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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission file number 1-5978
SIFCO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-0553950
- -------------------------------------------------------------- -----------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
970 East 64th Street, Cleveland Ohio 44103
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(216) 881-8600
--------------------------------------------------
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Shares, $1 Par Value American Stock Exchange
- --------------------------- -----------------------------------------
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter is $12,240,064.
The number of the Registrant's Common Shares outstanding at October 31, 2004 was
5,172,733. The aggregate market value of Common Shares held by non-affiliates of
the Registrant as of October 31, 2004 computed on the basis of the last reported
sale price per share of $3.79 of such stock on the American Stock Exchange, was
$11,675,156.
Documents incorporated by reference: Portions of the Proxy Statement for Annual
Meeting of Shareholders on January 25, 2005 (Part III).
PART I
ITEM 1. BUSINESS
A. THE COMPANY
SIFCO Industries, Inc. ("Company"), an Ohio corporation, was incorporated in
1916. The executive offices of the Company are located at 970 East 64th Street,
Cleveland, Ohio 44103, and its telephone number is (216) 881-8600.
The Company is engaged 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
finishing. The products include forged parts, machined forgings and other
machined metal parts, remanufactured component parts for aerospace and
industrial turbine engines, and selective electrochemical finishing solutions
and equipment. The Company's operations are conducted in three business
segments: (1) Turbine Component Services and Repair Group, (2) Aerospace
Component Manufacturing Group and (3) Metal Finishing Group.
B. PRINCIPAL PRODUCTS AND SERVICES
1. Turbine Component Services and Repair Group
The Company's Turbine Component Services and Repair Group ("Repair Group") is
headquartered in Cork, Ireland. This segment of the Company's business consists
principally of the repair and remanufacture of aerospace and industrial turbine
engine components. The business also performs machining and applies high
temperature-resistant coatings to new turbine engine components.
Operations
The aerospace portion of the Repair Group requires the procurement of
licenses/authority, which certify that the Company has obtained approval to
perform certain proprietary repair processes. Such approvals are generally
specific to an engine and its components, a process and a repair
facility/location. Without possession of such approvals, a company would be
precluded from competing in the aerospace turbine engine component repair
business. Approvals are issued by either the original equipment manufacturers
("OEM") of aerospace turbine engines or the Federal Aviation Administration
("FAA"). Historically, the aerospace portion of the Repair Group has elected to
procure approvals primarily from the OEM and currently maintains a variety of
OEM proprietary repair process approvals issued by each of the primary OEM (i.e.
General Electric, SNECMA, Pratt & Whitney, Rolls-Royce). In exchange for being
granted an OEM approval, the Repair Group is obligated to pay royalties to the
OEM for each type of component repair that it performs utilizing the OEM
approved proprietary repair process. The aerospace portion of Repair Group
continues to be successful in procuring FAA repair process approvals. There is
no royalty payment obligation associated with the use of a repair process
approved by the FAA. To procure an OEM or FAA approval, the Repair Group is
required to demonstrate its technical competence in the process of repairing
such turbine engine components.
The development of remanufacturing and repair processes is an ordinary part of
the Repair Group. The Repair Group continues to invest time and money on
research and development activities. The Company has research and development
activities in PVCVD (Pure Vacuum Chemical Vapor Deposition) of a wide range of
materials, laser technology and e-manufacturing. The Repair Group has the
opportunity to apply the results of this research in both the industrial and
aerospace turbine markets. Operating costs related to such activities are
expensed during the period in which they are incurred.
The Company has recognized the evolution of the industrial turbine engine
market. The Company's technologies have had many years of evolution in the
aerospace turbine engine sector. The application of similar technologies to the
industrial turbine engine sector has resulted in benefits to the industrial
turbine engine operator. The Company has invested capital in new equipment in
both the United States and Ireland that facilitates the repair and remanufacture
of these larger (than aerospace) industrial turbine engine components. Entry
into this sector significantly increases the potential market for the
application of the Company's technologies.
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The Repair Group generally has multiple sources for its raw materials, which
consist primarily of investment castings essential to this business, although
certain raw materials may be provided by a limited number of suppliers. Certain
items are procured directly from the OEM to satisfy repair process requirements.
Suppliers of such materials are located in many areas throughout North America
and Europe. The Repair Group generally does not depend on a single source for
the supply of its materials and management believes that its sources are
adequate for its business.
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, such operating costs are negatively
impacted. During certain periods, the Repair Group has been able to successfully
hedge its exposure to the strengthening euro thereby mitigating the negative
impact on its operating results during such periods. It is difficult to
determine at this time if the Company will be able to successfully hedge its
exposure to the euro (during periods of strength against the U.S. dollar) and,
therefore, mitigate the negative impact on the Repair Group's operating results
during future periods.
Industry
The performance of the domestic and international air transport industry
directly and significantly impacts the performance of the Repair Group.
Historically, the air transport industry's long-term outlook has, for many
years, been for continued, steady growth. Such outlook suggested the need for
additional aircraft and, therefore, growth in the requirement for aerospace
turbine engines and related engine repairs. While the events of September 11,
2001 resulted in an immediate reduction in the demand for passenger travel both
in the U.S. and internationally, such demand has recently rebounded to
pre-September 11, 2001 levels. Due to an inherent need to optimize the
efficiency and profitability of operations, airlines appear to be supporting
such increased demand for passenger travel with smaller fleets consisting of new
and more efficient aircraft. In addition, the financial condition of many
airlines in the U.S. and throughout the world continues to be weak. The U.S.
airline industry has received U.S. government assistance, while some airlines
have entered bankruptcy proceedings, and others continue to pursue major
restructuring initiatives. It is difficult to determine what the long-term
impact of the global terrorism threat may be on air travel and the demand for
services and products provided by the Repair Group.
The world's fleet of aircraft has been in transition. Several older models of
certain aircraft (727, 737-100/200, 747-100/200 and DC-9) and the engines (JT8D
and JT9D) that power such aircraft have been retired from use. As a result, the
overall demand for repairs to such older model engines has significantly
decreased. At the same time, newer generation aircraft (newer generation
737-700/800/900 and 747-400; 767, A320, A330, A340, etc.) and engines (CFM-56,
PW4000, Trent, etc.) are in use with newer technology required to both operate
and maintain such engines. Many of the larger fleets of such aircraft are now
operating under the umbrella of the "low cost" airlines. The introduction of
such newer generation aerospace turbine engines has in general reduced the
frequency with which such engines and related components need to be repaired.
The longer times between repairs have been attributed to improved technology,
including the improved ability to monitor an engine's condition while still in
operation. Although the newer generation aerospace turbine engines may require
less frequent overhaul, such aerospace turbine engines generally have a greater
number of components that require repair. This could result in a larger
aerospace turbine engine component repair market in the future. However, recent
experience is indicating that the extended time that an engine remains on wing
is causing significant component replacement costs due to the non-repairability
of the longer run components. Further, many airlines are reducing the time
interval between overhauls. This may cause a higher level of component repair
activity in the near term.
Recent years have seen the installation of numerous industrial turbine engines
as means of generating electric power for residential, commercial and industrial
consumers. The high cost of installation and maintenance of such units has
provided the Repair Group with the opportunity to bring value to this
significant market. Industrial turbine engine units are in use throughout the
world. Industrial turbine engine units operate in different modes. Some units
operate on a continuous base loading at a percentage of their maximum output,
while other units may operate at maximum output during specific periods of
electric power shortages (e.g. power blackouts, peak demand periods, etc.). The
latter units are called peak power systems. In general, industrial turbine
engine units are managed either by a government entity, an electric power
utility, or an independent power producer ("IPP"). IPPs originated principally
in response to deregulation of the organizations that operate electric power
utilities. Electric power deregulation has created greater competition and
therefore, more economical electric power for the end user. Repair and
remanufacture of industrial turbine engine components is a growing element of
cost management in the industrial turbine engine industry. The Repair Group's
experience, knowledge and technology in the more demanding aerospace market
augurs well for continued participation in the industrial turbine engine market.
Competition
In recent years, while the absolute number of competitors has decreased as a
result of industry consolidation and vertical integration, competition in the
component repair business has nevertheless increased, principally due to the
increasing
3
direct involvement of the aerospace turbine engine manufacturer into the turbine
engine overhaul and component repair businesses. With the entry of the OEM into
the market, there has been a general reluctance on the part of the OEM to issue,
to the independent component repair companies, its approvals for the repair of
its newer model engines and related components. However, if an OEM repair
process approval is not available, the Repair Group has, in many cases, been
successful in procuring, and subsequently marketing to its customers, FAA
approvals and related repair processes. It appears that the Repair Group will,
more likely than not, become more dependent on its ability to successfully
procure and market FAA approved licenses and related repair processes in the
future and/or on close collaboration with engine manufacturers. However, the
Repair Group believes it has partially compensated for these factors by its
success in broadening its product lines and developing new geographic markets
and customers, more recently by its continued expansion into the repair of
industrial turbine engine components.
Repair and remanufacture of industrial turbine engine components has evolved
through the need for the operator of electric power utilities to improve the
economics of its industrial turbine engine operations. To participate in the
industrial turbine engine sector, it is necessary to have a proven record of
application of the appropriate technologies. Most competitors involved in the
industrial turbine engine component repair sector are either the OEM or entities
that have a history of application of component repairs in the aerospace sector.
Metallurgical analysis of component material removed from an industrial turbine
engine determines the precise nature of the necessary technologies to be used to
return the component to service. The determination of qualification to repair
such components is the responsibility of the industrial turbine engine
owner/operator. Several OEM such as ABB, General Electric, Siemens, Alstom, etc.
participate to varying degrees in the repair and remanufacture of industrial
turbine engine components. The Repair Group's broad product capability (multiple
OEM types) and technology base augurs well for continued growth in the sector.
Customers
The identity and ranking of the Repair Group's principal customers can vary from
year to year. The Repair Group attempts to rely on its ability to adapt its
services and operations to changing requirements of the market in general and
its customers in particular, rather than relying on high volume production of a
particular item or group of items for a particular customer or customers. During
fiscal 2004, no single customer accounted for 10% or more of the Repair Group's
net sales. Although there is no assurance that this will continue, historically
as one or more major customers have reduced their purchases, the business has
generally been successful in replacing such reduced purchases, thereby avoiding
a material adverse impact on the business. No material part of the Repair
Group's business is seasonal.
Backlog of Orders
The Repair Group's backlog as of September 30, 2004 decreased to $4.4 million,
of which $3.6 million is scheduled for delivery during fiscal 2005 and $0.8
million is on hold, compared with $8.9 million as of September 30, 2003, of
which $7.3 million was scheduled for delivery during fiscal 2004 and $1.6
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 necessarily be indicative of actual sales for any succeeding period.
2. Aerospace Component Manufacturing Group
Operations
The Company's Aerospace Component Manufacturing Group ("ACM Group") is a
manufacturer of forged parts ranging in size from 2 to 1,000 pounds (depending
on configuration and alloy) in various alloys utilizing a variety of processes
for application in the aerospace and other industrial markets. The ACM Group's
forged products include: OEM and aftermarket components for aircraft and
land-based turbine engines; structural airframe components; aircraft landing
gear components, wheels and brakes; critical rotating components for
helicopters; and commercial/industrial products. The ACM Group also provides
heat-treatment and some machining of forged parts.
The forging, machining, or other preparation of prototype parts to customers'
specifications, which may require research and development of new parts or
designs, is an ordinary part of the ACM Group.
The ACM Group generally has multiple sources for its raw materials, which
consist primarily of high quality metals essential to this business, although
certain raw materials may be provided by a limited number of suppliers.
Suppliers of such materials are located in many areas throughout North America
and Europe. The ACM Group does not depend on a single source for the supply of
its materials and believes that its sources are adequate for its business. The
business is ISO 9001:2000 registered and AS 9100:2001 certified. In addition,
the ACM Group's heat-treating and non-destructive testing facilities are NADCAP
(National Aerospace and Defense Contractors Accreditation Program) accredited.
4
Industry
The performance of the domestic and international air transport industries
directly and significantly impacts the performance of the ACM Group.
Historically, the air transport industry's long-term outlook has, for many
years, been for continued, steady growth. Such outlook suggested the need for
additional aircraft and growth in the requirement for airframe and turbine
engine components. While the events of September 11, 2001 resulted in an
immediate reduction in the demand for passenger travel both in the U.S. and
internationally, such demand has recently rebounded to pre-September 11, 2001
levels. Rising fuel costs and fleet commonality are drivers of new aircraft
purchases. The Company is poised to take advantage of resulting improvement in
order demand from the airframe and engine manufacturers. The ACM business also
supplies new and spare components for military aircraft. Increases in military
airframe and turbine engine component net sales have partially offset the
decreases in commercial aerospace components. It is difficult to determine at
this time what the long-term impact of the global terrorism threat may be on the
demand for products provided by the ACM Group.
Competition
While there has been some consolidation in the forging industry, the ACM Group
believes there is limited opportunity to increase prices due to the overcapacity
that remains. The ACM Group believes, however, that its focus on quality,
customer service, new technology and offering a broad range of capabilities help
to give it an advantage in the primary markets it serves. The ACM Group believes
it can broaden its product lines by investing in equipment that expands
capabilities and by developing new customers in markets which require similar
technical competence, quality and service as the aerospace industry.
Customers
During fiscal 2004, the ACM Group had two customers, Rolls-Royce Corporation and
United Technologies Corporation, which accounted for 31% and 11%, respectively,
of the ACM Group's net sales. The ACM Group believes that the total loss of
sales to such customers would result in a materially adverse impact on the
business and income of the ACM Group. However, the ACM Group has maintained a
business relationship with these customers for well over ten years and is
currently conducting business with them under multi-year agreements. Although
there is no assurance that this will continue, historically as one or more major
customers have reduced their purchases, the ACM Group has generally been
successful in replacing such reduced purchases, thereby avoiding a material
adverse impact on the segment. The ACM Group attempts to rely on its ability to
adapt its services and operations to changing requirements of the market in
general and its customers in particular. No material part of the Company's ACM
Group's business is seasonal.
Backlog of Orders
The ACM Group's backlog as of September 30, 2004 increased to $23.6 million, of
which $21.3 million is scheduled for delivery during fiscal 2005 and $2.3
million is on hold, compared with $21.4 million as of September 30, 2003, of
which $18.6 million was scheduled for delivery during fiscal 2004 and $1.6
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 necessarily be indicative of actual sales for any succeeding period.
3. Metal Finishing Business Group
The Company's Metal Finishing Group is a provider of specialized electrochemical
technologies, including the electroplating process called "brush plating", as
well as anodizing and electropolishing systems, which are used to apply metal
coatings and finishes to a selective area of a component. The Metal Finishing
Group's SIFCO Selective Plating business provides (i) equipment and metal
solutions to customers to do their own in-house selective electrochemical
finishing and (ii) customized selective electrochemical finishing on a contract
service basis.
Operations
A variety of metals, determined by the customer's design requirements, can be
brush plated onto metal surfaces. Metals available using SIFCO Process solutions
include: cadmium, cobalt, copper, nickel, tin and zinc. Precious metal solutions
such as gold, iridium, palladium, platinum, rhodium, and silver are also
available. The Metal Finishing Group has also developed a number of
alloy-plating solutions including: nickel-cobalt, nickel-tungsten,
cobalt-tungsten, and tin-zinc. It also offers a complete line of functional
chromic, sulfuric, hard coat, phosphoric and boric-sulfuric anodizing finishes
and electropolishing. The Metal Finishing Group's process has a wide range of
both manufacturing and repair applications to functionally enhance, protect or
restore the underlying component. The process is environmentally friendlier than
traditional plating methods because it does not require the use of tanks and,
therefore, it generates minimal waste.
5
While the Metal Finishing Group offers the equipment and solutions to customers
so that they can conduct their own selective electrochemical finishing
operations, it also offers to provide services to customers that either do not
want to invest in the equipment, do not want to have responsibility for
hazardous materials, or who have decided to outsource non-core operations.
Selective electrochemical finishing services occur either at one of the Group's
job shop service facilities or at the customer's site by manual or fully
automated processes.
The Metal Finishing Group generally has alternate sources for its raw materials,
consisting primarily of various industrial chemicals and metal salts, as well as
graphite anodes and other electronic components for equipment manufactured by
the Group. There are multiple sources for all these materials and the Metal
Finishing Group generally does not depend on a single source for the supply of
its materials and, therefore, management believes that its sources are adequate
for its business.
The Metal Finishing Group sells its products and services under the following
brand names: SIFCO Process(R), Dalic(R), USDL(R) and Selectron(R), all of which
are specified in military and industrial specifications. The Metal Finishing
Group's manufacturing operations have ISO 9001:2001 and AS 9100A certifications.
In addition a certain facility is NADCAP (National Aerospace and Defense
Contractors Accreditation Program) certified. Three of the service centers are
FAA approved repair shops. Other Metal Finishing Group approvals include ABS
(American Bureau of Ships), ARR (American Railroad Registry), FAA (Federal
Aviation Administration), JRS (Japan Registry of Shipping), and KRS (Korean
Registry of Shipping).
Industry
While the Metal Finishing Group fits into the broad metal finishing industry, it
fills a very specific niche where either engineering demands for finishing only
selective areas of a component or scheduling requirements preclude other metal
finishing options. The Metal Finishing Group's process is used to provide
functional, engineered finishes, as opposed to decorative finishes, to a variety
of industries, including aerospace, heavy machinery, medical, petroleum
exploration, electric power generation, pulp and paper, printing and railroad
industries. The diversity of industries served helps to mitigate the impact of
economic cycles on the Metal Finishing Group.
Competition
The industry is fragmented into numerous product and service suppliers,
resulting in a competitive environment. The Metal Finishing Group attempts to
differentiate itself from the competition by creating high value applications
for larger, technically demanding customers. The Metal Finishing Group believes
that it is the largest supplier of selective electrochemical finishing supplies
and service in the world and the only supplier with strong technical and product
development capabilities.
Customers
The Metal Finishing Group has a customer base of over 1,000 customers. However,
approximately 20 customers, all of whom come from a variety of industries,
account for approximately 51% of the Group's annual sales. During fiscal 2004,
no single customer accounted for 10% or more of the Group's net sales. No
material part of the Metal Finishing Group's business is seasonal.
Backlog of Orders
The Metal Finishing Group essentially had no backlog at September 30, 2004 and
2003.
4. General
For financial information concerning the Company's reportable segments see
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7 and Note 13 of Notes to Consolidated Financial
Statements included in Item 8.
C. ENVIRONMENTAL REGULATIONS
In common with other companies engaged in similar businesses, the Company is
required to comply with various laws and regulations relating to the protection
of the environment. The costs of such compliance have not had, and are not
presently expected to have, a material effect on the capital expenditures,
earnings or competitive position of the Company and its subsidiaries under
existing regulations and interpretations.
6
D. EMPLOYEES
The number of the Company's employees increased from approximately 570 at the
beginning of fiscal year 2004 to approximately 600 at the end of fiscal year
2004. The Company is a party to collective bargaining agreements with its hourly
employees located at its Cleveland, Ohio; Minneapolis, Minnesota; and Cork,
Ireland facilities. Management considers its relations with the Company's
employees to be good.
E. NON-U.S. OPERATIONS
The Company's products and services are distributed and performed in U.S. as
well as non-U.S. markets. The Company commenced its operations in Ireland in
1981. The Company commenced its operations in the United Kingdom and France as a
result of an acquisition of a business in 1992. Wholly-owned subsidiaries
operate service and distribution facilities in Ireland, United Kingdom and
France.
Financial information about the Company's U.S. and non-U.S. operations is set
forth in Note 13 to the Consolidated Financial Statements included in Item 8.
As of September 30, 2004, essentially all of the Company's cash and cash
equivalents are in the possession of its non-U.S. subsidiaries and relate to
undistributed earnings of these non-U.S. subsidiaries. During fiscal 2004, the
Company received no distributions from its non-U.S. subsidiaries. Distributions
from the Company's non-U.S. subsidiaries to the Company may be subject to
statutory restrictions, adverse tax consequences or other limitations. In
October 2004, the American Jobs Creation Act of 2004 ("Act") was enacted. The
Act contains a one-time provision allowing earnings of controlled foreign
companies to be repatriated, at a reduced tax rate, during the tax year that
includes October 2004 or during the subsequent tax year. The Company expects to
receive a dividend from its non-U.S. subsidiaries during the first half of
fiscal 2005. The Company is still evaluating the Act's effects on its
repatriation plans and expects to complete its evaluation during the first half
of fiscal 2005.
ITEM 2. PROPERTIES
The Company's property, plant and equipment include the plants described below
and a substantial quantity of machinery and equipment, most of which is industry
specific machinery and equipment using special jigs, tools and fixtures and in
many instances having automatic control features and special adaptations. In
general, the Company's property, plant and equipment are in good operating
condition, are well maintained and substantially all of its facilities are in
regular use. The Company considers its investment in property, plant and
equipment as of September 30, 2004 suitable and adequate given the current
product offerings for the respective business segments' operations in the
current business environment. The square footage numbers set forth in the
following paragraphs are approximations:
- The Turbine Component Services and Repair Group operates three (3)
facilities with a total of 166,000 square feet that are involved in
the repair and remanufacture of aerospace and industrial turbine
engine components. Two of these plants are located in Cork, Ireland
(107,000 square feet) and one is in Minneapolis, Minnesota (59,000
square feet). A portion of the Minneapolis facility is also the site
of some of the Repair Group's machining operations. All of these
facilities are owned. The Repair Group ceased operations at a Tampa,
Florida facility (68,000 square feet) during fiscal 2003 and at a
third Cork, Ireland facility (30,000 square feet) in fiscal 2004
and, at September 30, 2004, both facilities were held for sale. In
October 2004, the Company completed the sale of the Cork, Ireland
facility. In November 2004, the Company completed the sale of the
Tampa, Florida facility.
- The Aerospace Component Manufacturing Group operates in a single
owned 262,000 square foot facility located in Cleveland, Ohio. This
facility is also the site of the Company's corporate headquarters.
- The Metal Finishing Group is headquartered in an owned 30,000 square
foot plant in Independence, Ohio. The Metal Finishing Group operates
a leased 6,000 square foot plant in Redditch, England. The Metal
Finishing Group also leases space for sales offices and/or for its
contract selective electrochemical finishing services in Norfolk,
Virginia; Hartford (East Windsor), Connecticut; Los Angeles (San
Dimas), California; Tacoma (Fife), Washington; Houston, Texas; and
Paris (Saint Maur Cedex), France (totaling approximately 31,000
square feet).
7
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company may be involved in pending legal
actions. The Company cannot reasonably estimate future costs related to these
matters and other matters that may arise, if any. Although it is possible that
the Company's future operating results could be affected by future cost of
litigation, it is management's belief at this time that such costs will not have
a material adverse affect on the Company's consolidated financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 2004 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company.
Name Age Title and Business Experience
- ---- --- -----------------------------
Jeffrey P. Gotschall (1) 56 Chairman of the Board since 2001;
Director of the Company since 1986;
Chief Executive Officer since 1990;
President from 1989 to 2002; Chief
Operating Officer from 1986 to 1990;
Executive Vice President from 1986 to
1989; and from 1985 to 1989, President
of SIFCO Turbine Component Services.
Timothy V. Crean 56 President and Chief Operating Officer
since 2002; Executive Vice-President of
SIFCO Industries, Inc. from 1998 to
2002; Managing Director of the SIFCO
Turbine Components Services and Repair
Group from 1995 to 2002, and Managing
Director of SIFCO Turbine Components,
Ltd. from 1986 to 2002.
Frank A. Cappello 46 Vice President-Finance and Chief
Financial Officer since 2000. Prior to
joining the Company, Mr. Cappello was
employed by ASHTA Chemicals Inc, a
commodity chemical manufacturer, from
August 1990 to December 1991 and from
June 1992 to February 2000, last serving
as Vice President Finance and
Administration and Chief Financial
Officer; and previously by KPMG LLP,
last serving as a Senior Manager in its
Assurance Group.
Hudson D. Smith (1) 53 Executive Vice President since September
2003 and Director of the Company since
1988. Mr. Smith has served as Treasurer
of the Company since 1983. Mr. Smith
previously served as President of the
Aerospace Component Manufacturing Group
from 1998 to 2003; Vice President and
General Manager of SIFCO Forge Group
from 1995 to 1997; General Manager of
SIFCO Forge Group's Cleveland Operations
from 1989 to 1995 and Group General
Sales Manager of SIFCO Forge Group from
1985 to 1989.
Carolyn J. Buller, Esq. 49 Secretary and General Counsel since
2000. Ms. Buller is a partner in the law
firm of Squire, Sanders & Dempsey LLP,
and has been an attorney with the firm
since 1981.
Remigijus H. Belzinskas 48 Corporate Controller since 2000. Prior
to joining the Company, Mr. Belzinskas
was employed by Signature Brands, Inc.,
a manufacturer and distributor of
consumer products, from August 1990 to
December 1999, serving as Corporate
Controller; and previously by KPMG LLP,
last serving as a Senior Manager in its
Assurance Group.
(1) Hudson D. Smith and Jeffrey P. Gotschall are cousins.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Shares are traded on the American Stock Exchange under the
symbol "SIF". The following table sets forth, for the periods indicated, the
high and low closing sales price for the Company's Common Shares as reported by
the American Stock Exchange.
YEARS ENDED SEPTEMBER 30,
-------------------------
2004 2003
---- ----
HIGH LOW HIGH LOW
---------- ---------- ---------- ----------
First Quarter ........................................... $ 4.50 $ 2.17 $ 3.20 $ 2.30
Second Quarter .......................................... 4.25 3.70 2.60 1.50
Third Quarter ........................................... 4.40 3.50 2.65 1.35
Fourth Quarter .......................................... 3.83 3.00 2.49 1.85
The Company has not declared or paid any cash dividends within the last three
(3) fiscal years and does not anticipate paying any such dividends in the
foreseeable future. The Company currently intends to retain all of its earnings
for the operation and expansion of its businesses. The Company's ability to
declare or pay cash dividends is limited by its credit agreement covenants. At
October 31, 2004, there were approximately 755 shareholders of record of the
Company's Common Shares, as reported by National City Corporation, the Company's
Transfer Agent and Registrar, which maintains its corporate offices at National
City Center, 1900 East Ninth Street, Cleveland, Ohio 44101-0756.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The data presented below should be read in conjunction with the audited
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in Item 8.
YEARS ENDED SEPTEMBER 30,
-------------------------
2004 2003 2002 2001 2000
------- ------- --------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Net sales ........................................... $87,393 $79,939 $ 80,033 $105,633 $106,138
Income (loss) before income tax provision (benefit).. (5,866) (5,373) (13,448) 4,668 2,479
Income tax provision (benefit) ...................... 80 (26) (1,462) 1,694 57
Net income (loss) ................................... (5,946) (5,347) (11,986) 2,974 2,422
Net income (loss) per share (basic) ................. (1.14) (1.02) (2.30) 0.58 0.47
Net income (loss) per share (diluted) ............... (1.14) (1.02) (2.30) 0.58 0.47
Cash dividends per share ............................ --- --- --- --- 0.20
SHARES OUTSTANDING AT YEAR END ...................... 5,214 5,226 5,258 5,237 5,134
BALANCE SHEET DATA
Working capital ..................................... $16,029 $14,669 $17,087 $ 31,971 $ 28,279
Property, plant and equipment, net .................. 19,882 25,699 29,106 29,383 29,009
Total assets ........................................ 59,759 61,678 69,642 86,596 80,500
Long-term debt, net of current maturities ........... 5,797 7,258 8,695 10,135 11,565
Total shareholders' equity .......................... 24,802 30,281 37,735 49,374 45,500
Shareholders' equity per share ...................... 4.76 5.79 7.18 9.43 8.86
FINANCIAL RATIOS
Return on beginning shareholders' equity ............ (19.6)% (14.2)% (24.3)% 6.5% 4.8%
Long-term debt to equity percent .................... 23.4% 24.0 % 23.0% 20.5% 25.4%
Current ratio ....................................... 1.8 1.9 1.9 2.5 2.6
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 finishing. The products include forgings, machined forged parts
and other machined metal parts, remanufactured component parts for turbine
engines, and selective electrochemical finishing solutions and equipment. The
Company's operations are conducted in three business segments: (1) Turbine
Component Services and Repair Group, (2) Aerospace Component Manufacturing
Group, and (3) Metal Finishing Group.
A. RESULTS OF OPERATIONS
1. Fiscal Year 2004 Compared With Fiscal Year 2003
Fiscal 2004 net sales increased 9.3% to $87.4 million, compared with $79.9
million in fiscal 2003. Net loss for fiscal 2004 was $5.9 million, or $1.14 per
diluted share, compared with a net loss of $5.3 million, or $1.02 per diluted
share, in fiscal 2003.
Turbine Component Services and Repair Group ("Repair Group")
The Repair Group, which accounted for 52.6% of the Company's net sales in fiscal
2004, had net sales of $46.0 million, up 12.9% from the $40.7 million in fiscal
2003. Turbine engine component manufacturing and repair net sales increased $4.5
million to $37.0 million in fiscal 2004, compared with $32.5 million in fiscal
2003. 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 fiscal 2004, compared with fiscal 2003. This reflects an increase in demand
for component repairs for newer model large aerospace turbine engines offset by
reduced demand for component repairs for older model large aerospace turbine
engines. In addition, net sales associated with the demand for replacement
parts, which often complement component repair services provided to customers,
increased $0.8 million in fiscal 2004 to $9.0 million, compared with $8.2
million in fiscal 2003.
During fiscal 2004, the Repair Group's selling, general and administrative
expenses decreased $1.3 million to $4.7 million, or 10.2% of net sales, from
$6.0 million, or 14.7% of net sales, in fiscal 2003. Included in the $6.0
million of selling, general and administrative expenses in fiscal 2003 were
charges aggregating $1.3 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 fiscal 2003 were $4.3 million, or 10.5% of net sales.
The Repair Group's operating loss in fiscal 2004 decreased $2.0 million to $3.3
million from a $5.3 million loss in fiscal 2003. Included in the $5.3 million
operating loss in fiscal 2003 were charges aggregating $1.3 million related to
the impairment of equipment and $0.4 million of severance charges. Operating
results improved in fiscal 2004 principally due to the non-recurrence of the
aforementioned impairment and severance charges. The increased sales volumes for
component manufacturing and repair service would have had a more positive impact
on margins if not for the negative impact of the continued strength of the euro
against the U.S. dollar as described below.
During fiscal 2004, the euro continued to strengthen in relation to the U.S.
dollar. 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 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 fiscal 2004, the Company did not
hedge all of its exposure to the strengthening euro and, therefore, the
resulting impact on the Repair Group's operating results in fiscal 2004 was
higher operating costs of approximately $3.8 million related to its non-U.S.
operations, including selling, general and administrative expenses, when
compared to fiscal 2003.
Aerospace Component Manufacturing Group ("ACM Group")
Net sales of the ACM Group in fiscal 2004 increased 2.6% to $30.5 million,
compared with $29.7 million in 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
components for small aircraft decreased $1.6 million to $13.2 million in fiscal
2004, compared with $15.2 million in fiscal 2003. Net sales of turbine engine
components for small aircraft, which consist primarily of net sales to
Rolls-
10
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 $2.6 million to $12.7 million in fiscal 2004, compared with
$10.5 million in fiscal 2003. Net sales of airframe components for large
aircraft decreased $0.3 million to $1.8 million in fiscal 2004, compared with
$2.1 million in fiscal 2003. Net sales of turbine engine components for large
aircraft increased to $1.0 million in fiscal 2004, compared with $0.9 million in
fiscal 2003. Net sales of non-aerospace components were $1.0 million in both
fiscal 2004 and 2003. Other sales, consisting primarily of tooling revenue and
order cancellation charges, were $0.8 million in fiscal 2004.
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 $1.7 million to
$13.1 million in fiscal 2004, compared with $15.3 million in fiscal 2003.
Selling, general and administrative expenses in fiscal 2004 were $2.1 million,
or 7.0% of net sales, compared with $1.5 million, or 5.1% of net sales, in
fiscal 2003. Included in the $1.5 million of selling, general and administrative
expenses in fiscal 2003 was a credit of $0.9 million for the reversal of a
liability related to a previous year employment action that was settled in favor
of the Company during the fourth quarter of fiscal 2003. The remaining selling,
general and administrative expenses in fiscal 2003 were $2.4 million, or 8.0% of
net sales. Selling, general and administrative expenses in fiscal 2004 benefited
from a $0.2 million reduction in the provision for uncollectible accounts
receivable.
The ACM Group's operating income was $1.7 million and $1.6 million in fiscal
2004 and 2003, respectively. Operating results were favorably impacted in fiscal
2004 compared with fiscal 2003 by (i) a $0.6 million decrease in material cost
primarily as a result of product mix consisting of a greater percentage of
products sold containing lower cost materials; (ii) a $0.3 million decrease in
labor costs due to improved utilization of labor; (iii) a $0.1 million decrease
in manufacturing supplies and repair expenses; (iv) a $0.1 million decrease in
outside services expense; and (v) a $0.1 million decrease in tooling expense.
Operating results in fiscal 2004 were negatively impacted by a $0.3 million
increase in the LIFO provision and a $0.3 million increase in outside processing
costs. Operating results in fiscal 2003 were favorably impacted by a $0.9
million credit in selling, general and administrative expenses as discussed in
the previous paragraph.
Metal Finishing Group
Net sales of the Metal Finishing Group increased 15.0% to $10.9 million in
fiscal 2004, compared with net sales of $9.5 million in fiscal 2003. In fiscal
2004, product net sales, consisting of selective electrochemical finishing
equipment and solutions, increased 5.8% to $5.6 million, compared with $5.3
million in fiscal 2003. In fiscal 2004, customized selective electrochemical
finishing contract service net sales increased 24.7% to $5.0 million, compared
with $4.0 million in fiscal 2003. In fiscal 2004, net sales to customers in the
oil and gas exploration industry increased $0.5 million; net sales to customers
in the aerospace industry increased $0.6 million; and net sales to customers in
the electronics industry increased $0.2 million, compared with fiscal 2003.
These net sales gains were partially offset in fiscal 2004 by a decrease of $0.1
million in net sales to the U.S. military, compared with fiscal 2003.
Selling, general and administrative expenses in fiscal 2004 were $5.9 million,
or 54.1% of net sales, compared with $2.9 million, or 31.1% of net sales, in
fiscal 2003. Included in the $5.9 million of selling, general and administrative
expenses in fiscal 2004 was a $2.6 million non-cash impairment charge to
write-off goodwill as a result of the Company's annual goodwill impairment
evaluation. See Note 1.F., "Summary of Significant Accounting Policies-Goodwill
and Other Intangible Assets", in the Notes to Consolidated Financial Statements
included in Item 8 for expanded discussion of goodwill impairment. The remaining
selling, general and administrative expenses in fiscal 2004 were $3.3 million,
or 30.6% of net sales. Selling, general and administrative expenses were
negatively impacted by a $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
fiscal 2004 was negatively impacted by higher costs, including labor, employee
benefits and depreciation associated with the start up of a new
customer-dedicated contract service operation at an existing service shop;
higher insurance expense; as well as the increases in selling, general and
administrative expenses previously discussed.
Corporate Unallocated Expenses
Corporate unallocated expenses, consisting of corporate salaries and benefits,
legal and professional and other corporate expenses were $1.6 million in fiscal
2004 compared with $1.7 million in fiscal 2003. In the fiscal 2004, corporate
unallocated expenses were favorably impacted primarily by a $0.2 million
decrease in legal and professional expenses partially offset by a $0.1 million
increase in corporate salary and employee benefits expenses.
11
Other/General
Interest expense was $0.8 million in both 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 fiscal years 2004
and 2003.
WEIGHTED AVERAGE WEIGHTED AVERAGE
INTEREST RATE OUTSTANDING BALANCE
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
------------------------ --------------------------
CREDIT AGREEMENT 2004 2003 2004 2003
- ---------------- ---- ---- ------------ ------------
Industrial development variable rate demand
revenue bond .......................... 1.2% 1.4% $2.9 million $3.1 million
Term note ................................. 9.5% 8.8% $5.1 million $6.3 million
Revolving credit agreement ................ 4.7% 4.6% $2.6 million $2.2 million
Currency exchange loss was $0.3 million in both fiscal 2004 and 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 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 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. The deferred tax asset of $575
recognized in fiscal 2004 is attributable to the gain on the disposal of a
building and land in October 2004 that was part of the Repair Group's Irish
operations and that was recognized for Irish income tax purposes in fiscal 2004.
2. Fiscal Year 2003 Compared With Fiscal Year 2002
Fiscal 2003 net sales of $79.9 million were essentially comparable to fiscal
2002 net sales of $80.0 million. Net loss for fiscal 2003 was $5.3 million, or
$1.02 per diluted share, compared with net loss of $12.0 million, or $2.30 per
diluted share, in fiscal 2002.
Turbine Component Services and Repair Group ("Repair Group")
The Repair Group, which accounted for 51.0% of the Company's net sales in fiscal
2003, had net sales of $40.7 million, up 11.5% from the $36.5 million in fiscal
2002. Turbine engine component manufacturing and repair net sales increased $0.9
million to $32.5 million in fiscal 2003, compared with $31.6 million in fiscal
2002, reflecting a $2.3 million recovery in the fourth quarter of fiscal 2003.
Demand for component repairs for both small and large aerospace turbine engines
increased in fiscal 2003, compared with fiscal 2002. Such increased demand
reflects a strong recovery relative to large aerospace turbine engines in the
fourth quarter of fiscal 2003. 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. The reduced
utilization of older generation aircraft that negatively impacted the Company in
fiscal 2002 continued during 2003. Despite the increase in component repairs for
newer model aerospace turbine engines, the commercial airline industry in
general continues to experience reduced commercial flight hours, which
determines the need for component repairs to newer model aerospace turbine
engines. Lower demand for component repairs for industrial turbine engines
partially offset the increase in demand for component repairs for both small and
large aerospace turbine engines. Net sales associated with the demand for
replacement parts, which often complement turbine engine component repair
services provided to customers, were up $3.3 million in 2003 to $8.2 million,
compared with $4.9 million in fiscal 2002. The increase in replacement parts net
sales is attributable to a change in product mix with certain major customers.
During fiscal 2003, the Repair Group's selling, general and administrative
expenses decreased $1.8 million to $6.0 million, or 14.7% of net sales, from
$7.8 million, or 21.4% of net sales, in fiscal 2002. Included in the $6.0
million of selling, general and administrative expenses in fiscal 2003 were
charges aggregating $1.3 million related to equipment impairment and $0.4
million of severance charges related to the further consolidation of the Repair
Group's operations during fiscal 2003. Included in the $7.8 million of selling,
general and administrative expenses in fiscal 2002 were $1.9 million of charges
related to goodwill and equipment impairment, a $0.3 million increase in a
contingency reserve related to a vendor dispute that was resolved during fiscal
2003, and $0.9 million of severance charges associated with the reduction of the
Repair Group's capacity for the repairing of components related to older
generation aerospace turbine engines. The
12
remaining selling, general and administrative expenses of $4.3 million, or 10.5%
of net sales, in fiscal 2003 were $0.4 million less than the remaining $4.7
million, or 12.9% of net sales, of such expenses in fiscal 2002.
The Repair Group's operating loss in fiscal 2003 decreased $6.2 million to $5.3
million from an $11.5 million loss in fiscal 2002. Included in the operating
loss in fiscal 2003 were charges aggregating $1.3 million related to the
impairment of equipment and $0.4 million of severance charges. Included in the
operating loss in fiscal 2002 were charges aggregating $6.1 million related to
inventory write-downs ($3.3 million), the impairment of goodwill ($0.7 million),
and the impairment of equipment ($1.2 million); and the $0.9 million of
severance charges. During the first quarter of fiscal 2002, the Repair Group
performed an evaluation of its existing operations in light of the anticipated
impacts on its business of the September 11, 2001 terrorist attacks. The
principal result of this evaluation process was the decision to optimize the
Repair Group's multiple operations by reducing certain of its capacity for the
repairing of components related to older generation aerospace turbine engines,
principally the JT8D. As a result of this decision, the Repair Group recognized,
during fiscal 2002, the aforementioned charges. In addition, during fiscal 2002,
the Repair Group increased, by $0.3 million, a contingency reserve related to
the previously discussed vendor dispute. The Repair Group's $3.6 million
operating loss, before the $1.7 million of aforementioned impairment and
severance charges, during fiscal 2003 is a decrease of $1.5 million, when
compared to the $5.1 million operating loss, before the $6.4 million of
aforementioned impairment, severance, and contingency charges, during fiscal
2002. The reduced operating loss, before the aforementioned charges in both
years, was primarily due to the positive impact on margins of a 40% increase in
fiscal 2003 fourth quarter sales volumes for both component manufacturing and
repair services and replacement parts. Partially offsetting the positive impact
of the Repair Group's increased sales volumes in fiscal 2003 was the negative
impact on margins of reduced pricing for its products. Such downward pressure on
pricing is expected to continue, the magnitude of which is difficult to predict
at this time.
During fiscal 2003, the euro had strengthened against the U.S. dollar when
compared to fiscal 2002. The Repair Group's non-U.S. operations have a
significant portion of its operating costs denominated in euros and, therefore,
as the euro strengthens, such costs are negatively impacted. During the first
nine months of fiscal 2003, the Repair Group was able to hedge much of its
exposure to the strengthening euro thereby mitigating the negative impact on its
operating results. Had the Repair Group not hedged such exposure during the
first nine months of fiscal 2003, its operating loss would have been greater by
approximately $2.0 million during fiscal 2003. The impact on the Repair Group's
operating results in the fourth quarter of fiscal 2003, the period during which
it did not hedge much of its exposure to the strengthening euro, was higher
operating costs of approximately $0.7 million related to its non-U.S.
operations, when compared to the same fiscal 2002 period.
In an effort to curtail the Repair Group's operating losses, which stem
primarily from its current excess capacity for component repairs, the Company
ceased operations at its Tampa, Florida turbine engine component repair facility
during fiscal 2003 and continues to optimize its remaining turbine engine
component repair capacity through consolidation of operations and other
productivity improvement efforts.
Aerospace Component Manufacturing Group ("ACM Group")
Net sales in fiscal 2003 decreased 10.4% to $29.7 million, compared with $33.2
million in fiscal 2002. 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 airframe components for large aircraft decreased $1.7 million in fiscal
2003 to $2.1 million, compared with $3.8 million in fiscal 2002. Net sales of
airframe components for small aircraft were $15.2 million in both fiscal 2003
and 2002. Net sales of turbine engine components for small aircraft declined
$1.2 million to $10.5 million in fiscal 2003, compared with $11.7 million in
fiscal 2002. $1.1 million of the aforementioned net sales decrease is
attributable to a decrease in net sales to Rolls-Royce Corporation consisting
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 non-aerospace related products
decreased $0.3 million in fiscal 2003 to $1.0 million, compared with $1.3
million in fiscal 2002.
Certain of the ACM Group's products have both military and commercial aircraft
applications. Net sales of airframe and turbine engine components for military
applications increased $1.0 million to $15.3 million in fiscal 2003, compared
with $14.3 million in fiscal 2002.
Selling, general and administrative expenses in fiscal 2003 were $1.5 million.
The primary factor impacting the ACM Group's selling, general and administrative
expenses is a $0.9 million reversal in fiscal 2003 of a charge that was recorded
in the second quarter of fiscal 2002. Such charge was recorded in connection
with an employment action and a related claim that was settled in favor of the
Company during the fourth quarter of fiscal 2003. The Company had filed a claim
against its insurance carrier for its failure to provide coverage. Selling,
general and administrative expenses, before the impact of this legal contingency
reserve, were $2.4 million, or 8.0% of net sales, in fiscal 2003, compared with
$2.5
13
million, or 7.4% of net sales, in fiscal 2002. Selling, general and
administrative expenses in fiscal 2003 benefited by a reduction of $0.1 million
in the ACM Group's bad debt expense, compared with fiscal 2002.
The ACM Group's operating income was $1.6 million in fiscal 2003, compared with
an operating loss of $0.3 million in fiscal 2002. Operating results in fiscal
2003 were favorably impacted by the reversal of the $0.9 million legal
contingency accrual, while operating results in fiscal 2002 were unfavorably
impacted by the establishment of such legal contingency accrual as discussed
above. Operating income, before the impact of this legal contingency reserve,
was $0.8 million in fiscal 2003, compared with $0.5 million in fiscal 2002.
Operating results were favorably impacted in fiscal 2003 by a $0.8 million
decrease in variable tooling expenses and by a $0.2 million decrease in outside
services expense. Such decreases were primarily attributable to the ACM Group's
efforts to reduce such expenditures and to perform the work in-house. As noted
previously, selling, general and administrative expenses in fiscal 2003
benefited by a reduction of $0.1 million in the ACM Group's bad debt expense,
compared with fiscal 2002. These expense decreases were offset in part by a $0.4
million increase in energy expenses. The balance of the change in operating
income is primarily attributable to the interplay between overall lower net
sales in relation to fixed manufacturing, selling, general and administrative
expenses in fiscal 2003. During fiscal 2003, the ACM Group continued the cost
containment and reduction actions initiated in fiscal 2002 to mitigate, in part,
the impact of reduced revenues.
Metal Finishing Group
Net sales in fiscal 2003 decreased 8.0% to $9.5 million, compared with $10.3
million in fiscal 2002. In fiscal 2003, product net sales, consisting of
selective electrochemical metal finishing equipment and solutions, decreased
10.7% to $5.3 million, compared with $5.9 million in fiscal 2002. In fiscal
2003, contract service net sales decreased 6.2% to $4.0 million, compared with
$4.2 million in fiscal 2002. Net sales to customers in the power generation,
general manufacturing, and aerospace industries decreased approximately $0.6
million, $0.4 million and $0.3 million, respectively, in fiscal 2003 due to
overall weakness in these industries, compared with fiscal 2002. These net sales
decreases were partially offset by an increase in net sales to customers in the
automotive industry of approximately $0.5 million in fiscal 2003, compared with
fiscal 2002, attributable primarily to increased net sales from existing
customers in this industry.
Selling, general and administrative expenses were $2.9 million in both fiscal
2003 and 2002, or 31.1% and 28.0% of net sales, respectively. In fiscal 2003
selling, general and administrative expenses were negatively impacted by a $0.1
million increase in compensation expense and a $0.1 million increase in legal
and professional expense, compared with fiscal 2002. These increases were offset
by a $0.1 million decrease in employee incentive expense.
The Metal Finishing Group's operating income in fiscal 2003 was $0.8 million,
compared with $1.5 million in fiscal 2002. Operating results were negatively
impacted by a $0.1 million increase in legal and professional expense. This
increase was offset by a $0.2 million decrease in total employee incentive
expense in fiscal 2003, compared with fiscal 2002. The balance of the decrease
in operating income is primarily attributable to the interplay between overall
lower net sales in relation to fixed manufacturing, selling, general and
administrative expenses in fiscal 2003, compared with fiscal 2002.
Corporate Unallocated Expenses
Corporate unallocated expenses, consisting of corporate salaries and benefits,
legal and professional and other corporate expenses, were $1.7 million in fiscal
2003, compared with $1.9 million in fiscal 2002. In fiscal 2003, corporate
unallocated expenses were favorably impacted by lower corporate pension expense
of $0.1 million due to the decision in fiscal 2003 to cease the accrual of
future benefits under a defined benefit pension plan. Lower legal and
professional and consulting expenses also favorably impacted corporate
unallocated expenses in fiscal 2003, compared with fiscal 2002.
Other/General
Interest income was $0.1 million in fiscal 2003, compared with $0.3 million in
fiscal 2002. The reduction of interest income is attributable to lower average
cash and cash equivalent balances outstanding and to lower interest rates
available from short-term investments during fiscal 2003, compared with fiscal
2002. Interest expense was $0.8 million in both fiscal 2003 and 2002. Term note
interest expense decreased slightly in fiscal 2003, compared with fiscal 2002.
The decrease in the weighted average term note outstanding balance of $6.3
million in fiscal 2003, compared with $7.5 million in fiscal 2002, was partially
offset by an increase in the weighted average interest rate payable under the
term note in fiscal 2003. Revolving credit agreement interest expense was
comparable in both fiscal 2003 and 2002. The decrease in the interest rate
payable under the revolving credit agreement was offset by an increase in the
weighted average revolving credit agreement outstanding balance of $2.2 million
in fiscal 2003, compared with $1.9 million in fiscal 2002. The interest rate
payable under the industrial development variable rate demand revenue bond
decreased in fiscal 2003, compared with fiscal 2002. The weighted average
industrial development variable rate demand revenue bond outstanding balance
during fiscal 2003 was $3.1 million, compared with $3.4 million in fiscal 2002.
14
Foreign currency exchange loss was $0.3 million in fiscal 2003, compared with
nil in the comparable period in fiscal 2002. This loss is the result of foreign
currency exchange rate fluctuations, resulting primarily from the 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.
In fiscal 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. The modest tax benefit
recognized in fiscal 2003 is attributable to the realization of a residual
portion of fiscal 2002's tax loss carryback in fiscal 2003 by one of the
Company's non-U.S. subsidiaries.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $5.6 million at September 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. In October 2004, the American Jobs
Creation Act of 2004 ("Act) was enacted. The Act contains a one-time provision
allowing earnings of controlled foreign companies to be repatriated, at a
reduced tax rate, during the tax year that includes October 2004 or during the
subsequent tax year. The Company expects to receive a dividend from its non-U.S.
subsidiaries during the first half of fiscal 2005. The Company is still
evaluating the Act's effects on its repatriation plans and expects to complete
its evaluation during the first half of fiscal 2005. The range of potential
amounts to be repatriated is $6.0 million to $14.0 million, which would result
in a potential income tax obligation of $0.3 million to $0.7 million.
The Company's operating activities provided cash of $2.8 million in fiscal 2004,
compared with $0.7 million in fiscal 2003. The increase in cash provided by
operating activities in fiscal 2004 is primarily due to a $1.3 million decrease
in inventories and a $2.9 million increase in accounts payable, partially offset
by a $1.1 million increase in accounts receivable. The change in these
components of working capital was due to factors resulting from normal business
conditions of the Company, including sales levels, the relative timing of
payments to suppliers, and inventory levels required to support customer demand.
Capital expenditures were $2.8 million in fiscal 2004, compared with $2.1
million in fiscal 2003. Fiscal 2004 capital expenditures consist of $1.0 million
by the ACM Group, $0.3 million by the Metal Finishing Group and $1.5 million by
the Repair Group. Capital expenditures in fiscal 2004 consisted primarily of
equipment to expand and diversify both the ACM Group's manufacturing and
machining capabilities and the Repair Group's repair capabilities. The Company
anticipates that total fiscal 2005 capital expenditures will approximate $3.5
million. Fiscal 2005 capital expenditures are anticipated to (i) provide
increased range of manufacturing capabilities; (ii) automate certain machining
operations; and (iii) enhance the Company's service and repair capabilities.
At September 30, 2004, the Company has a 15-year industrial development variable
rate demand revenue bond outstanding, which was issued to expand the Repair
Group's Tampa, Florida facility. The industrial development bond requires annual
principal payments ranging from $0.3 million in fiscal 2005 to $0.4 million in
fiscal 2013. The interest rate at September 30, 2004 was 1.82%. The outstanding
balance of the industrial development bond at September 30, 2004 was $2.7
million. The bank's annual commitment fee on the standby letter of credit that
collateralizes the industrial development bond is 2.75% of the outstanding
balance. Operations at the Tampa, Florida facility ceased in fiscal 2003. At
September 30, 2004, the facility is held for sale. In November 2004, the Company
completed the sale of this facility. The net proceeds from the sale were
approximately $2.6 million and the assets that were sold had a net book value of
approximately $2.4 million. The proceeds from the sale of the facility will
likely be utilized to retire the industrial development bond.
At September 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
September 30, 2004 was 9.49%. The outstanding balance of the term note at
September 30, 2004 was $4.5 million.
At September 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 5.25% at
15
September 30, 2004. A 0.375% commitment fee is incurred on the unused balance of
the revolving credit agreement. At September 30, 2004, the outstanding balance
was $3.1 million and the Company had $2.5 million available under its $6.0
million 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 certain specified financial ratios, including a minimum
tangible net worth level, and a fixed charge coverage ratio. During fiscal 2004,
the Company entered into agreements with its bank to waive its minimum tangible
net worth covenant at March 31, 2004 and to modify such covenant for future
periods.
In November 2004, the Company entered into an agreement with its bank to amend
certain provisions of its credit agreements. The amendment extends the maturity
date of the Company's term note and $6.0 million revolving credit agreement to
April 1, 2006, waives its minimum tangible net worth and fixed charge coverage
ratios at September 30, 2004 and modifies its minimum tangible net worth
requirement for future periods. Taking into consideration the impact of this
amendment, the Company was in compliance with all applicable covenants at
September 30, 2004
In October 2004, the Company completed the sale of a building and land that was
part of its Repair Group's Irish operations and was included in assets held for
sale at September 30, 2004. The net proceeds from the sale of these assets were
$8.0 million and the assets that were sold had a net book value of approximately
$1.8 million.
The Company believes that cash flows from its operations and proceeds from the
aforementioned property sales together with existing cash reserves and the funds
available under its revolving credit agreement will be sufficient to meet its
working capital requirements through the end of fiscal year 2005. However, no
assurances can be given as to the sufficiency of the Company's working capital
to support the Company's operations. If the existing cash reserves, cash flow
from operations and funds available under the revolving credit agreement are
insufficient; if working capital requirements are greater than currently
estimated; and/or if the Company is unable to satisfy the covenants set forth in
its credit agreements, the Company may be required to adopt one or more
alternatives, such as reducing or delaying capital expenditures, restructuring
indebtedness, selling assets or operations, or issuing additional shares of
capital stock in the Company. There can be no assurance that any of these
actions could be 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. OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any obligations that meet the definition of an
off-balance sheet arrangement and that have or are reasonably likely to have a
material effect on the Company's financial condition or results of operations.
For discussion of (i) an interest rate swap agreement, see Interest Rate Risk,
and (ii) foreign currency exchange contracts, see Foreign Currency Risk included
in Item 7A.
D. OTHER CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's outstanding contractual obligations
and other commercial commitments at September 30, 2004, and the effect such
obligations are expected to have on liquidity and cash flow in future periods.
(Amounts in thousands)
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN MORE THAN
--------- ------------
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR >1-3 YEARS >3-5 YEARS 5 YEARS
- ----------------------- ------------ ------------ ------------ ------------ ------------
Long-term debt (1)................ $ 10,366 $ 4,569 $ 3,851 $ 597 $ 1,349
Capital lease obligations......... 56 17 32 7 ---
Operating lease obligations....... 686 285 240 161 ---
------------ ------------ ------------ ------------ ------------
Total..................... $ 11,108 $ 4,871 $ 4,123 $ 765 $ 1,349
============ ============ ============ ============ ============
(1) Reflects November 2004 amendment to Company's credit agreement with its
bank.
Excluded from the foregoing Other Contractual Obligations table are open
purchase orders at September 30, 2004 for raw materials and supplies required in
the normal course of business.
16
E. OUTLOOK
The Company's Repair and ACM Groups' businesses continue to be heavily dependent
upon the strength of the commercial airlines as well as aircraft and related
engine manufacturers. Consequently, the performance of the domestic and
international air transport industry directly and significantly impacts the
performance of the Repair and ACM Groups' businesses.
The events of September 11, 2001 resulted in an immediate reduction in the
demand for passenger travel both in the U.S. and internationally. Aircraft
manufacturers announced reductions in forecasted aircraft deliveries as a result
of such reduced demand. In addition, the financial condition of many airlines in
the U.S. and throughout the world continues to be weak. The U.S. airline
industry has received U.S. government assistance, while some airlines have
entered bankruptcy proceedings, and others continue to pursue major
restructuring initiatives. In more recent years, declines in the commercial
airline, aircraft and related engine industries have been partially offset by
increases in U.S. military spending for aircraft and related components. Demand
for passenger travel recently rebounded to pre-September 11, 2001 levels. The
air transport industry's long-term outlook has been one of continued, steady
growth. Such outlook suggests the need for additional aircraft and, therefore,
growth in the requirement for airframe and engine components as well as
aerospace turbine engine repairs.
It is difficult to determine the potential long-term impact that the global
terrorism threat may have on air travel and the demand for the products and
services provided by the Company. These factors could result in further
decreases in orders for new and after-market commercial aerospace products and
repair services as well as an increase in credit risk associated with doing
business with the financially troubled airlines and their suppliers. All of
these consequences, to the extent that they may occur, could negatively impact
the Company's net sales, operating profits and cash flows. However, in light of
the current business environment, the Company believes that that cash on-hand,
funds available under its revolving credit agreement, anticipated funds
generated from operations and funds generated from recent property sales will be
adequate to meet its liquidity needs through the foreseeable future.
F. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Allowances for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of certain customers to make required payments. The
Company evaluates the adequacy of its allowances for doubtful accounts each
quarter based on the customers' credit-worthiness, current economic trends or
market conditions, past collection history, aging of outstanding accounts
receivable and specific identified risks.
Inventories
The Company maintains allowances for obsolete and excess inventory. The Company
evaluates its allowances for obsolete and excess inventory each quarter. Each
business segment maintains formal policies, which require at a minimum that
reserves be established based on an analysis of the age of the inventory on a
part-by-part basis. In addition, if the Company learns of specific obsolescence,
other than that identified by the aging criteria, an additional reserve will be
recognized as well. Specific obsolescence may arise due to a technological or
market change, or based on cancellation of an order.
Impairment of Long-Lived Assets (excluding goodwill)
The Company reviews the carrying value of its long-lived assets, including
property, plant and equipment, at least annually or when events and
circumstances warrant such a review. This review is performed using estimates of
future undiscounted cash flows, which include proceeds from disposal of assets.
If the carrying value of a long-lived asset is greater than the estimated
undiscounted future cash flows, the long-lived asset is considered impaired and
an impairment charge is recorded for the amount by which the carrying value of
the long-lived asset exceeds its fair value.
The Company has a significant amount of property, plant and equipment. The
determination as to whether events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable involves judgment. The
Company believes that its estimate of future undiscounted cash flows is a
critical accounting estimate because (i) it requires the Company to make
assumptions about future results and (ii) the impact of recognizing an
impairment charge could have a material impact on the Company's financial
position and results of operations.
17
In projecting future undiscounted cash flows, the Company relies on internal
budgets and forecasts; and projected proceeds upon disposal of long-lived
assets. The Company's budgets and forecasts are based on historical results and
anticipated future market conditions, such as the general business climate and
the effectiveness of competition.
The Company believes that its estimates of future undiscounted cash flows and
fair value are reasonable; however, changes in estimates of such undiscounted
cash flows and fair value could change the Company's estimates of fair value.
Further, actual results can differ significantly from assumptions used by the
Company in making its estimates. Future changes in the Company's estimates could
result in future impairment charges.
Goodwill
The Company complies with the accounting standards that require goodwill to be
tested for impairment at least annually using a two-step process that begins
with an estimation of the fair value of the segment. If the fair value of the
segment exceeds its book value, goodwill of the segment is not considered
impaired.
To estimate the fair value of the Metal Finishing Group, the Company computed
the segment's projected debt free cash flows related to future periods. Applying
present value techniques to the debt free cash flow information, the Company
estimated the fair value of the segment. As a result, the Company determined
that the fair value of the Metal Finishing Group did not exceed its book value,
including goodwill, at September 30, 2004. As a consequence, the Company
concluded that the Metal Finishing Group's goodwill was fully impaired at
September 30, 2004 and, therefore, a full write off as of such date was
appropriate.
The Company believes that its estimate of the Metal Finishing Group's projected
debt free cash flows is a critical accounting estimate because (i) it requires
the Company to make assumptions about future results and (ii) the impact of
recognizing an impairment of goodwill could have a material impact on the
Company's financial position and results of operations. In projecting debt free
cash flow, the Company relied on internal budgets and forecasts. The Company's
budgets and forecasts are based on historical results and anticipated future
market conditions, such as the general business climate and the effectiveness of
competition.
Valuation of deferred tax allowance
The Company accounts for deferred taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", whereby the Company recognizes an income tax
benefit related to its consolidated net losses and other temporary differences
between financial reporting basis and tax reporting basis. At September 30,
2004, the Company's net deferred tax asset before any valuation allowance was
$4.7 million.
At September 30, 2004, the income tax benefit related to its consolidated net
losses and other temporary differences between financial reporting basis and tax
reporting basis was offset by a valuation allowance of $4.1 million based on 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.
G. RECENTLY ISSUED ACCOUNTING STANDARDS
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 revised
standard retains the disclosure requirements contained in SFAS No. 132, and
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 postretirement benefit 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.
18
H. FORWARD-LOOKING STATEMENTS
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 operation, 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 engine 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 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) the impact of changes in defined benefit pension
plan actuarial assumptions on future contribution obligations; and (14) stable
government, business conditions, laws, regulations and taxes in economies where
business is conducted.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is subject to foreign currency
and interest rate risk. The risks primarily relate to the sale of the Company's
products in transactions denominated in non-U.S. dollar currencies (primarily
the euro); the payment in local currency, of wages and other costs related to
the Company's non-U.S. operations; and changes in interest rates on the
Company's long-term debt obligations. The Company does not hold or issue
financial instruments for trading purposes.
The Company believes that inflation has not materially affected its results of
operations in 2004, and does not expect inflation to be a significant factor in
fiscal 2005.
A. FOREIGN CURRENCY RISK
The U.S. dollar is the functional currency for all of the Company's U.S.
operations as well as its Irish subsidiary. The functional currency of the Irish
subsidiary is the U.S. dollar because a substantial majority of the subsidiary's
transactions are denominated in U.S. dollars. For these operations, all gains
and losses from completed currency transactions are included in income
currently. For the Company's other non-U.S. subsidiaries, the functional
currency is the local currency. Assets and liabilities are translated into U.S.
dollars at the rate of exchange at the end of the period and revenues and
expenses are translated using average rates of exchange. Foreign currency
translation adjustments are reported as a component of accumulated other
comprehensive income (loss) in the consolidated statements of shareholders'
equity.
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, which typically expire within one year. However, such risk
is mitigated only for the periods for which the Company has foreign currency
exchange contracts in effect, and only to the extent of the U.S. dollar amounts
of such contracts. At September 30, 2004, the Company had forward exchange
contracts outstanding for durations of up to 12 months to purchase euros
aggregating U.S. $19.2 million at a euro to U.S. dollar exchange rate of
approximately 1.20. A ten percent appreciation or depreciation of the value of
the U.S. dollar relative to the currency in which the forward exchange contracts
outstanding at September 30, 2004 are denominated, would result in a $2.0
million decline or increase, respectively, in the value of the forward exchange
contracts. The Company will continue to evaluate its foreign currency risk, if
any, and the effectiveness of using similar hedges in the future to mitigate
such risk.
19
At September 30, 2004, 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............................ 610 212
Accounts receivable.................................. 572 577
Accounts payable..................................... 101 1,307
Accrued liabilities.................................. 64 111
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, a revolving credit agreement and industrial development variable
rate demand revenue bond. These interest rate exposures are managed in part by
an interest rate swap agreement to fix the interest rate of the term note. If
interest rates were to increase or decrease 100 basis points (1%) from the
September 30, 2004 rates, and assuming no changes in the amounts outstanding
under the revolving credit agreement and industrial development bond, annual
interest expense to the Company would increase or decrease $0.06 million,
respectively. The Company's sensitivity analyses of the effects of changes in
interest rates do not consider the impact of a potential change in the level of
variable rate borrowings or derivative instruments outstanding that could take
place if these hypothetical conditions prevail.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of SIFCO Industries, Inc. and
Subsidiaries
We have audited the accompanying consolidated balance sheets of SIFCO
Industries, Inc. (an Ohio Corporation) and Subsidiaries as of September 30, 2004
and 2003, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the each of the three years in the period ended
September 30, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SIFCO Industries,
Inc. and Subsidiaries as of September 30, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2004, in conformity with accounting principles generally
accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2003 to conform to Statement of Financial Accounting Standards No. 142.
/s/ GRANT THORNTON LLP
Cleveland, Ohio
October 29, 2004 (except for
Note 5 and Note 12, as to which
the date is November 12, 2004)
21
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30,
-----------------------------
2004 2003 2002
------- ------- --------
Net sales ............................................ $87,393 $79,939 $ 80,033
Operating expenses:
Cost of goods sold .............................. 77,992 72,380 76,331
Selling, general and administrative expenses .... 14,381 12,172 15,952
------- ------- --------
Total operating expenses ................... 92,373 84,552 92,283
------- ------- --------
Operating loss ........................ (4,980) (4,613) (12,250)
Interest income ...................................... (59) (106) (258)
Interest expense ..................................... 782 827 838
Foreign currency exchange loss (gain), net ........... 343 345 (34)
Other expense (income), net .......................... (180) (306) 652
------- ------- --------
Loss before income tax provision (benefit).. (5,866) (5,373) (13,448)
Income tax provision (benefit) ....................... 80 (26) (1,462)
------- ------- --------
Net loss .............................. $(5,946) $(5,347) $(11,986)
======= ======= ========
Net loss per share (basic) ........................... $ (1.14) $ (1.02) $ (2.30)
Net loss per share (diluted) ......................... $ (1.14) $ (1.02) $ (2.30)
Weighted-average number of common shares (basic) ..... 5,221 5,252 5,219
Weighted-average number of common shares (diluted) ... 5,221 5,252 5,236
See notes to consolidated financial statements.
22
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30,
-------------
ASSETS 2004 2003
------ -------- ---------
Current Assets:
Cash and cash equivalents ......................................... $ 5,578 $ 4,524
Receivables, net .................................................. 17,720 16,648
Inventories ....................................................... 7,845 9,189
Refundable income taxes ........................................... --- 23
Deferred income taxes ............................................. 575 ---
Prepaid expenses and other current assets ......................... 1,132 473
Assets held for sale .............................................. 4,231 ---
-------- ---------
Total current assets .................................... 37,081 30,857
Property, plant and equipment:
Land .............................................................. 559 859
Buildings ......................................................... 12,758 19,455
Machinery and equipment ........................................... 59,327 59,853
-------- ---------
72,644 80,167
Less - accumulated depreciation ................................... 52,762 54,468
-------- ---------
Property, plant and equipment, net ...................... 19,882 25,699
Other assets:
Goodwill and other intangible assets, net ......................... --- 2,574
Other assets ...................................................... 2,796 2,548
-------- ---------
Total other assets ....................................... 2,796 5,122
-------- ---------
Total assets ....................................... $ 59,759 $ 61,678
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt .............................. $ 4,569 $ 3,226
Accounts payable .................................................. 9,354 6,491
Accrued liabilities ............................................... 7,129 6,471
-------- ---------
Total current liabilities ................................ 21,052 16,188
Long-term debt, net of current maturities .............................. 5,797 7,258
Other long-term liabilities ............................................ 8,108 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 5,257 shares in 2004 and 5,294 shares in 2003;
outstanding 5,214 shares in 2004 and 5,226 shares in 2003 .. 5,257 5,294
Additional paid-in capital ........................................ 6,497 6,661
Retained earnings ................................................. 22,336 28,282
Accumulated other comprehensive loss .............................. (8,867) (9,247)
Unearned compensation - restricted common shares .................. (166) (309)
Common shares held in treasury at cost, 43 shares in 2004 and
68 shares in 2003 ............................................ (255) (400)
-------- ---------
Total shareholders' equity ............................... 24,802 30,281
-------- ---------
Total liabilities and shareholders' equity .......... $ 59,759 $ 61,678
======== =========
See notes to consolidated financial statements.
23
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
-------------------------
2004 2003 2002
------- ------- --------
Cash flows from operating activities:
Net loss .................................................... $(5,946) $(5,347) $(11,986)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization ..................... 3,498 4,183 4,706
Loss (gain) on disposal of property, plant and
equipment .................................... (60) 34 (7)
Deferred income taxes ............................. (575) --- 15
Asset impairment charges .......................... 2,574 1,309 5,160
Changes in operating assets and liabilities:
Receivables .................................. (1,072) (2,143) 4,200
Inventories .................................. 1,344 1,517 4,054
Refundable income taxes ...................... 23 1,400 (1,423)
Prepaid expenses and other current assets .... (37) (7) (923)
Other assets ................................. (308) (408) (563)
Accounts payable ............................. 2,863 2,361 (2,588)
Accrued liabilities .......................... 658 (4,187) 1,916
Other long-term liabilities .................. (118) 2,026 28
------- ------- -------
Net cash provided by operating
activities .......................... 2,844 738 2,589
Cash flows from investing activities:
Capital expenditures .............................. (2,754) (2,149) (5,043)
Proceeds from disposal of property, plant and
equipment ................................... 125 158 105
Reimbursement of equipment expenditures ........... 750 --- ---
Other ............................................. 120 137 191
------- ------- -------
Net cash used for investing
activities .......................... (1,759) (1,854) (4,747)
Cash flows from financing activities:
Proceeds from revolving credit agreement .......... 54,395 31,770 24,735
Repayments of revolving credit agreement .......... (53,063) (32,393) (27,309)
Repayments of long-term debt ...................... (1,450) (1,440) (1,430)
Repurchase of common shares ....................... --- --- (143)
Proceeds from other indebtedness .................. --- 14 ---
Share transactions under employee stock plans ..... 87 106 101
------- ------- -------
Net cash used for financing
activities .......................... (31) (1,943) (4,046)
------- ------- -------
Increase (decrease) in cash and cash equivalents ................. 1,054 (3,059) (6,204)
Cash and cash equivalents at beginning of year ................... 4,524 7,583 13,787
------- ------- -------
Cash and cash equivalents at end of
year ............................... $ 5,578 $ 4,524 $ 7,583
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest ...................................... $ (677) $ (750) $ (845)
Cash recovered from (paid for) income taxes, net ............ $ (9) $ 1,449 $ (573)
See notes to consolidated financial statements.
24
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
ACCUMULATED COMMON
ADDITIONAL OTHER SHARES TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED HELD IN SHAREHOLDERS'
SHARES CAPITAL EARNINGS LOSS COMPENSATION TREASURY EQUITY
-------- ----------- -------- ------------- ------------ -------- -------------
BALANCE - SEPTEMBER 30, 2001 $ 5,308 $ 6,783 $ 45,615 (7,423) (460) (449) $ 49,374
Comprehensive income (loss):
Net loss................................ --- --- (11,986) --- --- --- (11,986)
Foreign currency translation
adjustment........................... --- --- --- 112 --- --- 112
Currency exchange contract adjustment... --- --- --- 1,035 --- --- 1,035
Unrealized loss on interest rate swap
agreement, net of income tax
provision of $156.................... --- --- --- (254) --- --- (254)
Minimum pension liability adjustment.... --- --- --- (504) --- --- (504)
-------------
Total comprehensive loss.......... ( 11,597)
Shares repurchased and held in treasury..... --- --- --- --- --- (143) (143)
Share transactions under employee stock
plans............................... 50 153 --- --- (102) --- 101
-------- ----------- -------- ------------- ------------ -------- -------------
BALANCE - SEPTEMBER 30, 2002 $ 5,358 $ 6,936 $ 33,629 $ (7,034) $ (562) $ (592) $ 37,735
Comprehensive income (loss):
Net loss................................ --- --- (5,347) --- --- --- (5,347)
Foreign currency translation
adjustment........................... --- --- --- 162 --- --- 162
Currency exchange contract adjustment... --- --- --- (1,035) --- --- (1,035)
Unrealized gain on interest rate swap
agreement............................ --- --- --- 169 --- --- 169
Minimum pension liability adjustment.... --- --- --- (1,509) --- --- (1,509)
-------------
Total comprehensive loss..........