<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 1-5601
AMERICAN PRECISION INDUSTRIES INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1284388
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2777 WALDEN AVENUE, BUFFALO, NEW YORK 14225
- -------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(716) 684-9700
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Number of shares of outstanding stock
on November 10, 1998 7,478,533
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
--------------------
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
----------------------------------
(Unaudited)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, OCTOBER 3, SEPTEMBER 30, OCTOBER 3,
(In thousands, except per share data) 1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 54,995 $ 55,014 $163,667 $130,429
COSTS AND EXPENSES
Cost of products sold 38,542 38,592(1) 114,668 90,461(1)
Selling and administrative 11,627 11,283 36,012 26,382
Research and product development 1,096 1,021 3,594 2,527
Interest and debt expense,
net of investment income 784 870 2,411 1,889
Other expense - 210(1) - 210(1)
-------- -------- -------- --------
52,049 51,976 156,685 121,469
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES 2,946 3,038 6,982 8,960
INCOME TAXES 1,060 780 2,513 2,847
-------- -------- -------- --------
NET EARNINGS $ 1,886 $ 2,258 $ 4,469 $ 6,113
======== ======== ======== ========
EARNINGS PER COMMON SHARE
BASIC $ 0.25 $ 0.30 $ 0.60 $ 0.83
======== ======== ======== ========
DILUTED $ 0.20 $ 0.24 $ 0.48 $ 0.74
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 7,473 7,412 7,459 7,365
======== ======== ======== ========
Diluted 9,463 9,383 9,406 8,310
======== ======== ======== ========
</TABLE>
(1) Cost of products sold includes a pre-tax inventory charge of $816,000.
Other expense includes $331,000 of pre-tax cost related to a dispute
settlement with the U.S. Government, offset by non-operating income of
$121,000. Total after-tax impact of these items is $636,000.
2
<PAGE> 3
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(In thousands, except share and per share data) 1998 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,109 $ 2,313
Accounts receivable less allowance for
doubtful accounts of $996 and $1,124 36,257 32,163
Inventories - net 41,663 38,510
Prepaid expenses 2,200 4,744
Deferred income taxes 4,224 4,338
-------- --------
TOTAL CURRENT ASSETS 87,453 82,068
INVESTMENTS - 686
OTHER ASSETS
Cost in excess of net assets acquired - net 20,446 19,853
Prepaid pension costs 1,635 1,669
Net cash value of life insurance 3,750 3,199
Other 2,417 2,251
-------- --------
28,248 26,972
DEFERRED INCOME TAXES 314 297
PROPERTY, PLANT AND EQUIPMENT
Land 3,596 3,409
Buildings and improvements 20,753 20,327
Machinery, equipment and furniture 58,455 51,427
Construction in process 3,834 2,689
-------- --------
86,638 77,852
Less accumulated depreciation 31,695 25,205
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 54,943 52,647
-------- --------
TOTAL ASSETS $170,958 $162,670
======== ========
</TABLE>
3
<PAGE> 4
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(In thousands, except share and per share data) 1998 1997
------------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 13,844 $ 14,086
Accounts payable 15,244 15,792
Accrued compensation and payroll taxes 7,863 6,585
Other liabilities and accrued expenses 8,145 7,980
Current portion of long-term obligations 1,372 1,329
--------- ---------
TOTAL CURRENT LIABILITIES 46,468 45,772
DEFERRED INCOME TAXES 1,977 1,926
OTHER NONCURRENT LIABILITIES 3,113 3,488
LONG-TERM OBLIGATIONS, LESS CURRENT PORTION 36,186 34,884
SHAREHOLDERS' EQUITY
Series B seven percent (7%) convertible
preferred stock, par value $1.00 a share,
1,236,337 shares issued and outstanding 26,156 26,156
Common stock, par value $.66 2/3 a share:
Authorized - 30,000,000 shares
Issued - 7,847,223 and 7,812,215 shares 5,231 5,207
Additional paid-in capital 13,390 13,107
Retained earnings 40,041 35,572
Accumulated other comprehensive income 1,234 (604)
--------- ---------
86,052 79,438
Less cost of 374,262 treasury shares 2,838 2,838
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 83,214 76,600
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 170,958 $ 162,670
========= =========
</TABLE>
4
<PAGE> 5
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 30, October 3,
(Dollars in thousands) 1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 4,469 $ 6,113
Adjustments to reconcile net income to cash and
cash equivalents provided by operating activities:
Depreciation/Amortization 6,985 4,624
Gain on sale of investments/fixed assets 14 51
Stock compensation programs (309) 281
Change in various allowance accounts 364 72
Other 186 302
(Increase) Decrease in:
Accounts receivable (3,627) (6,819)
Inventory (2,186) 1,015
Prepaid expenses 1,646 (416)
Prepaid income taxes 1,054 -
Deferred income tax assets 236 (492)
Other assets, net (971) (356)
Increase (Decrease) in:
Accounts payable (911) 2,302
Accrued expenses 875 (3,764)
Federal, state and foreign income taxes 118 44
Other noncurrent liabilities (280) (6)
--------- ---------
Net Cash Provided by Operating Activities 7,663 2,951
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in acquisitions, net of cash & cash equivalents acquired (9) (7,708)
Purchases of investments and marketable securities (15) (55)
Additions to property, plant and equipment (7,419) (6,640)
Proceeds from investments, marketable securities 718 2,944
--------- ---------
Net Cash (Used) by Investing Activities (6,725) (11,459)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options 306 1,070
Payment of long-term obligations, including current maturities (1,002) (978)
Dividends paid - (471)
Increase in long-term obligations 1,909 6,527
Increase (Decrease) in short-term borrowings (1,175) 3,832
--------- ---------
Net Cash Provided by Financing Activities 38 9,980
--------- ---------
Effect of Exchange Rate Changes (180) -
Net Increase (Decrease) in Cash and Cash Equivalents 796 1,472
Cash and Cash Equivalents at Beginning of Year 2,313 2,412
--------- ---------
Cash and Cash Equivalents at End of Year $ 3,109 $ 3,884
========= =========
</TABLE>
5
<PAGE> 6
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Third Quarter Ended September 30, 1998
------------------------------------------
Note A Consolidated Financial Statements
- ------ ---------------------------------
The Consolidated Balance Sheet as of September 30, 1998, and the
Consolidated Statement of Earnings and the Consolidated Statement
of Cash Flows for the periods ended September 30, 1998 and
October 3, 1997 have been prepared by the Company without audit.
In the opinion of management, all adjustments necessary to
present fairly the financial position, results of operations, and
changes in cash flow at September 30, 1998 and for all periods
presented have been made. The Consolidated Balance Sheets include
the assets, liabilities and resulting goodwill of all
subsidiaries. The Consolidated Statements of Earnings and Cash
Flows for the nine months ended October 3, 1997 include the
results of API Schmidt-Bretten and API Portescap since January
31, 1997 and July 8, 1997, the dates of their respective
acquisitions.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with Generally
Accepted Accounting Principles have been condensed or omitted. It
is suggested these condensed consolidated financial statements be
read in conjunction with the financial statements and the notes
thereto included in the Company's 1997 Annual Report to
Shareholders.
Note B Inventories
- ------ -----------
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1998 1997
------------- ------------
<S> <C> <C>
Finished goods $ 6,688 $ 9,133
Work in process 10,983 10,807
Raw materials 23,992 18,570
------- -------
$41,663 $38,510
======= =======
</TABLE>
Had the cost of all inventories at September 30, 1998 and
December 31, 1997 been determined by the FIFO method, these
amounts would have been greater by $1,052 for both periods.
6
<PAGE> 7
Note C Long-Term Obligations
- ------ ---------------------
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------------------------------------------------------------
Out- Long- Out- Long-
(In thousands) standing Current Term standing Current Term
--------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Industrial
Revenue Bonds $11,443 $ 1,146 $10,297 $12,294 $ 1,130 $11,164
Revolving Credit Debt 19,250 - 19,250 17,300 - 17,300
Supplemental
Benefit Program 750 1,034 199 835
976 226
Portescap Debt-
Mortgage and Other
Long-Term Loans 5,889 - 5,889 5,585 - 5,585
------- ------- ------- ------- ------- -------
$37,558 $ 1,372 $36,186 $36,213 $ 1,329 $34,884
======= ======= ======= ======= ======= =======
</TABLE>
Note D Earnings Per Share
- ------ ------------------
All earnings per share amounts reflect the implementation of
Statement of Financial Accounting Standards No. 128 Earnings per
Share ("SFAS 128"). SFAS 128 established new standards for
computing and presenting earnings per share and requires all
prior period earnings per share data to be restated to conform
with the provisions of the statement. Basic earnings per share
is computed by dividing net earnings by the weighted average
number of shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of
shares determined for the basic computations plus the number of
shares of common stock that would be issued assuming all
contingently issuable shares having a dilutive effect on
earnings per share were outstanding for the period.
Note E Foreign Currency Translation
- ------ ----------------------------
The financial statements of subsidiaries outside the United
States are measured using the local currency as the functional
currency. Assets, including goodwill, and liabilities are
translated at the rates of exchange at the balance sheet date.
The resulting translation adjustments are included in equity
adjustment from foreign currency translation, a separate
component of shareholders' equity reported in Accumulated other
comprehensive income. Income and expense items are translated at
average monthly rates of exchange.
The Company utilizes forward foreign currency exchange contracts
to manage exposures resulting from fluctuations in foreign
currency exchange rates on monetary assets and liabilities
denominated in foreign currencies arising from its operations.
Gains and losses on foreign currency transactions are recorded in
income and are not material during the periods presented. The
Company does not engage in foreign currency speculation.
As of September 30, 1998 and December 31, 1997 foreign exchange
contracts outstanding were not significant.
7
<PAGE> 8
Note F Selected Segment Data
- ------ ---------------------
The Company conducts operations in two major industrial
classifications: Heat Transfer Technology and Motion
Technologies. Information about the net sales and operating
profit of these segments is set forth below:
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------- --------------------------
SEPTEMBER 30, OCTOBER 3, SEPTEMBER 30, OCTOBER 3,
(Dollars in thousands) 1998 1997 1998 1997
------------- --------- --------------------------
<S> <C> <C> <C> <C>
NET SALES:
Heat Transfer 24,676 24,715 71,547 69,591
Motion 30,319 30,299 92,120 60,838
-------- -------- -------- --------
54,995 55,014 163,667 130,429
======== ======== ======== ========
OPERATING PROFIT:
Heat Transfer 2,696 2,073 6,637 6,432
Motion 2,214 3,366 6,074 7,342
-------- -------- -------- --------
4,910 5,439 12,711 13,774
GENERAL CORPORATE EXPENSE, NET (1,180) (1,531) (3,318) (2,925)
INTEREST AND DEBT EXPENSE (784) (870) (2,411) (1,889)
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES 2,946 3,038 6,982 8,960
======== ======== ======== ========
</TABLE>
Note G Adoption of SFAS No. 130
- ------ ------------------------
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." Comprehensive income is defined as "the
change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources". Under SFAS 130, the term "comprehensive income" is used
to describe the total net earnings plus other comprehensive
income which for the Company includes foreign currency
translation adjustments and minimum pension liability not yet
recognized as net periodic pension cost.
The adoption of SFAS 130 did not impact the calculation of net
earnings or earnings per share nor did it impact reported assets,
liabilities or total shareholders' equity. It did impact the
presentation of the components of shareholders' equity within the
balance sheet and will result in the presentation of the
components of comprehensive income within an annual financial
statement, which must be displayed with the same prominence as
other financial statements.
8
<PAGE> 9
The components of the Company's total comprehensive income (loss)
were:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
SEPTEMBER 30, OCTOBER 3,
(In thousands) 1998 1997
------------- ----------
<S> <C> <C>
Net earnings $ 4,469 $ 6,113
Other comprehensive income (loss):
Foreign currency translation adjustments 1,312 (215)
Minimum pension liability, net of tax (78) (74)
------- -------
Total comprehensive income (loss) $ 5,703 $ 5,824
======= =======
</TABLE>
The foreign currency translation adjustments are not currently
adjusted for income taxes since they relate to investments which
are permanent in nature.
9
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
SALES
American Precision Industries Inc. ("API") consolidated sales for the third
quarter of 1998 were $55.0 million, equal to the similar period of 1997. For the
first nine months of 1998, consolidated sales of $163.7 million were 25.5% above
sales for the first nine months of 1997. The acquisition of Portescap, a Swiss
micromotor company acquired July 8, 1997 and of Schmidt-Bretten, a German heat
exchanger company acquired January 31, 1997, accounted for $31.1 million of the
$33.2 million increase in nine-month comparative sales. The remaining $2.1
million sales increase resulted from higher sales of API Motion's brakes,
clutches, resolvers and magnetic components and of API Heat Transfer's
air-cooled products offset by lower demand for other Motion Control products
(weak semi-conductor industry demand), including Gettys turbo motors (delayed
new product introduction) and for shell and tube heat exchangers (weak
refrigeration market demand).
COST OF PRODUCTS SOLD
Cost of products sold for the third quarter and first nine months of 1998 were
$38.5 million and $114.7 million respectively as compared to $38.6 million and
$90.5 million for similar periods in 1997. The third quarter of 1998 cost of
goods sold was $.8 million higher than the similar period in 1997 when third
quarter 1997 is adjusted to exclude one-time inventory write-downs. The majority
of the higher cost was related to manufacturing inefficiencies at the Company's
air-cooled heat exchanger facility. The causes of these inefficiencies were
resolved late in the third quarter of 1998 by the addition of furnace capacity.
The acquisition of Portescap and Schmidt-Bretten accounted for $21.2 million of
the increase in cost of goods sold for the nine-month period compared with the
similar period in 1997. The remaining $3.0 million increase was the result of
the manufacturing inefficiencies mentioned above and the higher sales volume.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative costs in the third quarter 1998 were $11.6 million, a
$.3 million increase as compared to 1997's third quarter. Currency rate
fluctuations increased the dollar value of selling, general and administrative
expenses at the Company's foreign operations, accounting for the comparative
increase.
Selling and administrative costs for the nine-month period of 1998 are $36.0
million, up $9.6 million compared with the prior year. The Portescap and
Schmidt-Bretten acquisitions account for $7.2 million of the increase. In
addition, higher selling costs related to volume growth of brakes and clutches,
resolvers, magnetic components and plate and frame heat exchangers, costs to
support market introduction of Gettys' turbo motors, and the currency rate
fluctuations mentioned above account for the balance of the comparative
increase.
10
<PAGE> 11
RESEARCH AND PRODUCT DEVELOPMENT
Product development spending was $1.1 million and $3.6 million for the third
quarter and nine-month periods of 1998 compared with $1.0 million and $2.5
million for similar periods in 1997. Development spending for product redesigns
of Gettys motors and Portescap micromotors account for the quarterly comparative
increase. For the nine months, the Portescap acquisition accounts for $1.0
million of the comparative increase.
INTEREST AND DEBT EXPENSE
Interest and Debt Expense, net of investment income, was $.8 million in the
third quarter of 1998 compared with $.9 million last year. The lower expense
reflects the lower interest resulting from the fourth quarter 1997 restructuring
of Portescap's Swiss franc debt following the July 8, 1997 Portescap
acquisition. For the first nine months of 1998 compared with the similar period
for 1997, interest and debt expense increased to $2.4 million from $1.9 million
principally as a result of interest on the debt acquired with Portescap.
OTHER EXPENSE
The 1997 other expense reflected a September 1997 agreement with the United
States government relating to government sub-contract work performed by API's
former Rapidsyn Division between 1987 and 1995. This cost was partially offset
by a $121,000 gain from the sale of a non-operating investment.
TAXES
The year-to-date tax rate for the nine-month period of 1998 was 36.0% compared
to a rate of 31.8% for the same period last year. The 1997 rate included
non-recurring benefits from adjustments to pre-1997 tax provisions as audits
were successfully completed. The geographic mix of the Company's earnings, most
notably increased profits in Germany, account for the remainder of the rate
increase in 1998 when compared with 1997.
During the fourth quarter of 1998, API Portescap was granted a 10-year exemption
from Cantonal taxes on profits from its new products produced in Switzerland.
The Canton of Neuchatel also recommended to the federal authorities that a
similar exemption from federal taxes be approved. The statutory federal income
tax rate is 8.5%. The Company is currently discussing with Swiss authorities the
details for the calculations of the tax holidays' benefits.
NET EARNINGS
Net Earnings for the third quarter and first nine months of 1998 were $1.9
million and $4.5 million respectively as compared to $2.3 million and $6.1
million for the similar periods of 1997. For the third quarter, excluding
one-time items in 1997, 1998 net income was $1.0 million below the similar
quarter of 1997 due to the lower semi-conductor demand for API's motion control
products, the design, development and product introduction costs for API's new
turbo motors, and the higher tax rate. For the first nine months of 1998, the
increased net income from the acquisitions of Portescap and Schmidt-Bretten were
more than offset by the
11
<PAGE> 12
production issues related to air-cooled heat exchangers, costs related to the
introduction of new motor and drive products at API Motion, higher corporate
costs and a higher tax rate.
SEGMENT DATA DISCUSSION
Heat Transfer
- -------------
Third quarter 1998 sales in the heat transfer segment were $24.7 million, equal
to the third quarter of 1997. 1998 third quarter operating profit was $2.7
million, $.6 million or 30% above the third quarter of last year. When adjusted
to exclude a one-time $.4 million third quarter 1997 inventory write-down,
comparative operating profit increased by 8%.
- - For the shell and tube product line, lower sales to the refrigeration market
caused third quarter 1998 sales to be 8% below last year. Manufacturing cost
reductions were more than offset by the lower sales volume resulting in
operating profit to fall 5% below (excluding 1997's inventory adjustment) the
third quarter 1997 level.
- - The plate and frame heat exchanger product line had third quarter sales and
operating profit increase by 1% and 158% compared with the third quarter of
1997. The third quarter of 1997 included a large systems order. Excluding
this order, 1998's sales and operating profit were respectively 11% and 51%
above the similar quarter of 1997.
- - For air-cooled products, third quarter 1998 sales were up 8% compared with
the third quarter of 1997. On a comparative basis, third quarter 1998 profits
were 38% lower than last year's third quarter results. Progress in resolving
manufacturing inefficiencies improved significantly following the mid-July
start-up of a new furnace. September sales were at record levels and
operating profit exceeded that of the similar month of 1997.
For the nine months of 1998, Heat Transfer sales of $71.5 million were 2.8%
above the similar period last year. Operating profit of $6.6 million was 3.2%
higher comparatively. Ownership of Schmidt-Bretten, acquired January 31, 1997,
for a full nine months in 1998 and increased sales of air-cooled products offset
lower shell and tube heat exchanger sales. Lower operating profit due to
manufacturing inefficiencies related to air-cooled products was more than offset
by cost reductions and margin improvements in the other products.
Motion
- ------
1998 third quarter sales for Motion (including sales of magnetic components
previously reported as the Electronic Components segment) were $30.3 million,
equal to sales in the third quarter 1997. Operating profit was $2.2 million,
down $1.2 million when compared to third quarter 1997's operating profit, and
down $1.6 million excluding a $.4 million one-time inventory write-down in
1997's third quarter.
12
<PAGE> 13
- - For Controls and for Gettys motors products, weak semi-conductor
industry demand for both current and new motion control products and
the phase out of older motor products as Gettys continued its new turbo
motor development and introduction reduced third quarter 1998 sales by
34% as compared to the same period in 1997. The sales decline plus
turbo motor development and market introduction costs lowered operating
profit by $1.1 million in 1998's third quarter when compared to the
third quarter of 1997.
- - Motion's brakes, clutches and resolver sales increased 22% in the third
quarter of 1998 when compared with the third quarter of 1997. Price
competition in the markets served by these products and added marketing
resources offset the profit from the higher sales.
- - Micromotor manufacturing productivity at Motion's Portescap facility in
Switzerland attained higher levels during the third quarter, 1998,
similar to our experience late in the second quarter. This followed the
low productivity levels in April 1998 during Portescap's conversion to
a flow manufacturing process. Sequentially, third quarter 1998
operating profits increased 78% as compared with the second quarter of
1998.
- - When adjusted to exclude the impact of currency fluctuation, sales in
the third quarter of 1998 were $1.1 million lower when compared with
sales in the third quarter of 1997. The lower sales reflect 1997 order
timing, which experienced lower early year demand and stronger second
half shipments. The lower comparative volume accounted for the majority
of the $.9 million lower third quarter 1998 operating profit compared
with 1997's third quarter result. The balance of the shortfall is the
net result of lower margins related to the work-off of old, higher cost
inventory offset by cost savings from earlier restructuring activities.
- - The magnetic components product line showed a 151% sales increase in
the third quarter of 1998 compared with the prior year. Higher sales
and cost control produced a 17% increase in quarterly operating profit
compared to the prior year.
For the first nine month 1998 period, sales of $92.1 million were up $31.3
million compared with the similar period of 1997. Portescap's acquisition on
July 8, 1997 accounts for $29.4 million of the increase. Higher demand for
brakes, clutches, resolvers and components offset by lower sales of controls and
Gettys motors account for the remainder of the increase. Operating profit for
the nine months was $6.1 million, $1.3 million below operating profit for the
first nine months of 1997.
13
<PAGE> 14
FINANCIAL POSITION
Comparative information on the Company's liquidity position follows (000
omitted).
<TABLE>
<CAPTION>
September 30, October 3,
------------- -------------
1998 1997
------------- -------------
<S> <C> <C>
Net Working Capital $40,985 $31,764
Current Ratio 1.9 1.6
Cash and Cash Equivalents $ 3,109 $ 3,884
<CAPTION>
Nine Months Ended
-------------------------------
September 30, October 3,
1998 1997
------------- -------------
Cash Flow from Operations $ 7,663 $ 2,951
Capital Expenditures $ 7,419 $ 6,640
</TABLE>
The Company has available short-term lines of credit which it utilizes to fund
current operations. On August 31, 1998, the Company signed a loan agreement with
Marine Midland Bank and Fleet Bank for a $100 million, multi-currency, five-year
unsecured Revolving Credit Facility with a variable rate of interest based on
either the prime rate or LIBOR, with $50 million of the facility available in
foreign currencies selected by the Company. The new credit facility replaced the
Company's $20 million Revolving Credit Facility with Marine Midland Bank.
Twenty-five million dollars ($25 million) of the new facility will be used to
repay the existing line and for general corporate purposes. The balance of the
facility is available for acquisitions and the possible redemption of some or
all of the Company's Series B 7% Cumulative Convertible preferred stock which
has an aggregate redemption value of approximately $26 million. The facility is
guaranteed by the Company's U.S. domestic subsidiaries.
YEAR 2000
The Company is addressing through its Heat Transfer, Motion, Components and
Corporate Groups the business and technology issues presented by the year 2000
("Y2K") and the possibility that computer programs may not properly recognize a
year that begins with a "20" instead of the familiar "19." The Company oversees
and coordinates its Y2K efforts through a management committee which is chaired
by the Company's Chief Financial Officer and which includes a business executive
and information technology ("IT") managers from each Group. The members also
comprise the leadership team for their Group. The Y2K Committee and the various
Groups utilize outside computer consultants as the need arises. Periodic status
reports are provided to the Company's Audit Committee.
The Y2K Committee has organized its efforts into four categories:
1. IT Systems - hardware and software for operational and administrative
systems
14
<PAGE> 15
2. Non-IT Areas - production and testing equipment, office equipment and
facilities
3. Products and customers
4. Suppliers (material and services)
In all areas, the primary focus is on assuring that mission critical systems are
or will become Y2K compliant.
The Company's Y2K efforts can best be summarized by discussing separately its
U.S. and European operations.
U.S. Business and Corporate Groups:
- -----------------------------------
The Company's U.S. IT environment consists of relatively new mainframe hardware,
a mixed age range of personal computers and package software purchased or
licensed from recognized software providers. The Company policy has been to not
customize source code.
An inventory and assessment of its IT systems for Y2K compliance occurred in
mid-1997. This effort indicated a few non-compliant critical systems and
identified remedies which were not difficult or costly to implement. Most
non-compliant systems required software upgrades to Y2K compliant release levels
available from the software package suppliers. Such upgrades are either complete
or will be so by the second quarter of 1999. Written certification of compliance
is being secured from the suppliers of the release upgrades.
Reviews of non-IT areas were undertaken in early 1998. No mission critical
non-compliance issues have been identified. The Company intends to continue to
monitor this area.
Product reviews have not identified any products containing embedded logic which
would be non-compliant. However, the Company is limited in its ability to
identify and review all products that were sold in the past, particularly by its
Motion Group, and, therefore, the Company cannot be certain that there are not
older products still in use which contain embedded logic which may be non-Y2K
compliant.
Supplier surveys have begun to assess the compliance status of the Company's
critical suppliers and the Company intends to continue to survey its suppliers
throughout the Y2K period.
European Businesses:
- --------------------
The Company made two European acquisitions in 1997 - Schmidt Bretten, a German
heat transfer company, and Portescap, a Swiss micromotor company. Status reviews
of Y2K compliance for these units identified critical systems requiring upgrade.
Schmidt-Bretten is in the process of replacing its operating and administrative
systems. This project is scheduled to be completed in mid-1999. Portescap will
require upgrades to certain of its software and expects to complete these by
mid-1999.
The Company's European units will be conducting reviews of non-IT areas,
products and suppliers similar to those undertaken in the U.S., and plans are to
have these reviews completed in mid-1999.
15
<PAGE> 16
Costs and Contingency Plans:
- ----------------------------
Domestically, the Company's Y2K compliance costs have not been material.
Management estimates that costs incurred to date for Y2K related hardware and
software upgrades to be less than $.2 million and costs for outside consultants
to be less than $.1 million. Future costs are currently not expected to exceed
an additional $.3 million.
Internationally the Company has budgeted the equivalent of $.3 million to
replace the outdated administrative system at its German heat transfer
subsidiary. This replacement provides a number of operating improvements,
including Y2K compliance. The Company has begun implementing a general upgrade
of IT systems at its Swiss micromotor subsidiary. Future costs specifically
related to Y2K compliance at the swiss micromotor subsidiary are currently
estimated to be less than $.2 million.
At this time the Company does not have reason to believe that there will be any
significant interruption in the Company's operations caused by a Y2K problem
that is unique to the Company, and, therefore, the Company has not adopted a
contingency plan for that event. However, the Y2K Committee will continue to
monitor this possibility and will attempt to identify cost effective and timely
solutions should a problem in this regard be likely.
16
<PAGE> 17
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
Components of Consolidated Statement of Earnings
Expressed as a Percentage of Net Sales
------------------------------------------------
<TABLE>
<CAPTION>
Third Quarter Ended
---------------------------
September 30, October 3,
1998 1997
------------- ----------
<S> <C> <C>
Net Sales 100.0 100.0
----- -----
Costs and Expenses
Cost of products sold 70.1 70.1
Selling and administrative 21.1 20.5
Research and product development 2.0 1.9
Interest and debt expense, net of investment income 1.4 1.6
Other expense - 0.4
----- -----
94.6 94.5
----- -----
Earnings before Income Taxes 5.4 5.5
Income Taxes 1.9 1.4
----- -----
Net Earnings 3.5 4.1
===== =====
Income Taxes as a percentage of
Earnings Before Income Taxes 36.0% 25.7%
===== =====
</TABLE>
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
None
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
None
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None
Item 5. Other Information
- ------- -----------------
None
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
See the index to exhibits immediately preceding the
exhibits filed with this report.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on September 8,
1998 reporting under Item 5 its new Credit Agreement
with Marine Midland Bank and Fleet National Bank dated
August 31, 1998.
18
<PAGE> 19
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
* * * * * *
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
--------------------------------------------------
LITIGATION REFORM ACT OF 1995
-----------------------------
Certain statements made in this report constitute forward-looking
statements based upon current expectations and are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve certain assumptions,
risks and uncertainties that could cause actual results to differ
materially from those included in, or contemplated, by the statements.
These assumptions, risks and uncertainties include, but are not limited
to, the successful transition of the acquisitions of Schmidt-Bretten
and Portescap into the Company, the continued improvement at the
Company's air-cooled heat exchanger operation, customer acceptance of
the new line of motors and drives, the successful installation of the
new flow manufacturing system at Portescap, improvements in the
semi-conductor and refrigeration markets, stability in the interest
rate and foreign currency environment, the Company's ability to deal
with issues raised by the Year 2000, as well as the risks and
uncertainties associated with general economic cycles in North America,
Europe or the Far East. The Company expressly disclaims any obligation
to update any forward-looking statements as a result of developments
occurring after the date hereof.
* * * * * *
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN PRECISION INDUSTRIES INC.
/s/ Bruce McH. Kirchner
- ----------------------------------
Bruce McH. Kirchner
Chief Financial Officer
/s/ Mark E. Wood
- ----------------------------------
Mark E. Wood
Corporate Controller
November 11, 1998
19
<PAGE> 20
EXHIBIT INDEX
-------------
2A Credit Agreement, with exhibits and schedules, dated August 31, 1998,
by and among American Precision Industries Inc., and Marine Midland
Bank, as agent and lender, and Fleet National Bank, as lender
(incorporated by reference to Exhibit 4(A) in the Registrant's Form
8-K dated September 8, 1998).
4A Rights Agreement, dated as of July 24, 1998, between American
Precision Industries Inc. and American Securities Transfer & Trust,
Inc., as Rights Agent (incorporated by reference to Exhibit 4 in the
Registrant's Form 8-A dated July 24, 1998).
10A Amendment No. 1 to the American Precision Industries Inc. 1997
Officers Stock Option Plan
10B Amendment No. 1 to the American Precision Industries Inc. 1995
Directors Stock Option Plan
10C Amendment No. 2 to the American Precision Industries Inc. 1998
Employees Stock Option Plan
10D Amendment No. 2 to the American Precision Industries Inc. 1995
Employees Stock Option Plan
10E Amendment No. 2 to the American Precision Industries Inc. 1993
Employees Stock Option Plan
10F Amendment No. 2 to the American Precision Industries Inc. 1989
Employees Stock Option Plan
11 Computation of net income per share
27 Financial Data Schedule
20
<PAGE> 1
EXHIBIT 10A
-----------
Amendment No. 1
to the
AMERICAN PRECISION INDUSTRIES INC.
1997 OFFICERS STOCK OPTION PLAN
WHEREAS, American Precision Industries Inc. (the "Company")
adopted the American Precision Industries Inc. 1997 Officers Stock Option Plan
(the "Plan") effective April 25, 1997, and
WHEREAS, Section 8.3 of the Plan authorizes the Board of
Directors of the Company (the "Board") to amend the Plan in its discretion,
except to the extent approval of the Company's shareholders would be required by
law, and
WHEREAS, on July 24, 1998, the Board approved and authorized
the amendment to the Plan set out below,
NOW, THEREFORE, the Plan is amended as follows:
1. A new Section 8.3A is added to the Plan to read as follows:
8.3A RESTRICTIONS ON AMENDMENTS AND GRANTS.
Notwithstanding any contradictory provisions of the
Plan, and except as provided in Section 7.1 or as
approved by the Company's shareholders, an Option may
not be amended to reduce the exercise price or
cancelled and replaced with another Option having a
lower exercise price.
2. This amendment is effective July 24, 1998.
IN WITNESS WHEREOF, this document is executed this 27th day of
October, 1998, pursuant to the authorization of the Board of Directors.
AMERICAN PRECISION INDUSTRIES INC.
By /s/ James R. Schwinger
----------------------------------
Vice President - Human Resources
21
<PAGE> 1
EXHIBIT 10B
-----------
Amendment No. 1
to the
AMERICAN PRECISION INDUSTRIES INC.
1995 DIRECTORS STOCK OPTION PLAN
as Restated
WHEREAS, American Precision Industries Inc. (the "Company")
adopted the American Precision Industries Inc. 1995 Directors Stock Option Plan
(the "Plan") effective July 1, 1995, amended the Plan effective February 25,
1997, and amended and restated the Plan effective February 20, 1998, and
WHEREAS, Section 10.3 of the Plan authorizes the Board of
Directors of the Company (the "Board") to amend the Plan in its discretion,
except to the extent approval of the Company's shareholders would be required by
law, and
WHEREAS, on July 24, 1998, the Board approved and authorized
the amendment to the Plan set out below,
NOW, THEREFORE, the Plan is amended as follows:
1. A new Section 10.3A is added to the Plan to read as
follows:
10.3A Restrictions on Amendments and Grants.
Notwithstanding any contradictory provisions of the
Plan, and except as provided in Section 9.1 or as
approved by the Company's shareholders, an Option may
not be amended to reduce the exercise price or
cancelled and replaced with another Option having a
lower exercise price.
2. This amendment is effective July 24, 1998.
IN WITNESS WHEREOF, this document is executed this 27th day of
October, 1998, pursuant to the authorization of the Board of Directors.
AMERICAN PRECISION INDUSTRIES INC.
By /s/ James R. Schwinger
----------------------------------
Vice President - Human Resources
22
<PAGE> 1
EXHIBIT 10C
-----------
Amendment No. 2
to the
AMERICAN PRECISION INDUSTRIES INC.
1998 EMPLOYEES STOCK OPTION PLAN
WHEREAS, American Precision Industries Inc. (the "Company")
adopted the American Precision Industries Inc. 1998 Employees Stock Option Plan
(the "Plan") effective February 20, 1998, and amended the Plan effective April
24, 1998, and
WHEREAS, Section 8.3 of the Plan authorizes the Board of
Directors of the Company (the "Board") to amend the Plan in its discretion,
except to the extent approval of the Company's shareholders would be required by
law, and
WHEREAS, on July 24, 1998, the Board approved and authorized
the amendment to the Plan set out below,
NOW, THEREFORE, the Plan is amended as follows:
1. A new Section 8.3A is added to the Plan to read as follows:
8.3A RESTRICTIONS ON AMENDMENTS AND GRANTS.
Notwithstanding any contradictory provisions of the
Plan, and except as provided in Section 7.1 or as
approved by the Company's shareholders, an Option may
not be amended to reduce the exercise price or
cancelled and replaced with another Option having a
lower exercise price.
2. This amendment is effective July 24, 1998.
IN WITNESS WHEREOF, this document is executed this 27th day of October,
1998, pursuant to the authorization of the Board of Directors.
AMERICAN PRECISION INDUSTRIES INC.
By /s/ James R. Schwinger
----------------------------------
Vice President - Human Resources
23
<PAGE> 1
EXHIBIT 10D
-----------
Amendment No. 2
to the
AMERICAN PRECISION INDUSTRIES INC.
1995 EMPLOYEES STOCK OPTION PLAN
WHEREAS, American Precision Industries Inc. (the "Company")
adopted the American Precision Industries Inc. 1995 Employees Stock Option Plan
(the "Plan") effective December 16, 1994, and amended the Plan effective April
24, 1998, and
WHEREAS, Article II(e) of the Plan authorizes the Board of
Directors of the Company (the "Board") to amend the Plan in its discretion,
except to the extent approval of the Company's shareholders would be required by
law, and
WHEREAS, on July 24, 1998, the Board approved and authorized
the amendment to the Plan set out below,
NOW, THEREFORE, the Plan is amended as follows:
1. A new Article II(h) is added to the Plan to read as
follows:
(h) RESTRICTIONS ON AMENDMENTS AND GRANTS.
Notwithstanding any contradictory provisions of the
Plan, and except as provided in Article V(e)(vii) or as
approved by the Company's shareholders, an Option may
not be amended to reduce the exercise price or
cancelled and replaced with another Option having a
lower exercise price.
2. This amendment is effective July 24, 1998.
IN WITNESS WHEREOF, this document is executed this 27th day of
October, 1998, pursuant to the authorization of the Board of Directors.
AMERICAN PRECISION INDUSTRIES INC.
By /s/ James R. Schwinger
----------------------------------
Vice President - Human Resources
24
<PAGE> 1
EXHIBIT 10E
-----------
Amendment No. 2
to the
AMERICAN PRECISION INDUSTRIES INC.
1993 EMPLOYEES STOCK OPTION PLAN
WHEREAS, American Precision Industries Inc. (the "Company")
adopted the American Precision Industries Inc. 1993 Employees Stock Option Plan
(the "Plan") effective December 16, 1992, and amended the Plan effective
December 16, 1994, and
WHEREAS, Article II(e) of the Plan authorizes the Board of
Directors of the Company (the "Board") to amend the Plan in its discretion,
except to the extent approval of the Company's shareholders would be required by
law, and
WHEREAS, on July 24, 1998, the Board approved and authorized
the amendment to the Plan set out below,
NOW, THEREFORE, the Plan is amended as follows:
1. A new Article II(f) is added to the Plan to read as
follows:
(f) RESTRICTIONS ON AMENDMENTS AND GRANTS.
Notwithstanding any contradictory provisions of the
Plan, and except as provided in Article V(e)(vii) or as
approved by the Company's shareholders, an Option may
not be amended to reduce the exercise price or
cancelled and replaced with another Option having a
lower exercise price.
2. This amendment is effective July 24, 1998.
IN WITNESS WHEREOF, this document is executed this 27th day of
October, 1998, pursuant to the authorization of the Board of Directors.
AMERICAN PRECISION INDUSTRIES INC.
By /s/ James R. Schwinger
----------------------------------
Vice President - Human Resources
25
<PAGE> 1
EXHIBIT 10F
-----------
Amendment No. 2
to the
AMERICAN PRECISION INDUSTRIES INC.
1989 EMPLOYEES STOCK OPTION PLAN
WHEREAS, American Precision Industries Inc. (the "Company")
adopted the American Precision Industries Inc. 1989 Employees Stock Option Plan
(the "Plan") effective February 27, 1989, and amended the Plan effective
December 16, 1994, and
WHEREAS, Article II(e) of the Plan authorizes the Board of
Directors of the Company (the "Board") to amend the Plan in its discretion,
except to the extent approval of the Company's shareholders would be required by
law, and
WHEREAS, on July 24, 1998, the Board approved and authorized
the amendment to the Plan set out below,
NOW, THEREFORE, the Plan is amended as follows:
1. A new Article II(f) is added to the Plan to read as
follows:
(f) RESTRICTIONS ON AMENDMENTS AND GRANTS.
Notwithstanding any contradictory provisions of the
Plan, and except as provided in Article V(e)(vii) or as
approved by the Company's shareholders, an Option may
not be amended to reduce the exercise price or
cancelled and replaced with another Option having a
lower exercise price.
2. This amendment is effective July 24, 1998.
IN WITNESS WHEREOF, this document is executed this 27th day of
October, 1998, pursuant to the authorization of the Board of Directors.
AMERICAN PRECISION INDUSTRIES INC.
By /s/ James R. Schwinger
----------------------------------
Vice President - Human Resources
26
<PAGE> 1
EXHIBIT 11
----------
AMERICAN PRECISION INDUSTRIES INC.
COMPUTATION OF NET INCOME PER SHARE
(Shares and dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 3, SEPTEMBER 30, OCTOBER 3,
1998 1997 1998 1997
------------ --------- ------------- ----------
<S> <C> <C> <C> <C>
Net Income $1,886 $2,258 $4,469 $6,113
------ ------ ------ ------
Weighted average common shares outstanding
Basic 7,473 7,412 7,459 7,365
Incremental shares from assumed conversions:
Stock options and warrants 322 432 408 432
Series B convertible preferred stock 1,539 1,539 1,539 513
------ ------ ------ ------
Weighted average common shares outstanding
Diluted 9,334 9,383 9,406 8,310
------ ------ ------ ------
Earnings per share:
Basic $ 0.25 $ 0.30 $ 0.60 $ 0.83
Diluted $ 0.20 $ 0.24 $ 0.48 $ 0.74
</TABLE>
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,109
<SECURITIES> 0
<RECEIVABLES> 37,253
<ALLOWANCES> 996
<INVENTORY> 41,663
<CURRENT-ASSETS> 87,453
<PP&E> 86,638
<DEPRECIATION> 31,695
<TOTAL-ASSETS> 170,958
<CURRENT-LIABILITIES> 46,468
<BONDS> 36,186
0
26,156
<COMMON> 5,231
<OTHER-SE> 51,827
<TOTAL-LIABILITY-AND-EQUITY> 170,958
<SALES> 163,667
<TOTAL-REVENUES> 163,667
<CGS> 114,668
<TOTAL-COSTS> 114,668
<OTHER-EXPENSES> 3,594
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,411
<INCOME-PRETAX> 6,982
<INCOME-TAX> 2,513
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,469
<EPS-PRIMARY> .60
<EPS-DILUTED> .48
</TABLE>
