Annual Report and Form 10-K
Fiscal Year 2007
To our Shareholders:
In fiscal 2007 we made significant progress toward the stated objective of sustained profitability for SIFCO
Industries, Inc. Our significantly improved income from continuing operations of $8.7 million in fiscal 2007
compared to essentially breakeven results in fiscal 2006 can be principally attributed to the following items:
• The strength of the aerospace and defense industries which have created a very strong demand for our
products, and which has resulted in an increase in sales from continuing operations of 27% in fiscal 2007
compared with fiscal 2006;
• Our concerted efforts and success in optimizing our cost structure by means of focused spending and
significantly improved operating efficiencies during a period of strong growth in shipments; and
• Our significant investments in and the leveraging of our human capital.
In addition, the Company completed a second key divestiture with the sale of its industrial turbine repair business
during the third quarter of fiscal 2007. Most importantly, all three business units were profitable in fiscal 2007 and
all are well positioned to take advantage of the growing opportunities in their respective marketplaces.
Although we at SIFCO are very proud of the progress we were able to accomplish in fiscal 2007, we are not yet
satisfied - we believe there is much more that can and will be accomplished in fiscal 2008 and beyond.
Aerospace Component Manufacturing (“ACM”) Group - the ACM Group is now our largest business segment
with sales growth in fiscal 2007 of 37%, which is a sequel to the strong sales growth of 42% that was realized in
fiscal 2006. The Group continues to implement lean initiatives, which it calls SMART (Streamlined Manufacturing
Activities to Reduce Time/Cost). This continuous improvement program utilizes cross-functional teams to identify
and eliminate (or reduce) waste and variation throughout the ACM business with major goals that include: improved
on-time delivery, manufacturing cycle-time reductions and improved customer service and satisfaction. All of these
help achieve the objective of improving the Group’s competitiveness as SIFCO continues its journey to world-class
performance.
The ACM Group provides forged components to a wide variety of aerospace applications, many of which go into a
variety of aircraft manufactured by Boeing, Airbus, Embraer, Cessna, Lockheed Martin, Sikorsky Aircraft and Bell
Helicopter. ACM Group’s forged components can be found on new programs from Boeing (787 Dreamliner),
Bell/Boeing (V22 Osprey), Lockheed Martin (F35 Joint Strike Fighter) and Embraer (170 and 190 Regional Jets).
The ACM Group enters fiscal 2008 with a significant backlog totaling $82.8 million, of which $66.6 million is
scheduled for customer delivery during fiscal 2008. Based on what the ACM Group is seeing and hearing in the
marketplace, we believe that the robust aerospace and defense markets will remain strong at least through 2011.
1
Applied Surface Concepts (“ASC”) Group – the ASC Group provides a unique, tank-less electrochemical metal
finishing process for applications in growing and diverse markets. The Group’s coating capabilities can be found on
a variety of applications such as the coating of drill bits used to explore for new oil deposits on deep sea platforms
and the coating of landing gear for both helicopter and fixed wing commercial and military aircraft. In fiscal 2007,
net sales increased $2.0 million and operating profit increased $1.6 million from the previous year - a very good
result. The significant improvement in profitability in fiscal 2007 is partially attributable to the Group’s successful
effort to better manage its cost structure, given its level of business activities. As the leader in its market segment,
the ASC Group continues to invest in research and development efforts to further expand its coating applications in
the diverse markets that it serves. For a business that serves diverse markets, the ASC Group is equally diverse
geographically, with four (4) operations in the USA: Cleveland, Houston, Hartford and Norfolk, and three (3)
international locations: the United Kingdom, France, and Sweden.
Turbine Component Services and Repair (“Repair”) Group – With the completion in fiscal 2007 of the Repair
Group’s planned divestiture of its repair operations located in Ireland, this business segment now consists of a
turbine engine component repair operation in Minneapolis, Minnesota that serves the small turbine engine
component repair market. This operation repaired its first turbine component in the 1960’s and it continues to
partner with original equipment manufacturers of turbine engines to develop repairs for small turbine engines used
to power commercial, military and business aircraft ranging from helicopters and single engine aircraft to auxiliary
power units on large commercial aircraft. For example, recently, the Repair Group developed a repair of hot section
vanes for the newest turboprop engine used on regional aircraft. The Repair Group’s ability to weld, diffusion bond,
machine, and most importantly, to apply a high temperature resistant thermal coating, is instrumental to a successful
repair. An added dimension to the Group’s strength stems from the ability to do new part manufacturing of legacy
turbine engine hot section components. Operational improvements continue through a blend of lean manufacturing
principles and selective process automation.
During fiscal 2007, we have significantly improved the strength of our balance sheet. At September 30, 2007, our
current assets are three times greater than our current liabilities and our long-term debt to equity ratio was only
8.1%, with $5.5 million of cash on hand and only $3.0 million of long-term debt. We are continuing to position the
Company to take advantage of the available opportunities in the aerospace market, while at the same time being
mindful of the competitive challenges that we face. We again thank all our dedicated employees for their service to
SIFCO, and above all, we appreciate the confidence and support of our valued customers and shareholders.
Jeffrey P. Gotschall
Chairman of the Board and
Chief Executive Officer
2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2007
or
/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _________________ to _____________________
Commission file number 1-5978
SIFCO Industries, Inc.
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of incorporation or organization)
970 East 64th Street, Cleveland Ohio
(Address of principal executive offices)
34-0553950
(I.R.S. Employer Identification No.)
44103
(Zip Code)
(Registrant’s telephone number, including area code)
(216) 881-8600
Securities Registered Pursuant to Section 12(b) of the Act:
Common Shares, $1 Par Value
(Title of each class)
Securities registered pursuant to Section 12(g) of the Act: None
American Stock Exchange
(Name of each exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined
in Rule 12b-2 of the Act).
large accelerated filer ____ accelerated filer ____ non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price
at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal
quarter is $30,986,787.
The number of the Registrant’s Common Shares outstanding at October 31, 2007 was 5,283,357
Documents incorporated by reference: Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on
January 29, 2008 (Part III)
Item 1. Business
A.
The Company
PART I
SIFCO Industries, Inc. (“SIFCO” or “Company”), an Ohio corporation, was incorporated in 1916. The executive offices of
the Company are located at 970 East 64th Street, Cleveland, Ohio 44103, and its telephone number is (216) 881-8600.
The Company is engaged in the production and sale of a variety of metalworking processes, services and products produced
primarily to the specific design requirements of its customers. The processes and services include forging, heat-treating,
coating, welding, machining and selective electrochemical finishing. The products include forged components, machined
forgings and other machined metal components, remanufactured components for aerospace turbine engines, and selective
electrochemical finishing solutions and equipment. The Company’s operations are conducted in three business segments:
(1) Aerospace Component Manufacturing Group, (2) Turbine Component Services and Repair Group and (3) Applied
Surface Concepts Group.
B.
Principal Products and Services
1. Aerospace Component Manufacturing Group
The Company’s Aerospace Component Manufacturing Group (“ACM Group”) has a single operation in Cleveland, Ohio.
This segment of the Company’s business consists principally of the manufacture of forged components for aerospace
applications. As a part of the ACM Group’s manufacturing process, the business performs forging, heat-treating and
precision component machining.
Operations
The Company’s ACM Group is a manufacturer of forged components ranging in size from 2 to 400 pounds (depending on
configuration and alloy), primarily in various steel and titanium alloys, utilizing a variety of processes for applications
principally in the aerospace industry. The ACM Group’s forged products include: original equipment manufacturers
(“OEM”) and aftermarket components for aircraft and land-based turbine engines; structural airframe components; aircraft
landing gear components; wheels and brakes; critical rotating components for helicopters; and commercial/industrial
products. The ACM Group also provides heat-treatment, surface-treatment, non-destructive testing and select machining of
forged components.
The ACM Group generally has multiple sources for its raw materials, which consist primarily of high quality metals
essential to this business. Suppliers of such materials are located throughout North and South America and Europe. In
general, because of tight aerospace grade steel capacity and the limited supply of titanium, raw material lead times have
increased in recent years. However, lead times for certain grades have recently shortened. The ACM Group generally does
not depend on a single source for the supply of its materials. Due to the scarcity of certain raw materials, some material is
provided by a limited number of suppliers; however, the ACM Group believes that its sources are adequate for its business.
The business is ISO 9001:2000 registered and AS 9100:2001 certified. In addition, the ACM Group’s chemical
etching/milling and non-destructive testing facilities are NADCAP (National Aerospace and Defense Contractors
Accreditation Program) accredited and its heat-treating facility is seeking re-accreditation through NADCAP.
Industry
The performance of the domestic and international air transport industry directly and significantly impacts the performance
of the ACM Group. The air transport industry’s long-term outlook is for continued, steady growth. Such outlook suggests
the need for additional aircraft and, therefore, growth in the requirement for airframe and turbine engine components. The
air transport industry is currently benefiting from several favorable trends including: (i) projected growth in air traffic, (ii)
the beginning of major replacement and refurbishment cycles driven by the desire for more fuel efficient aircraft and fleet
commonality, and (iii) the increased use of wide-body aircraft. Management’s current outlook for the air transport industry
continues to remain favorable, with growth expected through at least 2011, and believes the ACM Group is poised to take
advantage of the resulting improvement in order demand from the airframe and engine manufacturers. The ACM Group
also supplies new and spare components for military aircraft. As a result of continued military initiatives, there has been
increased demand for both new and spare components for military customers. It is difficult to determine at this time what
the long-term impact of these factors may be on the demand for products provided by the ACM Group.
Competition
While there has been some consolidation in the forging industry, the ACM Group believes there is limited opportunity to
increase prices, other than for the pass-through of rising raw material steel and titanium alloys prices. The ACM Group
believes, however, that its demonstrated aerospace expertise along with focus on quality, customer service, SMART
(Streamlined Manufacturing Activities to Reduce Time/Cost) initiatives, and offering a broad range of capabilities provide
it with an advantage in the primary markets it serves. The ACM Group competes with both U.S. and non-U.S. suppliers of
forgings. As customers are establishing new facilities throughout the world, the ACM Group will continue to encounter
non-U.S. competition. The ACM Group believes it can expand its markets by (i) broadening its product lines through
investment in equipment that expands its manufacturing capabilities and (ii) developing new customers in markets whose
participants require similar technical competence and service (as the aerospace industry) and are willing to pay a premium
for quality.
Customers
During fiscal 2007, the ACM Group had two customers, various business units of Rolls-Royce Corporation and United
Technologies Corporation, which accounted for 17% and 11%, respectively, of the ACM Group’s net sales. The net sales to
these two customers when combined with (i) a third customer that individually accounts for less than 10% of the Group’s
nets sales and (ii) the direct subcontractors to these three customers, accounted for 56% of the ACM Group’s net sales in
2007. The ACM Group believes that the loss of sales to such customers would result in a materially adverse impact on the
business and income of the ACM Group. However, the ACM Group has maintained a business relationship with these
three customers for well over ten years and is currently conducting business with some of them under multi-year
agreements. Although there is no assurance that this will continue, historically as one or more major customers have
reduced their purchases, the ACM Group has generally been successful in replacing such reduced purchases, thereby
avoiding a material adverse impact on the ACM Group. The ACM Group attempts to rely on its ability to adapt its
services and operations to changing requirements of the market in general and its customers in particular. No material part
of the ACM Group’s business is seasonal.
Backlog of Orders
The ACM Group’s backlog as of September 30, 2007 increased to $82.8 million, of which $66.6 million is scheduled for
delivery during fiscal 2008, compared with $65.7 million as of September 30, 2006, of which $53.5 million was scheduled
for delivery during fiscal 2007. It is important to note that certain aerospace grade steel and titanium alloys raw material
delivery lead times are beginning to shorten and such lead time improvement may in the future result in a fundamental shift
in the ordering pattern of the ACM Group’s customers. A potential consequence of such a shift may be that customers will
not place orders as far in advance as they currently do resulting in a potential reduction in the ACM Group’s backlog.
Accordingly, such backlog reduction, to the extent it may occur, may not necessarily be completely indicative of actual
sales expected for any succeeding period. All orders are subject to modification or cancellation by the customer with
limited charges.
2. Turbine Component Services and Repair Group
The Company’s Turbine Component Services and Repair Group (“Repair Group”) has a single operation in Minneapolis,
Minnesota. This segment of the Company’s business consists principally of the repair and remanufacture of small
aerospace turbine engine components. As a part of the repair and remanufacture process, the business performs precision
component machining and applies high temperature-resistant coatings to turbine engine components.
Operations
The Repair Group requires the procurement of licenses/authority, which certify that the Group has obtained approval to
perform certain proprietary repair processes. Such approvals are generally specific to an engine and its components, a repair
process, and a repair facility/location. Without possession of such approvals, a company would be precluded from
competing in the aerospace turbine engine component repair business. Approvals are issued by either the original
equipment manufacturers (“OEM”) of aerospace turbine engines or the Federal Aviation Administration (“FAA”).
In general, the Company considers aerospace turbine engines that (i) possess a thrust of less than 17,500 pounds and/or (ii)
are used to power aircraft that carry fewer than 100 passengers to be small aerospace turbine engines. Historically, the
Repair Group has elected to procure approvals primarily from the OEMs and currently maintains proprietary repair process
approvals issued by certain of the primary small engine OEMs (e.g. Pratt & Whitney, Rolls-Royce, Turbomeca, and
Hamilton Sundstrand). In exchange for being granted an OEM approval, the Repair Group is obligated, in most cases, to
2
pay royalties to the OEM for each type of component repair that it performs utilizing the OEM-approved proprietary repair
process. The Repair Group continues to be successful in procuring FAA repair process approvals. There is generally no
royalty payment obligation associated with the use of a repair process approved by the FAA. To procure an OEM or FAA
approval, the Repair Group is required to demonstrate its technical competence in the process of repairing such turbine
engine components.
The development of remanufacturing and repair processes is an ordinary part of the Repair Group business. The Repair
Group continues to invest time and money on research and development activities. The Company’s research and
development activities in high temperature resistant coatings applied to super-alloy materials have applications in the small
aerospace turbine engine markets. Operating costs related to such activities are expensed during the period in which they
are incurred. The Group’s research and development expense related to its continuing operations was $0.4 million in fiscal
2007.
The Repair Group generally has multiple sources for its raw materials, which consist primarily of investment castings and
industrial coating materials essential to this business. Certain items are procured directly from the OEM to satisfy repair
process requirements. Suppliers of such materials are located throughout North America and Europe. Although certain raw
materials may be provided by a limited number of suppliers, the Repair Group generally does not depend on a single source
for the supply of its materials and management believes that its sources are adequate for its business.
Industry
The performance of the air transport industry directly and significantly impacts the performance of the Repair Group. The
air transport industry’s long-term outlook is for continued, steady growth. Such outlook suggests the need for additional
aircraft and, therefore, growth in the requirement for aerospace turbine engines and related engine repairs. The air transport
industry is currently benefiting from several favorable trends including: (i) projected growth in air traffic, (ii) the beginning
of major replacement and refurbishment cycles driven by the desire for more fuel efficient aircraft and fleet commonality,
and (iii) the increased use of wide-body aircraft. Management’s current outlook for the air transport industry continues to
remain favorable. It is difficult to determine what the long-term impact of these factors may be on air travel and the demand
for services and products provided by the Repair Group.
Competition
In recent years, while the absolute number of competitors has decreased as a result of industry consolidation and vertical
integration, competition in the turbine engine component repair business has nevertheless increased, principally due to the
increased direct involvement of the aerospace turbine engine manufacturers in the turbine engine overhaul and component
repair businesses. With the presence of the OEM in the market, there has been a general reluctance on the part of the OEM
to issue, to independent component repair companies, its approvals for the repair of its newer model engines and related
components. The Company believes that the Repair Group will, more likely than not, become more dependent in the future
on (i) its ability to successfully procure and market FAA approved licenses and related repair processes and/or (ii) a close
collaboration with engine manufacturers.
Customers
The identity and ranking of the Repair Group’s principal customers can vary from year to year. The Repair Group attempts
to rely on its ability to adapt its services and operations to changing requirements of the market in general and its customers
in particular, rather than relying on high volume production of a particular item or group of items for a particular customer
or customers. During fiscal 2007, the Repair Group had one customer, consisting of various business units of United
Technologies Corporation, which accounted for 35% of the Repair Group’s net sales from continuing operations. Although
there is no assurance that this will continue, historically as one or more major customers have reduced their purchases, the
business has generally been successful in replacing such reduced purchases, thereby avoiding a material adverse impact on
the business. No material part of the Repair Group’s business is seasonal.
Backlog of Orders
The Repair Group’s backlog from continuing operations as of September 30, 2007 increased to $4.2 million, of which $1.5
million is scheduled for delivery during fiscal 2008 and $2.7 million is on hold, compared with $2.7 million as of September
30, 2006, of which $1.6 million was scheduled for delivery during fiscal 2007 and $1.1 million was on hold. All orders are
subject to modification or cancellation by the customer with limited charges. The Repair Group believes that the backlog
may not necessarily be indicative of actual sales for any succeeding period.
3
3. Applied Surface Concepts Group
The Company’s Applied Surface Concepts Group (“ASC Group”) provides surface enhancement technologies principally
related to selective electrochemical finishing and anodizing. Principal product offerings include (i) the sale of metal
solutions and equipment required for selective electrochemical finishing and (ii) providing selective electrochemical
finishing contract services.
Operations
Selective electrochemical finishing of a part or component is done without the use of an immersion tank. A wide variety of
pure metals and alloys, principally determined by the customer’s design requirements, can be used for applications
including corrosion protection, wear resistance, anti-galling, increased lubricity, increased hardness, increased electrical
conductivity, and re-sizing. SIFCO Process® metal solutions include: cadmium, cobalt, copper, nickel, tin and zinc. In
addition, precious metal solutions such as gold, iridium, palladium, platinum, rhodium, and silver are also provided to
customers. The ASC Group has also developed a number of alloy-plating solutions.
The ASC Group can either (i) supply the selective electrochemical finishing chemicals and equipment to customers desiring
to perform selective electrochemical finishing in-house or (ii) provide manual, semi-automated, or automated contract
selective electrochemical finishing services at either the customer’s site or at one of the Group’s facilities. The Group
operates four U.S. facilities in geographic areas strategically located in proximity to its customers (Cleveland, Ohio /
Hartford, Connecticut / Norfolk, Virginia / Houston, Texas) and three in Europe (Birmingham, England / Paris, France /
Rattvik, Sweden). The scope of selective electrochemical finishing work includes part salvage and repair, part
refurbishment, and new part enhancement. Selective electrochemical finishing solutions are produced in the Cleveland,
Ohio and Birmingham, England facilities.
The ASC Group generally has multiple sources for its raw materials, which consist primarily of industrial chemicals and
metal salts and, therefore, does not depend on a single source for the supply of key raw materials. Management believes
that its sources are adequate to support its business.
The ASC Group sells its products and services under recognized industry brand names including: SIFCO Process®, Dalic®,
USDL® and Selectron®, all of which are specified in military and industrial specifications. The ASC Group’s
manufacturing operations have ISO 9001:2001 and AS 9100A certifications. In addition, two of its facilities are NADCAP
(National Aerospace and Defense Contractors Accreditation Program) certified. Two of the service centers are FAA
approved repair shops. Other ASC Group approvals include ABS (American Bureau of Ships), ARR (American Railroad
Registry), JRS (Japan Registry of Shipping), and KRS (Korean Registry of Shipping).
Industry
Selective electrochemical finishing occupies a niche within the broader metal finishing industry. The ASC Group’s
selective electrochemical finishing process is used to provide functional, engineered finishes rather than decorative finishes,
and it serves many markets including aerospace, automotive, electric power generation, and oil and gas. In its planning and
decision making processes, management of the ASC Group monitors and evaluates precious metal prices, global
manufacturing activity, internal labor capacity, technological developments in surface enhancement, and the exploration
and production activities relative to oil and gas products. The diversity of industries served helps to mitigate the impact of
economic cycles on the ASC Group.
Competition
Although the Company believes that the ASC Group is the largest selective electrochemical finishing company in the
world, there are several companies globally that manufacture and sell selective electrochemical finishing solutions and
equipment and/or provide contract selective electrochemical finishing services. The ASC Group seeks to differentiate itself
through its technical support, research and development, and automation capabilities. The ASC Group also competes with
other surface enhancement technologies such as welding and metal spray.
Customers
The ASC Group has a customer base of over 1,000 customers. However, approximately 10 customers, who operate in a
variety of industries, accounted for approximately 34% of the Group’s fiscal 2007 net sales. During fiscal 2007, the ASC
Group had one customer, Halliburton Company, which accounted for 13% of the ASC Group’s net sales. No material part
of the ASC Group’s business is seasonal.
4
Backlog of Orders
Due to the nature of its business (i.e. shorter lead times for its products and services) the ASC Group had no material
backlog at September 30, 2007 and 2006.
4. General
For financial information concerning the Company’s reportable segments see Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7 and Note 11 of Notes to Consolidated Financial
Statements included in Item 8.
C.
Environmental Regulations
In common with other companies engaged in similar businesses, the Company is required to comply with various laws and
regulations relating to the protection of the environment. The costs of such compliance have not had, and are not presently
expected to have, a material effect on the capital expenditures, earnings or competitive position of the Company and its
subsidiaries under existing regulations and interpretations.
D.
Employees
The number of the Company’s employees decreased from approximately 390 at the beginning of fiscal year 2007 to
approximately 338 employees at the end of fiscal 2007. The decrease was principally a result of the Company’s disposition
of its industrial turbine engine component repair business, which employed approximately 100 people, which decrease was
partially offset by additional employees hired to support the growth in the Company’s three businesses. The Company is a
party to collective bargaining agreements with certain employees located at its Cleveland, Ohio and Minneapolis,
Minnesota facilities. The ACM Group union contract expires in May 2010 (effective since May 2005) and the Turbine
Component Repair Group union contract expires July 2009 (effective since July 2005). Management considers its relations
with the Company’s employees to be good.
E.
Non-U.S. Operations
The Company’s products and services are distributed and performed in U.S. as well as non-U.S. markets. The Company
commenced its operations in Ireland in 1981 and ceased such operations in fiscal 2007. The Company commenced its
operations in the United Kingdom and France as a result of an acquisition of a business in 1992. The Company
commenced its operations in Sweden as a result of an acquisition of a business in 2006. Wholly-owned subsidiaries operate
the Company’s service and distribution facilities in United Kingdom, France and Sweden.
Financial information about the Company’s U.S. and non-U.S. operations is set forth in Note 11 to the Consolidated
Financial Statements included in Item 8.
As of September 30, 2007, the majority 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. Distributions from the Company’s non-U.S.
subsidiaries to the Company may be subject to statutory restrictions, adverse tax consequences or other limitations.
5
Item 2. Properties
The Company’s property, plant and equipment include the facilities described below and a substantial quantity of
machinery and equipment, most of which consists of industry specific machinery and equipment using special jigs, tools
and fixtures and in many instances having automatic control features and special adaptations. In general, the Company’s
property, plant and equipment are in good operating condition, are well maintained and substantially all of its facilities are
in regular use. The Company considers its investment in property, plant and equipment as of September 30, 2007 suitable
and adequate given the current product offerings for the respective business segments’ operations in the current business
environment. The square footage numbers set forth in the following paragraphs are approximations:
• The Turbine Component Services and Repair Group operates a single facility in Minneapolis, Minnesota
with a total of 59,000 square feet and that is involved in the repair and remanufacture of small aerospace
turbine engine components. In addition, the Repair Group owns a building and land located in Cork, Ireland
(59,000 square feet) that (i) is subject to a long-term lease arrangement with PAS Technologies Ireland, the
acquirer of the Repair Group’s industrial turbine engine component repair business in fiscal 2007, and (ii) is
being marketed for sale as of September 30, 2007.
• The Aerospace Component Manufacturing Group operates in a single, owned 240,000 square foot facility
located in Cleveland, Ohio. This facility is also the site of the Company’s corporate headquarters.
• The Applied Surface Concepts Group is headquartered in an owned 34,000 square foot facility in Cleveland,
Ohio. The Group leases space aggregating approximately 54,000 square feet for sales offices and/or for its
contract selective electrochemical finishing services in Norfolk, Virginia; Hartford, Connecticut; Houston,
Texas; Paris, France; and Birmingham, England. The Group also operates in an owned 4,500 square foot
facility in Rattvik, Sweden.
Item 3. Legal Proceedings
In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot
reasonably estimate future costs, if any, related to these matters but does not believe any such matters are material to its
financial condition or results of operations. The Company maintains various liability insurance coverages to protect its
assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it
is possible that the Company’s future operating results could be affected by future cost of litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the Company’s 2007 fiscal year.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The Company’s Common Shares are traded on the American Stock Exchange under the symbol “SIF”. The following table
sets forth, for the periods indicated, the high and low sales price for the Company’s Common Shares as reported by the
American Stock Exchange.
Years Ended September 30,
2007
2006
High
Low
High
Low
First Quarter……………………………...
Second Quarter…………………………..
Third Quarter…………………………….
Fourth Quarter…………………………...
$ 7.30 $ 4.15 $ 4.00
5.25
4.51
10.91
5.16
8.61
21.29
4.75
13.50
25.50
$ 2.95
3.74
4.20
3.80
6
Performance Graph
Set forth below is a graph comparing the returns to shareholders of the Company's Common Shares to the returns
to shareholders of the S&P Composite – 500 Stock Index and the S&P Aerospace/Defense Group. The graph assumes (i)
that the value of the investment in the Common Shares, the S&P Composite – 500 Stock Index and the S&P
Aerospace/Defense Group was $100 on September 30, 2002 and (ii) the reinvestment of dividends.
COMPARISON OF FIVE-YEAR RETURN PERFORMANCE OF
SIFCO INDUSTRIES, INC., S&P 500 INDEX
AND S&P AEROSPACE/DEFENSE GROUP
SIFCO Stock Price vs. S&P 500 and S&P
Aerospace/Defense Index
$700.00
$600.00
$500.00
$400.00
$300.00
$200.00
$100.00
$0.00
9/30/02
3/31/03
9/30/03
3/31/04
9/30/04
3/31/05
9/30/05
3/31/06
9/30/06
3/31/07
9/30/07
S&P 500
SIFCO
S&P Aerospace/Defense
Dividends and Shares Outstanding
The Company has not declared or paid any cash dividends within the last two (2) fiscal years and does not anticipate paying
any such dividends in the foreseeable future. The Company currently intends to retain all of its earnings for the operation
of its businesses. The Company’s ability to declare or pay cash dividends is limited by its credit agreement covenants. At
October 31, 2007, there were approximately 660 shareholders of record of the Company’s Common Shares, as reported by
National City Corporation, the Company’s Transfer Agent and Registrar, which maintains it corporate offices at National
City Center, 1900 East Ninth Street, Cleveland, Ohio 44101-0756.
7
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data of the Company. The data presented below should be read in
conjunction with the audited Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8.
Years Ended September 30,
2007
2006
2005
2004
2003
(Amounts in thousands, except per share data)
Statement of Operations Data
Net sales…………………………...….……………….. $
Income (loss) from continuing operations before
income tax provision………………………………
Income tax provision……………………...……………
Income (loss) from continuing operations………….….
Income (loss) from continuing operations per
87,255
$
68,606 $
52,863
$
53,798
$
52,634
10,255
1,483
8,772
(35)
14
(49)
(2,424)
541
(2,965)
(3,298)
75
(3,373)
(3,000)
19
(3,019)
share (basic)……………………………………..
1.67
(0.01)
(0.57)
(0.65)
(0.58)
Income (loss) from continuing operations per
share (diluted)…………………………………...
Income (loss) from discontinued operations, net of tax..
Net income (loss)……………………………………....
Net income (loss) per share (basic)………………..
Net income (loss) per share (diluted)………….…..
Cash dividends per share……………………………….
1.66
(2,044)
6,728
1.28
1.27
---
(0.01)
1,009
960
0.18
0.18
---
(0.57)
2,769
(196)
(0.04)
(0.04)
---
(0.65)
(2,573)
(5,946)
(1.14)
(1.14)
---
(0.58)
(2,328)
(5,347)
(1.02)
(1.02)
---
Shares Outstanding at Year End…………………….
5,281
5,222
5,222
5,214
5,226
Balance Sheet Data
Working capital………………………………..………
Property, plant and equipment, net…………………….
Total assets…………………………………….………
Long-term debt, net of current maturities……………..
Other long-term liabilities……………………………...
Total shareholders’ equity……………………..………
Shareholders’ equity per share………………………...
Financial Ratios
Return on beginning shareholders’ equity…………......
Long-term debt to equity percent…………..…………..
Current ratio…………………………………..………..
$
32,350
10,570
60,889
2,986
5,613
36,778
6.96
$
15,011
14,059
48,775
427
5,939
25,183
4.82
$
9,619
18,744
49,523
10
8,645
22,398
4.29
$
16,029
19,882
59,759
5,797
8,108
24,802
4.76
$
14,669
25,699
61,678
7,258
7,951
30,281
5.79
26.7%
8.1%
3.1
4.3%
1.7%
1.9
(0.8)%
---
1.5
(19.6)%
23.4 %
1.8
(14.2)%
24.0%
1.9
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, may
contain various forward-looking statements and includes assumptions concerning the Company’s operations, future results
and prospects. These forward-looking statements are based on current expectations and are subject to risk and
uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the
Company provides this cautionary statement identifying important economic, political and technological factors, among
others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or
implied by the forward-looking statements and related assumptions. Such factors include the following: (1) future business
environment, including capital and consumer spending; (2) competitive factors, including the ability to replace business
which may be lost due to increased direct involvement by the turbine engine manufacturers in turbine component service
and repair markets; (3) successful procurement of certain repair materials and new repair process licenses from turbine
engine manufacturers and/or the Federal Aviation Administration; (4) metals and commodities price increases and the
Company’s ability to recover such price increases; (5) successful development and market introductions of new products,
including the continued development of turbine repair processes; (6) regressive pricing pressures on the Company’s
products and services, with productivity improvements as the primary means to maintain margins; (7) success with the
further development of strategic alliances with certain turbine engine manufacturers for turbine component repair services;
(8) the impact on business conditions, and on the aerospace industry in particular, of the global terrorism threat; (9)
continued reliance on consumer acceptance of regional and business aircraft powered by more fuel efficient turboprop
engines vs. regional and business aircraft powered by turbofan engines; (10) continued reliance on several major customers
8
for revenues; (11) the Company’s ability to continue to have access to its revolving credit facility and to comply with the
terms of its credit agreement, including financial covenants, (12) the impact of changes in defined benefit pension plan
actuarial assumptions on future contributions; and (13) stable governments, business conditions, laws, regulations and taxes
in economies where business is conducted.
The Company and its subsidiaries engage in the production and sale of a variety of metalworking processes, services and
products produced primarily to the specific design requirements of its customers. The processes and services include
forging, heat-treating, coating, welding, machining and selective electrochemical finishing. The products include forgings,
machined forged parts and other machined metal parts, remanufactured component parts for turbine engines, and selective
electrochemical finishing solutions and equipment. The Company’s operations are conducted in three business segments:
(1) Aerospace Component Manufacturing Group, (2) Turbine Component Services and Repair Group, and (3) Applied
Surface Concepts Group. The Company endeavors to plan and evaluate its businesses’ operations while taking into
consideration certain factors including the following – (i) the projected build rate for commercial, business and military
aircraft as well as the engines that power such aircraft, (ii) the projected maintenance, repair and overhaul schedules for
commercial, business and military aircraft as well as the engines that power such aircraft, and (iii) anticipated exploration
and production activities relative to oil and gas products, etc.
A.
Results of Operations
1. Fiscal Year 2007 Compared with Fiscal Year 2006
In fiscal 2007, the Company and its Irish subsidiary, SIFCO Turbine Components Limited (“SIFCO Turbine”), which is a
part of the Company’s Turbine Component Services and Repair Group, completed the sale of its industrial turbine engine
component repair business and certain related assets (“Industrial Repair Business”). In addition, in fiscal 2006, the
Company and SIFCO Turbine completed the sale of its large aerospace turbine engine component repair business and
certain related assets (“Large Aero Business”). The combined results of the Company’s Industrial Repair and Large Aero
Businesses are reported as discontinued operations in the accompanying Consolidated Statements of Operations.
Net sales from continuing operations in fiscal 2007 increased 27.2% to $87.3 million, compared with $68.6 million in fiscal
2006. Income from continuing operations in fiscal 2007 was income of $8.8 million, compared with a loss of $0.1 million
in fiscal 2006. Income from discontinued operations, net of tax, which includes both the Industrial Repair and Large Aero
Businesses, was a loss of $2.0 million in fiscal 2007, compared to income of $1.0 million in fiscal 2006. Included in the
$2.0 million loss from discontinued operations in fiscal 2007 was (i) $2.1 million of grant income related to the expiration
of certain grants, as explained more fully in Note 4 to the Consolidated Financial Statements in Item 8 and (ii) a loss of
approximately $0.8 million from the divestiture of the Industrial Repair Business, as explained more fully in Note 9 to the
Consolidated Financial Statements in Item 8. Included in the $1.0 million of income from discontinued operations in fiscal
2006 was a gain of approximately $4.4 million from the divestiture of the Large Aero Business, as explained more fully in
Note 9 to the Consolidated Financial Statements in Item 8.
Net income in fiscal 2007 was $6.7 million, compared with $1.0 million in fiscal 2006.
Aerospace Component Manufacturing Group (“ACM Group”)
Net sales in fiscal 2007 increased 36.5% to $60.0 million, compared with $43.9 million in fiscal 2006. The significant
increase in the ACM Group’s net sales in fiscal 2007 was due to a combination of (i) an increase in volumes resulting from
the general strength of demand in the markets which the Company serves and (ii) an increase in product prices principally
reflecting the pass-through to customers of the increase in raw material prices incurred by the Company. For purposes of
the following discussion, the ACM Group considers aircraft that can accommodate less than 100 passengers to be small
aircraft and those that can accommodate 100 or more passengers to be large aircraft. Net sales of airframe components for
small aircraft increased $7.2 million to $30.6 million in fiscal 2007, compared with $23.4 million in fiscal 2006. Net sales
of turbine engine components for small aircraft, which consist primarily of net sales of turbine engine components for
business and regional jets, as well as military transport and surveillance aircraft, increased $6.5 million to $18.1 million in
fiscal 2007, compared with $11.6 million in fiscal 2006. Net sales of airframe components for large aircraft increased $2.7
million to $7.1 million in fiscal 2007, compared with $4.4 million in fiscal 2006. Net sales of turbine engine components
for large aircraft decreased $0.1 million to $1.7 million in fiscal 2007, compared with $1.8 million in fiscal 2006.
Commercial product and non-product sales were $2.5 million and $2.7 million in fiscal 2007 and 2006, respectively.
Included in net sales in fiscal 2007 was $0.7 million related principally to certain product pricing adjustments that were
agreed to and recorded in the fourth quarter of fiscal 2007 and that related to customer shipments that occurred during the
9
prior two quarters of fiscal 2007. Such pricing adjustments resulted principally from the finalization, during the fourth
quarter of fiscal 2007, of certain ACM Group customer negotiations that were initiated during the first half of fiscal 2007.
Of the $0.7 million in fourth quarter pricing adjustments, $0.5 million related to net sales in the third quarter of fiscal 2007
and $0.1 million related to net sales in the second quarter of fiscal 2007.
The ACM Group’s airframe and turbine engine component products have both military and commercial applications. Net
sales of airframe and turbine engine components that solely have military applications were $25.7 million in fiscal 2007,
compared with $20.5 million in fiscal 2006. This increase is attributable in part to increased military spending due to
ongoing wartime demand such as for additional military helicopters and related replacement components.
In fiscal 2007, The ACM Group’s total material cost of goods sold as a percentage of net product sales decreased 1.3%
compared with fiscal 2006. Availability of certain aerospace grade materials improved somewhat in fiscal 2007, compared
with fiscal 2006, resulting in the beginning of the shortening of certain raw materials lead times.
During fiscal 2007, the ACM Group’s selling, general and administrative expense increased $0.5 million to $3.7 million, or
6.1% of net sales, compared with $3.2 million, or 7.3% of net sales, in fiscal 2006. The $0.5 million increase in fiscal 2007
was principally due to increases in the ACM Group’s compensation expense, including incentive compensation, and
variable selling costs resulting from (i) the hiring of certain additional personnel to support the growth in the ACM Group’s
business and (ii) the overall significant increase in net sales and operating income during fiscal 2007 compared with fiscal
2006.
The ACM Group’s operating income in fiscal 2007 was $10.3 million, compared with $1.7 million in fiscal 2006.
Operating results improved significantly in fiscal 2007 compared with fiscal 2006 due primarily to the positive impact on
margins resulting from significantly higher production and net sales volumes in fiscal 2007. The improved margins are due
principally to (i) operating efficiencies and the related absorption of the ACM Group’s relatively high fixed operating costs
over more units of production and sales in fiscal 2007, (ii) improvements in product pricing and (iii) a $1.2 million
reduction in the LIFO provision in fiscal 2007 compared with fiscal 2006.
Turbine Component Services and Repair Group (“Repair Group”)
Net sales from continuing operations in fiscal 2007, which consist principally of component repair services (including
precision component machining and industrial coating) for small aerospace turbine engines, increased 4.9% to $12.9
million, compared with $12.3 million in fiscal 2006.
During fiscal 2007, the Repair Group’s selling, general and administrative expenses from continuing operations decreased
$0.2 million to $1.4 million or 10.5% of net sales, compared with $1.6 million, or 12.7% of net sales, in fiscal 2006.
Included in the $1.6 million of selling, general and administrative expenses in fiscal 2006 were $0.1 million of severance
and related charges.
The Repair Group’s operating income from continuing operations in fiscal 2007 was $0.7 million, compared with $0.2
million in fiscal 2006. The improvement in operating income is principally attributable to (i) the aforementioned reduction
in selling, general and administrative expenses, (ii) the relative product sales mix - with a larger portion of sales being
higher margin product with a lower raw material/higher value-added content and (iii) the consumption of lower cost and/or
previously written down inventory.
Applied Surface Concepts Group (“ASC Group”)
Net sales of the ASC Group increased 16.2% to $14.3 million in fiscal 2007, compared with net sales of $12.3 million in
fiscal 2006. In fiscal 2007, product net sales, consisting of selective electrochemical finishing equipment and solutions,
increased 11.4% to $7.1 million, compared with $6.3 million in fiscal 2006. In fiscal 2007, customized selective
electrochemical finishing contract service net sales increased 21.5% to $7.1 million, compared with $5.8 million in fiscal
2006.
During fiscal 2007, The ASC Group’s selling, general and administrative expenses decreased $0.3 million to $4.4 million,
or 31.0% of net sales, compared with $4.7 million, or 38.4% of net sales, in fiscal 2006. The principal reason for the $0.3
million decrease in selling, general and administrative expenses in fiscal 2007 as compared to fiscal 2006 was the reduction
in headcount and related expenses, which was partially offset by $0.1 million of severance and related charges incurred in
fiscal 2007.
10
The ASC Group’s operating income in fiscal 2007 was $1.0 million, compared with an operating loss of $0.6 million in
fiscal 2006. Operating results improved principally due to (i) the positive impact on margins of the significantly higher net
sales volumes in fiscal 2007, while maintaining a relatively fixed cost structure, compared with fiscal 2006 and (ii) the
aforementioned $0.3 million reduction in selling, general and administrative expenses.
Corporate Unallocated Expenses
Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate
expenses, were $1.7 million in fiscal 2007 compared $1.6 million in fiscal 2006. During fiscal 2007, a $0.3 million
reduction in compensation expense due principally to a management restructuring (after the sale of the Large Aero Business
of the Repair Group’s business that occurred in fiscal 2006) was offset by a $0.4 million increase in incentive expense
related to payments earned as a result of (i) the successful completion of certain strategic initiatives and (ii) the Company’s
significantly improved operating results in fiscal 2007. Legal and professional expenses related to the sale of the
Company’s Industrial Repair Business that were charged to corporate unallocated expenses in the first two quarters of fiscal
2007 were reclassified in the third quarter of fiscal 2007 to loss on sale of business, which is included in income (loss) from
discontinued operations, net of tax.
Other/General
Interest expense from continuing operations was $0.2 million in fiscal 2007, compared with a nominal amount in fiscal
2006. The following table sets forth the weighted average interest rates and weighted average outstanding balances under
the Company’s credit agreements in fiscal years 2007 and 2006.
Credit Agreement
Revolving credit agreement……………………….
Debt purchase agreement (1)..…………………….
Weighted Average
Interest Rate
Year Ended September 30,
Weighted Average
Outstanding Balance
Year Ended September 30,
2007
8.8%
N/A
2006
8.4%
4.6%
2007
2006
$1.4 million
N/A
$0.7 million
$0.7 million
(1) Debt purchase agreement was with an Irish bank and was paid off during the third quarter of fiscal 2006. Interest
expense related to this debt is included in income (loss) from discontinued operations.
During fiscal 2007, in addition to recognizing at statutory rates the utilization of $3.6 million of the Company’s available
U.S. net operating loss carry forwards, the Company (i) provided $1.8 million of U.S. deferred income taxes on the
undistributed earnings of its non-U.S. subsidiaries that are available for distribution as of September 30, 2007; (ii) reversed
a substantial portion of the valuation allowance previously established against its net deferred tax assets and, accordingly,
recognized a U.S. deferred income tax benefit of approximately $3.0 million, as explained more fully in Note 6 to the
Consolidated Financial Statements in Item 8; and (iii) recognized the benefit of the excess tax basis of the Company’s
property, plant and equipment of $0.7 million. The Company’s total non-U.S. income tax provision was $0.1 million.
2. Fiscal Year 2006 Compared With Fiscal Year 2005
In fiscal 2006, the Company and SIFCO Turbine completed the sale of its Large Aero Business. The combined results of
SIFCO’s Industrial Repair and Large Aero Businesses are reported in discontinued operations in the accompanying
Consolidated Statements of Operations in Item 8.
Net sales from continuing operations in fiscal 2006 increased 29.8% to $68.6 million, compared with $52.9 million in fiscal
2005. The loss from continuing operations in fiscal 2006 was $0.1 million, compared with $3.0 million in fiscal 2005.
Income from discontinued operations, net of tax, which includes both the Industrial Repair and Large Aero Businesses, was
$1.0 million in fiscal 2006 compared with $2.8 million in fiscal 2005. Included in the $1.0 million of income from
discontinued operations in fiscal 2006, was a gain of approximately $4.4 million from the divestiture of the Large Aero
Business as explained more fully in Note 9 to the Consolidated Financial Statements in Item 8. Included in the $2.8 million
of income from discontinued operations in fiscal 2005 was a gain of approximately $6.2 million from the sale of certain
non-operating assets of the Repair Group’s Ireland operations. Net income in fiscal 2006 was $1.0 million, compared with
a net loss of $0.2 million in fiscal 2005.
11
Aerospace Component Manufacturing Group
Net sales in fiscal 2006 increased 41.8% to $43.9 million, compared with $31.0 million in fiscal 2005. For purposes of the
following discussion, the ACM Group considers aircraft that can accommodate less than 100 passengers to be small aircraft
and those that can accommodate 100 or more passengers to be large aircraft. Net sales of airframe components for small
aircraft increased $8.5 million to $23.4 million in fiscal 2006, compared with $14.9 million in fiscal 2005. Net sales of
turbine engine components for small aircraft, which consist primarily of business aircraft and regional commercial jets, as
well as military transport and surveillance aircraft, increased $1.1 million to $11.6 million in fiscal 2006, compared with
$10.5 million in fiscal 2005. Net sales of airframe components for large aircraft increased $1.9 million to $4.4 million in
fiscal 2006, compared with $2.5 million in fiscal 2005. Net sales of turbine engine components for large aircraft increased
$0.9 million to $1.8 million in fiscal 2006, compared with $0.9 million in fiscal 2005. The increase in the ACM Group’s net
sales volumes during fiscal 2006 is in part attributable to an increase in the ACM Group’s selling prices due to increases in
raw material prices in the market place, some of which were passed through to the ACM Group’s customers. The
commercial aerospace industry continues to experience strong demand, most notably for mid-size single-aisle aircraft as
well as for regional aircraft. Other product and non-product sales were $2.7 million and $2.2 million in fiscal 2006 and
2005, respectively.
The ACM Group’s airframe and turbine engine component products have both military and commercial applications. Net
sales of airframe and turbine engine components that solely have military applications were $20.5 million and $13.1 million
in fiscal 2006 and 2005, respectively. This increase is attributable in part to increased military spending due to ongoing
wartime demand such as for additional military helicopters.
In fiscal 2006, the ACM Group’s total material cost of goods sold as a percentage of net product sales increased 6.2%,
compared with fiscal 2005. Overall steel capacity was tight during fiscal 2006, especially for aerospace grade materials.
Titanium pricing is impacted by limited world-wide supply of titanium. These factors, coupled with increased steel
demand, have resulted in higher raw material prices. While all grades of raw material experienced cost increases during
fiscal 2006, aerospace alloy and titanium grades experienced the most significant increases.
Selling, general and administrative expenses in fiscal 2006 were $3.2 million, or 7.3% of net sales, compared with $2.3
million, or 7.5% of net sales, in fiscal 2005. The $0.9 million increase in selling, general and administrative expenses in
fiscal 2006 was principally due to increases in the ACM Group’s compensation, including incentive compensation;
provision for bad debts; consulting services; and variable selling costs. The increases in compensation ($0.2 million) and
variable selling ($0.3 million) expenses were principally due to the significant increase in net sales and operating income
during fiscal 2006, compared with fiscal 2005.
The ACM Group’s operating income in fiscal 2006 was $1.7 million, compared with operating income of $0.2 million in
fiscal 2005. Operating results were positively impacted in fiscal 2006 compared with fiscal 2005 due to the positive impact
on margins resulting from significantly higher sales volumes, partially offset by a $2.1 million increase in the LIFO
provision, which increase was due principally to the increased cost of raw material steel being experienced within the ACM
Group’s industry as well as increases in certain other components of its manufacturing costs. The ACM Group’s business is
heavy manufacturing in nature and consequently bears large fixed operating costs. Therefore, improvements in sales
volume generally result in positive impacts on operating margins as such fixed costs are spread over more units of
production, as was experienced during fiscal 2006. Operating income in fiscal 2006 included $0.2 million of profit on sale
of excess raw material inventory, compared with $0.4 million in fiscal 2005. Operating income in fiscal 2006 was
negatively impacted by a $0.4 million increase in expenditures for the purchase of new tooling and repairs to existing
tooling. Revenue associated with sales of components manufactured with new tooling generally will be realized in future
periods when such component products are shipped.
Turbine Component Services and Repair Group
Net sales from continuing operations in fiscal 2006, which consist principally of component repair services (including
precision component machining and industrial coating) for small aerospace turbine engines, increased 22.5% to $12.3
million, compared with $10.1 million in fiscal 2005.
During fiscal 2006, the Repair Group’s selling, general and administrative expenses from continuing operations increased
$0.3 million to $1.6 million, or 12.7% of net sales, from $1.3 million, or 13.0% of net sales, in fiscal 2005. Included in both
the $1.6 million and $1.3 million of selling, general and administrative expenses in fiscal 2006 and 2005, respectively, were
$0.1 million of severance and related charges. The remaining selling, general and administrative expenses from continuing
operations in fiscal 2006 and 2005 were $1.5 million, or 11.8% of net sales, and $1.2 million, or 12.3% of net sales,
respectively.
12
The Repair Group’s operating income from continuing operations in fiscal 2006 was $0.2 million, compared with an
operating loss of $1.7 million in fiscal 2005. The improvement in operating income is principally attributable to the
positive impact on margins of the significantly higher net sales volumes in fiscal 2006, while maintaining a relatively fixed
cost structure, compared with fiscal 2005.
Applied Surface Concepts Group
Net sales of the ASC Group increased 4.5% to $12.3 million in fiscal 2006, compared with net sales of $11.8 million in
fiscal 2005. In fiscal 2006, product net sales, consisting of selective electrochemical finishing equipment and solutions,
increased 5.1% to $6.3 million, compared with $6.0 million in fiscal 2005. In fiscal 2006, customized selective
electrochemical finishing contract service net sales increased 5.4% to $5.8 million, compared with $5.5 million in fiscal
2005. The increase in net sales in 2006 is principally attributable to (i) an increase in sales to the oil and gas industry, which
remained strong in both the exploration and production sectors and (ii) $0.9 million of net sales generated by the ASC
Group’s Swedish operation that was acquired during the first quarter of fiscal 2006.
The ASC Group’s selling, general and administrative expenses in fiscal 2006 were $4.7 million, or 38.4% of net sales,
compared with $4.4 million, or 37.4% of net sales, in fiscal 2005. The $0.3 million increase in selling, general and
administrative expenses in fiscal 2006 is attributable to an increase in compensation and related benefit expenses due
principally to certain positions being filled in fiscal 2006, which were open in fiscal 2005, in anticipation of higher sales
volumes in fiscal 2006 that did not materialize.
The ASC Group’s operating loss was $0.6 million in fiscal 2006 compared with operating income of $0.8 million in fiscal
2005 due in part to the above noted items. In addition, operating results were negatively impacted by (i) a shift, during the
fiscal 2006, in sales mix to fewer large volume contract service jobs resulting in a decline in operating efficiencies
generally associated with such jobs, (ii) expenses related to the costs of relocating two of the Group’s facilities as well as
the cost of operating inefficiencies experienced during the relocations, and (iii) higher precious metal raw material costs,
which could not be immediately passed on to customers.
Corporate Unallocated Expenses
Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate
expenses, were $1.6 million in both fiscal 2006 and 2005. Included in the $1.6 million of corporate unallocated expenses in
fiscal 2006 were $0.3 million of incentive expenses. Included in the $1.6 million of corporate unallocated expenses in fiscal
2005 were $0.3 million of severance and related employee benefit expenses incurred as a result of a reorganization of
personnel. The remaining corporate unallocated expenses in both fiscal 2006 and 2005 were $1.3 million.
Other/General
Interest expense from continuing operations was a nominal amount in fiscal 2006 compared with $0.2 million in fiscal
2005. The following table sets forth the weighted average interest rates and weighted average outstanding balances under
the Company’s credit agreements in fiscal years 2006 and 2005.
Credit Agreement
Industrial development variable rate demand
revenue bond (1)..……………………………….
Term note (1)..……………………………………..
Revolving credit agreement………………………..
Debt purchase agreement (2)..……………………..
Weighted Average
Interest Rate
Year Ended September 30,
2006
2005
Weighted Average
Outstanding Balance
Year Ended September 30,
2006
2005
N/A
N/A
8.4%
4.6%
1.8%
7.7%
6.4%
3.6%
N/A
N/A
$0.7 million
$0.7 million
$0.6 million
$0.8 million
$1.7 million
---
(1) Industrial development variable rate demand revenue bond and the term note were paid off during the first quarter
of fiscal 2005.
(2) Debt purchase agreement was entered into on September 29, 2005 and was paid off during the third quarter of
fiscal 2006.
13
In fiscal 2006 and 2005, the income tax benefit related to the Company’s U.S. operating losses was offset by a valuation
allowance based upon an assessment of the Company’s ability to realize such benefits. In assessing the Company’s ability
to realize its deferred tax assets, management considered the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies. Future reversal of the valuation allowance will be achieved either when the tax
benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through
future taxable income. A deferred tax asset of $0.6 million was recognized in fiscal 2004 and was attributable to the gain
on the completion of the disposal of a building and land in fiscal 2005 that was part of the Repair Group’s Irish operations,
and that was recognized for Irish income tax purposes in fiscal 2004 but was recognized for financial reporting purposes in
fiscal 2005 in conformity with accounting principles generally accepted in the United States of America. The Company also
recorded a U.S. income tax provision in fiscal 2005 under the American Jobs Creation Act of 2004 for a dividend it
received from its non-U.S. subsidiaries.
B. Liquidity and Capital Resources
Cash and cash equivalents increased to $5.5 million at September 30, 2007 from $4.7 million at September 30, 2006. At
present, essentially all of the Company’s cash and cash equivalents are in the possession of its non-U.S. subsidiaries.
Distributions from the Company’s non-U.S. subsidiaries to the Company may be subject to statutory restriction, adverse tax
consequences or other limitations.
The Company’s operating activities consumed $4.4 million of cash (of which $1.1 million was from continuing operations)
in fiscal 2007, compared with $1.9 million of cash consumed by operating activities (of which $0.6 million was used by
continuing operations) in fiscal 2006. The $1.1 million of cash used for operating activities from continuing operations in
fiscal 2007 was primarily due to (i) $11.4 million of income from continuing operations before depreciation expense and a
deferred tax benefit; offset by (ii) a $3.5 million increase in accounts receivable and a $9.2 million increase in inventory,
principally attributable to the ACM Group’s response to the increased demand in its business. The other changes in these
components of working capital were due to factors resulting from normal business conditions of the Company, including (i)
sales levels, (ii) collections from customers, and (iii) the relative timing of payments to suppliers.
Capital expenditures were $1.4 million (of which $0.9 million was from continuing operations) in fiscal 2007 compared to
$1.3 million (of which $1.1 million was from continuing operations) in fiscal 2006. Fiscal 2007 capital expenditures from
continuing operations consist of $0.5 million by the ACM Group, $0.3 million by the ASC Group and $0.1 million by the
Repair Group. The Company anticipates that capital expenditures will be within the range of $3.0 to $4.0 million in fiscal
2008 to support the projected growth in the Company’s businesses.
In fiscal 2007, the Repair Group completed the sale of its Industrial Repair Business and certain related assets. This sale
generated net cash proceeds of approximately $4.4 million during fiscal 2007.
At September 30, 2007, the Company has a $6.0 million revolving credit agreement with a bank, subject to sufficiency of
collateral, which expires on October 1, 2008 and bears interest at the bank’s base rate plus 0.50%. The interest rate was
8.25% at September 30, 2007. A 0.375% commitment fee is incurred on the unused balance of the revolving credit
agreement. At September 30, 2007, $2.6 million was outstanding and the Company had $3.4 million available under its
$6.0 million revolving credit agreement. The Company’s revolving credit agreement is secured by substantially all of the
Company’s assets located in the United States of America and a guarantee by its U.S. subsidiaries.
Under its revolving credit agreement with the bank, the Company is subject to certain customary covenants. These include,
without limitation, covenants (as defined) that require maintenance of certain specified financial ratios, including a
minimum tangible net worth level and a minimum EBITDA level. The Company was in compliance with all applicable
covenants at September 30, 2007.
The Company believes that cash flows from its operations together with existing cash reserves and the funds available
under its revolving credit agreement will be sufficient to meet its working capital and capital expenditure requirements
through the end of fiscal year 2008.
14
C. Off-Balance Sheet Arrangements
The Company does not have any obligations that meet the definition of an off-balance sheet arrangement and that have, or
are reasonably likely to have, a material effect on the Company’s financial condition or results of operations.
D. Other Contractual Obligations
The following table summarizes the Company’s outstanding contractual obligations and other commercial commitments at
September 30, 2007 and the effect such obligations are expected to have on liquidity and cash flow in future periods.
Other Contractual Obligations
Total
Payments Due by Period
(Amounts in thousands)
>1 up to
3 years
Less than
1 year
>3 up to
5 years
More than
5 years
Debt obligations………...…….. $
Capital lease obligations………
Operating lease obligations…...
10 $
538
1,541
1
140
457
$
$
2
253
771
2
145
313
$
5
---
---
Total…………..…….….... $
2,089
$
598
$
1,026
$
460
$
5
Excluded from the foregoing Other Contractual Obligations table are open purchase orders at September 30, 2007 for raw
materials and supplies required in the normal course of business. Included in other long-term liabilities in the Company’s
balance sheet as of September 30, 2007 is $1.0 million of liabilities related to the Company’s defined benefit pension plans
and approximately $1.2 million of net deferred tax liabilities. The Company is expected to fund $1.4 million of pension
obligations in fiscal 2008.
E. Outlook
The Company’s Repair and ACM Groups’ businesses continue to be heavily dependent upon the strength of the
commercial airlines as well as aircraft and related engine manufacturers. Consequently, the performance of the domestic
and international air transport industry directly and significantly impacts the performance of the Repair and ACM Groups’
businesses.
The financial condition of many airlines in the U.S. and throughout the world, while showing improvement, continues to be
weak. The U.S. airline industry has received U.S. government assistance, while some airlines have entered and/or
proceeded through the bankruptcy reorganization process, and others continue to pursue major restructuring initiatives,
which appear to have had a positive impact on operating results in recent periods. Modest improvements in the commercial
airlines and increased demand in the aircraft and related engine industries have been complemented by increases in U.S.
military spending for aircraft and related components. The air transport industry’s long-term outlook has been one of
continued, steady growth. Such outlook suggests the need for additional aircraft and, therefore, growth in the requirement
for airframe and engine components as well as aerospace turbine engine repairs. The air transport industry is currently
benefiting from several favorable trends including: (i) projected growth in air traffic, (ii) the beginning of major
replacement and refurbishment cycles driven by the desire for more fuel efficient aircraft and fleet commonality, and (iii)
the increased use of wide-body aircraft. Management’s current outlook for the air transport industry continues to remain
favorable, with expected growth through at least 2011.
It is difficult to determine the potential long-term impact that the aforementioned factors may have on air travel and the
demand for the products and services provided by the Company. Lack of continued improvement could result in credit risk
associated with serving the financially troubled airlines and/or their suppliers. All of these consequences, to the extent that
they may occur, could negatively impact the Company’s net sales, operating profits and cash flows. However, in light of
the current business environment, the Company believes that cash on-hand, funds available under its revolving credit
agreement, and anticipated funds generated from operations will be adequate to meet its liquidity needs through the
foreseeable future.
15
F. Critical Accounting Policies and Estimates
Allowances for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of certain
customers to make required payments. The Company evaluates the adequacy of its allowances for doubtful accounts each
quarter based on the customers’ credit-worthiness, current economic trends or market conditions, past collection history,
aging of outstanding accounts receivable and specific identified risks. As these factors change, the Company’s allowances
for doubtful accounts may change in subsequent periods. Historically, losses have been within management’s expectations
and have not been significant.
Inventories
The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete
and excess inventory each quarter. Each business segment maintains formal policies, which require at a minimum that
reserves be established based on an analysis of the age of the inventory on a product-by-product basis. In addition, if the
Company learns of specific obsolescence, other than that identified by the aging criteria, an additional reserve will be
recognized as well. Specific obsolescence may arise due to a technological or market change, or based on cancellation of
an order. Management’s judgment is necessary in determining the realizable value of these products to arrive at the proper
allowance for obsolete and excess inventory.
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, at least annually
or when events and circumstances warrant such a review. This review is performed using estimates of future undiscounted
cash flows, which include proceeds from disposal of assets. If the carrying value of a long-lived asset is greater than the
estimated undiscounted future cash flows, and if such excess carrying value is determined to be permanent, then the long-
lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the
long-lived asset exceeds its fair value.
The Company has a significant amount of property, plant and equipment. The determination as to whether events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable involves judgment. The
Company believes that its estimate of future undiscounted cash flows is a critical accounting estimate because (i) it requires
the Company to make assumptions about future results and (ii) the recognition of an impairment charge could have a
material impact on the Company’s financial position and results of operations.
In projecting future undiscounted cash flows, the Company relies on internal budgets and forecasts, and projected proceeds
upon disposal of long-lived assets. The Company’s budgets and forecasts are based on historical results and anticipated
future market conditions, such as the general business climate and the effectiveness of competition.
The Company believes that its estimates of future undiscounted cash flows and fair value are reasonable; however, changes
in estimates of such undiscounted cash flows and fair value could change the Company’s estimates of fair value. Further,
actual results can differ significantly from assumptions used by the Company in making its estimates. Future changes in
the Company’s estimates could result in future impairment charges.
Valuation of deferred tax allowance
The Company accounts for deferred taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”, whereby the
Company recognizes an income tax benefit related to its consolidated net losses and other temporary differences between
financial reporting basis and tax reporting basis. At September 30, 2007, the Company’s net deferred tax liability before
any valuation allowance was $0.7 million.
At September 30, 2006, the income tax benefit related to its consolidated net losses and other temporary differences
between financial reporting basis and tax reporting basis was offset by a valuation allowance of $4.6 million based on an
assessment of the Company’s ability to realize such benefits. In assessing the Company’s ability to realize its deferred tax
assets, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies. During fiscal 2007, the Company reversed a substantial majority of the valuation allowance based on
the Company’s determination that, at this time, it is more likely than not that the benefit will be realized through future
taxable income.
16
G. Impact of Newly Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards No. 157 (“SFAS No. 157”), “Fair Value Measurement”. This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some
entities, the application of this statement will change current practice. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of
this statement is not expected to have a material impact on the Company’s financial position or results of its operations.
Item 7A. 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 (the euro, pound
sterling and the Swedish krona); 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. The Company does not hold or
issue financial instruments for trading purposes.
The Company believes that inflation has not materially affected its results of operations in 2007, and does not expect
inflation to be a significant factor in fiscal 2008.
A. Foreign Currency Risk
The U.S. dollar is the functional currency for all of the Company’s U.S. operations. For these operations, all gains and
losses from completed currency transactions are included in income currently. For the Company’s non-U.S. subsidiaries,
the functional currency is the local currency. Assets and liabilities are translated into U.S. dollars at the rate of exchange at
the end of the period and revenues and expenses are translated using average rates of exchange. Foreign currency
translation adjustments are reported as a component of accumulated other comprehensive loss.
Historically, the Company has been able to mitigate the impact of foreign currency risk by means of hedging such risk
through the use of foreign currency exchange contracts, which typically expire within one year. However, such risk is
mitigated only for the periods for which the Company has foreign currency exchange contracts in effect, and only to the
extent of the U.S. dollar amounts of such contracts. At September 30, 2007, the Company had no forward exchange
contracts outstanding. The Company will continue to evaluate its foreign currency risk, if any, and the effectiveness of
using similar hedges in the future to mitigate such risk.
At September 30, 2007, the Company’s assets and liabilities denominated in the pound sterling, the euro and Swedish krona
were as follows (amounts in thousands):
Pound Sterling
Euro Swedish Krona
Cash and cash equivalents………...……….
Accounts receivable……………………….
Accounts payable………………………….
Accrued liabilities…………………………
77
194
34
49
216
544
505
126
190
1,624
109
2,172
B. Interest Rate Risk
The Company’s primary interest rate risk exposure results from the variable interest rate mechanisms associated with the
Company’s long-term debt consisting of a revolving credit agreement with a U.S. bank. If interest rates were to increase or
decrease 100 basis points (1%) from the September 30, 2007 rate, and assuming no change in the amount outstanding under
the revolving credit agreement, annual interest expense to the Company would be nominally impacted. The Company’s
sensitivity analyses of the effects of changes in interest rates do not consider the impact of a potential change in the level of
variable rate borrowings or derivative instruments outstanding that could take place if these hypothetical conditions prevail.
17
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of SIFCO Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of SIFCO Industries, Inc. (an Ohio Corporation) and
Subsidiaries as of September 30, 2007 and 2006, and the related consolidated statements of operations, shareholders’
equity, and cash flows for each of the three years in the period ended September 30, 2007. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of SIFCO Industries, Inc. and Subsidiaries as of September 30, 2007 and 2006, and the results of their operations
and their cash flows for each of the three years in the period ended September 30, 2007 in conformity with accounting
principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole.
Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
As discussed in Note 1 to the consolidated financial statements, the Company has adopted Financial Accounting Standards
Board Statement No. 158, “Employers’ Accounting for Defined Benefit and Other Postretirement Plans, an Amendment of
FASB Statements No. 87, 88, 106 and 132(R)” in 2007.
/s/ GRANT THORNTON LLP
Cleveland, Ohio
December 4, 2007.
18
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Years Ended September 30,
2006
2007
2005
Net sales…………………………………………….….……….…..…..
Operating expenses:
Cost of goods sold……………………………….………….……….
Selling, general and administrative expenses…….………………….
Loss (Gain) on disposal of operating assets…………………………
$
87,255
$
68,606
$
52,863
65,835
11,173
(137)
57,662
11,106
89
45,593
9,697
83
Total operating expenses……………………….…………….…..
76,871
68,857
55,373
Operating income (loss).….…..……………………..….…….
10,384
Interest income………………………………………………….……....
Interest expense………………………………………………….……...
Foreign currency exchange loss (gain), net……………………….….....
Other income, net……………………………..……………...................
Income (loss) from continuing operations before income
tax provision…………………………………....................
Income tax provision………………………………..….……………….
Income (loss) from continuing operations………………...…
(4)
167
(20)
(14)
10,255
1,483
8,772
(251)
(52)
77
6
(247)
(35)
14
(49)
(2,510)
(12)
184
(12)
(246)
(2,424)
541
(2,965)
Income (loss) from discontinued operations, net of tax
(2,044)
1,009
2,769
Net income (loss)………………………………………….....
$
6,728
$
960
Income (loss) per share from continuing operations
Basic…………………………………………………………. $
Diluted……………………………………………………….. $
Income (loss) per share from discontinued operations, net of tax
Basic…………………………………………………………. $
Diluted……………………………………………………….. $
Net income (loss) per share
Basic…………………………………………………………. $
Diluted…….…………………….……………........................ $
Weighted-average number of common shares (basic)………...…..……
Weighted-average number of common shares (diluted)……….….……
$
$
$
$
$
$
1.67
1.66
(0.39)
(0.39)
1.28
1.27
5,246
5,286
(0.01)
(0.01)
0.19
0.19
0.18
0.18
5,222
5,227
$
$
$
$
$
$
$
(196)
(0.57)
(0.57)
0.53
0.53
(0.04)
(0.04)
5,224
5,228
See notes to consolidated financial statements.
19
SIFCO Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents………………..……………………..………….. $
Receivables, net….………………………..……………………..………….
Inventories………………………………….……………………....……….
Deferred income taxes…………………..………………………..…………
Refundable income taxes…………………..………………………..………
Prepaid expenses and other current assets…..…………………………..…..
Assets held for sale………………………………………………………...
Total current assets………………..…………………..………..…….
Property, plant and equipment:
Land……………………………………..…………………………………..
Buildings………………………………..………………….……..………....
Machinery and equipment……………..……………………..……………..
Accumulated depreciation………..……………………..………….……….
Property, plant and equipment, net..……...……………..……………
Other assets …..………………………..……………………..…………….…..
September 30,
2007
5,510
19,473
16,897
2,423
---
370
3,189
47,862
580
9,727
33,234
43,541
32,971
10,570
2,457
$
2006
4,744
18,652
8,052
---
188
601
---
32,237
577
11,671
43,636
55,884
41,825
14,059
2,479
Total assets……..…………………………………....……………
$
60,889
$
48,775
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt…..……………………..…………….. $
Accounts payable……………………..……………………..………………
Accrued liabilities…………………..…………………………..…………...
$
87
9,735
5,690
Total current liabilities………..…………………………..…………...
15,512
Long-term debt, net of current maturities……..………………..………………
Deferred income taxes………………………………………………………….
Other long-term liabilities………………..………………………..…..……….
Shareholders’ equity:
Serial preferred shares, no par value, authorized 1,000 shares…...………....
Common shares, par value $1 per share, authorized 10,000 shares; issued
and outstanding 5,281 shares in 2007 and 5,222 shares in 2006……….
Additional paid-in capital………………..………………………..………...
Retained earnings……………………..…………………………..………...
Accumulated other comprehensive loss……..…………………..….……....
52
10,454
6,720
17,226
427
101
5,838
2,986
3,655
1,958
---
---
5,281
6,352
29,828
(4,683)
5,222
6,323
23,100
(9,462)
Total shareholders’ equity……..…………………………..………….
36,778
25,183
Total liabilities and shareholders’ equity…..…………..……….…. $
60,889
$
48,775
See notes to consolidated financial statements.
20
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
Years Ended September 30,
2007
2006
2005
Cash flows from operating activities:
Net income (loss)….……………………………….……..…………………….
Loss (income) from discontinued operations, net of tax………………………..
Adjustments to reconcile net income (loss) to net cash used for operating
activities:
Depreciation and amortization…………………….………….........................
Gain on disposal of property, plant and equipment………………………......
Deferred income taxes………………………………………………………..
Share transactions under employee stock plan…………….............................
Asset impairment charges…………………………………….........................
Changes in operating assets and liabilities:
Receivables…………………………………………………………………
Inventories………………………………………………………………….
Refundable income taxes…………..……………………………………….
Prepaid expenses and other current assets………………………………….
Other assets……………………………………………………………........
Accounts payable…………………………………………...........................
Accrued liabilities…………………………………………………………..
Other long-term liabilities………………………………………………….
Net cash used for operating activities of continuing operations……..
Net cash used for operating activities of discontinued operations…...
Cash flows from investing activities:
Capital expenditures……………………………………......................................
Proceeds from disposal of property, plant and equipment……………………....
Acquisition of business………………………………………………………….
Other………………………………………………………..................................
Net cash provided by (used for) investing activities of continuing
operations………………………………………………………....
Net cash provided by investing activities of discontinued operations..
Cash flows from financing activities:
Proceeds from revolving credit agreement……………………………………...
Repayments of revolving credit agreement……………………………………..
Proceeds from other indebtedness..……………………………………………...
Repayments of long-term debt……………………………..................................
Repayments of capital lease obligations……………...........................................
Dividends from foreign subsidiary ……………………………………………...
Net cash provided by financing activities of continuing operations….
Net cash used for financing activities of discontinued operations……
Increase (decrease) in cash and cash equivalents…………………………………..
Cash and cash equivalents at beginning of year……………………………………
Effect of exchange rate changes on cash and cash equivalents…………………….
$
6,728
2,044
$
960
(1,009)
$
(196)
(2,769)
1,447
(141)
1,208
88
---
(3,512)
(9,197)
8
11
888
(148)
371
(915)
(1,120)
(3,248)
(874)
63
---
118
(693)
3,228
32,091
(29,908)
180
(236)
(75)
---
2,052
---
219
4,744
547
1,407
(1,061)
34
139
289
1,370
(29)
---
73
---
(2,946)
(279)
---
79
3
2,408
204
(792)
(564)
(1,317)
(1,141)
1,150
(434)
139
(286)
7,533
18,416
(17,999)
287
(297)
---
---
407
(1,913)
3,860
884
---
(2,177)
(1,506)
---
(694)
(98)
1,163
232
266
(4,365)
(323)
(1,434)
2,617
---
33
1,216
7,219
24,189
(27,296)
---
(7,247)
---
13,000
2,646
(11,087)
(4,694)
5,578
---
Cash and cash equivalents at end of year……….....………………
$
5,510
$
4,744
$
884
Supplemental disclosure of cash flow information:
Cash paid for interest……………………………………………………………
Cash paid for income taxes, net…………………………………………………
$
$
(107) $
(635) $
(131) $
(523) $
(358)
(809)
See notes to consolidated financial statements.
21
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands)
Common
Shares
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Unearned
Compensation
Common
Shares
Held in
Treasury
Total
Shareholders’
Equity
Balance – September 30, 2004
$ 5,257
$ 6,497
$ 22,336 $ (8,867)
$ (166) $ (255)
$ 24,802
Comprehensive income (loss):
Net loss …………………………….……..
Foreign currency translation adjustment….
Currency exchange contract adjustment….
Unrealized gain on interest rate swap
agreement……………………………..
Minimum pension liability adjustment, net
of tax…..................................................
Total comprehensive loss…….……
---
---
---
---
---
---
---
---
(196)
---
---
---
34
(909)
---
---
---
---
---
---
(196)
34
(909)
---
---
125
---
---
125
---
---
(1,532)
---
---
(1,532)
(2,478)
Share transactions under employee stock plans...
(29)
(215)
---
---
106
212
74
Balance – September 30, 2005
$ 5,228
$ 6,282 $ 22,140
$ (11,149) $ (60) $ (43)
$ 22,398
Comprehensive income:
Net income………………………………...
Foreign currency translation adjustment…..
Currency exchange contract adjustment…..
Minimum pension liability adjustment, net
of tax…..................................................
Total comprehensive income.……..
---
---
---
---
---
---
960
---
---
---
75
288
---
---
---
---
---
---
960
75
288
---
---
---
1,324
---
---
1,324
2,747
Stock option expense…………………………....
Share transactions under employee stock plans...
---
(6)
78
(37)
---
---
---
---
---
60
---
43
78
60
`
Balance – September 30, 2006
$ 5,222 $ 6,323 $ 23,100 $ (9,462)
$ --- $ ---
$ 25,183
Comprehensive income:
Net income………………………………...
Foreign currency translation adjustment…..
Minimum pension liability adjustment, net
of tax…..................................................
Total comprehensive income.……..
Adjustment to initially apply SFAS No. 158,
---
---
---
---
6,728
---
---
2,285
---
---
---
---
6,728
2,285
---
---
---
2,819
---
---
2,819
11,832
net of tax as of September 30, 2007…………
Stock option expense…………………………....
Share transactions under employee stock plans....
---
---
59
---
32
(3)
---
---
---
(325)
---
---
---
---
---
---
---
---
(325)
32
56
Balance – September 30, 2007
$ 5,281 $ 6,352 $ 29,828 $ (4,683)
$ --- $ ---
$ 36,778
See notes to consolidated financial statements.
22
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years ended September 30, 2007, 2006 and 2005
(Dollars in thousands, except share and per share data)
1. Summary of Significant Accounting Policies
A. DESCRIPTION OF BUSINESS
SIFCO Industries, Inc. and Subsidiaries (the “Company”) are engaged in the production and sale of a variety of
metalworking processes, services and products produced primarily to the specific design requirements of its customers.
The processes and services include forging, heat-treating, coating, welding, machining and selective electrochemical
finishing; and the products include forgings, machined forged parts and other machined metal parts, remanufactured
component parts for turbine engines, and selective electrochemical finishing solutions and equipment. The Company’s
operations are conducted in three business segments: (1) Aerospace Component Manufacturing Group, (2) Turbine
Component Services and Repair Group and (3) Applied Surface Concepts Group.
B. 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. The U.S. dollar is the
functional currency for all the Company’s U.S. operations. For these operations, all gains and losses from completed
currency transactions are included in income currently. Effective October 1, 2006, the functional currency of the Irish
subsidiary is the euro because a substantial majority of the subsidiary’s transactions subsequent to September 30, 2006 are
denominated in euros. Prior to October 1, 2006, the functional currency of the Irish subsidiary was the U.S. dollar because a
substantial majority of the subsidiary’s transactions prior to October 1, 2006 were denominated in U.S. dollar. 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. Foreign currency translation adjustments are reported as a component of accumulated other
comprehensive loss in the consolidated statements of shareholders’ equity.
C. CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash
equivalents.
D. CONCENTRATIONS OF CREDIT RISK
Receivables are presented net of allowance for doubtful accounts of $603 and $668 at September 30, 2007 and 2006,
respectively. During fiscal 2007 and 2006, $214 and $135 of accounts receivable were written off against the allowance for
doubtful accounts, respectively. Bad debt expense totaled $147, $121 and $115 in fiscal 2007, 2006 and 2005, respectively.
Most of the Company’s receivables represent trade receivables due from manufacturers of turbine engines and aircraft
components and turbine engine overhaul companies located throughout the world, including a significant concentration of
U.S. based companies. Approximately 37% of the Company’s net sales in 2007 were to four (4) of its largest customers,
with an additional 13% of combined net sales to various direct subcontractors to those four (4) customers. No other single
group or customer represents greater than 5% of total net sales in 2007. The Company performs ongoing credit evaluations
of its customers’ financial conditions. The Company believes its allowance for doubtful accounts is sufficient based on the
credit exposures outstanding at September 30, 2007. However, certain customers have filed for bankruptcy protection in
the last several years and it is possible that additional credit losses could be incurred if other customers seek bankruptcy
protection.
E. INVENTORY VALUATION
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for
approximately 80% and 59% of the Company’s inventories at September 30, 2007 and 2006, respectively. Cost is
determined using the specific identification method for approximately 7% and 12% of the Company’s inventories at
September 30, 2007 and 2006, respectively. The first-in, first-out (“FIFO”) method is used to value the remainder of the
Company’s inventories.
The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete
and excess inventory each quarter. Each business segment maintains formal policies, which require at a minimum that
reserves be established based on an analysis of the age of the inventory on a part-by-part basis. In addition, if the Company
learns of specific obsolescence, other than that identified by the aging criteria, an additional reserve will be recognized as
well. Specific obsolescence may arise due to a technological or market change, or based on cancellation of an order.
23
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is generally computed using the straight-line and the double
declining balance methods. Depreciation is provided in amounts sufficient to amortize the cost of the assets over their
estimated useful lives. Depreciation provisions are based on estimated useful lives: (i) buildings, including building
improvements - 5 to 50 years and (ii) machinery and equipment, including office and computer equipment - 3 to 20 years.
The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, at least annually
or when events and circumstances warrant such a review. This review is performed using estimates of future undiscounted
cash flows, which include proceeds from disposal of assets. If the carrying value of a long-lived asset is greater than the
estimated undiscounted future cash flows, and if such excess carrying value is determined to be permanent, then the long-
lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the
long-lived asset exceeds its fair value.
G. NET INCOME PER SHARE
The Company’s net income per basic share has been computed based on the weighted-average number of common shares
outstanding. Net income per diluted share reflects the effect of the Company’s outstanding stock options under the treasury
stock method. However, during periods of operating losses, outstanding stock options are not included in the calculation of
net loss per diluted share because such inclusion would be anti-dilutive.
H. REVENUE RECOGNITION
The Company recognizes revenue in accordance with the relevant portions of the Securities and Exchange Commission’s
Staff Accounting Bulletins No. 101, “Revenue Recognition in Financial Statements” and No. 104, “Revenue Recognition”.
Revenue is generally recognized when products are shipped or services are provided to customers.
I. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This Statement requires an employer to (i) recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) —measured as
the difference between plan assets at fair value and the benefit obligation—as an asset or liability in its statement of
financial position; (ii) recognize changes in that funded status in the year in which the changes occur through
comprehensive income; (iii) recognize as a component of other comprehensive income, net of tax, the gains or losses and
prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost
pursuant to FASB Statement No. 87, “Employers’ Accounting for Pensions”, or No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions”; and (iv) measure defined benefit plan assets and obligations as of the date of
the employer’s fiscal year end. The Company adopted the requirement to recognize the funded status of its defined benefit
pension plans as an asset or liability in the consolidated balance sheet as of September 30, 2007. The adoption resulted in
(i) an increase of $1,138 to other assets, (ii) an increase of $1,630 to other long-term liabilities, (iii) an increase of $167 to
deferred tax assets and (iv) an increase of $325 to accumulated other comprehensive loss. The requirement to measure plan
assets and benefit obligations as of the date of the Company’s fiscal year-end consolidated balance sheet is effective for
fiscal years ending after December 15, 2008. The Company currently uses a July 1st measurement date.
In September 2006, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108
(“SAB No. 108”), “Financial Statement Misstatements”. SAB No. 108 expresses the SEC staff’s view regarding the process
of quantifying financial statement misstatements. The Interpretations in SAB No. 108 are being issued to address diversity
in practice in quantifying financial statement misstatements and the potential under current practice for the build up of
improper amounts on the balance sheet. SAB No. 108 is effective for annual financial statements covering the first fiscal
year ending after November 15, 2006. The Company adopted the provisions of SAB No. 108 effective October 1, 2006.
The adoption of this statement in fiscal 2007 did not have a material impact on the Company’s financial position, cash
flows or results of its operations.
24
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
In May 2005, the FASB issued Statement of Financial Accounting No. 154, “Accounting Changes and Error Corrections” –
a replacement of Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes”, and FASB Statement No.
3, “Reporting Accounting Changes in Interim Financial Statements”. This statement changes the requirements for the
accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. APB Opinion No. 20 previously required that most
voluntary changes in accounting principle be recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. This statement requires retrospective application to prior
periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-
specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of a
change in accounting principle on one or more individual periods presented, this statement requires that the new accounting
principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other
appropriate components of equity or net assets in the statement of financial position) for that period. When it is
impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this
statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date
practicable. SFAS No. 154 is effective for changes in accounting principle made in fiscal years beginning after December
15, 2005. The Company adopted SFAS No. 154 effective October 1, 2006. The adoption of this statement in fiscal year
2007 did not have a material impact on the Company’s financial position, cash flows or results of operations.
J. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In June 2006, FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes” – an
interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an entity’s financial statements and provides guidance on the recognition, derecognition, and
measurement of benefits related to an entity’s uncertain tax position(s). FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 effective October 1, 2007. The adoption of FIN 48 did not have a
material impact on the Company’s financial position, cash flows and results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”. This Statement defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or
permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value
is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements.
However, for some entities, the application of this statement will change current practice. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. The adoption of this statement is not expected to have a material impact on the Company’s financial position or
results of its operations.
K. USE OF ESTIMATES
Accounting principles generally accepted in the United States require management to make a number of estimates and
assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent liabilities, at the date
of the consolidated financial statements, and the reported amounts of revenues and expenses during the period in preparing
these financial statements. Actual results could differ from those estimates.
L. STOCK-BASED COMPENSATION
Prior to the adoption of SFAS No. 123R (revised 2004) on October 1, 2005, the Company employed the disclosure-only
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). The following pro forma
information regarding net income and earnings per share was determined as if the Company had accounted for its stock
options under the fair value method prescribed by SFAS No. 123. For purposes of pro forma disclosure, the estimated fair
value of the stock options is amortized over the options’ vesting periods. The pro forma information is as follows:
25
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
Net loss as reported…………………………………………….…..…….
Less - Stock-based compensation expense determined under fair
value based method for all awards, net of related tax effects……
Pro forma net loss as if the fair value based method
had been applied to all awards…………….…………..…..…….
Net loss per share:
Basic – as reported……………………….…………..……..…...
Basic – pro forma……………………….…………..………..….
Diluted – as reported………………….…………..…………..…
Diluted – pro forma………………………………..…..………...
Years Ended
September 30, 2005
$
(196)
57
(253)
(0.04)
(0.05)
(0.04)
(0.05)
$
$
$
$
$
M. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has from time-to-time utilized foreign currency exchange contracts as part of the management of its foreign
currency risk exposure. The Company has no financial instruments held for trading purposes. All financial instruments are
put into place to hedge specific exposure. To qualify as a hedge, the item to be hedged must expose the Company to
foreign currency risk and the hedging instrument must effectively reduce that risk. If the financial instrument is designated
as a cash flow hedge, the effective portions of changes in the fair value of the financial instrument are recorded in
accumulated other comprehensive loss in the shareholders’ equity section of the consolidated balance sheets. Ineffective
portions of changes in the fair value of the financial instrument, to the extent they may exist, are recognized in the
consolidated statements of operations.
Historically, the Company has been able to mitigate the impact of foreign currency risk by means of hedging such risk
through the use of foreign currency exchange contracts, which typically expire within one year. However, such risk is
mitigated only for the periods for which the Company has foreign currency exchange contracts in effect, and only to the
extent of the U.S. dollar amounts of such contracts. At September 30, 2007 and 2006, the Company had no forward
exchange contracts outstanding.
N. RESEARCH AND DEVELOPMENT
Research and development costs from continuing operations are expensed as incurred. Research and development expense
from continuing operations was approximately $880, $622 and $760 in fiscal 2007, 2006 and 2005, respectively.
O. ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive income (loss) is included on the Consolidated Statements of Shareholders’ Equity. The components of
accumulated other comprehensive loss as shown on the Consolidated Balance Sheets at September 30 are as follows:
2007
2006
2005
Foreign currency translation adjustment…………... $
Currency exchange contract adjustment…………...
SFAS No. 158 net pension liability, net of tax…….
Minimum pension liability adjustment, net of tax…
(4,358)
---
(325)
---
$
(6,643)
---
---
(2,819)
$
(6,718)
(288)
---
(4,143)
Total accumulated other comprehensive loss…..
$
(4,683)
$
(9,462)
$
(11,149)
P. RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to the 2007 consolidated financial statement presentation.
26
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
2. Inventories
Inventories at September 30 consist of:
Raw materials and supplies……….………..…….
Work-in-process………………….………………
Finished goods………………………………...…
$
2007
7,579
6,433
2,885
$
2006
3,220
3,222
1,610
Total inventories……...………….….….…. $
16,897
$
8,052
If the FIFO method had been used for the entire Company, inventories would have been $7,191 and $6,860 higher than
reported at September 30, 2007 and 2006, respectively.
3. Accrued Liabilities
Accrued liabilities at September 30 consist of:
2007
2006
Accrued employee compensation and benefits….…..
Accrued workers’ compensation………..…………...
Accrued pension……………………………………..
Accrued income taxes…………………..…….….….
Accrued royalties……………………………………
Accrued legal and professional……………….……..
Other accrued liabilities…………………..…….…...
$
2,199
1,190
---
358
394
252
1,297
$
1,692
1,247
572
822
823
274
1,290
Total accrued liabilities………………….…....
$
5,690
$
6,720
4. Government Grants
The Company has received grants from certain government entities as an incentive to invest in facilities, research and
employees. The Company has historically elected to treat capital and employment grants as a contingent obligation and
does not commence amortizing such grants into income until such time that it is more certain that the Company will not be
required to repay a portion of these grants. Capital grants are amortized into income over the estimated useful lives of the
related assets. Employment grants are amortized into income over five years.
Certain Company grants that were subject to repayment expired during fiscal 2007. Therefore, the Company will not be
required to repay such grants and, accordingly, the Company recognized grant income of $2,143 in income (loss) from
discontinued operations, net of tax, during fiscal 2007 in the accompanying consolidated statement of operations. In
addition, primarily as a result of an amendment to and expiration of certain grant agreements during fiscal year 2006, the
Company recognized grant income, in income (loss) from discontinued operations, of $746 in fiscal 2006. The unamortized
portion of deferred grant revenue is recorded in other long-term liabilities at September 30, 2007 and September 30, 2006,
which amounted to $421 and $2,423, respectively. The majority of the Company’s grants were denominated in euros. The
Company adjusts its deferred grant revenue balance in response to currency exchange rate fluctuations for as long as such
grants are treated as obligations. The Company recognized grant income of $66 in fiscal 2005.
27
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
5. Long-Term Debt
Long-term debt at September 30 consists of:
2007
2006
Revolving credit agreement…..…………………..…………….
Other………………………………………………………..…..
$
Total bank debt...…………..……………………..……....
Capital lease obligations...…..……………………..……...........
Less – current maturities………………………………..………
2,600
10
2,610
463
87
Total long-term debt………..………………..…………..
$
2,986
$
$
417
62
479
---
52
427
At September 30, 2007, the Company has a $6,000 revolving credit agreement with a bank subject to sufficiency of
collateral that expires on October 1, 2008 and bears interest at the bank’s base rate plus 0.50%. The interest rate was 8.25%
and 8.75% at September 30, 2007 and 2006, respectively. The daily average balance outstanding against the revolving
credit agreement was $1,363 and $665 during 2007 and 2006, respectively. A commitment fee of 0.375% is incurred on
the unused balance. At September 30, 2007, the Company had $3,355 available under its $6,000 revolving credit
agreement. The Company’s revolving credit agreement is secured by substantially all of the Company’s assets located in
the United States of America and a guarantee by its U.S. subsidiaries.
Under its revolving credit agreement with the bank, the Company is subject to certain customary covenants. These include,
without limitation, covenants (as defined) that require maintenance of certain specified financial ratios, including a
minimum tangible net worth level and a minimum EBITDA level. The Company was in compliance with all applicable
covenants at September 30, 2007.
6. Income Taxes
The components of income (loss) from continuing operations before income tax provision are as follows:
Years Ended September 30,
2007
2006
2005
U.S…………….…….………….………………..……….… $
Non-U.S…………….……………………………...……..…
9,876
379
$
$
155
190
(2,466)
42
Income (loss) from continuing operations before
income tax provision………….................................
$
10,255
$
(35)
$
(2,424)
The income tax provision consists of the following:
Current income tax provision:
U.S. federal …….…...………………………………..….
U.S. state and local………………………………………
Non-U.S…...………………………………….………….
Total current tax provision………...………………….
Deferred income tax provision (benefit):
U.S. federal………………………………………………
U.S. state and local………………………………………
Non-U.S………………………………………………….
Total deferred tax provision………………..................
$
$
95
115
65
275
$
---
---
14
14
1,276
(83)
15
1,208
---
---
---
---
524
---
17
541
---
---
---
---
Income tax provision……………………….…... $
1,483
$
14
$
541
28
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
The income tax provision differs from amounts currently payable or refundable due to certain items reported for financial
statement purposes in periods that differ from those in which they are reported for tax purposes. The income tax provision
in the accompanying consolidated statements of operations differs from amounts determined by using the statutory rate as
follows:
Years Ended September 30,
2006
2007
2005
Income (loss) before income tax provision………...…………. $
Less-U.S. state and local income tax provision………..……...
10,255
32
Income (loss) before U.S. and non-U.S. income tax
provision……………………………………………...
$
10,223
$
$
$
(35)
---
(2,424)
---
(35)
$
(2,424)
3,476
(12)
(824)
Income tax provision (benefit) at U.S. federal statutory rate….
Tax effect of:
U.S. loss (income) for which no U.S. federal tax benefit
(provision) has been recognized………………...……….
Non-US income for which no U.S. federal tax provision has
been recognized……………………………………….…
U.S. income for which a U.S. federal tax provision has been
recognized under the American Jobs Creation Act of
2004……………………………………………………...
Business expenses not deductible for tax…………………...
Recognition of excess tax basis of assets…...………………
Undistributed earnings of non-U.S. subsidiaries……………
Reversal of deferred tax valuation allowance……………….
Other…………………………….….……………………….
---
---
---
265
(704)
1,837
(2,999)
(392)
(52)
78
---
---
---
---
---
---
838
3
524
---
---
---
---
---
541
Income tax provision………………………………….. $
1,483
$
14
$
Deferred tax assets and liabilities at September 30 consist of the following:
$
Deferred tax assets:
Net U.S. operating loss carryforwards…….……………….…....…
Net non-U.S. operating loss carryforwards………………….……..
Employee benefits…………………………………………….……
Investment valuation reserve…………………………………..…...
Inventory reserves………………….…………….……………..….
Asset impairment reserve…………………………………………..
Allowance for doubtful accounts…………………...………………
Foreign tax credits…………………………………..……………...
Additional pension liability……………………………..………….
Government grants…………………………………………………
Net state operating loss carry forwards…………………………….
Alternative minimum tax credit carry forwards……………………
Other……………………………………………………………….
Total deferred tax assets…………………………..…………
2007
2006
$
290
575
---
---
926
122
154
2,667
---
42
110
290
106
5,282
3,924
569
50
511
481
88
176
442
958
242
---
---
---
7,441
29
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
Deferred tax liabilities:
Depreciation……………………………………………….………..
Unremitted foreign earnings……………………………….……….
Employee benefits………………………………………………….
Other……………………………………………………….……….
Total deferred tax liabilities…………………………………
Net deferred tax assets (liabilities)………………………………….…
Valuation allowance…………………………………………………...
1,561
4,136
301
---
5,998
(716)
(516)
2,383
26
---
525
2,934
4,507
(4,608)
Net deferred tax liabilities…………………………………...
$
(1,232)
$
(101)
At September 30, 2007 the Company has U.S. federal and state, as well as non-U.S. tax loss carryforwards of
approximately $900, $4,900 and $5,700, respectively. The U.S. federal tax loss carryforwards expire in 2026. The non-U.S.
tax loss carryforwards do not expire.
During fiscal 2007, the Company recorded a decrease of $4,092 in the valuation allowance against its net deferred tax
assets. In assessing the Company’s ability to realize its net deferred tax assets, management considers whether it is more
likely than not that some portion or all of its net deferred tax assets may not be realized. Management considered the
scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this
assessment. Future reversal of the remaining valuation allowance may be achieved either when the tax benefit is realized or
when it has been determined that it is more likely than not that the benefit will be realized through future taxable income.
$2,999 of the valuation allowance reversal was recognized in the Company’s fiscal 2007 income tax provision. $958 of the
valuation allowance reversal related to the Company’s minimum pension liabilities and, therefore, was recognized through
other comprehensive income. The $135 balance of the valuation allowance reversed in fiscal year 2007 was recognized
by the Company’s discontinued operations.
Cumulative undistributed earnings of non-U.S. subsidiaries for which no U.S. deferred federal income tax liabilities have
been established were approximately $2,200 at September 30, 2007. The incremental U.S. federal income tax related to
any repatriation of these cumulative foreign earnings is indeterminable currently. The incremental foreign withholding
taxes associated with a repatriation of all such earnings would approximate $53. During fiscal 2005, the Company received
distributions from the earnings of its non-U.S. subsidiaries accumulated subsequent to September 30, 2000. The Company
elected to treat the $13,440 distribution from the earnings of its non-U.S. subsidiaries in 2005 under the provisions of the
American Jobs Creation Act of 2004, whereby the qualifying portion of the distribution was eligible for favorable tax
treatment.
7. Retirement Benefit Plans
The Company and certain of its subsidiaries sponsor defined benefit pension plans covering most of its employees. The
Company’s funding policy for U.S. defined benefit pension plans is based on an actuarially determined cost method
allowable under Internal Revenue Service regulations. Prior to August 1, 2006, non-U.S. defined benefit pension plans
were funded in accordance with the requirements of regulatory bodies governing the plans.
One of the Company’s U.S. defined benefit pension plans, which plan covers substantially all non-union employees of the
Company’s U.S. operations who were hired prior to March 1, 2003, was frozen in 2003. Consequently, although the plan
otherwise continues, the plan ceased the accrual of additional pension benefits for service subsequent to March 1, 2003.
In 2006, the Company’s Irish subsidiary advised the trustees of its two non-U.S. defined benefit pension plans that the
Company would cease making contributions to such plans effective August 1, 2006. The trustees subsequently advised the
Company that (i) the trustees would wind-up both defined benefit pension plans during fiscal 2007 and (ii) as of September
30, 2007, the trustees have made significant progress toward the completion of the wind-up process for both such plans
with no further obligation on the part of the Company or its Irish subsidiary. For financial reporting purposes, the
Company’s actions with respect to these two non-U.S. plans resulted in (i) the curtailment of both plans in 2006, (ii) no net
curtailment gain or loss being recognized in the accompanying consolidated statement of operations for fiscal 2006, and
(iii) a significant portion of the required settlement distributions being made to plan participants in 2007.
30
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
The Company uses a July 1 measurement date for its U.S. defined benefit pension plans. For 2007 and 2006, the
Company’s defined benefit plans had accumulated benefit obligations of $18,789 and $27,031. Net pension expense for the
Company-sponsored defined benefit pension plans consists of the following:
Years Ended September 30,
2007
2006
2005
Service cost………………………………………..………. $
Interest cost…………………………………….……….….
Expected return on plan assets………………….………….
Amortization of transition asset……….…………………...
Amortization of prior service cost…………….…….……..
Amortization of net (gain) loss……………………...……..
$
280
990
(1,195)
---
132
105
945
1,463
(1,616)
---
132
(51)
$
687
1,434
(1,681)
(11)
132
111
Net pension expense for defined benefit plans……... $
312
$
873
$
672
The status of all U.S. and non-U.S. defined benefit pension plans at September 30 is as follows:
Benefit obligations:
Benefit obligations at beginning of year………………...….……. $
Service cost……………………………..……….………………..
Interest cost…………………………..…………….……………..
Participant contributions……………..……….…………………..
Actuarial (gain) loss………………..…………….………….……
Benefits paid………………………..………….………………....
Settlements / curtailments………………………………………..
Plan terminations………………………………………………....
Currency translation adjustments..…..…………..……………….
2007
2006
27,031
280
990
---
(1,478)
(621)
---
(8,177)
764
$
29,808
945
1,463
339
(4,967)
(745)
(415)
---
603
Benefit obligations at end of year……..……..……………. $
18,789
$
27,031
Plan assets:
Plan assets at beginning of year………..……..………………….. $
Actual return on plan assets….………..………….……………....
Employer contributions………………..………..………………..
Participant contributions……………..………….…………….….
Benefits paid…………………………..……….….……………...
Settlements / curtailments………………………………………..
Plan terminations………………………………………………....
Currency translation adjustments………..…….………………..
2007
2006
24,905
2,046
982
---
(621)
---
(8,177)
764
$
22,293
1,890
1,031
339
(745)
(415)
---
512
Plan assets at end of year………..…….…………………... $
19,899
$
24,905
31
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
Reconciliation of Funded Status:
Plan assets in excess of (less than) projected benefit obligations... $
Amounts recognized in accumulated other comprehensive loss:
Plans in which
Assets Exceed Benefit
Obligations at
September 30,
2007
2006
Plans in which
Benefit Obligations
Exceed Assets at
September 30,
2007
2006
2,330
$
1,383
$
(1,220)
$
(3,509)
Net loss (gain)………………………………………………...
Prior service cost……………………………………………...
Unrecognized net (gain) loss……………………………………....
Unrecognized prior service cost…………………………………...
Contribution between measurement date and fiscal year-end…….
(1,571)
433
---
---
---
---
---
(595)
526
---
1,484
145
---
---
205
---
---
2,941
185
228
Net amount recognized in the consolidated balance sheets.….
$
1,192
$
1,314
$
614
$
(155)
Amounts recognized in the Consolidated Balance Sheets are:
Other assets…………………………………………………………
Accrued liabilities……………………………………………….....
Other long-term liabilities………………………...………………..
Accumulated other comprehensive loss – pretax…..…………..…..
$
2,330
---
---
(1,138)
$
$
1,314
---
---
---
$
---
---
(1,016)
1,630
994
(572)
(3,396)
2,819
Net amount recognized in the Consolidated Balance Sheets.….
$
1,192
$
1,314
$
614
$
(155)
The amounts in accumulated other comprehensive income (loss) that are expected to be recognized as components of net
periodic benefit costs during 2008 are as follows:
Plans in which
Assets Exceed
Benefit
Obligations
Plans in which
Benefit
Obligations
Exceed Assets
Net loss (gain)……………………………………………...... $
Prior service cost…………………..……….………………..
Total……………..……….………………………………... $
(107)
93
(14)
$
$
34
40
74
Where applicable, the following weighted-average assumptions were used in developing the benefit obligation and the net
pension expense for defined benefit pension plans:
Discount rate …………….………………….…………………..
Expected return on assets………….……….…………………...
Rate of compensation increase……………….…………………
6.3%
8.2%
---
5.4%
7.2%
1.0%
5.3%
8.0%
3.5%
Years Ended September 30,
2007
2005
2006
32
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
The following table sets forth the asset allocation of the Company’s defined benefit pension plan assets at September 30,
2007 and 2006:
September 30, 2007
Equity securities………. $
Debt securities…………
Other securities………..
Asset
Amount
10,659
5,928
3,312
% Asset
Allocation
54%
30%
16%
September 30, 2006
% Asset
Allocation
69 %
29 %
2 %
Asset
Amount
17,186
7,090
629
$
Total………………….
$
19,899
100%
$
24,905
100 %
Investment objectives of the Company’s defined benefit plans’ assets are to (i) optimize the long-term return on the plans’
assets while assuming an acceptable level of investment risk, (ii) maintain an appropriate diversification across asset classes
and among investment managers, and (iii) maintain a careful monitoring of the risk level within each asset class. Asset
allocation objectives are established to promote optimal expected returns and volatility characteristics given the long-term
time horizon for fulfilling the obligations of the Company’s defined benefit pension plans. Selection of the appropriate
asset allocation for the plans’ assets was based upon a review of the expected return and risk characteristics of each asset
class.
External consultants assist the Company with monitoring the appropriateness of the investment strategy and the related
asset mix and performance. To develop the expected long-term rate of return assumptions on plan assets, generally the
Company uses long-term historical information for the target asset mix selected. Adjustments are made to the expected
long-term rate of return assumptions when deemed necessary based upon revised expectations of future investment
performance of the overall investments markets.
The Company expects to make contributions of $1,359 to its defined benefit pension plans during fiscal 2008. The
following benefit payments, which reflect expected future service of participants, are expected to be paid:
Years Ending
September 30,
Projected
Benefit
Payments
2008…………………………….
2009…………………………….
2010…………………………….
2011…………………………….
2012…………………………….
2013-2017………………………
$
859
657
728
865
983
6,725
The Company also contributes to a U.S. multi-employer retirement plan for certain union employees. The Company’s
contributions to the plan in 2007, 2006 and 2005 were $43, $48 and $41, respectively.
Substantially all non-union U.S. employees of the Company and its U.S. subsidiaries are eligible to participate in the
Company’s U.S. defined contribution plan. The Company makes a quarterly matching contribution to this Plan equal to an
amount that represents up to 5% of eligible participant compensation. The Company’s regular matching contribution
expense for this defined contribution plan in 2007, 2006 and 2005 was $229, $221 and $214, respectively. This defined
contribution plan provides that the Company may also make an additional discretionary matching contribution during those
periods in which the Company achieves certain performance levels. The Company’s additional discretionary matching
contribution expense in 2007, 2006 and 2005 was $158, $0 and $0, respectively.
The Company’s United Kingdom subsidiary sponsors for certain of its employees a defined contribution plan. The
Company contributes annually 5% of eligible employees’ compensation, as defined. Total contribution expense in 2007,
2006 and 2005 was $24, $31 and $40, respectively.
The Company’s Swedish subsidiary sponsors, for its employees three defined contribution plans. The Company contributes
annually a percentage of eligible employees’ compensation, as defined. Total contribution expense in 2007 and 2006 was
$21 and $24, respectively.
33
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
8. Stock-Based Compensation
The Company awarded stock options under its shareholder approved 1995 Stock Option Plan (“1995 Plan”) and 1998
Long-term Incentive Plan (“1998 Plan”). Under the 1995 Plan, the initial aggregate number of stock options that were
available to be granted was 200,000 and, at September 30, 2007, no further options may be awarded under such Plan. The
aggregate number of stock options that were available to be granted under the 1998 Plan in any fiscal year was limited to
1.5% of the total outstanding Common Shares of the Company as of September 30, 1998, up to a maximum of 5% of such
total outstanding shares, subject to adjustment for forfeitures. At September 30, 2007, no further options may be awarded
under the 1998 Plan. Option exercise price is not less than fair market value on date of grant and options are exercisable no
later than ten years from date of grant. Options issued under all plans generally vest at a rate of 25% per year.
Option activity is as follows:
Years Ended September 30,
2006
2007
2005
Options at beginning of year………………………….………...
Weighted average exercise price…………………………….
Options granted during the year……………………….………..
Weighted average exercise price…………………………….
Options exercised during the year……………………………...
Weighted average exercise price………………………….....
Options canceled during the year……………………….………
Weighted average exercise price…………………………….
Options at end of year…………………………………………..
Weighted average exercise price…………………………….
Options exercisable at end of year……………………………...
Weighted average exercise price…………………………….
261,000
$ 6.55
---
$ ---
(113,000)
$ 8.91
(37,500)
$ 5.59
110,500
$ 4.46
92,500
$ 4.61
278,000
$ 6.40
---
$ ---
---
$ ---
(17,000)
$ 4.14
261,000
$ 6.55
205,750
$ 7.32
405,500
$ 6.24
55,000
$ 3.74
(71,250)
$ 4.24
(111,250)
$ 5.89
278,000
$ 6.40
171,625
$ 7.99
As of September 30, 2007 and 2006, there was $18 and $51, respectively, of total unrecognized compensation cost related
to the unvested stock options granted under the Company’s stock option plans. That cost is expected to be recognized over
a weighted average period of 1.3 years as of September 30, 2007.
The following table provides additional information regarding options outstanding as of September 30, 2007:
Option
Exercise Price
Options
Outstanding
Options
Exercisable
Options Vested or
Expected to Vest
$ 3.50
$ 3.74
$ 4.69
$ 5.50
$ 6.81
$ 6.94
Total
23,500
37,500
15,000
27,000
5,000
2,500
110,500
18,500
24,500
15,000
27,000
5,000
2,500
92,500
23,500
37,500
15,000
27,000
5,000
2,500
110,500
Weighted average
remaining term………….
Aggregate intrinsic value..
5.6 years
$ 1,203
5.3 years
$ 1,002
5.6 years
$ 1,203
34
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
On October 1, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised
2004), “Share-Based Payment”. This Statement focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No 123R (revised 2004) requires all equity instrument-based
payments to employees, including grants of employee stock options, to be recognized in the income statement based on
their fair values. The Company adopted this statement using the modified prospective method and, accordingly, prior
period results have not been restated. Under this method, the Company is required to record compensation expense for all
equity instrument-based awards granted after the date of adoption and for the unvested portion of previously granted equity
instrument-based awards that remain outstanding at the date of adoption. Total compensation expense recognized in fiscal
years 2007 and 2006 was $32 and $78, respectively. No tax benefit was recognized for this compensation expense. Prior to
the adoption of SFAS No. 123R (revised 2004) the Company employed the disclosure-only provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS No. 123”). Pro forma information required by this standard
regarding net loss and net loss per share can be found in Note 1 – Summary of Significant Accounting Policies. This
information is required to be determined as if the Company had accounted for its stock options granted subsequent to
September 30, 1996 under the fair value method of that standard.
The fair values of options granted in fiscal year ending September 30, 2005 were estimated at the dates of grants using a
Black-Scholes options pricing model with the following weighted average assumptions:
Risk-free interest rate……………………..
Dividend yield…………………………….
Volatility factor…………………………...
Expected life of stock options…………….
Year Ended
September 30,
2005
4.14%
0.00%
46.80%
7.0 years
Based upon the preceding assumptions, the weighted average fair values of stock options granted during fiscal year 2005
was $2.02 per share.
Under the Company’s restricted stock program, Common Shares of the Company may be granted at no cost to certain
officers and key employees. These shares vest over either a four or five-year period, with either 25% or 20% vesting each
year, respectively. Under the terms of the program, participants will not be entitled to dividends nor voting rights until the
shares have vested. Upon issuance of Common Shares under the program, unearned compensation equivalent to the market
value of the Common Shares at the date of award is charged to shareholders’ equity and subsequently amortized to expense
over the vesting periods. Compensation expense related to the amortization of unearned compensation was $61and $69 in
fiscal years 2006 and 2005, respectively. At September 30, 2006 and 2007, there was no unrecognized compensation
expense related to restricted stock awards.
9. Asset Divestiture
In June, 2007, the Company and its Irish subsidiary, SIFCO Turbine Components Limited (“SIFCO Turbine”), completed
the sale of its industrial turbine engine component repair business to PAS Technologies Inc. The industrial turbine engine
component repair business operated in SIFCO Turbine’s Cork, Ireland facility. Net cash proceeds from the sale of the
business and certain related assets, after approximately $300 of third party transaction charges, were approximately $4,400.
The assets that were sold had a net book value of approximately $4,700 (accounts receivable, $2,100; inventory, $400; and
machinery and equipment, $2,200). The Company’s Repair Group recognized a loss of approximately $800 on disposal of
these assets in 2007, which loss is included in income (loss) from discontinued operations, net of tax. Upon completion of
this transaction, the Company no longer maintains a turbine engine component repair operation in Ireland. SIFCO Turbine
retained ownership of the Cork, Ireland facility (subject to a long-term lease arrangement with PAS Turbines Ireland) and
substantially all existing liabilities of the business. The long-term lease agreement that the Company entered into with PAS
included below market lease rates during the initial five-year term of the lease and, accordingly, the Company recorded a
loss of approximately $500 associated with such below market lease. Such loss is included in the aforementioned $800 loss
on disposal of assets. The Company agreed to guarantee the performance by SIFCO Turbine of all of its obligations under
the applicable business purchase agreement. At September 30, 2007, assets held for sale in the Consolidated Balance
Sheets consist of SIFCO Turbine’s Cork Ireland facility. The Company expects to dispose of this asset within the next 12
months.
35
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
In May, 2006, the Company and SIFCO Turbine completed the sale of the large aerospace portion of its turbine engine
component repair business and certain related assets to SR Technics. Historically, the large aerospace portion of SIFCO
Turbine’s turbine engine component repair business was operated in portions of two facilities located in Cork, Ireland, one
of which was sold as part of this transaction. Net proceeds from the sale of the business and certain related assets, after
approximately $800 of third party transaction charges, were $8,950 and the assets that were sold had a net book value of
approximately $4,500. The Company’s Repair Group recognized a gain of approximately $4,400 on disposal of these
assets in 2006, which gain is included in income (loss) from discontinued operations, net of tax. SIFCO Turbine retained
substantially all existing liabilities of the business and the Company agreed to guarantee the performance by SIFCO
Turbine of all of its obligations under an applicable asset purchase agreement.
In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, the financial results of both the large aerospace and industrial turbine engine component repair
businesses, which together make up essentially all of SIFCO Turbine’s operations, are reported as discontinued operations
for all periods presented in the Consolidated Statements of Operations. The financial results included in discontinued
operations were as follows:
2007
2006
2005
Net sales………………………………………………….
Income (loss) before income tax provision ….…………..
Income (loss) from discontinued operations, net of tax….
$
5,996
(2,149)
(2,044)
$
$
18,382
1,530
1,009
28,105
3,280
2,769
10. Contingencies
In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot
reasonably estimate future costs, if any, related to these matters but does not believe any such matters are material to its
financial condition or results of operations. The Company maintains various liability insurance coverages to protect its
assets from losses arising out of or involving activities associated with ongoing and normal business operations, although it
is possible that the Company’s future operating results could be affected by future cost of litigation.
The Company leases various facilities and equipment under capital and operating leases expiring at various dates. At
September 30, 2007, minimum rental commitments under non-cancelable leases are as follows:
Year ending September 30,
Capital
Leases
Operating
Leases
2008…………….…………………………………………..... $
2009…………….…………………………………………….
2010…………….…………………………………………….
2011…………….…………………………………………….
2012…………….…………………………………………….
Thereafter…………………………………………………….
Total minimum lease payments…………………………..
Amount representing interest………………………………...
Present value of net minimum lease payments………………
Less - current maturities……………………………………..
Long-term capital lease obligation……………………….
$
140
129
124
117
28
---
538
75
463
86
377
$
$
457
413
358
193
120
---
1,541
The Company recorded capital leases of equipment totaling $553 in 2007. Amortization of the cost of equipment under
capital leases is included in depreciation expense. At September 30, assets recorded under capital leases consist of the
following:
Machinery and equipment………………………………………
Accumulated depreciation….…………………………………..
$
2007
553
(110)
$
2006
---
---
36
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
11. Business Segments
The Company identifies reportable segments based upon distinct products manufactured and services performed. The
Turbine Component Services and Repair Group (“Repair Group”) consists primarily of the repair and remanufacture of
aerospace and industrial turbine engine components. The Repair Group is also involved in precision component machining
and industrial coatings for turbine engine applications. The Aerospace Component Manufacturing Group consists of the
production, heat-treatment, surface-treatment, non-destructive testing, and some machining of forged components in
various steel alloys utilizing a variety of processes for application principally in the aerospace industry. The Applied
Surface Concepts Group is a provider of specialized selective electrochemical metal finishing processes and services used
to apply metal coatings to a selective area of a component. The Company’s reportable segments are separately managed.
One customer of two of the Company’s segments in fiscal 2007 and of all three of the Company’s segments in fiscal 2006
and 2005 accounted for 13%, 12% and 19% of the Company’s consolidated net sales from continuing operations in 2007,
2006 and 2005, respectively. Another customer of all three of the Company’s segments accounted for 13%, 15% and 23%
of the Company’s consolidated net sales from continuing operations in 2007, 2006 and 2005, respectively. The combined
net sales to these two customers, two other customers and to the direct subcontractors to these four customers accounted for
50% of the Company’s consolidated net sales from continuing operations in 2007.
Geographic net sales from continuing operations are based on location of customer. The United States of America is the
single largest country for unaffiliated customer sales, accounting for 77%, 77% and 80% of consolidated net sales from
continuing operations in fiscal 2007, 2006 and 2005, respectively. No other single country represents greater than 10% of
consolidated net sales from continuing operations in 2007, 2006 and 2005. Net sales from continuing operations to
unaffiliated customers located in various European countries accounted for 8%, 12%, and 9% of consolidated net sales in
2007, 2006 and 2005, respectively.
Corporate unallocated expenses represent expenses that are not of a business segment operating nature and, therefore, are
not allocated to the business segments for reporting purposes. Corporate identifiable assets consist primarily of cash and
cash equivalents.
37
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
The following table summarizes certain information regarding segments of the Company’s continuing operations:
Years Ended September 30,
2007
2006
2005
Net sales:
Aerospace Component Manufacturing Group…….……………….. $
Turbine Component Services and Repair Group…….……………..
Applied Surface Concepts Group…………………..………………
59,993
12,942
14,320
$
43,941
12,340
12,325
Consolidated net sales…………...…………………..…….……. $
87,255
$
68,606
Operating income (loss):
Aerospace Component Manufacturing Group………………..……. $
Turbine Component Services and Repair Group………………..….
Applied Surface Concepts Group………………………..…………
Corporate unallocated expenses….…………..……….…..………..
Consolidated operating income (loss)…………………………...
Interest expense, net…………………………..…………..…………....
Foreign currency exchange loss (gain), net….…..…………………….
Other income, net…………………..………..…………........................
$
10,338
704
1,030
(1,688)
10,384
163
(20)
(14)
1,673
246
(559)
(1,611)
(251)
25
6
(247)
$
$
$
30,988
10,076
11,799
52,863
157
(1,784)
765
(1,648)
(2,510)
172
(12)
(246)
Consolidated income (loss) from continuing operations before
income tax provision (benefit)….……………………………
$
10,255
$
(35)
$
(2,424)
Depreciation and amortization expense:
Aerospace Component Manufacturing Group…….……………….. $
Turbine Component Services and Repair Group…….……………..
Applied Surface Concepts Group………..………………..………..
$
614
495
338
643
475
289
Consolidated depreciation and amortization expense……..……
$
1,447
$
1,407
Capital expenditures:
Aerospace Component Manufacturing Group…....……………....... $
Turbine Component Services and Repair Group…....……………...
Applied Surface Concepts Group……………..……………………
$
461
90
323
161
278
702
Consolidated capital expenditures..………..…………………...
$
874
$
1,141
Identifiable assets:
Aerospace Component Manufacturing Group….....………..……… $
Turbine Component Services and Repair Group….....………..……
Applied Surface Concepts Group…………………………………..
Corporate………………..……………..……………..………….….
34,895
10,910
7,083
8,001
$
22,802
14,605
6,543
4,825
Consolidated total assets………….…………………….……….. $
60,889
$
48,775
Non-U.S. operations:
Net sales from continuing operations.………..……….……………
Operating income (loss) from continuing operations………………
Identifiable assets (excluding cash)…..……..……………………...
$
$
4,515
365
6,413
3,569
(182)
9,899
$
$
$
$
$
$
$
639
512
219
1,370
761
225
448
1,434
20,149
23,340
5,054
980
49,523
2,649
6
17,756
38
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
12. Summarized Quarterly Results of Operations (Unaudited)
During the fourth quarter of fiscal year 2007, the Company reevaluated its U.S. income tax provision and determined that it
had, during the third quarter of fiscal year 2007, incorrectly reflected the accounting for (i) the reversal of its valuation
allowance against its net deferred tax assets and (ii) the recognition of the tax benefit resulting from the utilization in fiscal
2007 of its U.S. net operating loss carry forwards. This resulted in the understatement of the Company’s U.S. income tax
provision and the overstatement of the Company’s income from continuing operations for the nine months ended June 30,
2007 in the amount of $1,780.
2007 Quarter Ended
Dec. 31 March 31
June 30
Sept. 30
Net sales………………………………………………….
Cost of goods sold…………….........................................
$ 19,136 $ 21,520
15,728
14,955
$ 24,022 $ 22,577
16,717
18,435
Income from continuing operations before income tax
provision………………………………………….......
1,603
3,077
2,513
3,062
Income tax provision (benefit):
Previously reported…………………………………...
Restated………………………………………………
Income from continuing operations:
Previously reported…………………………………....
Restated………………………………………………..
31
31
1,572
1,572
81
81
(1,162)
618
2,996
2,996
3,675
1,895
N/A
753
N/A
2,309
Income (loss) from discontinued operations, net of tax…
605
(970)
(1,532)
(147)
Net income:
Previously reported…………………………………....
Restated………………………………………………..
2,177
2,177
2,026
2,026
2,143
363
N/A
2,162
Income per share from continuing operations:
Basic:
Previously reported………………………………...
Restated…………………………………………….
Diluted:
Previously reported………………………………...
Restated…………………………………………….
Income (loss) per share from discontinued operations:
Basic…………………………………………………...
Diluted………………………........................................
Net income per share:
Basic:
Previously reported………………………………..
Restated…………………………………………….
Diluted:
Previously reported………………………………..
Restated…………………………………………….
0.30
0.30
0.30
0.30
0.12
0.12
0.42
0.42
0.42
0.42
0.57
0.57
0.57
0.57
0.70
0.36
0.69
0.36
N/A
0.44
N/A
0.43
(0.19)
(0.19)
(0.29)
(0.29)
(0.03)
(0.03)
0.39
0.39
0.38
0.38
0.41
0.07
0.40
0.07
N/A
0.41
N/A
0.40
39
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
Dec. 31
2006 Quarter Ended
March 31
June 30
Net sales………………………………………………….
Cost of goods sold…………….........................................
$ 13,504 $ 18,553 $ 18,780
15,270
11,529
14,858
Income (loss) from continuing operations before income
tax provision (benefit)…...…………..………………...
Income tax provision (benefit)…………………………..
Income (loss) from continuing operations……………….
Income (loss) from discontinued operations, net of tax…
Net income (loss)………………………………………..
(606)
13
(619)
(847)
(1,466)
Income (loss) per share from continuing operations:
Basic…………………………………………………...
Diluted………………………........................................
Income (loss) per share from discontinued operations:
Basic…………………………………………………...
Diluted………………………........................................
Net income (loss) per share:
Basic……………………………………………….......
Diluted………………………........................................
(0.12)
(0.12)
(0.16)
(0.16)
(0.28)
(0.28)
1,123
7
1,116
(1,749)
(633)
0.21
0.21
(0.33)
(0.33)
(0.12)
(0.12)
584
---
584
2,747
3,331
0.11
0.11
0.53
0.53
0.64
0.64
Sept. 30
$ 17,769
16,005
(1,136)
(6)
(1,130)
858
(272)
(0.22)
(0.22)
0.16
0.16
(0.05)
(0.05)
13. Acquisition
On October 12, 2005, the Company’s Applied Surface Concepts Group acquired the stock of Selmet Norden AB of Rattvik,
Sweden, a supplier of contract manufacturing services for selective electrochemical finishing that primarily serves the
industrial community in Scandinavia. The acquisition was accounted for as a purchase, with the results of operations
included in the consolidated financial statements beginning with the acquisition date. The purchase price, net of cash
acquired, was $434. The purchase price allocation resulted in current assets of $198, property, plant and equipment of $484,
and current liabilities of $248. Pro forma financial information is not presented, as the effect of the acquisition is not
material to the Company’s financial position or results of operations.
40
SIFCO Industries, Inc. and Subsidiaries
Valuation and Qualifying Accounts
Years Ended September 30, 2007, 2006 and 2005
(Amounts in thousands)
Schedule II
Balance at
Beginning
of Period
Additions
(Reductions)
Charged to
Expense
Additions
(Reductions)
Charged to
Other
Accounts
Deductions
Balance
at End of
Period
Year Ended September 30, 2007
Deducted from asset accounts
Allowance for doubtful accounts…………
Return and allowance reserve…………….
Inventory obsolescence reserve…………..
Inventory LIFO reserve…………………..
Asset impairment reserve………………...
Valuation allowance for deferred taxes…..
$ 668 $ 147
(34)
473
331
---
(4,092)
63
1,149
6,860
493
4,608
$ 2
---
1
---
---
---
$ (214)
---
(104)
---
(175)
---
(a)
(b)
(c)
(d)
$ 603
29
1,519
7,191
318
516
Accrual for estimated liability
Workers’ compensation reserve………….
1,247
167
---
(223)
(e)
1,190
Year Ended September 30, 2006
Deducted from asset accounts
Allowance for doubtful accounts…………
Return and allowance reserve…………….
Inventory obsolescence reserve…………..
Inventory LIFO reserve…………………..
Asset impairment reserve………………...
Valuation allowance for deferred taxes…..
Accrual for estimated liability
$ 682 $ 121 $ ---
---
1
---
---
---
(30)
167
2,737
289
(459)
143
1,353
4,122
1,371
5,067
$ (135)
(50)
(372)
---
(1,167)
---
(a)
(b)
(c)
(d)
$ 668
63
1,149
6,860
493
4,608
Workers’ compensation reserve………….
1,203
275
---
(372)
(e)
1,247
Year Ended September 30, 2005
Deducted from asset accounts
Allowance for doubtful accounts…………
Return and allowance reserve…………….
Inventory obsolescence reserve…………..
Inventory LIFO reserve…………………..
Asset impairment reserve………………...
Valuation allowance for deferred taxes…..
$ 630
136
1,097
3,518
1,350
4,129
$ 115
23
485
604
21
938
Accrual for estimated liability
Workers’ compensation reserve………….
1,117
379
(a) Accounts determined to be uncollectible, net of recoveries
(b) Actual returns received
(c) Inventory sold or otherwise disposed
(d) Equipment sold or otherwise disposed
(e) Payment of workers’ compensation claims
2
---
---
---
---
---
---
(a)
(b)
(c)
$ (65)
(16)
(229)
---
---
---
$ 682
143
1,353
4,122
1,371
5,067
(293)
(e)
1,203
41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be
disclosed in its reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is processed,
recorded, summarized and reported within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management,
including the Chairman and Chief Executive Officer of the Company and Chief Financial Officer of the Company, of the
effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15(e) as of September 30, 2007 (the “Evaluation Date”). Based upon that evaluation, the Chairman and Chief
Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date and because of the material
weakness noted below, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) were not effective
in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to
be included in the Company’s periodic SEC filings. Notwithstanding the existence of the material weakness described
below, management has concluded that the consolidated financial statements in this Form 10-K fairly present, in all
material respects, the Company's financial position, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency, or combination of control deficiencies, that result in more than a remote
likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As
of June 30, 2007, the end of the Company’s third quarter of fiscal year 2007, the Company did not maintain effective
controls to determine the completeness and accuracy of it income tax provision. Subsequent to the issuance of its unaudited
consolidated condensed financial statements for the quarter ended June 30, 2007, the Company identified an error in the
calculation of its June 30, 2007 U.S. income tax provision that resulted in a net understatement of its income tax provision
of approximately $1,780,000. This resulted in an overstatement of income from continuing operations and a corresponding
overstatement of net income of approximately $1,780,000. This control deficiency resulted in a restatement of the
Company’s quarterly financial statements for its third quarter of fiscal year 2007. Accordingly, management has
determined that this control deficiency constitutes a material weakness.
Remediation of Material Weakness – the Company has engaged a qualified third party to assist in the calculation of its
fiscal year end tax provision and related disclosures and intends, to the extent considered necessary, to utilize such party for
interim reporting purposes in future periods.
There was no significant change in our internal control over financial reporting that occurred during the fourth fiscal quarter
ended September 30, 2007 that has materially affected, or that is reasonably likely to materially affect our internal control
over financial reporting.
Item 9B. Other Information
None
42
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth certain information regarding the executive officers of the Company.
Name
Age
Title and Business Experience
Jeffrey P. Gotschall
59
Frank A. Cappello
49
Chairman of the Board since 2001; Director of the Company since 1986;
Chief Executive Officer since 1990; President from 1989 to 2002; Chief
Operating Officer from 1986 to 1990; Executive Vice President from 1986
to 1989; and from 1985 to 1989, President of SIFCO Turbine Component
Services.
Vice President-Finance and Chief Financial Officer since 2000. Prior to
joining the Company, Mr. Cappello was employed by ASHTA Chemicals
Inc, a commodity chemical manufacturer, from August 1990 to December
1991 and from June 1992 to February 2000, last serving as Vice President
Finance and Administration and Chief Financial Officer; and previously by
KPMG LLP, last serving as a Senior Manager in its Assurance Group.
The Company incorporates herein by reference the information required by this item as to the Directors, procedures for
recommending Director nominees and the Audit Committee appearing under the captions “Proposal to Elect Six (6)
Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance and Board of
Director Matters” of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission
on or about December 14, 2007.
The Directors of the Company are elected annually to serve for one-year terms or until their successors are elected and
qualified.
The Company has adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-K under the Securities
Exchange Act of 1934, as amended. The Code of Ethics is applicable to, among other people, the Company’s Chief
Executive Officer, Chief Financial Officer, who is the Company’s Principal Financial Officer and to the Corporate
Controller, who is the Company’s Principal Accounting Officer. The Company’s Code of Ethics is available on its website:
www.sifco.com.
43
Item 11. Executive Compensation
The Company incorporates herein by reference the information appearing under the captions “Compensation Discussion
and Analysis”, “Executive Compensation”, “Compensation Committee Report”, “Compensation Committee Interlocks and
Insider Participation” and “Director Compensation” of the Company’s definitive Proxy Statement to be filed with the
Securities and Exchange Commission on or about December 14, 2007.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following table sets forth information regarding Common Shares to be issued under the Company’s equity
compensation plans as of September 30, 2007.
Plan Category
Number of
Securities to
be issued
upon Exercise
of
Outstanding
Options
Weighted-
Average
Exercise
Price of
Outstanding
Options
Number of
Securities
Remaining
Available for
Future
Issuance Under
Equity
Compensation
Plans
Equity compensation plans approved by security holders:
1998 Long-term Incentive Plan (1)..…………………….
1995 Stock Option Plan (2)..…………………………….
73,000
37,500
$ 4.83
3.74
---
---
Total…………………………………………………..
110,500
$ 4.46
---
(1) Under the 1998 Long-term Incentive Plan the aggregate number of stock options that were available to be granted in
any fiscal year was limited to 1.5% of the total outstanding Common Shares of the Company at September 30, 1998, up to a
cumulative maximum of 5% of such total outstanding shares, subject to adjustment for forfeitures. No further options may
be awarded under this plan. During 2007, 58,000 options granted under the 1998 Long-term Incentive Plan were exercised.
(2) Under the 1995 Stock Option Plan the initial aggregate number of stock options that that were available to be granted is
200,000. No further options may be awarded under this plan. During 2007, 55,000 options granted under the 1995 Stock
Option Plan were exercised.
For additional information concerning the Company’s equity compensation plans, refer to the discussion in Note 8 to the
Consolidated Financial Statements.
The Company incorporates herein by reference the beneficial ownership information appearing under the captions
“Outstanding Shares and Voting Rights” and “Stock Ownership of Executive Officers, Director and Nominees” of the
Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about December 14,
2007.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The Company incorporates herein by reference the information required by this item appearing under the captions
“Corporate Governance and Board of Director Matters” and “Certain Relationships and Related Transactions” of the
Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about December 14,
2007.
Item 14. Principal Accounting Fees and Services
The Company incorporates herein by reference the information required by this item appearing under the caption “Principal
Accounting Fees and Services” of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or about December 14, 2007.
44
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Financial Statements:
PART IV
The following Consolidated Financial Statements; Notes to the Consolidated Financial Statements and the Reports
of Independent Registered Public Accounting Firm are included in Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Years Ended September 30, 2007, 2006 and 2005
Consolidated Balance Sheets - September 30, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended September 30, 2007, 2006 and 2005
Consolidated Statements of Shareholders’ Equity for the Years Ended September 30, 2007, 2006 and 2005
Notes to Consolidated Financial Statements - September 30, 2007, 2006 and 2005
(a) (2) Financial Statement Schedules:
The following financial statement schedule is included in Item 8:
Schedule II – Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related regulations, are inapplicable, or the information has been
included in the Notes to the Consolidated Financial Statements.
(a)(3) Exhibits:
The following exhibits are filed with this report or are incorporated herein by reference to a prior filing in
accordance with Rule 12b-32 under the Securities and Exchange Act of 1934 (Asterisk denotes exhibits filed with
this report.).
Exhibit
No.
3.1
3.2
4.1
4.2
Description
Third Amended Articles of Incorporation of SIFCO Industries, Inc., filed as Exhibit 3(a) of the Company’s
Form 10-Q dated March 31, 2002, and incorporated herein by reference
SIFCO Industries, Inc. Amended and Restated Code of Regulations dated January 29, 2002, filed as
Exhibit 3(b) of the Company’s Form 10-Q dated March 31, 2002, and incorporated herein by reference
Amended and Restated Credit Agreement Between SIFCO Industries, Inc. and National City Bank dated
April 30, 2002, filed as Exhibit 4(b) of the Company’s Form 10-Q dated March 31, 2002, and incorporated
herein by reference
Consolidated Amendment No. 1 to Amended and Restated Credit Agreement, Amended and Restated
Reimbursement Agreement and Promissory Note dated November 26, 2002 between SIFCO Industries,
Inc. and National City Bank, filed as Exhibit 4.5 of the Company’s Form 10-K dated September 30, 2002,
and incorporated herein by reference
45
Exhibit
No.
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Description
Consolidated Amendment No. 2 to Amended and Restated Credit Agreement, Amended and Restated
Reimbursement Agreement and Promissory Note dated February 13, 2003 between SIFCO Industries, Inc.
and National City Bank, filed as Exhibit 4.6 of the Company’s Form 10-Q dated December 31, 2002, and
incorporated herein by reference
Consolidated Amendment No. 3 to Amended and Restated Credit Agreement, Amended and Restated
Reimbursement Agreement and Promissory Note dated May 13, 2003 between SIFCO Industries Inc. and
National City Bank, filed as Exhibit 4.7 of the Company’s Form 10-Q dated March 31, 2003, and
incorporated herein by reference
Consolidated Amendment No. 4 to Amended and Restated Credit Agreement, Amended and Restated
Reimbursement Agreement and Promissory Note dated July 28, 2003 between SIFCO Industries, Inc. and
National City Bank, filed as Exhibit 4.8 of the Company’s Form 10-Q dated June 30, 2003, and
incorporated herein by reference
Consolidated Amendment No. 5 to Amended and Restated Credit Agreement, Amended and Restated
Reimbursement Agreement and Promissory Note dated November 26, 2003 between SIFCO Industries,
Inc. and National City Bank, filed as Exhibit 4.9 of the Company’s Form 10-K dated September 30, 2002,
and incorporated herein by reference
Amendment No. 6 to Amended and Restated Credit Agreement dated March 31, 2004 between SIFCO
Industries, Inc. and National City Bank, filed as Exhibit 4.10 of the Company’s Form 10-Q dated March
31, 2004, and incorporated herein by reference
Consolidated Amendment No. 7 to Amended and Restated Credit Agreement, Amended and Restated
Reimbursement Agreement and Promissory Note dated May 14, 2004 between SIFCO Industries, Inc. and
National City Bank, filed as Exhibit 4.11 of the Company’s Form 10-Q dated March 31, 2004, and
incorporated herein by reference
Consolidated Amendment No. 8 to Amended and Restated Credit Agreement, Amended and Restated
Reimbursement Agreement and Promissory Note effective June 30, 2004 between SIFCO Industries, Inc.
and National City Bank, filed as Exhibit 4.12 of the Company’s Form 10-Q dated June 30, 2004, and
incorporated herein by reference
4.10 Consolidated Amendment No. 9 to Amended and Restated Credit Agreement, Amended and Restated
Reimbursement Agreement and Promissory Note effective November 12, 2004 between SIFCO Industries,
Inc. and National City Bank, filed as Exhibit 4.13 to the Company’s Form 10-K dated September 30, 2004,
and incorporated herein by reference
4.11 Amendment No. 10 to Amended and Restated Credit Agreement dated as of February 4, 2005 but effective
as of December 31, 2004 between SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.14 to
the Company’s Form 10-Q dated December 31, 2004, and incorporated herein by reference
4.12
4.13
Amendment No. 11 to Amended and Restated Credit Agreement dated May 19, 2005 between SIFCO
Industries, Inc. and National City Bank, filed as Exhibit 4.15 to the Company’s Form 10-Q/A dated March
31, 2005, and incorporated herein by reference
Amendment No. 12 to Amended and Restated Credit Agreement dated August 10, 2005 between SIFCO
Industries, Inc. and National City Bank, filed as Exhibit 4.16 to the Company’s Form 10-Q dated June 30,
2005, and incorporated herein by reference
4.14
Debt Purchase Agreement Between The Governor and Company of the Bank of Ireland and SIFCO
Turbine Components Limited, filed as Exhibit 4.17 to the Company’s Form 8-K dated September 29, 2005,
and incorporated herein by reference
46
Exhibit
No.
Description
4.15 Mortgage and Charge dated September 26, 2005 between SIFCO Turbine Components Limited and the
Governor and Company of the Bank of Ireland, filed as Exhibit 4.18 to the Company’s Form 8-K dated
September 29, 2005, and incorporated herein by reference
4.16 Amendment No. 13 to Amended and Restated Credit Agreement dated November 23, 2005 between
SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.19 to the Company’s Form 10-K dated
September 30, 2005, and incorporated herein by reference
4.17 Amendment No. 14 to Amended and Restated Credit Agreement dated February 10, 2006 between SIFCO
Industries, Inc. and National City Bank, filed as Exhibit 4.20 to the Company’s Form 10-Q dated
December 31, 2005, and incorporated herein by reference
4.18 Amendment No. 15 to Amended and Restated Credit Agreement dated August 14, 2006 between SIFCO
Industries, Inc. and National City Bank, filed as Exhibit 4.21 to the Company’s Form 10-Q dated June 30,
2006, and incorporated herein by reference
4.19 Amendment No. 16 to Amended and Restated Credit Agreement dated November 29, 2006 between
SIFCO Industries, Inc. and National City Bank, filed as Exhibit 4.22 to Company’s Form 10-K dated
September 30, 2006, and incorporated herein by reference.
4.20 Amendment No. 17 to Amended and Restated Credit Agreement dated February 5, 2007 between SIFCO
Industries, Inc. and National City Bank, filed as Exhibit 4.23 to the Company’s Form 10-Q dated
December 31, 2006 and incorporated herein by reference
4.21 Amendment No. 18 to Amended and Restated Credit Agreement dated May 10, 2007 between SIFCO
Industries, Inc. and National City Bank, filed as Exhibit 4.24 to the Company’s Form 10-Q dated March
31, 2007 and incorporated herein by reference
9.1
Voting Trust Agreement dated January 30, 2007, filed as Exhibit 9.3 of the Company’s Form 10-Q dated
December 31, 2006, and incorporated herein by reference
10.1
Deferred Compensation Program for Directors and Executive Officers (as amended and restated April 26,
1984), filed as Exhibit 10(b) of the Company’s Form 10-Q dated March 31, 2002, and incorporated herein
by reference
10.2
SIFCO Industries, Inc. 1998 Long-term Incentive Plan, filed as Exhibit 10.3 of the Company’s form 10-Q
dated June 30, 2004, and incorporated herein by reference
10.3
SIFCO Industries, Inc. 1995 Stock Option Plan, filed as Exhibit 10(d) of the Company’s Form 10-Q dated
March 31, 2002, and incorporated herein by reference
10.4
10.5
10.6
Change in Control Severance Agreement between the Company and Frank Cappello, dated September 28,
2000, filed as Exhibit 10(g) of the Company’s Form 10-Q dated December 31, 2000, and incorporated
herein by reference
Change in Control Severance Agreement between the Company and Remigijus Belzinskas, dated
September 28, 2000, filed as Exhibit 10 (i) of the Company’s Form 10-Q dated December 31, 2000, and
incorporated herein by reference
Change in Control Severance Agreement between the Company and Jeffrey P. Gotschall, dated July 30,
2002, filed as Exhibit 10.10 of the Company’s Form 10-K dated September 30, 2002, and incorporated
herein by reference
10.7
Form of Restricted Stock Agreement, filed as Exhibit 10.11 of the Company’s Form 10-K dated September
30, 2002, and incorporated herein by reference
47
Exhibit
No.
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Description
Form of Tender, Condition of Tender, Condition of Sale and General Conditions of Sale dated June 30, 2004
as Exhibit 10.12 of the Company’s Form 8-K dated October 14, 2004, and incorporated herein by reference
Separation Agreement and Release between Hudson D. Smith and SIFCO Industries, Inc. effective January
31, 2005, filed as Exhibit 10.13 of the Company’s Form 8-K dated February 8, 2005, and incorporated
herein by reference
Separation Pay Agreement between Frank A. Cappello and SIFCO Industries, Inc. dated December 16,
2005, filed as Exhibit 10.14 of the Company’s Form 10-K dated September 30, 2005, and incorporated
herein by reference
Agreement for the Purchase of the Assets of the Large Aerospace Business of SIFCO Turbine Components
Limited dated March 16, 2006 between SIFCO Turbine Components Limited, SIFCO Industries, Inc, and
SR Technics Airfoil Services Limited, as amended on April 19, 2006, May 2, 2006, May 5, 2006, May 9,
2006, and May 10, 2006, filed as Exhibit 10.15 of the Company’s Form 10-Q dated March 31, 2006, and
incorporated herein by reference
Separation Agreement and Release Without Prejudice between the Company and Timothy V. Crean, dated
November 28, 2006 filed as Exhibit 99.1 of the Company’s Form 8-K dated November 30, 2006, and
incorporated herein by reference
Amendment No. 1 to Change in Control Severance Agreement between the Company and Frank Cappello,
dated February 5, 2007, filed as Exhibit 10.17 of the Company’s Form 10-Q dated December 31, 2006 and
incorporated herein by reference
Amendment No. 1 to Change in Control Severance Agreement between the Company and Remigijus
Belzinskas, dated February 5, 2007, filed as Exhibit 10.18 of the Company’s Form 10-Q dated December
31, 2006 and incorporated herein by reference
Business Purchase Agreement dated as of May 7, 2007 between PAS Technologies Inc. (Parent), PAS
Turbines Ireland Limited (Buyer), SIFCO Industries Inc. (Shareholder), and SIFCO Turbine Components
Limited (Company), filed as Exhibit 10.19 of the Company’s Form 10-Q dated June 30, 2007 and
incorporated herein by reference
14.1
Code of ethics, filed as Exhibit 14.1 of the Company’s form 10-K dated September 30, 2003, and
incorporated herein by reference
*21.1
Subsidiaries of Company
*23.1
Consent of Grant Thornton LLP
*31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a)
*31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a)
*32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
*32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
48
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
SIFCO Industries, Inc.
By: /s/ Frank A.Cappello
Frank A. Cappello
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
Date: December 14, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below on
December 14, 2007 by the following persons on behalf of the Registrant in the capacities indicated.
/s/ Jeffrey P. Gotschall
Jeffrey P. Gotschall
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ Hudson D. Smith
Hudson D. Smith
Director
/s/ Frank N. Nichols
Frank N. Nichols
Director
/s/ P. Charles Miller
P. Charles Miller
Director
/s/ Alayne L. Reitman
Alayne L. Reitman
Director
/s/ J. Douglas Whelan
J. Douglas Whelan
Director
/s/ Frank A. Cappello
Frank A. Cappello
Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
/s/ Remigijus H. Belzinskas
Remigijus H. Belzinskas
Corporate Controller
(Principal Accounting Officer)
49
SHAREHOLDER INFORMATION
DIRECTORS
AUDITORS
Jeffrey P. Gotschall
Chairman of the Board and
Chief Executive Officer
Frank N. Nichols
Retired Group Vice President,
Parker Hannifin Corporation Aerospace Group
P. Charles Miller, Jr.
Chairman of the Board,
Chief Executive Officer,
Duramax Marine LLC
Alayne L. Reitman
Formerly Vice President – Finance and
Chief Financial Officer,
The Tranzonic Companies, Inc.
Hudson D. Smith
President
Forged Aerospace Sales, LLC
J. Douglas Whelan
Retired President and Chief Operating Officer,
Wyman-Gordon Company
OFFICERS
Jeffrey P. Gotschall
Chairman of the Board and
Chief Executive Officer
Frank A. Cappello
Vice President - Finance and
Chief Financial Officer
Remigijus H. Belzinskas
Corporate Controller
Grant Thornton LLP
Certified Public Accountants
800 Halle Building
1228 Euclid Avenue
Cleveland, Ohio 44115
GENERAL COUNSEL
Squire, Sanders & Dempsey LLP
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114-1304
COMPANY INFORMATION
Included with this Annual Report is a copy of
SIFCO Industries, Inc.’s Form 10-K filed with
the Securities and Exchange Commission for the
year ended September 30, 2007. Additional
copies of the Company’s Form 10-K and other
information are available to shareholders upon
written request to:
Investor Relations
SIFCO Industries, Inc.
970 East 64th Street
Cleveland, Ohio 44103
We also
www.sifco.com.
invite you
to visit our website:
ANNUAL MEETING
The annual meeting of shareholders of SIFCO
Industries, Inc. will be held at National City
Bank, East Ninth Street and Euclid Avenue,
Cleveland, Ohio, at 10:30 a.m. on January 29,
2008.
50
970 East 64th Street, Cleveland, Ohio 44103-1694
Phone: (216) 881-8600 Fax: (216) 432-6281
www.sifco.com