ITEM 1. BUSINESS THE COMPANY -----------
SIFCO Industries, Inc., an Ohio corporation (the "Company"), 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 metal-working processes, services and products produced primarily to the specific design requirements of its customers. The processes include forging, heat treating, welding, machining and electroplating; and the products include forgings, machined forgings and other machined metal parts, remanufactured component parts for turbine engines, and electroplating solutions and equipment. The Company engages in international technology transfer and also has marketing expertise to provide worldwide sourcing and distribution of overseas manufacturers. The Company's operations are conducted in two segments: (1) Turbine Component Services and Repair and (2) Aerospace Component Manufacturing.
TURBINE COMPONENT SERVICES AND REPAIR -------------------------------------
The Company's Turbine Component Services and Repair segment consists of the repair and remanufacture of jet engine and industrial turbine components; precision machining for aerospace applications, including subassemblies and finished replacement parts; and equipment, solutions and contract services in selective electroplating for aerospace, defense and industrial markets.
AEROSPACE COMPONENT MANUFACTURING ---------------------------------
The Company's Aerospace Component Manufacturing segment consists of the production and some finishing of forgings in numerous alloys for application in the aerospace and several sophisticated industrial markets, utilizing a variety of processes, including conventional and near-net shape hot forging and cold forging techniques. The Company's forged products include: OEM and aftermarket parts for aircraft engines; structural airframe components; and land-based gas turbine engine parts; construction, ordnance and nuclear power components; valves and other parts for oil drilling and mining equipment; and low and high pressure closures for boilers.
COMPETITION; PRINCIPAL CUSTOMERS; BACKLOG -----------------------------------------
There is active competition among many companies, large and small, in every one of the services and products offered by the Company. The Company, however, believes that it offers a wider variety of services than most of its competitors and is more experienced than most in meeting the exact requirements and technical specifications of its customers, particularly those in the aerospace and turbine components repair markets. In addition, the Company has the ability to use its management and marketing expertise to provide worldwide sourcing and selling capabilities.
There is excess capacity in many segments of the forging industry which the Company believes has the effect of increasing competition and limits the ability to raise prices. The Company feels, however, that its focus on quality and customer service help to give it an advantage in the markets it serves.
Defense orders can be quite volatile year to year. The decline in defense spending that occurred in the early nineties negatively impacted both sales and income of the Company. The growth in the commercial aerospace business and the turbine component service and repair business since that time has reduced the impact of defense spending on the Company, with defense business accounting for 11% to 15% of the Company's sales over the last few years.
The performance of the domestic and international air transport industries directly and significantly impact our performance. The restructuring and down turn in the airline industry, in the early nineties, negatively impacted the sales and income of the Company by increasing price competition for the available business. Recently there has been a strong resurgence in the performance of the worldwide airlines industry. The Air Transport Association predicts a continuation of record profit levels for the industry. Although historically related, there can be no assurance that record profits for the air transport industry will translate directly into the particular performance of the Company.
A reduction in the number of airlines could result in fewer new aircraft being ordered as the remaining airlines purchase the used aircraft from the airlines no longer in business. On the other hand, older aircraft require repairs more frequently than newer aircraft, and this could have a positive effect on the Company. The airline industry's long term outlook is still for continued growth in air travel which would suggest the need for newer aircraft and growth in the requirement for repairs. The Company is not able to quantify the interplay of these factors.
The Company believes it can partially compensate for these factors mentioned above by its efforts to broaden its product lines and develop new geographic markets, customers and technologies.
The identity and rankings of the Company's principal customers vary from year to year, and the Company relies on its ability to adapt its services and operations to changing requirements rather than on any high volume production of a particular item or group of items for a particular
customer or customers. Sales to the Company's three largest customers were approximately $9.0 million, $6.5 million and $5.0 million, respectively. Sales to the Company's next two largest customers were $3.2 million and $2.0 million. The first and last of the aforementioned companies serve the aerospace market and the remaining three the airline transportation market. The Company believes that the total loss of sales of its largest customer or two or more of the four remaining customers mentioned above would result in a materially adverse impact on the business and income of the Company. Although there is no assurance that this will continue, historically as one or more major customers have reduced their purchases, one or more other customers have increased purchases avoiding a materially adverse impact on the business or financial results of the Company.
No material part of the Company's business is seasonal.
Information concerning the Company's business, backlog and its reportable business segments as set forth on pages 5, 6 and 16, respectively, of the 1997 Annual Report to Shareholders is incorporated herein by reference.
RESEARCH AND DEVELOPMENT; PATENTS; RAW MATERIALS ------------------------------------------------
The forging, machining, development of remanufacturing processes, or other preparation of prototype parts to customers' specifications for use in their research and development of new parts or designs has been an ordinary portion of the Company's business. Apart from such work, the Company has spent no material amount of time or money on research and development activities; and the accounting records of the Company do not differentiate between work on orders for customer research and development and work on other customer orders.
The Company uses in its business various trademarks, trade names, patents, trade secrets and licenses. A number of these licenses are important to the Company and a loss of them could have a negative impact on the Company.
The Company has many sources for the raw materials, primarily high quality steel, investment castings and chemicals essential to this business. Suppliers of such materials are located in many areas throughout the country. The Company does not depend on a single source for the supply of its materials and believes that its sources are adequate for its business.
ENVIRONMENTAL REGULATIONS -------------------------
In common with other companies engaged in similar businesses, the Company has been 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.
EMPLOYEES ---------
The number of the Company's employees increased from 684 at the beginning of the fiscal year to 770 at the end of the fiscal year.
ITEM 2.
ITEM 2. PROPERTIES
The Company's fixed assets include the plants described below and a substantial quantity of machinery and equipment, most of which is general purpose machinery and equipment using special jigs, tools and fixtures and in many instances having automatic control features and special adaptions. The Company's plants, machinery and equipment are in good operating condition, are well-maintained and substantially all of its facilities are in regular use. The Company considers the present level of fixed assets capitalized as of September 30, 1997 suitable and adequate given the current product offerings for the respective business segments' operations in the current business environment. The square footage numbers set forth in the following paragraphs are approximations.
The Turbine Component Services and Repair segment has seven plants with a total of 271 thousand square feet. Five of these plants with a total of 227 thousand square feet are for the repair and remanufacture jet engine and industrial turbine components. Three of these plants are located in Cork, Ireland (126 thousand square feet), one in Minneapolis, Minnesota (59 thousand square feet) and one in Tampa, Florida (42 thousand square feet). A portion of the Minneapolis plant is also the site of the Company's machining operations.
Selective Plating has two plants, one of which is located in Independence, Ohio (34 thousand square feet), and a leased facility in Redditch, England (10 thousand square feet).
The Company also leases space for sales offices and/or its contract plating services in Norfolk, Virginia; Hartford (East Windsor), Connecticut; Los Angeles (San Dimas), California; and Tacoma, Washington. Selective Plating also leases sales office space in Saint-Maur, France.
The Aerospace Component Manufacturing segment has one plant of 223 thousand square feet located in Cleveland, Ohio. This facility is also the site of the Company's corporate headquarters.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The information required by Item 5 is incorporated herein by reference to pages 1, 7 and 11 of the Annual Report to Shareholders for the year ended September 30, 1997. As of November 1, 1997, the Company had 776 shareholders of record.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference to page 7 of the Annual Report to Shareholders for the year ended September 30, 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 is incorporated herein by reference to pages 5 and 6 of the Annual Report to Shareholders for the year ended September 30, 1997.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are incorporated herein by reference to pages 8 through 16, inclusive, of the Annual Report to Shareholders for the year ended September 30, 1997.
ITEM 9.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The information required by Item 10 as to Directors of the Registrant, is incorporated herein by reference to the information set forth on pages 4 through 6 of the Proxy Statement for the Annual Meeting of Shareholders to be held January 27, 1998.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The Executive Officers of the Company are elected annually to serve for one-year terms or until their successors are elected and qualified. The officers listed below were elected January 28, 1997.
PART III (CONTINUED)
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT (continued)
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT (CONTINUED) - ------------------------------------------------------------------
(1) Charles H. Smith, Jr. and George D. Gotschall are brothers-in-law. Hudson D. Smith is the son of Charles H. Smith, Jr. Jeffrey P. Gotschall is the son of George D. Gotschall.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to pages 10 through 15 of the Proxy Statement for the Annual Meeting of Shareholders to be held January 27, 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the information set forth on pages 2 through 8 of the Proxy Statement for the Annual Meeting of Shareholders to be held January 27, 1998.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: ---------------------
The following consolidated financial statements and related notes of the Registrant and its subsidiaries contained on pages 8 through 16, inclusive, of the Annual Report to Shareholders for the year ended September 30, 1997, are incorporated herein by reference.
Consolidated Balance Sheets - September 30, 1997 and 1996.
Consolidated Statements of Income for the Years Ended September 30, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements for the Years Ended September 30, 1997, 1996 and 1995.
Report of Independent Public Accountants.
(a) (2) Financial Statement Schedules: ------------------------------
Report of Independent Public Accountants on the Financial Statement Schedules.
Schedule II -- Allowance for Doubtful Accounts for the Years Ended September 30, 1997, 1996 and 1995.
All schedules, other than Schedules II are omitted since the information is not required or is otherwise furnished.
PART IV (continued)
(a) (3) Exhibits: ---------
** (3) Second Amended Articles of Incorporation, as amended, and Amended Code of Regulations.
*** (4) Instruments defining the rights of security holders. Reference is made to Exhibit (3) above and to Note 2, page 10 of the 1986 Annual Report to Shareholders.
**** (9) Voting Trust Agreement, as amended.
(10) Material Contracts:
*****) (a) 1989 Stock Option Plan # (b) Incentive Compensation Plan, as amended and restated # (c) Deferred Compensation Program, as amended and restated ****) (d) Form of Indemnification Agreement between the Registrant and each of its Directors and Executive Officers *) (e) 1994 Phantom Stock Plan
(13) 1997 Annual Report to Shareholders
***** (21) Subsidiaries of the Registrant
(23) Consent of Arthur Andersen LLP
(24) Powers of Attorney
*) Incorporated herein by reference to Exhibit A to the Proxy Statement for the Annual Meeting of Shareholders held January 31, 1995. **) Incorporated herein by reference to Form 10-K, September 30, 1986 ***) Incorporated herein by reference to Form 10-K, September 30, 1987 ****) Incorporated herein by reference to Form 10-K, September 30, 1988 *****) Incorporated herein by reference to Form 10-K, September 30, 1989 # Incorporated herein by reference to Form 10-K, September 30, 1995
(27) Financial Data Schedule
(99) Report of Independent Public Accountants On The Financial Statement Schedule II
(b) (1) Reports on Form 8-K -------------------
No reports on Form 8-K were filed during the last quarter of the fiscal year ended September 30, 1997.
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: /*/ Richard A. Demetter ----------------------------- Richard A. Demetter Chief Accounting Officer Date: December 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below on December 18, 1997 by the following persons on behalf of the Registrant in the capacities indicated.