<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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 ISSUER (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 OCTOBER 31, 1997
- ---------------------------- -------------------------------------
COMMON STOCK, $.20 PAR VALUE 2,355,478
(SEE NOTE 5 TO CONSOLIDATED FINANCIAL
STATEMENTS)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES ; NO X
--- ---
-1-
<PAGE> 2
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
a) CONSOLIDATED BALANCE SHEET, SEPTEMBER 30, 1997 3
b) CONSOLIDATED STATEMENT OF INCOME, THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 4
c) CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 5
d) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 9
PART II. OTHER INFORMATION
SIGNATURES 13
ITEM 6(a). EXHIBITS
27 FINANCIAL DATA SCHEDULE
</TABLE>
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<PAGE> 3
PART I FINANCIAL INFORMATION
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
($000'S OMITTED EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
CASH $ 1,000
ACCOUNTS RECEIVABLE 2,188
INVENTORIES 8,118
PREPAID INCOME TAXES 249
DEFERRED TAX ASSET 564
OTHER 969
--------
TOTAL CURRENT ASSETS 13,088
PROPERTY, PLANT AND EQUIPMENT, NET 7,493
OTHER ASSETS 444
--------
$ 21,025
========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT $ 246
ACCOUNTS PAYABLE 1,021
ACCRUED EMPLOYEE COMPENSATION AND BENEFIT COSTS 880
ACCRUED INCOME TAXES 99
OTHER ACCRUED LIABILITIES 265
--------
TOTAL CURRENT LIABILITIES 2,511
--------
LONG-TERM DEBT 6,486
NON-CURRENT DEFERRED TAX LIABILITY 543
SHAREHOLDERS' EQUITY:
COMMON STOCK, PAR VALUE $.20; AUTHORIZED
4,000,000 SHARES; ISSUED 2,614,506 SHARES 523
CAPITAL IN EXCESS OF PAR VALUE 13,269
RETAINED EARNINGS 1,876
--------
15,668
EMPLOYEE STOCK OWNERSHIP TRUST COMMITMENT (2,943)
TREASURY STOCK, AT COST, 259,028 SHARES (1,240)
--------
TOTAL SHAREHOLDERS' EQUITY 11,485
--------
$ 21,025
========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE> 4
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($000'S OMITTED EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 3,578 $ 3,643 $11,278 $ 11,543
COSTS AND EXPENSES:
COST OF GOODS SOLD 2,418 2,511 7,612 7,963
SELLING, GENERAL AND ADMINISTRATIVE 743 730 2,319 2,294
INTEREST 92 85 252 250
DEPRECIATION AND AMORTIZATION 159 160 475 473
--------- ---------- --------- ----------
3,412 3,486 10,658 10,980
--------- --------- --------- ----------
INCOME BEFORE NET GAIN ON THE SALE OF
ASSETS AND INCOME TAXES 166 157 620 563
NET GAIN ON SALE OF ASSETS 0 639 0 639
--------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES 166 796 620 1,202
INCOME TAX PROVISION 61 307 229 453
--------- --------- --------- ----------
NET INCOME $ 105 $ 489 $ 391 $ 749
========= ========= ========= ==========
NET INCOME PER SHARE $ 0.06 $ 0.29 $ 0.23 $ 0.45
========= ========= ========= ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE> 5
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000'S OMITTED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES:
NET INCOME $ 391 $ 749
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES -
DEPRECIATION AND AMORTIZATION 475 473
GAIN ON SALE OF ASSETS (EXCLUSIVE OF RELATED CHARGES) 0 (1,116)
CHANGE IN ASSETS AND LIABILITIES -
ACCOUNTS RECEIVABLE 526 368
INVENTORIES (911) (369)
PREPAID INCOME TAXES (249) 261
OTHER CURRENT ASSETS 160 (386)
OTHER ASSETS 11 (241)
ACCOUNTS PAYABLE 30 (85)
ACCRUED EMPLOYEE COMPENSATION & BENEFIT COSTS 6 218
OTHER ACCRUED LIABILITIES 42 88
OTHER NON-CURRENT LIABILITY 0 251
CHANGE IN CURRENT PORTION OF LONG-TERM DEBT (3) 17
ACCRUED INCOME TAXES (101) 0
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 377 228
--------- ---------
CASH FLOWS RELATED TO INVESTING ACTIVITIES:
SALE OF ASSETS 0 1,255
CAPITAL EXPENDITURES - PROPERTY, PLANT &
EQUIPMENT (607) (337)
--------- ---------
NET CASH USED IN (PROVIDED BY) INVESTING ACTIVITIES (607) 918
--------- ---------
CASH FLOWS RELATED TO FINANCING ACTIVITIES:
INCREASE IN DEMAND LOAN 250 0
PAYMENTS ON DEMAND LOAN (250) 0
PRINCIPAL PAYMENTS ON LONG-TERM DEBT (159) (192)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (159) (192)
--------- ---------
NET (DECREASE) INCREASE IN CASH (389) 954
--------- ---------
CASH AT BEGINNING OF PERIOD 1,389 612
--------- ---------
CASH AT END OF PERIOD $ 1,000 $ 1,566
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-5-
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000 OMITTED IN TABLES EXCEPT FOR 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 $157,000 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 $18,000 of deferred revenue which represents
billings and 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.
<TABLE>
<CAPTION>
2. Inventories SEPTEMBER 30, 1997
----------- ------------------
<S> <C>
Raw materials and common parts $ 1,084
Work-in-process (including engineering and other
support costs) 6,820
Finished goods 450
-------
8,354
Less common parts expected to be used after one year (236)
-------
$ 8,118
=======
</TABLE>
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.
-6-
<PAGE> 7
3. Property, plant and equipment
-----------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
Land $ 11
Buildings 6,109
Machinery, equipment and tooling 7,957
--------
14,077
Less accumulated depreciation (6,584)
--------
$ 7,493
========
</TABLE>
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
--------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
Industrial Development Revenue Bonds; secured by a
letter of credit from a bank with interest payable monthly
at a floating rate (4.25% at September 30, 1997) $ 5,000
Unsecured term note; payable to a bank with
interest at prime plus 1/4% (8.75% at
September 30, 1997); quarterly principal
payments of $34,439 through November 1, 2000 413
Secured term note; payable to a government agency
with interest at 6%; monthly principal payments of
$2,778 commencing on July 1, 1996 through May 1, 2004,
with a final principal payment of $102,754 due June 1, 2004 325
Various other secured term notes payable to government agencies 994
---------
6,732
Less current portion (246)
---------
$ 6,486
=========
</TABLE>
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
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<PAGE> 8
capital lease has been pledged to secure its obligations to the government
agency, the bank and the bondholders.
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
---------------------------
<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 -- -- -- 391 -- --
--------- ---- ------- ------ ------- -------
Balance September
30, 1997 2,614,506 $523 $13,269 $1,876 ($2,943) ($1,240)
========= ==== ======= ====== ======= =======
</TABLE>
Per share data is based on weighted average outstanding shares of
1,692,918 for the third quarter and nine month periods ended September 30, 1997
and 1,660,104 for the third quarter and nine month periods ended September 30,
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.
8
<PAGE> 9
SERVOTRONICS, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------- ---------------------------------------------------------
The following table sets forth for the periods 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.
<TABLE>
<CAPTION>
RELATIONSHIP TO PERIOD TO RELATIONSHIP TO PERIOD TO
NET SALES PERIOD $ NET SALES PERIOD $
QUARTER ENDED INCREASE NINE MONTHS ENDED INCREASE
SEPTEMBER 30, (DECREASE) SEPTEMBER 30, (DECREASE)
1997 1996 97-96 1997 1996 97-96
---- ---- ----- ---- ---- -----
Net sales
<S> <C> <C> <C> <C> <C> <C>
Advanced technology products 58.1% 55.4% 2.8% 57.9% 53.4% 3.5%
Consumer products 41.9% 44.6% -2.7% 42.1% 46.6% -5.4%
---- ---- ----- ---- ---- ----
100.0% 100.0% -1.8% 100.0% 100.0% -2.3%
Cost of goods sold, exclusive of
depreciation 67.6% 68.9% -3.7% 67.5% 69.0% -4.4%
---- ---- ----- ---- ---- ----
Gross profit 32.4% 31.1% 2.5% 32.5% 31.0% 2.4%
---- ---- ----- ---- ---- ----
Selling, general and administrative 20.8% 20.0% 1.8% 20.6% 19.9% 1.1%
Interest 2.6% 2.3% 8.2% 2.2% 2.2% 0.8%
Depreciation and amortization 4.4% 4.4% -0.6% 4.2% 4.1% 0.4%
Net gain on sale of assets 0.0% -17.5% - 0.0% -5.5% -
---- --- ----- ---- ---- ----
27.8% 9.2% 195.8% 27.0% 20.6% 28.1%
---- ---- ----- ---- ---- ----
Income before provision for income taxes 4.6% 21.9% -79.1% 5.5% 10.4% -48.4%
Income tax provision 1.7% 8.5% -80.1% 2.0% 3.9% -49.4%
---- ---- ----- ---- ---- ----
Net income 2.9% 13.4% -78.5% 3.5% 6.5% -47.8%
===== ===== ===== ===== ===== =====
</TABLE>
-9-
<PAGE> 10
Management Discussion
- ---------------------
During the nine month period ended September 30, 1997 and for the
comparable period ended September 30, 1996, approximately 20% of the Company's
revenues were derived from contracts with agencies of the U.S. Government or
their prime contractors. For the third quarter of 1997 and 1996, approximately
20% and 23% respectively, of the Company's revenues were derived from comparable
sources. 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 nine month
period ended September 30, 1997 showed an approximate increase in operating
income (income before interest and the net gain on the sale of assets) of
approximately 7.5% from $811,000 to $872,000. For the third quarter of 1997
operating income (income before interest and the net gain on the sale of assets)
increased approximately 6.6% from $242,000 to $258,000. The increase in
operating income is a result of product mix.
The Advanced Technology Group's total backlog (funded and unfunded) as
of September 30, 1997 increased by approximately 40% from a year earlier. The
September 30, 1997 total backlog is approximately $45,100,000 as compared to
$32,000,000 of which $37,000,000 and $25,200,000 were unfunded in each of the
respective comparative periods. Approximately $29,300,000 of the September 30,
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
-10-
<PAGE> 11
firm orders.
Net sales for the three month and nine month periods ended September
30, 1997 showed an approximate 1.8% and 2.3% decrease respectively. The decrease
in sales is the result of a decrease in sales by the Consumer Products Group
because of a decrease in customer demands and the phase out of certain lower
margin products. The approximate 5.5% increase in the nine month sales for the
Advanced Technology Group partially offset the lower sales by the Consumer
Products Group. The 1996 net income reflects the previously reported sale of the
former headquarters. This sale was completed in the third quarter of 1996 and is
reflected as a net gain on sale of assets of $639,000 (gain on the sale of the
assets of $1,116,000 less charges related thereto of $477,000) as shown in the
accompanying financial statements.
Selling, general and administrative costs increased for the nine month
period and quarter ended September 30, 1997 when compared to the comparable
periods of 1996 due to an increase in selling and professional costs.
Income taxes for the nine month period and quarter ended September 30,
1997 decreased as a percentage of income before taxes when compared to the
comparable periods 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 nine month period ending September
30, 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 September 30, 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 times.
During the nine month period ended September 30, 1997, the Company
expended
-11-
<PAGE> 12
$607,000 on capital expenditures. The Company also has a $1,000,000 line of
credit at September 30, 1997 of which nothing is outstanding at September 30,
1997.
There are no material commitments for capital expenditures at September
30, 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 256,045 shares have been purchased. In 1997, through
October 31, no additional shares have been purchased.
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 20% 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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<PAGE> 13
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: November 11, 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
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000089140
<NAME> SERVOTRONICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 2,188
<ALLOWANCES> 0
<INVENTORY> 8,118
<CURRENT-ASSETS> 13,088
<PP&E> 7,493
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,025
<CURRENT-LIABILITIES> 2,511
<BONDS> 6,486
0
0
<COMMON> 523
<OTHER-SE> 10,962
<TOTAL-LIABILITY-AND-EQUITY> 21,025
<SALES> 11,278
<TOTAL-REVENUES> 11,278
<CGS> 7,612
<TOTAL-COSTS> 10,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 252
<INCOME-PRETAX> 620
<INCOME-TAX> 229
<INCOME-CONTINUING> 391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 391
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
