FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2001
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Commission File Number: 1-5978
SIFCO Industries, Inc.
(Exact name of registrant as specified in its charter)
Ohio 34-0553950
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
970 East 64th Street, Cleveland, Ohio 44103
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(Address of principal executive offices) (Zip Code)
(216) 881-8600
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(Registrant's telephone number, including area code)
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
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As of January 31, 2002, the issuer had 5,120,433 shares of common stock
outstanding.
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
December 31
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2001 2000
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Net sales $ 20,338 $ 25,185
Operating expenses:
Cost of goods sold--products and services 18,257 20,751
Cost of goods sold--inventory impairment charges 2,814 103
Selling, general and administrative expenses 2,918 2,955
Asset impairment charges 1,380 ---
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Total operating expenses 25,369 23,809
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Operating income (loss) (5,031) 1,376
Interest income ( 92) (72)
Interest expense 226 291
Foreign currency exchange loss, net 105 595
Other expense (income), net (110) (26)
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Income (loss) before income tax provision (5,160) 588
Income tax provision (benefit) (1,470) 286
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Net income (loss) $ (3,690) $ 302
========== ==========
Net income (loss) per share (basic) $ (0.71) $ .06
Net income (loss) per share (diluted) $ (0.71) $ .06
Weighted-average number of common shares (basic) 5,225 5,135
Weighted-average number of common shares (diluted) 5,248 5,155
See accompanying notes to unaudited consolidated condensed financial statements.
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands, except per share data)
December 31 September 30
2001 2001
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(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,902 $ 13,787
Receivables, net 14,019 18,705
Inventories 15,760 18,013
Deferred income taxes 1,709 1,709
Prepaid expenses and other current assets 838 578
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Total current assets 43,228 52,792
PROPERTY, PLANT AND EQUIPMENT, NET 28,929 29,383
OTHER ASSETS:
Funds held by trustee for capital project --- 92
Goodwill and other intangible assets, net 2,743 3,558
Other assets 829 771
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Total other assets 3,572 4,421
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Total assets $ 75,729 $ 86,596
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,430 $ 1,430
Accounts payable 5,606 6,717
Other accrued liabilities 6,204 7,702
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Total current liabilities 13,240 15,849
LONG-TERM DEBT--NET OF CURRENT MATURITIES 11,482 15,107
OTHER LONG-TERM LIABILITIES 5,865 6,266
SHAREHOLDERS' EQUITY:
Serial preferred shares, no par value --- ---
Common shares, par value $1 per share 5,308 5,308
Additional paid-in capital 6,783 6,783
Retained earnings 41,925 45,615
Accumulated other comprehensive loss (7,906) (7,423)
Unearned compensation--restricted common shares (437) (460)
Common shares held in treasury at cost (531) (449)
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Total shareholders' equity 45,142 49,374
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Total liabilities and shareholders' equity $ 75,729 $ 86,596
================== ==================
See accompanying notes to unaudited consolidated condensed financial statements.
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended
December 31
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,690) $ 302
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,244 1,106
Gain on disposal of property and equipment (8) ---
Inventory and asset impairment charges 4,194 103
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Receivables 4,686 1,431
Inventories (560) 963
Prepaid expenses and other current assets (260) (109)
Other assets (243) (106)
Accounts payable (1,112) (2,733)
Accrued liabilities (2,064) 162
Other long-term liabilities (284) (118)
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Net cash provided by operating activities 1,903 1,001
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,180) (830)
Decrease (increase) in funds held by trustee for capital project 92 (9)
Proceeds from sale of property, plant and equipment 18 ---
Other (34) 60
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Net cash used for investing activities (1,104) (779)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit agreement 6,404 8,252
Repayments of revolving credit agreement (9,729) (5,406)
Repayments of long-term debt (300) (300)
Repurchase of common shares (82) ---
Issuance of common shares 23 4
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Net cash provided by (used for) financing activities (3,684) 2,550
Decrease in cash and cash equivalents (2,885) 2,772
Cash and cash equivalents at the beginning of the period 13,787 4,687
Effect of exchange rate changes on cash and cash equivalents --- 387
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Cash and cash equivalents at the end of the period $ 10,902 $ 7,846
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ (249) $ (237)
Cash recovered (paid) for income taxes, net (237) (1)
See accompanying notes to unaudited consolidated condensed financial statements.
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands)
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated condensed financial statements included herein
include the accounts of the Company and its wholly-owned subsidiaries. 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 consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the SIFCO Industries, Inc. and Subsidiaries ("Company") fiscal 2001
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.
2. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". This standard is effective for fiscal years beginning after
December 15, 2001. The Company expects to adopt this standard on October 1,
2002, the first quarter of the Company's fiscal year 2003. The standard changes
financial accounting and reporting for acquired goodwill and indefinite life
intangible assets. Under SFAS No. 142, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value based test. The
adoption will result in no further amortization of goodwill. Amortization of
goodwill during the quarter ended December 31, 2001 was $29. At this time, the
Company has not prepared an analysis of this standard to determine if an
impairment charge would be recognized upon adoption.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations". This standard addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from acquisition, construction, development and/or
the normal operation of a long-lived asset, except for certain obligation of
lessees. This standard requires entities to record the fair value of a liability
for an asset retirement obligation in the period incurred. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The Company expects to
adopt this standard on October 1, 2002. The Company has not yet determined the
impact, if any, of adopting this standard.
In September 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", related to the disposal of a
segment of a business. This statement amends certain provisions of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements". SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company
expects to adopt this standard on October 1, 2002. The Company has not yet
determined the impact, if any, of adopting this standard.
3. INVENTORIES
Inventories consist of:
December 31 September 30
2001 2001
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Raw material and supplies $ 4,865 $ 5,714
Work-in-process 5,312 5,905
Finished goods 5,583 6,394
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Total inventories $ 15,760 $ 18,013
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If the FIFO method had been used for the entire Company, inventories would have
been $2,900 and $2,884 higher than reported at December 31, 2001 and September
30, 2001, respectively.
4. INVENTORY AND ASSET IMPAIRMENT CHARGES
During the first quarter of fiscal 2002, the Company's Turbine Component Service
and Repair Group ("Repair Group") performed an evaluation of its existing
operations in light of the current and anticipated impacts on its business of
the September 11, 2001 terrorist attacks on the United States. The principal
result of this evaluation process was the decision to optimize the Repair
Group's multiple operations by reducing certain of its capacity for the
repairing of components related to older generation jet engines, principally
JT8D. Consequently, the Repair Group recognized, during the first quarter of
fiscal 2002, $4.1 million of asset impairment charges. These charges included
inventory write-downs of $2.7 million, a goodwill write-off of $0.7 million and
$0.7 million of equipment write-downs.
As a direct consequence of the September 11, 2001 terrorist attacks on the
United States, the demand for JT8D jet engine repair services experienced an
accelerated and substantial decline during the first quarter of fiscal 2002.
Because of the foregoing and as a result of the Company's decision to reduce
certain of its capacity to repair components principally related to the JT8D
engine, the recoverability of the carrying value of the related inventory has
been adversely affected. Consequently, an inventory write-down in the first
quarter of fiscal 2002 was determined to be appropriate. The write-off of
goodwill was based on an analysis of projected undiscounted cash flows, which
were no longer deemed adequate to support the value of goodwill associated with
the business. The fixed asset write-downs relate to equipment that will be
disposed as a consequence of the Company's decision to reduce certain of its
capacity to repair components principally related to the JT8D jet engine. The
realization of these assets was determined based on estimated current market
value.
In the first quarter of fiscal 2002, $33 of severance charges were incurred
associated with the reduction of the Repair Group's capacity for the repairing
of components related to older generation jet engines, principally JT8D.
Additional charges will be recorded in the second quarter of fiscal 2002 for
severance costs of $138 associated with the same reduction.
5. COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Total comprehensive income (loss) is as follows:
Three Months Ended
December 31
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2001 2000
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Net income (loss) $ (3,690) $ 302
Foreign currency translation adjustment (34) 1,534
Cumulative effect adjustment of interest rate
swap agreement, net of tax --- 135
Gain (loss) on interest rate swap agreement 40 (152)
Loss on currency exchange contracts (415) ---
Minimum pension liability adjustments (74) ---
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Total comprehensive income (loss) $ (4,173) $ 1,819
=========== ==========
The components of accumulated other comprehensive loss are as follows:
December 31 September 30
2001 2001
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Foreign currency translation adjustment $ (7,153) $ (7,119)
Interest rate swap adjustment (264) (304)
Currency exchange contract adjustment (415) ---
Minimum pension liability adjustments (74) ---
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Total accumulated other comprehensive loss $ (7,906) $ (7,423)
=============== ==============
6. BUSINESS SEGMENTS
The Company identifies reportable segments based upon distinct products
manufactured and services provided. The Turbine Component Services and Repair
("Repair") segment consists primarily of the repair and remanufacture of jet
engine (aerospace) turbine components. The Repair business is also involved in
the repair of industrial land-based gas turbine components and precision
machining for aerospace applications. The Aerospace Component Manufacturing
("ACM") segment consists of the production, heat treatment and some machining of
forgings in various alloys utilizing a variety of processes for application in
the aerospace industry as well as several other industrial markets. The Metal
Finishing segment is a provider of a specialized electroplating process called
brush plating, which is used to apply metal coatings to a selective area of a
component. The Company's reportable segments are separately managed.
Segment information is as follows:
Three Months Ended
December 31
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2001 2000
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Net sales:
Turbine Component Service and Repair $ 9,612 $ 13,776
Aerospace Component Manufacturing 8,136 8,969
Metal Finishing 2,590 2,440
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Consolidated net sales $ 20,338 $ 25,185
=========== ==========
Operating income (loss):
Turbine Component Service and Repair $ (5,284) $ 1,017
Aerospace Component Manufacturing 293 458
Metal Finishing 365 299
Corporate unallocated expenses (405) (398)
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Consolidated operating income (loss) (5,031) 1,376
Interest expense, net 134 219
Foreign currency exchange loss , net 105 595
Other (income) expense, net (110) (26)
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Consolidated income (loss) before income tax provision $ (5,160) $ 588
=========== ==========
7. FUNCTIONAL CURRENCY
The U.S. dollar is the functional currency for all of the Company's U.S.
operations. Effective October 1, 2001, the Company changed the functional
currency of its Irish subsidiary from the euro to the U.S. dollar. The
functional currency was changed because a substantial majority of the
subsidiary's transactions are now denominated in U.S. dollars. For these
operations, all gains and losses from currency transactions, if any, are
included in income currently. For the Company's other non-U.S. subsidiaries, the
functional currency is the local currency. Assets and liabilities are translated
into U.S. dollars at the rates of exchange at the end of the period and revenues
and expenses are translated using average rates of exchange. Translation
adjustments are reported as a component of accumulated other comprehensive loss.
8. LONG-TERM DEBT
During the second quarter of fiscal 2002, the Company amended its revolving
credit agreement to better support the Company's needs in the current business
environment and among other things, modified certain financial covenant
requirements and granted the lending institution a security interest in the
accounts receivable, inventories and equipment of the Company's U.S. operations.
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 of the jet engine
manufacturers into turbine component services and repair markets; (3) successful
procurement of new repair process licenses; (4) fluctuating foreign currency
(euros) exchange rates; (5) successful development and market introductions of
new products, including an advanced coating technology; (6) stability of
government laws and regulations, including taxes; (7) stable governments and
business conditions in economies where business is conducted; and (8) the
long-term impact on the aerospace industry of the September 11, 2001 terrorist
attacks on the United States.
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 brush plating.
The products include forgings, machined forged parts and other machined metal
parts, remanufactured component parts for turbine engines, and brush plating
solutions and equipment.
A. RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 2000
Net sales in the first three months of fiscal 2002 declined by 19.2% to $20.3
million, compared with $25.2 million for the comparable period in fiscal 2001.
Loss before income tax provision in the first three months of fiscal 2002 was
$5.2 million, compared with income before income tax provision of $0.6 million
for the comparable period in fiscal 2001. For the first three months of fiscal
2002 the Company incurred a net loss of $3.7 million, or $(0.71) per share
(diluted), compared with net income of $0.3 million, or $0.06 per share
(diluted) in the same period in fiscal 2001.
TURBINE COMPONENT SERVICES AND REPAIR GROUP ("REPAIR GROUP")
The Repair Group had net sales of $9.6 million in the first quarter of fiscal
2002, down $4.2 million, or 30.2%, from $13.8 million in the comparable fiscal
2001 period. Demand for component repairs for virtually all models of large jet
engines, especially the older models, was down in the first quarter of fiscal
2002 compared to the same period in fiscal 2001. The continued retirement and
reduced utilization of older generation aircraft that negatively impacted the
Company in fiscal 2001 was accelerated/exacerbated during the first quarter of
fiscal 2002 as a direct consequence of the September 11, 2001 terrorist attacks
on the United States as many airlines chose to reduce capacity by retiring many
of the older aircraft in their fleets. In addition, the impact of the terrorist
attacks on the commercial airline industry in general has also resulted in the
reduced demand for repairs of newer model jet engines due to reduced commercial
flight demand, which determines the need for such repairs. Revenues associated
with the demand for replacement parts that complement repair services provided
to customers were also down in the first quarter of fiscal 2002 because of the
reduced repair volumes in general.
Operating income (loss) in the first quarter of fiscal 2002 decreased $6.3
million from $1.0 million of income in the same period in fiscal 2001 to a $5.3
million loss. Included in the decreased operating results for the first quarter
of fiscal 2002 were charges aggregating $4.1 million related to inventory
write-down ($2.7 million), the impairment of goodwill ($0.7 million) and the
impairment of equipment ($0.7 million). During the first quarter of fiscal 2002,
the Repair group performed an evaluation of its existing operations in light of
the current and anticipated impacts of the September 11, 2001 terrorist attacks
on its business. The principal result of this evaluation process was the
decision to optimize the Repair Group's multiple operations by reducing certain
of its capacity for the repairing of components related to older generation jet
engines, principally the JT8D. As a result of this decision, the Repair Group
recognized, during the first fiscal quarter of fiscal 2002, the aforementioned
charges. The remaining $2.2 million decrease in operating results during the
first quarter of fiscal 2002, compared to the same period in fiscal 2001, was
primarily due to the negative impact on margins of the reduced sales volumes for
repair services and related replacement parts.
During the first quarter of fiscal 2002, the Repair Group's selling, general and
administrative expenses increased $1.4 million to $2.6 million, or 26.9% of net
sales, from $1.2 million, or 9.3% of net sales, in the same period in fiscal
2001. Included in the $2.6 million of selling, general and administrative
expenses for the first quarter of fiscal 2002 were the $1.4 million of charges
related to the goodwill and equipment impairments. The remaining $1.2 million of
selling, general and administrative expenses for the first quarter of fiscal
2002 represented 12.6 % of net sales. In the first quarter of fiscal 2002, $.03
million of severance charges was incurred associated with the reduction of the
Repair Group's capacity for the repairing of components related to older
generation jet engines, principally JT8D. Additional charges will be recorded in
the second quarter of fiscal 2002 for severance costs of $0.1 million associated
with the same reduction.
AEROSPACE COMPONENT MANUFACTURING GROUP ("ACM GROUP")
Net sales in the first quarter of fiscal 2002 declined 9.3% to $8.1 million,
compared with $9.0 million in the same fiscal 2001 period. The decrease in net
sales is primarily attributable to a decrease in the number of AE series new
generation jet engines to be built by Rolls-Royce for business and regional jets
as a direct consequence of the reduced flight schedules, cancellation of
aircraft orders, workforce reductions and declining financial performance of the
airline industry in the wake of the September 11, 2001 terrorist attacks on the
United States. Net sales were also reduced by $0.1 million due to a reduction in
selling prices to its largest customer that were negotiated during the first
quarter of fiscal 2002. These decreases in net sales during the first quarter of
fiscal 2002 were partially offset by an increase in shipments of components for
military aircraft.
The ACM Group's operating income in the first quarter of fiscal 2002 was $0.3
million, or 3.6% of net sales, compared with $0.5 million, or 5.1% of net sales
in the same fiscal 2001 period. The primary factor impacting the ACM Group's
operating income in the first quarter of fiscal 2002 is a $0.1 million reduction
in selling prices to its largest customer that was negotiated during the first
quarter of fiscal 2002 and is expected to impact future periods. The Company
believes that the impact of this selling price reduction may be at least
partially offset in future periods by the implementation of several cost savings
initiatives that the Company is pursuing. In addition, the overall lower net
sales level negatively impacted operating income in the first quarter of fiscal
2002. Selling, general and administrative expenses were $0.6 million in the
first quarter of fiscal 2002, compared with $0.5 million in the first quarter of
fiscal 2001. Selling, general and administrative expenses were negatively
impacted by higher variable selling expense due to product mix and an increase
in the ACM Group's allowance for bad debts, offset in part by a reduction in
travel expenses in the wake of the events of September 11.
METAL FINISHING GROUP
Net sales in the first quarter of fiscal 2002 increased 6.1% to $2.6 million,
compared with $2.4 million for the comparable period in fiscal 2001. Product
sales, consisting of brush plating equipment and solutions and representing
54.6% of total Metal Finishing Group net sales, decreased $0.2 million, or
12.6%. Product net sales declined due to overall economic weakness in aerospace,
steel, railroad and pulp and paper industries. Contract service net sales,
representing 43.8% of total Metal Finishing Group net sales, increased $0.3
million or 43.7% in the first three months of fiscal 2002, compared with the
same period in fiscal 2001. Contract service net sales benefited from several
large contracts.
The Metal Finishing Group's operating income in the first quarter of fiscal 2002
was $0.4 million, or 14.1% of net sales, compared with $0.3 million, 12.3% of
net sales, in the comparable period in fiscal 2001. The higher sales volume
accounted for a portion of the increase in operating income. In addition
operating income benefited from improved
margins due to better labor utilization rates in contract sales associated with
the higher sales volume. First quarter fiscal 2002 operating income also
benefited from lower selling, general and administrative expenses as a result of
a reduction in advertising and travel expenditures in the wake of the events of
September 11, 2001. The Company does not anticipate experiencing similar cost
reductions in future periods as business activity returns to historical levels.
CORPORATE UNALLOCATED EXPENSES
Corporate unallocated expenses, consisting of corporate salaries and benefits,
legal and professional and other corporate expenses were $0.4 million in both
the first quarters of fiscal 2002 and 2001. Lower expenses related to management
incentive expense and public company expenses favorably impacted corporate
unallocated expenses. Higher consulting expense and compensation and benefit
expenses offset these decreases.
OTHER/GENERAL
Interest income increased slightly due to higher average cash and cash
equivalent balances outstanding during the first quarter of fiscal 2002,
compared with the comparable period in fiscal 2001, partially offset by lower
interest rates. Interest expense decreased to $0.2 million in the first quarter
of fiscal 2002, compared with $0.3 million in the first quarter of fiscal 2001
due to overall lower average borrowings under the Company's revolving credit
agreement as well as lower interest rates.
Foreign currency exchange loss decreased to $0.1 million in the first quarter of
fiscal 2002, compared with $0.6 million in the first quarter of fiscal 2001.
Foreign currency exchange loss decreased in part because effective October 1,
2001, the Company changed the functional currency of its Irish subsidiary from
the euro to the U.S. dollar. The functional currency was changed because a
substantial majority of the subsidiary's transactions are now denominated in
U.S. dollars. Other income increased approximately $0.1 million due to an
increase in the amount of income from Irish government agencies that was
recognized by the Company's Irish subsidiary as well as a one time gain from the
sale of the ACM Group's interest in certain natural gas wells.
The Company's consolidated income tax benefit of $1.5 million results in an
effective tax rate of 28.5% in the first quarter of fiscal 2002. Expenses not
deductible for tax purposes, primarily the write-off of the Repair Group's
goodwill of $0.7 million, resulted in an effective tax benefit lower than the
statutory rate.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased during the first quarter of fiscal 2002 to
$10.9 million from $ 13.8 million at September 30, 2001. At present, essentially
all of the Company's cash and cash equivalents are in the possession of its
non-U.S. subsidiaries and relate to undistributed earnings of these non-U.S.
subsidiaries. During first quarter of fiscal 2002, the Company received a
distribution of $2.5 million from one of its non-U.S. subsidiaries. This
distribution was utilized to repay a portion of the outstanding balance under
the Company's revolving credit agreement.
Cash flow activity for the first quarter of fiscal 2002 is presented in the
Consolidated Condensed Statement of Cash Flows. Due to lower net sales, cash was
provided by a $1.7 million decrease in the ACM Group's accounts receivable, as
well as a $2.8 million decrease in the Repair Group's accounts receivable. ACM
Group inventories increased $0.7 million due to lower sales in part attributable
to order rescheduling, reduction or cancellation in response to the events of
September 11, 2001. The combined $3.2 million decrease in accounts payable and
accrued liabilities is due primarily to lower operating expenses and inventory
purchases, the payment of fiscal 2001 incentives and lower overall purchasing
activity due to lower sales. Working capital was $30.0 million at December 31,
2001, compared with $36.9 million at September 30, 2001. The current ratio was
3.3 at both December 31 and September 30, 2001.
Capital expenditures were $1.2 million in the first three months of fiscal 2002,
compared with $0.8 million in the comparable period in fiscal 2001. The Company
anticipates making a total of $3.2 million of capital expenditures during fiscal
2002. These capital expenditures consist of expenditures that will enhance the
Repair Group's turbine repair services, other new equipment and the upgrade of
existing equipment.
The Company's long-term debt as a percentage of equity at December 31, 2001 was
25.4%, compared with 30.6% at September 30, 2001. At December 31, 2001, the
Company had $1.6 million outstanding against its $10.0 million revolving credit
agreement.
During the first quarter of fiscal 2002, the Company repurchased 16,600 shares
of its Common Shares, bringing the total repurchased under the Company's Common
Share repurchase program to 87,300 of the 100,000 shares approved. No dividends
were declared during the first quarter of fiscal 2002.
The Company believes that the funds available under its revolving credit
facility and anticipated funds generated from its operations will be adequate to
meet its liquidity requirements through the foreseeable future.
EFFECTS OF FOREIGN CURRENCY AND INFLATION
The Company operates internationally and enters into transactions denominated in
non-U.S. dollar currencies. As a result, the Company is subject to the
variability that arises from exchange rate movements. The impact of changes in
exchange rates on the operating results of the Company was discussed previously.
The Company believes that inflation has not materially affected its results of
operations in the first quarter of fiscal 2002 and does not expect inflation to
be a significant factor for the balance of fiscal 2002.
C. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". This standard is effective for fiscal years beginning after
December 15, 2001. The Company expects to adopt this standard on October 1,
2002, the first quarter of the Company's fiscal year 2003. The standard changes
financial accounting and reporting for acquired goodwill and indefinite life
intangible assets. Under SFAS No. 142, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value based test. The
adoption will result in no further amortization of goodwill. Amortization of
goodwill during the quarter ended December 31, 2001 was $29. At this time, the
Company has not prepared an analysis of this standard to determine if an
impairment charge would be recognized upon adoption.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143, " Accounting for Asset Retirement Obligations". This standard addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from acquisition, construction, development and/or
the normal operation of a long-lived asset, except for certain obligation of
lessees. This standard requires entities to record the fair value of a liability
for an asset retirement obligation in the period incurred. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The Company expects to
adopt this standard on October 1, 2002. The Company has not yet determined the
impact, if any, of adopting this standard.
In September 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement supercedes SFAS No. 121, "
Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to
be Disposed of" and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions", related to the disposal of
a segment of a business. This statement amends certain provisions of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements". SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company
expects to adopt this standard on October 1, 2002. The Company has not yet
determined the impact, if any, of adopting this standard.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is subject to foreign currency
and interest rate risk. The risks primarily relate to the sale of the Company's
products in transactions denominated in non-U.S. dollar currencies (primarily
the euro), the payment, in local currency, of wages and other costs related to
the Company's non-U.S. operations, and changes in interest rates on the
Company's long-term debt obligations.
FOREIGN CURRENCY RISK
The U.S. dollar is the functional currency for all of the Company's U.S.
operations. Effective October 1, 2001, the Company changed the functional
currency of its Irish subsidiary from the euro to the U.S. dollar. The
functional currency was changed because a substantial majority of the
subsidiary's transactions are now denominated in U.S. dollars. For these
operations, all gains and losses from currency transactions, if any, are
included in income currently. For the Company's other non-U.S. subsidiaries, the
functional currency is the local currency. Assets and liabilities are translated
into U.S. dollars at the rates of exchange at the end of the period and revenues
and expenses are translated using average hates of exchange. Translation
adjustments are reported as a component of accumulated other comprehensive
income.
Historically, the Company has been able to mitigate the impact, if any, of
foreign currency risk by means of hedging such risk through the use of foreign
currency exchange contracts. At December 31, 2001, the Company had several
forward exchange contracts outstanding for durations of up to nine months to
purchase foreign currencies aggregating U.S. $13.0 million.
INTEREST RATE RISK
There have been no material changes to the Company's interest rate risk during
the three months ended December 31, 2001. For additional information refer to
Item 7 of the SIFCO Industries, Inc. Form 10-K for the year ended September 30,
2001.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 15, 2001, a former employee ("Plaintiff") filed a complaint in the
Cuyahoga County Court of Common Pleas alleging certain wrongdoing on the part of
the Company, including wrongful termination of the Plaintiff. The Plaintiff
seeks unspecified compensatory and punitive damages. The Company believes that
the allegations are without merit and intends to vigorously defend its position.
For additional information regarding legal proceedings refer to Item 3 of the
SIFCO Industries, Inc. Form 10-K for the year ended September 30, 2001.
The Company cannot reasonably estimate future costs related to these matters and
other matters that may arise. Although it is possible that the Company's future
operating results could be affected by future cost of litigation, it is
management's belief at this time that such costs will not have a material
adverse affect on the Company's consolidated financial position or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION LOCATION
(3) Second Amended Articles of Incorporation, as amended, (A)
and Amended Code of Regulations
Location Reference (A) Incorporated herein by reference to Form 10-K, September 30, 1986
(b) Reports on Form 8-K
The Company did not file a Current Report on Form 8-K in the first quarter
of fiscal 2002.
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 February 11, 2002 /s/ Jeffrey P. Gotschall
------------------------
Jeffrey P. Gotschall
Chairman,
President and
Chief Executive Officer
Date February 11, 2002 /s/ Frank A. Cappello
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Frank A. Cappello
Vice President-Finance
(Principal Financial Officer)