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