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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 December 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 January 31, 2004 was
5,152,233.
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
DECEMBER 31,
---------------------------------
2003 2002
---- ----
Net sales...................................................... $ 20,839 $ 17,424
Operating expenses:
Cost of goods sold......................................... 18,052 16,935
Selling, general and administrative expenses............... 2,928 2,974
------------ ------------
Total operating expenses.............................. 20,980 19,909
------------ ------------
Operating loss.................................. (141) (2,485)
Interest income................................................ (13) (32)
Interest expense............................................... 205 197
Foreign currency exchange loss, net............................ 184 187
Other income, net.............................................. (14) (25)
------------ ------------
Loss before income tax provision................ (503) (2,812)
Income tax provision........................................... 7 14
------------ ------------
Net loss........................................ $ (510) $ (2,826)
============ ============
Net loss per share (basic)..................................... $ (0.10) $ (0.54)
Net loss per share (diluted)................................... $ (0.10) $ (0.54)
Weighted-average number of common shares (basic)............... 5,226 5,258
Weighted-average number of common shares (diluted)............. 5,226 5,258
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)
DECEMBER 31, SEPTEMBER 30,
2003 2003
----------------- ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 3,591 $ 4,524
Receivables, net....................................................... 17,312 16,648
Inventories............................................................ 9,344 9,184
Refundable income taxes................................................ 25 23
Prepaid expenses and other current assets.............................. 1,268 473
Assets held for sale................................................... 2,423 ---
----------------- ----------------
Total current assets........................................ 33,963 30,852
Property, plant and equipment, net......................................... 22,067 25,704
Other assets:
Goodwill, net.......................................................... 2,574 2,574
Other assets........................................................... 2,777 2,548
----------------- ----------------
Total other assets.......................................... 5,351 5,122
----------------- ----------------
Total assets......................................... $ 61,381 $ 61,678
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................................... $ 1,452 $ 1,451
Accounts payable....................................................... 5,830 6,491
Accrued liabilities.................................................... 6,333 6,471
----------------- ----------------
Total current liabilities................................... 13,615 14,413
Long-term debt, net of current maturities.................................. 9,640 9,033
Other long-term liabilities................................................ 8,068 7,951
Shareholders' equity:
Serial preferred shares, no par value, authorized 1,000 shares......... --- ---
Common shares, par value $1 per share, authorized 10,000 shares;
issued 5,282 and 5,294 shares at December 31, 2003 and
September 30, 2003, respectively; outstanding 5,226 shares........ 5,282 5,294
Additional paid-in capital............................................. 6,602 6,661
Retained earnings...................................................... 27,772 28,282
Accumulated other comprehensive loss................................... (8,986) (9,247)
Unearned compensation - restricted common shares....................... (283) (309)
Common shares held in treasury at cost, 56 and 68 shares at December 31
2003 and September 30, 2003, respectively........................ (329) (400)
----------------- ----------------
Total shareholders' equity.................................. 30,058 30,281
----------------- ----------------
Total liabilities and shareholders' equity........... $ 61,381 $ 61,678
================= ================
See notes to unaudited consolidated condensed financial statements.
3
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net loss............................................................... $ (510) $ (2,826)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................................... 863 1,071
Gain on disposal of property, plant and equipment............... 8 (2)
Deferred income taxes........................................... --- 10
Changes in operating assets and liabilities:
Receivables................................................. 86 1,212
Inventories................................................. (160) 505
Prepaid expenses and other current assets................... (743) (504)
Other assets................................................ (229) (25)
Accounts payable............................................ (661) 590
Accrued liabilities......................................... (138) (886)
Other long-term liabilities................................. 194 23
------------ ------------
Net cash used for operating activities................... (1,290) (832)
Cash flows from investing activities:
Capital expenditures............................................ (430) (719)
Proceeds from disposal of property, plant and equipment......... 41 15
Other........................................................... 113 57
------------ ------------
Net cash used for investing activities................... (276) (647)
Cash flows from financing activities:
Proceeds from revolving credit agreement........................ 14,354 6,350
Repayments of revolving credit agreement........................ (13,447) (7,230)
Repayments of long-term debt.................................... (300) (300)
Share transactions under employee stock plan.................... 26 36
------------ ------------
Net cash provided by (used for) financing activities..... 633 (1,144)
------------ ------------
Decrease in cash and cash equivalents....................................... (933) (2,623)
Cash and cash equivalents at the beginning of the period................... 4,524 7,583
------------ ------------
Cash and cash equivalents at the end of the period....... $ 3,591 $ 4,960
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest.......................................... $ (178) $ (180)
Cash recovered from (paid for) income taxes, net................ (3) 10
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 2003 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.
B. 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
DECEMBER 31,
------------------------------
2003 2002
---- ----
Net loss as reported.................................... $ (510) $ (2,826)
Less: Stock-based compensation expense determined
under fair value based method for all awards, net
of related tax effects............................. 27 35
------------ ------------
Pro forma net loss as if the fair value based
method had been applied to all awards.............. $ (537) $ (2,861)
============ ============
Net loss per share:
Basic - as reported.............................. $ (0.10) $ (0.54)
Basic - pro forma................................ $ (0.10) $ (0.54)
Diluted - as reported............................ $ (0.10) $ (0.54)
Diluted - pro forma.............................. $ (0.10) $ (0.54)
C. NEW ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits". This
standard revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans as required by SFAS No. 87, "Employers' Accounting for Pensions",
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits", and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions". This
standard retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits", which
it replaces. It requires additional disclosures to those in the original SFAS
No. 132 about the assets, obligations, cash flows and net periodic benefit cost
of defined benefit pension plans and other defined benefit postretirement plans.
The provisions of SFAS No. 132 remain in effect until the provisions of SFAS No.
132 (revised 2003) are adopted. SFAS No. 132 (revised 2003) is generally
effective for fiscal years ending after December 15, 2003. The
5
interim-period disclosures required by SFAS No. 132 (revised 2003) are effective
for interim periods beginning after December 15, 2003. The Company does not
expect the adoption of this standard in fiscal year 2004 to have an impact on
the Company's financial position or results of operations.
D. REVENUE RECOGNITION
The Company recognizes revenue in accordance with the relevant portions of the
Securities and Exchange Commission's Staff Accounting Bullet No. 101, "Revenue
Recognition in Financial Statements" and No. 104, "Revenue Recognition". Revenue
is generally recognized when products are shipped or services are provided to
customers.
2. INVENTORIES
Inventories consist of:
DECEMBER 31, SEPTEMBER 30,
2003 2003
---------------- ----------------
Raw materials and supplies............. $ 2,703 $ 2,537
Work-in-process........................ 3,156 3,028
Finished goods......................... 3,485 3,619
---------------- ----------------
Total inventories................ $ 9,344 $ 9,184
================ ================
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out ("LIFO") method for 24% and 28% of the Company's
inventories at December 31, 2003 and September 30, 2003, respectively. Cost is
determined using the specific identification method for approximately 34% and
33% of the Company's inventories at December 31, 2003 and September 30, 2003,
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 inventories for
which cost is determined using the LIFO method, inventories would have been
$3,237 and $3,230 higher than reported at December 31, 2003 and September 30,
2003, respectively.
3. ASSETS HELD FOR SALE
Assets held for sale at December 31, 2003 consist of the building and land of
the Company's Turbine Component Services and Repair Group's Tampa, Florida
facility, which ceased operations during fiscal 2003. These assets are recorded
at amounts not in excess of what the Company currently expects based on
management's estimates to receive upon sale, less cost of disposal.
4. COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Total comprehensive loss is as follows:
THREE MONTHS ENDED
DECEMBER 31,
------------------------------------
2003 2002
---- ----
Net loss............................................................... $ (510) $ (2,826)
Foreign currency translation adjustment................................ 131 64
Unrealized gain on interest rate swap agreement, net of income tax
provision of $10 in fiscal 2003................................... 78 19
Currency exchange contract adjustment.................................. 52 160
--------------- ---------------
Total comprehensive loss.................................... $ (249) $ (2,583)
=============== ===============
6
The components of accumulated other comprehensive loss are as follows:
DECEMBER 31, SEPTEMBER 30,
2003 2003
--------------- ---------------
Foreign currency translation adjustment....................... $ (6,714) $ (6,845)
Interest rate swap agreement adjustment....................... (311) (389)
Currency exchange contract adjustment......................... 52 ---
Minimum pension liability adjustment.......................... (2,013) (2,013)
--------------- ---------------
Total accumulated other comprehensive loss......... $ (8,986) $ (9,247)
=============== ===============
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
aerospace and 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.
Segment information is as follows:
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2003 2002
---- ----
Net sales:
Turbine Component Services and Repair Group............................ $ 11,724 $ 8,449
Aerospace Component Manufacturing Group................................ 6,456 7,005
Metal Finishing Group.................................................. 2,659 1,970
----------- -----------
Consolidated net sales............................................. $ 20,839 $ 17,424
=========== ===========
Operating income (loss):
Turbine Component Services and Repair Group........................... $ (454) $ (1,861)
Aerospace Component Manufacturing Group............................... 364 (101)
Metal Finishing Group................................................. 228 (132)
Corporate unallocated expenses........................................ (279) (391)
----------- -----------
Consolidated operating loss........................................ (141) (2,485)
Interest expense, net..................................................... 192 165
Foreign currency exchange loss, net....................................... 184 187
Other income, net......................................................... (14) (25)
----------- -----------
Consolidated loss before income tax provision...................... $ (503) $ (2,812)
=========== ===========
All of the Company's net goodwill of $2,574 at December 31, 2003 and September
30, 2003 is allocated to the Company's Metal Finishing Group.
6. SEVERANCE ACCRUAL
During fiscal 2003, as a result of the continuing downturn in the commercial
aviation industry and the resulting reduction in demand for third party
aerospace turbine engine component repair services, such as those provided by
the Company, the Turbine Component Services and Repair Group ("Repair Group")
decided to optimize its component repair capability through consolidation of
operations. The Company expects to complete these actions by June 30, 2004. As a
result of this decision, the Repair Group incurred $645 of severance and other
employee benefit charges to be paid to 60 personnel, all of which was incurred
during fiscal 2003. As of December 31, 2003, payments totaling $623 have been
made for these expenses and all affected personnel have been terminated.
7
The following table summarizes the remaining liabilities for qualified exit
costs at December 31, 2003 and activity for the three months then ended:
BALANCE TOTAL 2004 2004 BALANCE
SEPTEMBER 30, 2004 CASH NON-CASH DECEMBER 31,
2003 CHARGES PAYMENTS CHARGES 2003
------------------ --------------- --------------- -------------- ----------------
Severance and other employee benefits $ 37 $ --- $ 15 $ --- $ 22
================== =============== =============== ============== ================
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 turbine
engine manufacturers in turbine component services and repair markets; (3)
successful procurement of certain repair materials and new repair process
licenses from turbine engine manufacturers and/or the Federal Aviation
Administration; (4) fluctuating foreign currency (primarily the euro) exchange
rates; (5) metals and commodities price increases and the Company's ability to
recover such price increases; (6) successful development and market
introductions of new products, including an advanced coating technology and the
continued development of heavy industrial turbine repair processes; (7)
regressive pricing pressures on the Company's products and services, with
productivity improvements as the primary means to maintain margins; (8) success
with the further development of strategic alliances with certain turbine engine
manufacturers for turbine component repair services; (9) 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 and the reduced number
of aircraft in service; (10) successful replacement of declining demand for
repair services for turboprop engine components with component repair services
for small turbofan engines utilized in the business and regional aircraft
markets; (11) continued reliance on several major customers for revenues; (12)
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; (13) the difficulty in predicting
the timing and outcome of legal proceedings; (14) anticipated sale and amount of
proceeds from the sale of the Company's Tampa, Florida facility; and (15) 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
Three Months Ended December 31, 2003 Compared With Three Months Ended December
31, 2002
Net sales in the first three months of fiscal 2004 increased 19.6% to $20.8
million, compared with $17.4 million in the comparable period in fiscal 2003.
Net loss in the first three months of fiscal 2004 was $0.5 million, compared
with a net loss of $2.8 million in the comparable period in fiscal 2003.
Turbine Component Services and Repair Group ("Repair Group")
Net sales in the first three months of fiscal 2004 increased 38.8% to $11.7
million, compared with $8.5 million in the comparable fiscal 2003 period.
Component manufacturing and repair net sales increased $2.4 million to $9.4
million in the first three months of fiscal 2004, compared with $7.0 million in
the comparable fiscal 2003 period. Demand for precision
8
component machining and component repairs for small and large aerospace turbine
engines as well as industrial turbine engines increased in the first three
months of fiscal 2004, compared with the comparable fiscal 2003 period. This
reflects a reduction in component repairs for older model large aerospace
turbine engines offset by increased demand for component repairs for newer model
large aerospace turbine engines. Net sales associated with the demand for
replacement parts, which often complement component repair services provided to
customers, were up $0.9 million in the first three months of 2004 to $2.3
million, compared with $1.4 million in the comparable fiscal 2003 period.
During the first three months of fiscal 2004, the Repair Group's selling,
general and administrative expenses increased $0.1 million to $1.3 million, or
11.2% of net sales, from $1.2 million, or 14.0% of net sales, in the comparable
fiscal 2003 period.
The Repair Group's operating loss in the first three months of fiscal 2004
decreased $1.4 million to $0.5 million from a $1.9 million loss in the
comparable fiscal 2003 period. The reduced operating loss was primarily due to
the positive impact on margins of increased sales volumes for both component
manufacturing and repair services and replacement parts.
During fiscal 2003 and continuing into the first three months of fiscal 2004,
the euro strengthened against the U.S. dollar. The Repair Group's non-U.S.
operations have most of its sales and substantial majority of its costs
denominated in U.S. dollars but, a significant portion of its operating costs
are denominated in euros. Therefore, as the euro strengthens, costs denominated
in euros are negatively impacted. During the first three months of fiscal 2003,
the Repair Group hedged much of its exposure to the strengthening euro thereby
mitigating the negative impact on its operating results in that period. During
the first three months of fiscal 2004, the Company did not hedge much of its
exposure to the strengthening euro and, therefore, the impact on the Repair
Group's operating results in the first three months of fiscal 2004 was higher
operating costs of approximately $1.0 million related to its non-U.S.
operations, when compared to the comparable fiscal 2003 period.
The Repair Group's backlog as of December 31, 2003, was $6.7 million, compared
with $8.9 million as of September 30, 2003. At December 31, 2003, $5.4 million
of the total backlog is scheduled for delivery over the next twelve months and
$1.3 million was on hold. All orders are subject to modification or cancellation
by the customer with limited charges. The Repair Group believes that the backlog
may not be indicative of actual sales for any succeeding period.
Aerospace Component Manufacturing Group ("ACM Group")
Net sales in the first three months of fiscal 2004 decreased 7.9% to $6.5
million, compared with $7.0 million in the first three months of fiscal 2003.
For purposes of this discussion, the ACM Group considers aircraft that can
accommodate less than 100 passengers to be small aircraft, and those that can
accommodate 100 or more passengers to be large aircraft. Net sales of turbine
engine components for small aircraft declined $0.5 million to $2.3 million in
the first three months of fiscal 2004, compared with $2.8 million in the
comparable fiscal 2003 period. This is primarily attributable to a decrease in
net sales to Rolls-Royce Corporation, which consist primarily of components for
small turbine engines, such as the AE series latest generation turbine engines
for business and regional jets, as well as military transport and surveillance
aircraft. Net sales of airframe components for small aircraft increased $0.3
million in the first three months of fiscal 2004 to $3.4 million, compared with
$3.1 million in the same period in fiscal 2003. Net sales of airframe components
for large aircraft declined to $0.5 million in the first three months of fiscal
2004 from $0.6 million in the comparable period in fiscal 2003. Net sales of
turbine engine components for large aircraft were $0.2 million in the first
three months of both fiscal 2004 and 2003.
Net sales of airframe and turbine engine components solely for military
applications were $3.1 million in the first three months of both fiscal 2004 and
2003. The balance of the ACM Group's net sales of airframe and turbine engine
components has both military and commercial aircraft applications.
Selling, general and administrative expenses in the first three months of fiscal
2004 were $0.5 million, or 7.6% of net sales, compared with $0.6 million, or
9.0% of net sales, in the first three months of fiscal 2003. Selling, general
and administrative expenses in the first three months of fiscal 2004 benefited
by a reduction of $0.1 million in the ACM Group's provision for bad debts,
compared with the same period in fiscal 2003.
The ACM Group's operating income in the first three months of fiscal 2004 was
$0.4 million compared with an operating loss of $0.1 million in the first three
months of fiscal 2003. Operating results were favorably impacted in the first
three months of fiscal 2004 by a $0.2 million decrease in material cost as a
result of product mix consisting of a greater percentage of products sold
containing lower cost materials in the first three months of fiscal 2004,
compared with the same period in fiscal 2003. Operating results in the first
three months of fiscal 2004 also benefited from a $0.1 million decrease in
variable tooling expenses, as well as a $0.1 million decrease in manufacturing
supplies and repair expenses, compared with the same period in fiscal 2003. As
noted previously, selling, general and administrative expenses in the first
three months of fiscal
9
2004 benefited by a reduction of $0.1 million in the ACM Group's provision for
bad debts, compared with the comparable period in fiscal 2003.
The ACM Group's backlog as of December 31, 2003, was $21.9 million, compared
with $21.4 million as of September 31, 2003. At December 31, 2003, $19.9 million
of the total backlog is scheduled for delivery over the next twelve months and
$0.1 million was 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 three months of fiscal 2004 increased 35% to $2.7
million, compared with $2.0 million in the comparable period of fiscal 2003. In
the first three months of fiscal 2004, product net sales, consisting of
selective electrochemical finishing equipment and solutions, increased 22.6% to
$1.4 million, compared with $1.1 million in the same period in fiscal 2003. In
the first three months of fiscal 2004, contract service net sales increased
53.5% to $1.2 million, compared with $0.8 million in the comparable period in
fiscal 2003. Net sales to customers in most of the industries served by the
Metal Finishing Group increased in the first three months of fiscal 2004,
compared with the same period in fiscal 2003. Net sales to customers in the oil
and gas exploration industries increased $0.2 million in the first three months
of fiscal 2004, compared with the same period in fiscal 2003, attributable
primarily to new contract service work. Net sales to customers in the
automotive, aerospace and electronic industries increased $0.1 million each in
the first three months of fiscal 2004, compared with the same period in fiscal
2003. These net sales increases were partially offset by a $0.1 million decrease
in net sales to customers in the power generation industry and the U.S.
military.
Selling, general and administrative expenses were $0.8 million in the first
three months of both fiscal 2004 and 2003, or 31.6% and 39.0% of net sales,
respectively. In the first three months of fiscal 2004, increases in employee
incentive, provision for bad debts and legal and professional expenses offset a
decrease in compensation expense due to staffing optimization.
The Metal Finishing Group's operating income in the first three months of fiscal
2004 was $0.2 million, compared with an operating loss of $0.1 million in the
first three months of fiscal 2003. Operating income in the first three months of
fiscal 2004 benefited from the interplay between higher net sales in relation to
fixed overhead, selling, general and administrative expenses.
The Metal Finishing Group essentially had no backlog at December 31, 2003.
Corporate Unallocated Expenses
Corporate unallocated expenses, consisting of corporate salaries and benefits,
legal and professional and other corporate expenses, were $0.3 million in the
first three months of fiscal 2004, compared with $0.4 million in the same period
in fiscal 2003. In the first three months of fiscal 2004, corporate unallocated
expenses were favorably impacted primarily by lower legal and professional
expenses, compared with the same period in fiscal 2003.
Other/General
Interest expense was $0.2 million in both the first three months of fiscal 2004
and 2003. The favorable impact of a lower weighted average term note outstanding
balance of $5.5 million in the first three months of fiscal 2004, compared with
$6.7 million in the same period in fiscal 2003, was offset by a higher weighted
average interest rate payable under the term note in the first three months of
fiscal 2004, compared with the same period in fiscal 2003. The favorable impact
of a lower weighted average revolving credit agreement outstanding balance of
$2.3 million in the first three months of fiscal 2004, compared with $2.4
million in the same period in fiscal 2003, was offset by a higher weighted
average interest rate payable under the revolving credit agreement in the first
three months of fiscal 2004, compared with the same period in fiscal 2003. The
interest rate payable under the industrial development variable rate demand
revenue bond decreased in the first three months of fiscal 2004, compared with
the same period in fiscal 2003. The weighted average industrial development
variable rate demand revenue bond outstanding balance during the first three
months of fiscal 2004 was $3.0 million, compared to $3.2 million in the same
period of fiscal 2003.
Currency exchange loss was $0.2 million in both the first three months of fiscal
2004 and 2003. This loss is the result of currency exchange rate fluctuations,
resulting primarily from the continuing decline in the value of the U.S. dollar
in relation to the euro, on the Company's monetary assets and liabilities that
are not denominated in U.S. dollars.
10
In the first three months of fiscal 2004 and 2003, the income tax benefit
related to the Company's U.S. and non-U.S. subsidiary 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 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 $3.6 million at December 31, 2003 from
$4.5 million at September 30, 2003. 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. Distributions from the Company's non-U.S.
subsidiaries to the Company may be subject to statutory restrictions, adverse
tax consequences or other limitations.
The Company's operating activities used $1.3 million of cash in the first three
months of fiscal 2004. The decrease in cash provided by operations is primarily
attributable to (i) a $0.7 million increase in prepaid expenses and other
current assets due primarily to the payment of certain insurance premiums; and
(ii) a $0.7 million decrease in accounts payable that is primarily attributable
to the timing of payments to vendors. During the first three months of fiscal
2004, the Company recognized a $0.7 million increase in accounts receivable and
a corresponding decrease in property, plant and equipment due to the recognition
of an agreement for the reimbursement of certain capital expenditures that were
made in anticipation of a proposed joint venture that did not materialize.
Capital expenditures were $0.4 million in the first three months of fiscal 2004.
Capital expenditures in the first three months of fiscal 2004 were evenly split
between the Company's three business segments and are expected to (i) provide
increased range of manufacturing capabilities; (ii) automate certain machining
operations; and (iii) enhance the Company's service and repair capabilities. At
December 31, 2003, the Company had outstanding commitments for capital
expenditures totaling $1.3 million. The Company anticipates that total fiscal
2004 capital expenditures will approximate $3.0 million.
At December 31, 2003, the Company has a 15-year industrial development variable
rate revenue bond outstanding, 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 industrial development variable rate revenue bond requires annual principal
payments ranging from $0.2 million in fiscal 2004 to $0.4 million in fiscal
2013. The interest rate is reset weekly based on prevailing tax-exempt money
market rates. The interest rate as of December 31, 2003 was 1.45%. The
outstanding balance of the industrial development variable rate revenue bond at
December 31, 2003 was $3.0 million. The bank's commitment fee on the standby
letter of credit that collateralizes the industrial development variable rate
revenue bond is 2.75% of the outstanding balance.
Operations at the Repair Group's Tampa, Florida facility ceased at the end of
fiscal 2003. At December 31, 2003, the facility is held for sale. The sale of
the facility may result in one of the following occurring: (i) repayment of the
industrial development variable rate revenue bond; (ii) continued servicing of
the industrial development variable rate revenue bond by the Company; or (iii)
assumption of the industrial development variable rate revenue bond by the buyer
of the facility. The ultimate use of the facility determines, in part, which
options may be available.
At December 31, 2003, the Company has a term note that is repayable 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, becomes an
effective fixed rate term note, subject to adjustment based upon the level of
certain financial ratios. The effective fixed interest rate at December 31, 2003
was 9.49%. The outstanding balance of the term note at December 31, 2003 was
$5.4 million.
At December 31, 2003, the Company had a $6.0 million revolving credit agreement,
subject to sufficiency of collateral, that expires on March 31, 2005 and bears
interest at the bank's base rate plus 0.50%. The interest rate was 4.5% at
December 31, 2003. A 0.375% commitment fee is incurred on the unused balance of
the revolving credit agreement. At December 31, 2003, the outstanding balance
under the revolving credit agreement was $2.7 million and the Company had $2.5
million available under its revolving credit agreement.
All of the Company's long-term debt is secured by substantially all of the
Company's assets located in the U.S., a guarantee by its U.S. subsidiaries and a
pledge of 65% of the Company's ownership interest in its non-U.S. subsidiaries.
Under its credit agreements, the Company is subject to certain customary
covenants. These include, without limitations, covenants (as defined) that limit
the amount of capital expenditures and require maintenance of a minimum tangible
net
11
worth level and a minimum adjusted fixed charge coverage to EBITDA ratio. The
Company was in compliance with all applicable covenants at December 31, 2003.
The Company believes that cash flow from its operations together with existing
cash reserves and funds available under its revolving credit agreement will be
sufficient to meet its working capital requirements through the end of fiscal
2004. 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
assurances that any of these actions could be accomplished, of 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 December 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits". This
standard revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans as required by SFAS No. 87, "Employers' Accounting for Pensions",
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits", and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions". This
standard retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits", which
it replaces. It requires additional disclosures to those in the original SFAS
No. 132 about the assets, obligations, cash flows and net periodic benefit cost
of defined benefit pension plans and other defined benefit postretirement plans.
The provisions of SFAS No. 132 remain in effect until the provisions of SFAS No.
132 (revised 2003) are adopted. SFAS No. 132 (revised 2003) is generally
effective for fiscal years ending after December 15, 2003. The interim-period
disclosures required by SFAS No. 132 (revised 2003) are effective for interim
periods beginning after December 15, 2003. The Company does not expect the
adoption of this standard in fiscal year 2004 to have an impact on the Company's
financial position or results of operations.
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 and British pounds); 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 three months of fiscal 2004, and does not expect
inflation to be a significant factor in the balance of fiscal 2004.
A. FOREIGN CURRENCY RISK
The U.S. dollar is the functional currency for all of the Company's U.S.
operations and Irish subsidiary. 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.
During the first three months of fiscal 2004, the euro continued to strengthen
against the U.S. dollar. 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. 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. During the first three months of fiscal
2004, the Company did not hedge much of its exposure to the euro. At December
31, 2003, the Company had forward exchange contracts outstanding for durations
of up to two months to purchase euros aggregating U.S. $3.2 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 December
31,
12
2003 are denominated, would result in a $0.3 million decline or increase,
respectively, in the value of the forward exchange contracts. Factors that could
impact the effectiveness of the Company's hedging efforts include accuracy of
expenditure estimates, volatility of currency markets and the cost and
availability of hedging instruments. 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.
At December 31, 2003, the Company's assets and liabilities denominated in
British pounds and the euro were as follows (amounts in thousands):
BRITISH POUNDS EURO
-------------- ----
Cash and cash equivalents.................... 464 337
Accounts receivable.......................... 420 292
Accounts payable and accrued liabilities..... 170 1,661
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 December 31, 2003 rates, and
assuming no changes in the amounts outstanding under the revolving credit
agreement and industrial development variable rate demand revenue bond, the
additional annual interest expense to the Company would be approximately $0.1
million.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chairman and Chief
Executive Officer of the Company and Chief Financial Officer of the Company, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of
the period covered by this report. Based upon that evaluation, the Chairman and
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There has been no significant change in our internal control over financial
reporting that occurred during the period covered by this report that has
materially affected, or that is reasonably likely to materially affect our
internal control over financial reporting.
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
None.
ITEM 5. OTHER INFORMATION
None.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed with this report or are incorporated herby
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, filed as Exhibit 4.7 of the Company's
Form 10-Q dated March 31, 2003, and incorporated herein by
reference
4.8 Consolidated Amendment No. 4 to Amended and Restated Credit
Agreement, Amended and Restated Reimbursement Agreement and
Promissory Note dated July 28, 2003 between SIFCO Industries,
Inc. and National City Bank, filed as Exhibit 4.8 of the
Company's Form 10-Q dated June 30, 2003 and incorporated herein
by reference
4.9 Consolidated Amendment No. 5 to Amended and Restated Credit
Agreement, Amended and Restated Reimbursement Agreement and
Promissory Note dated November 26, 2003 between SIFCO
Industries, Inc. and National City Bank, filed as Exhibit 4.9 of
the Company's 10-K dated September 30, 2003 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
14
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, 10.5 filed as Exhibit
10 (g) of the Company's Form 10-Q dated December 31, 2000 and
incorporated herein by reference
10.6 Change in Control Severance Agreement between the Company and
Hudson Smith, dated September 28, 2000, 10.6 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, 10.7 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 10.8 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 10.9 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, filed as Exhibit
10.10 of the Company's Form 10-K dated September 30, 2002 and
incorporated herein by reference
10.11 Form of Restricted Stock Agreement, filed as Exhibit 10.11 of
the Company's form 10-K dated September 30, 2002, and
incorporated herein by reference
14.1 Code of Ethics, filed as Exhibit 14.1 of the Company's Form
10-K dated September 30, 2003 and incorporated herein by
reference
16.1 Letter from Arthur Andersen LLP to the Securities and Exchange
Commission dated June 27, 2002, filed as Exhibit 16 of the
Company's Form 8-K dated June 27, 2003 and incorporated by
reference
*31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) / 15d-14(a)
*31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) / 15d-14(a)
*32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350
*32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 2003.
15
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: February 6, 2004
/s/ Jeffrey P. Gotschall
------------------------
Jeffrey P. Gotschall
Chairman of the Board and
Chief Executive Officer
Date: February 6, 2004
/s/ Frank A. Cappello
------------------------
Frank A. Cappello
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
16