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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 June 30, 2004
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 (I.R.S. Employer Identification No.)
of 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 July 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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $ 23,015 $ 22,574 $ 66,648 $ 58,428
Operating expenses:
Cost of goods sold 20,421 19,167 58,888 53,150
Selling, general and administrative expenses 2,849 3,045 8,686 10,194
-------- -------- -------- --------
Total operating expenses 23,270 22,212 67,574 63,344
-------- -------- -------- --------
Operating income (loss) (255) 362 (926) (4,916)
Interest income (14) (8) (40) (53)
Interest expense 189 217 592 631
Foreign currency exchange loss (gain), net (55) 60 93 287
Other income, net (132) (150) (185) (214)
-------- -------- -------- --------
Income (loss) before income tax (243) 243 (1,386) (5,567)
provision
Income tax provision 10 11 43 41
-------- -------- -------- --------
Net income (loss) $ (253) $ 232 $ (1,429) $ (5,608)
======== ======== ======== ========
Net income (loss) per share (basic) $ (0.05) $ 0.04 $ (0.27) $ (1.07)
Net income (loss) per share (diluted) $ (0.05) $ 0.04 $ (0.27) $ (1.07)
Weighted-average number of common shares (basic) 5,220 5,254 5,223 5,256
Weighted-average number of common shares (diluted) 5,220 5,254 5,223 5,256
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)
JUNE 30, SEPTEMBER 30,
2004 2003
---------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 5,938 $ 4,524
Receivables, net 17,530 16,648
Inventories 7,987 9,184
Refundable income taxes -- 23
Prepaid expenses and other current assets 882 473
Assets held for sale 4,198 --
-------- --------
Total current assets 36,535 30,852
Property, plant and equipment, net 19,946 25,704
Other assets:
Goodwill, net 2,574 2,574
Other assets 2,822 2,548
-------- --------
Total other assets 5,396 5,122
-------- --------
Total assets $ 61,877 $ 61,678
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,461 $ 1,451
Accounts payable 7,034 6,491
Accrued liabilities 7,271 6,471
-------- --------
Total current liabilities 15,766 14,413
Long-term debt, net of current maturities 8,996 9,033
Other long-term liabilities 7,931 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
5,269 and 5,294 shares at June 30, 2004 and September 30, 2003,
respectively; outstanding 5,214 shares at June 30, 2004 and 5,226 at
September 30, 2003 5,269 5,294
Additional paid-in capital 6,559 6,661
Retained earnings 26,853 28,282
Accumulated other comprehensive loss (8,980) (9,247)
Unearned compensation - restricted common shares (188) (309)
Common shares held in treasury at cost, 55 and 68 shares at June 30, 2004
and September 30, 2003, respectively (329) (400)
-------- --------
Total shareholders' equity 29,184 30,281
-------- --------
Total liabilities and shareholders' equity $ 61,877 $ 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)
NINE MONTHS ENDED
JUNE 30,
--------------------
2004 2003
--------- ---------
Cash flows from operating activities:
Net loss $ (1,429) $ (5,608)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 2,670 3,242
Loss (gain) on disposal of property, plant and equipment (13) 3
Asset impairment charges -- 1,175
Changes in operating assets and liabilities:
Receivables (882) (1,702)
Inventories 1,197 (67)
Refundable income taxes 23 (58)
Prepaid expenses and other current assets (409) (280)
Other assets (274) (158)
Accounts payable 543 3,143
Accrued liabilities 736 (882)
Other long-term liabilities 161 129
-------- --------
Net cash provided by (used for) operating activities 2,323 (1,063)
Cash flows from investing activities:
Capital expenditures (1,909) (1,355)
Proceeds from disposal of property, plant and equipment 77 143
Reimbursement of equipment expenditures 750 --
Other 135 128
-------- --------
Net cash used for investing activities (947) (1,084)
Cash flows from financing activities:
Proceeds from revolving credit agreement 40,809 19,242
Repayments of revolving credit agreement (39,685) (18,919)
Repayments of long-term debt (1,151) (1,140)
Proceeds from other indebtedness -- 14
Share transactions under employee stock plan 65 93
-------- --------
Net cash provided by (used for) financing activities 38 (710)
Increase (decrease) in cash and cash equivalents 1,414 (2,857)
Cash and cash equivalents at the beginning of the period 4,524 7,583
-------- --------
Cash and cash equivalents at the end of the period $ 5,938 $ 4,726
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ (434) $ (566)
Cash recovered from (paid for) income taxes, net 36 (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 periods. The pro forma information is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------------
2004 2003 2004 2003
-------- ------ ---------- ----------
Net income (loss) as reported $ (253) $ 232 $ (1,429) $ (5,608)
Less: Stock-based compensation expense
determined under fair value based method for
all awards, net of related income tax effects 27 35 82 103
------- ------- ----------- ----------
Pro forma net income (loss) as if the fair value
based method had been applied to all awards $ (280) $ 197 $ (1,511) $ (5,711)
======== ======= ========== =========
Net income (loss) per share:
Basic - as reported $ (0.05) $ 0.04 $ (0.27) $ (1.07)
Basic - pro forma $ (0.05) $ 0.04 $ (0.29) $ (1.09)
Diluted - as reported $ (0.05) $ 0.04 $ (0.27) $ (1.07)
Diluted - pro forma $ (0.05) $ 0.04 $ (0.29) $ (1.09)
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 adoption of
this standard during the second quarter of fiscal year 2004 did not 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 Bulletin 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:
JUNE 30, SEPTEMBER 30,
2004 2003
-------- -------------
Raw materials and supplies $2,577 $2,537
Work-in-process 2,915 3,028
Finished goods 2,495 3,619
------ ------
Total inventories $7,987 $9,184
====== ======
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out ("LIFO") method for 34% and 28% of the Company's
inventories at June 30, 2004 and September 30, 2003, respectively. Cost is
determined using the specific identification method for approximately 24% and
33% of the Company's inventories at June 30, 2004 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
$3,343 and $3,230 higher than reported at June 30, 2004 and September 30, 2003,
respectively.
3. ASSETS HELD FOR SALE
Assets held for sale at June 30, 2004 consist of the building and land of the
Company's Turbine Component Services and Repair Group facility located in Tampa,
Florida, which ceased operations during fiscal 2003, and a building and land
that is part of the Turbine Component Services and Repair Group's Irish
operations, which are being consolidated into the remaining two buildings during
fiscal 2004. 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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2004 2003 2004 2003
------- ------- -------- --------
Net income (loss) $ (253) $ 232 $(1,429) $(5,608)
Foreign currency translation adjustment (14) 79 149 146
Unrealized gain on interest rate swap agreement,
net of income tax provision of $12 and $22 in
fiscal 2003 88 55 212 98
Currency exchange contract adjustment 61 (695) (63) (1,035)
Minimum pension liability adjustment (31) (37) (31) (37)
------- ------- -------- --------
Total comprehensive loss $ (149) $ (366) $(1,162) $(6,436)
======= ======= ======== ========
6
The components of accumulated other comprehensive loss are as follows:
JUNE 30, SEPTEMBER 30,
2004 2003
-------- -------------
Foreign currency translation adjustment $(6,696) $(6,845)
Interest rate swap agreement adjustment (177) (389)
Currency exchange contract adjustment (63) --
Minimum pension liability adjustment (2,044) (2,013)
-------- --------
Total accumulated other comprehensive loss $(8,980) $(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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales:
Turbine Component Services and Repair Group $ 11,474 $ 11,114 $ 35,476 $ 29,074
Aerospace Component Manufacturing Group 8,687 8,965 23,005 22,144
Metal Finishing Group 2,854 2,495 8,167 7,210
-------- -------- -------- --------
Consolidated net sales $ 23,015 $ 22,574 $ 66,648 $ 58,428
======== ======== ======== ========
Operating income (loss):
Turbine Component Services and Repair Group $ (874) $ (407) $ (2,011) $ (4,765)
Aerospace Component Manufacturing Group 733 1,075 1,700 686
Metal Finishing Group 158 281 575 566
Corporate unallocated expenses (272) (587) (1,190) (1,403)
-------- -------- -------- --------
Consolidated operating income (loss) (255) 362 (926) (4,916)
Interest expense, net 175 209 552 578
Foreign currency exchange loss (gain), net (55) 60 93 287
Other income, net (132) (150) (185) (214)
-------- -------- -------- --------
Consolidated income (loss) before income tax provision $ (243) $ 243 $ (1,386) $ (5,567)
======== ======== ======== ========
The Company's net goodwill of $2,574 at March 31, 2004 and September 30, 2003 is
allocated to its Metal Finishing Group.
6. LONG-TERM DEBT
Effective June 30, 2004, the Company entered into an agreement with its lending
bank to amend certain provisions of its credit agreements. The amendment extends
the maturity date of the Company's term note to September 30, 2005. The
amendment also extends the maturity date of the standby letter of credit that
collateralizes the industrial development variable rate revenue bond to
September 30, 2005.
7
7. RETIREMENT BENEFIT PLANS
The Company and certain of its subsidiaries sponsor defined benefit pension
plans covering most of its employees. The components of net periodic benefit
cost of the Company's defined benefit plans are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2004 2003 2004 2003
------- ------- ------- -------
Service cost $ 163 $ 86 $ 469 $ 549
Interest cost 350 511 1,044 1,202
Expected return on plan assets (373) (528) (1,139) (1,258)
Amortization of transition asset (3) (5) (8) (10)
Amortization of prior service cost 33 38 99 118
Amortization of net (gain) loss 10 21 19 (53)
------- ------- ------- -------
Net periodic benefit cost $ 180 $ 123 $ 484 $ 548
======= ======= ======= =======
Through June 30, 2004, the Company has made $869 of contributions in fiscal 2004
to its defined benefit pension plans. The Company anticipates contributing an
additional $345 to fund its defined benefit pension plans during the balance of
fiscal 2004, resulting in total projected contributions of $1,214 in fiscal
2004.
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 service 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 impact on business
conditions, and on the aerospace industry in particular, of global terrorism
threat; (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) pension plan actuarial assumptions and future
contributions; (14) net realizable value of assets held for sale; 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.
8
A. Results of Operations
NINE MONTHS ENDED JUNE 30, 2004 COMPARED WITH NINE MONTHS ENDED JUNE 30, 2003
Net sales in the first nine months of fiscal 2004 increased 14.1% to $66.6
million, compared with $58.4 million in the comparable period in fiscal 2003.
Net loss in the first nine months of fiscal 2004 was $1.4 million, compared with
a net loss of $5.6 million in the comparable period in fiscal 2003.
Turbine Component Services and Repair Group ("Repair Group")
Net sales in the first nine months of fiscal 2004 increased 22.0% to $35.5
million, compared with $29.1 million in the comparable fiscal 2003 period.
Component manufacturing and repair net sales increased $5.1 million to $28.2
million in the first nine months of fiscal 2004, compared with $23.1 million in
the comparable fiscal 2003 period. Demand for precision component machining and
for component repairs for industrial turbine engines and large aerospace turbine
engines increased, while the demand for component repairs for small aerospace
turbine engines decreased in the first nine months of fiscal 2004, compared with
the comparable fiscal 2003 period. This reflects an increase in component
repairs for newer model large aerospace turbine engines offset by reduced demand
for component repairs for older model large aerospace turbine engines. Net sales
associated with the demand for replacement parts, which often complement
component repair services provided to customers, increased $1.3 million in the
first nine months of fiscal 2004, compared with the comparable fiscal 2003
period.
During the first nine months of fiscal 2004, the Repair Group's selling, general
and administrative expenses decreased $1.2 million to $3.6 million, or 10.1% of
net sales, from $4.8 million, or 16.5% of net sales, in the comparable fiscal
2003 period. Included in the $4.8 million of selling, general and administrative
expenses in the first nine months of fiscal 2003 were charges aggregating $1.2
million related to the impairment of equipment and $0.4 million of severance
charges related to the further consolidation of the Repair Group's operations
during fiscal 2003. The remaining selling, general and administrative expenses
in the first nine months of fiscal 2003 were $3.2 million, or 11.1% of net
sales.
The Repair Group's operating loss in the first nine months of fiscal 2004
decreased $2.8 million to $2.0 million from a $4.8 million loss in the
comparable fiscal 2003 period. Included in the operating loss in the first nine
months of fiscal 2003 were charges aggregating $1.2 million related to the
impairment of equipment and $0.4 million of severance charges. In addition to
the impact of the non-recurrence of the aforementioned impairment and severance
charges, operating results improved in the first nine months of fiscal 2004 due
to the positive impact on margins of increased sales volumes for component
manufacturing and repair services, partially offset by reduced margins on sales
of replacement parts and the negative impact of the continued strength of the
euro against the U.S. dollar as described below.
During fiscal 2003, the euro strengthened against the U.S. dollar. The euro
continued to be strong in relation to the U.S. dollar during the first nine
months of fiscal 2004. The Repair Group's non-U.S. operation has most of its
sales denominated in U.S. dollars while 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 nine 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 nine months of fiscal 2004, the Company did not hedge
all of its exposure to the strengthening euro and, therefore, the impact on the
Repair Group's operating results in the first nine months of fiscal 2004 was
higher operating costs, including selling, general and administrative expenses,
of approximately $3.5 million related to its non-U.S. operations, when compared
to the comparable fiscal 2003 period.
The Repair Group's backlog as of June 30, 2004, was $5.5 million, compared with
$8.9 million as of September 30, 2003. At June 30, 2004, $4.5 million of the
total backlog is scheduled for delivery over the next twelve months and $1.0
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 of the ACM Group in the first nine months of fiscal 2004 increased
3.9% to $23.0 million, compared with $22.1 million in the comparable period of
fiscal 2003.
For purposes of the following 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 airframe
9
components for small aircraft decreased $0.5 million to $10.3 million in the
first nine months of fiscal 2004, compared with $10.8 million in the same period
in fiscal 2003. Net sales of turbine engine components for small aircraft, which
consist primarily of net sales to Rolls-Royce Corporation of turbine engine
components for the AE series turbine engines for business and regional jets, as
well as military transport and surveillance aircraft, increased $0.8 million to
$8.9 million in the first nine months of fiscal 2004, compared with $8.1 million
in the comparable period in fiscal 2003. Net sales of airframe components for
large aircraft were $1.5 million in the first nine months of both fiscal 2004
and 2003. Net sales of turbine engine components for large aircraft increased to
$0.8 million in the first nine months of fiscal 2004, compared with $0.7 million
in the same period in fiscal 2003. Other sales, including non-aerospace
component sales, were $1.5 million and $1.0 million in the first nine months of
fiscal 2004 and 2003, respectively. The increase in other sales is attributable
primarily to increases in tooling revenue and order cancellation charges.
The ACM Group's airframe and turbine engine component products have both
military and commercial applications. Net sales of airframe and turbine engine
components that solely have military applications decreased $0.6 million to
$10.2 million in the first nine months of fiscal 2004, compared with $10.8
million in the first nine months of fiscal 2003.
Selling, general and administrative expenses in the first nine months of fiscal
2004 were $1.4 million, or 6.2% of net sales, compared with $1.7 million, or
7.7% of net sales, in the first nine months of fiscal 2003. Selling, general and
administrative expenses in the first nine months of fiscal 2004 benefited from a
$0.2 million reduction in the provision for uncollectible accounts receivable
and $0.1 million reduction in compensation and employee benefits expenses due to
open positions, compared with the comparable period in fiscal 2003.
The ACM Group's operating income in the first nine months of fiscal 2004 was
$1.7 million, compared with operating income of $0.7 million in the same period
in fiscal 2003. Operating results were favorably impacted in the fist nine
months of fiscal 2004 compared with the same period in fiscal 2003 by (i) a $0.5
million decrease in material cost as a result of product mix consisting of a
greater percentage of products sold containing lower cost materials; (ii) a $0.2
million decrease in labor costs due to improved utilization of labor; (iii) a
$0.2 million decrease in manufacturing supplies and repair expenses; and (iv) a
$0.2 million decrease in outside services expense. Operating results in the
first nine months of fiscal 2004 were negatively impacted by a $0.1 million
increase in the LIFO provision and a $0.4 million decrease in inventory levels
compared with the same period in fiscal 2003. Operating results in the first
nine months of fiscal 2004 were also favorably impacted by reductions in
selling, general and administrative expenses as discussed in the previous
paragraph.
The ACM Group's backlog as of June 30, 2004 was $21.9 million, compared with
$21.4 million as of September 30, 2003. At June 30, 2004, $20.1 million of the
total backlog was scheduled for delivery over the next twelve months and $1.8
million was scheduled for delivery beyond the next twelve months. All orders are
subject to modification or cancellation by the customer with limited charges.
The ACM Group believes that the backlog may not be indicative of actual sales
for any succeeding period.
Metal Finishing Group
Net sales of the Metal Finishing Group increased 13.3% to $8.1 million in the
first nine months of fiscal 2004, compared with net sales of $7.2 million in the
first nine months of fiscal 2003. In the first nine months of fiscal 2004,
product net sales, consisting of selective electrochemical finishing equipment
and solutions, increased 7.2% to $4.4 million, compared with $4.1 million in the
same period in fiscal 2003. In the first nine months of fiscal 2004, customized
selective electrochemical finishing contract service net sales increased 19.8%
to $3.6 million, compared with $3.0 million in the same period in fiscal 2003.
In the first nine months of fiscal 2004 net sales to customers in the oil and
gas exploration industry increased $0.6 million; net sales to customers in the
aerospace industry increased $0.3 million; net sales to customers in the
electronics industry increased $0.2 million; and net sales to customers in the
automotive industry increased $0.1 million, compared with the same period in
fiscal 2003. These net sales gains were partially offset in the first nine
months of fiscal 2004 by a decrease of $0.1 million in net sales to the U.S.
military, compared with the same period in fiscal 2003.
Selling, general and administrative expenses in the first nine months of fiscal
2004 were $2.5 million, or 30.3% of net sales, compared with $2.3 million, or
31.7% of net sales, in the first nine months of fiscal 2003. The increase in
selling, general and administrative expenses is attributable to $0.1 million
increase in compensation and employee benefit expenses, consisting primarily of
one-time severance benefits, and a $0.1 million increase in legal and
professional expenses. Operating income in both the first nine months of fiscal
2004 and 2003 was $0.6 million. Operating income in the first nine months of
fiscal 2004 was negatively impacted by higher costs, including labor and
employee benefits, associated with the start up of a new customer-dedicated
contract service operation at an existing service shop and higher insurance
expense; as well as the increases in selling, general and administrative
expenses previously discussed.
10
The Metal Finishing Group essentially had no backlog at June 30, 2004.
Corporate Unallocated Expenses
Corporate unallocated expenses, consisting of corporate salaries and benefits,
legal and professional and other corporate expenses, were $1.2 million in the
first nine months of fiscal 2004, compared with $1.4 million in the same period
in fiscal 2003. In the first nine months of fiscal 2004, corporate unallocated
expenses were favorably impacted primarily by a $0.1 million decrease in legal
and professional expenses and by a $0.1 million decrease in corporate salary and
employee benefits expenses.
Other/General
Interest expense was $0.6 million in the first nine months of fiscal 2004 and
2003. The following table sets forth the weighted average interest rates and
weighted average outstanding balances under the Company's credit agreements in
the first nine months of fiscal years 2004 and 2003.
WEIGHTED AVERAGE WEIGHTED AVERAGE
INTEREST RATE OUTSTANDING BALANCE
NINE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
-------------------------- ----------------------------
CREDIT AGREEMENT 2004 2003 2004 2003
- ---------------- ------- --------- ------------ ------------
Industrial development variable rate demand
revenue bond 1.2% 1.4% $2.9 million $3.2 million
Term note 9.5% 8.8% $5.2 million $6.4 million
Revolving credit agreement 4.5% 4.6% $2.5 million $2.3 million
Currency exchange loss was $0.1 million in the first nine months of fiscal 2004,
compared with $0.3 million in the comparable period in fiscal 2003. This loss is
the result of the impact of currency exchange rate fluctuations, resulting
primarily from the impact of continued strength of the euro in relation to the
U.S. dollar, on the Company's monetary assets and liabilities that are not
denominated in U.S. dollars.
In the first nine months of fiscal year 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 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.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003
Net sales in the third quarter of fiscal 2004 increased 2.0% to $23.0 million,
compared with $22.6 million in the comparable period in fiscal 2003. Net loss in
the third quarter of fiscal 2004 was $0.3 million, compared with a net income of
$0.2 million in the comparable period in fiscal 2003.
Turbine Component Services and Repair Group ("Repair Group")
Net sales in the third quarter of fiscal 2004 increased 3.2% to $11.5 million,
compared with $11.1 million in the comparable fiscal 2003 period. Component
manufacturing and repair net sales increased $0.9 million to $9.3 million in the
third quarter of fiscal 2004, compared with $8.4 million in the comparable
fiscal 2003 period. Demand for component repairs for industrial turbine engines
and for small and large aerospace turbine engines increased, while the demand
for precision component machining decreased in the third quarter of fiscal 2004,
compared with the comparable fiscal 2003 period. This reflects an increase in
component repairs for newer model large aerospace turbine engines offset by
reduced demand for component repairs for older model large aerospace turbine
engines. Net sales associated with the demand for replacement parts, which often
complement component repair services provided to customers, decreased $0.5
million in the third quarter of fiscal 2004, compared with the comparable fiscal
2003 period.
During the third quarter of fiscal 2004, the Repair Group's selling, general and
administrative expenses were $1.1 million, or 10.1% of net sales, compared with
$1.1 million, or 9.9% of net sales, in the comparable fiscal 2003 period.
Included in the
11
$1.1 million of selling, general and administrative expenses in the third
quarter of fiscal 2003 were $0.2 million of severance charges related to the
further consolidation of the Repair Group's operations during fiscal 2003. The
remaining selling, general and administrative expenses in the third quarter of
fiscal 2003 were $0.9 million, or 8.0% of net sales.
The Repair Group's operating loss in the third quarter of fiscal 2004 increased
$0.5 million to $0.9 million from a $0.4 million loss in the comparable fiscal
2003 period. Included in the operating loss in the third quarter of fiscal 2003
were $0.2 million of severance charges. The increased operating loss in the
third quarter of fiscal 2004 was primarily due to the negative impact of the
continued strength of the euro against the U.S. dollar as further discussed
below. Operating results in the third quarter of fiscal 2004 did, however,
benefit from the positive impact on margins of increased sales volumes for
component manufacturing and repair services, partially offset by reduced margins
on sales of replacement parts.
During fiscal 2003, the euro strengthened against the U.S. dollar. The euro
continued to be strong in relation to the U.S. dollar during the first nine
months of fiscal 2004. The Repair Group's non-U.S. operation has most of its
sales denominated in U.S. dollars while 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 third quarter 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 third quarter of fiscal 2004, the Company hedged most of its exposure
to the strengthening euro, but did so at rates much less attractive than in the
same fiscal 2003 period and, therefore, the impact on the Repair Group's
operating results in the third quarter of fiscal 2004 was higher operating
costs, including selling, general and administrative expenses, of approximately
$1.3 million related to its non-U.S. operations, when compared to the comparable
fiscal 2003 period.
Aerospace Component Manufacturing Group ("ACM Group")
In the third quarter of fiscal 2004, ACM Group net sales decreased 3.1% to $8.7
million, compared with $9.0 million in the third quarter of fiscal 2003.
Net sales of airframe components for small aircraft decreased $1.4 million to
$3.6 million in the third quarter of fiscal 2004, compared with $4.9 million in
the third quarter of fiscal 2003. Net sales of turbine engine components for
small aircraft, which consist primarily of net sales to Rolls-Royce Corporation
of turbine engine components for the AE series turbine engines for business and
regional jets, as well as military transport and surveillance aircraft,
increased $0.7 million to $3.5 million in the third quarter of fiscal 2004,
compared with $2.8 million in the third quarter of fiscal 2003. Airframe
component net sales for large aircraft were $0.5 million in the third quarter of
fiscal 2004 and 2003. Net sales of turbine engine components for large aircraft
were $0.3 million in the third quarters of both fiscal 2004 and 2003. Other
sales, including non-aerospace component sales, were $0.8 million and $0.4
million in the third quarter of fiscal 2004 and 2003, respectively. This
increase in other sales is attributable primarily to increases in non-aerospace
related product net sales, tooling revenue and order cancellation charges.
The ACM Group's airframe and turbine engine component products have both
military and commercial applications. Net sales of airframe and turbine engine
components that solely have military applications decreased $1.8 million to $3.4
million in the third quarter of fiscal 2004, compared with $5.2 million in the
third quarter of fiscal 2003.
Selling, general and administrative expenses in the third quarter of fiscal 2004
were $0.6 million, or 6.6% of net sales, compared with $0.6 million, or 6.9% of
net sales, in the third quarter of fiscal 2003.
The ACM Group's operating income in the third quarter of fiscal 2004 was $0.7
million, compared with operating income of $1.1 million in the same period in
fiscal 2003. Operating results were negatively impacted in the third quarter of
fiscal 2004 compared with the third quarter of fiscal 2003 by (i) a $0.1 million
increase in outside processing expense; (ii) a $0.1 million increase in the LIFO
provision; (iii) a $0.1 million increase in physical inventory adjustments; and
(iv) a $0.3 million decrease in inventory levels. The effect of the preceding
was partially offset in the third quarter of fiscal 2004, compared with the
third quarter of fiscal 2003, by a $0.1 million decrease in energy costs and a
$0.1 million decrease in manufacturing supplies and repair expenses.
Metal Finishing Group
Net sales of the Metal Finishing Group increased 14.4% to $2.8 million in the
third quarter of fiscal 2004, compared with $2.5 million in the third quarter of
fiscal 2003. Product net sales, consisting of selective electrochemical
finishing equipment and solutions, increased 4.6% to $1.4 million in the third
quarter of fiscal 2004, compared with $1.3 million in the third quarter of
fiscal 2003. In the third quarter of fiscal 2004 customized selective
electrochemical finishing contract service net sales increased 24.0% to $1.3
million, compared with $1.1 million in the third quarter of fiscal 2003. In the
third quarter of
12
fiscal 2004, net sales to customers in the oil and gas exploration industry
increased $0.1 million; net sales to customers in the aerospace industry
increased $0.2 million; and net sales to customers in the automotive industry
increased $0.1 million, compared with the third quarter of fiscal 2003. These
net sales increases were partially offset by a $0.1 million decrease in net
sales to the U.S. military in the third quarter of fiscal 2004, compared with
the third quarter of fiscal 2003.
Selling, general and administrative expenses in the third quarter of fiscal 2004
were $0.9 million, compared with $0.7 million in the third quarter of fiscal
2003. The increase in selling, general and administrative expenses is
attributable to $0.1 million increase in compensation and employee benefits
expenses, consisting primarily of one-time severance benefits. Operating income
in the third quarter of fiscal 2004 was $0.2 million, compared with $0.3 million
in the third quarter of fiscal 2003. Operating income in the third quarter of
fiscal 2004 was negatively impacted by the increase in selling, general and
administrative expenses previously discussed and higher costs, including labor
and employee benefits, associated with the start up of a new customer-dedicated
contract service operation at an existing service shop.
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
third quarter of fiscal 2004, compared with $0.6 million in the third quarter of
fiscal 2003. In the third quarter of fiscal 2004, corporate unallocated expenses
were favorably impacted primarily by a $0.3 million decrease in legal and
professional expenses.
Other/General
Interest expense was $0.2 million in the third quarter of fiscal 2004 and 2003.
The following table sets forth the weighted average interest rates and weighted
average outstanding balances under the Company's credit agreements in the third
quarter of fiscal years 2004 and 2003.
WEIGHTED AVERAGE WEIGHTED AVERAGE
INTEREST RATE OUTSTANDING BALANCE
THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
--------------------------- ----------------------------
CREDIT AGREEMENT 2004 2003 2004 2003
- ---------------- ------- ---------- ------------ ------------
Industrial development variable rate demand
revenue bond 1.2% 1.3% $2.8 million $3.1 million
Term note 9.5% 9.5% $4.9 million $6.1 million
Revolving credit agreement 4.5% 4.7% $2.7 million $2.7 million
Currency exchange gain was $0.1 million in the third quarter of fiscal 2004,
compared with a loss of $0.1 million in the comparable period in fiscal 2003.
The third quarter fiscal 2004 gain is the result of the impact of currency
exchange rate fluctuations, resulting primarily from the impact of a nominal
strengthening 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.
In the third quarters of fiscal year 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 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 increased to $5.9 million at June 30, 2004 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.
13
The Company's operating activities generated $2.3 million of cash in the first
nine months of fiscal 2004. A decrease in inventories due to increased sales
activity as well as the Company's efforts to reduce inventory levels generated
$1.2 million. A $0.5 million increase in accounts payable, due to timing of
vendor payments, and a $0.7 increase in accrued liabilities, due to the timing
of increases in compensation and royalty accruals, generated $1.2 million.
Capital expenditures were $1.9 million in the first nine months of fiscal 2004.
Capital expenditures in the first nine months of fiscal 2004 consist of $0.7
million by the ACM Group, $0.2 million by the Metal Finishing Group and $1.0
million by the Repair Group. Capital expenditures 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
June 30, 2004, the Company had outstanding commitments for capital expenditures
totaling $0.9 million. The Company anticipates that total fiscal 2004 capital
expenditures will approximate $3.3 million. During the first nine months of
fiscal 2004, the Company received a $0.7 million reimbursement for certain
capital expenditures that were previously made in anticipation of a proposed
joint venture that did not materialize.
In July 2004, the Company entered into an agreement to sell a building and land
that is part of its Repair Group's Irish operations, with a net book value of
$1.8 million, for 6.5 million euros (approximately $7.9 million at June 30, 2004
exchange rate). The sale of the building is expected to close in the first
quarter of fiscal 2005.
At June 30, 2004, 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 June 30, 2004 was 1.20%. The outstanding
balance of the industrial development variable rate revenue bond at June 30,
2004 was $2.7 million. The bank's commitment fee on a 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 June 30, 2004, 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 June 30, 2004, the Company has a term note that is repayable in quarterly
installments of $0.3 million through August 2005, with the remaining balance of
$3.3 million due September 30, 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 June 30, 2004 was
9.49%. The outstanding balance of the term note as of June 30, 2004 was $4.8
million.
At June 30, 2004, the Company has a $6.0 million revolving credit agreement,
subject to sufficiency of collateral, that expires on September 30, 2005 and
bears interest at the bank's base rate plus 0.50%. The interest rate was 4.75%
at June 30, 2004. A 0.375% commitment fee is incurred on the unused balance of
the revolving credit agreement. At June 30, 2004, the outstanding balance under
the revolving credit agreement was $2.9 million and the Company had $3.1 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
require maintenance of a minimum tangible net worth level and minimum adjusted
fixed charge coverage to EBITDA ratio. The Company was in compliance with all
applicable covenants at June 30, 2004.
In May 2004, the Company entered into an agreement with its bank to amend
certain provisions of its credit agreements. The amendment extended the maturity
date of the Company's $6.0 million revolving credit agreement to September 30,
2005. The amendment waived the Company's minimum tangible net worth level
covenant for the period ended March 31, 2004 and modified the minimum tangible
net worth level covenant.
14
Effective June 30, 2004, the Company entered into an agreement with its lending
bank to amend certain provisions of its credit agreements. The amendment extends
the maturity date of the Company's term note to September 30, 2005. The
amendment also extends the maturity date of the standby letter of credit that
collateralizes the industrial development variable rate revenue bond to
September 30, 2005.
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, 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 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 adoption of this standard during
the second quarter of fiscal year 2004 did not 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 pound); 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 nine 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 its 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 nine months of fiscal 2004, the euro continued to be strong in
relation to the U.S. dollar. The Repair Group's non-U.S. operation has 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
15
extent of the U.S. dollar amounts of such contracts. During the first nine
months of fiscal 2004, the Company did not hedge all of its exposure to the
euro. At June 30, 2004, the Company had forward exchange contracts outstanding
for durations of up to three months to purchase euros aggregating U.S. $4.7
million at euro to U.S. dollar exchange rates ranging from 1.2196 to 1.2350. 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 June 30, 2004 are denominated, would result in a $0.5 million decline or
increase, respectively, in the value of the forward exchange contracts.
Subsequent to June 30, 2004, the Company entered into foreign currency exchange
contracts expiring through September 30, 2005 to purchase euros aggregating U.S.
$19.2 million at euro to U.S. dollar exchange rates ranging from 1.1985 to
1.2010. 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 June 30, 2004, the Company's assets and liabilities denominated in the
British pound and the euro were as follows (amounts in thousands):
BRITISH POUND EURO
------------- -----
Cash and cash equivalents 426 301
Accounts receivable 671 502
Accounts payable and accrued liabilities 121 1,945
B. 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 June 30, 2004 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.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
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
17
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
4.10 Amendment No. 6 to Amended and Restated Credit Agreement dated
March 31, 2004 between SIFCO Industries, Inc. and National
City Bank
4.11 Consolidated Amendment No. 7 to Amended and Restated Credit
Agreement, Amended and Restated Reimbursement Agreement and
Promissory Note dated May 14, 2004 between SIFCO Industries,
Inc. and National City Bank
*4.12 Consolidated Amendment No. 8 to Amended and Restated Credit
Agreement, Amended and Restated Reimbursement Agreement and
Promissory Note effective June 30, 2004 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
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
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, 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
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*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 June 30, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
SIFCO Industries, Inc.
(Registrant)
Date: August 9, 2004 /s/ Jeffrey P. Gotschall
------------------------
Jeffrey P. Gotschall
Chairman of the Board and
Chief Executive Officer
Date: August 9, 2004 /s/ Frank A. Cappello
---------------------
Frank A. Cappello
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
20