SIFCO INDUSTRIES INC - Annual Report: 2008 (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, 2008

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

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 Securities Exchange Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange 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 Securities Exchange 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer   þ (Do not check if a smaller reporting company)		Smaller reporting company o

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 $33,733,963.

The number of the Registrant’s Common Shares outstanding at October 31, 2008 was 5,294,716.

Documents incorporated by reference: Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on January 27, 2009 (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; and the products include forged components, machined forged parts 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 500 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, non-destructive testing, and heat-treating facilities are NADCAP (National Aerospace and Defense Contractors Accreditation Program) accredited.

Industry

The performance of the domestic and international air transport industry 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 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. 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. However, the current global economic crisis has created significant reductions in available capital and liquidity from banks and other providers of credit. Therefore, this crisis may adversely affect the ability of the ACM Group’s customers to fulfill their obligations, and a continued deterioration in the global economy could result in reduced demand for the products and services that it provides. The ACM Group’s current outlook for the air transport industry continues to remain favorable in the near term, and it believes that it is poised to take advantage of the resulting improvement in order demand from the airframe and engine manufacturers should it occur. However, the ACM Group is also beginning to see some of its key customers extend/delay their required delivery schedules. 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 raw material steel and titanium alloys price increases. 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, as well as 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 2008, the ACM Group had three customers, various business units of Rolls-Royce Corporation, United Technologies Corporation and Textron, Inc., which accounted for 16%, 12% and 11%, respectively, of the ACM Group’s net sales. The net sales to these three customers and the direct subcontractors to these three customers accounted for 54% of the ACM Group’s net sales in 2008. 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 four 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, 2008 decreased to $76.6 million, of which $63.8 million is scheduled for delivery during fiscal 2009, compared with $82.8 million as of September 30, 2007, of which $66.6 million was scheduled for delivery during fiscal 2008. It is important to note that the delivery lead times for certain aerospace grades of steel and titanium alloy raw materials have continued to shorten and the ACM Group believes that such lead time reduction has resulted in a fundamental shift in the ordering pattern of its customers. A likely consequence of such a shift is that customers are not placing orders as far in advance as they previously did resulting in a reduction, relative to comparable prior year periods, in the ACM Group’s backlog. Accordingly, such backlog reduction is not necessarily 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 repair processes and high temperature resistant coatings applied to super-alloy materials have applications in the small aerospace turbine engine markets. Operating costs related to such activities are expensed during the period in which they are incurred. The Group’s research and development expense was $0.5 million in fiscal 2008.

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

Industry

The performance of the air transport industry directly and significantly impacts the performance of the Repair Group. The air transport industry’s long-term outlook is for continued, steady growth. Such outlook suggests the need for additional aircraft and, therefore, growth in the requirement for aerospace turbine engines and related engine repairs. The air transport industry is currently benefiting from several favorable longer term 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 regional aircraft. 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. Management’s current outlook for the air transport industry continues to remain favorable in the near term.

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 OEMs in the market, there has been a general reluctance on the part of the OEMs 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) 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 2008, the Repair Group had two customers, consisting of various business units of United Technologies Corporation and Rolls-Royce Corporation, which accounted for 37% and 15%, respectively, 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, 2008 increased to $4.5 million, of which $2.3 million is scheduled for delivery during fiscal 2009 and $2.2 million is on hold, compared with $4.2 million as of September 30, 2007, of which $1.5 million was scheduled for delivery during fiscal 2008 and $2.7 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 plating 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 such as nickel-cobalt solutions that can be used as a more environmentally friendly replacement for a chrome plating solution or a zinc-nickel solution that can be used as a more environmentally friendly replacement for a cadmium plating solution.

The ASC Group can either (i) supply selective electrochemical finishing chemicals and equipment to customers desiring to perform selective electrochemical finishing in-house or (ii) provide manual or semi-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 major 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 of raw materials 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, medical, electric power generation, and oil and gas. In its planning and decision making processes, management of the ASC Group monitors and evaluates precious metal prices, global manufacturing activity, internal labor capacity, technological developments in surface enhancement, and the exploration and production activities relative to oil and gas products. The diversity of industries served helps to mitigate the impact of economic cycles on the ASC Group.

Competition

Although the Company believes that the ASC Group is the 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 and research and development 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% the Group’s fiscal 2008 net sales. During fiscal 2008, 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, 2008 and 2007.

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 increased from approximately 340 at the beginning of fiscal year 2008 to approximately 360 employees at the end of fiscal 2008. The increase was principally a result of the additional employees hired to support the growth in the Company’s businesses in general and the ACM Group in particular. 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 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 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 the 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, 2008, a significant portion (approximately 50%) 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, 2008 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, 2008.
	•		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 52,000 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 3,000 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 2008 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,
		2008								2007
		High				Low				High				Low
First Quarter		$	23.20			$	14.60			$	7.30			$	4.15
Second Quarter			16.78				9.80				10.91				4.51
Third Quarter			15.40				10.08				21.29				8.61
Fourth Quarter			10.95				7.60				25.50				13.50

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, 2003 and (ii) the reinvestment of dividends.

Comparison of Five-Year Return Performance of
SIFCO Industries, Inc., the S&P 500 Index
and the 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, 2008, there were approximately 644 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,
		2008				2007				2006				2005				2004
		(Amounts in thousands, except per share data)
Statement of Operations Data
Net sales		$	101,391			$	87,255			$	68,606			$	52,863			$	53,798
Income (loss) from continuing operations before income tax provision			8,820				10,255				(35	)			(2,424	)			(3,298	)
Income tax provision			3,277				1,483				14				541				75
Income (loss) from continuing operations			5,543				8,772				(49	)			(2,965	)			(3,373	)
Income (loss) from continuing operations per share (basic)			1.05				1.67				(0.01	)			(0.57	)			(0.65	)
Income (loss) from continuing operations per share (diluted)			1.04				1.66				(0.01	)			(0.57	)			(0.65	)
Income (loss) from discontinued operations, net of tax			287				(2,044	)			1,009				2,769				(2,573	)
Net income (loss)			5,830				6,728				960				(196	)			(5,946	)
Net income (loss) per share (basic)			1.10				1.28				0.18				(0.04	)			(1.14	)
Net income (loss) per share (diluted)			1.09				1.27				0.18				(0.04	)			(1.14	)
Cash dividends per share			—				—				—				—				—
Shares Outstanding at Year End			5,295				5,281				5,222				5,222				5,214
Balance Sheet Data
Working capital		$	34,315			$	32,350			$	15,011			$	9,619			$	16,029
Property, plant and equipment, net			10,253				10,570				14,059				18,744				19,882
Total assets			60,149				60,889				48,775				49,523				59,759
Long-term debt, net of current maturities			269				2,986				427				10				5,797
Other long-term liabilities			5,745				5,613				5,939				8,645				8,108
Total shareholders’ equity			40,679				36,778				25,183				22,398				24,802
Shareholders’ equity per share			7.68				6.96				4.82				4.29				4.76
Financial Ratios
Return on beginning shareholders’ equity			15.9	%			26.7	%			4.3	%			(0.8	)%			(19.6	)%
Long-term debt to equity percent			0.7	%			8.1	%			1.7	%			—				23.4	%
Current ratio			3.6				3.1				1.9				1.5				1.8

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; (3) successful development of turbine repair processes and/or the procurement of 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 and services; (6) regressive pricing pressures on the Company’s products and services, with productivity improvements as the primary means to maintain margins; (7) the impact on business conditions, and on the aerospace industry in particular, of the global terrorism threat; (8) 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; (9) continued reliance on several major customers for revenues; (10) 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, (11) the impact on future contributions to the Company’s defined benefit pension plan due to changes in actuarial assumptions and the

market value of plan assets; and (12) stable governments, business conditions, laws, regulations and taxes in the economic environments 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 forged components, 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 2008 Compared with Fiscal Year 2007

Net sales from continuing operations in fiscal 2008 increased 16.2% to $101.4 million, compared with $87.3 million in the comparable period in fiscal 2007.

Income from continuing operations before income taxes in fiscal 2008 was $8.8 million, compared with $10.3 million in the comparable period in fiscal 2007. Included in the $8.8 million of income from continuing operations before income taxes in fiscal 2008 was (i) $0.5 million of expense related to the business settlement of a product dispute that originated in fiscal 2007, (ii) $0.8 million of expense related to the impairment of a long-lived asset, and (iii) a LIFO provision of $1.7 million. Included in the $10.3 million of income from continuing operations before income taxes in fiscal 2007 was (i) $0.1 million of expense related to the business settlement of a product dispute that originated in fiscal 2007 and (ii) a LIFO provision of $0.3 million.

Income (loss) from discontinued operations, net of tax, which includes both the industrial turbine repair business that was sold in fiscal 2007 and the large aerospace turbine engine component repair business that was sold in fiscal 2006, was income of $0.3 million in fiscal 2008, compared with a $2.0 million loss in the comparable period in fiscal 2007. Included in the $2.0 million loss from discontinued operations in fiscal 2007 were (i) grant income of $2.1 million and (ii) a loss of approximately $0.8 million from the divestiture in fiscal 2007 of a business and certain related assets, as explained more fully in Notes 4 and 9, respectively, to the Consolidated Financial Statements.

Net income in fiscal 2008 was $5.8 million, compared with $6.7 million in the comparable period in fiscal 2007.

Aerospace Component Manufacturing Group (“ACM Group”)

Net sales in fiscal 2008 increased 20.0% to $72.0 million, compared with $60.0 million in the comparable period of fiscal 2007. 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 $7.6 million to $38.2 million in fiscal 2008, compared with $30.6 million in the comparable period in fiscal 2007. Net sales of turbine engine components for small aircraft, which consist primarily of business and regional jets, as well as military transport and surveillance aircraft, increased $1.8 million to $19.9 million in fiscal 2008, compared with $18.1 million in the comparable period in fiscal 2007. Net sales of airframe components for large aircraft increased $0.5 million to $7.6 million in fiscal 2008, compared with $7.1 million in the comparable period in fiscal 2007. Net sales of turbine engine components for large aircraft increased $1.3 million to $3.0 million in fiscal 2008, compared with $1.7 million in the comparable period in fiscal 2007. Commercial product sales and other revenues were $3.3 million and $2.5 million in fiscal 2008 and 2007, 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 $33.4 million in fiscal 2008, compared with $25.7 million in the comparable period in fiscal 2007. 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.

The ACM Group’s selling, general and administrative expenses increased $1.2 million to $4.9 million, or 6.8% of net sales, in fiscal 2008, compared with $3.7 million, or 6.1% of net sales, in the comparable period in fiscal 2007. The $1.2 million increase in selling, general and administrative expenses in fiscal 2008 was principally due to a $0.6 million payment to a customer that was made to achieve an amicable settlement related to a product dispute that originated in fiscal 2007, of which $0.1 million was expensed in fiscal 2007, and that the Company agreed to make as a business gesture of good faith and cooperation without admission of liability. The remaining selling, general and administrative expenses in fiscal 2008 and 2007 were $4.4 million, or 6.1% of net sales, and $3.6 million, or 6.0% of net sales, respectively. The remaining $0.8 million increase in selling, general and administrative expenses in fiscal 2008 compared to the same period in fiscal 2007 was principally due to (i) a $0.3 million increase in variable selling cost principally due to the increase in net sales, (ii) a $0.2 million increase in compensation and related expenses, and (iii) a $0.1 million increase in bad debt expense.

During the fourth quarter of fiscal 2008, the ACM group recorded $0.8 million of expense related the impairment of a long-lived asset.

The ACM Group’s operating income in fiscal 2008 was $9.9 million, compared with $10.3 million in the comparable period in fiscal 2007. Included in the $9.9 million of operating income in fiscal 2008 were the aforementioned $1.3 million of expenses related to the amicable settlement of a product dispute and the impairment of a long-lived asset. The $11.2 million of operating income in fiscal 2008, before these $1.3 million of expenses, reflected an improvement relative to fiscal 2007 principally due to the positive impact on margins resulting from higher production and sales volumes in the fiscal 2008, which allowed the ACM Group to leverage its fixed operating cost structure over more units of production and sales. The positive impact of the improved leverage of its fixed operating cost were partially offset by the negative impact of (i) a $1.4 million increase in the LIFO provision and (ii) higher variable labor costs recognized in fiscal 2008, compared to the same period in fiscal 2007.

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

During fiscal 2008, net sales, which consist principally of component repair services (including precision component machining and industrial coating) for small aerospace turbine engines, increased 10.8% to $14.3 million, compared with $12.9 million in the comparable fiscal 2007 period.

During fiscal 2008, the Repair Group’s selling, general and administrative expenses from continuing operations were $1.3 million, or 9.2% of net sales, compared with $1.4 million, or 10.5% of net sales, in the comparable fiscal 2007 period. Included in selling, general and administrative expenses during both fiscal 2008 and 2007 was $0.1 million of bad debt recoveries and, therefore, the remaining selling, general and administrative expenses were $1.4 million, or 9.9% of net sales, and $1.5 million, or 11.2% of net sales, during such periods.

The Repair Group’s operating results from continuing operations were a loss of $0.3 million in fiscal 2008 compared with income of $0.7 million, in the comparable fiscal 2007 period. Included in the $0.3 million operating loss during fiscal 2008 were (i) the aforementioned $0.1 million of bad debt recovery, (ii) $0.1 million of income from the sale of previously reserved inventory, and (iii) $0.1 million of income related to the renegotiation of a vendor obligation. Despite these favorable items, the reason that operating results did not improve with the higher volumes during fiscal 2008 is due principally to startup costs related to the production launch of a new component repair program and a change in product sales mix to less favorable margin products.

Applied Surface Concepts Group (“ASC Group”)

Net sales increased 5.3% to $15.1 million, compared with $14.3 million in the comparable fiscal 2007 period. In fiscal 2008, product net sales, consisting of selective electrochemical metal finishing equipment and solutions, increased $0.4 million to $7.5 million, compared with $7.1 million in the same period in fiscal 2007. In fiscal 2008, customized selective electrochemical metal finishing contract service net sales increased $0.3 million to $7.4 million, compared with $7.1 million in the same period in fiscal 2007. A portion of the ASC Group’s business is conducted in Europe and is denominated in local European currencies, which have strengthened in relation to the US dollar resulting in a favorable currency impact on net sales in fiscal 2008 of approximately $0.3 million.

The ASC Group’s selling, general and administrative expenses decreased $0.1 million to $4.3 million, or 28.7% of net sales, in fiscal 2008, compared with $4.4 million, or 31.0% of net sales in the comparable fiscal 2007 period. The $0.1 million decrease in selling, general and administrative expenses in fiscal 2008 was principally due to a reduction in

compensation and benefit related expenses attributable to certain salaried support positions that have either been eliminated or, if not eliminated, have not yet been replaced.

The ASC Group’s operating income in fiscal 2008 was $1.3 million, compared with $1.0 million in the same period in fiscal 2007. This $0.3 million increase in operating income is principally due to (i) a decrease in selling, general and administrative expenses discussed above and (ii) improved operating margins due to higher sales. These gains were partially offset by (i) rising precious metals commodity costs that could not be fully passed on to customers and (ii) higher compensation expense due to the hiring of additional operations personnel.

Corporate Unallocated Expenses

Corporate unallocated expenses, consisting of corporate salaries and benefits, legal and professional and other corporate expenses, were $2.0 million in fiscal 2008, compared with $1.7 million in the same period in fiscal 2007. The $0.3 million increase in fiscal 2008 is principally due to an increase in legal and professional expenses related to (i) the Company’s long-term strategic planning efforts, including its incentive compensation planning, (ii) its efforts required to achieve initial Sarbanes-Oxley compliance in fiscal 2008, and (iii) professional tax consulting services. These increases were partially offset by a decrease in incentive expense.

Other/General

Interest expense from continuing operations was $0.1 million and $0.2 million in fiscal 2008 and 2007, respectively. The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s revolving credit agreement in fiscal years 2008 and 2007.

		Weighted Average								Weighted Average
		Interest Rate								Outstanding Balance
		Year Ended September 30,								Year Ended September 30,
Credit Agreement		2008				2007				2008				2007
Revolving credit agreement			6.8	%			8.8	%		$1.4 million				$1.4 million

The Company believes that inflation did not materially affect its results of operations in fiscal 2008 or fiscal 2007, and does not expect inflation to be a significant factor in fiscal 2009.

2. 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.

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 (i) an increase in the ACM Group’s compensation expense, including incentive compensation, resulting from the hiring of certain additional personnel to support the growth in the ACM Group’s business and (ii) variable selling costs resulting from 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.

B. Liquidity and Capital Resources

Cash and cash equivalents increased to $10.4 million at September 30, 2008, compared with $5.5 million at September 30, 2007. At September 30, 2008, $5.5 million 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 provided $9.7 million of cash (of which $9.8 million was provided by continuing operations) in fiscal 2008, compared with $4.4 million of cash used by operating activities (of which $1.1 million was used for continuing operations) in fiscal 2007. The $9.8 million of cash provided by operating activities of continuing operations in fiscal 2008 was primarily due to (i) $11.0 million of income from continuing operations before such non-cash items as depreciation expense, asset impairment charges, LIFO provision and deferred taxes and (ii) a $3.4 million decrease in inventory, excluding the $1.7 million increase in the LIFO reserve. These sources of cash were offset principally by (i) a $1.3 million decrease in other long-term liabilities, (ii) a $1.4 million decrease in accounts payable and accrued liabilities and (iii) a $1.3 million increase in refundable income taxes. The changes in the components of working capital were due to factors resulting from normal business conditions of the Company, including (i) the ACM Group’s response to the increased demand in its business as measured by its sales levels, (ii) the ACM Group’s efforts to improve the optimization of its inventory levels during such periods of increased demand, (iii) collections from customers, (iv) the relative timing of payments to suppliers and (v) the amount of progress payments made for projected income tax obligations. The change in other long-term liabilities is principally attributable to the funding of a U.S. defined benefit pension plan.

Capital expenditures, all of which were from continuing operations, were $2.0 million in fiscal 2008 compared with $1.4 million (of which $0.9 million were from continuing operations) in fiscal 2007. Capital expenditures during fiscal 2008 consist of $1.1 million by the ACM Group, $0.4 million by the ASC Group and $0.5 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 2009 to support the projected growth in the Company’s businesses.

At September 30, 2008, the Company had an $8.0 million revolving credit agreement with a bank, subject to sufficiency of collateral, which expires on July 1, 2009 and bears interest at the bank’s base rate. The interest rate was 5.00% at September 30, 2008. A 0.35% commitment fee is incurred on the unused balance of the revolving credit agreement. At September 30, 2008, no amount was outstanding and the Company had $7.9 million available under its $8.0 million revolving credit agreement. The Company’s revolving credit agreement is secured by substantially all of the Company’s assets located in the U.S. 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, 2008.

In December 2008, the Company entered into an agreement with its bank to extend the maturity date of its revolving credit agreement from July 1, 2009 to October 1, 2010.

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 requirements through the end of fiscal year 2009.

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, 2008 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		$	9			$	2			$	3			$	4			$	—
Capital lease obligations			398				129				241				28				—
Operating lease obligations			1,354				493				697				164				—
Total		$	1,761			$	624			$	941			$	196			$	—

Excluded from the foregoing Other Contractual Obligations table are open purchase orders at September 30, 2008 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, 2008 is $1.6 million of liabilities related to the Company’s defined benefit pension plans. The Company is expected to fund $0.4 million of pension obligations in fiscal 2009.

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 the continuation of relatively strong demand in the aircraft and related engine industries have been complemented by relatively strong 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) 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. However, the current global economic crisis has created significant reductions in available capital and liquidity from banks and other providers of credit. Therefore, this crisis may adversely affect the ability of the Company’s customers and lenders to fulfill their obligations, and a continued deterioration in the global economy could result in reduced demand for the products and services that the Company provides. While Management’s current outlook for the air transport industry continues to remain favorable in the near term, the Company is beginning to see some of its key customers extend/delay their required delivery schedules.

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. 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.

Deferred Tax Valuation 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, 2008, the Company’s net deferred tax liability before any valuation allowance was $1.3 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 that time, it was more likely than not that the benefit would be realized through future taxable income.

G. Impact of Newly Issued Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 161 (“SFAS No. 161”), “Disclosure about Derivative Instruments and Hedging Activities —an amendment of SFAS No. 133”. The objective of this Statement is to enhance disclosures about an entity’s derivative and hedging activities and thereby improve the transparency of financial reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company currently has no hedging arrangements in place.

In December 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 110. This guidance continues to allow companies, in certain circumstances, to utilize a simplified method in determining the expected term of stock option grants when calculating the compensation expense to be recorded under Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment”. The simplified method can be used after December 31, 2007 only if a company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term. Because the Company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term, the Company will continue use the simplified method in determining the expected term of the stock options granted to date.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require expanded disclosure related to the ownership interests in subsidiaries held by parties other than the parent. Such ownership interest(s) shall be clearly identified, labeled, and presented in the consolidated financial statement and shall provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This Statement applies to all for-profit entities that prepare consolidated financial statements, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. At present, the Company has no current non-controlling ownership in any of its subsidiaries.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No. 141R), “Business Combinations”. The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity (the acquirer) provides in its financial reports about a business combination and its effects. To accomplish that, this Statement establishes principles and requirements for how the acquirer (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired entity (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This Statement applies to all transactions or other events in which an entity obtains control of one or more businesses. This Statement applies to all business entities, but does not apply to (i) the formation of a joint venture, (ii) the acquisition of an asset or a group of assets that does not constitute a business, (iii) a combination between entities or businesses under common control, or (iv) a combination between not-for-profit organizations or the acquisition of a for-profit business by a not-for-profit organization. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

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.

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, 2008, 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, 2008, 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			21				318				843
Accounts receivable			176				480				1,405
Accounts payable			83				74				69
Accrued liabilities			62				397				2,679

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, 2008 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. The Company is not a party to any hedging or other interest rate risk management agreements.

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, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended September 30, 2008. 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, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2008 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 7 to the consolidated financial statements, effective September 30, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 158, “Employers’ Accounting for Defined Benefit and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106 and 132(R)”.

/s/ GRANT THORNTON LLP

Cleveland, Ohio
December 14, 2008.

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

		Years Ended September 30,
		2008				2007				2006
Net sales		$	101,391			$	87,255			$	68,606
Operating expenses:
Cost of goods sold			79,161				65,835				57,662
Selling, general and administrative expenses			12,495				11,173				11,106
Loss (gain) on disposal or impairment of operating assets			757				(137	)			89
Total operating expenses			92,413				76,871				68,857
Operating income (loss)			8,978				10,384				(251	)
Interest income			(24	)			(4	)			(52	)
Interest expense			149				167				77
Foreign currency exchange loss (gain), net			35				(20	)			6
Other income, net			(2	)			(14	)			(247	)
Income (loss) from continuing operations before income tax provision			8,820				10,255				(35	)
Income tax provision			3,277				1,483				14
Income (loss) from continuing operations			5,543				8,772				(49	)
Income (loss) from discontinued operations, net of tax			287				(2,044	)			1,009
Net income		$	5,830			$	6,728			$	960
Income (loss) per share from continuing operations
Basic		$	1.05			$	1.67			$	(0.01	)
Diluted		$	1.04			$	1.66			$	(0.01	)
Income (loss) per share from discontinued operations, net of tax
Basic		$	0.05			$	(0.39	)		$	0.19
Diluted		$	0.05			$	(0.39	)		$	0.19
Net income per share
Basic		$	1.10			$	1.28			$	0.18
Diluted		$	1.09			$	1.27			$	0.18
Weighted-average number of common shares (basic)			5,291				5,246				5,222
Weighted-average number of common shares (diluted)			5,340				5,286				5,227

See notes to consolidated financial statements.

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

		September 30,
		2008				2007
ASSETS
Current assets:
Cash and cash equivalents		$	10,440			$	5,510
Receivables, net			19,130				19,473
Inventories			11,730				16,897
Refundable income taxes			1,309				—
Deferred income taxes			1,541				2,423
Prepaid expenses and other current assets			463				370
Assets held for sale			3,158				3,189
Total current assets			47,771				47,862
Property, plant and equipment:
Land			578				580
Buildings			9,933				9,727
Machinery and equipment			34,110				33,234
			44,621				43,541
Accumulated depreciation			34,368				32,971
Property, plant and equipment, net			10,253				10,570
Other assets			2,125				2,457
Total assets		$	60,149			$	60,889
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	94			$	87
Accounts payable			8,310				9,735
Accrued liabilities			5,052				5,690
Total current liabilities			13,456				15,512
Long-term debt, net of current maturities			269				2,986
Deferred income taxes			3,295				3,655
Other long-term liabilities			2,450				1,958
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 5,295 shares in 2008 and 5,281 shares in 2007			5,295				5,281
Additional paid-in capital			6,399				6,352
Retained earnings			35,658				29,828
Accumulated other comprehensive loss			(6,673	)			(4,683	)
Total shareholders’ equity			40,679				36,778
Total liabilities and shareholders’ equity		$	60,149			$	60,889

See notes to consolidated financial statements.

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

		Years Ended September 30,
		2008				2007				2006
Cash flows from operating activities:
Net income		$	5,830			$	6,728			$	960
Loss (income) from discontinued operations, net of tax			(287	)			2,044				(1,009	)
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization			1,483				1,447				1,407
Loss (gain) on disposal of property, plant and equipment			1				(141	)			(1,061	)
Deferred income taxes			1,184				1,208				34
Share transactions under employee stock plan			60				88				139
Asset impairment charges			757				—				289
Changes in operating assets and liabilities:
Receivables			(58	)			(3,512	)			(2,946	)
Inventories			5,124				(9,197	)			(279	)
Refundable income taxes			(1,311	)			8				—
Prepaid expenses and other current assets			(110	)			11				79
Other assets			(184	)			888				3
Accounts payable			(650	)			(148	)			2,408
Accrued liabilities			(705	)			371				204
Other long-term liabilities			(1,337	)			(915	)			(792	)
Net cash provided by (used for) operating activities of continuing operations			9,797				(1,120	)			(564	)
Net cash used for operating activities of discontinued operations			(62	)			(3,248	)			(1,317	)
Cash flows from investing activities:
Capital expenditures			(2,012	)			(874	)			(1,141	)
Proceeds from disposal of property, plant and equipment			1				63				1,150
Acquisition of business			—				—				(434	)
Other			—				118				139
Net cash used for investing activities of continuing operations			(2,011	)			(693	)			(286	)
Net cash provided by investing activities of discontinued operations			—				3,228				7,533
Cash flows from financing activities:
Proceeds from revolving credit agreement			21,029				32,091				18,416
Repayments of revolving credit agreement			(23,629	)			(29,908	)			(17,999	)
Proceeds from other indebtedness			—				180				287
Repayments of long-term debt			—				(236	)			(297	)
Repayments of capital lease obligations			(109	)			(75	)			—
Net cash provided by (used for) financing activities of continuing operations			(2,709	)			2,052				407
Net cash used for financing activities of discontinued operations			—				—				(1,913	)
Increase in cash and cash equivalents			5,015				219				3,860
Cash and cash equivalents at beginning of year			5,510				4,744				884
Effect of exchange rate changes on cash and cash equivalents			(85	)			547				—
Cash and cash equivalents at end of year		$	10,440			$	5,510			$	4,744
Supplemental disclosure of cash flow information:
Cash paid for interest		$	(172	)		$	(107	)		$	(131	)
Cash paid for income taxes, net		$	(3,598	)		$	(635	)		$	(523	)

See notes to consolidated financial statements.

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

														Accumulated
						Additional								Other								Common Shares				Total
		Common				Paid-In				Retained				Comprehensive				Unearned				Held in				Shareholders’
		Shares				Capital				Earnings				Loss				Compensation				Treasury				Equity
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
Comprehensive income:
Net income			—				—				5,830				—				—				—				5,830
Foreign currency translation adjustment			—				—				—				(500	)			—				—				(500	)
Pension liability adjustment, net of tax			—				—				—				(1,490	)			—				—				(1,490	)
Total comprehensive income																											3,840
Stock option and performance share expense			—				50				—				—				—				—				50
Share transactions under employee stock plans			14				(3	)			—				—				—				—				11
Balance — September 30, 2008		$	5,295			$	6,399			$	35,658			$	(6,673	)		$	—			$	—			$	40,679

See notes to consolidated financial statements.

SIFCO Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years ended September 30, 2008, 2007 and 2006
(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 forged components, machined forged parts and other machined metal parts, remanufactured components 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. dollars. 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 $583 and $603 at September 30, 2008 and 2007 respectively. During fiscal 2008 and 2007, $257 and $214 of accounts receivable were written off against the allowance for doubtful accounts, respectively. Bad debt expense totaled $254, $147 and $121 in fiscal 2008, 2007 and 2006, 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 42% of the Company’s net sales in 2008 were to four (4) of its largest customers, with an additional 12% 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 2008. 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, 2008.

E. INVENTORY VALUATION

Inventories are stated at the lower of cost or market. Cost is determined by the Company’s ACM Group using the last-in, first-out (“LIFO”) method for approximately 76% and 80% of the Company’s inventories at September 30, 2008 and 2007, respectively. Cost is determined using the specific identification method for approximately 8% and 7% of the Company’s inventories at September 30, 2008 and 2007, 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. 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

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. Asset impairment charges of $757 were recorded in the fourth quarter of fiscal 2008 related to certain machinery and equipment of the Company’s ACM Group. The machinery and equipment was determined to be permanently impaired and, therefore, the carrying value of such assets was reduced to its net realizable 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 June 2006, the Financial Accounting Standards Board (“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 adoption of FIN 48 in fiscal 2008 did not have a material impact on the Company’s financial position, cash flows and results of operations. As such, the Company has not recorded any liabilities for uncertain tax positions or any related interest and penalties. If the Company had recorded any such liabilities or any related interest and penalties, it would have classified the interest on uncertain tax benefits as interest expense and income tax penalties as selling, general and administrative expenses.

J. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS No. 161”), “Disclosure about Derivative Instruments and Hedging Activities —an amendment of SFAS No. 133”. The objective of this Statement is to enhance disclosures about an entity’s derivative and hedging activities and thereby improve the transparency of financial reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company currently has no hedging arrangements in place.

In December 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 110. This guidance continues to allow companies, in certain circumstances, to utilize a simplified method in determining the expected term of stock option grants when calculating the compensation expense to be recorded under SFAS No. 123(R), “Share-Based Payment”. The simplified method can be used after December 31, 2007 only if a company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term. Because the Company’s stock option exercise experience does not provide a reasonable basis upon which to estimate the expected option term, the Company will continue to use the simplified method in determining the expected term of the stock options granted to date.

SIFCO Industries, Inc. and Subsidiaries

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require expanded disclosure related to the ownership interests in subsidiaries held by parties other than the parent. Such ownership interest(s) shall be clearly identified, labeled, and presented in the consolidated financial statement and shall provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This Statement applies to all for-profit entities that prepare consolidated financial statements, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. At present, he Company has no non-controlling ownership in any of its subsidiaries.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No. 141R), “Business Combinations”. The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity (the acquirer) provides in its financial reports about a business combination and its effects. To accomplish that, this Statement establishes principles and requirements for how the acquirer (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired entity (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This Statement applies to all transactions or other events in which an entity obtains control of one or more businesses. This Statement applies to all business entities, but does not apply to (i) the formation of a joint venture, (ii) the acquisition of an asset or a group of assets that does not constitute a business, (iii) a combination between entities or businesses under common control, or (iv) a combination between not-for-profit organizations or the acquisition of a for-profit business by a not-for-profit organization. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

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. 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, 2008 and 2007, the Company had no forward exchange contracts outstanding.

M. RESEARCH AND DEVELOPMENT

Research and development costs from continuing operations are expensed as incurred. Research and development expense from continuing operations was approximately $672, $880 and $622 in fiscal 2008, 2007 and 2006, respectively.

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

N. ACCUMULATED OTHER COMPREHENSIVE LOSS

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

		2008				2007				2006
Foreign currency translation adjustment		$	(4,858	)		$	(4,358	)		$	(6,643	)
SFAS No. 158 net pension liability, net of tax			(1,815	)			(325	)			—
Minimum pension liability adjustment, net of tax			—				—				(2,819	)
Total accumulated other comprehensive loss		$	(6,673	)		$	(4,683	)		$	(9,462	)

O. RECLASSIFICATIONS

Certain amounts in prior years may have been reclassified to conform to the 2008 consolidated financial statement presentation.

2. Inventories

Inventories at September 30 consist of:

		2008				2007
Raw materials and supplies		$	3,792			$	7,579
Work-in-process			5,574				6,433
Finished goods			2,364				2,885
Total inventories		$	11,730			$	16,897

If the FIFO method had been used for the entire Company, inventories would have been $8,903 and $7,191 higher than reported at September 30, 2008 and 2007, respectively.

3. Accrued Liabilities

Accrued liabilities at September 30 consist of:

		2008				2007
Accrued employee compensation and benefits		$	1,836			$	2,199
Accrued workers’ compensation			1,107				1,190
Accrued income taxes			221				358
Accrued utilities			388				306
Accrued royalties			162				394
Accrued legal and professional			331				252
Other accrued liabilities			1,007				991
Total accrued liabilities		$	5,052			$	5,690

4. Government Grants

The Company 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 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.

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

The unamortized portion of deferred grant revenue is recorded in other long-term liabilities at September 30, 2008 and September 30, 2007, which amounted to $442 and $421, respectively. The majority of the Company’s grants are denominated in euros. The Company adjusts its deferred grant revenue balance in response to currency exchange rate fluctuations for as long as such grants are treated as obligations.

5. Long-Term Debt

Long-term debt at September 30 consists of:

		2008				2007
Revolving credit agreement		$	—			$	2,600
Capital lease obligations			354				463
Other			9				10
			363				3,073
Less — current maturities			94				87
Total long-term debt		$	269			$	2,986

At September 30, 2008, the Company had an $8,000 revolving credit agreement with a bank subject to sufficiency of collateral that expires on July 1, 2009 and bears interest at the bank’s base rate. The interest rate was 5.00% and 8.25% at September 30, 2008 and 2007, respectively. The daily average balance outstanding against the revolving credit agreement was $1,406 and $1,363 during 2008 and 2007, respectively. A commitment fee of 0.35% is incurred on the unused balance. At September 30, 2008, the Company had $7,955 available under its $8,000 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.

In December 2008, the Company entered into an agreement with its bank to extend the maturity date of its revolving credit agreement from July 1, 2009 to October 1, 2010.

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, 2008.

6. Income Taxes

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

		Years Ended September 30,
		2008				2007				2006
U.S.		$	8,282			$	9,876			$	155
Non-U.S.			538				379				(190	)
Income (loss) from continuing operations before income tax provision		$	8,820			$	10,255			$	(35	)

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

The income tax provision consists of the following:

		Years Ended September 30,
		2008				2007				2006
Current income tax provision:
U.S. federal		$	1,550			$	95			$	—
U.S. state and local			336				115				—
Non-U.S.			210				65				14
Total current tax provision			2,096				275				14
Deferred income tax provision (benefit):
U.S. federal			1,066				1,276				—
U.S. state and local			163				(83	)			—
Non-U.S.			(48	)			15				—
Total deferred tax provision			1,181				1,208				—
Income tax provision		$	3,277			$	1,483			$	14

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,
		2008				2007				2006
Income (loss) from continuing operations before income tax provision		$	8,820			$	10,255			$	(35	)
Less-U.S. state and local income tax provision			499				32				—
Income (loss) from continuing operations before U.S. and non-U.S. income tax provision		$	8,321			$	10,223			$	(35	)
Income tax provision (benefit) at U.S. federal statutory rate		$	2,829			$	3,476			$	(12	)
Tax effect of:
Business expenses not deductible for tax			27				265				—
Recognition of excess tax basis of assets			—				(704	)			—
Undistributed earnings of non-U.S. subsidiaries			11				1,837				—
Reversal of deferred tax valuation allowance			—				(2,999	)			—
State and local income taxes			499				32				—
Other			(89	)			(424	)			26
Income tax provision		$	3,277			$	1,483			$	14

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

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

		2008				2007
Deferred tax assets:
Net U.S. operating loss carryforwards		$	—			$	290
Net non-U.S. operating loss carryforwards			622				575
Employee benefits			433				—
Inventory reserves			621				926
Asset impairment reserve			366				122
Allowance for doubtful accounts			136				154
Foreign tax credits			2,822				2,667
Net state operating loss carry forwards			9				110
Alternative minimum tax credit carry forwards			—				290
Other			77				148
Total deferred tax assets			5,086				5,282
Deferred tax liabilities:
Depreciation			(1,819	)			(1,561	)
Unremitted foreign earnings			(4,541	)			(4,136	)
Employee benefits			—				(301	)
Total deferred tax liabilities			(6,360	)			(5,998	)
Net deferred tax liabilities			(1,274	)			(716	)
Valuation allowance			(480	)			(516	)
Net deferred tax liabilities		$	(1,754	)		$	(1,232	)

At September 30, 2008 the Company has U.S. state as well as non-U.S. tax loss carryforwards of approximately $95 and $5,869, respectively. The non-U.S. tax loss carryforwards do not expire.

During fiscal 2007, the Company recorded a decrease of $4,092 in the valuation allowance against its net deferred tax assets. In assessing the Company’s ability to realize its net deferred tax assets, management considers whether it is more likely than not that some portion or all of its net deferred tax assets may not be realized. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Future reversal of the remaining valuation allowance may be achieved either when the tax benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future taxable income. $2,999 of the valuation allowance reversal was recognized in the Company’s fiscal 2007 income tax provision. $958 of the valuation allowance reversal related to the Company’s pension liabilities and, therefore, was recognized through other comprehensive income. The Company’s discontinued operations recognized $36 and $135 reductions of the valuation allowance against its net deferred tax assets in fiscal years 2008 and 2007, respectively.

Cumulative undistributed earnings of non-U.S. subsidiaries for which no U.S. deferred federal income tax liabilities have been established were approximately $2,140 at September 30, 2008. The incremental U.S. federal income tax related to any repatriation of these cumulative foreign earnings is indeterminable currently. The incremental foreign withholding taxes associated with a repatriation of all such earnings would approximate $56.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various state, local and non-U.S. jurisdictions. The Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations for the years prior to fiscal year 2002.

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

7. Retirement Benefit Plans

The Company and certain of its subsidiaries sponsor defined benefit pension plans covering most of its employees. The Company’s funding policy for U.S. defined benefit pension plans is based on an actuarially determined cost method allowable under Internal Revenue Service regulations. Prior to August 1, 2006, non-U.S. defined benefit pension plans were funded in accordance with the requirements of regulatory bodies governing the plans. One of the Company’s U.S. defined benefit pension plans, which plan covers substantially all non-union employees of the Company’s U.S. operations who were hired prior to March 1, 2003, was frozen in 2003. Consequently, although the plan otherwise continues, the plan ceased the accrual of additional pension benefits for service subsequent to March 1, 2003.

In 2006, the Company’s Irish subsidiary advised the trustees of its two non-U.S. defined benefit pension plans that the Company would cease making contributions to such plans effective August 1, 2006. The trustees subsequently advised the Company that the trustees would wind-up both defined benefit pension plans during fiscal 2007. As of September 30, 2008, the trustees have advised the Company that the wind-up process for both such plans is complete with no further obligation on the part of the Company or its Irish subsidiary. For financial reporting purposes, the Company’s actions with respect to these two non-U.S. plans resulted in (i) the curtailment of both plans in fiscal 2006, (ii) no net curtailment gain or loss being recognized in the accompanying consolidated statement of operations for fiscal 2006, and (iii) all required settlement distributions being made to plan participants as of September 30, 2008.

The Company uses a July 1 measurement date for its U.S. defined benefit pension plans. For 2008 and 2007, the Company’s defined benefit plans had accumulated benefit obligations of $16,282 and $18,789. Net pension expense for the Company-sponsored defined benefit pension plans consists of the following:

		Years Ended September 30,
		2008				2007				2006
Service cost		$	242			$	280			$	945
Interest cost			951				990				1,463
Expected return on plan assets			(1,430	)			(1,195	)			(1,616	)
Amortization of prior service cost			132				132				132
Amortization of net (gain) loss			(71	)			105				(51	)
Net pension expense (income) for defined benefit plan		$	(176	)		$	312			$	873

The status of all U.S. and non-U.S. defined benefit pension plans at September 30 is as follows:

		2008				2007
Benefit obligations:
Benefit obligations at beginning of year		$	18,789			$	27,031
Service cost			242				280
Interest cost			951				990
Actuarial (gain) loss			(115	)			(1,478	)
Benefits paid			(441	)			(621	)
Plan terminations			(3,141	)			(8,177	)
Currency translation adjustments			(3	)			764
Benefit obligations at end of year		$	16,282			$	18,789
Plan assets:
Plan assets at beginning of year		$	19,899			$	24,905
Actual return on plan assets			(1,174	)			2,046
Employer contributions			1,564				982
Benefits paid			(441	)			(621	)
Plan terminations			(3,141	)			(8,177	)
Currency translation adjustments			(3	)			764
Plan assets at end of year		$	16,704			$	19,899

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

		Plans in which								Plans in which
		Assets Exceed Benefit								Benefit Obligations
		Obligations at								Exceed Assets at
		September 30,								September 30,
		2008				2007				2008				2007
Reconciliation of Funded Status:
Plan assets in excess of (less than) projected benefit obligations		$	2,014			$	2,330			$	(1,592	)		$	(1,220	)
Amounts recognized in accumulated other comprehensive loss:
Net loss (gain)			(1,070	)			(1,571	)			3,544				1,484
Prior service cost			340				433				106				145
Contribution between measurement date and fiscal year-end			—				—				—				205
Net amount recognized in the consolidated balance sheets		$	1,284			$	1,192			$	2,058			$	614
Amounts recognized in the Consolidated Balance Sheets are:
Other assets		$	2,014			$	2,330			$	—			$	—
Other long-term liabilities			—				—				(1,592	)			(1,016	)
Accumulated other comprehensive loss — pretax			(730	)			(1,138	)			3,650				1,630
Net amount recognized in the consolidated balance sheets		$	1,284			$	1,192			$	2,058			$	614