<PAGE> 1
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1998 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 881-8600
----------------------
None
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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
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Class Outstanding at January 31, 1999
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Common Stock, $1 Par Value 5,172,921
<PAGE> 2
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Financial Statements:
Consolidated Condensed Balance Sheets --
December 31, 1998, and September 30, 1998 2
Consolidated Condensed Statements of Income --
Three Months
December 31, 1998 and 1997 3
Consolidated Condensed Statements of Cash Flows --
Three Months
December 31, 1998 and 1997 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
<PAGE> 3
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($000 Omitted)
<TABLE>
<CAPTION>
Dec 31 Sept. 30
1998 1998
---- ----
ASSETS
------
<S> <C> <C>
Current Assets
Cash & Cash Equivalents $ 5,230 $ 3,503
Accounts Receivable, Net 19,133 20,073
Inventories
Raw Materials & Supplies
7,477 8,008
Work-in-Process & Finished Goods 19,014 19,631
------- -------
26,491 27,639
Prepaid Expenses and Other Current Assets 1,366 552
------- -------
TOTAL CURRENT ASSETS 52,220 51,767
Property, Plant & Equipment, Net 32,523 32,582
Goodwill, Net of Amortization 3,719 3,748
Funds Held by Trustee for Capital Project 922 922
Other Non-Current Assets 1,751 1,865
------- -------
TOTAL ASSETS $91,135 $90,884
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt 1,400 1,400
Accounts Payable 9,483 12,192
Accrued Expenses 6,919 7,355
Accrued Income Taxes 341 568
------- -------
TOTAL CURRENT LIABILITIES 18,143 21,515
Long-Term Debt - Less Current Portion 19,600 16,500
Deferred Federal Income Taxes and Other 2,853 2,979
Shareholders' Equity
Serial Preferred Shares - No Par Value -- --
Common Shares, Par Value $1 Per Share 5,173 5,170
Paid-in-Surplus 6,235 6,198
Retained Earnings 39,131 38,522
------- -------
TOTAL SHAREHOLDERS' EQUITY 50,539 49,890
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $91,135 $90,884
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
(2)
<PAGE> 4
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
($000 Omitted)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1998 1997
---- ----
<S> <C> <C>
Net Sales of SIFCO
Industries, Inc. $ 29,525 $ 29,898
Cost & Expenses
Cost of Goods Sold 25,080 23,212
Selling, General &
Administrative Expense 3,438 3,441
Interest Income (55) (50)
Interest Expense 350 257
Other (Income) Expense, Net (245) (139)
Total Costs & Expenses 28,568 26,721
Income Before Income Taxes 957 3,177
Provision for Federal, Foreign
& State Income Taxes 78 750
-------- --------
Net Income $ 879 $ 2,427
======== ========
Net Income Per Share (Basic) $ .17 $ .47
Net Income Per Share (Diluted) $ .17 $ .47
Average Shares Outstanding (Basic) 5,171 5,160
Average Shares Outstanding (Diluted) 5,242 5,206
Cash Dividends per Common Share $ -- $ --
</TABLE>
See accompanying notes to consolidated condensed financial statements.
(3)
<PAGE> 5
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($000 Omitted)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1998 1997
---- ----
<S> <C> <C>
Net cash provided by (used for) operating activities:
Net income $ 879 $ 2,427
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,127 1,052
Deferred income taxes and other (126) (124)
------- -------
Subtotal 1,880 3,355
Net cash provided by (used for) changes
in operating assets and liabilities:
Receivables 940 (411)
Inventories 1,148 (1,576)
Accrued or refundable income taxes (227) 444
Prepaid expenses and other current assets (814) (689)
Accounts payable (2,709) (450)
Accrued expenses (436) (48)
------- -------
Net cash provided by (used for) changes
in operating assets and liabilities (2,098) (2,730)
------- -------
Net cash provided by (used for) operating activities (218) 625
Net cash provided by (used for) investing activities:
Purchase of property, plant & equipment (1,302) (2,153)
(Increase) decrease in funds held by trustee for capital project -- --
Other 147 55
------- -------
Net cash provided by (used for) investing activities (1,155) (2,098)
Net cash provided by (used for) financing activities:
Proceeds from additional borrowings 3,400 2,500
Repayment of borrowings (300) (314)
Cash dividends declared -- --
------- -------
Net cash provided by (used for) financing activities 3,100 2,186
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Increase (decrease) in cash and cash equivalents 1,727 713
Cash and cash equivalents, beginning of year 3,503 2,998
------- -------
Cash and cash equivalents, end of period $ 5,230 $ 3,711
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
(4)
<PAGE> 6
SIFCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1998
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. Certain prior years' amounts have been
reclassified to conform with the 1998 classification.
(2) Debt:
-----
Long-term debt as of December 31, 1998 and September 30, 1998 consisted of:
<TABLE>
<CAPTION>
Dec 31 Sept. 30
1998 1998
---- ----
($000 Omitted)
<S> <C> <C>
Variable Rate Industrial Development
Revenue Improvement
and Refunding Bonds $ 4,100 $ 4,100
Note payable to bank, due in quarterly
installments of $300,000 11,400 11,700
Note payable to bank, due October 31, 1999,
interest payable quarterly, at rates based
upon LIBOR and DIBOR 1,000 1,000
Note payable under revolving credit
agreement, at the base rate 4,500 1,100
------- -------
$21,000 $17,900
Less - current maturities 1,400 1,400
------- -------
$19,600 $16,500
======= =======
</TABLE>
(5)
<PAGE> 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 December 31, 1998 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 $3.1
million and $4.7 million during the three-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.
In addition, the Company has a $1.15 million credit facility, which is used for
an irrevocable letter of credit that secures the $1 million loan from an Irish
bank due October 31, 1999. The loan has a variable interest rate based on a
combination of LIBOR and DIBOR (Dublin Interbank Rates) rates.
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 $11.3 million at December 31, 1998.
(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)
<PAGE> 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 $4,060,000
and $4,060,000 higher than reported at December 31, 1998 and September 30, 1998,
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, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
($000 omitted)
1998 1997
---- ----
<S> <C> <C>
Net Income $ 879 $ 2,427
Other comprehensive income (loss):
Foreign currency translation adjustments (269) (443)
------- -------
Comprehensive income $ 610 $ 1,984
======= =======
</TABLE>
(7)
<PAGE> 9
(9) Business Segment Information
----------------------------
The following table summarizes certain information regarding segments of the
Company's operations for the quarter ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
($000 omitted)
12/31/98 12/31/97
-------- --------
<S> <C> <C>
Net sales, including intersegment sales:
Turbine Component Services & Repair $ 20,715 $ 19,432
Aerospace Component Manufacturing 8,810 10,541
Intersegment sales 0 (75)
-------- --------
$ 29,525 $ 29,898
======== ========
Income (loss) from operations before corporate
expenses and interest expense:
Turbine Component Services & Repair $ 1,611 $ 3,030
Aerospace Component Manufacturing 289 1,035
-------- --------
1,900 4,065
Corporate expenses (648) (681)
Interest (expense) income, net (295) (207)
-------- --------
Income before income taxes $ 957 $ 3,177
======== ========
</TABLE>
(10) Basis of Presentation and Management Estimates:
-----------------------------------------------
The accompanying financial information for the three months ended December 31,
1998 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)
<PAGE> 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:
<TABLE>
<CAPTION>
Three Months Ended
December 31
1998 and 1997
--------------------------
<S> <C> <C>
Net Sales of SIFCO Industries, Inc. $ (373) (1) %
Cost of Sales 1,868 8 %
Selling, General & Administrative (3) 0 %
Interest Income 5 10 %
Interest Expense 93 36 %
Other Income, Net 106 76 %
Income Before Income Taxes (2,220) (70) %
Provision for Federal,
Foreign & State Income Taxes (672) (90) %
Net Income (1,548) (64) %
</TABLE>
(9)
<PAGE> 11
MANAGEMENT'S DISCUSSION
FIRST QUARTER RESULTS
We expected first quarter financial results to be slower than the record pace we
exhibited throughout most of fiscal 1998. Our expectation stemmed from an
anticipated slowdown in our Aerospace Manufacturing Group to facilitate the
conversion to synchronous manufacturing, and higher operating costs at our
Turbine Component Services and Repair Group as we brought facility operations
on-line that were completed last year. To our disappointment, market conditions
in both segments of our business caused our operating results to fall below our
expectations.
We achieved revenues for the first quarter of fiscal 1999 of $29.5 million, a
decrease of 1.2% from the record $29.9 million posted for last year's first
quarter. Changes in product mix, pushouts of orders, and the additional overhead
from our expansions resulted in pre-tax income falling to $1.0 from $3.2 million
for the prior year period. Net income of $0.9 million, or $0.17 per diluted
share, was down from fiscal 1998 first quarter's record $2.4 million, or $0.47
per share.
MARKET CONDITIONS
The aerospace industry experienced a period of uncertainty in the second half of
1998. Worldwide economic conditions created fears about passenger traffic and
aircraft utilization that resulted in delays in orders to our manufacturing
group and the postponement of aircraft repairs. We believe these to be
temporary. Passenger traffic and aircraft utilization remain high suggesting a
growing need for repairs and a reinstatement of manufacturing orders.
We are not content, however, to simply await improvements in market conditions.
But we are instead taking full advantage of this downturn to implement measures
that will benefit SIFCO in the future, primarily through continuing to transform
our repair operations to more full service repairs and materials management for
our customers. This long-term growth strategy was enhanced by our major capital
investments in 1998. This year we are investing our time and personnel resources
to make these investments successful. We expect to begin to realize the benefits
soon and will begin using our free cash flow to reduce debt and strengthen our
balance sheet.
TURBINE COMPONENT SERVICES AND REPAIR
Softer market conditions, increased competition, and a less favorable business
mix affected revenue growth and operating profitability for the Turbine
Component Services and Repair Group. Additionally, our facility expansions,
which will allow us to increase the types and volumes of products we can repair,
have not yet achieved the desired volume levels necessary to offset their
additional operating costs.
As aircraft utilization rates remain high, postponed repairs will inevitably
need to be made, making us optimistic for stronger results. Longer-term, our
initiative to become a more full service provider will strengthen our market
position, make us more valuable to our customers, and drive future revenue and
income growth.
AEROSPACE MANUFACTURING GROUP
The implementation of synchronous manufacturing, a pushout in orders, and
customer inventory adjustment caused results for the Aerospace Manufacturing
Group to decline for the quarter. On the positive side, our efforts in
synchronous manufacturing have reduced work-in-process inventory since we began
implementation in August. These new operating procedures, shorter material
lead-times, and equipment investments have improved our flexibility,
strengthened our on-time delivery rate, and allowed us to reduce backlog on a
more just-in-time basis. Our operational enhancements give us greater confidence
that we have the flexibility and capacity to support higher volume with quicker
delivery times when market conditions improve.
OUTLOOK
While the aerospace industry is one of long and short cycles, our investments
and strategies to prepare SIFCO for long-term strength and success remain
constant and ongoing. We believe market conditions will strengthen, and are
therefore optimistic for improvements.
(10)
<PAGE> 12
FINANCIAL ANALYSIS
Net sales for the first quarter ended December 31, 1998 decreased to
$29.5 million from $29.9 million a year ago, or a little more than 1%. The
Company reported net income of $0.9 million compared to $2.4 million a year ago.
Net interest expense increased to $0.3 million from $0.2 a year ago,
reflecting higher borrowing requirements for increased working capital.
New orders received declined to $28.0 million from $31.0 million last
year while backlog declined to $40.0 million from $46.0 million a year ago.
TURBINE COMPONENT SERVICES AND REPAIR (TCSR) net sales increased
slightly to $20.7 million from $19.5 million last year. TCSR income from
operations before corporate and interest expense decreased to $1.6 million
compared to $3.0 million last year as a result of increased operating costs
related to the Company's expansions in Ireland and Tampa, Florida and a less
profitable mix of business.
AEROSPACE COMPONENT MANUFACTURING segment (ACM) net sales decreased to
$8.8 million from $10.5 million last year. ACM income from operations before
corporate and interest expense declined to $0.3 million from $1.0 million last
year, primarily due to the volume decline.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $34.1 million at December 31, 1998, compared to
$30.2 million at September 30, 1998. The current ratio for the same period was
2.9 and 2.4 respectively. Total debt as a percentage of tangible shareholders'
equity was 45.3% at December 31, 1998 compared to 39.4% at September 30, 1998.
The Company has borrowed $4.5 million against its revolving credit line
of $6.0 million at December 31, 1998. The Company considers it has adequate
financing available to meet its needs through the current year.
(11)
<PAGE> 13
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 on the assessment 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 Company anticipates that it will
remediate its Year 2000 contingency plan. The Company estimates its cost to be
compliant at approximately $100,000, excluding the cost of Company information
technology employees.
However, the Year 2000 problem is unique and 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. It would be impractical for the company to address all potential Year
2000 problems of Third Parties that, if uncorrected, could have a material
adverse impact on the Company's business.
SAFE HARBOR STATEMENT
---------------------
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
December 31, 1998.
(12)
<PAGE> 14
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 5, 1999 /*/ Jeffrey P. Gotschall
---------------- -----------------------------
Jeffrey P. Gotschall
Chief Executive Officer
Date February 5, 1999 /*/ Richard A. Demetter
---------------- -----------------------------
Richard A. Demetter
Vice President - Finance
(Principal Accounting Officer)
(13)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000090168
<NAME> SIFCO INDUSTRIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,230
<SECURITIES> 0
<RECEIVABLES> 19,133
<ALLOWANCES> 0
<INVENTORY> 26,491
<CURRENT-ASSETS> 52,220
<PP&E> 32,523
<DEPRECIATION> 0
<TOTAL-ASSETS> 91,135
<CURRENT-LIABILITIES> 18,143
<BONDS> 0
5,173
0
<COMMON> 0
<OTHER-SE> 45,366
<TOTAL-LIABILITY-AND-EQUITY> 91,135
<SALES> 0
<TOTAL-REVENUES> 29,525
<CGS> 25,080
<TOTAL-COSTS> 28,518
<OTHER-EXPENSES> (300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 350
<INCOME-PRETAX> 957
<INCOME-TAX> 78
<INCOME-CONTINUING> 879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 879
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
