INDUSTRIES, INC.
Annual Report and Form 10-K
Fiscal Year 2012
INDUSTRIES, INC.
To our Shareholders:
As we indicated in our letter last year, SIFCO Industries, Inc is in a new era. This year we continued our
aggressive growth. An excellent precision forge business, Quality Aluminum Forge (“QAF”), was acquired in
October of 2011, the first month of our fiscal year. The addition of QAF continued the attainment of our
strategic growth initiatives. SIFCO has the objective to both diversify into more commercial aerospace business,
thereby lessening our dependence on the military, and to continue to broaden the scope of our product and
service offerings. QAF does both - its precision aluminum forging processes are among the best in the industry
and QAF is widely known among its commercial aerospace customers as a reliable, quality supplier.
The addition of QAF during fiscal 2012 was an important contributor to our 16% overall growth in sales and our
15% growth in adjusted EBITDA. SIFCO maintained its market share on military platforms during fiscal 2012,
but the uncertainty of government funding and the threat of across the board cuts have placed every program in
a state of uncertainty. In our core forging businesses, SIFCO now has a ratio of commercial to military business
equal to 55% commercial and 45% military. Just two years ago that ratio was skewed to over 70% military.
With the addition of QAF, SIFCO’s forging business also added significant machining capability and it
continues to look at every avenue to add more value to our customer product and service offerings such as
configured inventory, raw material stocking as well as more rapid and precise die design and refurbishment.
SIFCO continues to segment its businesses into the following operating groups:
Forged Components Group (“Forge Group”) - This is our core business and, with the acquisitions we
accomplished in fiscal 2011 and 2012, it continues to be by far our largest operating group. Sales grew to $103
million in fiscal 2012 from $84 million in fiscal 2011. This represents a 21% year-over-year increase. Our
products are now found on most commercial aircraft, military and commercial helicopters, military aircraft and
Industrial gas turbines.
Our capabilities continued to be enhanced by strategic capital investment with a new 5 axis precision machining
center and the installation of a 5,000 ton press, which doubled QAF’s forging size capabilities. In addition, the
previously installed 35,000 pound hammer has helped SIFCO to broaden its product and service offerings to
better meet our customers’ expanding needs.
Turbine Components Services & Repair (“Repair Group”) - This business segment repairs turbine engine
blade and vane components and provides advanced coating products and services. It serves the small turbine
engine component repair market. This business is aligned with original equipment manufacturers (“OEM’s”) in
the repair of small engine components for the general aviation market, helicopters, business jets, small
commercial regional jets and small land based turbines.
The Repair Group has a wide range of capabilities for component repair, advanced coatings, super-alloy brazing
and thermal spraying. The alignment with the OEM’s is usually a very positive relationship, whereby SIFCO
develops component repairs and advanced coating applications that provide the OEM’s customers with lower
cost solutions for extending the life of the high value turbine blades and vanes. The OEM’s approve the repair
processes developed by the Repair Group and then direct component repair and advanced coating business to the
Repair Group. The extended downturn in the general aviation market has resulted in the OEM’s maintaining
their internal component repair facilities at or near capacity before directing any work to independent
component repair facilities such as SIFCO.
The Repair Group has dropped below the breakeven point in volume with its current product and service
offerings. SIFCO is in the process of expanding its component repair and advanced coating applications in an
attempt to recoup the lost volume. SIFCO is also developing a new advanced coating process that extends the
life of turbine blades and vanes that will be proprietary to the Repair Group. These efforts should result in the
additional volumes needed for a business turnaround even if the general aviation market remains in the current
downturn for several more years.
Applied Surface Concepts (“ASC Group”) - This business segment develops, manufactures and sells selective
plating products and provides contract plating services for component repair, refurbishment, and OEM
applications. This group experienced a significant growth in both sales and operating profit in fiscal 2012.
Growth in several of the markets served resulted in a 6% growth in sales and a 4% growth in division operating
profit. The ASC Group is realigning its sales force to put more emphasis into those locations that have shown
stronger growth opportunity. We continue to work with this business segment to more fully develop its strategic
fit within the core competencies of SIFCO.
Fiscal 2012 was a growth year for SIFCO. However, the migration to an enterprise with a better balance of more
commercial aerospace business allowed SIFCO to continue its growth in both sales and EBITDA. The
accounting treatment for the acquisitions of T&W Forge and QAF resulted in a short-term reduction in operating
profit. Looking beyond the purchasing accounting conventions; however, clearly shows the added value we
were able to deliver to our shareholders during fiscal 2012. The strong outlook for the commercial aerospace
market continues to provide an optimistic outlook for SIFCO in the near term.
Our company is excited to be celebrating our 100th Anniversary in the coming year. We are proud of our
heritage and excited about our future. We again thank our dedicated associates for their service, our valued
customers for their business and encouragement, and our loyal shareholders for their support.
Jeffrey P. Gotschall
Chairman of the Board
Michael S. Lipscomb
President and Chief Executive Officer
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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, 2012
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)
34-0553950
(I.R.S. Employer Identification No.)
970 East 64th Street, Cleveland Ohio
(Address of principal executive offices)
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)
NYSE MKT
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Securities Exchange Act: None.
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) 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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
large accelerated filer [ ] accelerated filer [ ] non-accelerated filer [ ] smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 $48,086,083.
The number of the Registrant’s Common Shares outstanding at October 31, 2012 was 5,339,571.
Documents incorporated by reference: Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on January 17, 2013 (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 plating. The products include forged components (both conventional and
precision), machined forged parts and other machined metal components, remanufactured component parts for aerospace
turbine engines, and selective plating solutions and equipment. The Company’s operations are conducted in three business
segments: (i) Forged Components Group, (ii) Turbine Component Services and Repair Group and (iii) Applied Surface
Concepts Group.
B.
Principal Products and Services
1. Forged Components Group
The Forged Components Group (“Forge Group”) has multiple operations. SIFCO Forge is located in Cleveland, Ohio;
T&W Forge (“TWF”) is located in Alliance, Ohio and Quality Aluminum Forge (“QAF”) is located in Orange, California.
As discussed more fully in Note 12 to the consolidated financial statements included in Item 8, on October 28, 2011,
SIFCO completed the purchase of the forging business and substantially all related operating assets from GEL Industries,
Inc. (DBA Quality Aluminum Forge), which business is operated in QAF’s Orange and Long Beach, California facilities.
This segment of the Company’s business consists principally of the manufacture of forged components for aerospace and
energy applications. As a part of the Forge Group’s manufacturing process, the business performs forging, heat-treating and
precision component machining.
Operations
The Company’s Forge Group is a manufacturer of forged components with capability ranging in size from 2 to 1,100
pounds (depending on configuration and alloy), primarily in various steel, titanium and aluminum alloys, utilizing a variety
of processes for applications principally in the aerospace and energy markets. The Forge Group’s products include: original
equipment manufacturers (“OEM”) and aftermarket components for aircraft and industrial gas turbine engines; structural
airframe components; aircraft landing gear components; wheels and brakes; critical rotating components for helicopters;
and commercial/industrial products. The Forge Group also provides heat-treatment, surface-treatment, non-destructive
testing and select machining of forged components.
The Forge 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. The
Forge Group generally does not depend on a single source for the supply of its materials. Due to the limited supply of
certain raw materials, some material is provided by a small number of suppliers; however, the Forge Group believes that its
sources are adequate for its business. SIFCO Forge, TWF and QAF are ISO 9001:2000 registered with SIFCO Forge and
QAF also being AS 9100:2001 certified. In addition, the Forge Group’s chemical etching/milling, non-destructive testing,
and heat-treating facilities are NADCAP (National Aerospace and Defense Contractors Accreditation Program) accredited.
Industry
The performance of the domestic and international air transport industry as well as government defense spending and the
energy industry directly and significantly impact the performance of the Forge Group.
(cid:120) 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
financial condition of the global commercial airline industry continues to see improvement. This improvement is
due to strong demand in both air freight and passenger traffic. The air transport industry has recently benefited
from several favorable trends, including: (i) projected growth in air traffic and (ii) major replacement and
refurbishment cycles driven by the desire for more fuel efficient aircraft and fleet commonality. There has been
recent improvement in aircraft capacity utilization due to the increase in air freight and passenger traffic, which is
driving demand for additional capacity. In addition to the traditional markets, emerging markets in Asia and the
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Middle East are driving demand for aircraft as more people are flying today than has been the case in recent past.
Aircraft capacity is returning to the market at about the same pace as the growth in demand for such capacity. The
Forge Group believes this pattern should continue with the long-term steady growth projected by the air transport
industry. The Forge Group also supplies new and spare components for military aircraft, including helicopters.
Military spending has continued to be relatively strong and level in recent years. As a result of military initiatives,
there has been continuing demand for both new and spare components for military customers. The Forge Group’s
current outlook for the air transport industry is cautiously optimistic while the military segment remains stable, yet
subject to potential changes in defense spending decisions.
(cid:120) The long-term outlook for the energy industry is for steady, continued growth. The related demand for industrial
gas turbine units will continue with the increased demand from developing countries. The need for electrical
power generation will be satisfied, in part, by industrial gas turbines. While no one source will meet the world’s
power requirements, industrial gas turbines are increasingly being adapted to additional use applications to
improve the efficiency and reliability of power projects.
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 Forge Group. Lack of continued improvement in the global economy could result in increased credit risk
associated with serving the airlines and/or their suppliers. However, the Forge Group believes that it is poised to take
advantage of improvement in order demand from the commercial airframe and engine manufacturers as well as the
manufacturers of industrial gas turbine engines.
Competition
While there has been some consolidation in the forging industry, the Forge Group believes there is limited opportunity to
increase prices, other than for the pass-through of raw material aluminum, steel and titanium alloy price increases. The
Forge Group believes; however, that its demonstrated aerospace and energy expertise along with focus on quality, customer
service, SMART (Streamlined Manufacturing Activities to Reduce Time/Cost) initiatives, as well as offering a broad range
of capabilities that provide it with an advantage in the primary markets it serves. The Forge Group competes with both U.S.
and non-U.S. suppliers of forgings, some of which are significantly larger than the Forge Group. As customers establish
new facilities throughout the world, the Forge Group will continue to encounter non-U.S. competition. The Forge Group
believes it can expand its markets by (i) acquiring additional forging operations, (ii) broadening its product lines through
investment in equipment that expands its manufacturing capabilities and (iii) developing new customers in markets whose
participants require similar technical competence and service (as the aerospace and energy industries) and are willing to pay
a premium for quality and service.
Customers
During fiscal 2012, the Forge Group had three customers, consisting of various business units of United Technologies
Corporation, Rolls-Royce Corporation, and General Electric Corporation, which accounted for 17%, 16% and 12%,
respectively, of the Forge Group’s net sales. The net sales to these three customers, and to their direct subcontractors,
accounted for 55% of the Forge Group’s net sales in fiscal 2012. The Forge Group believes that the loss of sales to such
customers would result in a materially adverse impact on the business and income of the Forge Group. However, the Forge
Group has maintained a business relationship with many of these 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 Forge Group has generally been
successful in replacing such reduced purchases, thereby avoiding a material adverse impact on the Forge Group. The
Forge 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 Forge Group’s business is seasonal.
Backlog of Orders
The Forge Group’s backlog as of September 30, 2012 increased to $106.0 million, of which $87.8 million is scheduled for
delivery during fiscal 2013, compared with $92.2 million as of September 30, 2011, of which $74.3 million was scheduled
for delivery during fiscal 2012. The significant increase in the backlog as of September 30, 2012 compared to September
30, 2011, is primarily attributed to the addition of QAF, which accounted for $18.1 million of the total backlog as of
September 30, 2012. All orders are subject to modification or cancellation by the customer with limited charges. Delivery
lead times for certain raw materials (e.g. aerospace grades of steel and titanium alloy) have shortened since the beginning of
fiscal 2012 and the Forge Group believes that such lead time changes may ultimately result in a fundamental shift in the
ordering pattern of its customers. The Forge Group believes that a likely consequence of such a shift is that customers may
place orders later than they previously did, which may result in a decrease, relative to comparable prior year periods, in the
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Forge Group’s backlog. Accordingly, such backlog decrease, to the extent it may occur, may not necessarily be indicative
of a reduction in expected future sales.
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 turbine
engine components principally for aerospace applications. 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 certifies that the Repair 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 Canada, Rolls-Royce, Turbomeca, and
Hamilton Sundstrand). In exchange for being granted an OEM approval, the Repair Group is obligated, in certain cases, to
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’s business. The Repair
Group continues to invest time and money on research and development activities. The Company’s research and
development activities in repair processes and 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 Repair Group’s research and development expense was $0.7 and $0.5 million in
fiscal 2012 and 2011, respectively.
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, or from OEM-
certified suppliers, 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 financial
condition of the global commercial airline industry has improved. This improvement is due to strong demand in both air
freight and passenger traffic. The air transport industry has recently benefited from several favorable trends, including: (i)
projected growth in air traffic and (ii) the beginning of major replacement and refurbishment cycles driven by the desire for
more fuel efficient aircraft and fleet commonality. It is difficult to determine at this time what the long-term impact of these
factors may be on the demand for products and services provided by the Repair Group. Lack of continued improvement in
the global economy could result in further reduced demand for the products and services that the Repair Group provides.
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 turbine engine manufacturers in the turbine engine overhaul and component repair
businesses. With the presence of the OEMs in the market, there has been a general reluctance on the part of the OEMs to
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issue, to independent component repair companies, approvals for the repair of their 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) 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 2012, the Repair Group had four customers, consisting of various business units of Rolls-
Royce Corporation, Safran Group, ATC Aerospace and United Technologies Corporation, which accounted for 20%, 17%,
14% and 11%, respectively, of the Repair Group’s net sales. 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 as of September 30, 2012 decreased to $1.0 million, of which $0.1 million is scheduled for
delivery during fiscal 2013 and $0.9 million is on hold, compared with $1.2 million as of September 30, 2011, of which $0.3
million was scheduled for delivery during fiscal 2012 and $0.9 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. Applied Surface Concepts Group
The Company’s Applied Surface Concepts Group (“ASC Group”) provides surface enhancement technologies principally
related to selective plating and anodizing. Principal product offerings include (i) the development, production and sale of
metal plating solutions and equipment required for selective plating and (ii) providing selective plating contract services.
Operations
Selective plating of a 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 such as (i) nickel-tungsten, cobalt chromium carbide and nickel-cobalt
solutions that can be used as more environmentally friendly alternatives for hexavalent chromium plating solutions and (ii)
low hydrogen embrittlement zinc-nickel and tin-zinc solutions that can be used as more environmentally friendly
alternatives for cadmium plating solutions.
The ASC Group can either (i) supply selective plating chemicals and equipment to customers desiring to perform selective
plating in-house or (ii) provide manual or semi-automated contract selective plating services at either the customer’s site or
at one of the ASC Group’s facilities. The ASC Group operates four U.S. facilities in geographic areas strategically located
in proximity to its major customers (Cleveland, Ohio / Hartford, Connecticut / Norfolk, Virginia / Houston, Texas) and
three in Europe (Birmingham, England / Paris, France / Rattvik, Sweden). The scope of selective plating work includes
part salvage and repair, part refurbishment, and new part enhancement. Selective plating solutions are produced in the
Cleveland, Ohio and Birmingham, England facilities.
The ASC Group generally has multiple sources available for its raw materials, which consist primarily of industrial
chemicals and metal salts and, therefore, does not have a high dependence upon a single source for the supply of key raw
materials. Management believes that its sources of raw materials are adequate to support its business.
The ASC Group maintains recognized industry brand names including: SIFCO Process®, Copper Select®, Dalic®, USDL®
and Selectron®, all of which are specified in military and industrial specifications. The ASC Group’s manufacturing
operations have ISO 9001:2008 and AS 9100 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. The ASC Group is also registered with the ARR (American Railroad Registry) and KRS (Korean Registry of
Shipping).
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Industry
Selective plating occupies a niche within the broader metal finishing industry. The ASC Group’s selective plating process
is used to provide functional, engineered finishes rather than decorative finishes, and it serves many markets including
aerospace, medical, 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 world’s largest selective plating company, there are several
companies globally that manufacture and sell selective plating finishing solutions and equipment and/or provide contract
selective plating services. The ASC Group seeks to differentiate itself through its technical support and research and
development capabilities. The ASC Group also competes with other surface enhancement technologies such as welding and
metal spray.
Customers
During fiscal 2012, the ASC Group had no customers which accounted for 10% or more of the ASC Group’s net sales. The
ASC Group has a customer base of over 1,000 customers. Approximately 10 customers, who operate in a variety of
industries, accounted for approximately 29% of the ASC Group’s fiscal 2012 net sales. No material part of the ASC
Group’s business is seasonal.
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, 2012 and 2011.
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 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 increased from approximately 360 at the beginning of fiscal 2012 to
approximately 565 employees at the end of fiscal 2012. The Company is party to collective bargaining agreements with
certain employees located at its Forge Group’s Cleveland, Ohio (expires in May 2015) and Alliance, Ohio (expires in July
2013) facilities and at its Repair Group’s Minneapolis, Minnesota facility (expires in July 2014).
E.
Non-U.S. Operations
The Company’s products and services are distributed and performed in both U.S. and non-U.S. markets. 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 the United Kingdom, France and Sweden.
Financial information about the Company’s U.S. and non-U.S. operations and subsidiaries is set forth in Note 11 to the
consolidated financial statements included in Item 8.
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As of September 30, 2012, essentially all of the Company’s cash and cash equivalents are in the possession of its non-U.S.
subsidiaries and relate to undistributed earnings of these non-U.S. subsidiaries. Distributions from the Company’s non-U.S.
subsidiaries to the Company may be subject to statutory restrictions, adverse tax consequences or other limitations.
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 dies, 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,
2012 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:
(cid:120) The Repair Group operates a single, owned facility in Minneapolis, Minnesota with a total of 59,000 square feet
and is involved in the repair and remanufacture of principally small aerospace turbine engine components.
(cid:120) The Forge Group operates in multiple facilities - (i) an owned 240,000 square foot facility located in Cleveland,
Ohio, which is also the site of the Company’s corporate headquarters, (ii) a leased 450,000 square foot facility
located in Alliance, Ohio, and (iii) leased facilities aggregating approximately 67,000 square feet located in
Orange and Long Beach, California.
(cid:120) The ASC Group is headquartered in an owned 34,000 square foot facility in Cleveland, Ohio. The ASC Group
leases space aggregating 52,000 square feet for sales offices and/or for its contract selective plating services in
Norfolk, Virginia; Hartford, Connecticut; Houston, Texas; Paris, France; and Birmingham, England. The ASC
Group also operates in an owned 3,000 square foot facility in Rattvik, Sweden.
(cid:120) The Company owns a building located in Cork, Ireland (59,000 square feet) that is subject to a long-term lease
arrangement with the acquirer of the Repair Group’s industrial turbine engine component repair business that was
sold.
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 and 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 costs of litigation.
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 NYSE MKT exchange under the symbol “SIF”. The following table sets
forth, for the periods indicated, the high and low closing sales price for the Company’s Common Shares.
Years Ended September 30,
2012
2011
High
Low
High
Low
First Quarter……………………………...
Second Quarter…………………………..
Third Quarter…………………………….
Fourth Quarter…………………………...
Dividends and Shares Outstanding
$ 19.93 $ 17.81 $ 16.97 $ 12.06
15.91
15.63
16.22
18.54
18.06
18.20
22.43
22.98
23.75
17.68
17.88
19.96
The Company declared a cash dividend of $0.20 per Common Share in fiscal 2012. While the Company does not
necessarily anticipate paying regular annual dividends, the Company will continue to evaluate the payment of such
7
dividends annually based on its relative profitability and available resources. The Company currently intends to retain a
significant majority of its earnings for the operation and growth of its businesses. The Company’s ability to declare or pay
cash dividends is limited by its credit agreement covenants. At October 31, 2012, there were approximately 550
shareholders of record of the Company’s Common Shares, as reported by Computershare, Inc., the Company’s Transfer
Agent and Registrar, which maintains its U.S. corporate offices at 250 Royall Street, Canton, MA 02021.
Reference Part III, Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” for information related to the Company’s equity compensation plans.
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) the impact on business
conditions in general, and on the demand for product in the aerospace and power generation industries in particular, of the
global economic outlook, including the continuation of military spending at or near current levels and the availability of
capital and liquidity from banks and other providers of credit; (2) future business environment, including capital and
consumer spending; (3) competitive factors, including the ability to replace business which may be lost; (4) successful
development of turbine component repair processes and/or procurement of new repair process licenses from turbine engine
manufacturers and/or the Federal Aviation Administration; (5) metals and commodities price increases and the Company’s
ability to recover such price increases; (6) successful development and market introduction of new products and services;
(7) continued reliance on consumer acceptance of regional and business aircraft powered by more fuel efficient turboprop
engines; (8) continued reliance on military spending, in general, and/or several major customers, in particular, for revenues;
(9) the impact on future contributions to the Company’s defined benefit pension plans due to changes in actuarial
assumptions, government regulations and the market value of plan assets; (10) stable governments, business conditions,
laws, regulations and taxes in economies where business is conducted; and (11) the ability to successfully integrate
businesses that may be acquired into the Company’s operations.
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 both
conventional and precision forging, heat-treating, coating, welding, precision component machining and selective plating.
The products include conventional and precision forged components, machined forged components, other machined metal
components, remanufactured component parts for turbine engines, and selective plating solutions and equipment. The
Company’s operations are conducted in three business segments: (1) Forged Components 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 build rate for industrial gas turbine engines, (iii) the projected maintenance, repair
and overhaul schedules for commercial, business and military aircraft as well as the engines that power such aircraft, and
(iv) anticipated exploration and production activities relative to oil and gas products, etc.
The primary factor that impacts the operating income of all three of the Company’s business segments, in a similar manner,
is net sales and related production volumes. This is due to the fact that each of the Company’s segments operates within a
cost structure that includes a significant fixed component. Therefore, higher net sales volumes are expected to result in
greater operating income because such higher volumes allow the business segments’ operations to better leverage the fixed
component of their respective cost structures. Conversely, the opposite effect is expected to occur at lower net sales and
related production volumes.
A. Results of Operations
Non-GAAP Financial Measures
Presented below is certain financial information based on our EBITDA and Adjusted EBITDA. References to “EBITDA”
mean earnings before interest, taxes, depreciation and amortization, and references to “Adjusted EBITDA” mean EBITDA
8
plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of net income to EBITDA
and Adjusted EBITDA.
Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under accounting principles generally
accepted in the United States of America (“GAAP”). The Company presents EBITDA and Adjusted EBITDA because (i) it
believes they are useful indicators for evaluating operating performance and liquidity, including the Company's ability to
incur and service debt and (ii) it uses EBITDA to evaluate prospective acquisitions. Although the Company uses EBITDA
and Adjusted EBITDA for the reasons noted, the use of these non-GAAP financial measures as analytical tools has
limitations and, therefore, reviewers of the Company’s financial information should not consider them in isolation, or as a
substitute for analysis of its results of operations as reported in accordance with GAAP. Some of these limitations are:
(cid:120) Neither EBITDA nor Adjusted EBITDA reflects the interest expense, or the cash requirements necessary to service
interest payments, on indebtedness;
(cid:120) Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often
have to be replaced in the future, and neither EBITDA nor Adjusted EBITDA reflects any cash requirements for
such replacements;
(cid:120) The omission of the substantial amortization expense associated with the Company’s intangible assets further limits
the usefulness of EBITDA and Adjusted EBITDA;
(cid:120) Neither EBITDA nor Adjusted EBITDA includes the payment of taxes, which is a necessary element of operations;
and
(cid:120) Adjusted EBITDA excludes the cash expense the Company has incurred to acquire businesses.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash
available to the Company to invest in the growth of its businesses. Management compensates for these limitations by not
viewing EBITDA or Adjusted EBITDA in isolation and specifically by using other GAAP measures, such as net income,
net sales and operating profit, to measure operating performance. Neither EBITDA nor Adjusted EBITDA is a
measurement of financial performance under GAAP, and neither should be considered as an alternative to net income or
cash flow from operations determined in accordance with GAAP. The Company’s calculation of EBITDA and Adjusted
EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies.
The following table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA:
(Dollars in thousands)
Net income…………………………………………….. $
Adjustments:
September 30,
2012
2011
6,548
$
7,449
Depreciation and amortization expense…………….
Interest expense, net………………………………...
Income tax provision ……………………………….
6,671
438
2,852
4,386
82
3,789
EBITDA………………………………………
16,509
15,706
Adjustments:
Inventory purchase accounting adjustments (1)……
Acquisition transaction-related expenses (2)……….
Equity compensation expense (3)…………………..
LIFO provision (4)………………………………….
437
407
892
1,563
202
301
547
479
Adjusted EBITDA……………………………. $
19,808
$
17,235
(1) Represents accounting adjustments to inventory associated with acquisitions of businesses that were charged to
cost of sales when the inventory was sold.
(2) Represents transaction-related costs comprising legal, financial and tax due diligence expenses; and valuation
services costs that are required to be expensed as incurred.
(3) Represents the equity based compensation expense recognized by the Company under its 2007 Long-Term
Incentive Plan.
(4) Represents the increase in the reserve for inventories for which cost is determined using the last-in, first-out
(“LIFO”) method.
9
Fiscal Year 2012 Compared with Fiscal Year 2011
Net sales in fiscal 2012 increased 16.5% to $125.1 million, compared with $107.4 million in fiscal 2011. Net income in
fiscal 2012 was $6.6 million, compared with $7.4 million in fiscal 2011. EBITDA in fiscal 2012 was $16.5 million, or
13.2% of net sales, compared with $15.7 million, or 14.6% of net sales, in the comparable period in fiscal 2011. Adjusted
EBITDA in fiscal 2012 was $19.8 million, or 15.8% of net sales, compared with $17.2 million, or 16.1% of net sales, in the
comparable period in fiscal 2011. See “Non-GAAP Financial Measures” above for certain information regarding EBITDA
and Adjusted EBITDA, including reconciliations of EBITDA and Adjusted EBITDA to net income. As discussed more
fully in Note 12 to the consolidated financial statements, the Company completed the purchase of the forging businesses
and substantially all related operating assets of QAF and TWF on October 28, 2011 and December 10, 2010, respectively.
Forged Components Group (“Forge Group”)
The Forge Group consists of the production, heat-treatment, surface-treatment, non-destructive testing, and machining of
both conventional and precision forged components in various steel, titanium and aluminum alloys utilizing a variety of
processes for application principally in the aerospace and power generation industries. The Forge Group’s results for fiscal
2012 include the results of QAF from the date of its acquisition. The Forge Group’s results for fiscal 2011 include the
results of TWF from the date of acquisition. Net sales in fiscal 2012 increased 22.3% to $102.9 million, compared with
$84.1 million in fiscal 2011. The Forge Group produces forged components for (i) turbine engines that power commercial
business and regional aircraft as well as military aircraft and armored military vehicles; (ii) airframe applications for a
variety of aircraft; (iii) industrial gas turbine engines for power generation units; and (iv) other commercial applications.
Net sales comparative information for fiscal 2012 and 2011, respectively, is as follows:
(Dollars in millions)
Net Sales
Aerospace components for:
Year Ended
September 30,
2012
2011
Increase
(Decrease)
Fixed wing aircraft………………………………….............. $
Rotorcraft………………………............................................
Components for power generation units………............................
Commercial product sales and other revenue……………............
52.9
28.2
17.1
4.7
$ 36.3
26.4
16.2
5.2
$
16.6
1.8
0.9
(0.5)
Total………………………………………………….
$
102.9
$ 84.1
$
18.8
The increase in net sales of forged components for fixed wing aircraft and rotorcraft during fiscal 2012, compared with
fiscal 2011, is principally due to the impact of the acquisition of QAF during the first quarter of fiscal 2012. The increase
in net sales of components for power generation units is due to the full year impact in fiscal 2012 of the acquisition of TWF
during the first quarter of fiscal 2011.
The Forge Group’s aerospace components have both military and commercial applications. Net sales of such components
that solely have military applications were $35.5 million in fiscal 2012, compared with $32.5 million in fiscal 2011. This
increase is primarily attributable to the acquisition of QAF. Demand for additional military helicopters and related
replacement components are the primary drivers of such military sales demand.
The Forge Group’s cost of goods sold increased $16.3 million to $81.1 million, or 78.8% of net sales, during fiscal 2012,
compared with $64.8 million, or 77.0% of net sales in fiscal 2011. Cost of goods sold as a percentage of net sales reflected
an increase in fiscal 2012, compared to fiscal 2011, due to the net impact of the changes in the following components of
manufacturing related expenditures:
(cid:120) The material component of manufacturing costs was approximately 36.3% of net sales during fiscal 2012, compared
with 39.1% of net sales in fiscal 2011, due primarily to the mix of product - a higher concentration of products, with
lower material content, were sold during the fiscal 2012, compared with fiscal 2011.
(cid:120) All other manufacturing costs were approximately 42.5% of net sales during fiscal 2012, compared with 37.9% of
net sales in the comparable period in fiscal 2011. Labor costs, as a percentage of net sales, were higher principally
due to the mix of product - a higher concentration of products with higher labor content were sold during fiscal 2012,
compared with the comparable period in fiscal 2011. The Forge Group also experienced a reduction in its labor
efficiency during fiscal 2012, compared with fiscal 2011. The following changes in the components of the Forge
Group’s other manufacturing overhead expenditures during fiscal 2012 compared with fiscal 2011, a portion of
which was due to the acquisitions of QAF and TWF, also impacted cost of goods sold:
10
(cid:3)
(Dollars in millions)
Manufacturing expenditures
Overhead:
Year Ended
September 30,
2012
2011
Increase
(Decrease)
Utilities………………………………………………… $
Repairs, maintenance and supplies…………………….
Depreciation……………………………………………
Rent…………………………………………………….
Tooling…………………………………………………
4.7
4.6
2.9
0.5
3.3
$ 4.4
3.4
1.5
0.0
2.6
$
0.3
1.2
1.4
0.5
0.7
Manufacturing costs in fiscal 2012, compared with the same period in fiscal 2011, increased due to (i) an increase in
manufacturing expenditures required to support the $18.8 million of additional product sales volume for the Forge Group
and (ii) an increase in depreciation and rent expense, all of which were primarily attributable to the acquisitions of TWF
and QAF. These higher costs were partially offset by a decrease in the price paid for natural gas in fiscal 2012, compared
with fiscal 2011.
The Forge Group’s selling, general and administrative expenses increased $2.4 million to $8.9 million, or 8.6% of net sales,
in fiscal 2012, compared with $6.5 million, or 7.7% of net sales, in fiscal 2011. The increase in selling, general and
administrative expenses is principally due to (i) a $1.0 million increase in amortization of intangible assets related to the
acquisitions of TWF and QAF and (ii) a $1.2 million increase in relative spending levels due to the impact of the
acquisitions of TWF and QAF. The Forge Group’s selling, general and administrative expenses in fiscal 2012, before the
impact of the amortization of intangible assets, was $6.0 million, or 5.8% of net sales, compared with $4.6 million, or 5.4%
of net sales, in fiscal 2011.
The Forge Group’s operating income decreased $0.1 million to $12.9 million in fiscal 2012, compared with $13.0 million
in fiscal 2011. The following is a comparison of operating income on both a LIFO and FIFO basis:
(Dollars in millions)
Operating Income
Year Ended
September 30,
2012
2011
Increase
(Decrease)
Operating income………………………………........................
LIFO expense…………………………......................................
$
12.9
1.6
Operating income without LIFO expense………...................
$
14.5
$
$
13.0
0.5
$
(0.1)
1.1
13.5
$
1.0
The Forge Group’s operating income in fiscal 2012 was favorably impacted by the increase in gross profit generated from
$20.5 million of additional product sales volumes for TWF and QAF plus the net impact of the other cost of goods sold and
selling, general and administrative expense factors noted above.
Turbine Component Services and Repair Group (“Repair Group”)
During fiscal 2012, net sales, which consist principally of component repair services (including precision component
machining and industrial coatings) for small aerospace turbine engines, decreased 20.6% to $7.2 million, compared with
$9.0 million in fiscal 2011. The decrease in net sales during fiscal 2012, compared with fiscal 2011, is attributable to a
decrease in product sales volumes.
The Repair Group’s cost of goods sold decreased $0.5 million to $7.2 million or 100.4% of net sales in fiscal 2012,
compared with $7.7 million or 85.6% of net sales fiscal 2011. Cost of goods sold as a percentage of net sales reflected an
increase in fiscal 2012, compared to fiscal 2011, due principally to the Repair Group maintaining a minimum/base cost
structure that has a large fixed component that is determined necessary to sustain an operation with relevant capabilities.
During fiscal 2012, the Repair Group’s selling, general and administrative expenses were $1.4 million, or 19.3% of net
sales, compared with $1.6 million, or 17.5% of net sales, in fiscal 2011. The Repair Group’s decrease in selling, general
and administrative expenses is principally attributable to $0.2 million of expense related to the impairment of a long-lived
asset recognized in fiscal 2011.
11
The Repair Group’s operating loss in fiscal 2012 was $1.4 million, compared to $0.3 million in fiscal 2011. Operating
results in fiscal 2012 were negatively impacted by the significantly lower product sales volumes in relation to the large
fixed component of the Repair Group’s operating cost structure. The Repair Group will need to increase its product sales
volumes to increase its operating income.
Applied Surface Concepts Group (“ASC Group”)
Net sales in fiscal 2012 increased 6.1% to $15.0 million, compared with $14.2 million in fiscal 2011. For purposes of the
following discussion, (i) product net sales consist of selective plating equipment and solutions and (ii) contract service net
sales consist of customized selective plating services. Net sales comparative information for fiscal 2012 and 2011,
respectively, is as follows:
(Dollars in millions)
Net Sales
Year Ended
September 30,
2012
2011
Increase
(Decrease)
Product………………………………................................... $
Contract service…………………………………………….
Other………………………………………………………..
7.3
7.5
0.2
$ 6.6
7.4
0.2
$
0.7
0.1
0.0
Total……………………………………………………
$
15.0
$ 14.2
$
0.8
The increase in product net sales in fiscal 2012, compared with fiscal 2011, is attributed to an increase in net sales volumes
of selective plating equipment and solutions, as well as a general price increase implemented at the beginning of the second
quarter of fiscal 2012. A portion of the ASC Group’s business is conducted in Europe and is denominated in local European
currencies. Fluctuations in currency exchange rates during fiscal 2012, compared with fiscal 2011, had a nominal impact
on net sales.
The ASC Group’s cost of goods sold increased $0.3 million to $8.7 million, or 58.1% of net sales, during fiscal 2012,
compared with $8.4 million, or 59.0% of net sales, in fiscal 2011. Cost of goods sold as a percentage of net sales reflected a
decrease in fiscal 2012, compared to fiscal 2011, due principally to the following:
(cid:120) The material component of cost of goods sold was approximately 19.5% of net sales during fiscal 2012, compared
with 18.5% of net sales in fiscal 2011, due principally to certain higher commodity prices and the mix of product - a
higher concentration of products and contract services, with higher material content, were sold during fiscal 2012,
compared with fiscal 2011.
(cid:120) All other cost of goods sold were approximately 38.6% of net sales during fiscal 2012, compared with 40.5% of net
sales in fiscal 2011. The primary reason for the reduction of all other cost of goods sold as a percentage of net sales
is the impact of higher sales volumes during fiscal 2012, compared with fiscal 2011, which allowed the ASC Group
to favorably leverage the fixed component of its operating cost structure.
The ASC Group’s selling, general and administrative expenses were $5.2 million, or 34.8% of net sales, in fiscal 2012,
compared with $4.8 million, or 33.7% of net sales in fiscal 2011. The $0.4 million increase is due primarily to an increase
in sales promotion efforts and the filling of an open sales position.
The ASC Group’s operating income in fiscal 2012 was $1.1 million, compared with $1.0 million in fiscal 2011.
Corporate Unallocated Expenses
Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other expenses that
are not related to and, therefore, not allocated to the business segments, were $3.2 in fiscal 2012, compared with $2.9
million in fiscal 2011. The $0.3 million increase is due to a $0.2 million increase in legal and professional expenses
principally to support the acquisition of QAF, a $0.3 million increase in the Company’s long-term equity incentive plan
expense, partially offset by a $0.3 million decrease in the Company’s annual cash incentive plan expense.
12
Other/General
Interest expense was $0.5 million in fiscal 2012, compared to $0.1 million in fiscal 2011. As described more fully in note 6
to the consolidated financial statements included in Item 8, in connection with the October 2011 acquisition of the QAF
business, the Company borrowed $12.4 million from its revolving credit agreement and $10.0 million on a term note, and
issued a $2.4 million promissory note to the seller of the QAF business. The following table sets forth the weighted average
interest rates and weighted average outstanding balances under the Company’s debt agreement in fiscal 2012 and 2011:
Revolving credit agreement…………………………………..
Term note……………………………………………………..
Promissory note………………………………………………
Weighted Average
Interest Rate
Year Ended September 30,
Weighted Average
Outstanding Balance
Year Ended September 30,
2012
1.3%
2.9%
2.0%
2011
1.3%
N/A
N/A
2012
2011
$ 11.9 million $ 4.0 million
$ 9.0 million
$ 2.3 million
N/A
N/A
Other income, net consists principally of $0.4 million of rental income earned from the lease of the Cork, Ireland facility.
The Company believes that inflation did not materially affect its results of operations in either fiscal 2012 or 2011, and does
not expect inflation to be a significant factor in fiscal 2013.
Income Tax Provision
The Company’s effective tax rate in fiscal 2012 was 30%, compared to 34% in fiscal 2011, and differs from the U.S.
federal statutory rate due primarily to (i) the impact of U.S. state and local taxes, (ii) domestic production activities
deduction, (iii) application of tax credits, and (iv) the recognition of federal income taxes on undistributed earnings of non-
U.S. subsidiaries.
B. Liquidity and Capital Resources
Cash and cash equivalents increased to $7.2 million at September 30, 2012, compared with $6.4 million at September 30,
2011, At September 30, 2012, essentially all of the $7.2 million of the Company’s cash and cash equivalents are in the
possession of its non-U.S. subsidiaries for purposes of (i) funding the respective subsidiary businesses’ current operations
outside the U.S. and (ii) to fund potential future investment outside the U.S. In the future, if the Company determines that
there is no longer a need to maintain such cash within its non-U.S. operations, it may elect to distribute such cash to its U.S.
operations. Distributions from the Company’s non-U.S. subsidiaries to the Company may be subject to adverse tax
consequences.
The Company’s operating activities provided $9.8 million of cash in fiscal 2012 compared with $10.2 million in fiscal
2011. The $9.8 million of cash provided by operating activities in fiscal 2012 was primarily due to (i) net income of $6.6
million, (ii) $8.7 million from the net impact of such non-cash items as depreciation and amortization expense, deferred
taxes, equity compensation expense and LIFO expense and (iii) a $1.1 million decrease in accounts receivable. These items
were partially offset by a $6.1 million increase in inventories. These changes in the components of working capital do not
reflect the impact of the opening balance sheet related to the acquisition of QAF and were due primarily to factors resulting
from normal business conditions of the Company, including (i) building inventory in response to customer demand, (ii) the
relative timing of collections from customers and (iii) the relative timing of payments to suppliers and tax authorities.
Capital expenditures were $3.5 million in fiscal 2012 compared with $3.3 million in fiscal 2011. Capital expenditures
during fiscal 2012 consisted of $2.9 million by the Forge Group, $0.2 million by the ASC Group and $0.4 million by the
Repair Group. In addition to the $3.5 million expended during fiscal 2012, $0.2 million has been committed as of
September 30, 2012. The Company anticipates that total fiscal 2013 capital expenditures will be within the range of $4.0 to
$5.0 million and will relate principally to the further enhancement of production and product offering capabilities across all
three of the Company’s business groups.
In the fourth quarter of fiscal 2012, the Company declared a special cash dividend of $0.20 per common share, which will
result in a cash expenditure of $1.1 million during first quarter of fiscal 2013.
As described more fully in note 12 to the consolidated financial statements included in Item 8, the Company acquired a
forging business in October 2011 for approximately $24.8 million at closing. The acquisition was financed by borrowing
13
approximately $22.4 million from its bank, which borrowing consisted of a new $10.0 million term loan and drawing
approximately $12.4 million from its revolving credit facility. The balance of the acquisition was financed by the Company
issuing a $2.4 million promissory note to the seller, which note is payable by the Company in November 2013.
In October 2011, the Company entered into an amendment to its existing credit agreement with its bank increasing the
maximum borrowing amount from $30.0 million to $40.0 million, of which $10.0 million is a five (5) year term loan and
$30.0 million is a five (5) year revolving loan, secured by substantially all the assets of the Company and its U.S.
subsidiaries and a pledge of 65% of the stock of its non-U.S. subsidiaries. The term loan is repayable in quarterly
installments of $0.5 million starting December 1, 2011.
The term loan has a variable interest rate based on Libor, which becomes an effective fixed rate of 2.9% after giving effect
to an interest rate swap agreement. Borrowing under the revolving loan bears interest at a rate equal to Libor plus 0.75% to
1.75%, which percentage fluctuates based on the Company’s leverage ratio of outstanding indebtedness to EBITDA. The
bank loans are subject to certain customary financial covenants including, without limitation, covenants that require the
Company to not exceed a maximum leverage ratio and to maintain a minimum fixed charge coverage ratio. There is also a
commitment fee ranging from 0.10% to 0.25% to be incurred on the unused balance. The promissory note issued to the
seller is non-interest bearing and is due in November of 2013. The Company was in compliance with all applicable loan
covenants as of September 30, 2012.
Future cash flows from the Company’s U.S. operations will be used to pay down amounts outstanding under the
Company’s credit agreement. The Company believes it has adequate cash available in the possession of its non-U.S.
subsidiaries to finance its non-U.S. operations. The Company believes it has adequate cash/liquidity available to finance its
U.S operations from the combination of (i) the Company’s expected cash flows from U.S. operations and (ii) funds
available under its existing credit agreement.
C. Off-Balance Sheet Arrangements
Other than an interest rate swap agreement that the Company entered into with its bank, as described more fully in note 6 to
the consolidated financial statements included in Item 8, the Company does not have any obligations that meet the
definition of an off-balance sheet arrangement that have had, or are reasonably likely to have, a material effect on the
Company’s financial condition or results of operations.
D. 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. 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 involves judgment and is performed using estimates
of future undiscounted cash flows, which include proceeds from disposal of assets and which the Company considers a
critical accounting estimate. If the carrying value of a long-lived asset is greater than the estimated undiscounted future
14
cash flows, 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.
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, which could result in future
impairment charges.
Impairment of Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the net assets of an acquired business. The
determination of the fair value of assets and liabilities acquired typically involves obtaining independent appraisals of
certain tangible and intangible assets and may require management to make certain assumptions and estimates regarding
future events. Goodwill is not amortized, but is subject to an impairment testing annually or more frequently if events or
changes in circumstances indicate that goodwill may be impaired.
For the purposes of impairment testing, goodwill acquired in a business combination is allocated to the reporting entity
expected to benefit from the business combination. Goodwill impairment testing involves the comparison of the fair value
of a reporting unit, which is determined by its discounted cash flows, with its carrying value. The Company allocates the
fair value of the reporting unit to all of its assets, other than goodwill, and liabilities. Any remaining unallocated fair value
is then allocated to goodwill as its implied fair value. The amount of impairment loss is equal to the excess of the carrying
value of goodwill over the implied fair value of goodwill.
Purchase Price Allocations
The costs of business acquisitions are allocated to the acquired assets and liabilities based on their respective fair value at
the time of the acquisition. The determination of fair values typically involves obtaining independent appraisals of certain
tangible and intangible assets and may require management to make certain assumptions and estimates regarding future
events. In determining fair value, management may develop a number of possible future cash flow scenarios to which
probabilities are judgmentally assigned and evaluated. This allocation process impacts the Company’s reported assets and
liabilities and future net income.
Defined Benefit Pension Plan Expense
The Company maintains three defined benefit pension plans in accordance with the requirements of the Employee
Retirement Income Security Act of 1974 (“ERISA”). The amounts recognized in the consolidated financial statements for
pension benefits under these three defined benefit pension plans are determined on an actuarial basis utilizing various
assumptions. The discussion that follows provides information on the significant assumptions/elements associated with
these defined benefit pension plans.
One significant assumption in determining net pension expense is the expected return on plan assets. The Company
determines the expected return on plan assets principally based on (i) the expected return for the various asset classes in the
respective plans’ investment portfolios and (ii) the targeted allocation of the respective plans’ assets. The expected return
on plan assets is developed using historical asset return performance as well as current and anticipated market conditions
such as inflation, interest rates and market performance. Should the actual rate of return differ materially from the
assumed/expected rate, the Company could experience a material adverse effect on the funded status of its plans and,
accordingly, on its related future net pension expense.
Another significant assumption in determining the net pension expense is the discount rate. The discount rate for each plan
is determined, as of the fiscal year end measurement date, using prevailing market spot-rates (from an appropriate yield
curve) with maturities corresponding to the expected timing/date of the future defined benefit payment amounts for each of
the respective plans. Such corresponding spot-rates are used to discount future years’ projected defined benefit payment
amounts back to the fiscal year end measurement date as a present value. A composite discount rate is then developed for
each plan by determining the single rate of discount that will produce the same present value as that obtained by applying
the annual spot-rates. The discount rate may be further revised if the market environment indicates that the above
methodology generates a discount rate that does not accurately reflect the prevailing interest rates as of the fiscal year end
measurement date.
15
Deferred Tax Valuation Allowance
The Company accounts for deferred taxes in accordance with the provisions of the Accounting Standards Codification
(“ASC”) guidance related to 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.
E. Impact of Newly Issued Accounting Standards
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2012-2,
Intangibles – Goodwill and Other, which allows an entity to first assess qualitative factors to determine whether it is more
likely than not that an indefinite-lived asset is impaired for determining whether it is necessary to perform the quantitative
impairment test. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012. Early adoption is permitted. The adoption of this ASU did not have an impact on the Company’s
consolidated financial statements.
In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, and as a result entities are
required to continue to report reclassifications out of accumulated other comprehensive income consistent with the
presentation requirements in effect before ASU 2011-05. This update is effective for public companies with fiscal years
beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material impact
on its consolidated financial statements and disclosures.
16
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, 2012 and 2011, and the related consolidated statements of operations, shareholders’ equity
and cash flows for each of the two years in the period ended September 30, 2012. Our audits of the basic financial
statements included the financial statement schedule appearing under Schedule II. These financial statements and financial
statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule 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, 2012 and 2011, and the results of their operations
and their cash flows for each of the two years in the period ended September 30, 2012 in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ GRANT THORNTON LLP
Cleveland, Ohio
November 30, 2012
17
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Net sales…………………………………………….….……….…..…..
Operating expenses:
Cost of goods sold……………………………….………….……….
Selling, general and administrative expenses…….………………….
Amortization of intangible assets……………………………………
Loss on disposal or impairment of operating assets…………………
Years Ended September 30,
2012
2011
$
125,106
$ 107,357
97,025
15,846
2,879
10
80,916
13,582
1,917
87
Total operating expenses……………………….…………….…..
115,760
96,502
Operating income……...….…..……………………..….…….
9,346
10,855
Interest income………………………………………………….……....
Interest expense………………………………………………….……...
Foreign currency exchange loss (gain) …..……………………….….....
Other income, net……………………………..……………...................
Income before income tax provision........................................
Income tax provision………………………………..….……………….
(33)
471
(25)
(467)
9,400
2,852
(46)
128
5
(470)
11,238
3,789
Net income………………...……………………………….....
$
6,548
$
7,449
Net income per share:
Basic…………………………………………………………. $
Diluted…….…………………….……………........................ $
1.23
1.22
$
$
1.41
1.40
Weighted-average number of common shares:
Basic………………………………………………………….
Diluted………………………………………………………..
5,317
5,380
5,271
5,324
See notes to consolidated financial statements.
18
SIFCO Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
September 30,
$
ASSETS
Current assets:
Cash and cash equivalents………………..……………………..………….. $
Receivables, net….………………………..……………………..………….
Inventories………………………………….……………………....……….
Refundable income taxes…………………..………………………..………
Deferred income taxes…………………..………………………..…………
Prepaid expenses and other current assets…..…………………………..…..
Total current assets………………..…………………..………..…….
Property, plant and equipment:
Land……………………………………..…………………………………..
Buildings………………………………..………………….……..………....
Machinery and equipment……………..……………………..……………..
Total property, plant and equipment………………………………....
Accumulated depreciation………..……………………..………….……….
Property, plant and equipment, net...……...……………..…………..
Intangible assets, net……………………………………………………………
Goodwill………………………………………………………………………..
Other assets …..………………………..……………………..…………….…..
2012
7,176
23,354
18,692
0
1,461
1,223
51,906
579
15,039
59,769
75,387
43,128
32,259
14,627
7,015
738
2011
6,431
20,739
10,239
281
1,500
468
39,658
579
14,097
52,894
67,570
40,012
27,558
8,506
3,493
796
Total assets……..…………………………………....……………
$
106,545
$
80,011
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt…..……………………..…………….. $
Accounts payable……………………..……………………..………………
Accrued liabilities…………………..…………………………..…………...
Total current liabilities………..…………………………..…………...
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
5,366 shares in 2012 and 5,335 shares in 2011; outstanding 5,366
shares in 2012 and 5,299 shares in 2011……………………………….
Additional paid-in capital………………..………………………..………...
Retained earnings……………………..…………………………..………...
Accumulated other comprehensive loss……..…………………..….……....
Common shares held in treasury at cost, no shares in 2012 and 36 shares in
2011…………………………………………………………………….
$
2,002
9,727
4,953
16,682
19,683
1,542
8,496
30
9,778
4,626
14,434
1,186
2,233
8,749
0
0
5,366
7,523
59,597
(12,344)
5,335
7,032
54,122
(12,702)
0
(378)
Total shareholders’ equity……..…………………………..………….
60,142
53,409
Total liabilities and shareholders’ equity…..…………..……….…. $
106,545
$
80,011
See notes to consolidated financial statements.
19
SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
Years Ended September 30,
2012
2011
Cash flows from operating activities:
Net income……...….……………………………….……..…………………....... $
Adjustments to reconcile net income to net cash provided by operating
activities:
6,548
$
7,449
Depreciation expense…………………….………….........................................
Amortization expense…………………………………………………………..
Loss (gain) on disposal of property, plant and equipment……………..............
LIFO provision…………………………………………………………………
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……………………………………………….......
3,792
2,879
10
1,563
(427)
900
0
1,065
(6,055)
281
(601)
58
(403)
229
(72)
2,450
1,936
(132)
479
(108)
373
219
(2,288)
(1,621)
411
276
139
215
(98)
520
Net cash provided by operating activities……………………………..
9,767
10,220
Cash flows from investing activities:
Acquisition of businesses………………………………………………………...
Maturity of short-term investments………………………………………………
Capital expenditures…………………………………….......................................
Proceeds from disposal of property, plant and equipment………………………..
(24,886)
0
(3,521)
10
(22,566)
3,000
(3,293)
146
Net cash used for investing activities………………………………….
(28,397)
(22,713)
Cash flows from financing activities:
Proceeds from term note………………………………………………………….
Repayments of term note…………………………………………………………
Proceeds from revolving credit agreement……………………………………….
Repayments of revolving credit agreement………………………………………
Proceeds from other debt…………………………………………………………
Dividends paid…..………………………………………………………………..
Repayments of capital lease obligations and other long-term debt………………
10,000
(2,000)
59,671
(49,517)
2,302
(1,060)
(29)
0
0
33,844
(32,660)
0
(789)
(112)
Net cash provided by financing activities …………………………….
19,367
283
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………………….......
737
6,431
8
(12,210)
18,671
(30)
Cash and cash equivalents at end of year……….....………………….. $
7,176
$
6,431
Supplemental disclosure of cash flow information:
Cash paid for interest…………………………………………………………….. $
Cash paid for income taxes, net………………………………………………….. $
(393)
(3,037)
Non-cash financing transactions:
Dividends declared but not paid………………………………………………….
$
(1,073)
$
$
$
(125)
(2,721)
(1,060)
See notes to consolidated financial statements.
20
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
Common
Shares
Held in
Treasury
Total
Shareholders’
Equity
Balance – September 30, 2010
$ 5,325
$ 6,983
$ 47,733 $ (11,310) $ (692)
$ 48,039
Comprehensive income:
Net income………………………………......
Foreign currency translation adjustment…....
Retirement liability adjustment, net of tax....
0
0
0
0
0
0
7,449
0
0
0
(45)
(1,347)
0
0
0
7,449
(45)
(1,347)
Total comprehensive income.……………….......
6,057
Dividend declared……………………………......
Performance share expense…..............................
Share transactions under employee stock plans…
0
0
10
0
373
(324)
(1,060)
0
0
0
0
0
0
0
314
(1,060)
373
0
Balance – September 30, 2011
$ 5,335
$ 7,032
$ 54,122 $ (12,702) $ (378)
$ 53,409
Comprehensive income:
Net income…………………………………...
Foreign currency translation adjustment…….
Retirement liability adjustment, net of tax…..
Interest rate Swap Agreement adjustment,
net of tax…………………………………
Total comprehensive income………
Dividend declared………………………………..
Performance and restricted share expense…........
Share transactions under employee stock plans…
0
0
0
0
0
0
31
0
0
0
0
6,548
0
0
0
204
212
0
0
0
6,548
204
212
0
(58)
0
(58)
6,906
0
936
(445)
(1,073)
0
0
0
0
0
0
0
378
( 1,073)
936
(36)
Balance – September 30, 2012
$ 5,366
$ 7,523
$ 59,597 $ (12,344) $ 0
$ 60,142
See notes to consolidated financial statements.
21
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years ended September 30, 2012 and 2011
(Amounts in thousands, except 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 plating. The products
include forged components (both conventional and precision), machined forged parts and other machined metal parts,
remanufactured components for turbine engines, and selective plating solutions and equipment. The Company’s operations
are conducted in three business segments: (i) Forged Components Group, (ii) Turbine Component Services and Repair
Group and (iii) 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 and its Irish subsidiary. For these operations, all gains and losses
from completed currency transactions are included in income currently. The functional currency for the Company’s other
non-U.S. subsidiaries 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. A substantial majority of the Company’s cash and cash equivalent bank balances exceed federally insured
limits at September 30, 2012.
D. SHORT-TERM INVESTMENTS
In general, short-term investments have a maturity of three months to one year at the date of purchase. Short-term
investments classified as held-to-maturity are recorded at cost, which approximates fair value.
E. CONCENTRATIONS OF CREDIT RISK
Receivables are presented net of allowance for doubtful accounts of $614 and $664 at September 30, 2012 and 2011,
respectively. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The
Company writes off accounts receivable when they become uncollectible. During fiscal 2012 and 2011, $322 and $133 of
accounts receivable were written off against the allowance for doubtful accounts, respectively. Bad debt expense totaled
$164 and $196 in fiscal 2012 and 2011, respectively.
Most of the Company’s receivables represent trade receivables due from manufacturers of turbine engines and aircraft
components as well as turbine engine overhaul companies located throughout the world, including a significant
concentration of U.S. based companies. In fiscal 2012, approximately 44% of the Company’s net sales were to four (4) of
its largest customers and approximately 66% of the Company’s net sales were to a combination of five (5) of its largest
customers and their direct subcontractors. No other single customer or group represents greater than 5% of total net sales in
fiscal 2012. At September 30, 2012, approximately 39% of the Company’s outstanding net accounts receivable were due
from four (4) of its largest customers and approximately 61% of the Company’s outstanding net accounts receivable were
due from a combination of five (5) of its largest customers and their direct subcontractors. 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, 2012.
F. INVENTORY VALUATION
Inventories are stated at the lower of cost or market. For a portion of the Forge Group’s inventory, cost is determined using
the last-in, first-out (“LIFO”) method. For approximately 42% and 54% of the Company’s inventories at September 30,
2012 and 2011, respectively, the LIFO method is used to value the Company’s inventories. The first-in, first-out (“FIFO”)
method is used to value the remainder of the Company’s inventories.
22
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
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 policies, which require at a minimum that reserves be
established based on an analysis of the age of the inventory. In addition, if the Company identifies specific obsolescence,
other than that identified by the aging criteria, an additional reserve will be recognized. Specific obsolescence and excess
reserve requirements may arise due to technological or market changes, or based on cancellation of an order. The
Company’s reserves for obsolete and excess inventory were $1,718 and $1,398 at September 30, 2012 and 2011,
respectively.
G. 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; (ii) machinery and equipment, including office and computer equipment - 3 to 30 years, (iii)
software - 1 to10 years and (iv) leasehold improvements - 3 to 6 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, 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. Asset impairment
charges of $219 were recorded in fiscal 2011 related to certain machinery and equipment of the Company’s Repair Group.
The impairment is recorded in loss (gain) on disposal or impairment of operating assets in the accompanying statements of
operations. The machinery and equipment was determined to be impaired and, therefore, the carrying value of such assets
was reduced to its net realizable value.
The Company’s Irish subsidiary sold its operating business and retained ownership of its Cork, Ireland facility after the
business was sold. This property is subject to a lease arrangement with the acquirer of the business. At September 30,
2012, the carrying value of the property is $1,790 and is included in corporate identifiable assets (see Note 11). Rental
income of $433 and $443 was recognized in fiscal 2012 and 2011, and is recorded in other income on the consolidated
statements of operations.
H. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price paid over the fair value of the net assets of an acquired business.
Goodwill is subject to annual impairment testing and the Company has selected July 31 as the annual impairment testing
date. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying value, including goodwill. If so, then a two-step impairment test is used to identify
potential goodwill impairment. The first step of the goodwill impairment test compares the fair value of a reporting unit (as
defined) with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount,
goodwill is not considered impaired, and the second step of the goodwill impairment test is not required. The second step
measures the amount of impairment, if any, by comparing the carrying value of the goodwill associated with a reporting
unit to the implied fair value of the goodwill derived from the estimated overall fair value of the reporting unit and the
individual fair values of the other assets and liabilities of the reporting unit.
Intangible assets consist of identifiable intangibles acquired or recognized in the accounting for the acquisition of a
business and include such items as a trade name, a non-compete agreement, below market lease, customer relationships and
order backlog. Intangible assets are amortized over their useful lives ranging from less than one year to ten years.
23
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
I. 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, restricted shares
and performance shares under the treasury stock method. The dilutive effect of the Company’s stock options, restricted
shares and performance shares were as follows:
September 30,
2012
2011
Net income…………………………………………………….
$
6,548 $
7,449
Weighted-average common shares outstanding (basic)……….
Effect of dilutive securities:
Stock options…………………………………...................
Restricted shares…………………………………………..
Performance shares……………………………….............
Weighted-average common shares outstanding (diluted)……..
5,317
15
6
42
5,380
Net income per share – basic…………….……………………. $ 1.23 $
Net income per share – diluted.………….……………………. $
1.22 $
5,271
38
8
7
5,324
1.41
1.40
Outstanding share awards relating to approximately 144 and 123 weighted average shares were excluded from the
calculation of diluted earnings per share for the twelve months ended September 30, 2012 and 2011, respectively, as the
impact of including such share awards in the calculation of diluted earnings per share would have had an anti-dilutive
effect.
J. REVENUE RECOGNITION
The Company recognizes revenue in accordance with the relevant portions of the guidance provided by the United States
Securities and Exchange Commission (“SEC”) related to revenue recognition in financial statements. Revenue is generally
recognized when products are shipped or services are provided to customers.
K. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2012-2,
Intangibles – Goodwill and Other, which allows an entity to first assess qualitative factors to determine whether it is more
likely than not that an indefinite-lived asset is impaired for determining whether it is necessary to perform the quantitative
impairment test. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012. Early adoption is permitted. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
In September 2011, the FASB issued ASU 2011-09, Disclosures about an Employer’s Participation in a Multiemployer
Plan which requires the Company to provide additional quantitative and qualitative disclosures for multiemployer pension
plans and multiemployer other postretirement benefit plans in which the Company participates. The ASU is effective for
fiscal years ending after December 15, 2011, with early adoption permitted. The adoption of this guidance did not have a
material impact on the Company’s consolidated financial statements.
L. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, and as a result entities are
required to continue to report reclassifications out of accumulated other comprehensive income consistent with the
presentation requirements in effect before ASU 2011-05. This update is effective for public companies with fiscal years
beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material impact
on its consolidated financial statements.
24
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
M. USE OF ESTIMATES
Accounting principles generally accepted in the U.S. (“GAAP”) 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.
N. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses an interest rate swap agreement to reduce risk related to variable-rate debt, which is subject to changes
in market rates of interest. The interest rate swap is designated as a cash flow hedge. At September 30, 2012, the Company
held an interest rate swap agreement with a notional amount of $8,000. Cash flows related to the interest rate swap
agreement are included in interest expense. The Company’s interest rate swap agreement and its variable-rate term debt are
based upon LIBOR. During fiscal year 2012, the Company’s interest rate swap agreement qualified as a fully effective
cash flow hedge against the Company’s variable-rate term note interest risk. The following table reports the effects of the
mark-to-market valuation of the Company’s interest rate swap agreement at September 30, 2012:
Interest rate swap agreement market value adjustment ……………................... $
Tax effect of interest rate swap agreement market value adjustment…………..
(93)
35
Net interest rate swap agreement market value adjustment.……………… $
(58)
Historically, the Company has been able to mitigate the impact of foreign currency risk, to the extent it existed, by means of
hedging such risk through the use of foreign currency exchange contracts, which typically expired within one year.
However, such risk was mitigated only for the periods for which the Company had foreign currency exchange contracts in
effect, and only to the extent of the U.S. dollar amounts of such contracts. At September 30, 2012 and 2011, the Company
had no foreign currency exchange contracts outstanding.
O. RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and development expense was approximately $1,046
and $946 in fiscal 2012 and 2011, respectively.
P. ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive income 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:
2012
2011
Foreign currency translation adjustment, net of income tax benefit of
$200 and $410, respectively………………………………………...
Net retirement plan liability adjustment, net of income tax benefit of
$4,090 and $4,157, respectively………………………………….....
Interest rate swap agreement, net of income tax benefit of $35 in 2012
$
(5,566)
$
(5,770)
(6,720)
(58)
(6,932)
0
Total accumulated other comprehensive loss……………………….. $
(12,344)
$
(12,702)
Q. INCOME TAXES
The Company files a consolidated U.S. federal income tax return and tax returns in various state and local jurisdictions.
The Company’s non-U.S. subsidiaries also file tax returns in various jurisdictions, including Ireland, the United Kingdom,
France and Sweden. The Company has provided U.S. deferred income taxes on all cumulative earnings of non-U.S.
subsidiaries.
The Company provides deferred income taxes for the temporary difference between the financial reporting basis and tax
basis of the Company’s assets and liabilities. Such taxes are measured using the enacted tax rates that are assumed to be in
effect when the differences reverse. Deferred tax assets result principally from recording certain expenses in the financial
25
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
statements in excess of amounts currently deductible for tax purposes. Deferred tax liabilities result principally from tax
depreciation in excess of book depreciation and unremitted foreign earnings.
The Company maintains a valuation allowance against its deferred tax assets when management believes it is more likely
than not that all or a portion of a deferred tax asset may not be realized. Changes in valuation allowances are included in
the income tax provision in the period of change. In determining whether a valuation allowance is warranted, the Company
evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax
strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.
R. RECLASSIFICATIONS
Certain amounts in prior years may have been reclassified to conform to the 2012 consolidated financial statement
presentation.
2. Inventories
Inventories at September 30 consist of:
Raw materials and supplies……….………..…….
Work-in-process………………….………………
Finished goods………………………………...…
$
2012
4,551
9,162
4,979
$
2011
4,216
3,194
2,829
Total inventories……...………….….….…. $
18,692
$
10,239
If the FIFO method had been used for the entire Company, inventories would have been $9,537 and $7,974 higher than
reported at September 30, 2012 and 2011, respectively.
3. Goodwill and Intangible Assets
The Company’s intangible assets by major asset class subject to amortization as of:
September 30, 2012
Intangible assets:
Estimated
Useful Life
Original
Cost
Accumulated
Amortization
Net Book
Value
Trade name……………………..
Non-compete agreement………..
Below market lease…………......
Customer relationships…….…...
Order backlog…………………..
Transition services agreement.....
10 years
5 years
5 years
10 years
1 year
< 1 year
$
1,900
1,500
900
13,000
2,100
23
$
$
254
364
325
1,796
2,034
23
1,646
1,136
575
11,204
66
0
Total intangible assets….....
$
19,423
$
4,796
$
14,627
September 30, 2011
Intangible assets:
Trade name……………………..
Non-compete agreement………..
Below market lease…………......
Customer relationships…….…...
Order backlog…………………..
Transition services agreement.....
10 years
5 years
5 years
10 years
1 year
< 1 year
$
$
900
500
900
6,800
1,300
23
$
73
81
145
548
1,047
23
827
419
755
6,252
253
0
Total intangible assets….....
$
10,423
$
1,917
$
8,506
26
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
Included in the intangible assets at September 30, 2012 are assets acquired in connection with the purchase of the forging
business and substantially all related operating assets from GEL Industries, Inc. (DBA Quality Aluminum Forge, Inc.) on
October 28, 2011, as discussed more fully in Note 12. These acquired intangible assets consist of:
Estimated
Useful Life
Original
Cost
Intangible assets:
Trade name……………………..
Non-compete agreement………..
Customer relationships…….…...
Order backlog…………………..
10 years
5 years
10 years
1 year
$
1,000
1,000
6,200
800
Total intangible assets…....
$
9,000
The amortization expense on identifiable intangible assets for fiscal 2012 and 2011 was $2,879 and $1,917 respectively.
Amortization expense associated with the identified intangible assets, all of which relates to the Forged Components Group,
is expected to be as follows:
Amortization
Expense
Fiscal year 2013…………………………………….. $
Fiscal year 2014……………………………………..
Fiscal year 2015……………………………………..
Fiscal year 2016……………………………………..
Fiscal year 2017……………………………………..
2,037
1,970
1,970
1,744
1,507
Goodwill, all of which relates to the Forged Components Group, is not amortized, but is subject to an annual impairment
test. The Company tests its goodwill for impairment in the fourth fiscal quarter, and in interim periods if certain events
occur indicating that the carrying amount of goodwill may be impaired. During fiscal 2012, the Company performed a
quantitative assessment of goodwill for impairment. The impairment test consisted of a comparison between the fair value
of the indefinite lived intangible assets, as determined by projected undiscounted cash flows from future operations, and the
carrying values. The Company concluded that no impairment exists as of September 30, 2012. All of the goodwill is
expected to be deductible for tax purposes. Changes in the net carrying amount of goodwill were as follows:
Balance at September 30, 2011…………………….. $
Goodwill acquired during the year………………….
3,493
3,522
Balance at September 30, 2012..……………............ $
7,015
4. Accrued Liabilities
Accrued liabilities at September 30 consist of:
Accrued employee compensation and benefits…..
Accrued workers’ compensation………..……….
Accrued dividends……………………………….
Other accrued liabilities…………………..……...
$
2012
1,574
668
1,073
1,638
$
2011
1,792
674
1,060
1,100
Total accrued liabilities……………………
$
4,953
$
4,626
27
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
5. Government Grants
In previous periods the Company received grants from certain government entities as an incentive to invest in facilities,
research and employees. Capital grants are amortized into income over the estimated useful lives of the related assets.
Employment grants are amortized into income over five years. The unamortized portion of deferred grant revenue is
recorded in other long-term liabilities at September 30, 2012 and 2011, which amounted to $336 and $375, respectively.
The majority of the Company’s grants are 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.
6. Long-Term Debt
Long-term debt at September 30 consists of:
Revolving credit agreement…..…………………..…………….
Term loan……………………………………………………….
Promissory Note………………………………………………..
Other…………………………….. …………….…………..…..
$
Less – current maturities………………………………..………
2012
11,338
8,000
2,345
2
21,685
2,002
$
2011
1,184
0
0
32
1,216
30
Total long-term debt………..………………..…………..
$
19,683
$
1,186
In October 2011, the Company entered into an amendment to its existing credit agreement (the “Credit Agreement
Amendment”) with its bank to increase the maximum borrowing amount from $30.0 million to $40.0 million, of which
$10.0 million is a five (5) year term loan and $30.0 million is a five (5) year revolving loan, secured by substantially all the
assets of the Company and its U.S. subsidiaries and a pledge of 65% of the stock of its non-U.S. subsidiaries. The term loan
is repayable in quarterly installments of $0.5 million starting December 1, 2011.
The term loan has a Libor-based variable interest rate that was 2.2% at September 30, 2012 and which becomes an effective
fixed rate of 2.9% after giving effect to an interest rate swap agreement. Borrowing under the revolving loan bears interest
at a rate equal to Libor plus 0.75% to 1.75%, which percentage fluctuates based on the Company’s leverage ratio of
outstanding indebtedness to EBITDA. At September 30, 2012 the interest rate was 1.25%. The loans are subject to certain
customary financial covenants including, without limitation, covenants that require the Company to not exceed a maximum
leverage ratio and to maintain a minimum fixed charge coverage ratio. There is also a commitment fee ranging from 0.10%
to 0.25% to be incurred on the unused balance. The Company was in compliance with all applicable loan covenants as of
September 30, 2012.
In connection with the acquisition of the Quality Aluminum Forge business (“QAF”), as discussed more fully in Note 12,
the Company issued a $2.4 million non-interest bearing promissory note to the seller, which note is payable by the
Company in November, 2013. The imputed interest rate used to discount the note was 2% per annum.
28
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
7. Income Taxes
The components of income before income tax provision are as follows:
Years Ended September 30,
2012
2011
U.S…………….…….………….………………..……….….
Non-U.S…………….……………………………...……..….
$
8,419
981
$
10,388
850
Income before income tax provision………….................. $ 9,400
$
11,238
The income tax provision consists of the following:
Years Ended September 30,
2012
2011
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 (benefit)……...................
$
2,530
465
229
3,224
(396)
(40)
64
(372)
2,486
463
162
3,111
627
(62)
113
678
Income tax provision……………………….…...........
$
2,852
$
3,789
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,
2011
2012
Income before income tax provision…...…………………........ $
Less-U.S. state and local income tax provision………..……....
9,400
465
Income before U.S. and non-U.S. federal income tax
provision…………..........................................................
$
8,935
Income tax provision at U.S. federal statutory rates…………... $
Tax effect of:
Domestic production activities deduction………………….
Undistributed earnings of non-U.S. subsidiaries…………....
State and local income taxes………………………………..
Federal tax credits…………………………………………..
Other…………………………….….…………………….....
3,038
(278)
(91)
425
(330)
88
$
$
$
11,238
401
10,837
3,693
(275)
132
401
(289)
127
Income tax provision…………………………………...
$
2,852
$
3,789
29
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
Deferred tax assets and liabilities at September 30 consist of the following:
Deferred tax assets:
Net non-U.S. operating loss carryforwards………………….…….. $
Employee benefits…………………………………………….……
Inventory reserves………………….…………….……………..….
Asset impairment reserve…………………………………………..
Allowance for doubtful accounts…………………...………………
Foreign tax credits…………………………………..……………...
Other……………………………………………………………….
Total deferred tax assets…………………………..…………
2012
2011
$
592
3,282
664
398
154
3,021
43
8,154
592
2,910
641
435
190
3,221
149
8,138
Deferred tax liabilities:
Depreciation……………………………………………….………..
Unremitted foreign earnings……………………………….……….
Other………………………………………………………………...
(2,954)
(4,454)
(248)
(3,336)
(5,083)
0
Total deferred tax liabilities………………………………….
(7,656)
(8,419)
Net deferred tax assets (liabilities)……………...………….………….
Valuation allowance…………………………………………………...
498
(579)
(281)
(452)
Net deferred tax liabilities…………………………………...
$
(81)
$
(733)
At September 30, 2012, the Company has a non-U.S. tax loss carryforward of approximately $5,458, which relates to the
Company’s Irish subsidiary that ceased operations in 2007. A valuation allowance has been recorded against the deferred
tax asset related to this non-U.S. tax loss carryforward because it is unlikely that such operating loss can be utilized unless
the Irish subsidiary resumed operations. The non-U.S. tax loss carryforward does not expire.
The Company recognized a $127 increase in the valuation allowance against its net deferred tax assets in fiscal years 2012
and a $12 reduction in the valuation allowance against its net deferred tax assets in fiscal 2011.
The Company reported liabilities for uncertain tax positions, which includes any related interest and penalties, in fiscal
2012 and 2011 of $120 and $96, respectively. During fiscal 2012, the Company recognized a nominal amount for interest
and no amount for penalties. Based on the statute of limitations for specific jurisdictions, the related unrecognized tax
benefit for positions previously taken may change in the next 12 months by approximately $3, which would be recorded
through income tax expense. The Company classifies interest and penalties on uncertain tax positions as income tax
expense. A summary of activity related to the Company’s uncertain tax position is as follows:
2012
2011
Balance at beginning of year………………...….…………………... $
Increase due to tax positions taken in current year………………….
Increase due to tax positions taken in prior years……………………
Lapse of statute of limitations……………………………………….
$
96
55
1
(32)
63
46
14
(27)
Balance at end of year……..……..………………………………….
$
120
$
96
30
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states, local and non-U.S. jurisdictions.
The Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations for the years prior
to fiscal year 2006.
8. Retirement Benefit Plans
Defined 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 its defined benefit pension plans is based on an actuarially determined cost method
allowable under Internal Revenue Service regulations. One of the Company’s defined benefit pension plans, which 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.
The Company uses a September 30 measurement date for its U.S. defined benefit pension plans. Net pension expense,
benefit obligations and plan assets for the Company-sponsored defined benefit pension plans consists of the following:
Years Ended September 30,
2012
2011
Service cost………………………………………..…………............. $
Interest cost…………………………………….……….…….............
Expected return on plan assets………………….……………………
Amortization of prior service cost…………….…….………………..
Amortization of net loss……………………...……………………….
Early retirement expense……………………………………………..
Settlement cost………………………………………………..............
266
988
(1,413)
47
861
0
513
$
273
1,059
(1,454)
117
682
61
0
Net pension expense for defined benefit plan…............................. $
1,262
$
738
The status of all defined benefit pension plans at September 30 is as follows:
Benefit obligations:
Benefit obligations at beginning of year………………...….……. $
Service cost……………………………..……….………………..
Interest cost…………………………..…………….……………..
Amendments……………………………………………………...
Actuarial loss………………..…………….………….…………..
Benefits paid………………………..………….………………....
Early retirement expense…………………………………………
2012
2011
24,030
266
988
0
2,659
(1,637)
0
$
21,889
273
1,059
0
1,821
(1,073)
61
Benefit obligations at end of year……..……..……………. $
26,306
$
24,030
Plan assets:
Plan assets at beginning of year………..……..………………….. $
Actual return on plan assets….………..………….……………....
Employer contributions………………..………..………………..
Benefits paid…………………………..……….….……………...
16,642
2,929
1,015
(1,637)
$
16,653
364
698
(1,073)
Plan assets at end of year………..…….…………………... $
18,949
$
16,642
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:
Net loss……………………………………………….............
Prior service cost……………………………………………...
Plans in which
Assets Exceed Benefit
Obligations at
September 30,
2012
2011
Plans in which
Benefit Obligations
Exceed Assets at
September 30,
2012
2011
$
520
$
772
$
(7,877) $
(8,160)
872
0
562
39
9,907
31
10,449
39
Net amount recognized in the consolidated balance sheets.….
$
1,392
$
1,373
$
2,061
$
2,328
Amounts recognized in the consolidated balance sheets are:
Other assets……………………………………………………….. $
Other long-term liabilities………………………...……………….
Accumulated other comprehensive loss – pretax…..…………..….
$
520
0
872
772
0
601
$
$
0
(7,877)
9,938
0
(8,160)
10,488
Net amount recognized in the consolidated balance sheets.…. $
1,392
$
1,373
$
2,061
$
2,328
The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic
benefit costs during fiscal 2013 are as follows:
Plans in which
Assets Exceed
Benefit
Obligations
Plans in which
Benefit
Obligations
Exceed Assets
Net loss …….……………………………………………........
Prior service cost…………………..……….…………………
$
Total……………..……….………………………………..... $
44
0
44
$
$
862
8
870
Where applicable, the following weighted-average assumptions were used in developing the benefit obligation and the net
pension expense for defined benefit pension plans:
Years Ended
September 30,
2012
2011
Discount rate for liabilities……………………………………...
Discount rate for expenses……………………………………...
Expected return on assets………….……….…………………...
3.6%
4.2%
8.1%
4.2%
5.0%
8.3%
The Company classifies and discloses pension plan assets in one of the following three categories: (i) Level 1 - quoted
market prices in active markets for identical assets; (ii) Level 2 - observable market based inputs or unobservable inputs
that are corroborated by market data or (iii) Level 3 - unobservable inputs that are not corroborated by market data. Level 1
and Level 2 assets are valued using market based inputs. Level 3 asset values are determined by the trustees using a
discounted cash flow model. The following tables set forth the asset allocation of the Company’s defined benefit pension
plan assets and summarize the fair values and levels within the fair value hierarchy for such plan assets as of September 30,
2012 and 2011:
32
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
September 30, 2012
U.S. equity securities:
Large value………………………………
Large blend……………………………...
Large growth…………………………….
Mid blend………………………………..
Small blend……………………………..
$
Non-U.S equity securities:
Foreign large blend……………………..
Diversified emerging markets…………..
U.S. debt securities:
Inflation protected bond…………………
Intermediate term bond………………….
High inflation bond……………………...
Non-U.S. debt securities:
Emerging markets bonds………………...
Stable value:
Short-term bonds………………………..
Asset
Amount
Level 1
Level 2
Level 3
288
8,592
640
19
4
1,295
70
952
6,412
299
239
139
$
0 $
0
0
0
0
0
0
0
0
0
0
139
288 $
8,592
640
19
4
1,295
70
952
4,319
299
239
0
0
0
0
0
0
0
0
0
2,093
0
0
0
Total plan assets at fair value…………..........
$
18,949 $
139 $
16,717 $
2,093
September 30, 2011
U.S. equity securities:
Large value……………………………….. $
Large blend……………………………….
Large growth……………………………...
Mid blend…………………………………
Small blend……………………………….
Non-U.S. equity securities:
Foreign large blend……………………….
Diversified emerging markets…………....
U.S. debt securities:
Inflation protected bond………………….
Intermediate term bond………………….
High inflation bond……………………….
Non-U.S. debt securities:
Emerging markets bonds………………...
Stable value:
Short-term bonds………………………….
Asset
Amount
Level 1
Level 2
Level 3
204
6,945
832
43
34
1,048
109
489
6,176
328
257
177
$
0 $
0
0
0
0
0
0
0
0
0
0
177
204 $
6,945
832
43
34
1,048
109
489
4,083
328
257
0
0
0
0
0
0
0
0
0
2,093
0
0
0
Total plan assets at fair value…………...........
$
16,642 $
177 $
14,372 $
2,093
33
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
Changes in the fair value of the Company’s Level 3 investments during the years ending September 30, 2012 and 2011
were as follows:
2012
2011
Balance at beginning of year………………...….…………………............ $
Actual return on plan assets………………………………………………..
Purchases and sales of plan assets, net…………………………………….
$
2,093
118
(118)
1,911
144
38
Balance at end of year……..……..………………………………………..
$
2,093
$
2,093
Investment objectives relative to the assets of the Company’s defined benefit pension plans 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 categories and among investment managers, and (iii) maintain a careful monitoring of the risk
level within each asset category. 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 category in relation to the anticipated timing of future plan benefit payment
obligations. The Company has a long-term objective for the allocation of plan assets. However, the Company realizes that
actual allocations at any point in time will likely vary from this objective due principally to (i) the impact of market
conditions on plan asset values and (ii) required cash contributions to and distribution from the plans. The “Asset
Allocation Range” anticipates these potential scenarios and provides flexibility for the Plan’s investments to vary around
the objective without triggering a reallocation of the assets, as noted by the following:
Percent of Plan Assets at
September 30,
2012
2011
Asset
Allocation
Range
U.S. equities…...……………………..
Non-U.S. equities…………….............
U.S. debt securities………..................
Non-U.S. debt securities......................
Other securities…………...………….
50%
7%
41%
1%
1%
48%
7%
42%
2%
1%
30% to 70%
0% to 20%
20% to 70%
0% to 10%
0% to 60%
Total………………………………...
100%
100%
External consultants assist the Company with monitoring the appropriateness of the above 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 approximately $1,423 to its defined benefit pension plans during fiscal
2013. The Company has carryover balances from previous periods that may be available for use as a credit to reduce the
amount of contributions that the Company is required to make to certain of its defined benefit pension plans in fiscal 2013.
The Company’s ability to elect to use such carryover balances will be determined based on the actual funded status of each
defined benefit pension plan relative to the plan’s minimum regulatory funding requirements. The following defined
benefit payment amounts are expected to be made in the future:
Years Ending
September 30,
Projected
Benefit Payments
$
2013…………………………….
2014…………………………….
2015…………………………….
2016…………………………….
2017…………………………….
2018-2022………………………
34
1,991
1,370
1,269
1,288
1,804
8,279
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
Multi-Employer Plans
The Company contributes to two (2) U.S. multi-employer retirement plans for certain union employees, as follow:
Pension
Fund
Pension Protection
Act Zone Status
2011
2012
FIP/RP Status
Pending/
Implemented
Contributions
by the Company
2011
2012
Surcharge
Imposed
Expiration of
Collective
Bargaining
Agreement
Fund (cid:1030)
Green
Green
No
$
52
Fund (cid:1031)
Yellow
Yellow
Implemented
$ 205
$
$
60
144
No
Yes
5/31/2015
7/31/2013
(cid:1030) The fund is the IAM National Pension Fund – EIN 51-6031295 / Plan number 002. The IAM National Pension Fund
utilized the special 30-year amortization provided by Public law 111-192, section 211 to amortize its losses from 2008.
(cid:1031) The fund is the Boilermaker-Blacksmith National Pension Trust – EIN 48-6168020 / Plan number 001.
The plans’ year-end to which the zone status relates is December 31, 2011 and 2010.
The risks of participating in the multi-employer retirement plan are different from a single-employer plan in that i) assets
contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating
employers; ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne
by the remaining participating employers, and iii) if the Company chooses to stop participating in the multi-employer
retirement plan, the Company may be required to pay the plan an amount based on the unfunded status of the plan, referred
to as a withdrawal liability.
Defined Contribution Plans
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 non-discretionary, regular matching contributions to this
plan equal to an amount that represents one hundred percent (100%) of a participant’s deferral contribution up to one
percent (1%) of eligible compensation plus eighty percent (80%) of a participant’s deferral contribution between one
percent (1%) and six percent (6%) of eligible compensation. The Company’s regular matching contribution expense for its
U.S. defined contribution plan in 2012 and 2011 was $607 and $343, 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
2012 and 2011 was $71 and $185, respectively.
The Company’s United Kingdom subsidiary sponsors a defined contribution plan for certain of its employees. The
Company contributes annually 5% of eligible employees’ compensation, as defined. Total contribution expense in 2012
and 2011 was $21 and $20, respectively.
The Company’s Swedish subsidiary sponsors defined contribution plans for its employees. The Company contributes
annually a percentage of eligible employees’ compensation, as defined. Total contribution expense in fiscal 2012 and 2011
was $9 and $6, respectively.
9. Stock-Based Compensation
In previous periods, the Company awarded stock options under two shareholder approved plans. No further options may be
granted under either of the two plans. 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 both plans generally vested at a rate of 25%
per year. To the extent possible, shares of treasury stock are used to satisfy share requirements resulting from the exercise
of stock options. As of September 30, 2012 and 2011, all options awarded under both plans are fully vested.
35
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
Option activity is as follows:
Years Ended September 30,
2012
2011
Options at beginning of year………………………….………
Weighted average exercise price…………………………...
Options exercised 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…………………………...
43
$ 3.86
60
$ 4.33
(42) (17)
$ 5.50
43
$ 3.86
43
$ 3.86
$ 3.86
1
$ 3.74
1
$ 3.74
As of September 30, 2012 and 2011, there was no unrecognized compensation cost related to the stock options granted
under the Company’s stock option plans and, therefore, there was no compensation expense related to stock options
recognized in fiscal years 2012 and 2011. The 1 outstanding and exercisable option as of September 30, 2012 is fully
vested, has a weighted average remaining term of 2.7 years, and an intrinsic value of $14.
The Company has awarded performance and restricted shares under its shareholder approved 2007 Long-Term Incentive
Plan (“2007 Plan”). The aggregate number of shares that may be awarded under the 2007 Plan is 600,000 less any shares
previously awarded and subject to an adjustment for the forfeiture of any unissued shares. In addition, shares that may be
awarded are subject to individual recipient award limitations. The shares awarded under the 2007 Plan may be made in
multiple forms including stock options, stock appreciation rights, restricted or unrestricted stock, and performance related
shares. Any such awards are exercisable no later than ten years from date of grant.
The performance shares that have been awarded under the 2007 Plan generally provide for the issuance of the Company’s
common shares upon the Company achieving certain defined financial performance objectives during a period up to three
years following the making of such award. The ultimate number of common shares of the Company that may be earned
pursuant to an award ranges from a minimum of no shares to a maximum of 150% of the initial target number of
performance shares awarded, depending on the level of the Company’s achievement of its financial performance objectives.
With respect to such performance shares, compensation expense is being accrued at (i) approximately 100% of the target
levels for recipients of the performance shares awarded during fiscal 2012, (ii) approximately 50% of the target levels for
recipients of the performance shares awarded during fiscal 2011 and (iii) approximately 118% of the target levels for
recipients of the performance shares awarded during fiscal 2010. During each future reporting period, such expense may be
subject to adjustment based upon the Company’s subsequent estimate of the number of common shares that it expects to
issue upon the completion of the performance period. The performance shares were valued at the closing market price of
the Company’s common shares on the date of grant. The vesting of such shares is determined at the end of the performance
period.
During fiscal 2012 and 2011, the Company awarded restricted shares to certain of its directors. The restricted shares were
valued at the closing market price of the Company’s common shares on the date of grant, and such value was recorded as
unearned compensation. The unearned compensation is being amortized ratably over the restricted stock vesting period of
one (1) to three (3) years.
If all outstanding share awards are ultimately earned and issued at the target number of shares, then at September 30, 2012
there are approximately 396,200 shares that remain available for award. If any of the outstanding share awards are
ultimately earned and issued at greater than the target number of shares, up to a maximum of 150% of such target, then a
fewer number of shares would be available for award.
Compensation expense related to the performance and restricted shares awarded under the 2007 Plan, was $892 and $547
during fiscal 2012 and 2011, respectively. The Company recognized income tax benefits of $59 and $45 in fiscal 2012 and
2011, respectively, as a result of issuing common shares that were earned under the 2007 Plan. As of September 30, 2012,
there was $1,235 of total unrecognized compensation cost related to the performance and restricted shares awarded under
the 2007 Plan. The Company expects to recognize this cost over the next two (2) years.
36
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
The following is a summary of activity related to performance shares:
Outstanding at September 30, 2011…………………………………
Restricted shares awarded (2012 award)…………………………....
Restricted shares earned (2011 award)……………………………...
Restricted shares forfeited (various awards)………………………..
Performance shares awarded (2012 award)…………………………
Performance shares forfeited (various awards)……………………..
Performance shares earned (2009 award)…………………………...
Performance shares not earned (2009 award)………………………
Number of
Shares
135
27
(11)
(1)
59
(13)
(9)
(29)
Weighted
Average Fair
Value at Date
of Grant
$
13.25
22.08
16.30
22.00
19.53
16.65
5.99
5.99
Outstanding at September 30, 2012…………………………………
158
$
18.30
10. Commitments and 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; however, it 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 costs of litigation.
The Company leases various facilities and equipment under operating leases expiring at various dates. The Company
recorded rent expense of $1,058 and $564 in fiscal 2012 and 2011, respectively. At September 30, 2012, minimum rental
commitments under non-cancelable leases are as follows:
Year ending September 30,
Operating
Leases
2013…………….…………………………………………..... $
2014…………….…………………………………………….
2015…………….…………………………………………….
2016…………….…………………………………………….
Thereafter…………………………………………………….
Total minimum lease payments…………………………..
$
936
649
450
256
189
2,480
37
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
Forged Components Group (“Forge Group”) consists of the production, heat-treatment, surface-treatment, non-destructive
testing and some machining of both conventional and precision forged components in various steel, titanium and aluminum
alloys utilizing a variety of processes for application principally in the aerospace and power generation industries. The
Turbine Component Services and Repair Group (“Repair Group”) consists primarily of the repair and remanufacture of
small aerospace and industrial turbine engine components, and is also involved in providing precision component
machining and industrial coating of turbine engine components. The Applied Surface Concepts Group (“ASC Group”) is a
provider of specialized selective plating 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 all three of the Company’s segments accounted for 14% and 10% of the Company’s consolidated net sales
in fiscal 2012 and 2011, respectively. One customer of two of the Company’s segments in fiscal 2012 and three of the
Company’s segments in fiscal 2011 accounted for 14% and 19% of the Company’s consolidated net sales in 2012 and
2011, respectively. One customer of two of the Company’s segments in fiscal 2012 and one of the Company’s segments in
fiscal 2011accounted for 10% and 12% of the Company’s consolidated net sales in fiscal 2012 and 2011, respectively. The
combined net sales to these three customers, and to the direct subcontractors to these three customers, accounted for 48%
and 59% of the Company’s consolidated net sales in fiscal 2012 and 2011, respectively.
Geographic net sales are based on location of customer. The United States of America is the single largest country for
unaffiliated customer sales, accounting for 78% and 80% of consolidated net sales in fiscal 2012 and 2011, respectively.
No other single country represents greater than 10% of consolidated net sales in fiscal 2012 and 2011. Net sales to
unaffiliated customers located in various European countries accounted for 9% and 8% of consolidated net sales in fiscal
2012 and 2011, respectively. Net sales to unaffiliated customers located in various Asian countries accounted for 5% and
6% of consolidated net sales in fiscal 2012 and 2011, 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, and the Company’s Cork, Ireland facility.
38
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
The following table summarizes certain information regarding segments of the Company’s:
Years Ended September 30,
2012
2011
Net sales:
Forged Components Group…….…………………………………... $
Turbine Component Services and Repair Group…….……………..
Applied Surface Concepts Group…………………..………………
102,900
7,184
15,022
$
84,145
9,047
14,165
Consolidated net sales…………...…………………..…….……. $
125,106
$ 107,357
Operating income (loss):
Forged Components Group………………..…….
Turbine Component Services and Repair Group………………..….
Applied Surface Concepts Group………………………..…………
Corporate unallocated expenses….…………..……….…..………..
$
Consolidated operating income………………………….............
Interest expense, net…………………………..…………..…………....
Foreign currency exchange loss (gain), net….…..…………………….
Other income, net…………………..………..…………........................
$
12,938
(1,416)
1,064
(3,240)
9,346
438
(25)
(467)
13,000
(277)
1,025
(2,893)
10,855
82
5
(470)
Consolidated income before income tax provision………...……
$
9,400
$
11,238
Depreciation and amortization expense:
Forged Components Group…….…………………………………... $
Turbine Component Services and Repair Group…….……………..
Applied Surface Concepts Group………..………………..………..
Corporate unallocated expenses….…………..……….…..………...
Consolidated depreciation and amortization expense……..…….
LIFO expense for the Forged Components Group…………………….
$
$
Capital expenditures:
Forged Components Group…....…………….................................... $
Turbine Component Services and Repair Group…....……………...
Applied Surface Concepts Group……………..……………………
$
$
$
$
5,855
341
379
96
6,671
1,563
2915
410
196
3,542
308
426
110
4,386
479
2,798
219
276
Consolidated capital expenditures..………..…………………..... $
3,521
$
3,293
Identifiable assets:
Forged Components Group….....………..…………………………. $
Turbine Component Services and Repair Group….....………..……
Applied Surface Concepts Group…………………………………..
Corporate………………..……………..……………..………….….
84,519
3,480
6,437
12,109
$
58,361
3,758
6,217
11,675
Consolidated total assets………….…………………….……….. $
106,545
$
80,011
Non-U.S. subsidiaries:
Net sales.……………………...……………………………………. $
Operating income ……. ………………………………...………….
Identifiable assets (excluding cash) ………………………..............
$
5,612
470
4,511
5,010
369
4,422
39
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
12. Business Acquisition
On October 28, 2011, through its wholly-owned subsidiary, Forge Acquisition, LLC – now known as QAF, the Company
completed the purchase of the forging business and substantially all related operating assets from GEL Industries, Inc.
(DBA Quality Aluminum Forge, Inc.). The forging business is operated in QAF’s Orange and Long Beach, California
facilities, all of which are leased. The purchase price for the forging business and related operating assets was
approximately $24.9 million payable in cash, after certain adjustments related principally to the final working capital level
and/or indemnification holdback provisions under the purchase agreement. In addition, the Company has assumed certain
current operating liabilities of the forging business. The Company recorded net sales of $19.2 million from the date of
acquisition through September 30, 2012.
The QAF purchase transaction is accounted for under the purchase method of accounting. The allocation of the purchase
price, including amounts attributable to goodwill and intangible assets, all of which belong to the Forged Component
Group, is as follows:
October 28,
2011
Assets acquired:
Accounts receivable……………………………..
Inventory………………………………………...
Property and equipment………….........................
Intangible assets…………………………………
Goodwill…………………………………………
Other……………………………………………..
$
Liabilities assumed:
Accounts payable and accrued liabilities………..
3,703
3,961
4,965
9,000
3,522
153
25,304
418
Total purchase price………………………………….
$
24,886
The above fair values of assets acquired and liabilities assumed, as initially reported, were based upon appraisals, other
studies and additional information available at the time of the acquisition of QAF. The Company believes that such
information provided a reasonable basis for determining the fair values of the assets acquired and liabilities assumed.
On December 10, 2010, through its wholly-owned subsidiary, TWF Acquisition, LLC – now known as T&W Forge, LLC
(“TWF”), the Company completed the purchase of the forging business and substantially all related operating assets from
T&W Forge, Inc. (“T&W Forge”). TWF operates in T&W Forge’s Alliance, Ohio facility under a long-term lease
arrangement, with an option to purchase the facility at a nominal price. The TWF purchase transaction is accounted for
under the purchase method of accounting. The Company recorded net sales of $18.7 million from the date of acquisition
through September 30, 2012.
The results of operation of QAF and TWF from their respective dates of acquisition are included in the Company’s
consolidated statements of operations and are reported in the Forge Group. The following unaudited pro forma information
presents a summary of the results of operations for the Company including QAF and TWF as if the acquisitions had
occurred on October 1, 2010 and 2009, respectively:
Years Ended
September 30,
2012
2011
Net sales………………………………………………... $
Net income……………………………………………...
Net income per share (basic)……………………………
Net income per share (diluted)………………………….
$
126,619
7,533
1.42
1.40
129,757
9,915
1.88
1.86
40
SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements – (Continued)
13. Summarized Quarterly Results of Operations (Unaudited)
Dec. 31
2012 Quarter Ended
June 30
March 31
Sept. 30
Net sales………………………………………………….
Cost of goods sold…………….........................................
$ 28,510
22,045
$ 34,079 $ 30,968
23,047
26,601
$ 31,549
25,332
Income before income tax provision ……………………
Income tax provision ………..…………………………..
Net income ……..………………………………………..
Net income per share:
Basic……………………………………………….......
Diluted………………………........................................
1,733
547
1,186
0.22
0.22
2,696
972
1,724
0.32
0.32
3,302
861
2,441
0.46
0.46
1,669
472
1,197
0.22
0.22
Dec. 31 March 31
2011 Quarter Ended
June 30
Sept. 30
Net sales………………………………………………….
Cost of goods sold…………….........................................
$ 21,396
16,421
$ 26,804
19,878
$ 28,875 $ 30,282
22,542
22,075
Income before income tax provision ……………………
Income tax provision…………………………………….
Net income……………………………………………….
Net income per share:
Basic…………………………………………………...
Diluted…………………………………………………
1,857
651
1,206
0.23
0.23
3,002
1,007
1,995
0.38
0.38
2,879
815
2,064
0.39
0.39
3,500
1,316
2,184
0.41
0.41
41
SIFCO Industries, Inc. and Subsidiaries
Valuation and Qualifying Accounts
Years Ended September 30, 2012 and 2011
(Amounts in thousands)
Schedule II
Balance at
Beginning
of Period
Additions
(Reductions)
Charged to
Expense
Additions
(Reductions)
Charged to
Other
Accounts
Deductions
$ 664 $ 164 $ 108 $ (322) (a)
(b)
1,398
7,974
1,152
452
32
1,563
0
127
365
0
0
0
(77)
0
(106)
0
(c)
Balance at
End of
Period
$ 614
1,718
9,537
1,046
579
Year Ended September 30, 2012
Deducted from asset accounts
Allowance for doubtful accounts…………
Inventory obsolescence reserve…………..
Inventory LIFO reserve…………………..
Asset impairment reserve………………...
Deferred tax valuation allowance ………..
Accrual for estimated liability
Workers’ compensation reserve………….
674
170
(6)
(170)
(d)
668
Year Ended September 30, 2011
Deducted from asset accounts
Allowance for doubtful accounts…………
Inventory obsolescence reserve…………..
Inventory LIFO reserve…………………..
Asset impairment reserve………………...
Deferred tax valuation allowance ………..
Accrual for estimated liability
$ 582 $ 196 $ 19 $ (133) (a)
(b)
1,191
7,495
933
464
171
479
219
(12)
267
0
0
0
(231)
0
0
0
(c)
$ 664
1,398
7,974
1,152
452
Workers’ compensation reserve………….
945
20
30
(321)
(d)
674
(a) Accounts determined to be uncollectible, net of recoveries
(b) Inventory sold or otherwise disposed
(c) Equipment sold or otherwise disposed
(d) Payment of workers’ compensation claims
42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), disclosure controls and
procedures are controls and procedures designed to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such
information is accumulated and communicated to management, including the Company’s Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s disclosure
controls and procedures include components of the Company’s internal control over financial reporting. 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.
Management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, carried out an evaluation 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, 2012 (the “Evaluation Date”).
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation
Date, the Company’s disclosure controls and procedures were effective. Accordingly, 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.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Under the supervision of the Chief Executive Officer and Chief Financial
Officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2012 based on (i) the framework set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework” and “Internal Control over Financial
Reporting – Guidance for Smaller Public Companies” and (ii) The U.S. Securities and Exchange Commission (“SEC”)
Guidance Regarding Management’s Report on Internal Control Over Financial Reporting. Based on that evaluation,
management has concluded that the Company did maintain effective internal control over financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding
controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public
accounting firm pursuant to rules of the SEC that permit smaller reporting companies to provide only management’s report
in this annual report.
Changes in Internal Control over Financial Reporting and other Remediation
During fiscal 2012, the following occurred:
(cid:120) On October 28, 2011, the Company acquired the forging business and related assets from GEL Industries, Inc.,
which operated under its own set of systems and internal controls. The Company is substantially complete with
the incorporation of the acquired operations, as they relate to systems and internal controls.
There was no significant change in our internal control over financial reporting that occurred during the fourth fiscal quarter
ended September 30, 2012 that has materially affected, or that is reasonably likely to materially affect our internal control
over financial reporting.
Item 9B. Other Information
None.
43
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
64
Michael S. Lipscomb
65
James P. Woidke
49
Frank A. Cappello
54
Chairman of the Board since 2001; director of the Company since 1986;
Chief Executive Officer from 1990 to August 2009; 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.
President and Chief Executive officer since August 2009 and a director of
the Company since April 2010. Mr. Lipscomb previously served as a
director of the Company from 2002 to 2006. Mr. Lipscomb is also currently
the Chief Executive Officer of Aviation Component Solutions. Prior to
joining the Company, Mr. Lipscomb was Chairman, President and Chief
Executive Officer of Argo-Tech Corporation from 1994 to 2007, President
from 1990 to 1994, Executive V.P. and Chief Operating Officer from 1988
to 1990, and Vice President of Operations from 1986, when Argo-Tech was
formed, to 1988. Mr. Lipscomb joined TRW’s corporate staff in 1981 and
was appointed Director of Operations for the Power Accessories Division in
1985. Mr. Lipscomb previously served as a director of Argo-Tech and AT
Holdings Corporation from 1990 to 2007. He serves on the boards of Ruhlin
Construction Company and Altra Holdings, Inc. He is a former board
member of the Aerospace Industries Association and General Aviation
Manufacturers Association.
Chief Operating Officer since March 2010. Prior to the assumption of his
new role, Mr. Woidke served as General Manager of SIFCO’s Forged
Components Group since March, 2006. Prior to joining the Company, Mr.
Woidke was the Director of Engineering and Quality as well as Business
Unit Manager for Anchor Manufacturing Group from 2003 to 2006. From
1993 to 2003, Mr. Woidke held a number of different positions with Lake
Erie Screw Corporation, last serving as Director of Manufacturing
Operations. Mr. Woidke currently serves on the board of Forging Industry
Educational and Research Foundation (FIERF).
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 Seven (7)
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 SEC on or about November 30, 2012.
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 Operating 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
44
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 SEC
on or about November 30, 2012.
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, 2012.
Plan Category
Number of
Securities to
be issued
upon
Exercise of
Outstanding
Options
Number of
Securities to
be issued
upon
Meeting
Performance
Objectives
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:
1995 Stock Option Plan (1)..…………………….
2007 Long-term Incentive Plan (2)..………….....
1,000
---
---
158,936
$ 3.74
N/A
---
396,185
Total………………………………………….
1,000
158,936
$ 3.74
396,185
(1) Under the 1995 Stock Option Plan, no further options may be granted. During fiscal 2012, 22,000 options granted under
the 1995 Stock Option Plan were exercised.
(2) Under the 2007 Long-term Incentive Plan, the aggregate number of common shares that are available to be granted is
600,000 shares, with a further limit of no more than 50,000 shares to any one person in any twelve-month period. For
additional information concerning the Company’s equity compensation plans, refer to the discussion in Note 9 to the
Consolidated Financial Statements.
The Company incorporates herein by reference the beneficial ownership information appearing under the captions “Stock
Ownership of Certain Beneficial Owners” and “Stock Ownership of Executive Officers, Director and Nominees” of the
Company’s definitive Proxy Statement to be filed with the SEC on or about November 30, 2012.
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” of the Company’s definitive Proxy Statement to be filed with the
SEC on or about November 30, 2012.
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 SEC on or about November
30, 2012.
45
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 Report
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, 2012 and 2011
Consolidated Balance Sheets - September 30, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended September 30, 2012 and 2011
Consolidated Statements of Shareholders’ Equity for the Years Ended September 30, 2012 and 2011
Notes to Consolidated Financial Statements - September 30, 2012 and 2011
(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
9.1
9.2
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
Credit and Security Agreement among Fifth Third Bank and SIFCO Industries, Inc. (and subsidiaries)
dated December 10, 2010 filed as Exhibit 4.23 to the Company’s Form 8-K dated December 10, 2010
and incorporated herein by reference
First Amendment and Joinder to Credit and Security Agreement among Fifth Third Bank and SIFCO
Industries, Inc. (and subsidiaries) dated October 28, 2011 filed as Exhibit 4.2 to the Company’s Form 8-
K dated October 28, 2011 and incorporated herein by reference
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
Voting Trust Extension Agreement (effectively) dated January 31, 2010, filed as Exhibit 9.2 of the
Company’s Form 10-Q dated December 31, 2009, and incorporated herein by reference
10.1
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
46
Exhibit
No.
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Description
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
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/A 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/A dated December 31, 2000,
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
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
SIFCO Industries, Inc. 2007 Long-Term Incentive Plan, filed as Exhibit A of the Company’s Proxy and
Notice of 2008 Annual Meeting to Shareholders dated December 14, 2007, and incorporated herein by
reference
10.9
Letter Agreement between the Company and Jeffrey P. Gotschall, dated August 12, 2009 filed as
Exhibit 10.1 of the Company’s Form 8-K dated August 12, 2009 and incorporated herein by reference
10.10
10.11
10.12
10.13
Interim Chief Executive Officer Agreement, dated as of August 31, 2009, by and among SIFCO
Industries, Inc., Aviation Component Solutions and Michael S. Lipscomb filed as Exhibit 10.14 of the
Company’s Form 10-K dated September 30, 2009, and incorporated herein by reference
Amended and Restated Change in Control and Severance Agreement, between James P. Woidke and
SIFCO Industries, Inc., dated April 27, 2010 filed as Exhibit 10.15 of the Company’s Form 8-K dated
April 30, 2010, and incorporated herein by reference
Asset Purchase Agreement between T&W Forge, Inc and TWF Acquisition, LLC (a wholly-owned
subsidiary of SIFCO Industries Inc.) dated December 10, 2010 filed as Exhibit 10.14 to the Company’s
Form 8-K dated December 10, 2010, and incorporated herein by reference
Amendment No. 1 to the SIFCO Industries, Inc. 2007 Long-Term Incentive Plan, filed as Exhibit A of
the Company’s Proxy and Notice of 2011 Annual Meeting to Shareholders dated December 15, 2010,
and incorporated herein by reference
10.14
Asset Purchase Agreement between GEL Industries, Inc (DBA Quality Aluminum Forge) and Forge
Acquisition, LLC (a wholly-owned subsidiary of SIFCO Industries Inc.) dated October 28, 2011 filed as
Exhibit 10.16 to the Company’s Form 8-K dated October 28, 2011, 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 Independent Registered Public Accounting Firm
*31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a)
47
Exhibit
No.
*31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a)
Description
*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
*101
The following financial information from SIFCO Industries, Inc. Report on Form 10-K for the year
ended September 30, 2012 filed with the SEC on November 30, 2012, formatted in XBRL includes: (i)
Consolidated Statements of Operations for the years ended September 30, 2012 and 2011, (ii)
Consolidated Balance Sheets at September 30, 2012 and 2011, (iii) Consolidated Statements of Cash
Flow for the years ended September 30, 2012 and 2011, (vi) Consolidated Statements of Shareholders’
Equity for the years ended September 30, 2012 and 2011 and (v) the Notes to the Consolidated Financial
Statements.
48
SIGNATURES
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.
SIFCO Industries, Inc.
By: /s/ Frank A. Cappello
Frank A. Cappello
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
Date: November 30, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on November 30,
2012 by the following persons on behalf of the Registrant in the capacities indicated.
/s/ Jeffrey P. Gotschall
Jeffrey P. Gotschall
Chairman of the Board
/s/ Michael S. Lipscomb
Michael S. Lipscomb
President and Chief Executive Officer
(Principal Executive Officer)
Director
/s/ Alayne L. Reitman
Alayne L. Reitman
Director
/s/ John G. Chapman, Sr.
John G. Chapman, Sr.
Director
/s/ Hudson D. Smith
Hudson D. Smith
Director
/s/ Donald C. Molten, Jr.
Donald C. Molten, Jr.
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
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50
DIRECTORS
Jeffrey P. Gotschall
Chairman of the Board
Michael S. Lipscomb
President and Chief Executive Officer
John G. Chapman, Sr.
Retired - Strategic Relationship Management
Partner and Senior Contracting Partner
Deloitte LLP
Donald C. Molten, Jr.
Associate Headmaster – University School
Alayne L. Reitman
Formerly Vice President – Finance and
Chief Financial Officer,
The Tranzonic Companies, Inc.
Hudson D. Smith
President
Forged Aerospace Sales, LLC
OFFICERS
Michael S. Lipscomb
President and Chief Executive Officer
James P. Woidke
Chief Operating Officer
Frank A. Cappello
Vice President - Finance and
Chief Financial Officer
Remigijus H. Belzinskas
Corporate Controller
AUDITORS
Grant Thornton LLP
Certified Public Accountants
800 Halle Building
1228 Euclid Avenue
Cleveland, Ohio 44115
GENERAL COUNSEL
Benesch Friedlander Coplan & Aronoff LLP
200 Public Square, Suite 2300
Cleveland, Ohio 44114-2378
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, 2012. 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 the Great Lakes
Room, 200 Public Square – 3rd Floor, Cleveland,
Ohio, at 10:30 a.m. on January 17, 2013.
INDUSTRIES, INC.
970 East 64th Street, Cleveland, Ohio 44103-1694
Phone: (216) 881-8600 Fax: (216) 432-6281
www.sifco.com