1 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 1999 Commission File Number 1-5978 --------------------- --------- SIFCO Industries, Inc., and Subsidiaries ---------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0553950 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 970 East 64th Street, Cleveland, Ohio 44103 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (216) 881-8600 ------------------------- None - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 requirement for the past 90 days. Yes [X] No Class Outstanding at January 31, 2000 ----- ------------------------------- Common Stock, $1 Par Value 5,197,389 2 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page No. -------- Financial Statements: Consolidated Condensed Balance Sheets -- December 31, 1999, and September 30, 1999 2 Consolidated Condensed Statements of Income -- Three Months December 31, 1999 and 1998 3 Consolidated Condensed Statements of Cash Flows -- Three Months December 31, 1999 and 1998 4 Notes to Consolidated Condensed Financial Statements 5,6,7,8 Management's Discussion and Analysis of the Consolidated Condensed Statements of Income 9,10 Other Information and Signatures 11, 12 3 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS ($000 Omitted) Dec 31 Sept. 30 1999 1999 -------- -------- ASSETS ------ Current Assets Cash & Cash Equivalents $ 3,614 $ 1,487 Accounts Receivable, Net 19,136 22,192 Inventories Raw Materials & Supplies 6,075 6,780 Work-in-Process & Finished Goods 16,266 17,155 -------- -------- 22,341 23,935 Refundable Income Taxes 317 354 Prepaid Expenses and Other Current Assets 1,755 1,365 -------- -------- TOTAL CURRENT ASSETS 47,163 49,333 Property, Plant & Equipment, Net 30,678 31,392 Goodwill, Net of Amortization 3,603 3,632 Funds Held by Trustee for Capital Project 677 677 Other Non-Current Assets 1,373 1,427 -------- -------- TOTAL ASSETS $ 83,494 $ 86,461 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current Portion of Long-Term Debt 1,415 1,415 Accounts Payable 10,309 11,094 Accrued Expenses 6,159 6,566 -------- -------- TOTAL CURRENT LIABILITIES 17,883 19,075 Long-Term Debt - Less Current Portion 12,685 12,985 Deferred Federal Income Taxes and Other 4,075 4,355 Shareholders' Equity Serial Preferred Shares - No Par Value -- -- Common Shares, Par Value $1 Per Share 5,197 5,193 Paid-in-Surplus 6,385 6,352 Accumulated Other Comprehensive Income (Loss) (4,465) (2,749) Retained Earnings 41,734 41,250 -------- -------- TOTAL SHAREHOLDERS' EQUITY 48,851 50,046 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 83,494 $ 86,461 ======== ======== See accompanying notes to consolidated condensed financial statements. (2) 4 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME ($000 Omitted) Three Months Ended December 31 1999 1998 -------- -------- Net Sales of SIFCO Industries, Inc. $ 25,345 $ 29,525 Cost & Expenses Cost of Goods Sold 21,447 25,080 Selling, General & Administrative Expense 3,098 3,438 Interest Income (31) (55) Interest Expense 265 350 Other (Income) Expense, Net 41 (245) Total Costs & Expenses 24,820 28,568 Income Before Income Taxes 525 957 Provision for Federal, Foreign & State Income Taxes 41 78 -------- -------- Net Income $ 484 $ 879 ======== ======== Net Income Per Share (Basic) $ .09 $ .17 Net Income Per Share (Diluted) $ .09 $ .17 Average Shares Outstanding (Basic) 5,194 5,171 Average Shares Outstanding (Diluted) 5,240 5,242 Cash Dividends per Common Share $ -- $ -- See accompanying notes to consolidated condensed financial statements. (3) 5 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS ($000 Omitted) Three Months Ended December 31 1999 1998 ------- ------- Net cash provided by (used for) operating activities: Net income $ 484 $ 879 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 1,162 1,127 Deferred income taxes and other (280) (126) ------- ------- Subtotal 1,366 1,880 Net cash provided by (used for) changes in operating assets and liabilities: Receivables 3,056 940 Inventories 1,594 1,148 Accrued or refundable income taxes 37 (227) Prepaid expenses and other current assets (390) (814) Accounts payable (785) (2,709) Accrued expenses (407) (436) ------- ------- Net cash provided by (used for) changes in operating assets and liabilities 3,105 (2,098) ------- ------- Net cash provided by (used for) operating activities 4,471 (218) Net cash provided by (used for) investing activities: Purchase of property, plant & equipment (1,305) (1,302) (Increase) decrease in funds held by trustee for capital project -- -- Other (739) 147 ------- ------- Net cash provided by (used for) investing activities (2,044) (1,155) Net cash provided by (used for) financing activities: Proceeds from additional borrowings -- 3,400 Repayment of borrowings (300) (300) Cash dividends declared -- -- ------- ------- Net cash provided by (used for) financing activities (300) 3,100 ------- ------- Increase (decrease) in cash and cash equivalents 2,127 1,727 Cash and cash equivalents, beginning of year 1,487 3,503 ------- ------- Cash and cash equivalents, end of period $ 3,614 $ 5,230 ======= ======= See accompanying notes to consolidated condensed financial statements. (4) 6 SIFCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION DECEMBER 31, 1999 NOTES - ----- (1) Summary of Significant Accounting Policies: ------------------------------------------- Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. (2) Debt: ----- Long-term debt as of December 31, 1999 and September 30, 1999 consisted of: Dec 31 Sept. 30 1999 1999 ------- ------- ($000 Omitted) Variable Rate Industrial Development Revenue Improvement and Refunding Bonds $ 3,900 $ 3,900 Note payable to bank, due in quarterly installments of $300,000 10,200 10,500 Note payable under revolving credit agreement, at the base rate -- -- ------- ------- $14,100 $14,400 Less - current maturities 1,415 1,415 ------- ------- $12,685 $12,985 ======= ======= (5) 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED CONDENSED STATEMENTS OF INCOME In April 1998, the Company restructured its credit facilities. It reduced the previously existing $9 million revolving credit agreement to $6 million which is the current amount available on December 31, 1999. The revolving credit agreement bears interest at the bank's base rate, and also replaced the $5.144 million term loan with a 10-year, $12 million term loan. The term loan is repayable in quarterly payments of $0.3 million. The term loan bears interest at a fixed rate of 7.24%, subject to adjustment if certain loan covenants are not maintained. The average balance outstanding against the revolving credit agreement was less than $0.1 million and $3.1 million during the three-month period of fiscal 2000 and 1999, respectively. The balances outstanding under the revolving credit agreement have been classified as long term debt. A commitment fee of 1/4% is incurred on the remaining unused balance. In 1998, the Company obtained a $4.1 million, 15-year, Industrial Development bond. The proceeds of the bond of $1.6 million and the balance of the funds are being used to expand the Turbine Component Services and Repair facility in Tampa, Florida. The interest rate is reset weekly, based on prevailing tax-exempt money market rates. The first principal payment was $200,000 and increases each year until the final payment of $355,000 in 2013. The principal payment increases by $15,000 and $5,000 in the second and third year, respectively, and by $10,000 in the following seven years. The bonds are secured by the property and equipment of the facility, and backed by an irrevocable letter of credit. Among other covenants, the Company is required to maintain a minimum tangible net worth (as defined) of $30.0 million, increasing by 50% of net income subsequent to September 30, 1997. Tangible net worth exceeded the required minimum by $12.4 million at December 31, 1999. (3) Income Taxes: ------------- The provision for taxes on income, which is based on the anticipated effective rate for the year, does not bear the customary relationship to pre-tax income due primarily to foreign source income and net loss carry forward. Income tax expense differs from amounts currently payable due to certain items reported for financial statement purposes in periods which differ from those in which they are reported for tax purposes, principally accelerated depreciation. (4) Deferred Federal Income Taxes: ------------------------------ The Company has deferred to future periods the income taxes relating to timing differences between financial statement pre-tax income and taxable income. (6) 8 (5) Depreciation: ------------- For financial reporting purposes, the Company provides for depreciation of plant and equipment, principally by the straight-line method, at annual rates sufficient to amortize the cost over its estimated useful life. For tax purposes, the Company uses various accelerated methods and, accordingly, provides for the related deferred taxes. The principal rates of depreciation for financial reporting purposes are: buildings 2% to 5%, and machinery and equipment 5% to 33-1/3%. (6) Inventories: ------------ The Company follows the LIFO method of accounting for certain of its Forge Group inventories. Since the LIFO inventory determination for fiscal 1999 will be based upon year-end inventory levels and costs, the Company has provided for its anticipated "LIFO Adjustment" based on its estimated year-end inventory levels and costs. Under the Average Cost Method, inventories would have been $3,789,000 and $3,789,000 higher than reported at December 31, 1999 and September 30, 1999, respectively. (7) Other Income: ------------- Other income is comprised primarily of grant income from Irish government agencies, foreign exchange gains and losses, and royalty and fee income. (8) Comprehensive Income -------------------- Effective October 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement requires the disclosure of comprehensive income, which includes net income and other comprehensive income items previously included within separate components of shareholders' equity. Since the undistributed earnings of the Company's foreign subsidiaries are intended to be permanently reinvested, taxes have not been provided for foreign currency translation adjustments. Comprehensive income for the three months ended December 31, 1999 and 1998 are as follows: ($000 omitted) Three Months Ended December 31 1999 1998 ------- ------- Net Income $ 484 $ 879 Other comprehensive income (loss): Foreign currency translation adjustments (1,716) (269) ------- ------- Comprehensive income $(1,232) $ 610 ======= ======= (7) 9 (9) Business Segment Information ----------------------------- The following table summarizes certain information regarding segments of the Company's operations for the quarter ended December 31, 1999 and 1998: ($000 omitted) Three Months Ended December 31 1999 1998 -------- -------- Net sales, including intersegment sales: Turbine Component Services & Repair $ 17,743 $ 20,715 Aerospace Component Manufacturing 7,602 8,810 Intersegment sales -- -- -------- -------- $ 25,345 $ 29,525 ======== ======== Income (loss) from operations before corporate expenses and interest expense: Turbine Component Services & Repair $ 1,085 $ 1,611 Aerospace Component Manufacturing 153 289 -------- -------- 1,238 1,900 Corporate expenses (479) (648) Interest (expense) income, net (234) (295) -------- -------- Income before income taxes $ 525 $ 957 ======== ======== (10) Basis of Presentation and Management Estimates: ----------------------------------------------- The accompanying financial information for the three months ended December 31, 1999 has not been examined by independent public accountants. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation have been included. The Company prepares its financial statements in accordance with generally accepted accounting principles, which requires management to make estimates and assumptions that affect amounts reported in the financial statements for the reporting period. Actual results could differ from those based upon such estimates and assumptions. These estimates and assumptions are revised as necessary. (8) 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED CONDENSED STATEMENTS OF INCOME The following is management's discussion and analysis of certain significant factors which have affected the Company's earnings during the periods included in the accompanying consolidated condensed statements of income. A summary of the period-to-period changes in the principal items included in the consolidated condensed statements of income is shown below: Three Months Ended December 31 1999 and 1998 ------------- Net Sales of SIFCO Industries, Inc. $(4,180) (14.2)% Cost of Sales (3,633) (14.5)% Selling, General & Administrative (340) (9.9)% Interest Income (24) (43.6)% Interest Expense (85) (24.3)% Other Income, Net (286) (116.7)% Income Before Income Taxes (432) (45.1)% Provision for Federal, Foreign & State Income Taxes (37) (47.4)% Net Income (395) (44.9)% (9) 11 MANAGEMENT'S DISCUSSION AND FINANCIAL ANALYSIS For the first quarter of fiscal 2000, compared with the first quarter of fiscal 1999: - Net sales decreased 14.2% to $25.3 million from $29.5 million - Pre-tax income decreased 45.1% to $525,000 from $957,000 - Net income decreased 44.9% to $484,000 from $879,000 - Earnings per diluted share decreased to $0.09 from $0.17 New orders received for the first quarter were $25.4 million compared to $28.3 a year ago and $29.3 million in the quarter ended September 30, 1999. Backlog was $39.1 million compared to $39.5 million a year ago and $39.5 million at September 30, 1999. Net interest expense decreased to $0.2 million from $0.3 million resulting from lower borrowing requirements for working capital due to lower sales volume. TURBINE COMPONENT SERVICES AND REPAIR GROUP Turbine Component Services and Repair (TCSR) sales declined 14.3% to $17.7 million from $20.7 million a year ago. Operating profit declined 32.7% to $1.1 million from $1.6 million a year ago. As we said last quarter, repair volume for the older engines has declined as many of the older planes powered by these engines have been retired from the fleet. Our strategies of continuous improvement and product development will provide us with the mechanism to gain market share of the repair of the newer engine types. AEROSPACE COMPONENT MANUFACTURING GROUP Aerospace Component Manufacturing (ACM) sales declined 13.7% to $7.6 million from $8.8 million a year ago. Operating profit declined 47.1% to $0.15 million from $0.29 million a year ago. Boeing continues to reduce its build rate for the large commercial aircraft. Build rates for smaller commercial aircraft (business and regional jets) are still rising, which is good news for SIFCO. OUTLOOK "Our results for the first quarter were disappointing, but not unexpected in light of market conditions. However, we have a strong balance sheet with long-term debt-to-equity of 26% and will recover from this cycle as we have many others in the past," said SIFCO's President and Chief Executive Officer, Jeffrey Gotschall. LIQUIDITY AND CAPITAL RESOURCES Working capital was $29.3 million at December 31, 1999, compared to $30.3 million at September 30, 1999. The current ratio for the same period was 2.6 and 2.6 respectively. Total debt as a percentage of tangible shareholders' equity was 28.7% at December 31, 1999 compared to 29.6% at September 30, 1999. Year-to-date capital expenditures were $1.3 million compared to $1.3 million a year ago. Capital expenditures for fiscal 2000 are anticipated to be in the range of $4 to $7 million compared to $4.9 million in fiscal 1999. The expenditures will be primarily used to upgrade existing equipment and new capabilities. The Company has had no borrowing against its revolving credit line of $6.0 million at December 31, 1999. The Company considers it has adequate financing available to meet its needs through the foreseeable future. (10) 12 PROVISION FOR TAXES ON INCOME ----------------------------- The provision for taxes on income, which is based on the anticipated effective rate for the year, does not bear the customary relationship to pre-tax income, due primarily to foreign source income. YEAR 2000 ISSUE --------------- Based upon the results of efforts to date, the Company does not believe that the Year 2000 issue will have a material adverse effect on its financial condition or results of operations. The review includes: business applications which are supported by internal MIS employees, standard commercial programs on local PCs, manufacturing and building equipment and a survey of major customers and vendors for compliance. The problems detected to date have been manageable and correctable. The review and any changes required were completed in December 1999. The Company estimates its cost to be compliant at approximately $150,000, excluding the cost of Company information technology employees. All of this expenditure had been completed by December 31, 1999. The Company's Year 2000 program is based on various assumptions and expectations that cannot be assured. The cost estimate does not include costs associated with addressing and resolving issues as a result of the failure of third parties to become Year 2000 compliant. The Company's contingency plans include identification of alternate suppliers of key products and services used in manufacturing and support funcitons. Still, having no precedent of a Year 2000 problem, it is impractical for the Company to determine what impact, if any, would result to the Company's business if third parties do not address their Year 2000 issues. Through January 2000, the Company did not experience any disruptions in operations or service as a result of Year 2000 issues. However, the effects of Year 2000 may be experienced up to several months or longer after January 1, 2000. SAFE HARBOR STATEMENT --------------------- This Form 10-Q contains 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 the following cautionary statement identifying important economic, political and technological factors, among others, the absence 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) continuation of the current and projected future business environment, including interest rates and capital and consumer spending; (2) competitive factors and competitor responses to the Company's initiatives; (3) successful development and market introductions of anticipated new products; (4) stability of government laws and regulations, including taxes; (5) stable governments and business conditions in emerging economies; (6) successful penetration of emerging economies; (7) continuation of the favorable environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates; (8) successful identification and conversion of computer systems to address the year 2000 issue by the Company, suppliers and vendors. Item 6. Exhibits and Reports on Form 8-K (a) The following Exhibits are included herein: Exhibit 27 Financial Data Schedule (b) No report on Form 8-K was filed during the quarter ended December 31, 1999. (11) 13 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 January 31, 2000 /*/ Jeffrey P. Gotschall ------------------- ---------------------------- Jeffrey P. Gotschall Chief Executive Officer Date January 31, 2000 /*/ Richard A. Demetter ------------------- ---------------------------- Richard A. Demetter Vice President - Finance (Principal Accounting Officer) (12)