1
FORM 1O-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999 Commission File Number 1-5978
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SIFCO Industries, Inc., and Subsidiaries
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(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)
Registrant's telephone number, including area code (216) 881-8600
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None
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Former name, former address and former fiscal year, if changed since last
report.
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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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Class Outstanding at April 30, 1999
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Common Stock, $1 Par Value 5,179,777
2
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
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Financial Statements:
Consolidated Condensed Balance Sheets --
March 31, 1999, and September 30, 1998 2
Consolidated Condensed Statements of Income --
Three Months and Six Months
March 31, 1999 and 1998 3
Consolidated Condensed Statements of Cash Flows --
Three Months and Six Months
March 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 9,10,11
Other Information and Signatures 12, 13
3
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($000 Omitted)
Mar.31 Sept.30
1999 1998
-------- --------
ASSETS
------
Current Assets
Cash & Cash Equivalents $ 3,967 $ 3,503
Accounts Receivable, Net 19,129 20,073
Inventories
Raw Materials & Supplies 8,541 8,008
Work-in-Process & Finished Goods 16,929 19,631
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25,470 27,639
Prepaid Expenses and Other Current Assets 1,120 552
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TOTAL CURRENT ASSETS 49,686 51,767
Property, Plant & Equipment, Net 31,163 32,582
Goodwill, Net of Amortization 3,690 3,748
Funds Held by Trustee for Capital Project 660 922
Other Non-Current Assets 1,529 1,865
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TOTAL ASSETS $ 86,728 $ 90,884
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt 1,400 1,400
Accounts Payable 8,963 12,192
Accrued Expenses 7,324 7,355
Accrued Income Taxes 528 568
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TOTAL CURRENT LIABILITIES 18,215 21,515
Long-Term Debt - Less Current Portion 16,500 16,500
Deferred Federal Income Taxes and Other 2,996 2,979
Shareholders' Equity
Serial Preferred Shares - No Par Value - -
Common Shares, Par Value $1 Per Share 5,180 5,170
Paid-in-Surplus 6,272 6,198
Retained Earnings 37,565 38,522
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TOTAL SHAREHOLDERS' EQUITY 49,017 49,890
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 86,728 $ 90,884
======== ========
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 Six Months Ended
March 31 March 31
1999 1998 1999 1998
---- ---- ---- ----
Net Sales of SIFCO
Industries, Inc. $ 30,281 $ 30,949 $ 59,806 $ 60,847
Cost & Expenses
Cost of Goods Sold 25,343 24,681 50,423 47,893
Selling, General &
Administrative Expense 3,492 3,398 6,930 6,839
Interest Income (50) (53) (105) (103)
Interest Expense 293 308 643 565
Other (Income) Expense, Net (84) (202) (329) (341)
-------- -------- -------- --------
Total Costs & Expenses 28,994 28,132 57,562 54,853
Income Before Income Taxes 1,287 2,817 2,244 5,994
Provision for Federal, Foreign
& State Income Taxes 189 448 267 1,198
-------- -------- -------- --------
Net Income $ 1,098 $ 2,369 $ 1,977 $ 4,796
======== ======== ======== ========
Net Income Per Share (Basic) $ .21 $ .46 $ .38 $ .93
Net Income Per Share (Diluted) $ .21 $ .45 $ .38 $ .92
Average Shares Outstanding (Basic) 5,175 5,161 5,173 5,161
Average Shares Outstanding (Diluted) 5,220 5,231 5,233 5,226
Cash Dividends per Common Share $ .05 $ .05 $ .05 $ .05
See accompanying notes to consolidated condensed financial statements.
(3)
5
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($000 Omitted)
Six Months Ended
March 31
1999 1998
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Net cash provided by (used for) operating activities:
Net income $ 1,977 $ 4,796
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 2,241 2,065
Deferred income taxes and other 17 (294)
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Subtotal 4,235 6,567
Net cash provided by (used for) changes
in operating assets and liabilities:
Receivables 944 (598)
Inventories 2,169 (6,049)
Accrued or refundable income taxes (40) 401
Prepaid expenses and other current assets (568) (683)
Accounts payable (3,229) 2,785
Accrued expenses (31) (630)
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Net cash provided by (used for) changes
in operating assets and liabilities (755) (4,774)
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Net cash provided by (used for) operating activities 3,480 1,793
Net cash provided by (used for) investing activities:
Purchase of property, plant & equipment (2,236) (5,063)
(Increase) decrease in funds held by trustee for capital project 262 --
Other (784) (130)
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Net cash provided by (used for) investing activities (2,758) (5,193)
Net cash provided by (used for) financing activities:
Proceeds from additional borrowings 1,600 3,600
Repayment of borrowings (1,600) (628)
Cash dividends declared (258) (258)
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Net cash provided by (used for) financing activities (258) 2,714
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Increase (decrease) in cash and cash equivalents 464 (686)
Cash and cash equivalents, beginning of year 3,503 2,998
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Cash and cash equivalents, end of period $ 3,967 $ 2,312
======== ========
See accompanying notes to consolidated condensed financial statements.
(4)
6
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION
MARCH 31, 1999
NOTES
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(1) Summary of Significant Accounting Policies:
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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. Certain prior years' amounts have been
reclassified to conform with the 1998 classification.
(2) Debt:
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Long-term debt as of March 31, 1999 and September 30, 1998 consisted of:
Mar.31 Sept.30
1999 1998
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($000 Omitted)
Variable Rate Industrial Development
Revenue Improvement
and Refunding Bonds $ 4,100 $ 4,100
Note payable to bank, due in quarterly
installments of $300,000 11,100 11,700
Note payable to bank, due October 31, 1999,
interest payable quarterly, at rates based
upon LIBOR and DIBOR -- 1,000
Note payable under revolving credit
agreement, at the base rate 2,700 1,100
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$ 17,900 $ 17,900
Less - current maturities 1,400 1,400
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$ 16,500 $ 16,500
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(5)
7
In April 1998, the Company restructured its credit facilities. It reduced the
previously existing $9 million revolving credit agreement, which was $6 million
on March 31, 1999 and 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 $2.7
million and $6.0 million during the six-month period of fiscal 1999 and 1998,
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.
The Company obtained a $4.1 million, 15-year, Industrial Development bond. The
proceeds of the bond were used to refund the existing Industrial Development
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 is $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 $11.9 million at March 31, 1999.
(3) Income Taxes:
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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:
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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:
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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:
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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 $4,060,000
and $4,060,000 higher than reported at March 31, 1999 and September 30, 1998,
respectively.
(7) Other Income:
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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
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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 March 31, 1999 and 1998 are as
follows (in thousands):
Three Months Ended Six Months Ended
March 31 March 31
1999 1998 1999 1998
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Net Income $ 1,098 $ 2,369 $ 1,977 $ 4,796
Other comprehensive income (loss):
Foreign currency translation adjustments (2,407) (952) (2,676) (1,395)
-------- -------- -------- --------
Comprehensive income $ (1,309) $ 1,417 $ (699) $ 3,401
========= ======== ======== ========
(7)
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(9) Business Segment Information
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The following table summarizes certain information regarding segments
of the Company's operations for the quarter ended March 31, 1999 and
1998:
($000 omitted)
Three Months Ended Six Months Ended
March 31 March 31
1999 1998 1999 1998
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Net sales, including intersegment sales:
Turbine Component Services & Repair $ 21,475 $ 19,304 $ 42,190 $ 38,736
Aerospace Component Manufacturing 8,805 11,646 17,615 22,187
Intersegment sales 1 (1) 1 (76)
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$ 30,281 $ 30,949 $ 59,806 $ 60,847
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Income (loss) from operations before corporate
expenses and interest expense:
Turbine Component Services & Repair $ 1,608 $ 2,467 $ 3,218 $ 5,497
Aerospace Component Manufacturing 418 1,156 707 2,191
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2,026 3,623 3,925 7,688
Corporate expenses (496) (551) (1,143) (1,232)
Interest (expense) income, net (243) (255) (538) (462)
-------- -------- -------- --------
Income before income taxes $ 1,287 $ 2,817 $ 2,244 $ 5,994
======== ======== ======== ========
(10) Basis of Presentation and Management Estimates:
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The accompanying financial information for the three months ended March 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)
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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 Six Months Ended
March 31 March 31
1999 and 1998 1999 and 1998
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Net Sales of SIECO
Industries, Inc. $ (668) (2)% $(1,041) (2)%
Cost of Sales 662 3 % 2,530 5%
Selling, General &
Administrative 94 3 % 91 1%
Interest Income (3) (6)% 2 2%
Interest Expense (15) (5)% 78 14%
Other Income, Net (118) (58)% (12) (4)%
Income Before Income Taxes (1,530) (54)% (3,750) (63)%
Provision for Federal,
Foreign & State Income Taxes (259) (58)% (931) (78)%
Net Income (1,271) (54)% (2,819) (59)%
(9)
11
MANAGEMENT'S DISCUSSION & FINANCIAL ANALYSIS
In reviewing the company's performance during the second quarter, President &
CEO, Jeffrey P. Gotschall commented, "As expected, the worldwide economic
conditions causing the aerospace industry to postpone aircraft repairs and defer
orders for new parts continued to impact our financial results in the second
quarter."
For the second quarter of fiscal 1999, compared with the second quarter of
fiscal 1998:
- Net sales decreased 2% to $30.3 million from $30.9 million;
- Pre-tax income decreased 54% to $1.3 million from $2.8 million;
- Net income decreased 54% to $1.1 million from $2.4 million; and
- Earnings per diluted share decreased to $0.21 from $0.45
Through the first two quarters of fiscal 1999, compared with the first half of
fiscal 1998:
- Net sales decreased 2% to $59.8 million from $60.8 million;
- Pre-tax income decreased 63% to $2.2 million from $6 million;
- Net income decreased 58% to $2 million from $4.8 million; and
- Earnings per diluted share decreased to $0.38 from $0.92
New orders received decreased against last year for both the second quarter and
the six months. New orders for the second quarter were $27.4 million compared to
last year's $33.4 million and $56.0 million compared to $64.8 million
year-to-date. Backlog at March 31, 1999 was $37.3 million compared to $48.0 a
year ago.
Net interest expense for the quarter was $0.24 million compared to $0.30 last
year. Year-to-date net interest expense $0.5 million, the same as last year.
He continued, "If we have learned anything about the aerospace industry we
serve, it is that the business it provides is cyclical. So while we try to
reduce the impact of these cycles by expanding our services and broadening our
product line, we also use the slower periods to prepare for handling the next
business upturn more efficiently and more profitably."
TURBINE COMPONENT SERVICES AND REPAIR GROUP
The company continues to see soft markets and more aggressive competition in its
Turbine Component Services and Repair Group, which now accounts for 70 percent
of its corporate net sales. Turbine Component Services and Repair sales for the
quarter were up 11 percent to $21.5 million, but the less profitable mix of
business and higher operating costs of facilities that were added brought
operating profit down 35 percent to $1.6 million.
Aircraft utilization rates are high, and postponed repairs must be done
eventually. The company believes that the more it expands its capabilities and
moves closer to its goal of being a full-service provider of repair and
inventory management services, the more valuable it becomes to its customers.
AEROSPACE MANUFACTURING GROUP
SIFCO's manufacturing segment saw its quarterly operating income before
corporate and interest expense fall 64 percent on a 24 percent decline in sales.
Customers continued to defer or "push out" their orders and adjust their
inventories. The decline in new aircraft production from previous levels will
have a negative impact on sales although not quantifiable at this point. The
company is taking positive steps to improve results. As Mr. Gotschall stated,
"We have stepped up our efforts to generate international orders. As these
marketing efforts bear fruit and the temporary slowdown in our markets comes to
an end, we will be in a position to handle more business more efficiently and
increase sales and earnings."
OUTLOOK
"The factors influencing our financial results are continuing into our third
quarter, but continued aircraft utilization and the changing fleet mix indicate
eventual favorable trends for spares and repairs," Mr. Gotschall noted. "We are
confident in our long-term outlook."
(10)
12
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $31.5 million at March 31, 1999, compared to $30.2
million at September 30, 1998. The current ratio for the same period was 2.7 and
2.4 respectively. Total debt as a percentage of tangible shareholders' equity
was 37.7% at March 31, 1999 compared to 39.4% at September 30, 1998.
Year-to-date capital expenditures were $2.2 million compared to $5.1
million a year ago. Capital expenditures for fiscal 1999 are anticipated to be
in the range of $6 to $8 million compared to $11.3 million in fiscal 1998. The
expenditures will be primarily used to upgrade existing equipment and new
capabilities.
The Company has borrowed $2.7 million against its revolving credit line
of $6.0 million at March 31, 1999. The Company considers it has adequate
financing available to meet its needs through the foreseeable future.
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
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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 will be completed before
December 1999. The Company estimates its cost to be compliant at approximately
$150,000, excluding the cost of Company information technology employees.
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 functions. 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.
(11)
13
SAFE HARBOR STATEMENT
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This Annual Report 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
March 31, 1999.
(12)
14
SIGNATURES
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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 May 12, 1999 /*/ Jeffrey P. Gotschall
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Jeffrey P. Gotschall
Chief Executive Officer
Date May 12, 1999 /*/ Richard A. Demetter
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Richard A. Demetter
Vice President - Finance
(Principal Accounting Officer)
(13)