-----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, UyvnIO0eUlHbz0NnL+gDzB2+9/wQcRtw1qVEMCnn2rz6HR43Qp52dWbTpvtN3+Md vrdaGErnIq566cx8yNGOzg== 0000950152-04-006023.txt : 20040809 0000950152-04-006023.hdr.sgml : 20040809 20040809112242 ACCESSION NUMBER: 0000950152-04-006023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040809 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: 04959943 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 l08678ae10vq.txt SIFCO INDUSTRIES, INC. 10-Q/QUARTER ENDED 6-30-04 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from _________________ to ___________________ Commission file number 1-5978 SIFCO INDUSTRIES, INC. ---------------------- (Exact name of registrant as specified in its charter) Ohio 34-0553950 - --------------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 970 East 64th Street, Cleveland Ohio 44103 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (216) 881-8600 -------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X ---- ----- The number of the Registrant's Common Shares outstanding at July 31, 2004 was 5,152,233. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net sales $ 23,015 $ 22,574 $ 66,648 $ 58,428 Operating expenses: Cost of goods sold 20,421 19,167 58,888 53,150 Selling, general and administrative expenses 2,849 3,045 8,686 10,194 -------- -------- -------- -------- Total operating expenses 23,270 22,212 67,574 63,344 -------- -------- -------- -------- Operating income (loss) (255) 362 (926) (4,916) Interest income (14) (8) (40) (53) Interest expense 189 217 592 631 Foreign currency exchange loss (gain), net (55) 60 93 287 Other income, net (132) (150) (185) (214) -------- -------- -------- -------- Income (loss) before income tax (243) 243 (1,386) (5,567) provision Income tax provision 10 11 43 41 -------- -------- -------- -------- Net income (loss) $ (253) $ 232 $ (1,429) $ (5,608) ======== ======== ======== ======== Net income (loss) per share (basic) $ (0.05) $ 0.04 $ (0.27) $ (1.07) Net income (loss) per share (diluted) $ (0.05) $ 0.04 $ (0.27) $ (1.07) Weighted-average number of common shares (basic) 5,220 5,254 5,223 5,256 Weighted-average number of common shares (diluted) 5,220 5,254 5,223 5,256
See notes to unaudited consolidated condensed financial statements. 2 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, SEPTEMBER 30, 2004 2003 ---------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 5,938 $ 4,524 Receivables, net 17,530 16,648 Inventories 7,987 9,184 Refundable income taxes -- 23 Prepaid expenses and other current assets 882 473 Assets held for sale 4,198 -- -------- -------- Total current assets 36,535 30,852 Property, plant and equipment, net 19,946 25,704 Other assets: Goodwill, net 2,574 2,574 Other assets 2,822 2,548 -------- -------- Total other assets 5,396 5,122 -------- -------- Total assets $ 61,877 $ 61,678 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 1,461 $ 1,451 Accounts payable 7,034 6,491 Accrued liabilities 7,271 6,471 -------- -------- Total current liabilities 15,766 14,413 Long-term debt, net of current maturities 8,996 9,033 Other long-term liabilities 7,931 7,951 Shareholders' equity: Serial preferred shares, no par value, authorized 1,000 shares -- -- Common shares, par value $1 per share, authorized 10,000 shares; issued 5,269 and 5,294 shares at June 30, 2004 and September 30, 2003, respectively; outstanding 5,214 shares at June 30, 2004 and 5,226 at September 30, 2003 5,269 5,294 Additional paid-in capital 6,559 6,661 Retained earnings 26,853 28,282 Accumulated other comprehensive loss (8,980) (9,247) Unearned compensation - restricted common shares (188) (309) Common shares held in treasury at cost, 55 and 68 shares at June 30, 2004 and September 30, 2003, respectively (329) (400) -------- -------- Total shareholders' equity 29,184 30,281 -------- -------- Total liabilities and shareholders' equity $ 61,877 $ 61,678 ======== ========
See notes to unaudited consolidated condensed financial statements. 3 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED JUNE 30, -------------------- 2004 2003 --------- --------- Cash flows from operating activities: Net loss $ (1,429) $ (5,608) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 2,670 3,242 Loss (gain) on disposal of property, plant and equipment (13) 3 Asset impairment charges -- 1,175 Changes in operating assets and liabilities: Receivables (882) (1,702) Inventories 1,197 (67) Refundable income taxes 23 (58) Prepaid expenses and other current assets (409) (280) Other assets (274) (158) Accounts payable 543 3,143 Accrued liabilities 736 (882) Other long-term liabilities 161 129 -------- -------- Net cash provided by (used for) operating activities 2,323 (1,063) Cash flows from investing activities: Capital expenditures (1,909) (1,355) Proceeds from disposal of property, plant and equipment 77 143 Reimbursement of equipment expenditures 750 -- Other 135 128 -------- -------- Net cash used for investing activities (947) (1,084) Cash flows from financing activities: Proceeds from revolving credit agreement 40,809 19,242 Repayments of revolving credit agreement (39,685) (18,919) Repayments of long-term debt (1,151) (1,140) Proceeds from other indebtedness -- 14 Share transactions under employee stock plan 65 93 -------- -------- Net cash provided by (used for) financing activities 38 (710) Increase (decrease) in cash and cash equivalents 1,414 (2,857) Cash and cash equivalents at the beginning of the period 4,524 7,583 -------- -------- Cash and cash equivalents at the end of the period $ 5,938 $ 4,726 ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest $ (434) $ (566) Cash recovered from (paid for) income taxes, net 36 (10)
See notes to unaudited consolidated condensed financial statements 4 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Description of Business The unaudited consolidated condensed financial statements included herein include the accounts of SIFCO Industries, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, which include only normal recurring adjustments necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented, have been included. These unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's fiscal 2003 Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results to be expected for other interim periods or the full year. Certain prior period amounts have been reclassified in order to conform to current period classifications. B. Stock-Based Compensation The Company employs the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The following pro forma information regarding net income and earnings per share was determined as if the Company had accounted for its stock options under the fair value method prescribed by SFAS No. 123. For purposes of pro forma disclosure, the estimated fair value of the stock options is amortized over the options' vesting periods. The pro forma information is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, --------------------- --------------------------- 2004 2003 2004 2003 -------- ------ ---------- ---------- Net income (loss) as reported $ (253) $ 232 $ (1,429) $ (5,608) Less: Stock-based compensation expense determined under fair value based method for all awards, net of related income tax effects 27 35 82 103 ------- ------- ----------- ---------- Pro forma net income (loss) as if the fair value based method had been applied to all awards $ (280) $ 197 $ (1,511) $ (5,711) ======== ======= ========== ========= Net income (loss) per share: Basic - as reported $ (0.05) $ 0.04 $ (0.27) $ (1.07) Basic - pro forma $ (0.05) $ 0.04 $ (0.29) $ (1.09) Diluted - as reported $ (0.05) $ 0.04 $ (0.27) $ (1.07) Diluted - pro forma $ (0.05) $ 0.04 $ (0.29) $ (1.09)
C. New Accounting Standards In December 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits". This standard revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans as required by SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This standard retains the disclosure requirements contained in SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which it replaces. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The provisions of SFAS No. 132 remain in effect until the provisions of SFAS No. 132 (revised 2003) are adopted. SFAS No. 132 (revised 2003) is generally effective for fiscal years ending after December 15, 2003. The 5 interim-period disclosures required by SFAS No. 132 (revised 2003) are effective for interim periods beginning after December 15, 2003. The adoption of this standard during the second quarter of fiscal year 2004 did not have an impact on the Company's financial position or results of operations. D. Revenue Recognition The Company recognizes revenue in accordance with the relevant portions of the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and No. 104, "Revenue Recognition". Revenue is generally recognized when products are shipped or services are provided to customers. 2. INVENTORIES Inventories consist of:
JUNE 30, SEPTEMBER 30, 2004 2003 -------- ------------- Raw materials and supplies $2,577 $2,537 Work-in-process 2,915 3,028 Finished goods 2,495 3,619 ------ ------ Total inventories $7,987 $9,184 ====== ======
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method for 34% and 28% of the Company's inventories at June 30, 2004 and September 30, 2003, respectively. Cost is determined using the specific identification method for approximately 24% and 33% of the Company's inventories at June 30, 2004 and September 30, 2003, respectively. The first-in, first-out ("FIFO") method is used for the remainder of the inventories. If the FIFO method had been used for the inventories for which cost is determined using the LIFO method, inventories would have been $3,343 and $3,230 higher than reported at June 30, 2004 and September 30, 2003, respectively. 3. ASSETS HELD FOR SALE Assets held for sale at June 30, 2004 consist of the building and land of the Company's Turbine Component Services and Repair Group facility located in Tampa, Florida, which ceased operations during fiscal 2003, and a building and land that is part of the Turbine Component Services and Repair Group's Irish operations, which are being consolidated into the remaining two buildings during fiscal 2004. These assets are recorded at amounts not in excess of what the Company currently expects, based on management's estimates, to receive upon sale, less cost of disposal. 4. COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS Total comprehensive loss is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------- 2004 2003 2004 2003 ------- ------- -------- -------- Net income (loss) $ (253) $ 232 $(1,429) $(5,608) Foreign currency translation adjustment (14) 79 149 146 Unrealized gain on interest rate swap agreement, net of income tax provision of $12 and $22 in fiscal 2003 88 55 212 98 Currency exchange contract adjustment 61 (695) (63) (1,035) Minimum pension liability adjustment (31) (37) (31) (37) ------- ------- -------- -------- Total comprehensive loss $ (149) $ (366) $(1,162) $(6,436) ======= ======= ======== ========
6 The components of accumulated other comprehensive loss are as follows:
JUNE 30, SEPTEMBER 30, 2004 2003 -------- ------------- Foreign currency translation adjustment $(6,696) $(6,845) Interest rate swap agreement adjustment (177) (389) Currency exchange contract adjustment (63) -- Minimum pension liability adjustment (2,044) (2,013) -------- -------- Total accumulated other comprehensive loss $(8,980) $(9,247) ======== ========
5. BUSINESS SEGMENTS The Company identifies reportable segments based upon distinct products manufactured and services provided. The Turbine Component Services and Repair Group ("Repair Group") consists primarily of the repair and remanufacture of aerospace and industrial turbine engine components. The Repair Group is also involved in precision component machining for aerospace applications. The Aerospace Component Manufacturing Group consists of the production, heat treatment and some machining of forgings in various alloys utilizing a variety of processes for application in the aerospace industry. The Metal Finishing Group is a provider of specialized selective electrochemical metal finishing processes and services used to apply metal coatings to a selective area of a component. The Company's reportable segments are separately managed. Segment information is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net sales: Turbine Component Services and Repair Group $ 11,474 $ 11,114 $ 35,476 $ 29,074 Aerospace Component Manufacturing Group 8,687 8,965 23,005 22,144 Metal Finishing Group 2,854 2,495 8,167 7,210 -------- -------- -------- -------- Consolidated net sales $ 23,015 $ 22,574 $ 66,648 $ 58,428 ======== ======== ======== ======== Operating income (loss): Turbine Component Services and Repair Group $ (874) $ (407) $ (2,011) $ (4,765) Aerospace Component Manufacturing Group 733 1,075 1,700 686 Metal Finishing Group 158 281 575 566 Corporate unallocated expenses (272) (587) (1,190) (1,403) -------- -------- -------- -------- Consolidated operating income (loss) (255) 362 (926) (4,916) Interest expense, net 175 209 552 578 Foreign currency exchange loss (gain), net (55) 60 93 287 Other income, net (132) (150) (185) (214) -------- -------- -------- -------- Consolidated income (loss) before income tax provision $ (243) $ 243 $ (1,386) $ (5,567) ======== ======== ======== ========
The Company's net goodwill of $2,574 at March 31, 2004 and September 30, 2003 is allocated to its Metal Finishing Group. 6. LONG-TERM DEBT Effective June 30, 2004, the Company entered into an agreement with its lending bank to amend certain provisions of its credit agreements. The amendment extends the maturity date of the Company's term note to September 30, 2005. The amendment also extends the maturity date of the standby letter of credit that collateralizes the industrial development variable rate revenue bond to September 30, 2005. 7 7. RETIREMENT BENEFIT PLANS The Company and certain of its subsidiaries sponsor defined benefit pension plans covering most of its employees. The components of net periodic benefit cost of the Company's defined benefit plans are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2004 2003 2004 2003 ------- ------- ------- ------- Service cost $ 163 $ 86 $ 469 $ 549 Interest cost 350 511 1,044 1,202 Expected return on plan assets (373) (528) (1,139) (1,258) Amortization of transition asset (3) (5) (8) (10) Amortization of prior service cost 33 38 99 118 Amortization of net (gain) loss 10 21 19 (53) ------- ------- ------- ------- Net periodic benefit cost $ 180 $ 123 $ 484 $ 548 ======= ======= ======= =======
Through June 30, 2004, the Company has made $869 of contributions in fiscal 2004 to its defined benefit pension plans. The Company anticipates contributing an additional $345 to fund its defined benefit pension plans during the balance of fiscal 2004, resulting in total projected contributions of $1,214 in fiscal 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and includes assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides this cautionary statement identifying important economic, political and technological factors, among others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (1) future business environment, including capital and consumer spending; (2) competitive factors, including the ability to replace business which may be lost due to increased direct involvement by the turbine engine manufacturers in turbine component service and repair markets; (3) successful procurement of certain repair materials and new repair process licenses from turbine engine manufacturers and/or the Federal Aviation Administration; (4) fluctuating foreign currency (primarily the euro) exchange rates; (5) metals and commodities price increases and the Company's ability to recover such price increases; (6) successful development and market introductions of new products, including an advanced coating technology and the continued development of heavy industrial turbine repair processes; (7) regressive pricing pressures on the Company's products and services, with productivity improvements as the primary means to maintain margins; (8) success with the further development of strategic alliances with certain turbine engine manufacturers for turbine component repair services; (9) the impact on business conditions, and on the aerospace industry in particular, of global terrorism threat; (10) successful replacement of declining demand for repair services for turboprop engine components with component repair services for small turbofan engines utilized in the business and regional aircraft markets; (11) continued reliance on several major customers for revenues; (12) the Company's ability to continue to have access to its revolving credit facility, including the Company's ability to (i) continue to comply with the terms of its credit agreements, including financial covenants, (ii) continue to enter into amendments to its credit agreement containing financial covenants, which it and its bank lender find mutually acceptable, or (iii) continue to obtain waivers from its bank lender with respect to its compliance with the covenants contained in its credit agreement; (13) pension plan actuarial assumptions and future contributions; (14) net realizable value of assets held for sale; and (15) stable governments, business conditions, laws, regulations and taxes in economies where business is conducted. SIFCO Industries, Inc. and its subsidiaries engage in the production and sale of a variety of metalworking processes, services and products produced primarily to the specific design requirements of its customers. The processes and services include forging, heat-treating, coating, welding, machining and selective electrochemical metal finishing. The products include forgings, machined forged parts and other machined metal parts, remanufactured component parts for turbine engines, and selective electrochemical metal finishing solutions and equipment. 8 A. Results of Operations NINE MONTHS ENDED JUNE 30, 2004 COMPARED WITH NINE MONTHS ENDED JUNE 30, 2003 Net sales in the first nine months of fiscal 2004 increased 14.1% to $66.6 million, compared with $58.4 million in the comparable period in fiscal 2003. Net loss in the first nine months of fiscal 2004 was $1.4 million, compared with a net loss of $5.6 million in the comparable period in fiscal 2003. Turbine Component Services and Repair Group ("Repair Group") Net sales in the first nine months of fiscal 2004 increased 22.0% to $35.5 million, compared with $29.1 million in the comparable fiscal 2003 period. Component manufacturing and repair net sales increased $5.1 million to $28.2 million in the first nine months of fiscal 2004, compared with $23.1 million in the comparable fiscal 2003 period. Demand for precision component machining and for component repairs for industrial turbine engines and large aerospace turbine engines increased, while the demand for component repairs for small aerospace turbine engines decreased in the first nine months of fiscal 2004, compared with the comparable fiscal 2003 period. This reflects an increase in component repairs for newer model large aerospace turbine engines offset by reduced demand for component repairs for older model large aerospace turbine engines. Net sales associated with the demand for replacement parts, which often complement component repair services provided to customers, increased $1.3 million in the first nine months of fiscal 2004, compared with the comparable fiscal 2003 period. During the first nine months of fiscal 2004, the Repair Group's selling, general and administrative expenses decreased $1.2 million to $3.6 million, or 10.1% of net sales, from $4.8 million, or 16.5% of net sales, in the comparable fiscal 2003 period. Included in the $4.8 million of selling, general and administrative expenses in the first nine months of fiscal 2003 were charges aggregating $1.2 million related to the impairment of equipment and $0.4 million of severance charges related to the further consolidation of the Repair Group's operations during fiscal 2003. The remaining selling, general and administrative expenses in the first nine months of fiscal 2003 were $3.2 million, or 11.1% of net sales. The Repair Group's operating loss in the first nine months of fiscal 2004 decreased $2.8 million to $2.0 million from a $4.8 million loss in the comparable fiscal 2003 period. Included in the operating loss in the first nine months of fiscal 2003 were charges aggregating $1.2 million related to the impairment of equipment and $0.4 million of severance charges. In addition to the impact of the non-recurrence of the aforementioned impairment and severance charges, operating results improved in the first nine months of fiscal 2004 due to the positive impact on margins of increased sales volumes for component manufacturing and repair services, partially offset by reduced margins on sales of replacement parts and the negative impact of the continued strength of the euro against the U.S. dollar as described below. During fiscal 2003, the euro strengthened against the U.S. dollar. The euro continued to be strong in relation to the U.S. dollar during the first nine months of fiscal 2004. The Repair Group's non-U.S. operation has most of its sales denominated in U.S. dollars while a significant portion of its operating costs are denominated in euros. Therefore, as the euro strengthens, costs denominated in euros are negatively impacted. During the first nine months of fiscal 2003, the Repair Group hedged much of its exposure to the strengthening euro thereby mitigating the negative impact on its operating results in that period. During the first nine months of fiscal 2004, the Company did not hedge all of its exposure to the strengthening euro and, therefore, the impact on the Repair Group's operating results in the first nine months of fiscal 2004 was higher operating costs, including selling, general and administrative expenses, of approximately $3.5 million related to its non-U.S. operations, when compared to the comparable fiscal 2003 period. The Repair Group's backlog as of June 30, 2004, was $5.5 million, compared with $8.9 million as of September 30, 2003. At June 30, 2004, $4.5 million of the total backlog is scheduled for delivery over the next twelve months and $1.0 million was on hold. All orders are subject to modification or cancellation by the customer with limited charges. The Repair Group believes that the backlog may not be indicative of actual sales for any succeeding period. Aerospace Component Manufacturing Group ("ACM Group") Net sales of the ACM Group in the first nine months of fiscal 2004 increased 3.9% to $23.0 million, compared with $22.1 million in the comparable period of fiscal 2003. For purposes of the following discussion, the ACM Group considers aircraft that can accommodate less than 100 passengers to be small aircraft and those that can accommodate 100 or more passengers to be large aircraft. Net sales of airframe 9 components for small aircraft decreased $0.5 million to $10.3 million in the first nine months of fiscal 2004, compared with $10.8 million in the same period in fiscal 2003. Net sales of turbine engine components for small aircraft, which consist primarily of net sales to Rolls-Royce Corporation of turbine engine components for the AE series turbine engines for business and regional jets, as well as military transport and surveillance aircraft, increased $0.8 million to $8.9 million in the first nine months of fiscal 2004, compared with $8.1 million in the comparable period in fiscal 2003. Net sales of airframe components for large aircraft were $1.5 million in the first nine months of both fiscal 2004 and 2003. Net sales of turbine engine components for large aircraft increased to $0.8 million in the first nine months of fiscal 2004, compared with $0.7 million in the same period in fiscal 2003. Other sales, including non-aerospace component sales, were $1.5 million and $1.0 million in the first nine months of fiscal 2004 and 2003, respectively. The increase in other sales is attributable primarily to increases in tooling revenue and order cancellation charges. The ACM Group's airframe and turbine engine component products have both military and commercial applications. Net sales of airframe and turbine engine components that solely have military applications decreased $0.6 million to $10.2 million in the first nine months of fiscal 2004, compared with $10.8 million in the first nine months of fiscal 2003. Selling, general and administrative expenses in the first nine months of fiscal 2004 were $1.4 million, or 6.2% of net sales, compared with $1.7 million, or 7.7% of net sales, in the first nine months of fiscal 2003. Selling, general and administrative expenses in the first nine months of fiscal 2004 benefited from a $0.2 million reduction in the provision for uncollectible accounts receivable and $0.1 million reduction in compensation and employee benefits expenses due to open positions, compared with the comparable period in fiscal 2003. The ACM Group's operating income in the first nine months of fiscal 2004 was $1.7 million, compared with operating income of $0.7 million in the same period in fiscal 2003. Operating results were favorably impacted in the fist nine months of fiscal 2004 compared with the same period in fiscal 2003 by (i) a $0.5 million decrease in material cost as a result of product mix consisting of a greater percentage of products sold containing lower cost materials; (ii) a $0.2 million decrease in labor costs due to improved utilization of labor; (iii) a $0.2 million decrease in manufacturing supplies and repair expenses; and (iv) a $0.2 million decrease in outside services expense. Operating results in the first nine months of fiscal 2004 were negatively impacted by a $0.1 million increase in the LIFO provision and a $0.4 million decrease in inventory levels compared with the same period in fiscal 2003. Operating results in the first nine months of fiscal 2004 were also favorably impacted by reductions in selling, general and administrative expenses as discussed in the previous paragraph. The ACM Group's backlog as of June 30, 2004 was $21.9 million, compared with $21.4 million as of September 30, 2003. At June 30, 2004, $20.1 million of the total backlog was scheduled for delivery over the next twelve months and $1.8 million was scheduled for delivery beyond the next twelve months. All orders are subject to modification or cancellation by the customer with limited charges. The ACM Group believes that the backlog may not be indicative of actual sales for any succeeding period. Metal Finishing Group Net sales of the Metal Finishing Group increased 13.3% to $8.1 million in the first nine months of fiscal 2004, compared with net sales of $7.2 million in the first nine months of fiscal 2003. In the first nine months of fiscal 2004, product net sales, consisting of selective electrochemical finishing equipment and solutions, increased 7.2% to $4.4 million, compared with $4.1 million in the same period in fiscal 2003. In the first nine months of fiscal 2004, customized selective electrochemical finishing contract service net sales increased 19.8% to $3.6 million, compared with $3.0 million in the same period in fiscal 2003. In the first nine months of fiscal 2004 net sales to customers in the oil and gas exploration industry increased $0.6 million; net sales to customers in the aerospace industry increased $0.3 million; net sales to customers in the electronics industry increased $0.2 million; and net sales to customers in the automotive industry increased $0.1 million, compared with the same period in fiscal 2003. These net sales gains were partially offset in the first nine months of fiscal 2004 by a decrease of $0.1 million in net sales to the U.S. military, compared with the same period in fiscal 2003. Selling, general and administrative expenses in the first nine months of fiscal 2004 were $2.5 million, or 30.3% of net sales, compared with $2.3 million, or 31.7% of net sales, in the first nine months of fiscal 2003. The increase in selling, general and administrative expenses is attributable to $0.1 million increase in compensation and employee benefit expenses, consisting primarily of one-time severance benefits, and a $0.1 million increase in legal and professional expenses. Operating income in both the first nine months of fiscal 2004 and 2003 was $0.6 million. Operating income in the first nine months of fiscal 2004 was negatively impacted by higher costs, including labor and employee benefits, associated with the start up of a new customer-dedicated contract service operation at an existing service shop and higher insurance expense; as well as the increases in selling, general and administrative expenses previously discussed. 10 The Metal Finishing Group essentially had no backlog at June 30, 2004. Corporate Unallocated Expenses Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate expenses, were $1.2 million in the first nine months of fiscal 2004, compared with $1.4 million in the same period in fiscal 2003. In the first nine months of fiscal 2004, corporate unallocated expenses were favorably impacted primarily by a $0.1 million decrease in legal and professional expenses and by a $0.1 million decrease in corporate salary and employee benefits expenses. Other/General Interest expense was $0.6 million in the first nine months of fiscal 2004 and 2003. The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company's credit agreements in the first nine months of fiscal years 2004 and 2003.
WEIGHTED AVERAGE WEIGHTED AVERAGE INTEREST RATE OUTSTANDING BALANCE NINE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, -------------------------- ---------------------------- CREDIT AGREEMENT 2004 2003 2004 2003 - ---------------- ------- --------- ------------ ------------ Industrial development variable rate demand revenue bond 1.2% 1.4% $2.9 million $3.2 million Term note 9.5% 8.8% $5.2 million $6.4 million Revolving credit agreement 4.5% 4.6% $2.5 million $2.3 million
Currency exchange loss was $0.1 million in the first nine months of fiscal 2004, compared with $0.3 million in the comparable period in fiscal 2003. This loss is the result of the impact of currency exchange rate fluctuations, resulting primarily from the impact of continued strength of the euro in relation to the U.S. dollar, on the Company's monetary assets and liabilities that are not denominated in U.S. dollars. In the first nine months of fiscal year 2004 and 2003, the income tax benefit related to the Company's U.S. and non-U.S. subsidiary losses was offset by a valuation allowance based upon an assessment of the Company's ability to realize such benefits. In assessing the Company's ability to realize its deferred tax assets, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Future reversal of the valuation allowance will be achieved either when the tax benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future taxable income. THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003 Net sales in the third quarter of fiscal 2004 increased 2.0% to $23.0 million, compared with $22.6 million in the comparable period in fiscal 2003. Net loss in the third quarter of fiscal 2004 was $0.3 million, compared with a net income of $0.2 million in the comparable period in fiscal 2003. Turbine Component Services and Repair Group ("Repair Group") Net sales in the third quarter of fiscal 2004 increased 3.2% to $11.5 million, compared with $11.1 million in the comparable fiscal 2003 period. Component manufacturing and repair net sales increased $0.9 million to $9.3 million in the third quarter of fiscal 2004, compared with $8.4 million in the comparable fiscal 2003 period. Demand for component repairs for industrial turbine engines and for small and large aerospace turbine engines increased, while the demand for precision component machining decreased in the third quarter of fiscal 2004, compared with the comparable fiscal 2003 period. This reflects an increase in component repairs for newer model large aerospace turbine engines offset by reduced demand for component repairs for older model large aerospace turbine engines. Net sales associated with the demand for replacement parts, which often complement component repair services provided to customers, decreased $0.5 million in the third quarter of fiscal 2004, compared with the comparable fiscal 2003 period. During the third quarter of fiscal 2004, the Repair Group's selling, general and administrative expenses were $1.1 million, or 10.1% of net sales, compared with $1.1 million, or 9.9% of net sales, in the comparable fiscal 2003 period. Included in the 11 $1.1 million of selling, general and administrative expenses in the third quarter of fiscal 2003 were $0.2 million of severance charges related to the further consolidation of the Repair Group's operations during fiscal 2003. The remaining selling, general and administrative expenses in the third quarter of fiscal 2003 were $0.9 million, or 8.0% of net sales. The Repair Group's operating loss in the third quarter of fiscal 2004 increased $0.5 million to $0.9 million from a $0.4 million loss in the comparable fiscal 2003 period. Included in the operating loss in the third quarter of fiscal 2003 were $0.2 million of severance charges. The increased operating loss in the third quarter of fiscal 2004 was primarily due to the negative impact of the continued strength of the euro against the U.S. dollar as further discussed below. Operating results in the third quarter of fiscal 2004 did, however, benefit from the positive impact on margins of increased sales volumes for component manufacturing and repair services, partially offset by reduced margins on sales of replacement parts. During fiscal 2003, the euro strengthened against the U.S. dollar. The euro continued to be strong in relation to the U.S. dollar during the first nine months of fiscal 2004. The Repair Group's non-U.S. operation has most of its sales denominated in U.S. dollars while a significant portion of its operating costs are denominated in euros. Therefore, as the euro strengthens, costs denominated in euros are negatively impacted. During the third quarter of fiscal 2003, the Repair Group hedged much of its exposure to the strengthening euro thereby mitigating the negative impact on its operating results in that period. During the third quarter of fiscal 2004, the Company hedged most of its exposure to the strengthening euro, but did so at rates much less attractive than in the same fiscal 2003 period and, therefore, the impact on the Repair Group's operating results in the third quarter of fiscal 2004 was higher operating costs, including selling, general and administrative expenses, of approximately $1.3 million related to its non-U.S. operations, when compared to the comparable fiscal 2003 period. Aerospace Component Manufacturing Group ("ACM Group") In the third quarter of fiscal 2004, ACM Group net sales decreased 3.1% to $8.7 million, compared with $9.0 million in the third quarter of fiscal 2003. Net sales of airframe components for small aircraft decreased $1.4 million to $3.6 million in the third quarter of fiscal 2004, compared with $4.9 million in the third quarter of fiscal 2003. Net sales of turbine engine components for small aircraft, which consist primarily of net sales to Rolls-Royce Corporation of turbine engine components for the AE series turbine engines for business and regional jets, as well as military transport and surveillance aircraft, increased $0.7 million to $3.5 million in the third quarter of fiscal 2004, compared with $2.8 million in the third quarter of fiscal 2003. Airframe component net sales for large aircraft were $0.5 million in the third quarter of fiscal 2004 and 2003. Net sales of turbine engine components for large aircraft were $0.3 million in the third quarters of both fiscal 2004 and 2003. Other sales, including non-aerospace component sales, were $0.8 million and $0.4 million in the third quarter of fiscal 2004 and 2003, respectively. This increase in other sales is attributable primarily to increases in non-aerospace related product net sales, tooling revenue and order cancellation charges. The ACM Group's airframe and turbine engine component products have both military and commercial applications. Net sales of airframe and turbine engine components that solely have military applications decreased $1.8 million to $3.4 million in the third quarter of fiscal 2004, compared with $5.2 million in the third quarter of fiscal 2003. Selling, general and administrative expenses in the third quarter of fiscal 2004 were $0.6 million, or 6.6% of net sales, compared with $0.6 million, or 6.9% of net sales, in the third quarter of fiscal 2003. The ACM Group's operating income in the third quarter of fiscal 2004 was $0.7 million, compared with operating income of $1.1 million in the same period in fiscal 2003. Operating results were negatively impacted in the third quarter of fiscal 2004 compared with the third quarter of fiscal 2003 by (i) a $0.1 million increase in outside processing expense; (ii) a $0.1 million increase in the LIFO provision; (iii) a $0.1 million increase in physical inventory adjustments; and (iv) a $0.3 million decrease in inventory levels. The effect of the preceding was partially offset in the third quarter of fiscal 2004, compared with the third quarter of fiscal 2003, by a $0.1 million decrease in energy costs and a $0.1 million decrease in manufacturing supplies and repair expenses. Metal Finishing Group Net sales of the Metal Finishing Group increased 14.4% to $2.8 million in the third quarter of fiscal 2004, compared with $2.5 million in the third quarter of fiscal 2003. Product net sales, consisting of selective electrochemical finishing equipment and solutions, increased 4.6% to $1.4 million in the third quarter of fiscal 2004, compared with $1.3 million in the third quarter of fiscal 2003. In the third quarter of fiscal 2004 customized selective electrochemical finishing contract service net sales increased 24.0% to $1.3 million, compared with $1.1 million in the third quarter of fiscal 2003. In the third quarter of 12 fiscal 2004, net sales to customers in the oil and gas exploration industry increased $0.1 million; net sales to customers in the aerospace industry increased $0.2 million; and net sales to customers in the automotive industry increased $0.1 million, compared with the third quarter of fiscal 2003. These net sales increases were partially offset by a $0.1 million decrease in net sales to the U.S. military in the third quarter of fiscal 2004, compared with the third quarter of fiscal 2003. Selling, general and administrative expenses in the third quarter of fiscal 2004 were $0.9 million, compared with $0.7 million in the third quarter of fiscal 2003. The increase in selling, general and administrative expenses is attributable to $0.1 million increase in compensation and employee benefits expenses, consisting primarily of one-time severance benefits. Operating income in the third quarter of fiscal 2004 was $0.2 million, compared with $0.3 million in the third quarter of fiscal 2003. Operating income in the third quarter of fiscal 2004 was negatively impacted by the increase in selling, general and administrative expenses previously discussed and higher costs, including labor and employee benefits, associated with the start up of a new customer-dedicated contract service operation at an existing service shop. Corporate Unallocated Expenses Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate expenses, were $0.3 million in the third quarter of fiscal 2004, compared with $0.6 million in the third quarter of fiscal 2003. In the third quarter of fiscal 2004, corporate unallocated expenses were favorably impacted primarily by a $0.3 million decrease in legal and professional expenses. Other/General Interest expense was $0.2 million in the third quarter of fiscal 2004 and 2003. The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company's credit agreements in the third quarter of fiscal years 2004 and 2003.
WEIGHTED AVERAGE WEIGHTED AVERAGE INTEREST RATE OUTSTANDING BALANCE THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30, --------------------------- ---------------------------- CREDIT AGREEMENT 2004 2003 2004 2003 - ---------------- ------- ---------- ------------ ------------ Industrial development variable rate demand revenue bond 1.2% 1.3% $2.8 million $3.1 million Term note 9.5% 9.5% $4.9 million $6.1 million Revolving credit agreement 4.5% 4.7% $2.7 million $2.7 million
Currency exchange gain was $0.1 million in the third quarter of fiscal 2004, compared with a loss of $0.1 million in the comparable period in fiscal 2003. The third quarter fiscal 2004 gain is the result of the impact of currency exchange rate fluctuations, resulting primarily from the impact of a nominal strengthening of the U.S. dollar in relation to the euro, on the Company's monetary assets and liabilities that are not denominated in U.S. dollars. In the third quarters of fiscal year 2004 and 2003, the income tax benefit related to the Company's U.S. and non-U.S. subsidiary losses was offset by a valuation allowance based upon an assessment of the Company's ability to realize such benefits. In assessing the Company's ability to realize its deferred tax assets, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Future reversal of the valuation allowance will be achieved either when the tax benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future taxable income. B. Liquidity and Capital Resources Cash and cash equivalents increased to $5.9 million at June 30, 2004 from $4.5 million at September 30, 2003. At present, essentially all of the Company's cash and cash equivalents are in the possession of its non-U.S. subsidiaries and relate to undistributed earnings. Distributions from the Company's non-U.S. subsidiaries to the Company may be subject to statutory restrictions, adverse tax consequences or other limitations. 13 The Company's operating activities generated $2.3 million of cash in the first nine months of fiscal 2004. A decrease in inventories due to increased sales activity as well as the Company's efforts to reduce inventory levels generated $1.2 million. A $0.5 million increase in accounts payable, due to timing of vendor payments, and a $0.7 increase in accrued liabilities, due to the timing of increases in compensation and royalty accruals, generated $1.2 million. Capital expenditures were $1.9 million in the first nine months of fiscal 2004. Capital expenditures in the first nine months of fiscal 2004 consist of $0.7 million by the ACM Group, $0.2 million by the Metal Finishing Group and $1.0 million by the Repair Group. Capital expenditures are expected to (i) provide increased range of manufacturing capabilities; (ii) automate certain machining operations; and (iii) enhance the Company's service and repair capabilities. At June 30, 2004, the Company had outstanding commitments for capital expenditures totaling $0.9 million. The Company anticipates that total fiscal 2004 capital expenditures will approximate $3.3 million. During the first nine months of fiscal 2004, the Company received a $0.7 million reimbursement for certain capital expenditures that were previously made in anticipation of a proposed joint venture that did not materialize. In July 2004, the Company entered into an agreement to sell a building and land that is part of its Repair Group's Irish operations, with a net book value of $1.8 million, for 6.5 million euros (approximately $7.9 million at June 30, 2004 exchange rate). The sale of the building is expected to close in the first quarter of fiscal 2005. At June 30, 2004, the Company has a 15-year industrial development variable rate revenue bond outstanding, which was issued with an original face amount of $4.1 million and was used to expand the Repair Group's Tampa, Florida facility. The industrial development variable rate revenue bond requires annual principal payments ranging from $0.2 million in fiscal 2004 to $0.4 million in fiscal 2013. The interest rate is reset weekly based on prevailing tax-exempt money market rates. The interest rate as of June 30, 2004 was 1.20%. The outstanding balance of the industrial development variable rate revenue bond at June 30, 2004 was $2.7 million. The bank's commitment fee on a standby letter of credit that collateralizes the industrial development variable rate revenue bond is 2.75% of the outstanding balance. Operations at the Repair Group's Tampa, Florida facility ceased at the end of fiscal 2003. At June 30, 2004, the facility is held for sale. The sale of the facility may result in one of the following occurring: (i) repayment of the industrial development variable rate revenue bond; (ii) continued servicing of the industrial development variable rate revenue bond by the Company; or (iii) assumption of the industrial development variable rate revenue bond by the buyer of the facility. The ultimate use of the facility determines, in part, which options may be available. At June 30, 2004, the Company has a term note that is repayable in quarterly installments of $0.3 million through August 2005, with the remaining balance of $3.3 million due September 30, 2005. The term note has a variable interest rate, which, after giving effect to an interest rate swap agreement, becomes an effective fixed rate term note, subject to adjustment based upon the level of certain financial ratios. The effective fixed interest rate at June 30, 2004 was 9.49%. The outstanding balance of the term note as of June 30, 2004 was $4.8 million. At June 30, 2004, the Company has a $6.0 million revolving credit agreement, subject to sufficiency of collateral, that expires on September 30, 2005 and bears interest at the bank's base rate plus 0.50%. The interest rate was 4.75% at June 30, 2004. A 0.375% commitment fee is incurred on the unused balance of the revolving credit agreement. At June 30, 2004, the outstanding balance under the revolving credit agreement was $2.9 million and the Company had $3.1 million available under its revolving credit agreement. All of the Company's long-term debt is secured by substantially all of the Company's assets located in the U.S., a guarantee by its U.S. subsidiaries and a pledge of 65% of the Company's ownership interest in its non-U.S. subsidiaries. Under its credit agreements, the Company is subject to certain customary covenants. These include, without limitations, covenants (as defined) that require maintenance of a minimum tangible net worth level and minimum adjusted fixed charge coverage to EBITDA ratio. The Company was in compliance with all applicable covenants at June 30, 2004. In May 2004, the Company entered into an agreement with its bank to amend certain provisions of its credit agreements. The amendment extended the maturity date of the Company's $6.0 million revolving credit agreement to September 30, 2005. The amendment waived the Company's minimum tangible net worth level covenant for the period ended March 31, 2004 and modified the minimum tangible net worth level covenant. 14 Effective June 30, 2004, the Company entered into an agreement with its lending bank to amend certain provisions of its credit agreements. The amendment extends the maturity date of the Company's term note to September 30, 2005. The amendment also extends the maturity date of the standby letter of credit that collateralizes the industrial development variable rate revenue bond to September 30, 2005. The Company believes that cash flow from its operations together with existing cash reserves and funds available under its revolving credit agreement will be sufficient to meet its working capital requirements through the end of fiscal 2004. However, no assurances can be given as to the sufficiency of the Company's working capital to support the Company's operations. If the existing cash reserves, cash flow from operations and funds available under the revolving credit agreement are insufficient; if working capital requirements are greater than currently estimated; and/or if the Company is unable to satisfy the covenants set forth in its credit agreements, the Company may be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, restructuring indebtedness, selling assets or operations, or issuing additional shares of capital stock in the Company. There can be no assurances that any of these actions could be accomplished, or if so, on terms favorable to the Company, or that they would enable the Company to continue to satisfy its working capital requirements. C. Recently Issued Accounting Standards In December 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits". This standard revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans as required by SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This standard retains the disclosure requirements contained in SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which it replaces. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The provisions of SFAS No. 132 remain in effect until the provisions of SFAS No. 132 (revised 2003) are adopted. SFAS No. 132 (revised 2003) is generally effective for fiscal years ending after December 15, 2003. The interim-period disclosures required by SFAS No. 132 (revised 2003) are effective for interim periods beginning after December 15, 2003. The adoption of this standard during the second quarter of fiscal year 2004 did not have an impact on the Company's financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the ordinary course of business, the Company is subject to foreign currency and interest risk. The risks primarily relate to the sale of the Company's products and services in transactions denominated in non-U.S. dollar currencies (primarily the euro and British pound); the payment in local currency of wages and other costs related to the Company's non-U.S. operations (primarily the euro); and changes in interest rates on the Company's long-term debt obligations. The Company does not hold or issue financial instruments for trading purposes. The Company believes that inflation has not materially affected its results of operations during the first nine months of fiscal 2004, and does not expect inflation to be a significant factor in the balance of fiscal 2004. A. Foreign Currency Risk The U.S. dollar is the functional currency for all of the Company's U.S. operations and its Irish subsidiary. For the Company's other non-U.S. subsidiaries, the functional currency is the local currency. Assets and liabilities are translated into U.S. dollars at the rate of exchange at the end of the period and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in earnings. During the first nine months of fiscal 2004, the euro continued to be strong in relation to the U.S. dollar. The Repair Group's non-U.S. operation has a significant portion of its operating costs denominated in euros, and therefore, as the euro strengthens, such costs are negatively impacted. Historically, the Company has been able to mitigate the impact of foreign currency risk by means of hedging such risk through the use of foreign currency exchange contracts. However, such risk is mitigated only for the periods for which the Company has foreign currency exchange contracts in effect, and only to the 15 extent of the U.S. dollar amounts of such contracts. During the first nine months of fiscal 2004, the Company did not hedge all of its exposure to the euro. At June 30, 2004, the Company had forward exchange contracts outstanding for durations of up to three months to purchase euros aggregating U.S. $4.7 million at euro to U.S. dollar exchange rates ranging from 1.2196 to 1.2350. A ten percent appreciation or depreciation of the value of the U.S. dollar relative to the currencies, in which the forward exchange contracts outstanding at June 30, 2004 are denominated, would result in a $0.5 million decline or increase, respectively, in the value of the forward exchange contracts. Subsequent to June 30, 2004, the Company entered into foreign currency exchange contracts expiring through September 30, 2005 to purchase euros aggregating U.S. $19.2 million at euro to U.S. dollar exchange rates ranging from 1.1985 to 1.2010. Factors that could impact the effectiveness of the Company's hedging efforts include accuracy of expenditure estimates, volatility of currency markets and the cost and availability of hedging instruments. The Company will continue to evaluate its foreign currency risk, if any, and the effectiveness of using similar hedges in the future to mitigate such risk. At June 30, 2004, the Company's assets and liabilities denominated in the British pound and the euro were as follows (amounts in thousands):
BRITISH POUND EURO ------------- ----- Cash and cash equivalents 426 301 Accounts receivable 671 502 Accounts payable and accrued liabilities 121 1,945
B. Interest Rate Risk The Company's primary interest rate risk exposure results from the variable interest rate mechanisms associated with the Company's long-term debt consisting of a term note payable to the Company's bank, a revolving credit agreement and industrial development variable rate demand revenue bonds. These interest rate exposures are managed in part by an interest rate swap agreement to fix the interest rate of the term note payable to the Company's bank. If interest rates were to increase 100 basis points (1%) from June 30, 2004 rates, and assuming no changes in the amounts outstanding under the revolving credit agreement and industrial development variable rate demand revenue bond, the additional annual interest expense to the Company would be approximately $0.1 million. ITEM 4. CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chairman and Chief Executive Officer of the Company and Chief Financial Officer of the Company, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based upon that evaluation, the Chairman and Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There has been no significant change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or that is reasonably likely to materially affect our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS No change. ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS No change. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed with this report or are incorporated herby reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934 (Asterisk denotes exhibits filed with this report.).
Exhibit No. Description ----------- ----------- 3.1 Third Amended Articles of Incorporation of SIFCO Industries, Inc., filed as Exhibit 3(a) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 3.2 SIFCO Industries, Inc. Amended and Restated Code of Regulations dated January 29, 2002, filed as Exhibit 3(b) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.1 Amended and Restated Reimbursement Agreement dated April 30, 2002 between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4(a) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.2 Amended and Restated Credit Agreement between SIFCO Industries, Inc. and National City Bank dated April 30, 2002, filed as Exhibit 4(b) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.3 Promissory Note (Term Note) dated April 14, 1998 between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4(c) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.4 Loan Agreement Between Hillsborough County Industrial Development Authority and SIFCO Industries, Inc., dated as of May 1, 1998, filed as Exhibit 4(d) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 4.5 Consolidated Amendment No. 1 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated November 26, 2002 between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.5 of the Company's Form 10-K dated September 30, 2002, and incorporated herein by reference 4.6 Consolidated Amendment No. 2 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated February 13, 2003 between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.6 of the Company's Form 10-Q dated December 31, 2002, and incorporated herein by reference 4.7 Consolidated Amendment No. 3 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated May 13, 2003 between SIFCO Industries Inc. and National City Bank, filed as Exhibit 4.7 of the Company's Form 10-Q dated March 31, 2003, and incorporated herein by reference 4.8 Consolidated Amendment No. 4 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated July 28, 2003 between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.8 of the Company's Form 10-Q dated June 30, 2003 and incorporated herein by reference
17 4.9 Consolidated Amendment No. 5 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated November 26, 2003 between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.9 of the Company's 10-K dated September 30, 2003 and incorporated herein by reference 4.10 Amendment No. 6 to Amended and Restated Credit Agreement dated March 31, 2004 between SIFCO Industries, Inc. and National City Bank 4.11 Consolidated Amendment No. 7 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note dated May 14, 2004 between SIFCO Industries, Inc. and National City Bank *4.12 Consolidated Amendment No. 8 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement and Promissory Note effective June 30, 2004 between SIFCO Industries, Inc. and National City Bank 10.1 1989 Key Employee Stock Option Plan, filed as Exhibit B of the Company's Form S-8 dated January 9, 1990 and incorporated herein by reference 10.2 Deferred Compensation Program for Directors and Executive Officers (as amended and restated April 26, 1984), filed as Exhibit 10(b) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference *10.3 SIFCO Industries, Inc. 1998 Long-term Incentive Plan 10.4 SIFCO Industries, Inc. 1995 Stock Option Plan, filed as Exhibit 10(d) of the Company's Form 10-Q dated March 31, 2002, and incorporated herein by reference 10.5 Change in Control Severance Agreement between the Company and Frank Cappello, dated September 28, 2000, filed as Exhibit 10 (g) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.6 Change in Control Severance Agreement between the Company and Hudson Smith, dated September 28, 2000, filed as Exhibit 10 (h) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.7 Change in Control Severance Agreement between the Company and Remigijus Belzinskas, dated September 28, 2000, filed as Exhibit 10 (i) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.8 Change in Control Agreement between the Company and Frank Cappello, dated November 9, 2000, filed as Exhibit 10 (j) of the Company's Form 10-Q dated December 31, 2000 and incorporated herein by reference 10.9 Change in Control Severance Agreement between the Company and Timothy V. Crean, dated July 30, 2002, filed as Exhibit 10.9 of the Company's Form 10-K dated September 30, 2002 and incorporated herein by reference 10.10 Change in Control Severance Agreement between the Company and Jeffrey P. Gotschall, dated July 30, 2002, filed as Exhibit 10.10 of the Company's Form 10-K dated September 30, 2002 and incorporated herein by reference 10.11 Form of Restricted Stock Agreement, filed as Exhibit 10.11 of the Company's form 10-K dated September 30, 2002, and incorporated herein by reference 14.1 Code of Ethics, filed as Exhibit 14.1 of the Company's Form 10-K dated September 30, 2003 and incorporated herein by reference 16.1 Letter from Arthur Andersen LLP to the Securities and Exchange Commission dated June 27, 2002, filed as Exhibit 16 of the Company's Form 8-K dated June 27, 2003 and incorporated by reference
18 *31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a) *31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a) *32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 *32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2004. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. SIFCO Industries, Inc. (Registrant) Date: August 9, 2004 /s/ Jeffrey P. Gotschall ------------------------ Jeffrey P. Gotschall Chairman of the Board and Chief Executive Officer Date: August 9, 2004 /s/ Frank A. Cappello --------------------- Frank A. Cappello Vice President-Finance and Chief Financial Officer (Principal Financial Officer) 20 EX-4.12 2 l08678aexv4w12.txt EXHIBIT 4.12 EXHIBIT 4.12 CONSOLIDATED AMENDMENT NO. 8 TO AMENDED AND RESTATED CREDIT AGREEMENT, AMENDED AND RESTATED REIMBURSEMENT AGREEMENT AND PROMISSORY NOTE This Consolidated Amendment No. 8 to Amended and Restated Credit Agreement, Amended and Restated Reimbursement Agreement, and Promissory Note (this "AMENDMENT"), dated as of June 30, 2004, 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 from time to time (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 from time to time (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, as amended from time to time (as amended, 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, 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; 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 5A of the Credit Agreement is hereby amended by adding the following new Event of Default as subsection 5A.07 thereto: 5A.07 If Borrower shall not receive an amount of at least $4,000,000 in cash from its subsidiary, SIFCO Irish Holdings, Ltd., on or before November 1, 2004 and if such amount is not either used to pay down the principal of the Term Note or deposited into an account with Bank, subject to a security agreement in form and substance satisfactory to Bank, to secure payment of the Term Note. SECTION II - AMENDMENTS TO REIMBURSEMENT AGREEMENT A. The Expiration Date of the Letter of Credit is hereby extended from May 16, 2005 to September 30, 2005. SECTION III - AMENDMENTS TO TERM NOTE A. The maturity date of the Term Note is hereby extended from May 1, 2005 to September 30, 2005. Borrower shall continue to make principal payments in the amount of Three Hundred Thousand and 00/100ths Dollars ($300,000.00) on the first day of each February, May, August and November hereafter, with the final installment due on September 30, 2005 to be in the amount of the remaining outstanding principal of the Term Note. 1 SECTION IV - 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 (B) as of the date hereof no "Default" has occurred that is continuing under the Loan Documents. SECTION V - 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 VI - 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 VII - 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 /s/ Frank A. Cappello /s/ Denise Jakubovic - ------------------------------------- ------------------------------------ Frank A. Cappelo Denise Jakubovic Vice President-Finance and Corporate Banking Officer Chief Financial Officer Corporate Banking 2 EX-10.3 3 l08678aexv10w3.txt EXHIBIT 10.3 EXHIBIT 10.3 SIFCO INDUSTRIES, INC. 1998 LONG-TERM INCENTIVE PLAN 1. PURPOSES The purposes of the SIFCO Industries, Inc. 1998 Long-Term Incentive Plan (the "Plan") are to promote the long-term growth and performance of SIFCO Industries, Inc. and its subsidiaries by providing an opportunity for employees of SIFCO Industries, Inc. and its subsidiaries (collectively, the "Company") to participate through share ownership in the long-term growth and success of the Company, enhancing the Company's ability to attract and retain persons with desired abilities, providing additional incentives for such persons and furthering the identity of interests of employees and shareholders of the Company. 2. DEFINITIONS (a) "Award" means any form of stock option, stock appreciation right, restricted shares, share or share-based award or performance share granted to a Participant under the Plan. (b) "Award Agreement" means a written agreement between the Company and a Participant setting forth the terms, conditions and limitations applicable to an Award. (c) "Board" means the Board of Directors of SIFCO Industries, Inc. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" means the Compensation and Stock Option Committee of the Board, or such other committee of the Board that is designated by the Board to administer the Plan, provided that the Committee shall be constituted so as to satisfy any applicable legal requirements, including the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 162(m) of the Code or any respective successor rule. (f) "Fair Market Value" means the closing price of Shares as reported on the American Stock Exchange for the date in question, provided that if no sales of Shares were made on the American Stock Exchange on that date, the closing price of Shares as reported on the American Stock Exchange for the preceding day on which sales of Shares were made on the American Stock Exchange shall be used. (g) "Participant" means any employee of the Company or its direct or indirect subsidiaries or any other person whose selection the Committee determines to be in the best interests of the Company, to whom an Award is made under the Plan. (h) "Shares" means the common stock, par value $1.00 per share, of the Company. 3. SHARES AVAILABLE FOR AWARDS Subject to adjustment as provided in Section 11 below, the aggregate number of Shares which may be awarded under the Plan in each fiscal year of the Company shall be one and one half percent (1.5%) of the total outstanding Shares as of September 30, 1998 up to a maximum of five percent (5%) of such total outstanding Shares. Shares issuable under the Plan may consist of authorized and unissued Shares or treasury Shares. Any Shares issued by the Company through the assumption or substitution of outstanding grants previously made by an acquired corporation or entity shall not reduce the Shares available for Awards under the Plan. If any Shares subject to any Award granted under the Plan are forfeited or if such Award otherwise terminates without the issuance of such Shares or payment of other consideration in lieu of such Shares, the Shares subject to such Award, to the extent of any such forfeiture or termination, shall again be available for grant under the Plan as if such Shares had not been subject to an Award. 1 4. ADMINISTRATION The Plan shall be administered by the Committee, which shall have full power and authority to interpret the Plan, to grant waivers of Plan restrictions and to adopt such rules, regulations and policies for carrying out the Plan as it may deem necessary or proper in order to further the purposes of the Plan. In particular, the committee shall have the authority to (i) select Participants to receive Awards, (ii) determine the number and type of Awards to be granted, (iii) determine the terms and conditions, not inconsistent with the terms hereof, of any Award grants, (iv) interpret the terms and provisions of the Plan and any Award grants, (v) prescribe the form of any agreement or instrument executed in connection with any Award, and (vi) establish, amend and rescind such rules, regulations and policies for the administration of the Plan as it may deem advisable from time to time. 5. AWARDS The Committee shall determine the type(s) of Award(s) to be made to each Participant and shall set forth in the related Award Agreement the terms, conditions and limitations applicable to each Award. Awards may include but are not limited to those listed in this Section 5. Awards may be made singly, in combination, in tandem or in exchange for a previously granted Award, and also may be made in combination or in tandem with, in replacement of, or as alternatives to, grants or rights under any other employee plan of the Company, including the plan of any acquired entity. (a) Stock Options. Awards may be made in the form of stock options, which may be incentive stock options within the meaning of Section 422 of the Code or non-statutory stock options not intended to qualify under Section 422 of the Code. Incentive stock options may be granted only to employees. The aggregate Fair Market Value (determined at the time the option is granted) of Shares as to which incentive stock options are exercisable for the first time by a Participant during any calendar year (under the Plan and any other plan of the Company) shall not exceed $100,000 (or such other limit as may be required by the Code from time to time). The exercise price of stock options granted under the Plan shall be not less than 100% of Fair Market Value on the date of the grant. A stock option granted under the Plan shall be exercisable in whole or in such installments and at such times and upon such terms as may be determined by the Committee, provided that no stock option shall be exercisable more than ten years after the date of grant. A participant may pay the exercise price of a stock option in cash, Shares or a combination of cash and Shares. The Committee shall establish appropriate procedures for accepting Shares in payment of the exercise price of a stock option and may impose such conditions as it deems appropriate on such use of Shares. (b) Stock Appreciation Rights. Awards may be granted in the form of stock appreciation rights ("SARs"). SARs shall entitle the recipient to receive a payment, in cash or Shares, equal to the appreciation in market value of a stated number of Shares from the price stated in the Award Agreement to the Fair Market Value on the date of exercise or surrender. SARs may be granted either separately or in conjunction with other Awards granted under the Plan. Any SAR related to a non-statutory stock option may be granted at the same time such option is granted or any time thereafter before exercise or expiration of such option. Any SAR related to an incentive stock option must be granted at the same time such option is granted. Any SAR related to an option shall be exercisable only to the extent the related option is exercisable. In the case of any SAR related to any option, the SAR or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related option. Similarly, upon exercise of an SAR as to some or all of the Shares covered by a related option, the related option shall be canceled automatically to the extent of the SARs exercised, and such Shares shall not thereafter be eligible for grant. The Committee may impose such conditions or restrictions upon the exercise of any SAR as it shall deem appropriate. (c) Restricted Shares. Awards may be granted in the form of restricted Shares in such numbers and at such times as the Committee shall determine. Awards to restricted Shares shall be subject to such terms, conditions or restrictions as the Committee deems appropriate including, but not limited to restrictions on transferability, requirements of continued employment, individual performance or financial performance of the Company. The period of vesting and forfeiture restrictions shall be established by the Committee at the time of grant, except that no restriction period shall be less than 12 months. During the period in which any restricted Shares are subject to forfeiture restrictions, the Committee may, in its discretion, grant to the Participant to whom such restricted Shares have been awarded, all or any of the rights of a shareholder with respect to such restricted Shares, including the right to vote such Shares and to receive dividends with respect to such Shares. (d) Performance Shares. Awards may be made in the form of Shares that are earned only after the attainment of predetermined performance targets as established by the Committee at the time an Award is made ("Performance Shares"). A performance target shall be based upon one or any combination of the following: (i) 2 revenues of the Company; (ii) operating income of the Company; (iii) net income of the Company; (iv) earnings per Share; (v) the Company's return on equity; (i) cash flow of the Company; (vii) Company shareholder total return; (viii) return on assets; (ix) return on investment; (x) asset turnover; (xi) liquidity; (xii) capitalization; (xiii) stock price; (xiv) expenses; (xv) operating profit and margin;(xvi) retained earnings; (xvii) market share; (xviii) sales to targeted customers; (xix) customer satisfaction; (xx) quality measures; (xxi) productivity; (xxii) safety measures; or (xxiii) educational and technical skills of employees. Performance targets may also be based on the attainment of levels of performance of the Company and/or any of its affiliates or divisions under one or more of the measures described above relative to the performance of other businesses. The Committee shall be permitted to make adjustments when determining the attainment of a performance target to reflect extraordinary or nonrecurring items or events, or unusual nonrecurring gains or losses identified in the Company's financial statements, as long as any such adjustments are made in a manner consistent with Section 162(m) of the Code to the extent applicable. Awards of Performance Shares made to Participants subject to Section 162(m) of the Code are intended to qualify under Section 162(m) and provisions of such Awards shall be interpreted in a manner consistent with that intent to the extent appropriate. The foregoing provisions of this Section 5(d) also shall be applicable to Awards of restricted Shares made under Section 5(c) to the extent such Awards of restricted Shares are subject to the financial performance of the Company. At the end of the applicable performance period, Performance Shares shall be converted into Shares (or cash or a combination of Shares and cash, as set forth in the Award Agreement) and distributed to Participants based upon the applicable performance entitlement. Award payments made in cash rather than the issuance of Shares shall not, by reason of such payment in cash, result in additional Shares being available under the Plan. (e) Stock Awards. Awards may be made in Shares or on a basis valued in whole or in part by reference to, or otherwise based upon, Shares. Share awards shall be subject to conditions established by the Committee and set forth in the Award Agreement. 6. PAYMENT OF AWARDS; DEFERRALS Payment of Awards may be made in the form of Shares, cash or a combination of Shares and cash and may include such restrictions as the Committee shall determine, including restrictions on transfer and forfeiture provisions. With Committee approval, payments may be deferred, either in the form of installments or a future lump sum payment. The Committee may permit Participants to elect to defer payments of some or all types of Awards in accordance with procedures established by the Committee to assure that such deferrals comply with applicable requirements of the Code including the capability to make further deferrals for payment after retirement. The Committee may also establish rules and procedures for the crediting of interest on deferred cash payments and dividend equivalents for deferred payments denominated in Shares. 7. TAX WITHHOLDING The Company shall have the authority to withhold, or to require a Participant to remit to the Company, prior to issuance or delivery of any Shares or cash relating to an Award made under the Plan, an amount sufficient to satisfy federal, state and local tax withholding requirements associated with any Award. In addition, the Company may, in its sole discretion, permit a Participant to satisfy any tax withholding requirements, in whole or in part, by (i) delivering to the Company Shares held by such Participant having a Fair Market Value equal to the amount of the tax or (ii) directing the Company to retain Shares having such Fair Market Value and otherwise issuable to the Participant under the plan. 8. TERMINATION OF EMPLOYMENT If the employment of a Participant terminates for any reason, all unexercised, deferred and unpaid Awards shall be exercisable or paid in accordance with the applicable Award Agreement, which may provide that the Committee may authorize, as it deems appropriate, the acceleration and/or continuation of all or any part of Awards granted prior to such termination. 9. NONASSIGNABILITY Except as may be otherwise provided in the relevant Award Agreement, no Award or any benefit under the Plan shall be assignable or transferable, or payable to or exercisable by, anyone other than the Participant to whom it was granted. 10. CHANGE IN CONTROL (a) In the event of a Change in Control (as defined below) of the Company, and except as the Board may expressly provide otherwise, (i) all stock options or SARs then outstanding shall become fully exercisable as of the date of the Change in Control, whether or not then otherwise exercisable, (ii) all restrictions and conditions of all 3 Awards of restricted Shares then outstanding shall be deemed satisfied as of the date of the Change in Control, and (iii) all Awards of Performance Shares shall be deemed to have been fully earned as of the date of the Change in Control. (b) A "Change in Control" of the Company shall have occurred when any of the following events shall occur: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and immediately after such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock (as that term is hereafter defined) of the Company immediately prior to such transaction; (ii) The Company sells all or substantially all of its assets to any other corporation or other legal person, less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale; (iii) There is a report filed or required to be filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner", is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 20% or more of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item herein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (v) If during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors of the Company cease for any reason to constitute at least a majority thereof, provided, however, that for purpose of this clause (v), each Director who is first elected, or first nominated for election by the Company's shareholders by a vote of at least two-thirds of the Directors of the Company (or a committee thereof) then still in office who were Directors of the Company at the beginning of any such period will be deemed to have been a Director of the Company at the beginning of such period. Notwithstanding the foregoing provisions of Section 10 (b)(iii) or (iv) hereof, unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities or interest, or (iii) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item herein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. 11. ADJUSTMENTS UPON CHANGES OF CAPITALIZATION In the event of any change in the outstanding Shares by reason of a reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or any change in the corporate structure or Shares of the Company, the number of Shares as to which Awards may be granted under the Plan, including limitations relating to incentive stock option Awards and maximum Awards to individual Participants, the number of Shares issuable pursuant to then outstanding Awards, and/or, if appropriate, the prices of Shares related to outstanding Awards, shall be appropriately and proportionately adjusted. 4 12. RIGHTS OF EMPLOYEES Nothing in the Plan shall interfere with or limit in any way the right of the Company or any subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continued employment with the Company or any subsidiary. 13. AMENDMENTS, SUSPENSION OR TERMINATION OF PLAN AND AWARDS The Board may amend, suspend or terminate the Plan at any time, provided that no such action shall be taken that would impair the rights under an outstanding Award without the Participant's consent. The Board may amend the terms of any outstanding Award, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without the Participant's consent and no such amendment shall have the effect, with respect to any employee subject to Section 162(m) of the Code, of increasing the amount of any Award from the amount that would otherwise be payable pursuant to the formula and/or goals previously established for such Participant. 14. GOVERNING LAW The Plan, together with all determinations and actions made or taken in connection therewith, to the extent not otherwise governed by the Code or other laws of the United States, shall be governed by the laws of the State of Ohio. 15. EFFECTIVE AND TERMINATION DATES The Plan shall become effective on the date it is approved by the shareholders of the Company. The Plan shall continue in effect for a period of five (5) years from its effective date unless sooner terminated by the Board, at which time all outstanding Awards shall remain outstanding in accordance with their applicable terms and conditions. 5 EX-31.1 4 l08678aexv31w1.txt EXHBIT 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; and b. paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986; and c. 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 d. 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 9, 2004 /s/ Jeffrey P. Gotschall ----------------------------------- Jeffrey P. Gotschall Chairman of the Board and Chief Executive Officer 1 EX-31.2 5 l08678aexv31w2.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; and b. paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986; and c. 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 d. 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 9, 2004 /s/ Frank A. Cappello --------------------------------- Frank A. Cappello Vice President - Finance and Chief Financial Officer 1 EX-32.1 6 l08678aexv32w1.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 quarter ended June 30, 2004 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 9, 2004 This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by SIFCO Industries, Inc. for purposes of Section 18 of the Securities Exchange Act of 193, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that SIFCO Industries, Inc. specifically incorporates it by reference. A signed original of this written statement required by Section 906 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 l08678aexv32w2.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 quarter ended June 30, 2004 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 9, 2004 This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by SIFCO Industries, Inc. for purposes of Section 18 of the Securities Exchange Act of 193, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that SIFCO Industries, Inc. specifically incorporates it by reference. A signed original of this written statement required by Section 906 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-----