-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UXAVMJDaPRFBV18YA8cifHOmGBPYKJPV6T5vLNjYN+WzPOUqnGKuX8felWrsPbZD rI64pOP5uClJC3OqMFnkJw== 0000950152-01-506390.txt : 20020413 0000950152-01-506390.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950152-01-506390 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIFCO INDUSTRIES INC CENTRAL INDEX KEY: 0000090168 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT ENGINES & ENGINE PARTS [3724] IRS NUMBER: 340553950 STATE OF INCORPORATION: OH FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05978 FILM NUMBER: 1813411 BUSINESS ADDRESS: STREET 1: 970 E 64TH ST CITY: CLEVELAND STATE: OH ZIP: 44103 BUSINESS PHONE: 2168818600 MAIL ADDRESS: STREET 1: 970 EAST 64TH STREET CITY: CLEVELAND STATE: OH ZIP: 44103 FORMER COMPANY: FORMER CONFORMED NAME: STEEL IMPROVEMENT & FORGE CO DATE OF NAME CHANGE: 19690520 10-K405 1 l91847ae10-k405.txt SIFCO INDUSTRIES, INC. 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2001 Commission file number 1-5978 SIFCO Industries, Inc. and Subsidiaries (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Ohio 34-0553950 - ---------------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 970 East 64th Street, Cleveland Ohio 44103 - ---------------------------------------- ------------------------------------- (Address of principal executive offices) (Zip Code) (216) 881-8600 ----------------------------------------- (Registrant's telephone number, including area code) 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. X --- The aggregate market value of Common Shares held by non-affiliates of the Registrant as of December 7, 2001, computed on the basis of the last reported sale price per share of $5.01 of such stock on the American Stock Exchange, was $15,252,910. The number of the Registrant's Common Shares outstanding at December 7, 2001 was 5,120,933. Documents incorporated by reference: Portions of the Annual Report to Shareholders for the year ended September 30, 2001 (Part I, II, IV) Portions of the Proxy Statement for Annual Meeting of Shareholders on January 29, 2002 (Part III) 1 PART I ITEM 1. BUSINESS - ---------------- A. THE COMPANY SIFCO Industries, Inc., an Ohio corporation ("Company"), 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 include forging, heat-treating, coating, welding, machining and brush plating; and the products include forgings, machined forgings and other machined metal parts, remanufactured component parts for turbine engines, and brush plating solutions and equipment. The Company's operations are conducted in three business segments: (1) Turbine Component Services and Repair, (2) Aerospace Component Manufacturing and (3) Metal Finishing (previously included in the Turbine Component Services and Repair segment). B. PRINCIPAL PRODUCTS AND SERVICES 1. Turbine Component Services and Repair Segment --------------------------------------------- The Company's Turbine Component Services and Repair ("Repair") business is headquartered in Cork, Ireland. This business consists principally of the repair and remanufacture of jet engine (aerospace) turbine components. The Repair business is also involved in the repair of industrial land-based gas turbine components, precision machining for aerospace applications and inventory management. Operations The aerospace portion of the Repair business requires the procurement of licenses, which certify that it 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 component repair business. Approvals are issued by either the original equipment manufacturers ("OEM") of jet engines or the Federal Aviation Administration ("FAA"). Historically the Repair business 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. GE, SNECMA, Pratt and Whitney, Rolls-Royce, etc.). In exchange for being granted an OEM approval, the Repair business is obligated to pay a royalty to the OEM for each component repair that it performs utilizing the OEM approved proprietary repair process. Recently, the Repair business has been 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 business is required to demonstrate its technical competence in the process of repairing such turbine components. The development of remanufacturing and repair processes is an ordinary part of the Repair business. The Repair business continues to invest time and money on research and development activities. One such activity is the development of an advanced coating technology. At the present time, a small portion of the Company's repair business is dependent on advanced coating processes and it believes that it can continue to access such capabilities on a subcontract 2 basis when required. However, the Company believes that such requirements will likely increase in the future. While there is a patented advanced coating technology available for the Company to acquire, it has chosen not to do so because it believes that the cost/benefit justification for having that particular advanced coating capability (in-house) does not exist at this time. Instead, the Company, as part of a research group with several other companies, is in the process of researching and developing an equivalent/alternative, cost effective coating technology. Operating costs related to such activities are expensed during the period in which they are incurred. The Repair business generally has multiple, yet limited sources for its raw materials, consisting primarily of investment castings essential to this business. However, 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 business 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. Industry The performance of the domestic and international air transport industry directly and significantly impacts the performance of the Repair business. Historically, the air transport industry's long-term outlook has for many years been for continued steady growth, which suggested the long-term need for additional aircraft and growth in the world aircraft fleet and the requirement for aircraft engine repairs. The events of September 11, 2001, have resulted in an immediate reduction in the demand for passenger travel both in the U.S. and internationally. It is difficult to determine, at this time, the long-term impact of these events on air travel and the demand for the services and products provided by the Company. However, aircraft manufacturers have recently announced reductions in forecasted aircraft deliveries in the next few years as a result of reduced demand and many airlines have cancelled or rescheduled deliveries of new aircraft to which they had previously committed. In addition, the financial condition of many airlines, in the U.S. and overseas, is weak. The airline industry has made requests for U.S. government assistance while some airlines have entered bankruptcy proceedings and others have announced major restructurings, including significant reductions in service and the grounding of aircraft. These factors are likely to result in a decrease in orders for engine component repairs, which in turn could negatively impact the Company's sales, operating profits and cash flows. While the world's fleet of aircraft has been growing, it has also 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 either been retired from use or their in-flight service intervals are being reduced. In addition, as a direct result of the previously mentioned reduced demand for commercial flight miles, airlines have accelerated the timing of such retirements. As a result, the overall demand for repairs to such older model engines is not growing and in some cases is decreasing. At the same time, newer generation aircraft (newer generation 737 and 747; 767, A320, A330, A340, etc.) and engines (CFM56, PW4000, Trent, etc.) are being introduced with newer technology required to both operate and maintain such engines. The introduction of such newer generation engines has in general reduced the frequency with which engines and related components need to be repaired. The longer times between repairs has been attributed to improved technology, including the improved ability to monitor an engine's condition while still in operation. 3 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 direct involvement of the engine manufacturer into the 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 business 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 business 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 business believes it can partially compensate for these factors by its success in broadening its product lines and developing new geographic markets and customers (e.g., by participating in the repair of industrial (land-based) turbine engine components). Customers The identity and ranking of the Repair business segment's principal customers can vary from year to year. The Repair business 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 2001, the Repair business segment had two customers that accounted for 16% and 11% of the segment's net sales, Lufthansa AG and AeroThrust Corporation, respectively. 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 Company's Repair business is seasonal. 2. Aerospace Component Manufacturing Business Segment -------------------------------------------------- Operations The Company's Aerospace Component Manufacturing ("ACM") business consists of the production, heat treatment and some machining of forgings in various alloys utilizing a variety of processes for application in the aerospace industry as well as several other industrial markets. The Company's forged products include: OEM and aftermarket parts for aircraft and land-based turbine engines; structural airframe components; parts for aircraft landing gear, wheels and brakes; and parts for undersea cable communication systems and miscellaneous commercial products. 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 business. Apart from such work, the ACM business has not invested a material amount of time or money on research and development activities. The ACM business has many sources for its raw materials, consisting primarily of high quality metals essential to this business. Suppliers of such materials are located in many areas throughout North America and Europe. The ACM business 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 9002-1994 registered and AS9000 certified. In addition, the business's heat- 4 treating facilities are NADCAP (National Aerospace and Defense Contractors Accreditation Program) certified. Industry The performance of the domestic and international air transport industries directly and significantly impacts the performance of the ACM business. Historically the air transport industry's long-term outlook has been for continued steady growth, which suggested the long-term need for additional aircraft and growth in the world aircraft fleet. However, airline operations have been negatively impacted by the disruption caused by the September 11, 2001 terrorist attacks and the downturn in the U.S. economy. These conditions have resulted in reduced flight schedules, cancellation of aircraft orders, workforce reductions, and declining financial performance within the airline industry, as well as an industry-wide request for U.S. government assistance. These factors are likely to result in a decrease in orders for new and aftermarket commercial aerospace products, which in turn could negatively impact the Company's sales, operating profits and cash flows. Since September 11, 2001, the ACM business has experienced some commercial aerospace product rescheduling, reduction, and cancellation. The ACM business also supplies new and spare components for military aircraft. Increases in military products could partially offset a decrease in commercial aerospace products. The ACM business is not able to quantify the interplay of these factors. Competition There is excess capacity in many segments of the forging industry. The ACM business believes this has the effect of increasing competition and limits the ability to raise prices. The ACM business believes, however, that its focus on quality, customer service and offering a broader range of capabilities help to give it an advantage in the markets it serves. The Company believes it can partially compensate for these factors by broadening its product lines and developing new customers. Customers During fiscal 2001, the ACM business segment had one customer, Rolls-Royce Corporation, which accounted for 37% of the segment's net sales. The ACM business believes that the total loss of sales to such customer would result in a materially adverse impact on the business and income of the ACM business. However, the ACM business has maintained a business relationship with this customer for over ten years and is currently conducting business with it under a multi-year arrangement. 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. The ACM business 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 business is seasonal. 3. Metal Finishing Business Segment -------------------------------- The Company's Metal Finishing Segment is a provider of a specialized electroplating process called "brush plating", which is used to apply metal coatings to a selective area of a component. The Metal Finishing segment provides equipment and metal solutions to customers to do their own in-house brush plating, as well as provides custom brush plating on a contract service basis to customers who choose to outsource the work. 5 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. SIFCO has also developed a number of alloy-plating solutions, including: nickel-cobalt, nickel-tungsten, cobalt-tungsten, and tin-zinc. The segment's process has a wide range of both manufacturing and repair applications to functionally enhance, protect or restore the underlying component. The process is considered environmentally friendlier than traditional plating methods because it does not require the use of tanks and, therefore, it requires smaller amounts of solutions and generates less waste. While the Metal Finishing business offers the equipment and solutions to customers so that they can conduct their own brush plating operations, it also offers to provide brush plating 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. Brush plating services occur either at one of the segment's service facilities or at the customer's site by highly trained service technicians. Service center facilities are located within a six-hour drive of most major industrial locations in the United States and in Europe. The Metal Finishing business 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 business has ISO-9002-1994 certification and is AS 9000 compliant at its primary U.S. facility. In addition, both of its European facilities have ISO-9000-1994 certification. All of its other regional service centers are ISO-9000-1994 compliant, and 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 segment approvals include ABS (American Bureau of Ships), ARR (American Railroad Registry), FAA (Federal Aviation Agency), JRS (Japan Registry of Shipping), and KRS (Korean Registry of Shipping). Industry While the segment fits into the broad metal finishing industry, it fills a very specific niche where either engineering or scheduling requirements preclude other finishing options. The segment's process is used in a variety of industries, including aerospace, heavy machinery, medical, petroleum exploration, electric power generation, pulp and paper, printing and railroad. The diversity of industries served helps to mitigate the impact of economic cycles on the business. Competition Brush plating technology was developed in the 1940's in France and virtually everyone involved in this industry draws their formulations from the same core technology. The industry is fragmented into numerous product and service suppliers, resulting in a highly competitive environment. The Metal Finishing segment attempts to differentiate itself from the competition by creating high value applications for larger, technically demanding customers. The Company's Metal Finishing segment believes that it is the largest supplier of brush plating supplies and service in the world and the only supplier with strong technical and product development capabilities. 6 Customers The Metal Finishing business segment has a customer base of approximately 1,500 customers. However, approximately 10 to 12 customers, all of whom come from different industries, account for approximately half of the segment's annual sales. In fiscal 2001, no one customer accounted for 10% or more of the segment's net sales. 4. General ------- Information concerning the Company's reportable business segments as contained in the Company's Annual Report to Shareholders for the year ended September 30, 2001 is incorporated herein by reference. C. ENVIRONMENTAL REGULATIONS In common with other companies engaged in similar businesses, the Company has been 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. D. EMPLOYEES The number of the Company's employees decreased from 792 at the beginning of the fiscal year to 780 at the end of the fiscal year. 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 general purpose machinery and equipment using special jigs, tools and fixtures and in many instances having automatic control features and special adaptions. 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, 2001 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 segment has six (6) facilities with a total of 296 thousand square feet that are involved in the repair and remanufacture jet engine and industrial turbine components. Three of these plants are located in Cork, Ireland (137 thousand square feet), one in Minneapolis, Minnesota (59 thousand square feet) and two in Tampa, Florida (73 thousand square feet). A portion of the Minneapolis plant is also the site of some of the Company's machining operations. All of these facilities are owned, except for a leased 5 thousand square foot facility in Tampa, Florida. - The Aerospace Component Manufacturing segment operates in a single owned 262 thousand square foot facility located in Cleveland, Ohio. This facility is also the site of the Company's corporate headquarters. - The Metal Finishing segment is headquartered in an owned 30 thousand square foot plant in Independence, Ohio. The segment operates a leased 6 thousand square foot 7 plant in Redditch, England. The Metal Finishing segment also leases space for sales offices and/or for its contract plating services in Norfolk, Virginia; Hartford (East Windsor), Connecticut; Los Angeles (San Dimas), California; Tacoma (Fife), Washington; Houston, Texas; and Paris (Saint-Maur), France (totaling approximately 27 thousand square feet). ITEM 3. LEGAL PROCEEDINGS - ------------------------- In the normal course of business, the Company may, from time to time, be involved in pending legal actions. To the knowledge of the Company, the only pending legal actions existing as of September 30, 2001, in which the Company was a defendant, consist of the following: On September 13, 2000, a former employee ("Plaintiff") filed a complaint in the Cuyahoga County Court of Common Pleas alleging certain wrongdoing on the part of the Company, including wrongful termination of the Plaintiff. The Plaintiff seeks unspecified compensatory and punitive damages. Plaintiff voluntarily dismissed the suit without prejudice during 2001. The Plaintiff may refile the complaint within a prescribed time period. The Company believes that the allegations are without merit and would continue to vigorously defend its position. In May 1999, an employee ("Employee") filed an employment intentional tort action against the Company in conjunction with a serious injury suffered by the employee. The Employee has alleged personal injury in excess of $25.0 million and unspecified punitive damages. The Company has filed an Answer denying liability. Discovery is underway. In connection with the preceding litigation, the Company filed a complaint in the Cuyahoga County Court of Common Pleas against the Company's insurance carrier on the grounds that it has refused to provide indemnity to the Company for the preceding employment intentional tort action. Policy limits are $1.0 million after the Company first pays a self-insured retention of $0.5 million. The Company's complaint seeks a declaratory judgment that the insurance carrier owes a duty to indemnify the Company with respect to the preceding action. The parties have exchanged cross-Motions for Summary Judgment. The Motions remain pending. Recently, there have been communications from the Employee's counsel and counsel for the Company's insurance carrier about a potential settlement of both actions involving both monetary payments as well as a continued employment relationship between the Company and the Employee. These discussions are ongoing and the eventual outcome is uncertain. The Company cannot reasonably estimate future costs related to these matters and other matters that may arise. 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 position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- Not applicable. 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER - ---------------------------------------------------------------------------- MATTERS - ------- The information required by Part II, Item 5 is incorporated herein by reference to the information contained in the Company's Annual Report to Shareholders for the year ended September 30, 2001. The Company's common stock is traded on the American Stock Exchange (under the symbol: SIF). As of December 7, 2001, the Company had 757 shareholders of record. ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- The information required by Part II, Item 6 is incorporated herein by reference to the information contained in the Company's Annual Report to Shareholders for the year ended September 30, 2001. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS - ------------- The information required by Part II, Item 7 is incorporated herein by reference to the information contained in the Company's Annual Report to Shareholders for the year ended September 30, 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- The financial statements required by Part II, Item 8 are incorporated herein by reference to the information contained in the Company's Annual Report to Shareholders for the year ended September 30, 2001. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL - ------------------------------------------------------------------------------ DISCLOSURE - ---------- Not applicable. 9 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT - -------------------------------------------------------------------------- Information regarding Directors of the Company, as required by Part III, Item 10, is incorporated herein by reference to the information contained in the Company's Proxy Statement dated December 14, 2001, filed in connection with the Company's Annual Meeting of Shareholders to be held January 29, 2002. The Executive Officers of the Company are elected annually to serve for one-year terms or until their successors are elected and qualified. The Executive Officers and Key Employees as of December 14, 2001 were as follows:
Name Age Title and Business Experience - ---- --- ----------------------------- Jeffrey P. Gotschall(1) 53 Director of the Company since 1986; Elected Chairman of the Board in 2001; Chief Executive Officer since 1990 and President since 1989; Chief Operating Officer from 1986 to 1990; Mr. Gotschall previously served the Company from 1986 through 1989 as Executive Vice President and from 1985 through 1989 as President of SIFCO Turbine Component Services. Frank A. Cappello 43 Vice President-Finance and Chief Financial Officer since February 21, 2000, the date on which he initially joined the Company. Hudson D. Smith(1) 50 Director of the Company since 1988. Mr. Smith serves as Treasurer of the Company since 1983 and President of the SIFCO Forge Group since 1998. Mr. Smith previously served as Vice President and General Manager of SIFCO Forge Group from 1995 to 1997, General Manager of SIFCO Forge Group's Cleveland Operations from 1989 through 1995 and Group General Sales Manager of SIFCO Forge Group from 1985 through 1989. Timothy V. Crean 53 Executive Vice-President of SIFCO Industries, Inc. since 1998. Managing Director of the SIFCO Turbine Components Services and Repair Group since 1995, and Managing Director of SIFCO Turbine Components, Ltd. since 1986. Carolyn J. Buller, Esq. 46 Secretary and General Counsel since November 8, 2000. Ms. Buller is a partner in the law firm of Squire, Sanders & Dempsey and has been an attorney with the firm since 1981. Remigijus H. Belzinskas 45 Corporate Controller since June 21, 2000, the date on which he initially joined the Company.
(1) Charles H. Smith, Jr. is the father of Hudson D. Smith and the uncle of Jeffrey P. Gotschall, who are first cousins. 10 ITEM 11. EXECUTIVE COMPENSATION - ------------------------------- The information required by Part III, Item 11 is incorporated herein by reference to the information contained in the Company's Proxy Statement dated December 14, 2001, filed in connection with the Company's Annual Meeting of Shareholders to be held January 29, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The information required by Part III, Item 12 is incorporated herein by reference to the information contained in the Company's Proxy Statement dated December 14, 2001, filed in connection with the Company's Annual Meeting of Shareholders to be held January 29, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- Not applicable. 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------ (a)(1) FINANCIAL STATEMENTS: --------------------- The following consolidated financial statements contained in the Company's Annual Report to Shareholders for the year ended September 30, 2001, are incorporated herein by reference: Consolidated Statements of Income for the Years Ended September 30, 2001, 2000 and 1999. Consolidated Balance Sheets - September 30, 2001 and 2000. Consolidated Statements of Cash Flows for the Years Ended September 30, 2001, 2000 and 1999. Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 2001, 2000 and 1999. Notes to Consolidated Financial Statements - September 30, 2001, 2000 and 1999. Report of Independent Public Accountants. (a)(2) FINANCIAL STATEMENT SCHEDULES: ------------------------------ Report of Independent Public Accountants on the Financial Statement Schedule. Schedule II - Allowance for Doubtful Accounts for the Years Ended September 30, 2001, 2000 and 1999. Financial statement schedules, other than Schedule II are not presented because the information is not required or it is furnished elsewhere. 12 (a)(3) EXHIBITS: ---------
EXHIBIT NO. DESCRIPTION LOCATION - ----------- ----------- -------- (3) Second Amended Articles of Incorporation, as amended, and Amended Code of Regulations (A) (4) Instruments defining the rights of security holders (B) (9) Voting Trust Agreement, as amended (C) (10) Material Contracts: (a) 1989 Stock Option Plan (D) (b) Incentive Compensation Plan, as amended and restated (E) (c) Deferred Compensation Program, as amended and restated (E) (d) Form of Indemnification Agreement between the Registrant and each of its Directors and Executive Officers (C) (e) 1998 Long-Term Incentive Plan (F) (f) Change in Control Severance Agreement between the Company (G) and Frank Cappello, dated September 28, 2000 (g) Change in Control Severance Agreement between the Company (G) and Hudson Smith, dated September 28, 2000 (h) Change in Control Severance Agreement between the Company (G) and Remigijus Belzinskas, dated September 28, 2000 (i) Change in Control Agreement between the Company and Frank (G) Cappello, dated November 9, 2000 (13) Annual Report to Shareholders for the year ended September 30, 2001 (21) Subsidiaries of the Company (23) Consent of Arthur Andersen LLP (99) Report of Independent Public Accountants on the Financial Statement Schedule II - Allowance for Doubtful Accounts for the Years Ended September 30, 2001, 2000 and 1999.
LOCATION REFERENCE - ------------------ (A) Incorporated herein by reference to Form 10-K, September 30, 1986 (B) Incorporated herein by reference to Form 10-K, September 30, 1987 (C) Incorporated herein by reference to Form 10-K, September 30, 1988 (D) Incorporated herein by reference to Form 10-K, September 30, 1989 (E) Incorporated herein by reference to Form 10-K, September 30, 1995 (F) Incorporated herein by reference to Appendix A to the Proxy Statement for the Annual Meeting of Shareholders held January 26, 1999 (G) Incorporated herein by reference to Form 10-Q/A, December 31, 2000 (b)(1) REPORTS ON FORM 8-K ------------------- No reports on Form 8-K were filed during the last quarter of the fiscal year ended September 30, 2001. 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIFCO Industries, Inc. and Subsidiaries By: /s/ Frank A. Cappello ------------------------------ Vice President-Finance and Chief Financial Officer (Principal Financial Officer) Date: December 14, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below on December 14, 2001 by the following persons on behalf of the Registrant in the capacities indicated. /s/ Charles H. Smith, Jr. /s/ Richard S. Gray ------------------------- ------------------- Charles H. Smith, Jr. Richard S. Gray Chairman Emeritus Director Director /s/ Jeffrey P. Gotschall /s/ Thomas J. Vild ------------------------ ------------------ Jeffrey P. Gotschall Thomas J. Vild Chairman; Director President; Chief Executive Officer; Director /s/ Hudson D. Smith /s/ J. Douglas Whelan ---------------------- ----------------------- Hudson D. Smith J. Douglas Whelan Treasurer; Director Director /s/ Maurice Foley /s/ Remigijus H. Belzinskas ------------------ --------------------------- Maurice Foley Remigijus H. Belzinskas Director Corporate Controller (Principal Accounting Officer) 14 EX-13 3 l91847aex13.txt EXHIBIT 13 Exhibit 13 [SIFCO LOGO] SIFCO INDUSTRIES, INC. 2001 Annual Report - -------------------------------------------------------------------------------- [LOGO] Backed by over 89 years of industrial experience, the diamond "S" trademark can be found on critical aircraft components manufactured for nearly a century. It can still be found on engine components in the Liberty Engine used in World War I aircraft, landing gears of the classic Vought F4U Corsair, and the latest generation 737-800 manufactured by Boeing. [SIFCO LOGO] In 1993, a new corporate logo was designed by SIFCO employees to promote greater unity in our marketing identity and to illustrate the significant growth in SIFCO's business from manufacturing to turbine component services and repair. SIFCO engineers describe it as depicting an airfoil cross- section, while the more poetic among us claim it symbolizes man's flight from earthly bounds. While we admit that the interpretation of any abstraction can be open to debate, our graphic was selected to represent the technical as well as the personal points of view, and embodies our pride in a company firmly rooted in tradition and poised for future growth. It serves as the hallmark of SIFCO's commitment to customers -- a commitment that promises the best- engineered manufactured products and the most personal and timely service available anywhere worldwide. - -------------------------------------------------------------------------------- TABLE OF CONTENTS Financial Highlights ...................................................... 1 Letter to Our Shareholders ................................................ 2 Tribute to Charles H. Smith, Jr ........................................... 3 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................... 4 Consolidated Statements of Income ......................................... 8 Consolidated Balance Sheets ............................................... 9 Consolidated Statements of Cash Flows ..................................... 10 Consolidated Statements of Shareholders' Equity .................................................... 11 Notes to Consolidated Financial Statements .................................................... 12 Safe Harbor Statement ..................................................... 18 Report of Independent Public Accountants ...................................................... 18 George D. Gotschall In Memoriam ........................................... 19 Shareholder Information ................................................... 20 [SIFCO LOGO] SIFCO Industries, Inc. is primarily dedicated to meeting the technical needs of the aerospace industry in the production, repair, coating, machining and marketing of jet engine and other aerospace components. SIFCO serves the world's airlines through a network of manufacturing and service centers in the United States and abroad. The Company is committed to the satisfaction of its customers worldwide through competitive pricing, total service, comprehensive technology and superior quality. The Company's operations consist of three business segments:
TURBINE COMPONENT AEROSPACE METAL FINISHING SERVICES AND COMPONENT REPAIR MANUFACTURING "WE REPAIR COMPONENTS FROM "WE MANUFACTURE COMPONENTS "WE MANUFACTURE AND SELL THE TURBINE SECTION OF FOR A WIDE VARIETY OF EQUIPMENT, SOLUTIONS AND AEROSPACE AND LAND-BASED COMMERCIAL AND MILITARY SERVICE FOR A TRULY GAS TURBINE ENGINES." AIRCRAFT, INCLUDING HELICOPTERS." PORTABLE COATING CAPABILITY" 51% OF 2001 SALES 39% OF 2001 SALES 10% OF 2001 SALES
-------------------------- FINANCIAL HIGHLIGHTS --------------------------
Years Ended September 30 2001 2000 1999 1998 1997 (Amounts in thousands, except per share data) ==================================================================================================================================== STATEMENT OF INCOME DATA Net sales $105,633 $106,138 $115,490 $123,175 $108,790 Income before income tax provision 4,668 2,479 4,105 11,609 9,123 Income tax provision 1,694 57 332 2,324 2,047 Net income 2,974 2,422 3,773 9,285 7,076 Net income per share (basic) .58 .47 .73 1.80 1.38 Net income per share (diluted) .58 .47 .72 1.78 1.36 Cash dividends per share -- .20 .20 .20 .15 SHARES OUTSTANDING AT YEAR END 5,237 5,134 5,193 5,170 5,160 BALANCE SHEET DATA Working capital $ 36,943 $ 28,676 $ 31,924 $ 32,102 $ 26,235 Property, plant and equipment, net 29,383 29,009 31,392 32,582 24,714 Total assets 86,596 80,500 88,662 93,011 76,159 Long-term debt, net of current maturities 15,107 11,962 12,985 16,500 11,716 Total shareholders' equity 49,374 45,500 50,046 49,890 40,568 Shareholders' equity per share 9.43 8.86 9.64 9.65 7.86 FINANCIAL RATIOS Return on beginning shareholders' equity 6.5% 4.8% 7.6% 22.9% 19.7% Long-term debt to equity percent 30.6% 26.3% 25.9% 33.1% 28.9% Current ratio 3.3 2.6 2.6 2.5 2.3 STOCK SALES PRICE RANGE (HIGH-LOW) $7.45 - 4.40 $7.69 - 5.12 $15.00 - 7.00 $27.12 - 11.62 $21.25 - 9.62
1 [SIFCO LOGO] TO OUR SHAREHOLDERS ================================================================================ As we neared the end of FY 2001, the terrorist attacks occurred. Everyone in the aviation industry was and will continue to be impacted, but we feel we have positioned our Company to adapt to the changing needs that this marketplace will require. We have been striving to broaden our business base to strengthen our Company. The accomplishments in each business segment, as described below, are important steps toward that goal. To explain how we have positioned SIFCO, let me address our different business segments. We are now reporting our results in three business segments. The newest segment, "Metal Finishing", is our Selective Plating operation, previously reported in the Repair segment. As you can see from the operating results, this business segment has grown nicely. It has not only become a significant contributor to our profitability, but has done so by increasing its revenue outside of the aerospace marketplace. In FY 2001, 30% of its revenue was derived from the power generation and petrochemical markets, while only 25% was dependent on aerospace. The other markets that it serves are as diverse as medical, automotive, paper and printing, and military/defense. We are proud of its accomplishments and you can learn more about its applications on our website at www.sifco.com. Our Repair segment made progress this year in three important areas. We were pleased to report our Letter of Intent (LOI) with Rolls-Royce to progress toward a component repair joint venture. The ability to work with the large OEMs as well as continuing to develop FAA-approved repair processes is what makes SIFCO unique. During FY 2001 our dependence on the older engine models was reduced such that repairs of the Pratt & Whitney JT8D engine components provided less than 22% of revenue. We continue to develop component repairs for the most current model engines and are pleased to report significant progress in the development of repairs for the GE/SNECMA CFM 56 -5B and -5C. In other markets, our land-based power generation turbine component repair sales are small, but a promising alternative to aerospace in our repair business. Our Aerospace Component Manufacturing segment has achieved its goal of deriving over 50% of its revenue from turbine engine components. Most of these components are contained within turbine engines to power aircraft but some are used for land- based electrical power generation. This achievement is a tribute to the technical sophistication that resides within this business segment. By further penetration of the small turbine engine market,the segment has reduced its vulnerability and dependence on the large commercial aircraft market. Segment sales to the large commercial airframe market were less than 13% of total revenue. Sales to the regional jet, business jet, helicopter and U.S. military markets now account for over 75% of this segment's revenue, which is encouraging given the shift in the marketplace. This segment has focused on absolute customer satisfaction and will continue to refine its expertise in the areas of process control, cycle time reduction and lean manufacturing while increasing its value-added processes to meet the ever-changing needs of its customers worldwide. As we have indicated in the past, our markets are cyclical. To respond to the challenges that could be forthcoming, a strong balance sheet is essential. It is important to note that at year-end 2001 SIFCO's total debt net of cash was at a 10 year low. Our strong balance sheet will allow us to take advantage of opportunities that the current cycle may provide. One thing the events of September 11 have demonstrated is how quickly the world can change. We have and must continue to adapt to the world's changes, continuing to use our intelligence and instincts to guide us, but we are certainly more aware of the fragility of companies, marketplaces, economies, and world stability. As terrorist threats are addressed and contained, the world will move forward toward achieving peace and security, and we will move forward toward achieving our Company's goals for continued growth and prosperity. /s/ Jeffrey P. Gotschall President, Chief Executive Officer and Chairman of the Board 2 ================================================================================ CHARLES H. SMITH JR. RETIRES AS CHAIRMAN In July 2001, Charles H. Smith, Jr. retired as Chairman of SIFCO Industries, Inc. Mr. Smith has been a Director of the Company since 1941 and an Officer of the Company since 1943. Few executives have maintained such an active leadership role for over 60 years. Born in Cleveland, Ohio, in 1920, Mr. Smith first joined the Company as an apprentice during the summer of 1937, earning a wage of $.50 per hour. After earning a degree in Metallurgical Engineering from the Massachusetts Institute of Technology, and upon his father's sudden death, Mr. Smith became President of The Steel Improvement & Forge Company in 1943. He served as the Company's Chief Executive Officer for over 40 years until his retirement from full-time service in 1983. During this time, the Company diversified beyond forging into other metalworking processes and products. The Company went public in 1957 and was renamed SIFCO Industries, Inc. in 1969, the year it was listed on the American Stock Exchange. Mr. Smith is a former Chairman of the Board of the Chamber of Commerce of the United States (1974-1975). He also served his country as the United States Employer Delegate to the International Labor Organization in Geneva, Switzerland, beginning as an advisor to the U.S. Employer Delegate in 1953, then as the Employer Delegate in 1956 and again in the period 1975-1992. Between 1956 and 1975, he served as an advisor to the Employer Delegate on many occasions. He was a member of the Governing Body of the I.L.O. from 1975-1978. Mr. Smith served as a Founding Director and past Chairman of the National Endowment for Democracy. For many years, Mr. Smith represented SIFCO's interest as a member of the Board of Directors of Bharat Forge Company, Ltd. in Pune, India, the largest commercial forging company in continental Asia. For decades Mr. Smith was actively involved with the Y.M.C.A. and the Salvation Army in Cleveland, Ohio. During fiscal year 2001, the Board of Directors unanimously elected Charles H. Smith, Jr. to the position of Chairman Emeritus. As directors and shareholders, we will miss his active involvement and good counsel in the Company's affairs. At the same time, he has earned a well-deserved retirement from active board duties. We wish him well in all his future activities. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ RESULTS OF OPERATIONS FISCAL YEAR 2001 COMPARED WITH FISCAL YEAR 2000 In 2001, net sales decreased 0.5% to $105.6 million from $106.1 million in 2000. Net income increased 22.8% to $3.0 million, or $.58 per diluted share, in 2001 from $2.4 million, or $.47 per diluted share, in 2000. TURBINE COMPONENT SERVICES AND REPAIR GROUP ("REPAIR GROUP") The Repair Group, which accounted for 51% of the Company's business in fiscal 2001, had net sales of $54.4 million, down 11.8% from $61.7 million in fiscal 2000. Repair volumes for older model engine types continued the decline that the Company experienced during fiscal 2000. As the Company expected, demand for repairs to the older model JT8D (Pratt & Whitney) engines continue to decline due to the continued retirement and reduced utilization of older model aircraft. In addition, there was a reduced volume of repairs to the CFM-56 (GE/SNECMA) and RB211 (Rolls-Royce) engines principally as a result of the increased direct involvement of the jet engine manufacturers into the repair marketplace. However, the Repair Group was able to show stronger repair volumes with respect to the Tay (Rolls-Royce) and PW4000 (Pratt & Whitney) engines, which represent some of the Group's newer programs. Revenues associated with the demand for replacement parts that complement the repair services provided to customers were also down in fiscal 2001 because of the reduced repair volumes in general. Operating income in fiscal 2001 increased to $2.6 million, or 4.8% of net sales, from $2.3 million, or 3.8% of net sales, in fiscal 2000. Reduced sales volumes for repair services again adversely impacted the Repair Group's operating income. During fiscal 2001, the Repair Group's operating income was also negatively impacted by an increase in its reserve for obsolete replacement parts inventory of $0.7 million, when compared to 2000, of which $0.6 million was recorded in the fourth quarter of fiscal 2001. These negative impacts were partially offset by the positive impact of improved margins on the sales of replacement parts. Lower costs in 2001 for used replacement parts, that could be refurbished, resulted in improved margins on the sale of replacement parts. However, the overwhelming contributor to the Repair Group's sustained operating profit, in spite of its reduced sales volumes and additional reserve provisions, has been the positive impact on the Group's margins of the further weakening of the euro in relation to the U.S. dollar during fiscal 2001, when compared to fiscal 2000. Such positive impact accounted for approximately $2.5 million in operating income. The vast majority of the Repair Group's U.S. and non-U.S. sales are denominated in U.S. dollars. At the same time, over 50% of the Group's operations are located in Ireland and the majority of its related costs are denominated in local currency that is tied directly to the euro. Consequently, as the euro declines, such costs are favorably impacted when measured and reported in equivalent U.S. currency. During fiscal 2001, the Repair Group's selling, general and administrative expenses increased to $5.9 million, or 10.9% of net sales, from $5.6 million, or 9.1% of net sales in fiscal 2000. During fiscal 2001, the Repair Group recorded an increase in bad debt expense of $0.8 million, when compared to fiscal 2000, of which $0.2 million was recorded in the fourth quarter of fiscal 2001. The increase in bad debt expense was partially offset by the positive impact of a weaker euro as discussed previously. AEROSPACE COMPONENT MANUFACTURING GROUP ("ACM GROUP") Net sales for fiscal 2001 increased 17% to $40.9 million, compared with $35.0 million in fiscal 2000. The sales increase is net of a reduction in selling price of approximately $1.0 million caused by a decline in the market price of a key raw material that was passed on to customers in the second half of fiscal 2000. The increase in net sales is primarily attributable to an increase in the number of AE series new generation jet engines built by Rolls-Royce Corporation for business and regional jets, as well as transport and surveillance aircraft. Net sales in 2001 also benefited from an increase in shipments of components for military aircraft, as well as airframe components sold to commercial aircraft manufacturers. The ACM Group's operating income in 2001 was $3.5 million, or 8.5% of net sales, compared with $1.5 million, or 4.3% of net sales in 2000. The overall higher net sales level generated $0.8 million of operating income. In addition, the Group's operating income in 2001 benefited by $1.2 million as a result of improved efficiencies resulting from higher production volumes. The operating income in 2001 also benefited by $0.4 million due to process improvements and $0.4 million in lower tooling costs. LIFO benefit was $0.1 million and $0.8 million in 2001 and 2000, respectively. Selling, general and administrative expenses for fiscal 2001 increased $0.3 million to $2.2 million, compared to $1.9 million in fiscal 2000. The increase in fiscal 2001 is primarily attributable to lower selling, general and administrative expense recognized in fiscal 2000 due to a nonrecurring reevaluation of the Company's obligation to provide certain medical benefits to a small number of individuals who retired prior to 1993. Operating income as a percentage of net sales also benefited in fiscal 2001 from the decline in the market price of a key raw material in the second half of fiscal 2000. METAL FINISHING GROUP Net sales for fiscal 2001 increased 8.6% to $10.3 million, compared with $9.5 million in fiscal 2000. Contract service sales volumes increased $0.5 million, or 19%, representing 36% of total sales, in fiscal 2001 when compared to fiscal 2000. Solution sales increased $0.1 million, or 3%, representing 45% of total sales, in 2001 when compared to 2000. Operating income in fiscal 2001 increased to $1.7 million, or 16.7% of net sales, from $1.1 million, or 11.2% of net sales, in fiscal 2000. Margins improved in fiscal 2001, when compared to fiscal 2000, due principally to product mix, both in terms of increased sales and a higher margin in the contract services area as well as a shift within solutions sales to more of the higher margin precious metal solutions. In addition the Metal Finishing Group realized some production efficiencies on increased sales and fiscal 2000 had a nonrecurring charge of $0.1 million related to employee benefits. During fiscal 2001, the Metal Finishing Group's selling, general and administrative expenses of $2.9 million were generally comparable to fiscal 2000 in amount, but represented a lower percentage of net sales. CORPORATE UNALLOCATED EXPENSES Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate expenses, were $1.9 million in both 2001 and 2000. Corporate unallocated expenses were favorably impacted by $0.2 million of lower expenses related to consulting, defined contribution plan administration costs, public company expenses and actuarially determined defined benefit pension plan costs. This was offset by $0.2 million in higher management incentive expense and legal and professional expense. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ================================================================================ OTHER/GENERAL Interest income increased to $0.5 million in 2001, compared with $0.2 in 2000, primarily due to the increase in cash and cash equivalents in fiscal 2001, offset in part by lower interest rates. Interest expense was $1.2 million in 2001, compared with $1.0 million in fiscal 2000. Interest expense was negatively impacted by higher average borrowings under the Company's revolving credit agreement, offset in part by lower interest rates. Other expense was $0.6 million in fiscal 2001, compared with other income of $0.3 million in 2000. $0.8 million of this change is due to foreign currency transaction losses, of which $1.0 million of such loss occurred in the fourth quarter of 2001. These exchange losses result from the impact of the strengthening euro, principally in the fourth quarter of 2001, on the carrying values of certain net monetary assets of the Company's non-U.S. subsidiaries. In addition, the amount of grant income from Irish government agencies recognized by the Company's Irish subsidiary declined $0.1 million to $0.4 million in 2001, compared with $0.5 million in 2000. During fiscal 2001, U.S. income taxes were provided on the undistributed fiscal 2001 earnings of non-U.S. subsidiaries in anticipation that distributions from such earnings, to the extent they may occur, would result in an additional income tax liability. The Company's consolidated income tax provision of $1.7 million results in an effective tax rate of 36.3% in 2001, compared to 2.3% in 2000. Expenses not deductible for tax purposes resulted in an effective tax rate higher than the statutory rate. The Company's backlog as of September 30, 2001 was $35.8 million. Approximately 3.4% of the backlog is on hold and 10.2% is scheduled for delivery beyond fiscal 2002. The following is a breakout by business segment: Repair Group--$7.8 million and ACM Group--$28.0 million. The Metal Finishing Group essentially had no backlog. All orders are subject to modification or cancellation by the customer with limited charges. The Company believes that backlog may not necessarily be indicative of actual sales for any succeeding period. FISCAL YEAR 2000 COMPARED WITH FISCAL YEAR 1999 In 2000, net sales decreased 8.1% to $106.1 million from $115.5 million in 1999. Net income per diluted share was $.47 compared to $.72 in 1999. TURBINE COMPONENT SERVICES AND REPAIR GROUP ("REPAIR GROUP") The Repair Group, which accounted for 58% of the Company's business in fiscal 2000, had net sales of $61.7 million, down 14.5% from the $72.1 million level in fiscal 1999. The net sales growth that was anticipated when we expanded our repair facilities in 1998 has not materialized. The primary contributor to the decline in repair sales volume has been the reduced demand for the overhaul of older model Pratt & Whitney JT8D and JT9D engines as many of the older model 737-100/200, 727, 747-100/200 and DC-9 aircraft powered by these engines have experienced reduced utilization or were retired from their respective fleets. Also contributing to the reduction in repair sales was the reduced volume of repairs to the CFM-56 (GE/SNECMA) and RB211 (Rolls-Royce) engines as a result of the increased direct involvement of the jet engine manufacturers into the repair marketplace. Revenues associated with the demand for replacement parts that complement the repair services provided to customers was also down in 2000 because of the reduced repair volumes in general. Operating income in fiscal 2000 declined to $2.3 million, or 3.8% of net sales, from $4.5 million, or 6.2% of net sales, in fiscal 1999. While repair sales were down in fiscal 2000 compared to fiscal 1999, margins on such sales were up slightly as a direct result of the further weakening of the euro in relation to the U.S. dollar. The vast majority of the Repair Group's U.S. and non-U.S. sales are denominated in U.S. dollars. At the same time, over 50% of the Group's operations are located in Ireland and related costs are denominated in local currency that is tied directly to the euro. Consequently, as the euro declines, such costs are favorably impacted when measured and reported in equivalent U.S. currency. A decline in the availability of used replacement parts that can be refurbished required the Repair Group to procure higher cost new OEM replacement parts. As a result, not only did the Repair Group experience a general reduction in sales volume, the Repair Group also was impacted by lower margins on replacement parts sales due to higher replacement part costs in fiscal 2000. During fiscal 2000, the Repair Group's selling, general and administrative expenses decreased to $5.6 million, or 9.1% of net sales, from $5.9 million, or 8.2% of net sales, in fiscal 1999. AEROSPACE COMPONENT MANUFACTURING GROUP ("ACM GROUP") Net sales for fiscal 2000 increased 1.8% to $35.0 million, compared with $34.3 million for fiscal 1999. The sales increase is net of a reduction in selling price of $1.1 million caused by a decline in the market price of a key raw material during fiscal 2000 that was passed on to customers. The increase in sales is attributable to a rise in the build rates for business and regional jet aircraft during the latter part of fiscal 2000, offset in part by a reduction in the large aircraft build cycle from its peak in 1999. The ACM Group's operating income in fiscal 2000 was $1.5 million, or 4.3% of net sales, compared with $1.1 million, or approximately 3.2% of net sales in fiscal 1999. The operating income percentage benefited in fiscal 2000 from the decline in the market price of a key raw material. In addition, the ACM Group benefited from a $0.8 million and $0.3 million LIFO reversal in fiscal 2000 and 1999, respectively. During fiscal 2000 this benefit was partially offset by an increase in tooling expenditures of $0.7 million. The increase is attributable to construction of new tooling to support new programs, as well as increases in die maintenance costs as a result of the full year impact of the ACM Group's implementation of its Synchronous Manufacturing project in fiscal 1999. The objectives of the Synchronous Manufacturing project include shorter lead times, shorter cycle times, lower inventories and increased capacity for new orders and new products. Selling, general and administrative expenses for fiscal 2000 declined $0.2 million to $2.0 million, compared to $2.2 million in fiscal 1999. The decline in selling, general and administrative expenses is primarily attributable to the Company reevaluating its obligation to provide certain medical benefits to a small group of individuals who retired prior to 1993 and their surviving spouses. The Company does not anticipate that reevaluation of this obligation will produce comparable results in future years. METAL FINISHING GROUP Net sales for fiscal 2000 increased 5.0% to $9.5 million, compared with $9.1 million in fiscal 1999. Product mix between contract service sales, at 33%, and solution sales, at 49%, was consistent for both fiscal years. Operating income in fiscal 2000 declined to $1.1 million, or 11.2% of net sales, from $1.2 million, or 13.3% of net sales, in fiscal 1999. In fiscal 2000, there was a nonrecurring charge of $0.1 million related to employee benefits. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ================================================================================ During fiscal 2000, the Metal Finishing Group's selling, general and administrative expenses increased to $2.9 million, or 30.1% of net sales, from $2.8 million, or 31.2% of net sales, in fiscal 1999. The increase in 2000 was due principally to an increase of $0.1 million in selling expenses reflecting the cost of increased sales efforts in fiscal 2000. CORPORATE UNALLOCATED EXPENSES Corporate unallocated expenses of $1.9 million in both 2000 and 1999, consist of corporate salaries and benefits, legal and professional and other corporate expenses. Corporate unallocated expenses were favorably impacted in the fourth quarter of fiscal 2000 by $0.3 million due to changes in estimates in amounts provided for defined benefit pension plan expense, insurance expense, management incentive expense and charitable donation provision. Fourth quarter fiscal 2000 corporate unallocated expenses also were favorably impacted by $0.1 million due to lower overall spending for compensation, professional services, employee travel, and public company expenses. The Company does not anticipate that similar favorable results may necessarily occur in future periods. OTHER/GENERAL Consolidated selling, general and administrative expenses for the fourth quarter of fiscal 2000 were favorably impacted by $0.6 million for the foregoing reasons noted with respect to the ACM Group's selling, general and administrative expenses and corporate unallocated expenses. Net interest expense for 2000 is down 17.6% to $0.8 million from $1.0 million in 1999, primarily due to the Company's reduction of its outstanding debt obligations through the use of its operating cash flows. The Company's backlog as of September 30, 2000 was $42.6 million. Approximately 2.8% of the backlog is on hold and 6.2% is scheduled for delivery beyond fiscal 2001. The following is a breakout by business segment: Repair Group--$9.0 million; ACM Group--$33.5 million; and Metal Finishing Group--$0.1 million. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased during fiscal 2001 to $13.8 million from $4.7 million at September 30, 2000. At present, essentially all of the Company's cash and cash equivalents are in the possession of its non-U.S. subsidiaries and relate to undistributed earnings of these non-U.S. subsidiaries. Distribution of these non- U.S. subsidiary earnings would be subject to U.S. income taxes. The Company considers the undistributed earnings, accumulated prior to October 1, 2000, of its non-U.S. subsidiaries to be indefinitely reinvested in operations outside the United States. The Company has provided for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries accumulated in fiscal 2001 and will continue to provide for U.S. income taxes on such future earnings for the foreseeable future. During the first quarter of fiscal 2002, the Company received a distribution of $2.5 million from its non-U.S. subsidiary's fiscal 2001 earnings. Cash flow activity for fiscal 2001 is presented in the Consolidated Statements of Cash Flows. A decrease in the Repair Group's accounts receivable of $4.6 million was partially offset by an increase in the ACM Group's accounts receivable of $3.4 million. Repair Group accounts receivable decreased due to lower overall sales, as well as overall improvement in cash collections and an increase in the Repair Group's allowance for doubtful accounts. The ACM Group's accounts receivable increased due to higher overall sales, and slower cash collections. ACM Group inventories decreased $0.5 million, while Repair Group inventories decreased a net of $1.6 million. Strong ACM Group fourth quarter sales helped reduce the ACM Group's inventories, while the Repair Group's inventory decrease is attributable primarily to a reduction in replacement parts inventories in response to lower replacement part sales and an increase in its reserve for obsolete replacement parts inventory. The overall reduction in accounts payable of $2.3 million is due primarily to the overall lower year-end inventory levels. Working capital was $36.9 million at September 30, 2001, compared to $28.7 million at September 30, 2000. The current ratio was 3.3 and 2.6 at September 30, 2001 and 2000, respectively. Capital expenditures were $4.1 million in fiscal 2001, compared with $4.7 million in fiscal 2000. Fiscal 2001 capital expenditures consisted of equipment that will enhance the Repair Group's turbine repair services, other new equipment and the upgrade of existing equipment. The Company has no material outstanding commitments for capital expenditures. The Company believes that, given the uncertainties in the markets that it serves, capital expenditures in fiscal 2002 will not exceed fiscal 2001 levels. The Company's long-term debt as a percentage of equity at September 30, 2001 and 2000 was 30.6% and 26.3%, respectively. At September 30, 2001, the Company had $5.0 million outstanding against its $10.0 million revolving credit facility. During the fourth quarter of fiscal 2001, the Company announced the reinstatement of its share-repurchase program that had been suspended during the second quarter of fiscal 2001. No shares were repurchased in fiscal 2001. During fiscal 2000, common shares totaling 70,700 of the 100,000 shares approved were repurchased. No dividends were declared in fiscal 2001. Dividends of $1.0 million were paid in fiscal 2000. OUTLOOK The Company's business is heavily dependent upon the strength of the commercial airlines and the aircraft and related engine manufacturers. Consequently, the performance of the domestic and international air transport industry directly and significantly impact the performance of the Repair and ACM Groups' businesses. The air transport industry's long-term outlook has, for many years, been one of continued growth, which suggested the need for additional aircraft and growth in the requirement for aircraft and related engine repairs. The events of September 11, 2001 have resulted in an immediate reduction in the demand for passenger travel both in the U.S. and internationally. It is difficult to determine at this time what the long-term impact of these events will be on air travel and the demand for the services and products provided by the Company. However, aircraft manufacturers have recently announced reductions in forecasted aircraft deliveries in the next few years as a result of reduced demand, and many airlines have cancelled or rescheduled deliveries of new aircraft to which they had previously committed. In addition, the financial condition of many airlines in the U.S. and throughout the world is weak and some airlines have entered bankruptcy proceedings, while others have announced major restructurings, including significant reductions in service and the grounding of aircraft. This unexpected increase in the number idle aircraft, the number of which is skewed heavily toward older models, may disproportionately and negatively impact the Repair Group due to its concentration of providing replacement parts and repair services for the engines that power these aircraft. These factors could result in a decrease in orders for new and after-market commercial aerospace products and services; an increase in credit risk associated with doing business with the financially troubled airlines and their suppliers; and an increase in slow moving and/or 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ================================================================================ obsolete replacement parts inventory related to older model engines that are experiencing reduced usage. All of these consequences, to the extent that they occur, could negatively impact the Company's sales, operating profits and cash flows. However, in light of the current business environment, the Company believes that funds available under its credit facilities and anticipated funds generated from operations will be adequate to meet its liquidity needs through the foreseeable future. RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" on October 1, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income (loss), based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The Company uses an interest rate swap agreement to convert its variable rate term note to an effective fixed rate of 7.74%, subject to adjustment based upon the level of certain financial ratios. In accordance with the transition provisions of SFAS No. 133, upon adoption of this standard, the Company recorded in accumulated other comprehensive income (loss) a net of tax cumulative effect type adjustment of $0.1 million to recognize the fair value of the interest rate swap designated as a cash flow hedging instrument. Upon adoption, the derivative instrument was also recognized on the balance sheet at its fair value of $0.2 million. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". This standard is effective for fiscal years beginning after December 15, 2001. The Company has the option to adopt SFAS No. 142 in the first quarter of fiscal 2002. The Company has not yet determined when it will adopt this standard. The standard changes financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value based test. The adoption of this standard will result in no further amortization of goodwill. Amortization of goodwill in 2001 was $0.1 million, or $0.02 per share (diluted). At this time, the Company has not prepared an analysis of this standard to determine if an impairment charge would be recognized upon adoption. The Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", in June 2001. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. The adoption of this standard did not have an impact on the Company's financial position or results of operations. EFFECTS OF FOREIGN CURRENCY AND INFLATION The Company operates internationally and enters into transactions denominated in non-U.S. dollar currencies. As a result, the Company is subject to the variability that arises from exchange rate movements. The impact of changes in exchange rates on the operating results of the Company were discussed previously in "Results of Operations". The Company's use of foreign currency derivative contracts is discussed under the heading, "Quantitative and Qualitative Disclosures about Market Risk." The Company believes that inflation has not materially affected its results of operations in 2001 and 2000, and does not expect inflation to be a significant factor in fiscal 2002. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the ordinary course of business, the Company is subject to foreign currency and interest rate risk. The risks primarily relate to the sale of the Company's products in transactions denominated in non- U.S. dollar currencies (principally 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. FOREIGN CURRENCY RISK The U.S. dollar is the functional currency for all of the Company's U.S. operations. For these operations, all gains and losses from currency transactions, if any, are included in income currently. For the Company's non-U.S. subsidiaries, the functional currency is the local currency. Assets and liabilities are translated into U.S. dollars at the rates of exchange at the end of the year and revenues and expenses are translated using average rates of exchange. Translation adjustments are reported as a component of comprehensive income. Effective October 1, 2001, the Company changed the functional currency of its Irish subsidiary from the euro to the U.S. dollar. The functional currency was changed because a substantial majority of the subsidiary's transactions are now denominated in U.S. dollars. Historically, the Company has been able to mitigate the impact, if any, of foreign currency risk by means of hedging such risk through the use of foreign currency exchange contracts. While the Company had foreign currency exchange contracts outstanding during 2001, at September 30, 2001, there were no foreign currency exchange contracts outstanding. 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. During the first quarter of fiscal 2002, the Company entered into a number of foreign currency exchange contracts expiring throughout fiscal 2002 to sell U.S. dollars aggregating $16.0 million. INTEREST RATE RISK The Company is exposed to uncertain risks, primarily resulting from the effects of changes in interest rates. To reduce exposure to such risks resulting from fluctuations in interest rates, the Company uses derivative financial instruments. Specifically, the Company uses an interest rate swap agreement to mitigate the effects of interest rate fluctuations on net income by changing the floating interest rates on certain portions of the Company's debt to fixed interest rates. The effect of changes in interest rates on the Company's results of operations generally has been small relative to other factors that also affect net income, such as sales and operating profit. Management believes that its use of these derivative financial instruments to reduce risk is in the Company's best interest. The Company does not enter into derivative financial instruments for trading purposes. The Company's primary interest rate risk exposure results from its revolving credit agreement and industrial development bond. The Company's term note has its interest rate effectively fixed through an interest rate swap agreement. If interest rates were to increase 100 basis points (1%) from September 30, 2001 rates, and assuming no changes in long-term debt from September 30, 2001 levels, the additional annual expense to the Company would be approximately $0.1 million. 7 SIFCO Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Years ended September 30 (Amounts in thousands, except per share data) ================================================================================
2001 2000 1999 ======================================================================================================== NET SALES $ 105,633 $ 106,138 $ 115,490 OPERATING EXPENSES: Cost of goods sold 86,761 90,732 97,772 Selling, general and administrative expenses 12,960 12,357 12,827 - -------------------------------------------------------------------------------------------------------- Total operating expenses 99,721 103,089 110,599 - -------------------------------------------------------------------------------------------------------- Operating income 5,912 3,049 4,891 INTEREST INCOME (530) (196) (277) INTEREST EXPENSE 1,189 1,019 1,276 OTHER EXPENSE (INCOME), NET 585 (253) (213) - -------------------------------------------------------------------------------------------------------- Income before income tax provision 4,668 2,479 4,105 INCOME TAX PROVISION 1,694 57 332 - -------------------------------------------------------------------------------------------------------- Net income $ 2,974 $ 2,422 $ 3,773 ======================================================================================================= NET INCOME PER SHARE (BASIC) $ .58 $ .47 $ .73 NET INCOME PER SHARE (DILUTED) $ .58 $ .47 $ .72 WEIGHTED-AVERAGE NUMBER OF COMMON SHARES (BASIC) 5,144 5,169 5,181 WEIGHTED-AVERAGE NUMBER OF COMMON SHARES (DILUTED) 5,165 5,203 5,228
See accompanying notes to consolidated financial statements. 8 SIFCO Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS September 30 (Amounts in thousands, except per share data) ================================================================================
2001 2000 =========================================================================================================== ASSETS CURRENT ASSETS: Cash and cash equivalents $ 13,787 $ 4,687 Receivables, less allowance for doubtful accounts of $1,422 in 2001 and $765 in 2000 18,705 19,743 Inventories 18,013 19,878 Deferred income taxes 1,709 1,486 Prepaid expenses and other current assets 578 656 - ----------------------------------------------------------------------------------------------------------- Total current assets 52,792 46,450 PROPERTY, PLANT AND EQUIPMENT: Land 859 859 Buildings 19,063 18,493 Machinery and equipment 58,723 55,724 - ----------------------------------------------------------------------------------------------------------- 78,645 75,076 Less - accumulated depreciation and amortization 49,262 46,067 - ----------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 29,383 29,009 OTHER ASSETS: Funds held by trustee for capital project 92 530 Goodwill and other intangible assets, net 3,558 3,866 Other assets 771 645 - ----------------------------------------------------------------------------------------------------------- Total other assets 4,421 5,041 - ----------------------------------------------------------------------------------------------------------- Total assets $ 86,596 $ 80,500 =========================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 1,430 $ 1,420 Accounts payable 6,717 8,921 Accrued liabilities 7,702 7,433 - ----------------------------------------------------------------------------------------------------------- Total current liabilities 15,849 17,774 LONG-TERM DEBT, NET OF CURRENT MATURITIES 15,107 11,962 OTHER LONG-TERM LIABILITIES 6,266 5,264 SHAREHOLDERS' EQUITY: Serial preferred shares, no par value, authorized 1,000 shares -- -- Common shares, par value $1 per share, authorized 10,000 shares; issued 5,308 shares in 2001 and 5,205 shares in 2000; outstanding 5,237 shares in 2001 and 5,134 shares in 2000 5,308 5,205 Additional paid-in capital 6,783 6,413 Retained earnings 45,615 42,641 Accumulated other comprehensive loss (7,423) (8,310) Unearned compensation--restricted common shares (460) -- Common shares held in treasury at cost, 71 shares in 2001 and 2000 (449) (449) - ----------------------------------------------------------------------------------------------------------- Total shareholders' equity 49,374 45,500 - ----------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 86,596 $ 80,500 ===========================================================================================================
See accompanying notes to consolidated financial statements. 9 SIFCO Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended September 30 (Amounts in thousands, except per share data) ================================================================================
2001 2000 1999 ================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,974 $ 2,422 $ 3,773 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,368 4,632 4,789 Loss on disposal of property, plant and equipment 160 -- 71 Deferred income taxes 1,286 176 335 Changes in operating assets and liabilities: Receivables 1,205 575 (2,776) Inventories 2,081 2,177 2,596 Refundable income taxes -- 354 (354) Prepaid expenses and other current assets 84 606 (851) Other assets (119) 229 235 Accounts payable (2,268) 1,341 (207) Accrued liabilities 176 (1,873) (1,217) Other long-term liabilities (886) (168) 1,301 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 9,061 10,471 7,695 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,082) (4,652) (4,899) Decrease in funds held by trustee for capital project 438 147 245 Other 44 (404) (242) - ------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (3,600) (4,909) (4,896) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit agreement 30,132 9,286 20,500 Repayments of revolving credit agreement (25,557) (8,889) (21,600) Repayments of long-term debt (1,420) (1,415) (2,400) Repurchase of common shares -- (449) -- Cash dividends declared -- (1,031) (1,037) Issuance of common shares 13 73 177 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) financing activities 3,168 (2,425) (4,360) - ------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents 8,629 3,137 (1,561) Cash and cash equivalents at beginning of year 4,687 2,022 3,780 Effect of exchange rate changes on cash and cash equivalents 471 (472) (197) Cash and cash equivalents at end of year $ 13,787 $ 4,687 $ 2,022 ================================================================================================================== Supplemental disclosure of cash flow information: Cash paid for interest $ (1,082) $ (1,021) $ (1,295) Cash recovered (paid) for income taxes, net 460 (62) (1,246)
See accompanying notes to consolidated financial statements. 10 SIFCO Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF Years ended September 30 SHAREHOLDERS' EQUITY (Amounts in thousands, except per share data) ================================================================================
ACCUMULATED COMMON ADDITIONAL OTHER SHARES TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED HELD IN SHAREHOLDERS' SHARES CAPITAL EARNINGS INCOME (LOSS) COMPENSATION TREASURY EQUITY =============================================================================================================================== BALANCE - September 30, 1998 $ 5,170 $ 6,198 $ 38,514 $ 8 $ -- $ -- $ 49,890 Comprehensive income: Net income -- -- 3,773 -- -- -- 3,773 Foreign currency translation adjustment -- -- -- (2,757) -- -- (2,757) -------- Total comprehensive income 1,016 Shares issued to Defined Contribution Plan 6 51 -- -- -- -- 57 Shares issued to vendor as payment for services 4 48 -- -- -- -- 52 Stock options exercised, net of shares surrendered 13 55 -- -- -- -- 68 Dividends declared ($.20 per share) -- -- (1,037) -- -- -- (1,037) - ---------------------------------------------------------------------------------------------------------------------------- BALANCE - September 30, 1999 $ 5,193 $ 6,352 $ 41,250 $ (2,749) $ -- $ -- $ 50,046 Comprehensive loss: Net income -- -- 2,422 -- -- -- 2,422 Foreign currency translation adjustment -- -- -- (5,561) -- -- (5,561) -------- Total comprehensive loss (3,139) Shares issued to Defined Contribution Plan 1 5 -- -- -- -- 6 Shares issued to vendor as payment for services 6 42 -- -- -- -- 48 Stock options exercised 5 14 -- -- -- -- 19 Shares repurchased and held in treasury -- -- -- -- -- (449) (449) Dividends declared ($.20 per share) -- -- (1,031) -- -- -- (1,031) - ---------------------------------------------------------------------------------------------------------------------------- BALANCE - September 30, 2000 $ 5,205 $ 6,413 $ 42,641 $ (8,310) $ -- $ (449) $ 45,500 Comprehensive income: Net income -- -- 2,974 -- -- -- 2,974 Foreign currency translation adjustment -- -- -- 1,191 -- -- 1,191 Unrealized loss on interest rate swap agreement -- -- -- (304) -- -- (304) -------- Total comprehensive income 3,861 Shares issued to vendor as payment for services 3 10 -- -- -- -- 13 Shares issued under restricted stock plan 100 360 -- -- (460) -- -- - ---------------------------------------------------------------------------------------------------------------------------- BALANCE - September 30, 2001 $ 5,308 $ 6,783 $ 45,615 $ (7,423) $ (460) $ (449) $ 49,374 ============================================================================================================================
See accompanying notes to consolidated financial statements. 11 SIFCO Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED Years ended September 30, 2001, 2000 1999 and FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) ================================================================================ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. DESCRIPTION OF BUSINESS SIFCO Industries, Inc. and Subsidiaries (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 brush plating; and the products include forgings, machined forged parts and other machined metal parts, remanufactured component parts for turbine engines, and brush plating solutions and equipment. B. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. C. CASH EQUIVALENTS The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. D. INVENTORY VALUATION Inventories are stated at the lower of cost or market. Inventory costs include material, direct labor and factory overhead. Cost is determined by the last-in, first-out (LIFO) method for approximately 35% and 31% of inventories at September 30, 2001 and 2000, respectively. The first-in, first-out (FIFO) method is used for the remainder of inventories. E. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization are generally computed using the straight-line method, except for certain operations, which use the declining balance method, and are provided in amounts sufficient to amortize the cost of the assets over their estimated useful lives. Depreciation provisions are based on estimated useful lives: buildings and building improvements - 5 to 50 years and machinery and equipment, including office and computer equipment, - 2 to 20 years. F. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets primarily represent the excess of cost over the net assets of acquired companies. Goodwill is amortized using the straight-line method over 40 years. Also included is a 10-year, non-competition agreement with the former owner of an acquired company. This asset is being amortized using the straight-line method over 10 years. At September 30, 2001 and 2000, accumulated amortization of goodwill and other intangible assets was $3,179 and $2,853, respectively. The Company uses an undiscounted cash flow method to periodically review the value of goodwill and other intangible assets and believes such assets are realizable. G. NET INCOME PER SHARE The Company's net income per basic share amounts have been computed based on the average number of common shares outstanding. Net income per diluted share amounts reflect the effect of the Company's outstanding stock options under the treasury stock method. H. REVENUE RECOGNITION The Company recognizes revenue in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". Revenues are generally recognized when products are shipped or services are provided to customers. I. ADOPTION OF NEW ACCOUNTING STANDARD The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" on October 1, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income (loss), based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The Company uses an interest rate swap agreement to convert its variable rate term note to an effective fixed rate of 7.74%, subject to adjustment based upon the level of certain financial ratios. In accordance with the transition provisions of SFAS No. 133, upon adoption of this standard, the Company recorded in accumulated other comprehensive income (loss) a net of tax cumulative effect type adjustment of $135 to recognize the fair value of the interest rate swap designated as a cash flow hedging instrument. The derivative was also recognized on the balance sheet upon adoption at its fair value of $205. J. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." This standard is effective for fiscal years beginning after December 15, 2001. The Company has the option to adopt SFAS No. 142 in the first quarter of fiscal 2002. The Company has not yet determined when it will adopt this standard. The standard changes financial accounting and reporting for acquired goodwill and indefinite life intangible assets. Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value based test. The adoption of this standard will result in no further amortization of goodwill. Amortization of goodwill in 2001 was $116, or $0.02 per share (diluted). At this time, the Company has not prepared an analysis of this standard to determine if an impairment charge would be recognized upon adoption. The Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", in June 2001. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. The adoption of this standard did not have an impact on the Company's financial position or results of operations. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) ================================================================================ K. USE OF ESTIMATES Accounting principles generally accepted in the United States require management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period in preparing these consolidated financial statements. Actual results could differ from these estimates. L. RECLASSIFICATIONS Certain amounts in prior years have been reclassified to conform to the 2001 consolidated financial statement presentation. 2. INVENTORIES Inventories consist of: 2001 2000 ================================================================================ Raw materials and supplies $ 5,714 $ 4,427 Work-in-process 5,905 8,175 Finished goods 6,394 7,276 - -------------------------------------------------------------------------------- Total inventories $18,013 $19,878 ================================================================================ If the FIFO method had been used for the entire Company, inventories would have been $2,884 and $2,979 higher than reported at September 30, 2001 and 2000, respectively. 3. ACCRUED LIABILITIES Accrued liabilities consist of: 2001 2000 ================================================================================ Accrued employee compensation and benefits $2,076 $1,653 Accrued workers' compensation 1,497 1,471 Accrued income taxes 975 80 Accrued royalties 916 1,709 Other accrued liabilities 2,238 2,520 - -------------------------------------------------------------------------------- Total accrued liabilities $7,702 $7,433 ================================================================================ 4. GOVERNMENT GRANTS The Company receives grants and subsidies from the Republic of Ireland as an incentive to invest in facilities and training in that country. These grants and subsidies generally require that the Company maintain operations for up to ten years in order to qualify for the full value of benefits received. These grants are recorded as deferred credits when awarded and are subsequently amortized into income over the period in which such grants are required to be earned. The unamortized portion of these grants amounted to $1,892 and $2,656 at September 30, 2001 and 2000, and is included in other long-term liabilities. Grant revenue of $406, $513 and $620 for 2001, 2000 and 1999, respectively, is included in other expense (income), net. These grants may be repayable in certain circumstances, principally the sale of related assets or discontinuance of operations. The contingent liability for such possible repayments was $4,794 and $4,545 at September 30, 2001 and 2000, respectively. 5. LONG-TERM DEBT Long-term debt consists of: 2001 2000 ================================================================================ Term note payable to bank $ 8,100 $ 9,300 Revolving credit agreement 4,972 397 Industrial development variable rate demand revenue bonds 3,465 3,685 - -------------------------------------------------------------------------------- Total debt 16,537 13,382 Less - current maturities 1,430 1,420 - -------------------------------------------------------------------------------- Total long-term debt $15,107 $11,962 ================================================================================ The term note is unsecured and payable in quarterly installments of $300 through February 1, 2005 with the remaining balance of $3,900 due May 1, 2005. The term note has a variable interest rate which, after giving effect to an interest rate swap agreement with the same bank, becomes an effective fixed rate of 7.74% and is subject to adjustment based upon the level of certain financial ratios. The effective interest rate at September 30, 2001 was 7.99%. The interest rate swap agreement has a notional amount equal to the amount owed under the term note and bears interest at a fixed rate of 5.99%. The Company has an unsecured $10,000 revolving credit agreement which expires on March 31, 2003 and bears interest at the bank's base rate. The interest rate was 6.0% at September 30, 2001. The average balance outstanding against the revolving credit agreement was $3,779, $212 and $2,205 during 2001, 2000 and 1999, respectively. A commitment fee of 1/4% is incurred on the remaining unused balance. The Company has a $4,100, 15-year, industrial development bond outstanding, the net proceeds of which are being used at the Turbine Component Services and Repair facility in Tampa, Florida. The interest rate is reset weekly, based on prevailing tax-exempt money market rates (2.55% at September 30, 2001). The bond requires annual principal payments ranging from $230 in 2002 to $355 in 2013. The bonds are guaranteed by a letter of credit, which is secured by the property and equipment of the facility. Under its various credit agreements, the Company is subject to certain customary covenants. These include, without limitation, a minimum tangible net worth level (as defined). At September 30, 2001 the Company was in compliance with such covenants. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) ================================================================================ 6. INCOME TAXES The components of income before income tax provision are as follows: 2001 2000 1999 ================================================================================ U.S. $ 519 $(1,192) $ (498) Non-U.S 4,149 3,671 4,603 - -------------------------------------------------------------------------------- Income before income tax provision $4,668 $ 2,479 $ 4,105 ================================================================================ The income tax provision consists of the following: 2001 2000 1999 ================================================================================ Current income tax provision (benefit): U.S. federal $ (117) $ (564) $ (667) State and local 36 (11) 6 Non-U.S 489 456 658 - -------------------------------------------------------------------------------- Total current tax provision 408 (119) (3) - -------------------------------------------------------------------------------- Deferred U.S. federal income tax provision 1,286 176 335 - -------------------------------------------------------------------------------- Income tax provision $1,694 $ 57 $ 332 ================================================================================ The income tax provision differs from amounts currently payable or refundable due to certain items reported for financial statement purposes in periods which differ from those in which they are reported for tax purposes. The income tax provision in the accompanying Consolidated Statements of Income differs from the statutory rate as follows: 2001 2000 1999 ================================================================================ Income before income tax provision $ 4,668 $ 2,479 $ 4,105 Less-U.S., state and local income tax provision (benefit) 36 (11) 6 - -------------------------------------------------------------------------------- Income before federal income tax provision $ 4,632 $ 2,490 $ 4,099 ================================================================================ Income tax provision at U.S. federal statutory rate $ 1,575 $ 847 $ 1,393 Tax effect of: Non-U.S. tax rate differential -- (792) (975) Other 83 13 (92) - -------------------------------------------------------------------------------- U.S. federal and non-U.S income tax provision 1,658 68 326 Add-U.S., state and local income tax provision (benefit) 36 (11) 6 - -------------------------------------------------------------------------------- Income tax provision $ 1,694 $ 57 $ 332 ================================================================================ Deferred tax assets and liabilities consist of the following: 2001 2000 ================================================================================ Deferred tax assets: Employee benefits $ 1,445 $ 1,308 Doubtful accounts 305 151 Inventory and property reserves 536 355 Investment valuation reserve 511 511 Foreign tax credits 161 161 Other 156 370 - -------------------------------------------------------------------------------- Total deferred tax assets 3,114 2,856 Deferred tax liabilities: Depreciation 1,438 1,220 Unremitted foreign earnings 934 -- Personal property taxes 29 175 Other 381 -- - -------------------------------------------------------------------------------- Total deferred tax liabilities 2,782 1,395 - -------------------------------------------------------------------------------- Deferred tax assets net of liabilities 332 1,461 Valuation allowance (161) (161) - -------------------------------------------------------------------------------- Net deferred tax assets $ 171 $ 1,300 ================================================================================ The realization of the Company's net deferred tax assets is dependent upon the generation of future U.S. taxable income. Management believes it is more likely than not that the Company will generate sufficient future U.S. taxable income to fully utilize the established net deferred tax assets. The Company considers the undistributed earnings, accumulated prior to October 1, 2000, of its non-U.S. subsidiaries to be indefinitely reinvested in operations outside the United States. Distribution of these non-U.S. subsidiary earnings would be subject to U.S. income taxes. Cumulative undistributed earnings of non- U.S. subsidiaries for which no U.S. federal deferred income tax liabilities have been established were approximately $25,000 at September 30, 2001. During 2001, the Company provided $934 for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries accumulated in fiscal 2001. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) ================================================================================ 7. RETIREMENT BENEFIT PLANS The Company and certain of its U.S. subsidiaries sponsor defined benefit pension plans covering most of its employees. The Company's funding policy for U.S. defined benefit plans is based on an actuarially determined cost method allowable under Internal Revenue Service regulations. Non-U.S. plans are funded in accordance with the requirements of regulatory bodies governing the plans. Net pension expense for the Company-sponsored defined benefit plans for 2001, 2000 and 1999 consists of the following: 2001 2000 1999 ================================================================================ Service cost $ 813 $ 886 $ 906 Interest cost 1,180 1,153 967 Expected return on plan assets (1,483) (1,317) (1,122) Amortization of transition obligation (asset) (11) 12 (13) Amortization of prior service cost 42 42 (2) Amortization of net gain (262) (132) (79) - -------------------------------------------------------------------------------- Net pension expense for defined benefit plans $ 279 $ 644 $ 657 ================================================================================ The status of all significant U.S. and non-U.S. defined benefit plans is as follows: Benefit Obligations: 2001 2000 =============================================================================== Benefit obligation at beginning of year $ 14,596 $ 15,446 Service cost 813 886 Interest cost 1,180 1,153 Participant contributions 180 187 Actuarial loss (gain) 1,997 (1,061) Benefits paid (1,581) (1,395) Currency translation adjustment 142 (620) - -------------------------------------------------------------------------------- Benefit obligation at end of year $ 17,327 $ 14,596 ================================================================================ Plan Assets: 2001 2000 ================================================================================ Plan assets at beginning of year $ 18,144 $ 17,734 Actual return (loss) on plan assets (915) 1,941 Employer contributions 592 466 Participant contributions 180 187 Benefits paid (1,581) (1,395) Currency translation adjustment 151 (789) - -------------------------------------------------------------------------------- Plan assets at end of year $ 16,571 $ 18,144 ================================================================================ Plans in which Plans in which Assets Exceed Accumulated Accumulated Benefits Benefits Exceed Assets --------------- ------------- Reconciliation of Funded Status: 2001 2000 2001 2000 ================================================================================ Plan assets in excess of (less than) projected benefit obligations $ 2,454 $ 3,941 $(3,210) $ (393) Unrecognized net (gain) loss (1,939) (3,917) 503 (1,999) Unrecognized prior service cost 326 640 57 (211) Unrecognized transition asset -- (7) (49) (53) Currency translation adjustment -- 94 10 -- - -------------------------------------------------------------------------------- Net amount recognized in the balance sheet $ 841 $ 751 $(2,689) $(2,656) ================================================================================ The net amounts are recorded in other long-term liabilities. Assumptions used for defined benefit plans consist of: 2001 2000 1999 ================================================================================ Discount rate for liabilities 7.1% 7.8% 7.4% Expected return on assets 8.4% 8.6% 8.1% Rate of compensation increase 4.0% 4.0% 4.0% The Company also contributes to two U.S. multi-employer defined contribution plans for certain union employees. The Company's contributions to these plans in 2001, 2000 and 1999 were $47, $46 and $43, respectively. All nonunion employees of the Company and its U.S. subsidiaries are eligible to participate in the Company's defined contribution plan. The Company's matching contribution expense for 2001, 2000 and 1999 was $77, $85 and $80, respectively. The Company's Irish subsidiary sponsors, for all of its employees, a tax-advantaged profit sharing program, which was adopted in 1999. Company discretionary contributions and employee elective contributions are invested in common stock of the Company without being subject to personal income taxes if held for at least three years. Employees have the option of taking a cash taxable distribution. The total contribution expense was $-0- in 2001 and 2000, and $156 in 1999. The Company's Irish subsidiary also sponsors, for certain of its employees hired after October 1, 2000, a defined contribution plan. The Company contributes annually 5.5% of eligible employee compensation, as defined. Total contribution expense in 2001 was $10. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) ================================================================================ 8. STOCK OPTIONS During 1999, the Company adopted the 1998 Long-Term Incentive Plan. The aggregate number of stock options which may be granted under the Plan in each fiscal year is limited to 1.5% of the total outstanding shares at September 30, 1998 up to a maximum of 5% of such total outstanding shares. Options also remain outstanding under two previous stock option plans for which authority to issue additional grants has expired. Option exercise price is not less than fair market value on date of grant and options are exercisable no later than ten years from date of the grant. Options issued under all plans generally vest at a rate of 25% per year. Option activity relating to these plans during the last three years was as follows: 2001 2000 1999 ================================================================================ Options at beginning of year 276,000 205,000 148,250 Weighted average exercise price $8.03 $8.28 $5.67 Options granted during the year 77,000 76,000 80,000 Weighted average exercise price $4.75 $7.08 $12.88 Options exercised during the year -- (5,000) (15,750) Weighted average exercise price $ -- $3.75 $6.26 Options canceled during the year (9,000) -- (7,500) Weighted average exercise price $5.70 $ -- $10.00 Options at end of year 344,000 276,000 205,000 Weighted average exercise price $7.36 $8.03 $8.28 Options exercisable at end of year 174,000 138,750 97,500 Weighted average exercise price $7.16 $6.14 $4.84 The following table provides additional information regarding options outstanding as of September 30, 2001: Option Options Options Remaining Life of Exercise Price Outstanding Exercisable Options (Years) ================================================================================ $3.75 5,000 5,000 1.1 4.25 100,000 100,000 4.1 4.69 63,000 -- 9.1 5.16 10,000 -- 4.1 6.50 5,000 5,000 0.1 6.81 5,000 1,250 8.4 6.94 55,000 13,750 8.1 7.63 16,000 4,000 3.1 12.88 75,000 37,500 7.1 20.38 10,000 7,500 6.3 - -------------------------------------------------------------------------------- Total 344,000 174,000 ================================================================================ The Company employs the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation". The pro forma impact on compensation expense from incentive stock options granted was immaterial for all years presented. The Company had three Phantom Stock Plans as of September 30, 1999. The benefit under the Plans was based upon the difference between the market price (as defined) and award price, at the distribution valuation date, multiplied by the vested award units; plus the market value (as defined) of dividend equivalent units. On April 26, 1999, the Company's Board of Directors formally approved an amendment to the three Plans to better reflect the intended long-term nature of such plans. The principal modification was to change the definition of market price. The market price was previously defined as the average of the high and low market price for the Company's common shares during the 10 days prior to the distribution valuation date. The modified market price is defined as the average of the month-end market prices for the Company's common shares during the 36-month period prior to the distribution valuation date. The impact, as of April 26, 1999, of changing the definition of market price was to increase the Company's obligation under the three Plans by approximately $591. Because a controlling number of Board members agreed, during the quarter ended March 31, 1999, to make such Plan amendments, the Company accounted for the Plans, as modified, during such quarter. During 2000, all remaining participants in the Company's three Phantom Stock Plans elected to discontinue participation in the Plans. Therefore, all such participants received full and final distributions from the Plans aggregating approximately $919 during 2000. Consequently, as of September 30, 2000, there were no award units outstanding under any of these Phantom Stock Plans, and the Company has no further obligation under such Plans. As of September 30, 1999, there were 111,663 award units outstanding under the Phantom Stock Plans at award prices ranging from $3.55 to $20.31, plus 10,122 dividend equivalent units. There were no expenses relating to the Plans in 2001, 2000 and 1999. During 2001, the Company awarded to certain non-executive employees 100,000 restricted common shares. The value of such stock was established by the market price on the date of grant and was recorded as unearned compensation. The unearned compensation is being amortized ratably over the restricted stock vesting period of five years. 9. SUMMARIZED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) 2001 QUARTER ENDED -------------------------------------------------- Dec 31 March 31 June 30 Sept 30 ------ -------- ------- ------- Net sales $25,185 $27,726 $27,676 $25,046 Cost of goods sold 20,854 23,073 22,170 20,664 Net income 302 995 1,509 168 Net income per share Basic $.06 $.19 $.29 $.03 Diluted $.06 $.19 $.29 $.03 2000 Quarter Ended -------------------------------------------------- Dec 31 March 31 June 30 Sept 30 ------ -------- ------- ------- Net sales $25,345 $28,182 $26,097 $26,514 Cost of goods sold 21,447 23,493 22,656 23,136 Net income 484 934 45 959 Net income per share Basic $.09 $.18 $.01 $.19 Diluted $.09 $.18 $.01 $.19 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except share and per share data) ================================================================================ 10. CONTINGENCIES In the normal course of business, the Company is involved in pending legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters. 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 effect on the Company's consolidated financial position or results of operations. 11. FOREIGN CURRENCY MANAGEMENT The U.S. dollar is the functional currency for all of the Company's U.S. operations. For these operations, all gains and losses from currency transactions, if any, are included in income currently. For the Company's non-U.S. equity investments, the functional currency is the local currency. The cumulative translation effects for equity investments using functional currencies other than the U. S. dollar are included in accumulated other comprehensive loss in the consolidated statements of shareholders' equity. Foreign currency transaction loss (gain), net was $567, $(207) and $222 in 2001, 2000 and 1999, respectively, and is included in other expense (income), net. Effective October 1, 2001, the Company changed the functional currency of its Irish subsidiary from the euro to the U.S. dollar. The functional currency was changed because a substantial majority of the subsidiary's transactions are now denominated in U.S. dollars. The Company uses foreign currency exchange contracts, which typically expire within one year, to hedge payments and receipts of currencies related to the purchase and sale of goods overseas. Realized gains and losses on these contracts are recognized in the same period as the hedged transactions. At September 30, 2001, there were no foreign currency exchange contracts outstanding. 12. BUSINESS SEGMENTS The Company identifies reportable segments based upon distinct products manufactured and services provided. The Turbine Component Services and Repair ("Repair") segment consists primarily of the repair and remanufacture of jet engine (aerospace) turbine components. The Repair business is also involved in the repair of industrial land-based gas turbine components, precision machining for aerospace applications and inventory management. The Aerospace Component Manufacturing ("ACM") segment consists of the production, heat treatment and some machining of forgings in various alloys utilizing a variety of processes for application in the aerospace industry as well as several other industrial markets. The Metal Finishing segment is a provider of a specialized electroplating process called brush plating, which is used to apply metal coatings to a selective area of a component. The Company's reportable segments are separately managed. One customer of all three of the Company's segments accounted for 18% of the Company's consolidated net sales in 2001. In 2000, two customers accounted for 17% and 12%, respectively, of the Company's consolidated net sales. The Repair and ACM segments supplied the customer that accounted for 17% of such sales, while the customer that accounted for 12% of such sales was supplied by the Company's Repair segment. One customer of the Company's Repair segment accounted for 13% of consolidated net sales in 1999. Unallocated amounts represent expenses, which are not of an operating nature and therefore, not allocated to business segments for reporting purposes. Corporate assets are principally cash, cash equivalents and receivables. The following table summarizes certain information regarding segments of the Company's operations for the years ended September 30, 2001, 2000 and 1999: 2001 2000 1999 ================================================================================ Net sales: Turbine Component Services and Repair $ 54,401 $ 61,658 $ 72,081 Aerospace Component Manufacturing 40,891 34,958 34,345 Metal Finishing 10,341 9,522 9,064 - -------------------------------------------------------------------------------- Consolidated net sales $ 105,633 $ 106,138 $ 115,490 ================================================================================ Operating income: Turbine Component Services and Repair $ 2,609 $ 2,355 $ 4,487 Aerospace Component Manufacturing 3,476 1,491 1,097 Metal Finishing 1,724 1,070 1,202 Corporate unallocated expenses (1,897) (1,867) (1,895) - -------------------------------------------------------------------------------- Consolidated operating income 5,912 3,049 4,891 Interest expense, net 659 823 999 Other expense (income), net 585 (253) (213) - -------------------------------------------------------------------------------- Consolidated income before income tax provision $ 4,668 $ 2,479 $ 4,105 ================================================================================ Depreciation and amortization expense: Turbine Component Services and Repair $ 3,242 $ 3,461 $ 3,694 Aerospace Component Manufacturing 679 689 619 Metal Finishing 447 482 476 - -------------------------------------------------------------------------------- Consolidated depreciation and amortization expense $ 4,368 $ 4,632 $ 4,789 ================================================================================ Capital expenditures: Turbine Component Services and Repair $ 3,325 $ 4,121 $ 3,276 Aerospace Component Manufacturing 705 472 1,564 Metal Finishing 52 59 59 - -------------------------------------------------------------------------------- Consolidated capital expenditures $ 4,082 $ 4,652 $ 4,899 ================================================================================ Identifiable assets: Turbine Component Services and Repair $ 41,641 $ 47,367 $ 55,967 Aerospace Component Manufacturing 21,360 18,408 19,526 Metal Finishing 8,047 8,247 9,601 Corporate 15,548 6,478 3,568 - -------------------------------------------------------------------------------- Consolidated total assets $ 86,596 $ 80,500 $ 88,662 ================================================================================ Foreign operations: Net sales $ 38,224 $ 46,402 $ 53,982 Operating income 3,964 2,824 4,687 Identifiable assets 23,579 29,768 38,444 17 ================================================================================ SAFE HARBOR STATEMENT This Annual Report and Management's Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and include assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important economic, political and technological factors, among others, 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 the increased direct involvement of the jet engine manufacturers into turbine component services and repair markets; (3) successful procurement of new repair process licenses; (4) the impact of fluctuations of foreign currency (euros) exchange rates on the results of operations; (5) successful development and market introductions of new products, including an advanced coating technology; (6) stability of government laws and regulations, including taxes; (7) stable governments and business conditions in economies where business is conducted; and (8) the long-term impact on the aerospace industry of the September 11, 2001 terrorist attacks on the United States. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 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, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2001. 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 auditing standards generally accepted in the 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 financial statements referred to above present fairly, in all material respects, the financial position of SIFCO Industries, Inc. and Subsidiaries as of September 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Cleveland, Ohio, October 26, 2001. 18 ================================================================================ In Memoriam GEORGE D. GOTSCHALL 1920-2001 It is our sad duty to report the death of long-time employee and Director, George D. Gotschall. Mr. Gotschall passed away on February 12, 2001 after a short illness. He was born in Cleveland, Ohio in 1920 and graduated from the University of Michigan in 1942 with a Bachelor of Science in Engineering. After serving in the U.S. Air Force during World War II as a Radar and Communications Officer, he was promoted to Major and designated Assistant Chief, Special Projects Laboratory at Wright Field Air Force Base. In 1946 he worked with Brush Development Company as Assistant to the President. He then joined Steel Improvement & Forge Company in 1954 as Research Engineer and in 1957 was appointed Vice President of Manufacturing. In 1958, Mr. Gotschall and his family moved to South America where he was General Manager of the Forge Division, Industrias Kaiser Argentina, a joint venture with SIFCO. He also served as a Director of the Company from 1950 to 1958 and continuously from 1962 until his death. He was Assistant Secretary of the Company and served until his retirement in 1983 as Vice President-International and Treasurer. We at SIFCO count it a high privilege to have known him and will miss his wise counsel and unfailing good humor. ================================================================================ 19 SHAREHOLDER INFORMATION ================================================================================ DIRECTORS Maurice Foley Retired Director AerFi Group plc Shannon, Ireland Jeffrey P. Gotschall Chairman of the Board President and Chief Executive Officer SIFCO Industries, Inc. Richard S. Gray Retired President Enterprise Development, Inc. Cleveland, Ohio William R. Higgins Chief Executive Officer Applied Fiber Systems Clearwater, Florida Charles H. Smith, Jr. Chairman Emeritus SIFCO Industries, Inc. Hudson D. Smith Treasurer, SIFCO Industries, Inc. President, SIFCO Forge Group Thomas J. Vild Vild & Associates Chagrin Falls, Ohio J. Douglas Whelan Retired President and Chief Operating Officer Wyman-Gordon Company North Grafton, Massachusetts OFFICERS Jeffrey P. Gotschall Chairman of the Board President and Chief Executive Officer Timothy V. Crean Executive Vice President Hudson D. Smith Treasurer Frank A. Cappello Vice President-Finance and Chief Financial Officer Carolyn J. Buller Secretary and General Counsel Partner Squire, Sanders & Dempsey Remigijus H. Belzinskas Corporate Controller AUDITORS Arthur Andersen LLP 200 Public Square, Suite 1800 Cleveland, Ohio 44114-2803 GENERAL COUNSEL Squire, Sanders & Dempsey 4900 Key Tower 127 Public Square Cleveland, Ohio 44114-1304 TRANSFER AGENT AND REGISTRAR National City Bank Corporate Trust Operations P. O. Box 92301 Cleveland, Ohio 44193-0900 Phone: 1-800-622-6757 DIVIDEND REINVESTMENT SIFCO Industries maintains a dividend reinvestment program that enables shareholders to purchase additional shares of SIFCO stock without fees or service charges. To participate in this program, or for answers to any questions on your dividend investment account, contact the SIFCO corporate office. FORM 10-K REQUESTS A copy of the Company's current form 10-K annual report as filed with the Securities and Exchange Commission is available without charge to shareholders upon request to Investor Relations, SIFCO Industries, Inc. We also invite you to visit our website: www.sifco.com. ANNUAL MEETING The annual meeting of shareholders of SIFCO Industries, Inc. will be held at National City Bank, East Ninth Street and Euclid Avenue, Cleveland, Ohio, at 10:30 AM on January 29, 2002. COMMON SHARE INFORMATION The Company's Common Shares are quoted on the American Stock Exchange (AMEX) under the symbol SIF. The following table sets forth, for the periods indicated, the high and low sales price for the Company's Common Shares as reported by the American Stock Exchange. Years Ended September 30 2001 2000 ================================================================================ HIGH LOW High Low ---------------- ---------------- First Quarter $ 6.38 $ 4.56 $ 7.69 $ 6.56 Second Quarter 5.88 4.55 7.25 5.62 Third Quarter 6.05 4.40 7.25 5.62 Fourth Quarter 7.45 4.60 7.62 5.12 20 [SIFCO INDUSTRIES, INC. LOGO] 970 East 64th Street, Cleveland, Ohio 44103-1694 Phone: (216) 881-8600 Fax: (216) 432-6281 www.sifco.com EX-21 4 l91847aex21.txt EXHIBIT 21 EXHIBIT 21 SIFCO Industries, Inc. Subsidiaries of the Company September 30, 2001 Subsidiary State or Jurisdiction of Incorporation ---------- -------------------------------------- SIFCO Custom Machining Company Minnesota SIFCO Exports Limited Ireland SIFCO FSC, Inc. U.S. Virgin Islands SIFCO Holdings, Inc. Delaware SIFCO Irish Holdings Limited Ireland SIFCO Research and Development Limited Ireland SIFCO Selective Plating France SARL France SIFCO Selective Plating (UK) Limited United Kingdom SIFCO Turbine Components Limited Ireland EX-23 5 l91847aex23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated October 26, 2001, included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements, File Nos. 2-82001 and 33-32826. ARTHUR ANDERSEN LLP Cleveland, Ohio, December 14, 2001 EX-99 6 l91847aex99.txt EXHIBIT 99 EXHIBIT 99 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of SIFCO Industries, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in SIFCO Industries, Inc. and Subsidiaries' annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated October 26, 2001. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index of financial statement schedules is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, October 26, 2001. SCHEDULE II SIFCO Industries, Inc. and Subsidiaries Allowance For Doubtful Accounts For The Years Ended September 30, 2001, 2000 And 1999 (Amounts in thousands)
2001 2000 1999 ------- ------- ------- Balance beginning of period $ 765 $ 722 $ 774 Additions - charged to costs and expenses 1,098 220 84 Addition - reallocation of Corporate Reserves 433 - - Deductions - accounts determined to be uncollectible (930) (140) (169) Recoveries of fully reserved accounts 32 23 94 Exchange rate changes and other 24 (60) (61) ------- ------- ------- Balance end of period $ 1,422 $ 765 $ 722 ======= ======= =======
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