<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended March 31, 1997
__ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ____________________ to ____________________
Commission File No. 1 - 7109
SERVOTRONICS, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 16-0837866
- --------------------------------- ---------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1110 Maple Street, Elma, New York 14059-0300
--------------------------------------------
(Address of principal executive offices)
716-655-5990
------------
(Issuer's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at April 30, 1997
- ------------------------------------ -----------------------------
Common Stock, $.20 par value 2,355,478
(See Note 5 to Consolidated
Financial Statements)
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INDEX
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
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<S> <C> <C>
Item 1. Financial Statements
a) Consolidated Balance Sheet, March 31, 1997 3
b) Consolidated Statement of Income, Three Months Ended
March 31, 1997 and 1996 4
c) Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 1997 and 1996 5
d) Notes to Consolidated Financial Statements 6
e) Signatures 9
Item 2. Management's Discussion and Analysis or Plan of Operation 10
PART II. OTHER INFORMATION
Item 6(a). Exhibits
27 Financial Data Schedule
</TABLE>
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PART I FINANCIAL INFORMATION
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
($000'S OMITTED EXCEPT PER SHARE DATA)
(UNAUDITED)
Assets
Current Assets:
Cash $ 1,261
Accounts receivable 2,044
Inventories 7,821
Prepaid income taxes 102
Deferred tax asset 564
Other 1,072
--------
Total current assets 12,864
Property, plant and equipment, net 7,597
Other assets 451
--------
$ 20,912
========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 246
Accounts payable 1,291
Accrued employee compensation and benefit costs 912
Other accrued liabilities 162
--------
Total current liabilities 2,611
--------
Long-term debt 6,589
Non-current deferred tax liability 543
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; Issued 2,614,506 523
Capital in excess of par value 13,269
Retained earnings 1,560
--------
15,352
Employee stock ownership trust commitment (2,943)
Treasury stock, at cost, 259,028 shares (1,240)
--------
Total shareholders' equity 11,169
--------
$ 20,912
========
See notes to consolidated financial statements
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SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($000's omitted except per share data)
(Unaudited)
Three Months Ended
March 31,
1997 1996
---- ----
Net sales $ 3,473 $ 3,486
Costs and expenses:
Cost of goods sold 2,402 2,416
Selling, general and administrative 721 729
Interest 79 80
Depreciation and amortization 158 156
------- ------
3,360 3,381
------- ------
Income before income taxes 113 105
Income tax provision 38 35
------- ------
Net income $ 75 $ 70
======= ======
Net income per share $ 0.04 $ 0.04 *
======= ======
* Restated to give effect for shares issued in conjunction with the 8%
stock dividend declared in May 1996. (See Note 5 to Consolidated
Financial Statements).
See notes to consolidated financial statements
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SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000'S OMITTED)
(UNAUDITED)
Three Months Ended
March 31,
1997 1996
---- ----
Cash flows related to operating activities:
Net income $ 75 $ 70
Adjustments to reconcile net income to net
cash provided by (used in) operating activities -
Depreciation and amortization 158 156
Change in assets and liabilities -
Accounts receivable 670 242
Inventories (614) (590)
Prepaid income taxes (102) 8
Other current assets 57 7
Other assets 4 4
Accounts payable 300 123
Accrued employee compensation & benefit costs 36 130
Other accrued liabilities (58) 0
Accrued income taxes (200) 0
------- -------
Net cash provided by operating activities 326 150
Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (395) (97)
------- -------
Net cash used in investing activities (395) (97)
Cash flows related to financing activities:
Principal payments on long-term debt (59) (53)
------- -------
Net cash used in financing activities (59) (53)
------- -------
Net decrease in cash (128) 0
Cash at beginning of period 1,389 612
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$1,261 $ 612
See notes to consolidated financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000's omitted in tables except for per share data)
1. The information set forth herein is unaudited. This financial information
reflects all normal accruals and adjustments which, in the opinion of
management, are necessary for a fair statement of the results for the periods
presented.
Revenue recognition
-------------------
The Company incurred costs for certain contracts which are long term. These
contracts are accounted for under the percentage of completion method
(cost-to-cost) which recognizes revenue as the work progresses towards
completion. Revenues on the remaining contracts are recognized when the terms of
purchase orders are met.
Included in other current assets is $227,000 of unbilled revenues which
represent revenue earned under the percentage of completion method
(cost-to-cost) not yet billable under the terms of the contracts. Included in
other accrued liabilities is $26,000 of deferred revenue which represents
billings under the terms of the contracts in excess of revenue earned under the
percentage of completion method.
Reclassification of prior year balances
---------------------------------------
Certain prior year balances have been reclassified to conform with the
current year presentation.
2. Inventories March 31, 1997
----------- --------------
Raw materials and common parts $1,165
Work-in-process (including engineering and other
support costs) 6,561
Finished goods 331
------
8,057
Less common parts expected to be used after one year (236)
------
$7,821
======
Engineering and other support costs are incurred in fulfilling certain
contracts which have a production cycle longer than one year. A portion of these
costs will, therefore, not be realized within one year.
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3. Property, plant and equipment March 31, 1997
----------------------------- --------------
Land $ 11
Buildings 6,069
Machinery, equipment and tooling 7,785
-------
13,865
Less accumulated depreciation (6,268)
-------
$ 7,597
=======
Property, plant and equipment includes land and building under a $5,000,000
capital lease which can be purchased for a nominal amount at the end of the
lease term.
4. Long-term debt
March 31, 1997
--------------
Industrial Development Revenue Bonds; secured by a
letter of credit from a bank with interest
payable monthly at a floating rate (3.85%
at March 31, 1997) $ 5,000
Unsecured term note; payable to a bank with
interest at prime plus 1/4% (8.50% at
March 31, 1997); quarterly principal
payments of $34,439 through November 1, 2000 482
Secured term note; payable to a government agency
with interest at 6%; monthly principal payments
of $2,778 commencing on July 1, 1995 through
May 1, 2004, with a final principal payment of
$102,754 due June 1, 2004 342
Various other secured term notes payable to government
agencies 1,011
-------
6,835
Less current portion (246)
-------
$ 6,589
=======
Industrial Development Revenue Bonds were issued by a government agency to
finance the construction of the Company's new headquarters/Advanced Technology
facility. Annual sinking fund payments of $170,000 commence December 1, 2000 and
continue through 2013, with a final payment of $2,620,000 due December 1, 2014.
The Company has agreed to reimburse the issuer of the letter of credit if there
are draws on that letter of credit. The Company pays the letter of credit bank
an annual fee of 1% of the amount secured thereby and pays the remarketing agent
for the bonds an annual fee of .25% of the principal amount outstanding. The
Company's interest under the facility capital lease has been pledged to secure
its obligations to the government agency, the bank and the bondholders.
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The letter of credit reimbursement agreement, the unsecured term note
agreement and a secured term note contain, among other things, covenants
relative to maintenance of working capital and tangible net worth and
restrictions on capital expenditures, leases and additional borrowings.
5. Common shareholders' equity
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<TABLE>
<CAPTION>
Common stock
--------------------
Number Capital in
of shares excess of Retained Treasury
issued Amount par value earnings ESOP stock
------ ------ --------- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Balance December
31, 1996 2,614,506 $ 523 $ 13,269 $ 1,485 ($ 2,943) ($ 1,240)
Net income -- -- -- 75 -- --
--------- -------- ---------- --------- --------- ----------
Balance
March 31, 1997 2,614,506 $ 523 $ 13,269 $ 1,560 ($ 2,943) ($ 1,240)
========= ======== ========== ========= ========= ==========
</TABLE>
Per share data is based on weighted average outstanding shares of 1,692,918
and 1,660,104 for the first quarter ended March 31, 1997 and 1996.
In February of 1997, the Financial Accounting Standards Board (FASB) issued
a Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(FASB 128). FASB 128 replaces the presentation of primary and fully diluted
earnings per share with basic and diluted earnings per share, respectively. In
accordance with the provisions of FASB 128, the Company will adopt the standards
for reporting the basic and diluted earnings per share for all financial
statements with periods ending after December 15, 1997. The Company has
considered the potential impact of FASB 128 and has concluded that the effect of
adoption will not have a material effect on earnings per share.
On May 3, 1996 the Company's Board of Directors declared an 8% stock
dividend payable to shareholders of record on May 31, 1996. The payment date for
the stock dividend was July 1, 1996. Accordingly, per share data for all periods
presented in the accompanying income statement have been stated to give effect
to the issuance of these shares.
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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.
Date: May 14, 1997
SERVOTRONICS, INC.
By: /s/Lee D. Burns, Treasurer
--------------------------------------------
Lee D. Burns, Treasurer and
Chief Financial Officer
By: /s/Raymond C. Zielinski, Vice President
--------------------------------------------
Raymond C. Zielinski, Vice President
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SERVOTRONICS, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------- ----------------------------------------------------------
The following table sets forth for the period indicated the percentage
relationship of certain items in the consolidated statement of income to net
sales and the percentage increase or decrease of such items as compared to the
indicated prior period.
Relationship to Period to
net sales period $
three months ended increase
March 31, (decrease)
1997 1996 97-96
---- ---- -----
Net sales
Advanced technology products 53.2% 45.4% 7.6%
Consumer products 46.8% 54.6% -8.0%
----- ----- -----
100.0% 100.0% -0.4%
Cost of goods sold, exclusive of
depreciation 69.2% 69.3% -0.6%
------ ------ -----
Gross profit 30.8% 30.7% -1.3%
------ ------ -----
Selling, general and administrative 20.8% 20.9% -1.1%
Interest 2.3% 2.3% -1.3%
Depreciation and amortization 4.5% 4.5% 1.3%
------ ------ -----
27.6% 27.7% -1.1%
Income before provision for
income taxes 3.2% 3.0% 7.6%
Income tax provision 1.1% 1.0% 8.6%
------ ------ -----
Net income 2.1% 2.0% 7.1%
====== ====== =====
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Management Discussion
- ---------------------
During the three month period ended March 31, 1997 and for the comparable
period ended March 31, 1996, approximately 34% and 20% respectively, of the
Company's revenues were derived from contracts with agencies of the US
Government or their prime contractors. The Company's business is performed under
fixed price contracts. It is noted that, the many uncertainties in today's
global economy, the national deficit and defense cutbacks (both actual and
proposed) preclude any guarantees or even assurances that current programs will
be continued or that programs in the prototype stages will ultimately result in
production applications. It is because of such uncertainties and because such
adverse occurrences may not be counterbalanced with new programs or otherwise
that cyclical downturns in operational performances are realistic expectations.
Results of Operations
- ---------------------
The Company's consolidated results of operations for the three month period
ended March 31, 1997 showed an approximate .4% decrease in net sales and an
increase in net income of approximately 7.1% when compared to the same three
month period of 1996. The decrease in sales is the result of a decrease in sales
at the Consumer Products operations, due to a decrease in customer demands
partially offset by an increase in sales at the Advanced Technology operations.
The Advanced Technology Group's total backlog (funded and unfunded) as of
March 31, 1997 increased by approximately 43% from a year earlier. The March 31,
1997 total backlog is approximately $45,900,000 as compared to $32,100,000 of
which $37,700,000 and $24,700,000 were unfunded in each of the respective
comparable periods. Approximately $29,500,000 of the March 31, 1997 backlog is
for product deliveries beyond 1999. The unfunded portion of the backlog is based
on the Company's customers' estimated quantities for multi-year agreements for
which the Company has not received firm orders.
Operating profit as a percentage of net sales for the three month period
ended March 31, 1997 increased to 3.2 % from 3.0% as reported for the same three
month period of 1996. The
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fluctuations in operating profit as a percentage of net sales is a result of
differences in the product mix.
Selling, general and administrative costs decreased for the three month
period ended March 31, 1997 when compared to the same three month period of 1996
due to a decrease in sales and professional costs.
Income taxes for the three month period ended March 31, 1997 increased as a
percentage of income before taxes when compared to the same three month period
of 1996 due primarily to variable state income tax rates.
Liquidity and Capital Resources
- -------------------------------
Certain contracts of the Advanced Technology Group require development and
engineering costs in addition to hardware and the maintenance of inventory for
replacement and/or overhaul. The replacement and/or overhaul units are billed at
the time of shipment. During the three month period ending March 31, 1997, the
Company continued to invest in additional inventory for primarily new programs.
These costs and those incurred in previous periods are expensed as hardware is
shipped. The inventories at March 31, 1997, include costs associated with the
initiation and maintenance of certain programs and costs in anticipation of
increased demands upon the Company to support new programs and the request of
customers' for shorter production lead time.
During the three month period ended March 31, 1997, the Company expended
$395,000 on capital expenditures. The Company also has a $1,000,000 line of
credit at March 31, 1997 of which nothing is outstanding at March 31, 1997.
There are no material commitments for capital expenditures at March 31,
1997.
In 1991, the Company's Board of Directors authorized the purchase by the
Company of up to 250,000 additional shares of its common stock in open and
privately negotiated transactions for a total authorized purchase of up to
350,000 shares, of which 254,424 shares have been purchased. In 1997, through
April 30, no additional shares have been purchased.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-QSB
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
such as those pertaining to the Company's capital resources and profitability.
Forward-looking statements involve numerous risks and uncertainties. The Company
derives approximately 34% of its revenues from contracts with agencies of the
U.S. Government or their prime contractors. The Company's business is performed
under fixed price contracts and the following factors, among others discussed
herein, could cause actual results and future events to differ materially from
those set forth or contemplated in the forward-looking statements: uncertainties
in today's global economy, the growth of the national deficit and difficulty in
predicting defense appropriations, the discontinuance of current defense
programs, the vitality of the commercial aviation industry and its ability to
purchase new aircraft, the willingness and ability of the Company's customers to
fund and issue substantial follow-on orders to the Company for long-term
programs, competitive products and pricing, difficulties in the development or
commercialization of products, product demand and market acceptance, both for
the Company's products and its customers' products which incorporate components
supplied by the Company, enforceability of intellectual property rights,
capacity and supply, the effects of foreign competition, and the Company's
future accounting policies. The success of the Company also depends upon the
trends of the economy, including interest rates, income tax laws, governmental
regulation, legislation, population changes and those risk factors discussed
elsewhere in this Form 10-QSB. Readers are cautioned not to place undue reliance
on forward-looking statements, which reflect management's analysis only as the
date hereof. The Company assumes no obligation to update forward-looking
statements.
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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000089140
<NAME> SERVOTRONICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,261
<SECURITIES> 0
<RECEIVABLES> 2,044
<ALLOWANCES> 0
<INVENTORY> 7,821
<CURRENT-ASSETS> 12,864
<PP&E> 7,597
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,912
<CURRENT-LIABILITIES> 2,611
<BONDS> 6,589
<COMMON> 523
0
0
<OTHER-SE> 10,646
<TOTAL-LIABILITY-AND-EQUITY> 20,912
<SALES> 3,473
<TOTAL-REVENUES> 3,473
<CGS> 2,402
<TOTAL-COSTS> 3,360
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 113
<INCOME-TAX> 38
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<NET-INCOME> 75
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<EPS-DILUTED> $0.04
</TABLE>
