined) that limit
the amount of annual capital expenditures and require the maintenance of certain
specified financial ratios, including minimum tangible net worth level, a
maximum liability to tangible net worth ratio and an interest coverage ratio.
During the first six months of fiscal 2003, the Company entered into agreements
with its bank to waive (i) the interest coverage ratio covenant for the period
ended September 30, 2002 through the period ended December 31, 2003 (ii) the
minimum tangible net worth covenant for the period ending September30, 2002; and
(iii) the capital expenditure limitation for the period ended September 30,
2002. These agreements also modified certain financial covenants and the
corresponding interest rates. The Company was in compliance with all applicable
covenants at March 31, 2003.
16
In May 2003, the Company entered into an agreement with its bank to amend
certain provisions of its credit agreements. The amendment waives the interest
coverage ratio covenant through the period ended December 31, 2004 and extends
the maturity date of the Company's $6.0 million revolving credit agreement to
June 30, 2004. The amendment also provides for the reduction of borrowing
availability subject to the passage of time or the occurrence of a certain
event.
The Company's long-term debt as a percentage of equity at March 31, 2003 and
September 30, 2002 was 35.1% and 29.4%, respectively. At March 31, 2003, taking
into consideration the outstanding balance under the revolving credit agreement
and outstanding letters of credit, the Company had $2.0 million available
against its $6.0 million revolving credit agreement.
The Company believes that cash flow from its operations together with existing
cash reserves and the funds available under its revolving credit agreement will
be sufficient to meet its working capital requirements through the end of fiscal
year 2003. However, no assurances can be given as to the sufficiency of the
Company's working capital to support the Company's operations. If the existing
cash reserves, cash flow from operations and funds available under the revolving
credit agreement are insufficient; if working capital requirements are greater
than currently estimated; and/or if the Company is unable to satisfy the
covenants set forth in its credit agreements, the Company may be required to
adopt one or more alternatives, such as reducing or delaying capital
expenditures, restructuring indebtedness, selling assets or operations, or
issuing additional shares of capital stock in the Company. There can be no
assurance that any of these actions could be effected, or if so, on terms
favorable to the Company, or that they would enable the Company to continue to
satisfy its working capital requirements.
C. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". This standard is effective for fiscal years beginning after
December 15, 2001. The Company adopted this standard on October 1, 2002, the
beginning of the first quarter of the Company's fiscal year 2003. The standard
changes financial accounting and reporting for acquired goodwill and indefinite
life intangible assets. SFAS No. 142 provides that intangible assets with finite
useful lives will continue to be amortized and goodwill and intangible assets
with indefinite lives will not be amortized, but rather will be tested for
impairment upon adoption and on an annual basis thereafter. The Company
completed the initial impairment test and concluded that goodwill was not
impaired as of October 1, 2002. Other than the cessation of goodwill
amortization, the adoption of SFAS No. 142 did not have an impact on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This standard addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement cost. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. This standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period incurred. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002 and was adopted by the Company
effective October 1, 2002. The adoption of this standard did not have a material
impact on the Company's financial position or results of operations.
In September 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement superceded SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of" and the
accounting and reporting provisions of Accounting Principals Board Opinion No.
30, "Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
events and Transactions", related to the disposal of a segment of a business.
This statement amends certain provisions of Accounting Research bulletin No. 51,
"Consolidated Financial Statements". SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001 and was adopted by the company effective
October 1, 2002. The adoption of this standard did not have a material impact on
the Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This standard addresses financial and
accounting and reporting for costs associated with exit or disposal activities
and replaces Emerging Issues Task Force No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF No. 94-3"). SFAS
No. 146 requires that a liability for costs associated with an exit or disposal
activity to be recognized when the liability is incurred. Under EITF No. 94-3, a
liability for exit costs as defined in EITF No. 94-3 is recognized at the date
of an entity's commitment to an exit plan. Beginning January 1, 2003, the
Company recognizes liabilities associated with exit or disposal activities as
incurred in accordance with SFAS No. 146.
17
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure an Amendment of FASB Statement No. 123".
SFAS No. 148 provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also requires prominent disclosure in the significant
accounting policy note of both annual and interim financial statements of the
method of accounting for stock-based compensation and the related pro forma
disclosures when the intrinsic value method continues to be used. The statement
is effective for fiscal years beginning after December 15, 2002, and disclosure
provisions are effective for the first fiscal quarter beginning after December
15, 2002. Early application of the disclosure provisions is encouraged. The
Company adopted the disclosure provisions of SFAS 148 in the quarter ended
December 31, 2002. The adoption of this standard did not have a material impact
on the Company's financial position and results of operations.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statements 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003. The Company has not yet determined the impact, if
any, of adopting this standard.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is subject to foreign currency
and interest risk. The risks primarily relate to the sale of the Company's
products and services 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 (primarily the Euro); 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.
The Company believes that inflation has not materially affected its results of
operations during the first six months of fiscal 2003, and does not expect
inflation to be a significant factor in the balance of fiscal 2003.
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 local currency 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 rate 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 loss. Foreign currency transaction gains and losses are included
in earnings.
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 March 31, 2003, the
Company had several forward exchange contracts outstanding for durations of up
to three months to purchase Euros aggregating U.S. $3.5 million. A ten percent
appreciation or depreciation of the value of the U.S. dollar relative to the
currencies, in which the forward exchange contracts outstanding at March 31,
2003 are denominated, would result in a $0.4 million decline or increase,
respectively, in the value of the forward exchange contracts. The Company will
continue to evaluate its foreign currency risk, if any, and the effectiveness of
using similar hedges in the future to mitigate such risk.
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, a revolving credit agreement and
industrial development variable rate demand revenue bonds. These interest rate
exposures are managed in part by an interest rate swap agreement to fix the
interest rate of the term note payable to the Company's bank. If interest rates
were to increase 100 basis points (1%) from March 31, 2003 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.
18
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days of the filing of this report, the Company performed an
evaluation, under the supervision and with the participation of the Company's
Chief Executive and Chief Financial Officers, of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive and Chief Financial Officers have concluded that the Company's
disclosure controls and procedures are effective. No significant changes were
noted in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the Company's
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No change.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
No change.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on January 28, 2003, there were a
total of 4,675,502 shareholders voting either in person or by proxy. The
shareholders:
A. Elected six directors to the Company's Board of Directors, Jeffrey P.
Gotschall, Michael S. Lipscomb, P. Charles Miller, Jr., Alayne L.
Reitman, Hudson D. Smith and J. Douglas Whelan, to serve on the Board of
Directors until the Company's Annual Meeting in 2004.
The results of the voting for directors were as follows:
Name Votes For Votes Withheld
---- --------- --------------
Jeffrey P. Gotschall 4,594,430 81,072
Michael S. Lipscomb 4,609,002 66,500
P. Charles Miller, Jr. 4,610,263 65,239
Alayne L. Reitman 4,609,163 66,339
Hudson D. Smith 4,611,370 64,132
J. Douglas Whelan 4,611,498 64,014
B. Ratified Grant Thornton LLP as the independent auditors of the Company
to audit the books and accounts of the Company for the fiscal year
ending September 30, 2003. There were 4,625,954 votes cast for the
appointment, 22,040 votes cast against the appointment and 27,508
abstentions.
ITEM 5. OTHER INFORMATION
None.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed with this report or are incorporated herein by
reference to a prior filing in accordance with Rule 12b-32 under the Securities
and Exchange Act of 1934 (Asterisk denotes exhibits filed with this report.).
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
4.5 Consolidated Amendment No. 1 to Amended and Restated Credit
Agreement, Amended and Restated Reimbursement Agreement and
Promissory Note dated November 26, 2002 Between SIFCO
Industries, Inc. and National City Bank, filed as Exhibit 4.5
of the Company's Form 10-K dated September 30, 2002, and
incorporated herein by reference
4.6 Consolidated Amendment No. 2 to Amended and Restated Credit
Agreement, Amended and Restated Reimbursement Agreement and
Promissory Note dated February 13, 2003 Between SIFCO
Industries, Inc. and National City Bank, filed as Exhibit 4.6
of the Company's Form 10-Q dated December 31, 2002, and
incorporated herein by reference
*4.7 Consolidated Amendment No. 3 to Amended and Restated Credit
Agreement, Amended and Restated Reimbursement Agreement and
Promissory Note dated May 13, 2003 Between SIFCO Industries,
Inc. and National City Bank
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
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
10.5 Change in Control Severance Agreement between the Company
and Frank Cappello, dated September 28, 2000, filed as Exhibit
10 (g) of the Company's Form 10-Q dated December 31, 2000 and
incorporated herein by reference
20
10.6 Change in Control Severance Agreement between the Company
and Hudson Smith, dated September 28, 2000, filed as Exhibit
10 (h) of the Company's Form 10-Q dated December 31, 2000 and
incorporated herein by reference
10.7 Change in Control Severance Agreement between the Company
and Remigijus Belzinskas, dated September 28, 2000, filed as
Exhibit 10 (i) of the Company's Form 10-Q dated December 31,
2000 and incorporated herein by reference
10.8 Change in Control Agreement between the Company and Frank
Cappello, dated November 9, 2000, filed as Exhibit 10 (j) of
the Company's Form 10-Q dated December 31, 2000 and
incorporated herein by reference
10.9 Change in Control Severance Agreement between the Company and
Timothy V. Crean, dated July 30, 2002, filed as Exhibit 10.9
of the Company's Form 10-K dated September 30, 2002 and
incorporated herein by reference
10.10 Change in Control Severance Agreement between the Company and
Jeffrey P. Gotschall, dated July 30, 2002, 10.10 filed as
Exhibit 10.10 of the Company's Form 10-K dated September 30,
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
No reports on Form 8-K were filed during the quarter ended March 31, 2003.
21
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: May 20, 2003 /s/ Jeffrey P. Gotschall
---------------------------------------
Jeffrey P. Gotschall
Chairman of the Board and
Chief Executive Officer
Date: May 20, 2003 /s/ Frank A. Cappello
---------------------------------------
Frank A. Cappello
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
22
CERTIFICATIONS
I, Jeffrey P. Gotschall, certify that:
1. I have read this quarterly report on Form 10-Q of SIFCO Industries, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 20, 2003 /s/ Jeffrey P. Gotschall
------------------------
Jeffrey P. Gotschall
Chairman of the Board and
Chief Executive Officer
23
CERTIFICATIONS
I, Frank A. Cappello, certify that:
1. I have read this quarterly report on Form 10-Q of SIFCO Industries, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 20, 2003 /s/ Frank A. Cappello
---------------------
Frank A. Cappello
Vice President - Finance and
Chief Financial Officer
24