SIFCO INDUSTRIES INC - Annual Report: 2007 (Form 10-K)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

SIFCO Industries, Inc.

 

(Exact name of registrant as specified in its charter)

Ohio		34-0553950
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
970 East 64th Street, Cleveland Ohio		44103
(Address of principal executive offices)		(Zip Code)

(216) 881-8600

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:
Common Shares, $1 Par Value		American Stock Exchange
(Title of each class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the 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 o   No þ

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 o   No þ

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 þ   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

large accelerated filer o          accelerated filer o          non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter is $30,986,787.

The number of the Registrant’s Common Shares outstanding at October 31, 2007 was 5,283,357

Documents incorporated by reference: Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on January 29, 2008 (Part III)

 

 

PART I

Item 1. Business

A.

The Company

SIFCO Industries, Inc. (“SIFCO” or “Company”), an Ohio corporation, was incorporated in 1916. The executive offices of the Company are located at 970 East 64th Street, Cleveland, Ohio 44103, and its telephone number is (216) 881-8600.

The Company is engaged in the production and sale of a variety of metalworking processes, services and products produced primarily to the specific design requirements of its customers. The processes and services include forging, heat-treating, coating, welding, machining and selective electrochemical finishing. The products include forged components, machined forgings and other machined metal components, remanufactured components for aerospace turbine engines, and selective electrochemical finishing solutions and equipment. The Company’s operations are conducted in three business segments: (1) Aerospace Component Manufacturing Group, (2) Turbine Component Services and Repair Group and (3) Applied Surface Concepts Group.

B.

Principal Products and Services

1. Aerospace Component Manufacturing Group

The Company’s Aerospace Component Manufacturing Group (“ACM Group”) has a single operation in Cleveland, Ohio. This segment of the Company’s business consists principally of the manufacture of forged components for aerospace applications. As a part of the ACM Group’s manufacturing process, the business performs forging, heat-treating and precision component machining.

Operations

The Company’s ACM Group is a manufacturer of forged components ranging in size from 2 to 400 pounds (depending on configuration and alloy), primarily in various steel and titanium alloys, utilizing a variety of processes for applications principally in the aerospace industry. The ACM Group’s forged products include: original equipment manufacturers (“OEM”) and aftermarket components for aircraft and land-based turbine engines; structural airframe components; aircraft landing gear components; wheels and brakes; critical rotating components for helicopters; and commercial/industrial products. The ACM Group also provides heat-treatment, surface-treatment, non-destructive testing and select machining of forged components.

The ACM Group generally has multiple sources for its raw materials, which consist primarily of high quality metals essential to this business. Suppliers of such materials are located throughout North and South America and Europe. In general, because of tight aerospace grade steel capacity and the limited supply of titanium, raw material lead times have increased in recent years. However, lead times for certain grades have recently shortened. The ACM Group generally does not depend on a single source for the supply of its materials. Due to the scarcity of certain raw materials, some material is provided by a limited number of suppliers; however, the ACM Group believes that its sources are adequate for its business. The business is ISO 9001:2000 registered and AS 9100:2001 certified. In addition, the ACM Group’s chemical etching/milling and non-destructive testing facilities are NADCAP (National Aerospace and Defense Contractors Accreditation Program) accredited and its heat-treating facility is seeking re-accreditation through NADCAP.

Industry

The performance of the domestic and international air transport industry directly and significantly impacts the performance of the ACM Group. The air transport industry’s long-term outlook is for continued, steady growth. Such outlook suggests the need for additional aircraft and, therefore, growth in the requirement for airframe and turbine engine components. The air transport industry is currently benefiting from several favorable trends including: (i) projected growth in air traffic, (ii) the beginning of major replacement and refurbishment cycles driven by the desire for more fuel efficient aircraft and fleet commonality, and (iii) the increased use of wide-body aircraft. Management’s current outlook for the air transport industry continues to remain favorable, with growth expected through at least 2011, and believes the ACM Group is poised to take advantage of the resulting improvement in order demand from the airframe and engine manufacturers. The ACM Group also supplies new and spare components for military aircraft. As a result of continued military initiatives, there has been increased demand for both new and spare components for military customers. It is difficult to determine at this time what the long-term impact of these factors may be on the demand for products provided by the ACM Group.

Competition

While there has been some consolidation in the forging industry, the ACM Group believes there is limited opportunity to increase prices, other than for the pass-through of rising raw material steel and titanium alloys prices. The ACM Group believes, however, that its demonstrated aerospace expertise along with focus on quality, customer service, SMART (Streamlined Manufacturing Activities to Reduce Time/Cost) initiatives, and offering a broad range of capabilities provide it with an advantage in the primary markets it serves. The ACM Group competes with both U.S. and non-U.S. suppliers of forgings. As customers are establishing new facilities throughout the world, the ACM Group will continue to encounter non-U.S. competition. The ACM Group believes it can expand its markets by (i) broadening its product lines through investment in equipment that expands its manufacturing capabilities and (ii) developing new customers in markets whose participants require similar technical competence and service (as the aerospace industry) and are willing to pay a premium for quality.

Customers

During fiscal 2007, the ACM Group had two customers, various business units of Rolls-Royce Corporation and United Technologies Corporation, which accounted for 17% and 11%, respectively, of the ACM Group’s net sales. The net sales to these two customers when combined with (i) a third customer that individually accounts for less than 10% of the Group’s nets sales and (ii) the direct subcontractors to these three customers, accounted for 56% of the ACM Group’s net sales in 2007. The ACM Group believes that the loss of sales to such customers would result in a materially adverse impact on the business and income of the ACM Group. However, the ACM Group has maintained a business relationship with these three customers for well over ten years and is currently conducting business with some of them under multi-year agreements. Although there is no assurance that this will continue, historically as one or more major customers have reduced their purchases, the ACM Group has generally been successful in replacing such reduced purchases, thereby avoiding a material adverse impact on the ACM Group. The ACM Group attempts to rely on its ability to adapt its services and operations to changing requirements of the market in general and its customers in particular. No material part of the ACM Group’s business is seasonal.

Backlog of Orders

The ACM Group’s backlog as of September 30, 2007 increased to $82.8 million, of which $66.6 million is scheduled for delivery during fiscal 2008, compared with $65.7 million as of September 30, 2006, of which $53.5 million was scheduled for delivery during fiscal 2007. It is important to note that certain aerospace grade steel and titanium alloys raw material delivery lead times are beginning to shorten and such lead time improvement may in the future result in a fundamental shift in the ordering pattern of the ACM Group’s customers. A potential consequence of such a shift may be that customers will not place orders as far in advance as they currently do resulting in a potential reduction in the ACM Group’s backlog. Accordingly, such backlog reduction, to the extent it may occur, may not necessarily be completely indicative of actual sales expected for any succeeding period. All orders are subject to modification or cancellation by the customer with limited charges.

2. Turbine Component Services and Repair Group

The Company’s Turbine Component Services and Repair Group (“Repair Group”) has a single operation in Minneapolis, Minnesota. This segment of the Company’s business consists principally of the repair and remanufacture of small aerospace turbine engine components. As a part of the repair and remanufacture process, the business performs precision component machining and applies high temperature-resistant coatings to turbine engine components.

Operations

The Repair Group requires the procurement of licenses/authority, which certify that the Group has obtained approval to perform certain proprietary repair processes. Such approvals are generally specific to an engine and its components, a repair process, and a repair facility/location. Without possession of such approvals, a company would be precluded from competing in the aerospace turbine engine component repair business. Approvals are issued by either the original equipment manufacturers (“OEM”) of aerospace turbine engines or the Federal Aviation Administration (“FAA”).

In general, the Company considers aerospace turbine engines that (i) possess a thrust of less than 17,500 pounds and/or (ii) are used to power aircraft that carry fewer than 100 passengers to be small aerospace turbine engines. Historically, the Repair Group has elected to procure approvals primarily from the OEMs and currently maintains proprietary repair process approvals issued by certain of the primary small engine OEMs (e.g. Pratt & Whitney, Rolls-Royce, Turbomeca, and Hamilton Sundstrand). In exchange for being granted an OEM approval, the Repair Group is obligated, in most cases, to

pay royalties to the OEM for each type of component repair that it performs utilizing the OEM-approved proprietary repair process. The Repair Group continues to be successful in procuring FAA repair process approvals. There is generally no royalty payment obligation associated with the use of a repair process approved by the FAA. To procure an OEM or FAA approval, the Repair Group is required to demonstrate its technical competence in the process of repairing such turbine engine components.

The development of remanufacturing and repair processes is an ordinary part of the Repair Group business. The Repair Group continues to invest time and money on research and development activities. The Company’s research and development activities in high temperature resistant coatings applied to super-alloy materials have applications in the small aerospace turbine engine markets. Operating costs related to such activities are expensed during the period in which they are incurred. The Group’s research and development expense related to its continuing operations was $0.4 million in fiscal 2007.

The Repair Group generally has multiple sources for its raw materials, which consist primarily of investment castings and industrial coating materials essential to this business. Certain items are procured directly from the OEM to satisfy repair process requirements. Suppliers of such materials are located throughout North America and Europe. Although certain raw materials may be provided by a limited number of suppliers, the Repair Group generally does not depend on a single source for the supply of its materials and management believes that its sources are adequate for its business.

Industry

The performance of the air transport industry directly and significantly impacts the performance of the Repair Group. The air transport industry’s long-term outlook is for continued, steady growth. Such outlook suggests the need for additional aircraft and, therefore, growth in the requirement for aerospace turbine engines and related engine repairs. The air transport industry is currently benefiting from several favorable trends including: (i) projected growth in air traffic, (ii) the beginning of major replacement and refurbishment cycles driven by the desire for more fuel efficient aircraft and fleet commonality, and (iii) the increased use of wide-body aircraft. Management’s current outlook for the air transport industry continues to remain favorable. It is difficult to determine what the long-term impact of these factors may be on air travel and the demand for services and products provided by the Repair Group.

Competition

In recent years, while the absolute number of competitors has decreased as a result of industry consolidation and vertical integration, competition in the turbine engine component repair business has nevertheless increased, principally due to the increased direct involvement of the aerospace turbine engine manufacturers in the turbine engine overhaul and component repair businesses. With the presence of the OEM in the market, there has been a general reluctance on the part of the OEM to issue, to independent component repair companies, its approvals for the repair of its newer model engines and related components. The Company believes that the Repair Group will, more likely than not, become more dependent in the future on (i) its ability to successfully procure and market FAA approved licenses and related repair processes and/or (ii) a close collaboration with engine manufacturers.

Customers

The identity and ranking of the Repair Group’s principal customers can vary from year to year. The Repair Group attempts to rely on its ability to adapt its services and operations to changing requirements of the market in general and its customers in particular, rather than relying on high volume production of a particular item or group of items for a particular customer or customers. During fiscal 2007, the Repair Group had one customer, consisting of various business units of United Technologies Corporation, which accounted for 35% of the Repair Group’s net sales from continuing operations. Although there is no assurance that this will continue, historically as one or more major customers have reduced their purchases, the business has generally been successful in replacing such reduced purchases, thereby avoiding a material adverse impact on the business. No material part of the Repair Group’s business is seasonal.

Backlog of Orders

The Repair Group’s backlog from continuing operations as of September 30, 2007 increased to $4.2 million, of which $1.5 million is scheduled for delivery during fiscal 2008 and $2.7 million is on hold, compared with $2.7 million as of September 30, 2006, of which $1.6 million was scheduled for delivery during fiscal 2007 and $1.1 million was on hold. All orders are subject to modification or cancellation by the customer with limited charges. The Repair Group believes that the backlog may not necessarily be indicative of actual sales for any succeeding period.

3. Applied Surface Concepts Group

The Company’s Applied Surface Concepts Group (“ASC Group”) provides surface enhancement technologies principally related to selective electrochemical finishing and anodizing. Principal product offerings include (i) the sale of metal solutions and equipment required for selective electrochemical finishing and (ii) providing selective electrochemical finishing contract services.

Operations

Selective electrochemical finishing of a part or component is done without the use of an immersion tank. A wide variety of pure metals and alloys, principally determined by the customer’s design requirements, can be used for applications including corrosion protection, wear resistance, anti-galling, increased lubricity, increased hardness, increased electrical conductivity, and re-sizing. SIFCO Process^® metal solutions include: cadmium, cobalt, copper, nickel, tin and zinc. In addition, precious metal solutions such as gold, iridium, palladium, platinum, rhodium, and silver are also provided to customers. The ASC Group has also developed a number of alloy-plating solutions.

The ASC Group can either (i) supply the selective electrochemical finishing chemicals and equipment to customers desiring to perform selective electrochemical finishing in-house or (ii) provide manual, semi-automated, or automated contract selective electrochemical finishing services at either the customer’s site or at one of the Group’s facilities. The Group operates four U.S. facilities in geographic areas strategically located in proximity to its customers (Cleveland, Ohio / Hartford, Connecticut / Norfolk, Virginia / Houston, Texas) and three in Europe (Birmingham, England / Paris, France / Rattvik, Sweden). The scope of selective electrochemical finishing work includes part salvage and repair, part refurbishment, and new part enhancement. Selective electrochemical finishing solutions are produced in the Cleveland, Ohio and Birmingham, England facilities.

The ASC Group generally has multiple sources for its raw materials, which consist primarily of industrial chemicals and metal salts and, therefore, does not depend on a single source for the supply of key raw materials. Management believes that its sources are adequate to support its business.

The ASC Group sells its products and services under recognized industry brand names including: SIFCO Process^®, Dalic^®, USDL^® and Selectron^®, all of which are specified in military and industrial specifications. The ASC Group’s manufacturing operations have ISO 9001:2001 and AS 9100A certifications. In addition, two of its facilities are NADCAP (National Aerospace and Defense Contractors Accreditation Program) certified. Two of the service centers are FAA approved repair shops. Other ASC Group approvals include ABS (American Bureau of Ships), ARR (American Railroad Registry), JRS (Japan Registry of Shipping), and KRS (Korean Registry of Shipping).

Industry

Selective electrochemical finishing occupies a niche within the broader metal finishing industry. The ASC Group’s selective electrochemical finishing process is used to provide functional, engineered finishes rather than decorative finishes, and it serves many markets including aerospace, automotive, electric power generation, and oil and gas. In its planning and decision making processes, management of the ASC Group monitors and evaluates precious metal prices, global manufacturing activity, internal labor capacity, technological developments in surface enhancement, and the exploration and production activities relative to oil and gas products. The diversity of industries served helps to mitigate the impact of economic cycles on the ASC Group.

Competition

Although the Company believes that the ASC Group is the largest selective electrochemical finishing company in the world, there are several companies globally that manufacture and sell selective electrochemical finishing solutions and equipment and/or provide contract selective electrochemical finishing services. The ASC Group seeks to differentiate itself through its technical support, research and development, and automation capabilities. The ASC Group also competes with other surface enhancement technologies such as welding and metal spray.

Customers

The ASC Group has a customer base of over 1,000 customers. However, approximately 10 customers, who operate in a variety of industries, accounted for approximately 34% of the Group’s fiscal 2007 net sales. During fiscal 2007, the ASC Group had one customer, Halliburton Company, which accounted for 13% of the ASC Group’s net sales. No material part of the ASC Group’s business is seasonal.

Backlog of Orders

Due to the nature of its business (i.e. shorter lead times for its products and services) the ASC Group had no material backlog at September 30, 2007 and 2006.

4. General

For financial information concerning the Company’s reportable segments see Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 and Note 11 of Notes to Consolidated Financial Statements included in Item 8.

C.

Environmental Regulations

In common with other companies engaged in similar businesses, the Company is required to comply with various laws and regulations relating to the protection of the environment. The costs of such compliance have not had, and are not presently expected to have, a material effect on the capital expenditures, earnings or competitive position of the Company and its subsidiaries under existing regulations and interpretations.

D.

Employees

The number of the Company’s employees decreased from approximately 390 at the beginning of fiscal year 2007 to approximately 338 employees at the end of fiscal 2007. The decrease was principally a result of the Company’s disposition of its industrial turbine engine component repair business, which employed approximately 100 people, which decrease was partially offset by additional employees hired to support the growth in the Company’s three businesses. The Company is a party to collective bargaining agreements with certain employees located at its Cleveland, Ohio and Minneapolis, Minnesota facilities. The ACM Group union contract expires in May 2010 (effective since May 2005) and the Turbine Component Repair Group union contract expires July 2009 (effective since July 2005). Management considers its relations with the Company’s employees to be good.

E.

Non-U.S. Operations

The Company’s products and services are distributed and performed in U.S. as well as non-U.S. markets. The Company commenced its operations in Ireland in 1981 and ceased such operations in fiscal 2007. The Company commenced its operations in the United Kingdom and France as a result of an acquisition of a business in 1992. The Company commenced its operations in Sweden as a result of an acquisition of a business in 2006. Wholly-owned subsidiaries operate the Company’s service and distribution facilities in United Kingdom, France and Sweden.

Financial information about the Company’s U.S. and non-U.S. operations is set forth in Note 11 to the Consolidated Financial Statements included in Item 8.

As of September 30, 2007, the majority of the Company’s cash and cash equivalents are in the possession of its non-U.S. subsidiaries and relate to undistributed earnings of these non-U.S. subsidiaries. Distributions from the Company’s non-U.S. subsidiaries to the Company may be subject to statutory restrictions, adverse tax consequences or other limitations.

Item 2. Properties

The Company’s property, plant and equipment include the facilities described below and a substantial quantity of machinery and equipment, most of which consists of industry specific machinery and equipment using special jigs, tools and fixtures and in many instances having automatic control features and special adaptations. In general, the Company’s property, plant and equipment are in good operating condition, are well maintained and substantially all of its facilities are in regular use. The Company considers its investment in property, plant and equipment as of September 30, 2007 suitable and adequate given the current product offerings for the respective business segments’ operations in the current business environment. The square footage numbers set forth in the following paragraphs are approximations:

	•		The Turbine Component Services and Repair Group operates a single facility in Minneapolis, Minnesota with a total of 59,000 square feet and that is involved in the repair and remanufacture of small aerospace turbine engine components. In addition, the Repair Group owns a building and land located in Cork, Ireland (59,000 square feet) that (i) is subject to a long-term lease arrangement with PAS Technologies Ireland, the acquirer of the Repair Group’s industrial turbine engine component repair business in fiscal 2007, and (ii) is being marketed for sale as of September 30, 2007.
	•		The Aerospace Component Manufacturing Group operates in a single, owned 240,000 square foot facility located in Cleveland, Ohio. This facility is also the site of the Company’s corporate headquarters.
	•		The Applied Surface Concepts Group is headquartered in an owned 34,000 square foot facility in Cleveland, Ohio. The Group leases space aggregating approximately 54,000 square feet for sales offices and/or for its contract selective electrochemical finishing services in Norfolk, Virginia; Hartford, Connecticut; Houston, Texas; Paris, France; and Birmingham, England. The Group also operates in an owned 4,500 square foot facility in Rattvik, Sweden.

Item 3. Legal Proceedings

In the normal course of business, the Company may be involved in ordinary, routine legal actions. The Company cannot reasonably estimate future costs, if any, related to these matters but does not believe any such matters are material to its financial condition or results of operations. The Company maintains various liability insurance coverages to protect its assets from losses arising out of or involving activities associated with ongoing and normal business operations; however, it is possible that the Company’s future operating results could be affected by future cost of litigation.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the Company’s 2007 fiscal year.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s Common Shares are traded on the American Stock Exchange under the symbol “SIF”. The following table sets forth, for the periods indicated, the high and low sales price for the Company’s Common Shares as reported by the American Stock Exchange.

		Years Ended September 30,
		2007								2006
		High				Low				High				Low
First Quarter		$	7.30			$	4.15			$	4.00			$	2.95
Second Quarter			10.91				4.51				5.25				3.74
Third Quarter			21.29				8.61				5.16				4.20
Fourth Quarter			25.50				13.50				4.75				3.80

Performance Graph

     Set forth below is a graph comparing the returns to shareholders of the Company’s Common Shares to the returns to shareholders of the S&P Composite — 500 Stock Index and the S&P Aerospace/Defense Group. The graph assumes (i) that the value of the investment in the Common Shares, the S&P Composite — 500 Stock Index and the S&P Aerospace/Defense Group was $100 on September 30, 2002 and (ii) the reinvestment of dividends.

COMPARISON OF FIVE-YEAR RETURN PERFORMANCE OF
SIFCO INDUSTRIES, INC., S&P 500 INDEX
AND S&P AEROSPACE/DEFENSE GROUP

Dividends and Shares Outstanding

The Company has not declared or paid any cash dividends within the last two (2) fiscal years and does not anticipate paying any such dividends in the foreseeable future. The Company currently intends to retain all of its earnings for the operation of its businesses. The Company’s ability to declare or pay cash dividends is limited by its credit agreement covenants. At October 31, 2007, there were approximately 660 shareholders of record of the Company’s Common Shares, as reported by National City Corporation, the Company’s Transfer Agent and Registrar, which maintains it corporate offices at National City Center, 1900 East Ninth Street, Cleveland, Ohio 44101-0756.

Item 6. Selected Financial Data

The following table sets forth selected consolidated financial data of the Company. The data presented below should be read in conjunction with the audited Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8.

		Years Ended September 30,
		2007				2006				2005				2004				2003
		(Amounts in thousands, except per share data)
Statement of Operations Data
Net sales		$	87,255			$	68,606			$	52,863			$	53,798			$	52,634
Income (loss) from continuing operations before income tax provision			10,255				(35	)			(2,424	)			(3,298	)			(3,000	)
Income tax provision			1,483				14				541				75				19
Income (loss) from continuing operations			8,772				(49	)			(2,965	)			(3,373	)			(3,019	)
Income (loss) from continuing operations per share (basic)			1.67				(0.01	)			(0.57	)			(0.65	)			(0.58	)
Income (loss) from continuing operations per share (diluted)			1.66				(0.01	)			(0.57	)			(0.65	)			(0.58	)
Income (loss) from discontinued operations, net of tax			(2,044	)			1,009				2,769				(2,573	)			(2,328	)
Net income (loss)			6,728				960				(196	)			(5,946	)			(5,347	)
Net income (loss) per share (basic)			1.28				0.18				(0.04	)			(1.14	)			(1.02	)
Net income (loss) per share (diluted)			1.27				0.18				(0.04	)			(1.14	)			(1.02	)
Cash dividends per share			—				—				—				—				—
Shares Outstanding at Year End			5,281				5,222				5,222				5,214				5,226
Balance Sheet Data
Working capital		$	32,350			$	15,011			$	9,619			$	16,029			$	14,669
Property, plant and equipment, net			10,570				14,059				18,744				19,882				25,699
Total assets			60,889				48,775				49,523				59,759				61,678
Long-term debt, net of current maturities			2,986				427				10				5,797				7,258
Other long-term liabilities			5,613				5,939				8,645				8,108				7,951
Total shareholders’ equity			36,778				25,183				22,398				24,802				30,281
Shareholders’ equity per share			6.96				4.82				4.29				4.76				5.79
Financial Ratios
Return on beginning shareholders’ equity			26.7	%			4.3	%			(0.8	)%			(19.6	)%			(14.2	)%
Long-term debt to equity percent			8.1	%			1.7	%			—				23.4	%			24.0	%
Current ratio			3.1				1.9				1.5				1.8				1.9

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, may contain various forward-looking statements and includes assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides this cautionary statement identifying important economic, political and technological factors, among others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (1) future business environment, including capital and consumer spending; (2) competitive factors, including the ability to replace business which may be lost due to increased direct involvement by the turbine engine manufacturers in turbine component service and repair markets; (3) successful procurement of certain repair materials and new repair process licenses from turbine engine manufacturers and/or the Federal Aviation Administration; (4) metals and commodities price increases and the Company’s ability to recover such price increases; (5) successful development and market introductions of new products, including the continued development of turbine repair processes; (6) regressive pricing pressures on the Company’s products and services, with productivity improvements as the primary means to maintain margins; (7) success with the further development of strategic alliances with certain turbine engine manufacturers for turbine component repair services; (8) the impact on business conditions, and on the aerospace industry in particular, of the global terrorism threat; (9) continued reliance on consumer acceptance of regional and business aircraft powered by more fuel efficient turboprop engines vs. regional and business aircraft powered by turbofan engines; (10) continued reliance on several major customers

for revenues; (11) the Company’s ability to continue to have access to its revolving credit facility and to comply with the terms of its credit agreement, including financial covenants, (12) the impact of changes in defined benefit pension plan actuarial assumptions on future contributions; and (13) stable governments, business conditions, laws, regulations and taxes in economies where business is conducted.

The Company and its subsidiaries engage in the production and sale of a variety of metalworking processes, services and products produced primarily to the specific design requirements of its customers. The processes and services include forging, heat-treating, coating, welding, machining and selective electrochemical finishing. The products include forgings, machined forged parts and other machined metal parts, remanufactured component parts for turbine engines, and selective electrochemical finishing solutions and equipment. The Company’s operations are conducted in three business segments: (1) Aerospace Component Manufacturing Group, (2) Turbine Component Services and Repair Group, and (3) Applied Surface Concepts Group. The Company endeavors to plan and evaluate its businesses’ operations while taking into consideration certain factors including the following — (i) the projected build rate for commercial, business and military aircraft as well as the engines that power such aircraft, (ii) the projected maintenance, repair and overhaul schedules for commercial, business and military aircraft as well as the engines that power such aircraft, and (iii) anticipated exploration and production activities relative to oil and gas products, etc.

A. Results of Operations

1. Fiscal Year 2007 Compared with Fiscal Year 2006

In fiscal 2007, the Company and its Irish subsidiary, SIFCO Turbine Components Limited (“SIFCO Turbine”), which is a part of the Company’s Turbine Component Services and Repair Group, completed the sale of its industrial turbine engine component repair business and certain related assets (“Industrial Repair Business”). In addition, in fiscal 2006, the Company and SIFCO Turbine completed the sale of its large aerospace turbine engine component repair business and certain related assets (“Large Aero Business”). The combined results of the Company’s Industrial Repair and Large Aero Businesses are reported as discontinued operations in the accompanying Consolidated Statements of Operations.

Net sales from continuing operations in fiscal 2007 increased 27.2% to $87.3 million, compared with $68.6 million in fiscal 2006. Income from continuing operations in fiscal 2007 was income of $8.8 million, compared with a loss of $0.1 million in fiscal 2006. Income from discontinued operations, net of tax, which includes both the Industrial Repair and Large Aero Businesses, was a loss of $2.0 million in fiscal 2007, compared to income of $1.0 million in fiscal 2006. Included in the $2.0 million loss from discontinued operations in fiscal 2007 was (i) $2.1 million of grant income related to the expiration of certain grants, as explained more fully in Note 4 to the Consolidated Financial Statements in Item 8 and (ii) a loss of approximately $0.8 million from the divestiture of the Industrial Repair Business, as explained more fully in Note 9 to the Consolidated Financial Statements in Item 8. Included in the $1.0 million of income from discontinued operations in fiscal 2006 was a gain of approximately $4.4 million from the divestiture of the Large Aero Business, as explained more fully in Note 9 to the Consolidated Financial Statements in Item 8.

Net income in fiscal 2007 was $6.7 million, compared with $1.0 million in fiscal 2006.

Aerospace Component Manufacturing Group (“ACM Group”)

Net sales in fiscal 2007 increased 36.5% to $60.0 million, compared with $43.9 million in fiscal 2006. The significant increase in the ACM Group’s net sales in fiscal 2007 was due to a combination of (i) an increase in volumes resulting from the general strength of demand in the markets which the Company serves and (ii) an increase in product prices principally reflecting the pass-through to customers of the increase in raw material prices incurred by the Company. For purposes of the following discussion, the ACM Group considers aircraft that can accommodate less than 100 passengers to be small aircraft and those that can accommodate 100 or more passengers to be large aircraft. Net sales of airframe components for small aircraft increased $7.2 million to $30.6 million in fiscal 2007, compared with $23.4 million in fiscal 2006. Net sales of turbine engine components for small aircraft, which consist primarily of net sales of turbine engine components for business and regional jets, as well as military transport and surveillance aircraft, increased $6.5 million to $18.1 million in fiscal 2007, compared with $11.6 million in fiscal 2006. Net sales of airframe components for large aircraft increased $2.7 million to $7.1 million in fiscal 2007, compared with $4.4 million in fiscal 2006. Net sales of turbine engine components for large aircraft decreased $0.1 million to $1.7 million in fiscal 2007, compared with $1.8 million in fiscal 2006. Commercial product and non-product sales were $2.5 million and $2.7 million in fiscal 2007 and 2006, respectively.

Included in net sales in fiscal 2007 was $0.7 million related principally to certain product pricing adjustments that were agreed to and recorded in the fourth quarter of fiscal 2007 and that related to customer shipments that occurred during the

prior two quarters of fiscal 2007. Such pricing adjustments resulted principally from the finalization, during the fourth quarter of fiscal 2007, of certain ACM Group customer negotiations that were initiated during the first half of fiscal 2007. Of the $0.7 million in fourth quarter pricing adjustments, $0.5 million related to net sales in the third quarter of fiscal 2007 and $0.1 million related to net sales in the second quarter of fiscal 2007.

The ACM Group’s airframe and turbine engine component products have both military and commercial applications. Net sales of airframe and turbine engine components that solely have military applications were $25.7 million in fiscal 2007, compared with $20.5 million in fiscal 2006. This increase is attributable in part to increased military spending due to ongoing wartime demand such as for additional military helicopters and related replacement components.

In fiscal 2007, The ACM Group’s total material cost of goods sold as a percentage of net product sales decreased 1.3% compared with fiscal 2006. Availability of certain aerospace grade materials improved somewhat in fiscal 2007, compared with fiscal 2006, resulting in the beginning of the shortening of certain raw materials lead times.

During fiscal 2007, the ACM Group’s selling, general and administrative expense increased $0.5 million to $3.7 million, or 6.1% of net sales, compared with $3.2 million, or 7.3% of net sales, in fiscal 2006. The $0.5 million increase in fiscal 2007 was principally due to increases in the ACM Group’s compensation expense, including incentive compensation, and variable selling costs resulting from (i) the hiring of certain additional personnel to support the growth in the ACM Group’s business and (ii) the overall significant increase in net sales and operating income during fiscal 2007 compared with fiscal 2006.

The ACM Group’s operating income in fiscal 2007 was $10.3 million, compared with $1.7 million in fiscal 2006. Operating results improved significantly in fiscal 2007 compared with fiscal 2006 due primarily to the positive impact on margins resulting from significantly higher production and net sales volumes in fiscal 2007. The improved margins are due principally to (i) operating efficiencies and the related absorption of the ACM Group’s relatively high fixed operating costs over more units of production and sales in fiscal 2007, (ii) improvements in product pricing and (iii) a $1.2 million reduction in the LIFO provision in fiscal 2007 compared with fiscal 2006.

Turbine Component Services and Repair Group (“Repair Group”)

Net sales from continuing operations in fiscal 2007, which consist principally of component repair services (including precision component machining and industrial coating) for small aerospace turbine engines, increased 4.9% to $12.9 million, compared with $12.3 million in fiscal 2006.

During fiscal 2007, the Repair Group’s selling, general and administrative expenses from continuing operations decreased $0.2 million to $1.4 million or 10.5% of net sales, compared with $1.6 million, or 12.7% of net sales, in fiscal 2006. Included in the $1.6 million of selling, general and administrative expenses in fiscal 2006 were $0.1 million of severance and related charges.

The Repair Group’s operating income from continuing operations in fiscal 2007 was $0.7 million, compared with $0.2 million in fiscal 2006. The improvement in operating income is principally attributable to (i) the aforementioned reduction in selling, general and administrative expenses, (ii) the relative product sales mix — with a larger portion of sales being higher margin product with a lower raw material/higher value-added content and (iii) the consumption of lower cost and/or previously written down inventory.

Applied Surface Concepts Group (“ASC Group”)

Net sales of the ASC Group increased 16.2% to $14.3 million in fiscal 2007, compared with net sales of $12.3 million in fiscal 2006. In fiscal 2007, product net sales, consisting of selective electrochemical finishing equipment and solutions, increased 11.4% to $7.1 million, compared with $6.3 million in fiscal 2006. In fiscal 2007, customized selective electrochemical finishing contract service net sales increased 21.5% to $7.1 million, compared with $5.8 million in fiscal 2006.

During fiscal 2007, The ASC Group’s selling, general and administrative expenses decreased $0.3 million to $4.4 million, or 31.0% of net sales, compared with $4.7 million, or 38.4% of net sales, in fiscal 2006. The principal reason for the $0.3 million decrease in selling, general and administrative expenses in fiscal 2007 as compared to fiscal 2006 was the reduction in headcount and related expenses, which was partially offset by $0.1 million of severance and related charges incurred in fiscal 2007.

The ASC Group’s operating income in fiscal 2007 was $1.0 million, compared with an operating loss of $0.6 million in fiscal 2006. Operating results improved principally due to (i) the positive impact on margins of the significantly higher net sales volumes in fiscal 2007, while maintaining a relatively fixed cost structure, compared with fiscal 2006 and (ii) the aforementioned $0.3 million reduction in selling, general and administrative expenses.

Corporate Unallocated Expenses

Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate expenses, were $1.7 million in fiscal 2007 compared $1.6 million in fiscal 2006. During fiscal 2007, a $0.3 million reduction in compensation expense due principally to a management restructuring (after the sale of the Large Aero Business of the Repair Group’s business that occurred in fiscal 2006) was offset by a $0.4 million increase in incentive expense related to payments earned as a result of (i) the successful completion of certain strategic initiatives and (ii) the Company’s significantly improved operating results in fiscal 2007. Legal and professional expenses related to the sale of the Company’s Industrial Repair Business that were charged to corporate unallocated expenses in the first two quarters of fiscal 2007 were reclassified in the third quarter of fiscal 2007 to loss on sale of business, which is included in income (loss) from discontinued operations, net of tax.

Other/General

Interest expense from continuing operations was $0.2 million in fiscal 2007, compared with a nominal amount in fiscal 2006. The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s credit agreements in fiscal years 2007 and 2006.

		Weighted Average								Weighted Average
		Interest Rate								Outstanding Balance
		Year Ended September 30,								Year Ended September 30,
Credit Agreement		2007				2006				2007				2006
Revolving credit agreement			8.8	%			8.4	%		$1.4 million				$0.7 million
Debt purchase agreement (1)			N/A				4.6	%			N/A			$0.7 million

During fiscal 2007, in addition to recognizing at statutory rates the utilization of $3.6 million of the Company’s available U.S. net operating loss carry forwards, the Company (i) provided $1.8 million of U.S. deferred income taxes on the undistributed earnings of its non-U.S. subsidiaries that are available for distribution as of September 30, 2007; (ii) reversed a substantial portion of the valuation allowance previously established against its net deferred tax assets and, accordingly, recognized a U.S. deferred income tax benefit of approximately $3.0 million, as explained more fully in Note 6 to the Consolidated Financial Statements in Item 8; and (iii) recognized the benefit of the excess tax basis of the Company’s property, plant and equipment of $0.7 million. The Company’s total non-U.S. income tax provision was $0.1 million.

2. Fiscal Year 2006 Compared With Fiscal Year 2005

In fiscal 2006, the Company and SIFCO Turbine completed the sale of its Large Aero Business. The combined results of SIFCO’s Industrial Repair and Large Aero Businesses are reported in discontinued operations in the accompanying Consolidated Statements of Operations in Item 8.

Net sales from continuing operations in fiscal 2006 increased 29.8% to $68.6 million, compared with $52.9 million in fiscal 2005. The loss from continuing operations in fiscal 2006 was $0.1 million, compared with $3.0 million in fiscal 2005. Income from discontinued operations, net of tax, which includes both the Industrial Repair and Large Aero Businesses, was $1.0 million in fiscal 2006 compared with $2.8 million in fiscal 2005. Included in the $1.0 million of income from discontinued operations in fiscal 2006, was a gain of approximately $4.4 million from the divestiture of the Large Aero Business as explained more fully in Note 9 to the Consolidated Financial Statements in Item 8. Included in the $2.8 million of income from discontinued operations in fiscal 2005 was a gain of approximately $6.2 million from the sale of certain non-operating assets of the Repair Group’s Ireland operations. Net income in fiscal 2006 was $1.0 million, compared with a net loss of $0.2 million in fiscal 2005.

Aerospace Component Manufacturing Group

Net sales in fiscal 2006 increased 41.8% to $43.9 million, compared with $31.0 million in fiscal 2005. For purposes of the following discussion, the ACM Group considers aircraft that can accommodate less than 100 passengers to be small aircraft and those that can accommodate 100 or more passengers to be large aircraft. Net sales of airframe components for small aircraft increased $8.5 million to $23.4 million in fiscal 2006, compared with $14.9 million in fiscal 2005. Net sales of turbine engine components for small aircraft, which consist primarily of business aircraft and regional commercial jets, as well as military transport and surveillance aircraft, increased $1.1 million to $11.6 million in fiscal 2006, compared with $10.5 million in fiscal 2005. Net sales of airframe components for large aircraft increased $1.9 million to $4.4 million in fiscal 2006, compared with $2.5 million in fiscal 2005. Net sales of turbine engine components for large aircraft increased $0.9 million to $1.8 million in fiscal 2006, compared with $0.9 million in fiscal 2005. The increase in the ACM Group’s net sales volumes during fiscal 2006 is in part attributable to an increase in the ACM Group’s selling prices due to increases in raw material prices in the market place, some of which were passed through to the ACM Group’s customers. The commercial aerospace industry continues to experience strong demand, most notably for mid-size single-aisle aircraft as well as for regional aircraft. Other product and non-product sales were $2.7 million and $2.2 million in fiscal 2006 and 2005, respectively.

The ACM Group’s airframe and turbine engine component products have both military and commercial applications. Net sales of airframe and turbine engine components that solely have military applications were $20.5 million and $13.1 million in fiscal 2006 and 2005, respectively. This increase is attributable in part to increased military spending due to ongoing wartime demand such as for additional military helicopters.

In fiscal 2006, the ACM Group’s total material cost of goods sold as a percentage of net product sales increased 6.2%, compared with fiscal 2005. Overall steel capacity was tight during fiscal 2006, especially for aerospace grade materials. Titanium pricing is impacted by limited world-wide supply of titanium. These factors, coupled with increased steel demand, have resulted in higher raw material prices. While all grades of raw material experienced cost increases during fiscal 2006, aerospace alloy and titanium grades experienced the most significant increases.

Selling, general and administrative expenses in fiscal 2006 were $3.2 million, or 7.3% of net sales, compared with $2.3 million, or 7.5% of net sales, in fiscal 2005. The $0.9 million increase in selling, general and administrative expenses in fiscal 2006 was principally due to increases in the ACM Group’s compensation, including incentive compensation; provision for bad debts; consulting services; and variable selling costs. The increases in compensation ($0.2 million) and variable selling ($0.3 million) expenses were principally due to the significant increase in net sales and operating income during fiscal 2006, compared with fiscal 2005.

The ACM Group’s operating income in fiscal 2006 was $1.7 million, compared with operating income of $0.2 million in fiscal 2005. Operating results were positively impacted in fiscal 2006 compared with fiscal 2005 due to the positive impact on margins resulting from significantly higher sales volumes, partially offset by a $2.1 million increase in the LIFO provision, which increase was due principally to the increased cost of raw material steel being experienced within the ACM Group’s industry as well as increases in certain other components of its manufacturing costs. The ACM Group’s business is heavy manufacturing in nature and consequently bears large fixed operating costs. Therefore, improvements in sales volume generally result in positive impacts on operating margins as such fixed costs are spread over more units of production, as was experienced during fiscal 2006. Operating income in fiscal 2006 included $0.2 million of profit on sale of excess raw material inventory, compared with $0.4 million in fiscal 2005. Operating income in fiscal 2006 was negatively impacted by a $0.4 million increase in expenditures for the purchase of new tooling and repairs to existing tooling. Revenue associated with sales of components manufactured with new tooling generally will be realized in future periods when such component products are shipped.

Turbine Component Services and Repair Group

Net sales from continuing operations in fiscal 2006, which consist principally of component repair services (including precision component machining and industrial coating) for small aerospace turbine engines, increased 22.5% to $12.3 million, compared with $10.1 million in fiscal 2005.

During fiscal 2006, the Repair Group’s selling, general and administrative expenses from continuing operations increased $0.3 million to $1.6 million, or 12.7% of net sales, from $1.3 million, or 13.0% of net sales, in fiscal 2005. Included in both the $1.6 million and $1.3 million of selling, general and administrative expenses in fiscal 2006 and 2005, respectively, were $0.1 million of severance and related charges. The remaining selling, general and administrative expenses from continuing operations in fiscal 2006 and 2005 were $1.5 million, or 11.8% of net sales, and $1.2 million, or 12.3% of net sales, respectively.

The Repair Group’s operating income from continuing operations in fiscal 2006 was $0.2 million, compared with an operating loss of $1.7 million in fiscal 2005. The improvement in operating income is principally attributable to the positive impact on margins of the significantly higher net sales volumes in fiscal 2006, while maintaining a relatively fixed cost structure, compared with fiscal 2005.

Applied Surface Concepts Group

Net sales of the ASC Group increased 4.5% to $12.3 million in fiscal 2006, compared with net sales of $11.8 million in fiscal 2005. In fiscal 2006, product net sales, consisting of selective electrochemical finishing equipment and solutions, increased 5.1% to $6.3 million, compared with $6.0 million in fiscal 2005. In fiscal 2006, customized selective electrochemical finishing contract service net sales increased 5.4% to $5.8 million, compared with $5.5 million in fiscal 2005. The increase in net sales in 2006 is principally attributable to (i) an increase in sales to the oil and gas industry, which remained strong in both the exploration and production sectors and (ii) $0.9 million of net sales generated by the ASC Group’s Swedish operation that was acquired during the first quarter of fiscal 2006.

The ASC Group’s selling, general and administrative expenses in fiscal 2006 were $4.7 million, or 38.4% of net sales, compared with $4.4 million, or 37.4% of net sales, in fiscal 2005. The $0.3 million increase in selling, general and administrative expenses in fiscal 2006 is attributable to an increase in compensation and related benefit expenses due principally to certain positions being filled in fiscal 2006, which were open in fiscal 2005, in anticipation of higher sales volumes in fiscal 2006 that did not materialize.

The ASC Group’s operating loss was $0.6 million in fiscal 2006 compared with operating income of $0.8 million in fiscal 2005 due in part to the above noted items. In addition, operating results were negatively impacted by (i) a shift, during the fiscal 2006, in sales mix to fewer large volume contract service jobs resulting in a decline in operating efficiencies generally associated with such jobs, (ii) expenses related to the costs of relocating two of the Group’s facilities as well as the cost of operating inefficiencies experienced during the relocations, and (iii) higher precious metal raw material costs, which could not be immediately passed on to customers.

Corporate Unallocated Expenses

Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate expenses, were $1.6 million in both fiscal 2006 and 2005. Included in the $1.6 million of corporate unallocated expenses in fiscal 2006 were $0.3 million of incentive expenses. Included in the $1.6 million of corporate unallocated expenses in fiscal 2005 were $0.3 million of severance and related employee benefit expenses incurred as a result of a reorganization of personnel. The remaining corporate unallocated expenses in both fiscal 2006 and 2005 were $1.3 million.

Other/General

Interest expense from continuing operations was a nominal amount in fiscal 2006 compared with $0.2 million in fiscal 2005. The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s credit agreements in fiscal years 2006 and 2005.

		Weighted Average								Weighted Average
		Interest Rate								Outstanding Balance
		Year Ended September 30,								Year Ended September 30,
Credit Agreement		2006				2005				2006				2005
Industrial development variable rate demand revenue bond (1)			N/A				1.8	%			N/A			$0.6 million
Term note (1)			N/A				7.7	%			N/A			$0.8 million
Revolving credit agreement			8.4	%			6.4	%		$0.7 million				$1.7 million
Debt purchase agreement (2)			4.6	%			3.6	%		$0.7 million						—

In fiscal 2006 and 2005, the income tax benefit related to the Company’s U.S. operating losses was offset by a valuation allowance based upon an assessment of the Company’s ability to realize such benefits. In assessing the Company’s ability to realize its deferred tax assets, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Future reversal of the valuation allowance will be achieved either when the tax benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future taxable income. A deferred tax asset of $0.6 million was recognized in fiscal 2004 and was attributable to the gain on the completion of the disposal of a building and land in fiscal 2005 that was part of the Repair Group’s Irish operations, and that was recognized for Irish income tax purposes in fiscal 2004 but was recognized for financial reporting purposes in fiscal 2005 in conformity with accounting principles generally accepted in the United States of America. The Company also recorded a U.S. income tax provision in fiscal 2005 under the American Jobs Creation Act of 2004 for a dividend it received from its non-U.S. subsidiaries.

B. Liquidity and Capital Resources

Cash and cash equivalents increased to $5.5 million at September 30, 2007 from $4.7 million at September 30, 2006. At present, essentially all of the Company’s cash and cash equivalents are in the possession of its non-U.S. subsidiaries. Distributions from the Company’s non-U.S. subsidiaries to the Company may be subject to statutory restriction, adverse tax consequences or other limitations.

The Company’s operating activities consumed $4.4 million of cash (of which $1.1 million was from continuing operations) in fiscal 2007, compared with $1.9 million of cash consumed by operating activities (of which $0.6 million was used by continuing operations) in fiscal 2006. The $1.1 million of cash used for operating activities from continuing operations in fiscal 2007 was primarily due to (i) $11.4 million of income from continuing operations before depreciation expense and a deferred tax benefit; offset by (ii) a $3.5 million increase in accounts receivable and a $9.2 million increase in inventory, principally attributable to the ACM Group’s response to the increased demand in its business. The other changes in these components of working capital were due to factors resulting from normal business conditions of the Company, including (i) sales levels, (ii) collections from customers, and (iii) the relative timing of payments to suppliers.

Capital expenditures were $1.4 million (of which $0.9 million was from continuing operations) in fiscal 2007 compared to $1.3 million (of which $1.1 million was from continuing operations) in fiscal 2006. Fiscal 2007 capital expenditures from continuing operations consist of $0.5 million by the ACM Group, $0.3 million by the ASC Group and $0.1 million by the Repair Group. The Company anticipates that capital expenditures will be within the range of $3.0 to $4.0 million in fiscal 2008 to support the projected growth in the Company’s businesses.

In fiscal 2007, the Repair Group completed the sale of its Industrial Repair Business and certain related assets. This sale generated net cash proceeds of approximately $4.4 million during fiscal 2007.

At September 30, 2007, the Company has a $6.0 million revolving credit agreement with a bank, subject to sufficiency of collateral, which expires on October 1, 2008 and bears interest at the bank’s base rate plus 0.50%. The interest rate was 8.25% at September 30, 2007. A 0.375% commitment fee is incurred on the unused balance of the revolving credit agreement. At September 30, 2007, $2.6 million was outstanding and the Company had $3.4 million available under its $6.0 million revolving credit agreement. The Company’s revolving credit agreement is secured by substantially all of the Company’s assets located in the United States of America and a guarantee by its U.S. subsidiaries.

Under its revolving credit agreement with the bank, the Company is subject to certain customary covenants. These include, without limitation, covenants (as defined) that require maintenance of certain specified financial ratios, including a minimum tangible net worth level and a minimum EBITDA level. The Company was in compliance with all applicable covenants at September 30, 2007.

The Company believes that cash flows from its operations together with existing cash reserves and the funds available under its revolving credit agreement will be sufficient to meet its working capital and capital expenditure requirements through the end of fiscal year 2008.

C. Off-Balance Sheet Arrangements

The Company does not have any obligations that meet the definition of an off-balance sheet arrangement and that have, or are reasonably likely to have, a material effect on the Company’s financial condition or results of operations.

D. Other Contractual Obligations

The following table summarizes the Company’s outstanding contractual obligations and other commercial commitments at September 30, 2007 and the effect such obligations are expected to have on liquidity and cash flow in future periods.

		Payments Due by Period
		(Amounts in thousands)
						Less than				>1 up to				>3 up to				More than
Other Contractual Obligations		Total				1 year				3 years				5 years				5 years
Debt obligations		$	10			$	1			$	2			$	2			$	5
Capital lease obligations			538				140				253				145				—
Operating lease obligations			1,541				457				771				313				—
Total		$	2,089			$	598			$	1,026			$	460			$	5

Excluded from the foregoing Other Contractual Obligations table are open purchase orders at September 30, 2007 for raw materials and supplies required in the normal course of business. Included in other long-term liabilities in the Company’s balance sheet as of September 30, 2007 is $1.0 million of liabilities related to the Company’s defined benefit pension plans and approximately $1.2 million of net deferred tax liabilities. The Company is expected to fund $1.4 million of pension obligations in fiscal 2008.

E. Outlook

The Company’s Repair and ACM Groups’ businesses continue to be heavily dependent upon the strength of the commercial airlines as well as aircraft and related engine manufacturers. Consequently, the performance of the domestic and international air transport industry directly and significantly impacts the performance of the Repair and ACM Groups’ businesses.

The financial condition of many airlines in the U.S. and throughout the world, while showing improvement, continues to be weak. The U.S. airline industry has received U.S. government assistance, while some airlines have entered and/or proceeded through the bankruptcy reorganization process, and others continue to pursue major restructuring initiatives, which appear to have had a positive impact on operating results in recent periods. Modest improvements in the commercial airlines and increased demand in the aircraft and related engine industries have been complemented by increases in U.S. military spending for aircraft and related components. The air transport industry’s long-term outlook has been one of continued, steady growth. Such outlook suggests the need for additional aircraft and, therefore, growth in the requirement for airframe and engine components as well as aerospace turbine engine repairs. The air transport industry is currently benefiting from several favorable trends including: (i) projected growth in air traffic, (ii) the beginning of major replacement and refurbishment cycles driven by the desire for more fuel efficient aircraft and fleet commonality, and (iii) the increased use of wide-body aircraft. Management’s current outlook for the air transport industry continues to remain favorable, with expected growth through at least 2011.

It is difficult to determine the potential long-term impact that the aforementioned factors may have on air travel and the demand for the products and services provided by the Company. Lack of continued improvement could result in credit risk associated with serving the financially troubled airlines and/or their suppliers. All of these consequences, to the extent that they may occur, could negatively impact the Company’s net sales, operating profits and cash flows. However, in light of the current business environment, the Company believes that cash on-hand, funds available under its revolving credit agreement, and anticipated funds generated from operations will be adequate to meet its liquidity needs through the foreseeable future.

F. Critical Accounting Policies and Estimates

Allowances for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of certain customers to make required payments. The Company evaluates the adequacy of its allowances for doubtful accounts each quarter based on the customers’ credit-worthiness, current economic trends or market conditions, past collection history, aging of outstanding accounts receivable and specific identified risks. As these factors change, the Company’s allowances for doubtful accounts may change in subsequent periods. Historically, losses have been within management’s expectations and have not been significant.

Inventories

The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete and excess inventory each quarter. Each business segment maintains formal policies, which require at a minimum that reserves be established based on an analysis of the age of the inventory on a product-by-product basis. In addition, if the Company learns of specific obsolescence, other than that identified by the aging criteria, an additional reserve will be recognized as well. Specific obsolescence may arise due to a technological or market change, or based on cancellation of an order. Management’s judgment is necessary in determining the realizable value of these products to arrive at the proper allowance for obsolete and excess inventory.

Impairment of Long-Lived Assets

The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, at least annually or when events and circumstances warrant such a review. This review is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets. If the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, and if such excess carrying value is determined to be permanent, then the long-lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.

The Company has a significant amount of property, plant and equipment. The determination as to whether events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable involves judgment. The Company believes that its estimate of future undiscounted cash flows is a critical accounting estimate because (i) it requires the Company to make assumptions about future results and (ii) the recognition of an impairment charge could have a material impact on the Company’s financial position and results of operations.

In projecting future undiscounted cash flows, the Company relies on internal budgets and forecasts, and projected proceeds upon disposal of long-lived assets. The Company’s budgets and forecasts are based on historical results and anticipated future market conditions, such as the general business climate and the effectiveness of competition.

The Company believes that its estimates of future undiscounted cash flows and fair value are reasonable; however, changes in estimates of such undiscounted cash flows and fair value could change the Company’s estimates of fair value. Further, actual results can differ significantly from assumptions used by the Company in making its estimates. Future changes in the Company’s estimates could result in future impairment charges.

Valuation of deferred tax allowance

The Company accounts for deferred taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”, whereby the Company recognizes an income tax benefit related to its consolidated net losses and other temporary differences between financial reporting basis and tax reporting basis. At September 30, 2007, the Company’s net deferred tax liability before any valuation allowance was $0.7 million.

At September 30, 2006, the income tax benefit related to its consolidated net losses and other temporary differences between financial reporting basis and tax reporting basis was offset by a valuation allowance of $4.6 million based on an assessment of the Company’s ability to realize such benefits. In assessing the Company’s ability to realize its deferred tax assets, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. During fiscal 2007, the Company reversed a substantial majority of the valuation allowance based on the Company’s determination that, at this time, it is more likely than not that the benefit will be realized through future taxable income.

G. Impact of Newly Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurement”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of this statement is not expected to have a material impact on the Company’s financial position or results of its operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

In the ordinary course of business, the Company is subject to foreign currency and interest rate risk. The risks primarily relate to the sale of the Company’s products in transactions denominated in non-U.S. dollar currencies (the euro, pound sterling and the Swedish krona); the payment in local currency of wages and other costs related to the Company’s non-U.S. operations; and changes in interest rates on the Company’s long-term debt obligations. The Company does not hold or issue financial instruments for trading purposes.

The Company believes that inflation has not materially affected its results of operations in 2007, and does not expect inflation to be a significant factor in fiscal 2008.

A. Foreign Currency Risk

The U.S. dollar is the functional currency for all of the Company’s U.S. operations. For these operations, all gains and losses from completed currency transactions are included in income currently. For the Company’s non-U.S. subsidiaries, the functional currency is the local currency. Assets and liabilities are translated into U.S. dollars at the rate of exchange at the end of the period and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss.

Historically, the Company has been able to mitigate the impact of foreign currency risk by means of hedging such risk through the use of foreign currency exchange contracts, which typically expire within one year. However, such risk is mitigated only for the periods for which the Company has foreign currency exchange contracts in effect, and only to the extent of the U.S. dollar amounts of such contracts. At September 30, 2007, the Company had no forward exchange contracts outstanding. The Company will continue to evaluate its foreign currency risk, if any, and the effectiveness of using similar hedges in the future to mitigate such risk.

At September 30, 2007, the Company’s assets and liabilities denominated in the pound sterling, the euro and Swedish krona were as follows (amounts in thousands):

		Pound Sterling				Euro				Swedish Krona
Cash and cash equivalents			77				216				190
Accounts receivable			194				544				1,624
Accounts payable			34				505				109
Accrued liabilities			49				126				2,172

B. Interest Rate Risk

The Company’s primary interest rate risk exposure results from the variable interest rate mechanisms associated with the Company’s long-term debt consisting of a revolving credit agreement with a U.S. bank. If interest rates were to increase or decrease 100 basis points (1%) from the September 30, 2007 rate, and assuming no change in the amount outstanding under the revolving credit agreement, annual interest expense to the Company would be nominally impacted. The Company’s sensitivity analyses of the effects of changes in interest rates do not consider the impact of a potential change in the level of variable rate borrowings or derivative instruments outstanding that could take place if these hypothetical conditions prevail.

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of SIFCO Industries, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of SIFCO Industries, Inc. (an Ohio Corporation) and Subsidiaries as of September 30, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SIFCO Industries, Inc. and Subsidiaries as of September 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2007 in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

As discussed in Note 1 to the consolidated financial statements, the Company has adopted Financial Accounting Standards Board Statement No. 158, “Employers’ Accounting for Defined Benefit and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” in 2007.

/s/ GRANT THORNTON LLP

Cleveland, Ohio
December 4, 2007.

SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)

		Years Ended September 30,
		2007				2006				2005
Net sales		$	87,255			$	68,606			$	52,863
Operating expenses:
Cost of goods sold			65,835				57,662				45,593
Selling, general and administrative expenses			11,173				11,106				9,697
Loss (Gain) on disposal of operating assets			(137	)			89				83
Total operating expenses			76,871				68,857				55,373
Operating income (loss)			10,384				(251	)			(2,510	)
Interest income			(4	)			(52	)			(12	)
Interest expense			167				77				184
Foreign currency exchange loss (gain), net			(20	)			6				(12	)
Other income, net			(14	)			(247	)			(246	)
Income (loss) from continuing operations before income tax provision			10,255				(35	)			(2,424	)
Income tax provision			1,483				14				541
Income (loss) from continuing operations			8,772				(49	)			(2,965	)
Income (loss) from discontinued operations, net of tax			(2,044	)			1,009				2,769
Net income (loss)		$	6,728			$	960			$	(196	)
Income (loss) per share from continuing operations
Basic		$	1.67			$	(0.01	)		$	(0.57	)
Diluted		$	1.66			$	(0.01	)		$	(0.57	)
Income (loss) per share from discontinued operations, net of tax
Basic		$	(0.39	)		$	0.19			$	0.53
Diluted		$	(0.39	)		$	0.19			$	0.53
Net income (loss) per share
Basic		$	1.28			$	0.18			$	(0.04	)
Diluted		$	1.27			$	0.18			$	(0.04	)
Weighted-average number of common shares (basic)			5,246				5,222				5,224
Weighted-average number of common shares (diluted)			5,286				5,227				5,228

See notes to consolidated financial statements.

SIFCO Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except per share data)

		September 30,
		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	5,510			$	4,744
Receivables, net			19,473				18,652
Inventories			16,897				8,052
Deferred income taxes			2,423				—
Refundable income taxes			—				188
Prepaid expenses and other current assets			370				601
Assets held for sale			3,189				—
Total current assets			47,862				32,237
Property, plant and equipment:
Land			580				577
Buildings			9,727				11,671
Machinery and equipment			33,234				43,636
			43,541				55,884
Accumulated depreciation			32,971				41,825
Property, plant and equipment, net			10,570				14,059
Other assets			2,457				2,479
Total assets		$	60,889			$	48,775
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	87			$	52
Accounts payable			9,735				10,454
Accrued liabilities			5,690				6,720
Total current liabilities			15,512				17,226
Long-term debt, net of current maturities			2,986				427
Deferred income taxes			3,655				101
Other long-term liabilities			1,958				5,838
Shareholders’ equity:
Serial preferred shares, no par value, authorized 1,000 shares			—				—
Common shares, par value $1 per share, authorized 10,000 shares; issued and outstanding 5,281 shares in 2007 and 5,222 shares in 2006			5,281				5,222
Additional paid-in capital			6,352				6,323
Retained earnings			29,828				23,100
Accumulated other comprehensive loss			(4,683	)			(9,462	)
Total shareholders’ equity			36,778				25,183
Total liabilities and shareholders’ equity		$	60,889			$	48,775

See notes to consolidated financial statements.

SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)

		Years Ended September 30,
		2007				2006				2005
Cash flows from operating activities:
Net income (loss)		$	6,728			$	960			$	(196	)
Loss (income) from discontinued operations, net of tax			2,044				(1,009	)			(2,769	)
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization			1,447				1,407				1,370
Gain on disposal of property, plant and equipment			(141	)			(1,061	)			(29	)
Deferred income taxes			1,208				34				—
Share transactions under employee stock plan			88				139				73
Asset impairment charges			—				289				—
Changes in operating assets and liabilities:
Receivables			(3,512	)			(2,946	)			(2,177	)
Inventories			(9,197	)			(279	)			(1,506	)
Refundable income taxes			8				—				—
Prepaid expenses and other current assets			11				79				(694	)
Other assets			888				3				(98	)
Accounts payable			(148	)			2,408				1,163
Accrued liabilities			371				204				232
Other long-term liabilities			(915	)			(792	)			266
Net cash used for operating activities of continuing operations			(1,120	)			(564	)			(4,365	)
Net cash used for operating activities of discontinued operations			(3,248	)			(1,317	)			(323	)
Cash flows from investing activities:
Capital expenditures			(874	)			(1,141	)			(1,434	)
Proceeds from disposal of property, plant and equipment			63				1,150				2,617
Acquisition of business			—				(434	)			—
Other			118				139				33
Net cash provided by (used for) investing activities of continuing operations			(693	)			(286	)			1,216
Net cash provided by investing activities of discontinued operations			3,228				7,533				7,219
Cash flows from financing activities:
Proceeds from revolving credit agreement			32,091				18,416				24,189
Repayments of revolving credit agreement			(29,908	)			(17,999	)			(27,296	)
Proceeds from other indebtedness			180				287				—
Repayments of long-term debt			(236	)			(297	)			(7,247	)
Repayments of capital lease obligations			(75	)			—				—
Dividends from foreign subsidiary			—				—				13,000
Net cash provided by financing activities of continuing operations			2,052				407				2,646
Net cash used for financing activities of discontinued operations			—				(1,913	)			(11,087	)
Increase (decrease) in cash and cash equivalents			219				3,860				(4,694	)
Cash and cash equivalents at beginning of year			4,744				884				5,578
Effect of exchange rate changes on cash and cash equivalents			547				—				—
Cash and cash equivalents at end of year		$	5,510			$	4,744			$	884
Supplemental disclosure of cash flow information:
Cash paid for interest		$	(107	)		$	(131	)		$	(358	)
Cash paid for income taxes, net		$	(635	)		$	(523	)		$	(809	)

See notes to consolidated financial statements.

SIFCO Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands)

														Accumulated								Common
						Additional								Other								Shares				Total
		Common				Paid-In				Retained				Comprehensive				Unearned				Held in				Shareholders’
		Shares				Capital				Earnings				Loss				Compensation				Treasury				Equity
Balance — September 30, 2004		$	5,257			$	6,497			$	22,336			$	(8,867	)		$	(166	)		$	(255	)		$	24,802
Comprehensive income (loss):
Net loss			—				—				(196	)			—				—				—				(196	)
Foreign currency translation adjustment			—				—				—				34				—				—				34
Currency exchange contract adjustment			—				—				—				(909	)			—				—				(909	)
Unrealized gain on interest rate swap agreement			—				—				—				125				—				—				125
Minimum pension liability adjustment, net of tax			—				—				—				(1,532	)			—				—				(1,532	)
Total comprehensive loss																											(2,478	)
Share transactions under employee stock plans			(29	)			(215	)			—				—				106				212				74
Balance — September 30, 2005		$	5,228			$	6,282			$	22,140			$	(11,149	)		$	(60	)		$	(43	)		$	22,398
Comprehensive income:
Net income			—				—				960				—				—				—				960
Foreign currency translation adjustment			—				—				—				75				—				—				75
Currency exchange contract adjustment			—				—				—				288				—				—				288
Minimum pension liability adjustment, net of tax			—				—				—				1,324				—				—				1,324
Total comprehensive income																											2,747
Stock option expense			—				78				—				—				—				—				78
Share transactions under employee stock plans			(6	)			(37	)			—				—				60				43				60
															`
Balance — September 30, 2006		$	5,222			$	6,323			$	23,100			$	(9,462	)		$	—			$	—			$	25,183
Comprehensive income:
Net income			—				—				6,728				—				—				—				6,728
Foreign currency translation adjustment			—				—				—				2,285				—				—				2,285
Minimum pension liability adjustment, net of tax			—				—				—				2,819				—				—				2,819
Total comprehensive income																											11,832
Adjustment to initially apply SFAS No. 158, net of tax as of September 30, 2007			—				—				—				(325	)			—				—				(325	)
Stock option expense			—				32				—				—				—				—				32
Share transactions under employee stock plans			59				(3	)			—				—				—				—				56
Balance — September 30, 2007		$	5,281			$	6,352			$	29,828			$	(4,683	)		$	—			$	—			$	36,778

See notes to consolidated financial statements.

SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years ended September 30, 2007, 2006 and 2005
(Dollars in thousands, except share and per share data)

1. Summary of Significant Accounting Policies

A. DESCRIPTION OF BUSINESS

SIFCO Industries, Inc. and Subsidiaries (the “Company”) are engaged in the production and sale of a variety of metalworking processes, services and products produced primarily to the specific design requirements of its customers. The processes and services include forging, heat-treating, coating, welding, machining and selective electrochemical finishing; and the products include forgings, machined forged parts and other machined metal parts, remanufactured component parts for turbine engines, and selective electrochemical finishing solutions and equipment. The Company’s operations are conducted in three business segments: (1) Aerospace Component Manufacturing Group, (2) Turbine Component Services and Repair Group and (3) Applied Surface Concepts Group.

B. PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The U.S. dollar is the functional currency for all the Company’s U.S. operations. For these operations, all gains and losses from completed currency transactions are included in income currently. Effective October 1, 2006, the functional currency of the Irish subsidiary is the euro because a substantial majority of the subsidiary’s transactions subsequent to September 30, 2006 are denominated in euros. Prior to October 1, 2006, the functional currency of the Irish subsidiary was the U.S. dollar because a substantial majority of the subsidiary’s transactions prior to October 1, 2006 were denominated in U.S. dollar. For the Company’s other non-U.S. subsidiaries, the functional currency is the local currency. Assets and liabilities are translated into U.S. dollars at the rates of exchange at the end of the period and revenues and expenses are translated using average rates of exchange. Foreign currency translation adjustments are reported as a component of accumulated other comprehensive loss in the consolidated statements of shareholders’ equity.

C. CASH EQUIVALENTS

The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents.

D. CONCENTRATIONS OF CREDIT RISK

Receivables are presented net of allowance for doubtful accounts of $603 and $668 at September 30, 2007 and 2006, respectively. During fiscal 2007 and 2006, $214 and $135 of accounts receivable were written off against the allowance for doubtful accounts, respectively. Bad debt expense totaled $147, $121 and $115 in fiscal 2007, 2006 and 2005, respectively.

Most of the Company’s receivables represent trade receivables due from manufacturers of turbine engines and aircraft components and turbine engine overhaul companies located throughout the world, including a significant concentration of U.S. based companies. Approximately 37% of the Company’s net sales in 2007 were to four (4) of its largest customers, with an additional 13% of combined net sales to various direct subcontractors to those four (4) customers. No other single group or customer represents greater than 5% of total net sales in 2007. The Company performs ongoing credit evaluations of its customers’ financial conditions. The Company believes its allowance for doubtful accounts is sufficient based on the credit exposures outstanding at September 30, 2007. However, certain customers have filed for bankruptcy protection in the last several years and it is possible that additional credit losses could be incurred if other customers seek bankruptcy protection.

E. INVENTORY VALUATION

Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for approximately 80% and 59% of the Company’s inventories at September 30, 2007 and 2006, respectively. Cost is determined using the specific identification method for approximately 7% and 12% of the Company’s inventories at September 30, 2007 and 2006, respectively. The first-in, first-out (“FIFO”) method is used to value the remainder of the Company’s inventories.

The Company maintains allowances for obsolete and excess inventory. The Company evaluates its allowances for obsolete and excess inventory each quarter. Each business segment maintains formal policies, which require at a minimum that reserves be established based on an analysis of the age of the inventory on a part-by-part basis. In addition, if the Company learns of specific obsolescence, other than that identified by the aging criteria, an additional reserve will be recognized as well. Specific obsolescence may arise due to a technological or market change, or based on cancellation of an order.

SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)

F. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation is generally computed using the straight-line and the double declining balance methods. Depreciation is provided in amounts sufficient to amortize the cost of the assets over their estimated useful lives. Depreciation provisions are based on estimated useful lives: (i) buildings, including building improvements — 5 to 50 years and (ii) machinery and equipment, including office and computer equipment — 3 to 20 years.

The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, at least annually or when events and circumstances warrant such a review. This review is performed using estimates of future undiscounted cash flows, which include proceeds from disposal of assets. If the carrying value of a long-lived asset is greater than the estimated undiscounted future cash flows, and if such excess carrying value is determined to be permanent, then the long-lived asset is considered impaired and an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.

G. NET INCOME PER SHARE

The Company’s net income per basic share has been computed based on the weighted-average number of common shares outstanding. Net income per diluted share reflects the effect of the Company’s outstanding stock options under the treasury stock method. However, during periods of operating losses, outstanding stock options are not included in the calculation of net loss per diluted share because such inclusion would be anti-dilutive.

H. REVENUE RECOGNITION

The Company recognizes revenue in accordance with the relevant portions of the Securities and Exchange Commission’s Staff Accounting Bulletins No. 101, “Revenue Recognition in Financial Statements” and No. 104, “Revenue Recognition”. Revenue is generally recognized when products are shipped or services are provided to customers.

I. IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This Statement requires an employer to (i) recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) —measured as the difference between plan assets at fair value and the benefit obligation—as an asset or liability in its statement of financial position; (ii) recognize changes in that funded status in the year in which the changes occur through comprehensive income; (iii) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to FASB Statement No. 87, “Employers’ Accounting for Pensions”, or No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” and (iv) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year end. The Company adopted the requirement to recognize the funded status of its defined benefit pension plans as an asset or liability in the consolidated balance sheet as of September 30, 2007. The adoption resulted in (i) an increase of $1,138 to other assets, (ii) an increase of $1,630 to other long-term liabilities, (iii) an increase of $167 to deferred tax assets and (iv) an increase of $325 to accumulated other comprehensive loss. The requirement to measure plan assets and benefit obligations as of the date of the Company’s fiscal year-end consolidated balance sheet is effective for fiscal years ending after December 15, 2008. The Company currently uses a July 1^st measurement date.

In September 2006, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108 (“SAB No. 108”), “Financial Statement Misstatements”. SAB No. 108 expresses the SEC staff’s view regarding the process of quantifying financial statement misstatements. The Interpretations in SAB No. 108 are being issued to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The Company adopted the provisions of SAB No. 108 effective October 1, 2006. The adoption of this statement in fiscal 2007 did not have a material impact on the Company’s financial position, cash flows or results of its operations.

SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)

In May 2005, the FASB issued Statement of Financial Accounting No. 154, “Accounting Changes and Error Corrections” — a replacement of Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”. This statement changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of a change in accounting principle on one or more individual periods presented, this statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. SFAS No. 154 is effective for changes in accounting principle made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 effective October 1, 2006. The adoption of this statement in fiscal year 2007 did not have a material impact on the Company’s financial position, cash flows or results of operations.

J. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS

In June 2006, FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes” — an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and provides guidance on the recognition, derecognition, and measurement of benefits related to an entity’s uncertain tax position(s). FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 effective October 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s financial position, cash flows and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of this statement is not expected to have a material impact on the Company’s financial position or results of its operations.

K. USE OF ESTIMATES

Accounting principles generally accepted in the United States require management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period in preparing these financial statements. Actual results could differ from those estimates.

L. STOCK-BASED COMPENSATION

Prior to the adoption of SFAS No. 123R (revised 2004) on October 1, 2005, the Company employed the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). The following pro forma information regarding net income and earnings per share was determined as if the Company had accounted for its stock options under the fair value method prescribed by SFAS No. 123. For purposes of pro forma disclosure, the estimated fair value of the stock options is amortized over the options’ vesting periods. The pro forma information is as follows:

SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)

		Years Ended
		September 30, 2005
Net loss as reported		$	(196	)
Less — Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects			57
Pro forma net loss as if the fair value based method had been applied to all awards		$	(253	)
Net loss per share:
Basic — as reported		$	(0.04	)
Basic — pro forma		$	(0.05	)
Diluted — as reported		$	(0.04	)
Diluted — pro forma		$	(0.05	)

M. DERIVATIVE FINANCIAL INSTRUMENTS

The Company has from time-to-time utilized foreign currency exchange contracts as part of the management of its foreign currency risk exposure. The Company has no financial instruments held for trading purposes. All financial instruments are put into place to hedge specific exposure. To qualify as a hedge, the item to be hedged must expose the Company to foreign currency risk and the hedging instrument must effectively reduce that risk. If the financial instrument is designated as a cash flow hedge, the effective portions of changes in the fair value of the financial instrument are recorded in accumulated other comprehensive loss in the shareholders’ equity section of the consolidated balance sheets. Ineffective portions of changes in the fair value of the financial instrument, to the extent they may exist, are recognized in the consolidated statements of operations.

Historically, the Company has been able to mitigate the impact of foreign currency risk by means of hedging such risk through the use of foreign currency exchange contracts, which typically expire within one year. However, such risk is mitigated only for the periods for which the Company has foreign currency exchange contracts in effect, and only to the extent of the U.S. dollar amounts of such contracts. At September 30, 2007 and 2006, the Company had no forward exchange contracts outstanding.

N. RESEARCH AND DEVELOPMENT

Research and development costs from continuing operations are expensed as incurred. Research and development expense from continuing operations was approximately $880, $622 and $760 in fiscal 2007, 2006 and 2005, respectively.

O. ACCUMULATED OTHER COMPREHENSIVE LOSS

Comprehensive income (loss) is included on the Consolidated Statements of Shareholders’ Equity. The components of accumulated other comprehensive loss as shown on the Consolidated Balance Sheets at September 30 are as follows:

		2007				2006				2005
Foreign currency translation adjustment		$	(4,358	)		$	(6,643	)		$	(6,718	)
Currency exchange contract adjustment			—				—				(288	)
SFAS No. 158 net pension liability, net of tax			(325	)			—				—
Minimum pension liability adjustment, net of tax			—				(2,819	)			(4,143	)
Total accumulated other comprehensive loss		$	(4,683	)		$	(9,462	)		$	(11,149	)

P. RECLASSIFICATIONS

Certain amounts in prior years have been reclassified to conform to the 2007 consolidated financial statement presentation.

SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)

2. Inventories

Inventories at September 30 consist of:

		2007				2006
Raw materials and supplies		$	7,579			$	3,220
Work-in-process			6,433				3,222
Finished goods			2,885				1,610
Total inventories		$	16,897			$	8,052

If the FIFO method had been used for the entire Company, inventories would have been $7,191 and $6,860 higher than reported at September 30, 2007 and 2006, respectively.

3. Accrued Liabilities

Accrued liabilities at September 30 consist of:

		2007				2006
Accrued employee compensation and benefits		$	2,199			$	1,692
Accrued workers’ compensation			1,190				1,247
Accrued pension			—				572
Accrued income taxes			358				822
Accrued royalties			394				823
Accrued legal and professional			252				274
Other accrued liabilities			1,297				1,290
Total accrued liabilities		$	5,690			$	6,720

4. Government Grants

The Company has received grants from certain government entities as an incentive to invest in facilities, research and employees. The Company has historically elected to treat capital and employment grants as a contingent obligation and does not commence amortizing such grants into income until such time that it is more certain that the Company will not be required to repay a portion of these grants. Capital grants are amortized into income over the estimated useful lives of the related assets. Employment grants are amortized into income over five years.

Certain Company grants that were subject to repayment expired during fiscal 2007. Therefore, the Company will not be required to repay such grants and, accordingly, the Company recognized grant income of $2,143 in income (loss) from discontinued operations, net of tax, during fiscal 2007 in the accompanying consolidated statement of operations. In addition, primarily as a result of an amendment to and expiration of certain grant agreements during fiscal year 2006, the Company recognized grant income, in income (loss) from discontinued operations, of $746 in fiscal 2006. The unamortized portion of deferred grant revenue is recorded in other long-term liabilities at September 30, 2007 and September 30, 2006, which amounted to $421 and $2,423, respectively. The majority of the Company’s grants were denominated in euros. The Company adjusts its deferred grant revenue balance in response to currency exchange rate fluctuations for as long as such grants are treated as obligations. The Company recognized grant income of $66 in fiscal 2005.

SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)

5. Long-Term Debt

Long-term debt at September 30 consists of:

		2007				2006
Revolving credit agreement		$	2,600			$	417
Other			10				62
Total bank debt			2,610				479
Capital lease obligations			463				—
Less — current maturities			87				52
Total long-term debt		$	2,986			$	427

At September 30, 2007, the Company has a $6,000 revolving credit agreement with a bank subject to sufficiency of collateral that expires on October 1, 2008 and bears interest at the bank’s base rate plus 0.50%. The interest rate was 8.25% and 8.75% at September 30, 2007 and 2006, respectively. The daily average balance outstanding against the revolving credit agreement was $1,363 and $665 during 2007 and 2006, respectively. A commitment fee of 0.375% is incurred on the unused balance. At September 30, 2007, the Company had $3,355 available under its $6,000 revolving credit agreement. The Company’s revolving credit agreement is secured by substantially all of the Company’s assets located in the United States of America and a guarantee by its U.S. subsidiaries.

Under its revolving credit agreement with the bank, the Company is subject to certain customary covenants. These include, without limitation, covenants (as defined) that require maintenance of certain specified financial ratios, including a minimum tangible net worth level and a minimum EBITDA level. The Company was in compliance with all applicable covenants at September 30, 2007.

6. Income Taxes

The components of income (loss) from continuing operations before income tax provision are as follows:

		Years Ended September 30,
		2007				2006				2005
U.S		$	9,876			$	155			$	(2,466	)
Non-U.S			379				190				42
Income (loss) from continuing operations before income tax provision		$	10,255			$	(35	)		$	(2,424	)
The income tax provision consists of the following:
Current income tax provision:
U.S. federal		$	95			$	—			$	524
U.S. state and local			115				—				—
Non-U.S			65				14				17
Total current tax provision			275				14				541
Deferred income tax provision (benefit):
U.S. federal			1,276				—				—
U.S. state and local			(83	)			—				—
Non-U.S			15				—				—
Total deferred tax provision			1,208				—				—
Income tax provision		$	1,483			$	14			$	541

SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)

The income tax provision differs from amounts currently payable or refundable due to certain items reported for financial statement purposes in periods that differ from those in which they are reported for tax purposes. The income tax provision in the accompanying consolidated statements of operations differs from amounts determined by using the statutory rate as follows:

		Years Ended September 30,
		2007				2006				2005
Income (loss) before income tax provision		$	10,255			$	(35	)		$	(2,424	)
Less-U.S. state and local income tax provision			32				—				—
Income (loss) before U.S. and non-U.S. income tax provision		$	10,223			$	(35	)		$	(2,424	)
Income tax provision (benefit) at U.S. federal statutory rate			3,476				(12	)			(824	)
Tax effect of:
U.S. loss (income) for which no U.S. federal tax benefit (provision) has been recognized			—				(52	)			838
Non-US income for which no U.S. federal tax provision has been recognized			—				78				3
U.S. income for which a U.S. federal tax provision has been recognized under the American Jobs Creation Act of 2004			—				—				524
Business expenses not deductible for tax			265				—				—
Recognition of excess tax basis of assets			(704	)			—				—
Undistributed earnings of non-U.S. subsidiaries			1,837				—				—
Reversal of deferred tax valuation allowance			(2,999	)			—				—
Other			(392	)			—				—
Income tax provision		$	1,483			$	14			$	541

Deferred tax assets and liabilities at September 30 consist of the following:

		2007				2006
Deferred tax assets:
Net U.S. operating loss carryforwards		$	290			$	3,924
Net non-U.S. operating loss carryforwards			575				569
Employee benefits			—				50
Investment valuation reserve			—				511
Inventory reserves			926				481
Asset impairment reserve			122				88
Allowance for doubtful accounts			154				176
Foreign tax credits			2,667				442
Additional pension liability			—				958
Government grants			42				242
Net state operating loss carry forwards			110				—
Alternative minimum tax credit carry forwards			290				—
Other			106				—
Total deferred tax assets			5,282				7,441

SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)

Deferred tax liabilities:
Depreciation			1,561				2,383
Unremitted foreign earnings			4,136				26
Employee benefits			301				—
Other			—				525
Total deferred tax liabilities			5,998				2,934
Net deferred tax assets (liabilities)			(716	)			4,507
Valuation allowance			(516	)			(4,608	)
Net deferred tax liabilities		$	(1,232	)		$	(101	)