-----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, DQqSUYxf4RWNa4Umi/4eyZ+ApU2ndFW5DWCAsQajKnh1WbpwMcD06v7XUdrhkCQQ TCxkhDcFoLDzYGCRlJ2/cw== 0000950152-03-007302.txt : 20030804 0000950152-03-007302.hdr.sgml : 20030804 20030804134828 ACCESSION NUMBER: 0000950152-03-007302 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030804 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05978 FILM NUMBER: 03820037 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-Q 1 l02038ae10vq.txt SIFCO INDUSTRIES, INC. 10-Q/QTR END 6-30-03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from _______________ to __________________ Commission file number 1-5978 SIFCO INDUSTRIES, INC. ---------------------- (Exact name of registrant as specified in its charter) Ohio 34-0553950 - ---------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 970 East 64th Street, Cleveland Ohio 44103 - ------------------------------------------------- ------------------------- (Address of principal executive offices) (Zip Code) (216) 881-8600 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The number of the Registrant's Common Shares outstanding at July 31, 2003 was 5,127,733. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ----------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net sales $ 22,574 $ 20,167 $ 58,428 $ 61,252 Operating expenses: Cost of goods sold 19,167 17,489 53,150 56,970 Selling, general and administrative expenses 3,045 3,369 10,194 11,741 ---------- ---------- -------- -------- Total operating expenses 22,212 20,858 63,344 68,711 ---------- ---------- -------- -------- Operating income (loss) 362 (691) (4,916) (7,459) Interest income (8) (36) (53) (201) Interest expense 217 219 631 648 Foreign currency exchange loss (gain), net 60 (149) 287 3 Other income, net (150) (60) (214) (207) ---------- ---------- -------- -------- Income (loss) before income tax provision 243 (665) (5,567) (7,702) (benefit) Income tax provision (benefit) 11 (214) 41 (2,228) ---------- ---------- -------- -------- Net income (loss) $ 232 $ (451) $ (5,608) $ (5,474) ========== ========== ======== ======== Net income (loss) per share (basic) $ 0.04 $ (0.09) $ (1.07) $ (1.05) Net income (loss) per share (diluted) $ 0.04 $ (0.09) $ (1.07) $ (1.05) Weighted-average number of common shares (basic) 5,254 5,208 5,256 5,217 Weighted-average number of common shares (diluted) 5,252 5,233 5,256 5,239
See notes to unaudited consolidated condensed financial statements. 2 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, SEPTEMBER 30, 2003 2002 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 4,726 $ 7,583 Receivables, net 16,207 14,505 Inventories 10,767 10,701 Refundable income taxes 1,481 1,423 Prepaid expenses and other current assets 746 1,501 ----------- -------- Total current assets 33,927 35,713 Property, plant and equipment, net 25,916 29,106 Other assets: Goodwill, net 2,574 2,574 Other assets 1,190 946 ----------- -------- Total other assets 3,764 3,520 ----------- -------- Total assets $ 63,607 $ 68,339 =========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 1,451 $ 1,440 Accounts payable 7,231 4,130 Accrued liabilities 9,705 9,618 ----------- -------- Total current liabilities 18,387 15,188 Long-term debt, net of current maturities 10,279 11,093 Other long-term liabilities 3,549 4,323 Shareholders' equity: Serial preferred shares, no par value, authorized 1,000 shares -- -- Common shares, par value $1 per share, authorized 10,000 shares; issued 5,332 and 5,358 shares at June 30, 2003 and September 30, 2002, respectively; outstanding 5,242 and 5,258 shares at June 30, 2003 and September 30, 2002, respectively 5,322 5,358 Additional paid-in capital 6,780 6,936 Retained earnings 28,021 33,629 Accumulated other comprehensive loss (7,862) (7,034) Unearned compensation - restricted common shares (395) (562) Common shares held in treasury at cost, 80 and 100 shares at June 30, 2003 and September 30, 2002, respectively (474) (592) ----------- -------- Total shareholders' equity 31,392 37,735 ----------- -------- Total liabilities and shareholders' equity $ 63,607 $ 68,339 =========== ========
See notes to unaudited consolidated condensed financial statements. 3 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED JUNE 30, -------------------------- 2003 2002 ---- ---- Cash flows from operating activities: Net loss $ (5,608) $ (5,474) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 3,242 3,650 Loss (gain) on disposal of property, plant and equipment 3 (5) Deferred income taxes -- (9) Asset impairment charges 1,175 4,088 Changes in operating assets and liabilities: Receivables (1,702) 4,014 Inventories (67) 1,038 Refundable income taxes (58) -- Prepaid expenses and other current assets (280) (197) Other assets (244) (427) Accounts payable 3,101 (1,610) Accrued liabilities 87 (3,308) Other long-term liabilities (712) (47) -------- -------- Net cash provided (used) by operating activities (1,063) 1,713 Cash flows from investing activities: Capital expenditures (1,355) (4,324) Decrease in funds held by trustee for capital project -- 92 Proceeds from sale of property, plant and equipment 143 24 Other 128 68 -------- -------- Net cash used for investing activities (1,084) (4,140) Cash flows from financing activities: Proceeds from revolving credit agreement 19,242 19,379 Repayments of revolving credit agreement (18,919) (21,633) Repayments of long-term debt (1,140) (1,130) Proceeds from other indebtedness 14 -- Repurchase of common shares -- (143) Share transactions under employee stock plan 93 69 -------- -------- Net cash used for financing activities (710) (3,458) -------- -------- Decrease in cash and cash equivalents (2,857) (5,885) Cash and cash equivalents at the beginning of the period 7,583 13,787 -------- -------- Cash and cash equivalents at the end of the period $ 4,726 $ 7,902 ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest $ (566) $ (656) Cash paid for income taxes, net (10) (800)
See notes to unaudited consolidated condensed financial statements. 4 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. DESCRIPTION OF BUSINESS The unaudited consolidated condensed financial statements included herein include the accounts of SIFCO Industries, Inc. and its wholly owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, which include only normal recurring adjustments necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented, have been included. These unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's fiscal 2002 Annual Report on Form 10-K/A. The results of operations for any interim period are not necessarily indicative of the results to be expected for other interim periods or the full year. Certain prior period amounts have been reclassified in order to conform to current period classifications. B. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". This standard is effective for fiscal years beginning after December 15, 2001. The Company adopted this standard on October 1, 2002, the beginning of the first quarter of the Company's fiscal year 2003. The standard changes financial accounting and reporting for acquired goodwill and indefinite life intangible assets. SFAS No. 142 provides that intangible assets with finite useful lives will continue to be amortized and goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested for impairment upon adoption and on an annual basis thereafter. The Company completed the initial impairment test and concluded that goodwill was not impaired as of October 1, 2002. Other than the cessation of goodwill amortization, the adoption of SFAS No. 142 did not have an impact on the Company's financial position or results of operations. The following table presents pro forma net income (loss) and net income (loss) per share information, as if SFAS No. 142 had been adopted on October 1, 2001.
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, --------------------------- ----------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income (loss) as reported $ 232 $ (451) $ (5,608) $ (5,474) Goodwill amortization -- 21 -- 72 Trademark amortization -- 2 -- 6 ----------- ------------ ------------ -------------- Pro forma net income (loss) $ 232 $ (428) $ (5,608) $ (5,396) =========== ============ ============ ============== Basic net income (loss) per share: Net income (loss) as reported $ 0.04 $ (0.09) $ (1.07) $ (1.05) Goodwill amortization -- 0.01 -- 0.02 Trademark amortization -- -- -- -- ----------- ------------ ------------ -------------- Pro forma net income (loss) $ 0.04 $ (0.08) $ (1.07) $ (1.03) =========== ============ ============ ============== Diluted net income (loss) per share: Net income (loss) as reported $ 0.04 $ (0.09) $ (1.07) $ (1.05) Goodwill amortization -- 0.01 -- 0.02 Trademark amortization -- -- -- -- ----------- ------------ ------------ -------------- Pro forma net income (loss) $ 0.04 $ (0.08) $ (1.07) $ (1.03) =========== ============ ============ ==============
5 In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. The standard applies to legal obligations associated with the retirement of long-lived assets that result from acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and was adopted by the Company effective October 1, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In September 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement superceded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of Accounting Principals Board Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", related to the disposal of a segment of a business. This statement amends certain provisions of Accounting Research bulletin No. 51, "Consolidated Financial Statements". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and was adopted by the Company effective October 1, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard addresses financial and accounting and reporting for costs associated with exit or disposal activities and replaces Emerging Issues Task Force No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF No. 94-3"). SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for exit costs is recognized at the date of an entity's commitment to an exit plan. Beginning January 1, 2003, the Company recognizes liabilities associated with exit or disposal activities as they are incurred in accordance with SFAS No. 146. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure - an Amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation. It also requires prominent disclosure in the significant accounting policy note of both annual and interim financial statements of the method of accounting for stock-based compensation and the related pro forma disclosures when the intrinsic value method continues to be used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosure provisions are effective for the first fiscal quarters beginning after December 15, 2002. The Company adopted the disclosure provisions of SFAS 148 in the quarter ended December 31, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The Company does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 changes the accounting for certain financial instruments, which under previous guidance, issuers could account for as equity. The new standard requires that those financial instruments be classified as liabilities in statements of financial position. This new standard is effective for interim periods beginning after June 15, 2003. The Company does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations. 6 C. STOCK-BASED COMPENSATION The Company employs the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The following pro forma information regarding net income and earnings per share was determined as if the Company had accounted for its stock options under the fair value method prescribed by SFAS No. 123. For purposes of pro forma disclosure, the estimated fair value of the stock options is amortized over the options' vesting period. The pro forma information is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, --------------------- -------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income (loss) as reported $ 232 $ (451) $ (5,608) $ (5,474) Add: Stock-based compensation expense included in reported net loss, net of related tax effects -- -- -- -- Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects 35 25 103 76 ------- -------- --------- -------- Pro forma net income (loss) as if the fair value based method had been applied to all awards $ 197 $ (476) $ (5,711) $ (5,550) ======= ======== ========= ======== Net income (loss) per share: Basic - as reported $ 0.04 $ (0.09) $ (1.07) $ (1.05) Basic - pro forma $ 0.04 $ (0.09) $ (1.09) $ (1.06) Diluted - as reported $ 0.04 $ (0.09) $ (1.07) $ (1.05) Diluted - pro forma $ 0.04 $ (0.09) $ (1.09) $ (1.06)
2. INVENTORIES Inventories consist of:
JUNE 30, SEPTEMBER 30, 2003 2002 --------- ------------- Raw materials and supplies $ 3,108 $ 3,411 Work-in-process 3,454 3,525 Finished goods 4,205 3,765 --------- ------------- Total inventories $ 10,767 $ 10,701 ========= =============
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method for 31% and 35% of the Company's inventories at June 30, 2003 and September 30, 2002, respectively. Cost is determined using the specific identification cost method for 29% and 33% of the Company's inventories at June 30, 2003 and September 30, 2002, respectively. The first-in, first-out ("FIFO") method is used for the remainder of the inventories. If the FIFO method had been used for the inventories for which cost is determined using the LIFO method, inventories would have been $3,128 and $3,114 higher than reported at June 30, 2003 and September 30, 2002, respectively. 3. LONG-TERM DEBT In February 2003, the Company entered into an agreement with its lending bank to amend certain provisions of its credit agreements. The amendment waives the interest coverage ratio covenant through the period ended December 31, 2003. The amendment modifies certain other financial covenants and the corresponding interest rate. As a consequence, the term note's three-month LIBOR based effective borrowing rate increased to 9.49%, the revolving credit agreement's borrowing rate increased to the bank's base rate plus 0.5% and the commitment fee on the standby letter of credit backing up the industrial development bond increased to 2.75% effective February 13, 2003. Also, the amount available under the revolving credit agreement was reduced to $6,000, subject to sufficiency of collateral. 7 In May 2003, the Company entered into an agreement with its lending bank to further amend certain provisions of its credit agreements. The amendment waives the interest coverage ratio covenant through the period ended December 31, 2004 and extends the maturity date of the Company's $6,000 revolving credit agreement to June 30, 2004. This amendment also provides for a $1,000 reduction of borrowing availability subject to the passage of time or the occurrence of a certain event. In July 2003, the Company entered into an agreement with its lending bank to extend the maturity date of the Company's $6,000 revolving credit agreement to September 30, 2004. The amendment also extended the maturity date of the standby letter of credit that backs up the Company's industrial development bond to May 16, 2005. 4. COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS Total comprehensive loss is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- ------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income (loss) $ 232 $ (451) $ (5,608) $ (5,474) Foreign currency translation adjustment 79 143 146 89 Unrealized gain (loss) on interest rate swap agreement, net of income tax provision of $29 and $50 in 2002, respectively 55 (76) 98 22 Currency exchange contract adjustment (695) 1,889 (1,035) 1,466 Minimum pension liability adjustment (37) -- (37) (74) ------------ --------- --------- --------- Total comprehensive loss $ (366) $ 1,505 $ (6,436) $ (3,971) ============ ========= ========= =========
The components of accumulated other comprehensive loss are as follows:
JUNE 30, SEPTEMBER 30, 2003 2002 ------------ --------- Foreign currency translation adjustment $ (6,861) $ (7,007) Interest rate swap agreement adjustment (460) (558) Currency exchange contract adjustment --- 1,035 Minimum pension liability adjustment (541) (504) ------------ --------- Total accumulated other comprehensive loss $ (7,862) $ (7,034) ============ =========
8 5. BUSINESS SEGMENTS The Company identifies reportable segments based upon distinct products manufactured and services provided. The Turbine Component Services and Repair Group ("Repair Group") consists primarily of the repair and remanufacture of jet engine (aerospace) and heavy industrial turbine engine components. The Repair Group is also involved in precision component machining for aerospace applications. The Aerospace Component Manufacturing Group consists of the production, heat treatment and some machining of forgings in various alloys utilizing a variety of processes for application in the aerospace industry. The Metal Finishing Group is a provider of specialized selective electrochemical metal finishing processes and services used to apply metal coatings to a selective area of a component. The Company's reportable segments are separately managed. Segment information is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- ---------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net sales: Turbine Component Services and Repair Group $ 11,114 $ 9,059 $ 29,074 $ 28,210 Aerospace Component Manufacturing Group 8,965 8,525 22,144 25,365 Metal Finishing Group 2,495 2,583 7,210 7,677 ----------- ------------ ----------- ---------- Consolidated net sales $ 22,574 $ 20,167 $ 58,428 $ 61,252 =========== ============ =========== ========== Operating income (loss): Turbine Component Services and Repair Group $ (407) $ (1,148) $ (4,765) $ (7,315) Aerospace Component Manufacturing Group 1,075 575 686 177 Metal Finishing Group 281 271 566 943 Corporate unallocated expenses (587) (389) (1,403) (1,264) ----------- ------------ ----------- ---------- Consolidated operating income (loss) 362 (691) (4,916) (7,459) Interest expense, net 209 183 578 447 Foreign currency exchange loss, net 60 (149) 287 3 Other income, net (150) (60) (214) (207) ----------- ------------ ----------- ---------- Consolidated income (loss) before income tax provision (benefit) $ 243 $ (665) $ (5,567) $ (7,702) =========== ============ =========== ==========
All of the Company's net goodwill of $2,574 at June 30, 2003 and September 30, 2002 is attributable to the Company's Metal Finishing Group. 6. RETIREMENT BENEFIT PLAN The Company and certain of its subsidiaries sponsor defined benefit pension plans covering most of its employees. In January 2003, the Company's Board of Directors adopted a resolution effective February 28, 2003, to cease the accrual of future benefits under the SIFCO Industries, Inc. Salaried Retirement Plan ("Plan"), which covers substantially all non-union employees of the Company's U.S. operations. The Plan will otherwise continue. Because the unrecognized actuarial losses exceeded the curtailment gain, there was no income or expense recognized during the nine months ended June 30, 2003 related to these changes. In conjunction with the changes to the Plan, the Company made certain enhancements to the defined contribution plan that is available to substantially all non-union U.S. employees of the Company and its U.S. subsidiaries. 7. ASSET IMPAIRMENT AND OTHER CHARGES During fiscal 2002, the Company's Repair Group incurred charges related to severance and other employee benefits to be paid to approximately 76 personnel associated with the reduction of certain of its capacity for the repairing of jet engine turbine components. As of September 30, 2002, the Company had a severance accrual of $752. During the first nine months of fiscal 2003, severance and other employee benefit payments totaling approximately $534 were made in connection with this reduction. During the third quarter of fiscal 2003, the Company's Repair Group reevaluated its personnel requirements and determined that it would not terminate 12 personnel initially identified to be terminated. As a result of this decision, 9 $218 of the $752 severance accrual outstanding at September 30, 2002 was reversed during the third quarter of fiscal 2003. The reversal was recorded in selling, general and administrative expenses in the Consolidated Condensed Statements of Operations. During the second quarter of fiscal 2003, as a result of the current downturn in the commercial aviation industry and the resulting reduction in demand for third party jet engine turbine component repair services, such as those provided by the Company, the Repair Group decided to cease operations at one of its component repair facilities and to optimize its remaining component repair capacity through consolidation of operations. The Company expects to complete these actions by September 2003. As a result of this decision, the Repair Group anticipates incurring $635 of severance and other employee benefit charges to be paid to 60 personnel, of which the Repair Group incurred $171 and $430 during the second and third quarters of fiscal 2003, respectively, and which is recorded in selling, general and administrative expenses in the Consolidated Condensed Statements of Operations. As of June 30, 2003, payments totaling $540 have been made for these expenses and all but 9 of the personnel have been terminated. In connection with these decisions, asset impairment charges totaling $1,175 related to machinery and equipment were recorded in selling, general and administrative expenses in the Consolidated Condensed Statements of Operations during the second quarter of fiscal 2003. The machinery and equipment write-downs relate to items that are expected to be disposed as a consequence of the Repair Group's decision to cease operations at one facility and to consolidate other operations. Fair value of these assets was determined based on estimated cash flows. The following table summarizes the remaining liabilities for qualified exit costs at June 30, 2003 and activity for the nine month period then ended:
BALANCE AT TOTAL 2003 2003 BALANCE AT SEPTEMBER 30, 2003 CASH NON-CASH JUNE 30, 2002 CHARGES PAYMENTS CHARGES 2003 ------------- ---------- ----------- ----------- ---------- Severance and other employee benefits $ 752 $ 602 $ 1,074 $ (218) $ 62 Asset impairments -- 1,175 -- 1,175 -- ------------- ---------- ----------- ----------- ---------- Total $ 752 $ 1,777 $ 1,074 $ 957 $ 62 ============= ========== =========== =========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and includes assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides this cautionary statement identifying important economic, political and technological factors, among others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (1) future business environment, including capital and consumer spending; (2) competitive factors, including the ability to replace business which may be lost due to increased direct involvement by the jet engine manufacturers in turbine component services and repair markets; (3) successful procurement of certain repair materials and new repair process licenses from jet engine manufacturers and/or the Federal Aviation Administration; (4) fluctuating foreign currency (primarily the euro) exchange rates; (5) successful development and market introductions of new products, including an advanced coating technology and the continued development of heavy industrial turbine repair processes; (6) regressive pricing pressures on the Company's products and services, with productivity improvements as the primary means to maintain margins; (7) success with the further development of strategic alliances with certain turbine engine manufacturers for turbine component repair services; (8) the long-term impact on the aerospace industry of the September 11, 2001 terrorist attacks on the United States, including collection risks due to the failure of airlines, engine overhaul companies and other aerospace related industries; reduced number of aircraft in service; and the accelerated declining use of older model jet engines such as the JT8D; (9) successful replacement of declining demand for repair services for turboprop engine components with component repair services for small turbojet engines utilized in the business and regional aircraft markets; (10) continued reliance on several major customers for revenues; (11) the Company's ability to continue to have access to its revolving credit facility, including the Company's ability to (i) continue to comply with the terms of its credit agreements, including financial covenants, (ii) continue to enter into amendments to its credit agreement containing financial covenants, which it and its bank lender find mutually acceptable, or (iii) continue to obtain waivers from its bank lender with respect to its compliance with the covenants contained in its credit 10 agreement; (12) the difficulty in predicting the timing and outcome of legal proceedings; and (13) stable governments, business conditions, laws, regulations and taxes in economies where business is conducted. SIFCO Industries, Inc. and its subsidiaries engage in the production and sale of a variety of metalworking processes, services and products produced primarily to the specific design requirements of its customers. The processes and services include forging, heat-treating, coating, welding, machining and selective electrochemical metal finishing. The products include forgings, machined forged parts and other machined metal parts, remanufactured component parts for turbine engines, and selective electrochemical metal finishing solutions and equipment. A. RESULTS OF OPERATIONS NINE MONTHS ENDED JUNE 30, 2003 COMPARED WITH NINE MONTHS ENDED JUNE 30, 2002 Net sales in the first nine months of fiscal 2003 decreased 4.6% to $58.4 million, compared with $61.3 million for the comparable period in fiscal 2002. Loss before income tax provision in the first nine months of fiscal 2003 was $5.6 million, compared with loss before income tax benefit of $7.7 million for the comparable period in fiscal 2002. For the first nine months of fiscal 2003 the Company incurred a net loss of $5.6 million, or $1.07 per share (diluted), compared with a net loss of $5.5 million, or $1.05 per share (diluted) for the comparable period in fiscal 2002. TURBINE COMPONENT SERVICES AND REPAIR GROUP ("REPAIR GROUP") The Repair Group's net sales in the first nine months of fiscal 2003 increased 3.1% to $29.1 million, compared with $28.2 million in the same fiscal 2002 period. Component manufacturing and repair net sales decreased $1.4 million in the first nine months of fiscal 2003, compared with the same period in fiscal 2002. Demand for precision component machining and for component repairs for large jet and heavy industrial turbine engines decreased in the first nine months of fiscal 2003, compared with the same period in fiscal 2002. This reflects a reduction in component repairs for older model large jet engines partially offset by increased demand for component repairs for newer model large jet engines. The reduced utilization of older generation aircraft that negatively impacted the Company in fiscal 2002 continued during the first nine months of fiscal 2003. Despite the increase in component repairs for newer model large jet engines, the commercial airline industry in general continues to experience reduced commercial flight demand, which determines the need for component repairs to newer model jet engines. However, higher demand for component repairs for small jet engines partially offset the decline in demand for component repairs for larger jet engines. Net sales associated with the demand for replacement parts, which often complement component repair services provided to customers, were up $2.3 million in the first nine months of fiscal 2003 compared with the same period in fiscal 2002. The increase in replacement parts net sales is attributable to a change in product mix with certain major customers. During the first nine months of fiscal 2003, the Repair Group's selling, general and administrative expenses decreased $0.8 million to $4.8 million, or 16.5% of net sales, from $5.6 million, or 19.7% of net sales, in the same period in fiscal 2002. Included in the $4.8 million of selling, general and administrative expenses in the first nine months of fiscal 2003 were charges aggregating $1.2 million related to equipment impairment and $0.4 million of severance charges related to the further consolidation of the Repair Group's operations during fiscal 2003. Included in the $5.6 million of selling, general and administrative expenses in the first nine months of fiscal 2002 were $1.4 million of charges related to goodwill and equipment impairment, a $0.3 million increase in a contingency reserve related to a vendor dispute, and $0.2 million of severance charges associated with the reduction of the Repair Group's capacity for the repairing of components related to older generation jet engines. The remaining selling, general and administrative expenses of $3.2 million, or 11.1% of net sales, in the first nine months of fiscal 2003 were $0.5 million less than the remaining $3.7 million, or 13.2% of net sales, of such expenses in the same period in fiscal 2002. The Repair Group's operating loss in the first nine months of fiscal 2003 decreased $2.5 million to $4.8 million from a $7.3 million loss in the same period in fiscal 2002. Included in the operating loss in the first nine months of fiscal 2003 were charges aggregating $1.2 million related to the impairment of equipment and $0.4 million of severance charges. Included in the operating loss in the first nine months of fiscal 2002 were charges aggregating $4.1 million related to inventory write-downs ($2.7 million), the impairment of goodwill ($0.7 million) and the impairment of equipment ($0.7 million); and the $0.2 million of severance charges. During the first quarter of fiscal 2002, the Repair Group performed an evaluation of its existing operations in light of the anticipated impacts on its business of the September 11, 2001 terrorist attacks. The principal result of this evaluation process was the decision to optimize the Repair Group's multiple operations by reducing certain of its capacity for the repairing of components related to older generation jet engines, principally the JT8D. As a result of this decision, the Repair Group recognized, during the first nine months of fiscal 2002, the aforementioned charges. In addition, during the first nine months of fiscal 2002, the Repair Group increased, by $0.3 million, a contingency reserve 11 related to a vendor dispute. The Repair Group's $3.2 million operating loss, before the $1.6 million of aforementioned impairment and severance charges, during the first nine months of fiscal 2003 is an increase of $0.5 million, when compared to the $2.7 million operating loss, before the $4.6 million of aforementioned impairment, severance, and contingency charges, during the first nine months of fiscal 2002. The increased operating loss, before the aforementioned charges in both nine month periods, was primarily due to the negative impact on margins of the reduced sales volumes for component manufacturing and repair services, which was partially off-set by improved margins on increased volumes of replacement parts. During the first nine months of fiscal 2003, the euro had strengthened against the U.S. dollar when compared to the same period in fiscal 2002. The Repair Group's non-U.S. operations have a significant portion of its operating costs denominated in euros and, therefore, as the euro strengthens, such costs are negatively impacted. During the first nine months of fiscal 2003, the Repair Group was able to hedge much of its exposure to the strengthening euro thereby mitigating the negative impact on its operating results. Such exposure was hedged through the end of the third quarter of fiscal 2003. Had the Repair Group not hedged such exposure, its operating loss would have been greater by approximately $2.0 million during the first nine months of fiscal 2003. In an effort to curtail the Repair Group's operating losses, which stem primarily from its current excess capacity for component repairs, the Company announced in March of 2003 its plans to cease operations at its Tampa, Florida component repair facility and to continue to optimize its remaining component repair capacity through consolidation of operations and other productivity improvement efforts. AEROSPACE COMPONENT MANUFACTURING GROUP ("ACM GROUP") Net sales in the first nine months of fiscal 2003 decreased 12.7% to $22.1 million, compared with $25.4 million in the same fiscal 2002 period. In the first nine months of fiscal 2003, the ACM Group experienced net sales declines in all product categories, compared with the same period in fiscal 2002. Approximately $1.8 million of this decrease is attributable to a decline in the net sales of commercial aircraft airframe components, as a direct consequence of reduced flight schedules, cancellation of aircraft orders, workforce reductions, and continued poor financial performance of the airline industry in general. Net sales of military airframe and engine components in the first nine months of fiscal 2003 declined $0.4 million, compared with the same period of fiscal 2002. Net sales of engine components for small jet engines, consisting primarily of the AE series latest generation jet engines built by Rolls-Royce Corporation for business and regional jets, as well as military transport and surveillance aircraft, decreased $0.4 million in the first nine months of fiscal 2003, compared with the same period in fiscal 2002. Net sales of components for helicopters declined $0.3 million and net sales of components for large commercial jet engines declined $0.2 million in the first nine months of fiscal 2003, compared with the same period in fiscal 2002. Net sales of non-aerospace related products decreased $0.2 million in the first nine months of fiscal 2003, compared with the same period in fiscal 2002. Selling, general and administrative expenses in the first nine months of fiscal 2003 were $1.7 million, or 7.8% of net sales, compared with $2.7 million, or 10.7% of net sales, in the comparable period in fiscal 2002. The primary factor impacting the ACM Group's selling, general and administrative expenses in the first nine months of fiscal 2002 was a $0.9 million charge incurred in connection with the settlement, during the second quarter of fiscal 2002, of an employment action and a related claim that the Company had filed against its insurance carrier for its failure to provide coverage. Selling, general and administrative expenses in the first nine months of fiscal 2002, before this legal contingency accrual, were $1.9 million. Selling, general and administrative expenses were favorably impacted in the first nine months of fiscal 2003 by a reduction in the ACM Group's bad debt expense, compared with the comparable period in fiscal 2002. The ACM Group's operating income was $0.7 million in the first nine months of fiscal 2003, compared with operating income of $0.2 million in the comparable period of fiscal 2002. Operating results in the first nine months of fiscal 2002 were negatively impacted by the $0.9 million legal contingency accrual discussed above. Operating results were favorably impacted in the first nine months of fiscal 2003 by a $0.7 million decrease in variable tooling expenses. The balance of the change in operating income is primarily attributable to the interplay between overall lower net sales in relation to fixed manufacturing, selling, general and administrative expenses in the first nine months of fiscal 2003. The ACM Group's backlog as of June 30, 2003, was $22.2 million, compared with $24.9 million as of September 30, 2002. At June 30, 2003, $20.7 million of the total backlog is scheduled for delivery over the next twelve months. All orders are subject to modification or cancellation by the customer with limited charges. The ACM Group believes that the backlog may not be indicative of actual sales for any succeeding period. 12 METAL FINISHING GROUP Net sales in the first nine months of fiscal 2003 decreased 6.1 % to $7.2 million, compared with $7.7 million in the comparable fiscal 2002 period. In the first nine months of fiscal 2003, product net sales, consisting of selective electrochemical metal finishing equipment and solutions, declined 5.4% to $4.1 million, compared with $4.3 million in the comparable period in fiscal 2002. The majority of the decline in net sales of selective electrochemical metal finishing equipment and solutions in the first nine months of fiscal 2003 is attributable to the overall depressed economic conditions in the aerospace, power generation, pulp and paper, and railroad industries. These declines were partially offset by modest increased net sales to petroleum exploration and military customers. In the first nine months of fiscal 2003, contract service net sales decreased 8.4% to $3.0 million, compared with $3.3 million in the comparable period in fiscal 2002. Contract service net sales to customers in the power generation industry declined approximately $0.5 million. This decline was partially offset by a $0.3 million increase in contract service net sales to customers in the automotive industry. Selling, general and administrative expenses were $2.3 million and $2.2 million in the first nine months of fiscal 2003 and 2002, respectively, or 31.7% and 28.8% of net sales, respectively. In the first nine months of fiscal 2003, selling, general and administrative expense were negatively impacted by a $0.1 million increase in employee compensation and benefit expenses and a $0.1 million increase in legal and professional, advertising and other selling, general and administrative expenses. These increases were offset by a $0.1 million decrease in employee incentive expense. The Metal Finishing Group's operating income in the first nine months of fiscal 2003 was $0.6 million, compared with operating income of $0.9 million in the comparable period of fiscal 2002. Operating results were favorably impacted by a $0.2 million decrease in employee incentive expense in the first nine months of fiscal 2003, compared with the comparable period of fiscal 2002. Operating income was negatively impacted in the first nine months of fiscal 2003 by approximately $0.1 million in increased legal and professional, advertising and other selling, general and administrative expenses. The balance of the decrease in operating income is primarily attributable to the interplay between overall lower net sales in relation to fixed manufacturing, selling, general and administrative expenses in the first nine months of fiscal 2003. CORPORATE UNALLOCATED EXPENSES Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate expenses, were $1.4 million in the first nine months of fiscal 2003, compared with $1.3 million in the comparable period in fiscal 2002. In the first nine months of fiscal 2003, corporate unallocated expenses were negatively impacted by higher legal and professional expenses of $0.2 million. This increase in corporate unallocated expenses was offset in part by lower consulting expenses. OTHER/GENERAL Interest income was $0.1 million in the first nine months of fiscal 2003, compared with $0.2 million in the comparable period in fiscal 2002. The reduction of interest income is attributable to lower average cash and cash equivalent balances outstanding and to lower interest rates available from short-term investments during the first nine months of fiscal 2003, compared with the comparable period in fiscal 2002. Interest expense was $0.6 million in both the first nine months of fiscal 2003 and 2002. Term note interest expense decreased slightly in the first nine months of fiscal 2003, compared with the same period in fiscal 2002. The decline in the weighted average term note outstanding balance in the first nine months of fiscal 2003, compared with the comparable period in fiscal 2002, was partially offset by an increase in the weighted average interest rate payable under the term note. Revolving credit agreement interest expense increased slightly in the first nine months of fiscal 2003, compared with the same period in fiscal 2002. The decline in the interest rate payable under the revolving credit agreement was offset by an increase in the weighted average revolving credit agreement outstanding balance in the first nine months of fiscal 2003, compared with the same period in fiscal 2002. Industrial development bond interest expense declined in the first nine months of fiscal 2003, compared with the same period in fiscal 2002. Both the weighted average outstanding balance and interest rate payable under the industrial development bonds decreased in the first nine months of fiscal 2003, compared with the same period in fiscal 2002. Foreign currency exchange loss was $0.3 million in the first nine months of fiscal 2003, compared with nil in the comparable period in fiscal 2002. This loss is the result of foreign currency exchange rate fluctuations, resulting primarily from the decline in the value of the U.S. dollar in relation to the euro, on the Company's monetary assets and liabilities that are denominated in a foreign currency. 13 In the first nine months of fiscal 2003, the income tax benefit related to the Company's U.S. and non-U.S. subsidiary losses was offset by a valuation allowance based upon an assessment of the Company's ability to realize such benefits. In assessing the Company's ability to realize its net deferred tax assets, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Future reversal of the valuation allowance will be achieved either when the tax benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future taxable income. THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002 Net sales in the third quarter of fiscal 2003 increased 11.9% to $22.6 million, compared with $20.2 million in the comparable period in fiscal 2002. Income before income tax provision was $0.2 million in the third quarter of fiscal 2003, compared with a loss before income tax benefit of $0.7 million in the comparable period in fiscal 2002. In the third quarter of fiscal 2003, the Company generated net income of $0.2 million, or $0.04 per share (diluted), compared with a net loss of $0.5 million, or $0.09 per share (diluted) in the comparable period in fiscal 2002. TURBINE COMPONENT SERVICES AND REPAIR GROUP ("REPAIR GROUP") The Repair Group's net sales in the third quarter of fiscal 2003 increased 22.7% to $11.1 million, from $9.1 million in the same fiscal 2002 period. Component manufacturing and repair net sales increased $0.2 million in the third quarter of fiscal 2003, compared with the same period in fiscal 2002. Demand for precision component machining and for component repairs for large jet engines increased in the third quarter of fiscal 2003 compared with the same period in fiscal 2002. This reflects an increase in component repairs for newer model large jet engines partially offset by a reduced demand for component repairs for the older model large jet engines. Despite the increase in component repairs for newer model large jet engines, the commercial airline industry in general continues to experience reduced commercial flight demand, which determines the need for component repairs for newer model jet engines. The reduced utilization of older generation aircraft that negatively impacted the Company in fiscal 2002 continued in the third quarter of fiscal 2003. Demand for component repairs to smaller jet engines increased slightly in the third quarter of fiscal 2003, compared to the same period in fiscal 2002. Demand for component repairs for heavy industrial turbine engines decreased in the third quarter of fiscal 2003, compared to the same period in fiscal 2002. Net sales associated with the demand for replacement parts, which often complement repair services provided to customers, increased $1.8 million in the third quarter of fiscal 2003, compared with the same period in fiscal 2002. The increase in replacement parts net sales is attributable to a change in product mix with certain major customers. During the third quarter of fiscal 2003, the Repair Group's selling, general and administrative expenses decreased $0.4 million to $1.1 million, or 9.9% of net sales, from $1.5 million, or 17.0% of net sales, in the same period in fiscal 2002. In the third quarter of fiscal 2003, the Company incurred $0.2 million of severance charges related to the further consolidation of the Repair Group's operations during fiscal 2003. In the third quarter of fiscal 2002, the Company incurred a $0.3 million increase in a contingency reserve related to a vendor dispute and $0.2 million of severance charges associated with the reduction of the Repair Group's capacity for the repairing of components related to older generation jet engines. The remaining selling, general and administrative expenses of $0.9 million, or 8.0% of net sales, in the third quarter of fiscal 2003 were $0.2 million less than the remaining $1.1 million, or 11.9% of net sales, of such expenses in the same period in fiscal 2002. The Repair Group's operating loss in the third quarter of fiscal 2003 decreased $0.8 million to $0.4 million from a $1.2 million loss in the same period in fiscal 2002. Included in the operating loss for the third quarter of fiscal 2003 were $0.2 million of severance charges. Included in the operating loss for the third quarter of fiscal 2002 were charges aggregating $0.5 million for a $0.3 million increase in a contingency reserve related to a vendor dispute and $0.2 million of severance charges. The Repair Group's $0.2 million operating loss, before the $0.2 million of severance charges, in the third quarter of fiscal 2003, is an improvement of $0.5 million, when compared with a $0.7 million operating loss, before the $0.5 million of increased contingency and severance charges, in the comparable period of fiscal 2002. The improvement in operating results during the third quarter of fiscal 2003 compared to the same period in fiscal 2002 was primarily due to the positive impact on margins of the increased sales volumes for replacement parts. During the third quarter of fiscal 2003, the euro had strengthened against the U.S. dollar, compared to the same period in fiscal 2002. The Repair Group's non-U.S. operations have a significant portion of its operating costs denominated in euros and, therefore, as the euro strengthens, such costs are negatively impacted. During the third quarter of fiscal 2003, the Repair Group was able to hedge much of its exposure to the strengthening euro thereby mitigating the negative impact on its operating results. Such exposure was hedged through the end of the third quarter of fiscal 2003. Had the Repair Group not hedged such exposure, its operating loss would have been greater by approximately $0.9 million during the third quarter of fiscal 2003. 14 In an effort to curtail the Repair Group's operating losses, which stem primarily from its current excess capacity for component repairs, the Company announced in March of 2003 its plans to discontinue operations at its Tampa, Florida component repair facility and to continue to optimize its remaining component repair capacity through consolidation of operations and other productivity improvement efforts. AEROSPACE COMPONENT MANUFACTURING GROUP ("ACM GROUP") Net sales in the third quarter of fiscal 2003 increased 5.2% to $9.0 million, compared with $8.5 million in the same fiscal 2002 period. An increase in the net sales of military airframe and engine components due to the timing of military related procurement resulted in a $1.4 million increase in net sales in the third quarter of fiscal 2003, compared with the same period in fiscal 2002. Net sales of engine components for small jet engines, consisting primarily of the AE series latest generation jet engines built by Rolls-Royce Corporation for business and regional jets, as well as military transport and surveillance aircraft, decreased $0.7 million. Net sales of commercial airframe components declined $0.3 million as a direct consequence of reduced flight schedules, cancellation of aircraft orders, workforce reductions, and continued poor financial performance of the airline industry. Net sales of components for helicopters declined $0.2 million. This decline was offset by a $0.1 million increase in net sales of components for large jet engines and a $0.1 million increase in net sales of non-aerospace related products. Selling, general and administrative expenses were $0.6 million, or 6.9% of net sales, in the third quarter of fiscal 2003, compared with $0.7 million, or 8.3% of net sales, in the comparable period in fiscal 2002. Selling, general and administrative expenses were favorably impacted in the third quarter of fiscal 2003 by a $0.1 million decrease in the ACM Group's bad debt expense, compared with the comparable period in fiscal 2002. The ACM Group's operating income in the third quarter of fiscal 2003 was $1.1 million, compared with $0.6 million in the same period in fiscal 2002. Operating results were favorably impacted in the third quarter of fiscal 2003 by $0.2 million decrease in variable tooling expense and by a $0.1 million decrease in bad debt expense. The balance of the decrease in operating income is primarily attributable to the interplay between overall lower net sales in relation to fixed manufacturing, selling, general and administrative expenses in the third quarter of fiscal 2003. METAL FINISHING GROUP Net sales in the third quarter of fiscal 2003 decreased 3.4% to $2.5 million, compared with $2.6 million in the comparable fiscal 2002 period. In the third quarter of fiscal 2003, product net sales, consisting of selective electrochemical metal finishing equipment and solutions decreased 6.9% to $1.3 million, compared with $1.4 million in the comparable period in fiscal 2002. The majority of the decline in net sales of selective electrochemical metal finishing equipment and solutions in the third quarter of fiscal 2003 is attributable to the overall depressed economic conditions in the aerospace, pulp and paper, power generation, and railroad industries. These declines were partially offset by modest increases in net sales to customers in the medical industry. Contract service net sales were $1.1 million in both the third quarters of fiscal 2003 and 2002. Contract service net sales to customers in the military and power generation industries declined approximately $0.1 million each. These declines were offset by increases in contract service net sales to customers in the automotive and petroleum exploration industries of $0.1 million each. Selling, general and administrative expenses were $0.7 million in the third quarters of fiscal 2003 and 2002, or 29.6% and 28.5% of net sales, respectively. In the third quarter of fiscal 2003, a $0.1 million decrease in employee compensation, benefits and incentive expenses was offset by a $0.1 million increase in legal and professional and other selling, general and administrative expenses. The Metal Finishing Group's operating income was $0.3 million in both the third quarters of fiscal 2003 and 2002. Operating income in the third quarter of fiscal 2003 was favorably impacted by a $0.1 million decrease in employee compensation, benefits and incentive expenses in the third quarter of fiscal 2003, compared with the comparable period of fiscal 2002. This was offset by a $0.1 million increase in legal and professional, advertising and other selling, general and administrative expenses in the third quarter of fiscal 2003, compared with the comparable period of fiscal 2002. CORPORATE UNALLOCATED EXPENSES Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate expenses, were $0.6 million in the third quarter of fiscal 2003, compared with $0.4 million in the comparable period of fiscal 2002. In the third quarter of fiscal 2003, corporate unallocated expenses were negatively impacted by higher legal and professional expenses of $0.2 million. 15 OTHER/GENERAL Interest income was $0.01 million in the third quarter of fiscal 2003, compared with $0.04 million in the comparable period of fiscal 2002. The decline in interest income is attributable to lower average cash and cash equivalent balances outstanding and to lower interest rates available from short-term investments during the third quarter of fiscal 2003, compared with the comparable period in fiscal 2002. Interest expense was $0.2 million in both the third quarters of fiscal 2003 and 2002. Term note interest expense increased slightly in the third quarter of fiscal 2003, compared with the same period in fiscal 2002. The decline in the weighted average term note outstanding balance in the third quarter of fiscal 2003, compared with the same period in fiscal 2002, was offset by an increase in the weighted average interest rate payable under the term note. Revolving credit agreement interest expense also increased slightly in the third quarter of fiscal 2003. The decline in the interest rate payable under the revolving credit agreement was offset by an increase in the weighted average revolving credit agreement outstanding balance in the third quarter of fiscal 2003, compared with the same period in fiscal 2002. Industrial development bond interest declined in the third quarter of fiscal 2003, compared with the same period in fiscal 2002. Both the weighted average outstanding balance and interest rate payable under the industrial development revenue bond's decreased in the third quarter of fiscal 2003, compared with the same period in fiscal 2002. Foreign currency exchange loss was $0.1 million in the third quarter of fiscal 2003, compared with income of $0.1 million in the comparable period in fiscal 2002. This loss is the result of foreign currency exchange rate fluctuations, resulting primarily from the decline in the value of the U.S. dollar in relation to the euro, on the Company's monetary assets and liabilities that are denominated in a foreign currency. In the third quarter of fiscal 2003, the income tax benefit related to the Company's U.S. and non-U.S. subsidiary losses was offset by a valuation allowance based upon an assessment of the Company's ability to realize such benefits. In assessing the Company's ability to realize its net deferred tax assets, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Future reversal of the valuation allowance will be achieved either when the tax benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future taxable income. B. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased to $4.7 million at June 30, 2003 from $7.6 million at September 30, 2002. At present, essentially all of the Company's cash and cash equivalents are in the possession of its non-U.S. subsidiaries and relate to undistributed earnings. During the first nine months of fiscal 2003, the Company received a distribution of $1.5 million from its non-U.S. subsidiaries. This distribution was utilized to repay a portion of the outstanding balance under the Company's revolving credit agreement. Effective October 1, 2000, the Company began to accrue U.S. income taxes on the undistributed earnings of its non-U.S. subsidiaries in anticipation that distributions from such earnings, to the extent they may occur in the future, would result in an additional income tax liability. Distributions from the Company's non-U.S. subsidiaries to the Company may be subject to statutory restrictions, adverse tax consequences or other limitations. Cash flow activity for the first nine months of fiscal 2003 is presented in the Consolidated Condensed Statements of Cash Flows. During the first nine months of fiscal 2003, cash was provided by a $0.4 million decrease in the Metal Finishing Group's accounts receivable due to lower sales and improved cash collections. This was offset by a $1.6 million and $0.3 million increase in the Repair and ACM Groups' accounts receivables, respectively, that is primarily attributable to higher third quarter fiscal 2003 net sales compared with fourth quarter fiscal 2002 net sales. The Metal Finishing and Repair Groups' inventories increased $0.1 million and $0.4 million, respectively. The Repair Group's inventories increased in response to orders scheduled for shipment in the next six months. The ACM Group's inventories decreased $0.5 million due to higher third quarter fiscal 2003 net sales. The $3.2 million net increase in consolidated accounts payable and accrued liabilities is attributable to (i) $1.4 million increase in the ACM Group's accounts payable and accrued liabilities due primarily to the impact of extended payment terms negotiated with vendors; (ii) $1.7 million increase in the Repair Group's accounts payable attributable primarily to the increase in purchases of inventory to support the sale of replacement parts and the effect of foreign currency exchange rate fluctuations on obligations that are payable in a foreign currency (primarily the euro). Working capital was $15.5 million at June 30, 2003, compared with $20.5 million at September 30, 2002. The current ratio was 1.8 and 2.4 at June 30, 2003 and September 30, 2002, respectively. Capital expenditures were $1.4 million in the first nine months of fiscal 2003, compared with $4.3 million in the comparable period in fiscal 2002. Capital expenditures in the first nine months of fiscal 2003 consisted primarily of equipment to expand and diversify the Repair Group's repair capabilities, including heavy industrial turbine engine component repair. The Company anticipates that total fiscal 2003 capital expenditures will not exceed $2.2 million and will be concentrated in the Repair Group. At June 30, 2003, the Company had outstanding commitments for capital expenditures totaling $0.5 million. 16 The Company and certain of its subsidiaries sponsor defined benefit pension plans covering most of its employees. In January 2003, the Company's Board of Directors adopted a resolution effective February 28, 2003, to cease the accrual of future benefits under the SIFCO Industries, Inc. Salaried Retirement Plan ("Plan"), which covers substantially all non-union employees of the Company's U.S. operations. The Plan will otherwise continue. Because the unrecognized actuarial losses exceeded the curtailment gain, there was no income or expense recognized during the nine months ended June 30, 2003 related to these changes. In conjunction with the changes to the Plan, the Company made certain enhancements to the defined contribution plan that is available to substantially all non-union U.S. employees of the Company and its U.S. subsidiaries. At June 30, 2003, the Company has a 15-year industrial development bond, which was issued with an original face amount of $4.1 million and was used to expand the Repair Group's Tampa, Florida facility. The industrial development bond requires annual principal payments ranging from $0.2 million in fiscal 2004 to $0.4 million in fiscal 2013. The interest rate is reset weekly, based on prevailing tax-exempt money market rates. The interest rate at June 30, 2003 was 1.14%. The outstanding balance of the industrial development bond at June 30, 2003 was $3.0 million. The bank's commitment fee on the standby letter of credit backing up the industrial development bond was 2.75% at June 30, 2003. At June 30, 2003, the Company has a term note payable in quarterly installments of $0.3 million through February 2005, with the remaining balance of $3.9 million due May 1, 2005. The term note has a variable interest rate, which after giving effect to an interest rate swap agreement with the same bank, becomes an effective fixed rate note, subject to adjustment based upon the level of certain financial ratios. At June 30, 2003, the term note's three-month LIBOR based effective borrowing rate was 9.49%. The outstanding balance of the term note at June 30, 2003 was $6.0 million. At June 30, 2003, the Company has a $6.0 million revolving credit agreement, subject to sufficiency of collateral, that expires on June 30, 2004 and bears interest at the bank's base rate plus 0.5%. The interest rate was 4.50% at June 30, 2003. A 0.375% commitment fee is incurred on the unused balance of the revolving credit agreement. At June 30, 2003, the outstanding balance under the revolving credit agreement was $2.7 million. Under its credit agreements, the Company is subject to certain customary covenants. These include, without limitation, covenants (as defined) that limit the amount of annual capital expenditures and require the maintenance of certain specified financial ratios, including minimum tangible net worth level, a maximum liability to tangible net worth ratio and an interest coverage ratio. During the first nine months of fiscal 2003, the Company entered into agreements with its bank to waive (i) the interest coverage ratio covenant for the period ended September 30, 2002 through the period ended December 31, 2004 (ii) the minimum tangible net worth covenant for the period ending September 30, 2002; and (iii) the capital expenditure limitation for the period ended September 30, 2002. These agreements also modified certain financial covenants and the corresponding interest rates as well as extended the maturity date of the Company's $6.0 million revolving credit agreements to June 30, 2004. Under the most recent amendment, borrowing availability may be reduced by $1.0 million subject to the passage of time or the occurrence of a certain event. The Company was in compliance with all applicable covenants at June 30, 2003. In July 2003, the Company entered into an agreement with its lending bank to extend the maturity date of the Company's $6.0 million revolving credit agreement to September 30, 2004. The amendment also extended the maturity date of the standby letter of credit that backs up the Company's industrial development bond to May 16, 2005. The Company's long-term debt as a percentage of equity at June 30, 2003 and September 30, 2002 was 32.7% and 29.4%, respectively. At June 30, 2003, taking into consideration the outstanding balance under the revolving credit agreement and outstanding letters of credit, the Company had $3.3 million available against its $6.0 million revolving credit agreement. The Company believes that cash flow from its operations together with existing cash reserves and the funds available under its revolving credit agreement will be sufficient to meet its working capital requirements through the end of fiscal year 2003. However, no assurances can be given as to the sufficiency of the Company's working capital to support the Company's operations. If the existing cash reserves, cash flow from operations and funds available under the revolving credit agreement are insufficient; if working capital requirements are greater than currently estimated; and/or if the Company is unable to satisfy the covenants set forth in its credit agreements, the Company may be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, restructuring indebtedness, selling assets or operations, or issuing additional shares of capital stock in the Company. There can be no assurance that any of these actions could be accomplished, or if so, on terms favorable to the Company, or that they would enable the Company to continue to satisfy its working capital requirements. 17 C. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". This standard is effective for fiscal years beginning after December 15, 2001. The Company adopted this standard on October 1, 2002, the beginning of the first quarter of the Company's fiscal year 2003. The standard changes financial accounting and reporting for acquired goodwill and indefinite life intangible assets. SFAS No. 142 provides that intangible assets with finite useful lives will continue to be amortized and goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested for impairment upon adoption and on an annual basis thereafter. The Company completed the initial impairment test and concluded that goodwill was not impaired as of October 1, 2002. Other than the cessation of goodwill amortization, the adoption of SFAS No. 142 did not have an impact on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. The standard applies to legal obligations associated with the retirement of long-lived assets that result from acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and was adopted by the Company effective October 1, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In September 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement superceded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of Accounting Principals Board Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring events and Transactions", related to the disposal of a segment of a business. This statement amends certain provisions of Accounting Research bulletin No. 51, "Consolidated Financial Statements". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and was adopted by the company effective October 1, 2002. The adoption of this standard did not have a material impact on the Company's financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard addresses financial and accounting and reporting for costs associated with exit or disposal activities and replaces Emerging Issues Task Force No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF No. 94-3"). SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity to be recognized when the liability is incurred. Under EITF No. 94-3, a liability for exit costs as defined in EITF No. 94-3 is recognized at the date of an entity's commitment to an exit plan. Beginning January 1, 2003, the Company recognizes liabilities associated with exit or disposal activities as incurred in accordance with SFAS No. 146. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure an Amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also requires prominent disclosure in the significant accounting policy note of both annual and interim financial statements of the method of accounting for stock-based compensation and the related pro forma disclosures when the intrinsic value method continues to be used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosure provisions are effective for the first fiscal quarter beginning after December 15, 2002. The Company adopted the disclosure provisions of SFAS 148 in the quarter ended December 31, 2002. The adoption of this standard did not have a material impact on the Company's financial position and results of operations. On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statements 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The Company does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 changes the accounting for certain financial instruments, which under previous guidance, issuers could account for as equity. The new standard requires that those financial instruments be classified as liabilities in statements of financial position. This new standard is effective for interim periods beginning after June 15, 18 2003. The Company does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the ordinary course of business, the Company is subject to foreign currency and interest risk. The risks primarily relate to the sale of the Company's products and services in transactions denominated in non-U.S. dollar currencies (primarily the euro); the payment in local currency of wages and other costs related to the Company's non-U.S. operations (primarily the euro); and changes in interest rates on the Company's long-term debt obligations. The Company does not hold or issue financial instruments for trading purposes. The Company believes that inflation has not materially affected its results of operations during the first nine months of fiscal 2003, and does not expect inflation to be a significant factor in the balance of fiscal 2003. FOREIGN CURRENCY RISK The U.S. dollar is the functional currency for all of the Company's U.S. operations. Effective October 1, 2001, the Company changed the functional currency of its Irish subsidiary from the local currency to the U.S. dollar. The functional currency was changed because a substantial majority of the subsidiary's transactions are now denominated in U.S. dollars. For these operations, all gains and losses from completed currency transactions are included in income currently. For the Company's other non-U.S. subsidiaries, the functional currency is the local currency. Assets and liabilities are translated into U.S. dollars at the rate of exchange at the end of the period and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in earnings. Historically, the Company has been able to mitigate the impact of foreign currency risk by means of hedging such risk through the use of foreign currency exchange contracts. However, such risk is mitigated only for the periods for which the Company has foreign currency exchange contracts in effect, and only to the extent of the U.S. dollar amounts of such contracts. While the Company had foreign currency forward exchange contracts outstanding during the nine months ended June 30, 2003, at June 30, 2003, there were no such 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. At June 30, 2003, the Company's assets and liabilities denominated in British pounds and the euro were as follows (amounts in thousands):
BRITISH POUNDS EURO -------------- ---- Cash and cash equivalents 505 1,550 Accounts receivable 429 675 Accounts payable 90 471 Accrued liabilities 100 3,509
INTEREST RATE RISK The Company's primary interest rate risk exposure results from the variable interest rate mechanisms associated with the Company's long-term debt consisting of a term note payable to the Company's bank, a revolving credit agreement and industrial development variable rate demand revenue bonds. These interest rate exposures are managed in part by an interest rate swap agreement to fix the interest rate of the term note payable to the Company's bank. If interest rates were to increase or decrease by 100 basis points (1%) from June 30, 2003 rates, and assuming no changes in the amounts outstanding under the revolving credit agreement and industrial development variable rate demand revenue bonds, the Company's annual interest expense would increase or decrease by approximately $0.1 million, respectively. ITEM 4. CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chairman and Chief Executive Officer of the Company and the Chief Financial Officer of the Company, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based upon that evaluation, the Chairman and Chief 19 Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There has been no significant change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or that is reasonably likely to materially affect our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In connection with an employment action against the Company filed by an employee that was settled in March 2002, the Company filed a complaint in 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 this employment action. The Company's complaint sought a declaratory judgment that the insurance carrier owes a duty to indemnify the Company with respect to this action. In March 2002, the Company received a Ruling on its Motion for Summary Judgment denying the Company's complaint. Management of the Company believed that the Court's Ruling on its Motion for Summary Judgment was not consistent with existing case law and, therefore, the Company appealed this decision to the Cuyahoga County Court of Appeals. However, because the outcome of this appeal was uncertain and the initial Ruling was unfavorable, the Company provided $0.9 million in its second quarter fiscal 2002 financial statements, the full amount of this contingent obligation. In November 2002, the Cuyahoga County Court of Appeals reversed the Summary Judgment. In February 2003, the insurance carrier filed a Notice of Appeal with the Ohio Supreme Court and asked the Court to exercise its discretionary jurisdiction and hear an appeal of the Court of Appeals' November 2002 decision. In July 2003, the Ohio Supreme Court on its own initiative dismissed the insurance Carrier's appeal as being improvidently allowed. The insurance carrier has until August 4, 2003 to file a Motion of Reconsideration. ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS No change. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None. 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed with this report or are incorporated herein by reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934 (Asterisk denotes exhibits filed with this report.).
Exhibit No. Description - ----------- ----------- 3.1 Third Amended Articles of Incorporation of SIFCO Industries, Inc., filed as Exhibit 3(a) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 3.2 SIFCO Industries, Inc. Amended and Restated Code of Regulations dated January 29, 2002, filed as Exhibit 3(b) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.1 Amended and Restated Reimbursement Agreement dated April 30, 2002 Between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4(a) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.2 Amended and Restated Credit Agreement Between SIFCO Industries, Inc. and National City Bank dated April 30, 2002, filed as Exhibit 4(b) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.3 Promissory Note (Term Note) dated April 14, 1998 Between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4(c) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.4 Loan Agreement Between Hillsborough County Industrial Development Authority and SIFCO Industries, Inc., dated as of May 1, 1998, filed as Exhibit 4(d) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.5 Consolidated Amendment No. 1 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated November 26, 2002 Between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.5 of the Company's Form 10-K dated September 30, 2002, and incorporated herein by reference 4.6 Consolidated Amendment No. 2 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated February 13, 2003 Between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.6 of the Company's Form 10-Q dated December 31, 2002, and incorporated herein by reference 4.7 Consolidated Amendment No. 3 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated May 13, 2003 Between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.7 of the Company's Form 10-Q dated March 31, 2003, and incorporated herein by reference * 4.8 Consolidated Amendment No. 4 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated July 28, 2003 between SIFCO Industries, Inc and National City Bank 10.1 1989 Key Employee Stock Option Plan, filed as Exhibit B of the Company's Form S-8 dated January 9, 1990 and incorporated herein by reference 10.2 Deferred Compensation Program for Directors and Executive Officers (as amended and restated April 26, 1984), filed as Exhibit 10(b) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 10.3 SIFCO Industries, Inc. 1998 Long-term Incentive Plan, filed as Appendix A of the Company's Schedule 14A dated December 21, 1998, and incorporated herein by reference
21 10.4 SIFCO Industries, Inc. 1995 Stock Option Plan, filed as Exhibit 10(d) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 10.5 Change in Control Severance Agreement between the Company and Frank Cappello, dated September 28, 2000, filed as Exhibit 10 (g) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.6 Change in Control Severance Agreement between the Company and Hudson Smith, dated September 28, 2000, filed as Exhibit 10 (h) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.7 Change in Control Severance Agreement between the Company and Remigijus Belzinskas, dated September 28, 2000, filed as Exhibit 10 (i) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.8 Change in Control Agreement between the Company and Frank Cappello, dated November 9, 2000, filed as Exhibit 10 (j) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.9 Change in Control Severance Agreement between the Company and Timothy V. Crean, dated July 30, 2002, filed as Exhibit 10.9 of the Company's Form 10-K dated September 30, 2002 and incorporated herein by reference 10.10 Change in Control Severance Agreement between the Company and Jeffrey P. Gotschall, dated July 30, 2002, 10.10 filed as Exhibit 10.10 of the Company's Form 10-K dated September 30, 2002 and incorporated herein by reference *31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a) *31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a) *32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 *32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2003. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. SIFCO Industries, Inc. (Registrant) Date: August 4, 2003 /s/ Jeffrey P. Gotschall ------------------------- Jeffrey P. Gotschall Chairman of the Board and Chief Executive Officer Date: August 4, 2003 /s/ Frank A. Cappello --------------------- Frank A. Cappello Vice President-Finance and Chief Financial Officer (Principal Financial Officer) 23 EX-4.8 3 l02038aexv4w8.txt EXHIBIT 4.8 EXHIBIT 4.8 CONSOLIDATED AMENDMENT NO. 4 TO AMENDED AND RESTATED CREDIT AGREEMENT, AMENDED AND RESTATED REIMBURSEMENT AGREEMENT AND PROMISSORY NOTE This Consolidated Amendment No. 4 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement, and Promissory Note (this "AMENDMENT"), dated as of July 28, 2003, is entered into by and between SIFCO INDUSTRIES, INC. (the "BORROWER") and NATIONAL CITY BANK (the "BANK") for the purposes amending and supplementing the documents and instruments referred to below. WITNESSETH: WHEREAS, Borrower and Bank are parties to an Amended and Restated Credit Agreement made as of April 30, 2002, as amended by Letter Agreement dated August 1, 2002 (as amended, the "CREDIT AGREEMENT" providing for $6,000,000 of revolving credits; all terms used in the Credit Agreement being used herein with the same meaning); and WHEREAS, Borrower and Bank are parties to an Amended and Restated Reimbursement Agreement made as of April 30, 2002, as amended by Letter Agreement dated August 1, 2002 (as amended, the "REIMBURSEMENT AGREEMENT" pursuant to which a Letter of Credit was issued in the initial stated amount of $4,225,280; all terms used in the Reimbursement Agreement being used herein with the same meaning); and WHEREAS, Borrower and Bank are parties to Promissory Note made as of April 14, 1998 (the "TERM NOTE" providing for a $12,000,000 term loan; all terms used in the Term Note being used herein with the same meaning); and WHEREAS, the Credit Agreement, the Reimbursement Agreement and the Term Note were previously amended by Consolidated Amendment No. 1, Consolidated Amendment No. 2 and Consolidated Amendment No. 3; and WHEREAS, Borrower and Bank desire to further amend certain provisions of the Credit Agreement and the Reimbursement Agreement to, among other things, (a) amend and/or waive certain financial covenants applicable thereto, and (b) supplement certain of the covenants therein; and NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: SECTION I - AMENDMENTS TO CREDIT AGREEMENT A. Section 2A.02 of the Credit Agreement is hereby amended to extend the Expiration Date from JUNE 30, 2004 TO SEPTEMBER 30, 2004. B. Section 2B.16 (ii) of the Credit Agreement is hereby amended to read as follows: (ii) Advances for Subject Loans shall not exceed an amount equal to eighty percent (80%) of eligible accounts receivable (the "Borrowing Base") (to be determined by Bank), less a reserve in the amount of One Million Dollars ($1,000,000) (the "Reserve"). The Reserve shall be established the earliest to occur of (a) receipt of a federal tax refund or (b) by August 31, 2003. The requirement that the Borrower provide Bank with an equipment appraisal is hereby waived. SECTION II - AMENDMENTS TO REIMBURSEMENT AGREEMENT A.The EXPIRATION DATE of the Letter of Credit is hereby extended from MAY 16, 2004 to MAY 16, 2005. SECTION III -- REPRESENTATIONS AND WARRANTIES Borrower hereby represents and warrants to Bank, to the best of Borrower's knowledge, that (A) none of the representations and warranties made in the Credit Agreement, the Reimbursement Agreement or the Promissory Note (collectively, the "Loan Documents") has ceased to be true and complete in any material respect as of the date hereof; and 1 (B) as of the date hereof no "Default" has occurred that is continuing under the Loan Documents. SECTION IV -ACKNOWLEDGMENTS CONCERNING OUTSTANDING LOANS Borrower acknowledges and agrees that, as of the date hereof, all of Borrower's outstanding loan obligations to Bank are owed without any offset, deduction, defense, claim or counterclaim of any nature whatsoever. Borrower authorizes Bank to share all credit and financial information relating to Borrower with each of Bank's parent company and with any subsidiary or affiliate company of such Bank or of such Bank's parent company. SECTION V - REFERENCES On and after the effective date of this Amendment, each reference in the Credit Agreement, the Reimbursement Agreement or the Term Note to "this Agreement", "hereunder", "hereof", or words of like import referring to the Credit Agreement, Reimbursement Agreement or Term Note shall mean and refer to the Credit Agreement, Reimbursement Agreement and Term Note as amended hereby. The Loan Documents, as amended by this Amendment, are and shall continue to be in full force and effect and are hereby ratified and confirmed in all respects. To the extent any amendment set forth in any previous amendment is omitted from this Amendment, the same shall be deemed eliminated as between Borrower and the other parties hereto as of the date hereof. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Bank under the Loan Documents or constitute a waiver of any provision of the Loan documents except as specifically set forth herein. SECTION VI - COUNTERPARTS AND GOVERNING LAW This Amendment may be executed in any number of counterparts, each counterpart to be executed by one or more of the parties but, when taken together, all counterparts shall constitute one agreement. This Amendment, and the respective rights and obligations of the parties hereto, shall be construed in accordance with and governed by Ohio law. IN WITNESS WHEREOF, the Borrower and the Bank have caused this Amendment to be executed by their authorized officers as of the date and year first above written. SIFCO INDUSTRIES, INC. NATIONAL CITY BANK By: /s/ Frank A. Cappello By: /s/ Terry Wolford --------------------- ----------------- Name: Frank A. Cappello Name: Terry Wolford Title: Vice President - Finance Title: Vice President and Chief Financial Officer 2 EX-31.1 4 l02038aexv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13A-14(A) / 15D-14(A) I, Jeffrey P. Gotschall, certify that: 1. I have read this quarterly report on Form 10-Q of SIFCO Industries, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such internal controls and procedures to be designated under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 4, 2003 /s/ Jeffrey P. Gotschall ------------------------ Jeffrey P. Gotschall Chairman of the Board and Chief Executive Officer 1 EX-31.2 5 l02038aexv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13A-14(A) / 15D-14(A) I, Frank A. Cappello, certify that: 1. I have read this quarterly report on Form 10-Q of SIFCO Industries, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such internal controls and procedures to be designated under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 4, 2003 /s/ Frank A. Cappello --------------------- Frank A. Cappello Vice President - Finance and Chief Financial Officer 1 EX-32.1 6 l02038aexv32w1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report of SIFCO Industries, Inc. ("Company") on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof ("Report"), I, Jeffrey P. Gotschall, Chairman of the Board and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jeffrey P. Gotschall ------------------------ Jeffrey P. Gotschall Chairman of the Board and Chief Executive Officer August 4, 2003 Note: A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to SIFCO Industries, Inc. and will be retained by SIFCO Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 1 EX-32.2 7 l02038aexv32w2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Quarterly Report of SIFCO Industries, Inc. ("Company") on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof ("Report"), I, Frank A. Cappello, Vice President - Finance and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Frank A. Cappello --------------------- Frank A. Cappello Vice President - Finance and Chief Financial Officer August 4, 2003 Note: A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to SIFCO Industries, Inc. and will be retained by SIFCO Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 1 -----END PRIVACY-ENHANCED MESSAGE-----