<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, 1999
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 common stock outstanding on November 8, 1999 7,067,302
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
- ----------------------------------
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 58,058 $ 54,995 $ 175,216 $163,667
COSTS AND EXPENSES
Cost of products sold 40,841 38,542 124,241 114,668
Selling and administrative 11,905 11,627 34,972 36,012
Research and product development 1,310 1,096 4,087 3,594
Interest and debt expense, net of
investment income 949 784 2,743 2,411
-------- -------- --------- --------
55,005 52,049 166,043 156,685
-------- -------- --------- --------
EARNINGS BEFORE INCOME TAXES 3,053 2,946 9,173 6,982
INCOME TAXES 1,054 1,060 3,257 2,513
-------- -------- --------- --------
NET EARNINGS $ 1,999 $ 1,886 $ 5,916 $ 4,469
======== ======== ========= ========
Preferred stock dividends (458) -- (1,373) --
Net Earnings Available to Common Shareholders $ 1,541 $ 1,886 $ 4,543 $ 4,469
EARNINGS PER COMMON SHARE (1):
BASIC $ 0.21 $ 0.25 $ 0.62 $ 0.60
DILUTED $ 0.21 $ 0.20 $ 0.61 $ 0.48
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (1):
BASIC 7,245 7,473 7,373 7,459
DILUTED 7,370 9,463 7,507 9,406
</TABLE>
(1) See Exhibit 11 for the calculation of basic and diluted earnings per share.
See accompanying notes to Consolidated Financial Statements.
2
<PAGE> 3
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(Dollars in thousands, except share and per share data) 1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,232 $ 3,856
Accounts receivable less allowance for doubtful
accounts of $1,002 and $971 40,483 33,309
Inventories - net 43,500 43,715
Prepaid expenses 2,604 4,081
Deferred income taxes 2,655 2,672
-------- --------
TOTAL CURRENT ASSETS 93,474 87,633
OTHER ASSETS
Cost in excess of net assets acquired - net 27,134 20,129
Prepaid pension cost 1,666 1,747
Net cash value of life insurance 4,537 3,752
Other 2,655 2,344
-------- --------
35,992 27,972
PROPERTY, PLANT AND EQUIPMENT
Gross 106,296 85,356
Less accumulated depreciation 39,091 31,696
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 67,205 53,660
-------- --------
TOTAL ASSETS $196,671 $169,265
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
3
<PAGE> 4
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands, except share and per share data) 1999 1998
--------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term obligations $ 11,226 $ 14,158
Accounts payable 14,670 14,784
Accrued compensation and payroll taxes 9,434 6,838
Other liabilities and accrued expenses 10,094 7,071
Dividends payable 458 --
Current portion of long-term obligations 1,720 1,387
-------- --------
TOTAL CURRENT LIABILITIES 47,602 44,238
DEFERRED INCOME TAXES 2,027 2,111
OTHER NONCURRENT LIABILITIES 3,880 3,964
LONG-TERM OBLIGATIONS, LESS CURRENT PORTION 58,525 34,484
SHAREHOLDERS' EQUITY
Series B seven percent (7%) cumulative 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 - 7,870,764 and 7,853,635 shares 5,245 5,234
Additional paid-in capital 13,902 13,707
Retained earnings 46,473 41,930
Accumulated other comprehensive income (loss) (900) 279
-------- --------
90,876 87,306
Less cost of treasury shares, 701,162 and 374,262 6,239 2,838
-------- --------
TOTAL SHAREHOLDERS' EQUITY 84,637 84,468
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $196,671 $169,265
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
4
<PAGE> 5
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 5,916 $ 4,469
Adjustments to reconcile net income to cash and
cash equivalents provided by operating activities:
Depreciation and amortization 8,871 6,985
Stock compensation programs 195 (309)
Change in various allowance accounts 147 364
Other 198 200
(Increase) Decrease in:
Accounts receivable (5,469) (3,627)
Inventories 4,645 (2,186)
Prepaid expenses 1,858 2,700
Deferred income tax assets -- 236
Other assets, net (1,250) (971)
Increase (Decrease) in:
Accounts payable & accrued expenses 174 82
Other noncurrent liabilities 32 (280)
-------- -------
Net Cash Provided by Operating Activities 15,317 7,663
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in acquisitions, net of cash and cash equivalents acquired (21,165) (9)
Additions to property, plant and equipment (7,098) (7,419)
Other investing activities 61 703
-------- -------
Net Cash Used by Investing Activities (28,202) (6,725)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options 108 306
Payment of long-term obligations, including current maturities (5,367) (1,002)
Purchase of stock for treasury (3,401) --
Dividends paid (915) --
Increase in long-term obligations 25,135 1,909
Decrease in short-term borrowings (2,792) (1,175)
-------- -------
Net Cash Provided by Financing Activities 12,768 38
-------- -------
Effect of Exchange Rate Changes, net 493 (180)
Net Increase in Cash and Cash Equivalents 376 796
Cash and Cash Equivalents at Beginning of Year 3,856 2,313
-------- -------
Cash and Cash Equivalents at End of Period $ 4,232 $ 3,109
======== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
5
<PAGE> 6
AMERICAN PRECISION INDUSTRIES INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Third Quarter Ended September 30, 1999
------------------------------------------
Note A Consolidated Financial Statements
- ------ ---------------------------------
The Consolidated Balance Sheet as of September 30,1999, and the
Consolidated Statement of Earnings and the Consolidated Statement
of Cash Flows for the periods ended September 30, 1999 and
September 30, 1998 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, 1999 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 September 30, 1999 include the
results of API Elmo AB from February 1, 1999, the date of
acquisition.
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 1998 Annual Report to
Shareholders.
Note B Inventories
- ------ -----------
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(In thousands) 1999 1998
------- -------
<S> <C> <C>
Finished goods $ 9,593 $11,751
Work in process 9,028 8,509
Raw Materials 24,879 23,455
------- -------
$43,500 $43,715
======= =======
</TABLE>
Had the cost of all inventories at September 30, 1999 and
December 31, 1998 been determined by the FIFO method, these
amounts would have been greater by $902 and $915, respectively.
6
<PAGE> 7
Note C Long-Term Obligations
- ------ ---------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-----------------------------------------------------------------------------
(In thousands) TOTAL CURRENT LONG-TERM TOTAL CURRENT LONG-TERM
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Industrial Revenue Bonds $10,292 $ 1,165 $ 9,127 $11,165 $ 1,150 $10,015
Revolving Credit Debt 39,027 -- 39,027 18,250 -- 18,250
Supplemental Benefit Programs 702 232 470 821 237 584
Capital Lease Obligations 1,147 323 824 -- -- --
Portescap and Elmo Debt:
Mortgage and Other
Long-Term Loans 9,077 -- 9,077 5,635 -- 5,635
-----------------------------------------------------------------------------
$60,245 $ 1,720 $58,525 $35,871 $ 1,387 $34,484
=============================================================================
</TABLE>
Note D Earnings Per Share
- ------ ------------------
In accordance with Statement of Financial Accounting Standards
No. 128 Earnings per Share ("SFAS 128"), basic earnings per
share is computed by dividing net earnings (adjusted by the
charge against Retained Earnings for the preferred stock
dividend) 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.
The sequence in which potential common shares are considered in
the computation of diluted EPS may effect the amount of dilution
that they produce. To reflect maximum potential dilution, each
issue or series of potential common shares should be considered
in sequence from the most dilutive to the least dilutive. If
including the next group of potential shares in the sequence
results in a higher EPS than prior to their inclusion, the
potential shares are antidilutive, and they should not be
included in the calculation of diluted EPS. Refer to Exhibit 11
for computation.
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 (loss). Income and expense items are
translated at average monthly rates of exchange.
7
<PAGE> 8
Note F Selected Segment Data
- ------ ---------------------
The Company conducts operations in two major industrial segments:
Motion Technologies and Heat Transfer. Information about the net
sales and operating profit of these segments follows:
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
----------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES
Motion $ 35,752 $ 30,319 $ 107,401 $ 92,120
Heat Transfer 22,306 24,676 67,815 71,547
-------- -------- --------- ---------
TOTAL NET SALES $ 58,058 $ 54,995 $ 175,216 $ 163,667
======== ======== ========= =========
OPERATING PROFIT:
Motion $ 3,418 $ 2,214 $ 9,361 $ 6,074
Heat Transfer 2,121 2,696 6,408 6,637
-------- -------- --------- ---------
5,539 4,910 15,769 12,711
GENERAL CORPORATE EXPENSE, NET (1,537) (1,180) (3,853) (3,318)
INTEREST AND DEBT EXPENSE (949) (784) (2,743) (2,411)
-------- -------- --------- ---------
EARNINGS BEFORE INCOME TAXES $ 3,053 $ 2,946 $ 9,173 $ 6,982
======== ======== ========= =========
</TABLE>
Note G Derivatives and Hedging Activities
- ------ ----------------------------------
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 provides authoritative guidance
on accounting and financial reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for
hedging activities. The Statement requires the recognition of all
derivatives as either assets or liabilities in the consolidated
balance sheet, and the periodic measurement of those instruments
at fair value. The classification of gains and losses resulting
from changes in the fair values of derivatives is dependent on
the intended use of the derivative and its resulting designation,
as further defined in the Statement.
8
<PAGE> 9
In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133", which deferred the
required date of adoption of SFAS No. 133 for one year, to fiscal
years beginning after June 15, 2000; however, early adoption is
allowed, and initial application must be as of the beginning of a
fiscal quarter. Additionally, SFAS No. 133 cannot be applied
retroactively to prior periods. At adoption, existing hedging
relationships must be designated anew and documented pursuant to
the provisions of the Statement. The Company is continuing its
process of analyzing and assessing the impact that the adoption
of SFAS No. 133 is expected to have on its consolidated results
of operations, cash flows and financial position, but has not yet
reached any conclusions.
Note H Comprehensive Income
- ------ --------------------
The components of the Company's total comprehensive income
(loss) were:
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
September 30, September 30,
(In thousands) 1999 1998
---------------------------
<S> <C> <C>
Net earnings $ 5,916 $4,469
Other Comprehensive Income (Loss):
Foreign currency translation adjustments (1,196) 1,838
Minimum pension liability adjustment, net of tax 15 --
------- ------
Total other comprehensive (loss) (1,181) 1,838
------- ------
Total comprehensive income $ 4,735 $6,307
======= ======
</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
FINANCIAL REVIEW - OPERATIONS
NET SALES
American Precision Industries Inc.'s ("API" or "Company") consolidated net sales
for the third quarter and nine months of 1999 were $58.1 million and $175.2
million, increases of 5.6% and 7.1% respectively as compared with the
corresponding periods last year. The acquisition on February 1, 1999 of Elmo
Industrier AB ("Elmo"), a Swedish manufacturer of specialty electric motors, was
the cause of the increases. The addition of Elmo's sales more than offset lower
sales at continuing businesses caused by the weakness in the capital goods
market.
COST OF PRODUCTS SOLD
Cost of products sold for the third quarter and nine months of 1999 were $40.8
million and $124.2 million respectively as compared with $38.5 million and
$114.7 million for similar periods in 1998. Elmo's cost of goods sold, which was
the cause for the increase, was not completely offset by the reduced cost of
goods sold at continuing units resulting from cost reductions, productivity and
lower sales.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative costs in the third quarter 1999 were $11.9 million,
$.3 million above 1998's third quarter. Additional selling and administrative
expense related to the acquisition of Elmo was not fully offset by lower
variable selling expenses due to lower sales at continuing business and cost
reductions. Year-to-date selling and administrative costs for 1999 are $35.0
million, $1.0 million lower than these costs for the similar period in 1998.
Overhead reduction activities undertaken over the last 12 months in both
business segments more than offset the additional selling and administrative
costs related to the Elmo acquisition.
RESEARCH AND PRODUCT DEVELOPMENT
Product development spending was $1.3 million in the third quarter of 1999 and
$4.1 million for the nine-month period of 1999 as compared to $1.1 million and
$3.6 million for similar periods in 1998. The acquisition of Elmo accounts for
the majority of the increases.
INTEREST AND DEBT EXPENSE, NET OF INVESTMENT INCOME
Interest and Debt Expense, net of investment income, was $.9 million in the
third quarter of 1999 as compared with $.8 million for the third quarter of
1998. Higher interest expense resulting from the debt related to the Elmo
acquisition was not fully offset by lower expense due to lower rates and reduced
balances on previously existing debt. For the first nine months of 1999 compared
with the similar period for 1998, interest and debt expense increased to $2.7
million from $2.4 million
10
<PAGE> 11
TAXES
API's expected 1999 effective tax rate has decreased from 36% to 35.5%. This is
based upon the Company's latest forecast of the mix of earnings among higher and
lower tax rate countries. The 1999 tax rate includes the benefit of the Swiss
federal government tax holiday for API Portescap approved in the second quarter
of 1999. The benefit of this federal holiday to API's consolidated 1999 tax rate
is offset by the write-off of remaining tax loss carry-forwards included at
acquisition on API Portescap's balance sheet. The third quarter tax provision
reflects the adjustment to bring the Company's year-to-date tax rate to the
35.5% level. The consolidated tax rate for the third quarter and nine months of
1998 was 36%.
NET EARNINGS
Net Earnings for the third quarter and first nine months of 1999 were $2.0
million and $5.9 million respectively as compared with $1.9 million and $4.5
million for the similar periods of 1998. For the third quarter, the acquisition
of Elmo and the benefit of cost reductions at continuing units offset the impact
of lower sales at those units, which accounted for the 6% increase in net
earnings.
For the nine months of 1999, the 32.4% increase in net earnings is the result of
cost savings activities and the February 1, 1999 acquisition of Elmo, offset by
lower volume.
BUSINESS SEGMENT DISCUSSION
API Motion
- ----------
API Motion's third quarter 1999 sales increased 17.9% or $5.4 million when
compared to the same period in 1998. The comparative sales increase at Motion is
due to the acquisition of Elmo on February 1, 1999. The Elmo acquisition more
than offset the adverse impact from foreign currency exchange rate changes and
soft domestic market conditions for clutches, brakes and feedback devices.
The third quarter 1999 operating profit at API Motion increased 54.4%, or $1.2
million, when compared to the third quarter of 1998. The majority of this
increase in operating profit improvement was the benefit of cost and operating
improvements made over the last 12 months at the Company's continuing business
units. These factors more than offset the revenue decline for these businesses.
Elmo continued as a good profit generator in the third quarter and accounted for
the remainder of the comparative profit increase.
Sequentially, API Motion's third quarter 1999 sales were up only .8% over the
second quarter of 1999, while operating profit was up 13.7%. Stronger sales at
Portescap and at Motion's U.S. businesses, in addition to a slight benefit from
exchange translation rates, offset the reduction in Swedish sales due to holiday
scheduling in that country. The 13.7% sequential profit improvement is the
result of the higher sales and improvements at Portescap and Motion's U.S.
units, which more than offset the lower seasonal profitability in Sweden.
For the first nine months of 1999, sales of $107.4 million were up 16.6%
compared with the similar period of 1998. 1999 year-to-date operating profit of
$9.4 million was up 54.1% when compared with the first nine months of 1998. The
February 1, 1999 acquisition of Elmo accounted for the sales increase, more than
offsetting a sales decline for API Motion's continuing businesses caused by soft
business conditions in key market segments. Contributing to the
11
<PAGE> 12
higher operating profit were cost savings and productivity improvement
activities in API Motion's continuing business. These more than offset the
profit loss from lower sales. The Elmo acquisition also contributed to the
increase in operating profit.
API Heat Transfer
- -----------------
API Heat Transfer's third quarter 1999 sales and operating profit were $22.3
million and $2.1 million respectively.
Third quarter 1999 sales were 9.6% lower than sales in the third quarter of
1998, reflecting soft market conditions for larger shell and tube heat
exchangers, order timing for plate and frame products and foreign exchange rate
translation. Third quarter 1999 operating profit was 21.3% lower than the third
quarter of 1998, reflecting lower volume and pricing for shell and tube
products, offset by improved profitability of air-cooled and plate and frame
products.
Sequentially, API Heat Transfer's third quarter 1999 sales are down 2.7%
compared to the second quarter of 1999. Lower sales of shell and tube products
were not fully offset by higher air-cooled product sales. Operating profit fell
9.5%, reflecting the lower volume of shell and tube products which was not fully
offset by profits from the higher sales of air-cooled products.
For the first nine months of 1999, API Heat Transfer sales of $67.8 million were
5.2% below the similar period last year. Weak demand in the capital goods market
resulted in lower sales of shell and tube and air-cooled products. Higher plate
and frame heat exchangers sales did not fully offset these declines. The higher
profitability reflects the benefits of cost savings and productivity improvement
actions, whose benefit more than offset the profit reduction resulting from the
lower sales volume.
FINANCIAL POSITION
Comparative information on the Company's liquidity position follows ($000
omitted).
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------- -------
<S> <C> <C>
Net working capital $45,872 $40,985
Current ratio 2.0 1.9
Cash and cash equivalents $ 4,232 $ 3,109
Cash flow from operations (year-to-date) $15,317 $ 7,663
Capital expenditures (year-to-date) $ 7,098 $ 7,419
</TABLE>
The acquisition of Elmo, net of reductions in inventory at other units, is the
cause of the increase to net working capital.
The Company has available short-term lines of credit which it utilizes to fund
current operations.
On February 1, 1999, the Company used 189.9 million Swedish kronor ($24.2
million) of its $100 million multicurrency credit facility to acquire Elmo
Industrier AB and fund its working capital needs. As part of the Elmo
acquisition, API assumed bank debt of 44.2 million Swedish kronor ($5.7
million). API's bank debt at September 30, 1999 was $69.6 million. The remaining
availability at September 30, 1999 under the $100 million credit agreement is
$61 million.
12
<PAGE> 13
In February 1999, API's Board of Directors approved a stock repurchase program
and authorized the repurchase of up to $5 million of API common stock. At
September 30, 1999, the Company had spent $3.4 million to repurchase 326,900
shares. During the third quarter of 1999, the Company spent $1.5 million to
acquire 154,200 shares.
Effective January 1, 1999, a 7% annual dividend began to accrue on the $26.2
million principal amount of the Series B Seven Percent (7%) Cumulative
Convertible Preferred Stock outstanding, all of which is owned by InterScan
Holdings Ltd. The accrued dividend at September 30, 1999 was $458,000, which was
paid on October 1, 1999. A similar quarterly dividend will be accrued in
subsequent quarters with payments occurring on January 1, April 1, July 1 and
October 1 of each year.
YEAR 2000 INITIATIVES
The Company is addressing through its business groups the business and
technology issues presented by the year 2000 ("Y2K") and the possibility that
computer programs may not properly recognize the turn of the century. The
Company oversees its Y2K efforts through a committee chaired by the Company's
Chief Financial Officer. The committee includes a business executive and
information technology ("IT") manager from each business group. Outside computer
consultants are utilized as the need arises. Periodic status reports are
provided to the Company's Audit Committee.
The Y2K Committee has organized its efforts to address IT Systems, Non-IT Areas,
Products & Customers and Suppliers. The primary focus is on assuring that
mission critical systems are or will become Y2K compliant before year-end 1999.
U.S. Status:
- ------------
An inventory and assessment of IT systems at API's U.S. facilities occurred in
mid-1997. Most of the non-compliant systems required software upgrades available
from the software package suppliers. Such upgrades on major, mission critical
systems were completed during the second quarter of 1999. The majority of
non-mission critical systems are compliant, with only a few awaiting supplier
furnished upgrades. Written certification of compliance is being secured from
the suppliers of the release upgrades. Ongoing tests are performed to assure
compliance. In non-IT areas, evaluation of production, testing and office
equipment and of facilities has identified no mission critical non-compliance
issues. The Company continues to monitor this area.
Reviews have not identified any U.S. products 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. The
Company cannot be certain that there are not older products still in use which
contain embedded logic which may be non-Y2K compliant.
The Company's review of its U.S. raw material requirements has indicated it is
not dependent upon a sole supplier for critical materials or components. The
Company has been surveying its suppliers of materials and services to assess
their compliance status. To date, the results of these surveys have not
identified any areas of significant concern.
13
<PAGE> 14
European Status:
- ----------------
Status reviews at Schmidt-Bretten in Germany and Portescap in Switzerland and
the UK identified critical systems requiring upgrade.
Schmidt-Bretten has completed its program to replace its operating and
administrative systems. Reviews of non-IT areas have identified several
non-compliant items and remedies are in process. The identified items are not
considered to be significant. Raw material reviews have identified no
significant Y2K issues. Supplier surveys, begun in the first quarter of 1999,
have identified no significant concerns to date.
Portescap's Y2K review identified as non-compliant the integrated manufacturing
and administrative system which supports its Swiss facilities. A program begun
in the third quarter of 1998 brought this system into compliance during the
second quarter of 1999. A review of systems in Portescap's sales subsidiaries
was completed during the third quarter of 1999 and did not identify any critical
compliance issues.
Elmo, the Swedish motor company acquired on February 1, 1999, was in the process
of implementing a Y2K compliance program prior to its acquisition. The program
covers the areas discussed above and has identified no significant areas of
non-compliance. Upgrades to its operational and administrative systems were
completed in the second quarter of 1999.
Costs:
- ------
Management estimates that the costs for U.S. operations incurred to date for Y2K
related hardware and software upgrades to be less than $400,000. The 1999 cost
to complete the implementation of the system at Schmidt-Bretten was
approximately $200,000. The 1999 compliance cost for Elmo was less than
$100,000. Costs specifically related to Y2K compliance at Portescap are
estimated to be $500,000.
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 such an event. The Y2K Committee continues to monitor this
possibility and will attempt to identify cost effective and timely solutions
should a problem in this regard be likely.
14
<PAGE> 15
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency (Euro). The transition period for the introduction of
the Euro is between January 1, 1999 and January 1, 2002.
The Company has conducted an internal review of the potential effects of the
Euro conversion and determined that the modification of existing business
systems to accommodate the Euro are not expected to be material. Other factors
such as competitive implications of increased price transparency, currency
exchange rate risk and derivative exposures, continuity of material contracts
and potential tax consequences are not expected to have a material impact on the
Company's financial condition, liquidity or results of operations.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its financing and international operating
activities, is exposed to market risk from changes in interest rates and foreign
currency exchange rates which may adversely affect its results of operations and
financial position. The Company seeks to minimize the risks from these interest
rate and foreign currency exchange rate fluctuations through its normal
operating and financing activities. When deemed appropriate, the Company
utilizes forward contracts to minimize the foreign currency exchange rate risk.
The Company does not use derivative financial instruments for trading or other
speculative purposes.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's debt obligations which consist of a revolving credit
facility, industrial revenue bonds and various term loans. The majority of these
debt obligations have variable interest rates, primarily based on the London
Interbank Offered Rate (LIBOR) and an index rate based on short-term federal tax
exempt obligations. At September 30, 1999 and December 31, 1998, the carrying
value, which approximates fair value, under these obligations were approximately
$71 million and $49 million, respectively. If these variable interest rates were
to change by 10%, the impact on annual consolidated interest expense would be
approximately $350,000 and $225,000 for 1999 and 1998, respectively.
The Company's exposure to market risk for changes in foreign currency exchange
rates arises from investment in and intercompany balances with foreign
subsidiaries, receivables, payables, and firm commitments arising from
international transactions. The Company attempts to have all such transaction
exposures hedged with internal natural offsets to the fullest extent possible
and, once these opportunities have been exhausted, selectively through
derivative financial instruments with third parties using forward agreements. At
September 30, 1999 there were four outstanding forward agreements with aggregate
fair values of approximately $1 million with associated settlement dates
identified in the six-month period ending March 31, 2000. At December 31, 1998
one forward agreement with a settlement date of April 30, 1999 was outstanding
with a fair value of approximately $300,000. A 10% change in foreign exchange
rates would not have a material impact on the fair value of the forward
agreements or the Company's results of operations or cash flows related to these
contracts.
The above discussion and the estimated amounts generated from the sensitivity
analyses referred to above include forward-looking statements of market risk
which assume that certain adverse market conditions may occur. Actual future
market conditions may differ materially from such assumptions. Accordingly, the
forward-looking statements should not be considered projections by the Company
of future events of losses.
16
<PAGE> 17
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
None
(b) Reports on Form 8-K
None
17
<PAGE> 18
* * * * * *
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 Elmo acquisition into the Company,
the success of the actions taken to improve profitability, the
realization of benefits from cost savings initiatives, market
acceptance of new products, the absence of any disruptions to the
Company's business as a result of the effect of the Year 2000 on
computer and information technology and conversion to the Euro, and the
Company's effectiveness at gaining market share, as well as general
economic conditions in North America, Western Europe and Asia. The
Company expressly disclaims any obligation to update any
forward-looking statements as a result of developments occurring after
the date hereof.
* * *
SIGNATURES
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 10, 1999
18
<PAGE> 19
EXHIBIT INDEX
11. Statement re computation of per share earnings.
27. Financial Data Schedule.
- ---------------
19
<PAGE> 1
EXHIBIT 11
AMERICAN PRECISION INDUSTRIES INC.
SUPPLEMENTARY INFORMATION
COMPUTATION OF EARNINGS PER SHARE
(SHARES AND DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Third Quarter Ended
-------------------------------------------------------
September 30, 1999 September 30, 1998
-------------------------- ---------------------------
Income Common Per Income Common Per
Available Shares Share Available Shares Share
--------- -------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income $1,999 7,245 $0.28 $1,886 7,473 $0.25
Series B preferred stock dividends 458 -
------ ------
Earnings per share - Basic 1,541 7,245 0.21 1,886 7,473 0.25
Stock options & warrants - 125 - 451
------ ----- ------ -----
1,541 7,370 0.21 1,886 7,924 0.24
Series B convertible preferred stock 458 1,539 - 1,539
------ ----- ------ -----
1,999 8,909 0.22 1,886 9,463 0.20
Adjustment for anti-dilutive effect of
preferred stock dividend 458 1,539 N\A N\A
------ ----- ------ -----
Earnings per share - Diluted $1,541 7,370 $0.21 $1,886 9,463 $0.20
====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------------------------
September 30, 1999 September 30, 1998
-------------------------- ---------------------------
Income Common Per Income Common Per
Available Shares Share Available Shares Share
--------- -------- ------- ---------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net income $5,916 7,373 $0.80 $4,469 7,459 $0.60
Series B preferred stock dividends 1,373 -
------ ------
Earnings per share - Basic 4,543 7,373 0.62 4,469 7,459 0.60
Stock options & warrants - 134 - 408
------ ----- ------ -----
4,543 7,507 0.61 4,469 7,867 0.57
Series B convertible preferred stock 1,373 1,539 - 1,539
------ ----- ------ -----
5,916 9,046 0.65 4,469 9,406 0.48
Adjustment for anti-dilutive effect of
preferred stock dividend 1,373 1,539 N\A N\A
------ ----- ------ -----
Earnings per share - Diluted $4,543 7,507 $0.61 $4,469 9,406 $0.48
====== ===== ====== =====
</TABLE>
Refer to Footnote D concerning Earnings per Share calculation methodology.
For purposes of calculating basic and diluted earnings per share, net earnings
have been reduced by the dividend payable on the Company's convertible preferred
stock (if such shares paid a dividend during such period) to arrive at earnings
available to common shareholders. The weighted average number of outstanding
common shares used to calculate basic earnings per share is calculated on an
equivalent share basis using the weighted average number of shares outstanding
of the Company's common stock.
The assumed conversion of the convertible preferred stock is not considered in
the calculation of diluted earnings per share for the applicable periods
presented because the effect is antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,232
<SECURITIES> 0
<RECEIVABLES> 41,485
<ALLOWANCES> 1,002
<INVENTORY> 43,500
<CURRENT-ASSETS> 93,474
<PP&E> 106,296
<DEPRECIATION> 39,091
<TOTAL-ASSETS> 196,671
<CURRENT-LIABILITIES> 47,602
<BONDS> 58,525
0
26,156
<COMMON> 5,245
<OTHER-SE> 53,236
<TOTAL-LIABILITY-AND-EQUITY> 196,671
<SALES> 175,216
<TOTAL-REVENUES> 175,216
<CGS> 124,241
<TOTAL-COSTS> 124,241
<OTHER-EXPENSES> 4,087
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,743
<INCOME-PRETAX> 9,173
<INCOME-TAX> 3,257
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,916
<EPS-BASIC> .62
<EPS-DILUTED> .61
</TABLE>
