<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 June 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 July 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
----- -----
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INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
----------------------------- --------
<S> <C> <C>
Item 1. Financial Statements
a) Consolidated Balance Sheet, June 30, 1997 3
b) Consolidated Statement of Income, Three and Six Months Ended
June 30, 1997 and 1996 4
c) Consolidated Statement of Cash Flows for the Six Months Ended
June 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
Item 4. Submission of matters to a Vote of Security Holders 12
Signatures 13
Item 6(a). Exhibits
27 Financial Data Schedule
</TABLE>
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PART I FINANCIAL INFORMATION
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
($000's omitted except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Assets
Current assets:
<S> <C>
Cash $ 1,029
Accounts receivable 2,377
Inventories 8,055
Deferred tax asset 564
Other 1,132
------------
Total current assets 13,157
Property, plant and equipment, net 7,555
Other assets 449
------------
$ 21,161
============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 246
Accounts payable 1,308
Accrued employee compensation and benefit costs 989
Accrued income taxes 16
Other accrued liabilities 138
------------
Total current liabilities 2,697
------------
Long-term debt 6,541
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 1,771
------------
15,563
Employee stock ownership trust commitment (2,943)
Treasury stock, at cost, 259,028 shares (1,240)
------------
Total shareholders' equity 11,380
------------
$ 21,161
============
</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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,228 $ 4,414 $ 7,701 $ 7,900
Costs and expenses:
Cost of goods sold 2,792 3,036 5,194 5,452
Selling, general and administrative 855 835 1,576 1,564
Interest 82 85 161 165
Depreciation and amortization 158 157 316 313
--------- --------- --------- ---------
3,887 4,113 7,247 7,494
--------- --------- --------- ---------
Income before income taxes 341 301 454 406
Income tax provision 130 111 168 146
--------- --------- --------- ---------
Net income $ 211 $ 190 $ 286 $ 260
========= ========= ========= =========
Net income per share $ 0.12 $ 0.11 $ 0.17 $ 0.16
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
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SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000's omitted)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows related to operating activities:
Net income $ 286 $ 260
Adjustments to reconcile net income to net
cash provided by (used in) operating activities -
Depreciation and amortization 316 313
Change in assets and liabilities -
Accounts receivable 337 448
Inventories (848) (270)
Prepaid income taxes 0 122
Other current assets (3) (549)
Other assets 6 7
Accounts payable 317 131
Accrued employee compensation & benefit costs 115 49
Other accrued liabilities (85) (101)
Accrued income taxes (184)
--------- ---------
Net cash provided by operating activities 257 410
--------- ---------
Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (510) (242)
---------- ----------
Net cash used in investing activities (510) (242)
---------- ----------
Cash flows related to financing activities:
Increase in demand loan 150 0
Payments on demand loan (150) 0
Principal payments on long-term debt (107) (105)
---------- ----------
Net cash used in financing activities (107) (105)
---------- ----------
Net (decrease) increase in cash (360) 63
Cash at beginning of period 1,389 612
--------- ---------
Cash at end of period $ 1,029 $ 675
========= =========
</TABLE>
See notes to consolidated financial statements
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<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 $335,000 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.
Reclassification of prior year balances
---------------------------------------
Certain prior year balances have been reclassified to conform with the
current year presentation.
<TABLE>
<CAPTION>
2. Inventories June 30, 1997
----------- -------------
<S> <C>
Raw materials and common parts $ 1,192
Work-in-process (including engineering and other
support costs) 6,691
Finished goods 408
-----------
8,291
Less common parts expected to be used after one year (236)
-----------
$ 8,055
==========
</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.
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<PAGE> 7
<TABLE>
<CAPTION>
3. Property, plant and equipment June 30, 1997
----------------------------- -------------
<S> <C>
Land $ 11
Buildings 6,089
Machinery, equipment and tooling 7,880
----------
13,980
Less accumulated depreciation (6,425)
----------
$ 7,555
==========
</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>
June 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 (4.35% at June 30, 1997) $ 5,000
Unsecured term note; payable to a bank with
interest at prime plus 1/4% (8.75% at
June 30, 1997); quarterly principal
payments of $34,439 through November 1, 2000 448
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 336
Various other secured term notes payable to government agencies 1,003
---------
6,787
Less current portion (246)
---------
$ 6,541
=========
</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
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<PAGE> 8
facility 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 -- -- -- 286 -- --
--------- -------- ---------- --------- --------- ----------
Balance
June 30, 1997 2,614,506 $ 523 $ 13,269 $ 1,771 ($ 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 second quarter ended June 30, 1997 and 1996
and 1,692,918 and 1,660,104 for the six month period ended June 30, 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.
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<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 six months ended increase
June 30, (decrease) June 30, (decrease)
1997 1996 97-96 1997 1996 97-96
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales
Advanced technology products 61.7% 57.7% 2.1% 57.8% 52.5% 3.9%
Consumer products 38.3% 42.3% -5.3% 42.2% 47.5% -6.7%
----- ----- ----- ----- ----- -----
100.0% 100.0% -4.2% 100.0% 100.0% -2.4%
Cost of goods sold, exclusive of
depreciation 66.0% 68.8% -8.0% 67.4% 69.0% -4.7%
----- ----- ----- ----- -----
Gross profit 34.0% 31.2% 4.2% 32.6% 31.0% -2.5%
----- ----- ---- ----- ----- -----
Selling, general and administrative 20.2% 18.9% 2.4% 20.5% 19.8% 0.8%
Interest 1.9% 1.9% -3.5% 2.1% 2.1% -2.4%
Depreciation and amortization 3.7% 3.6% 0.6% 4.1% 4.0% 1.0%
---- ---- ---- ---- ---- ----
25.8% 24.4% -0.5% 26.7% 25.9% -0.6%
----- ----- ----- ----- ----- -----
Income before provision for income taxes 8.2% 6.8% 13.3% 5.9% 5.1% 11.8%
Income tax provision 3.2% 2.5% 17.1% 2.2% 1.8% 15.1%
---- ---- ----- ---- ---- -----
Net income 5.0% 4.3% 11.1% 3.7% 3.3% 10.0%
==== ==== ===== ==== ==== =====
</TABLE>
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<PAGE> 10
Management Discussion
---------------------
During the six month period ended June 30, 1997 and for the comparable
period ended June 30, 1996, approximately 20% and 18% respectively, of the
Company's revenues were derived from contracts with agencies of the U.S.
Government or their prime contractors. For the second quarter of 1997 and
1996, approximately 18% and 22% 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 six month
period ended June 30, 1997 showed an approximate 2.4% decrease in net
sales and an increase in net income of approximately 10.0% when compared
to the same six month period of 1996. For the second quarter of 1997, net
sales decreased approximately 4.2% with an increase in net income of 11.1%
compared to the same period of 1996. The change in gross margins is a
combination of product mix and cost reductions. The decrease in sales is
the result of a decrease in sales at the Consumer Products Group's
operations due to a decrease in customer demands, partially offset by an
increase in sales at the Advanced Technology Group's operations.
The Advanced Technology Group's total backlog (funded and unfunded) as
of June 30, 1997 increased by approximately 37% from a year earlier. The
June 30, 1997 total backlog is approximately $45,300,000 as compared to
$33,000,000 of which $37,300,000 and $25,500,000 were unfunded in each of
the respective comparative periods. Approximately $29,300,000 of the June
30, 1997 backlog is for product deliveries beyond 1999. The unfunded
portion of the
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<PAGE> 11
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 six month period
ended June 30, 1997 increased to 5.9% from 5.1% as reported for the same
six month period of 1996. For the second quarter of 1997 operating profit
as a percent of net sales increased to 8.2% from 6.8% when compared to the
same period of 1996. The fluctuations in operating profit as a percentage
of net sales is a result of differences in the product mix.
Selling, general and administrative costs increased for the six month
period and quarter ended June 30, 1997 when compared to the comparable
periods of 1996 due to an increase in sales at the Advanced Technology
Group's operations and professional costs.
Income taxes for the six month period and quarter ended June 30, 1997
increased 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 six month period
ending June 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
June 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 six month period ended June 30, 1997, the Company expended
$510,000 on capital expenditures. The Company also has a $1,000,000 line of
credit at June 30, 1997 of which nothing is outstanding at June 30, 1997.
There are no material commitments for capital expenditures at June 30,
1997.
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<PAGE> 12
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 July 31, no additional shares have been purchased.
PART II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------
The annual meeting of shareholders of the Registrant was held on June
30, 1997. At the meeting, each of the directors of the Registrant was
elected to serve until the next annual meeting of shareholders until his
successor is elected and qualified. The following table shows the results
of the voting at the meeting.
<TABLE>
<CAPTION>
Withheld
Name of Nominee For Authority
--------------- --- ---------
<S> <C> <C>
Dr. William H. Duerig 2,143,144 2,195
Donald W. Hedges 2,143,144 2,195
Nicholas D. Trbovich, Jr. 2,143,141 2,198
Dr. Nicholas D. Trbovich 2,143,141 2,198
</TABLE>
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: August 13, 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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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000089140
<NAME> Servotronics, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,029
<SECURITIES> 0
<RECEIVABLES> 2,377
<ALLOWANCES> 0
<INVENTORY> 8,055
<CURRENT-ASSETS> 13,157
<PP&E> 7,555
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,161
<CURRENT-LIABILITIES> 2,697
<BONDS> 6,541
<COMMON> 523
0
0
<OTHER-SE> 15,040
<TOTAL-LIABILITY-AND-EQUITY> 21,161
<SALES> 7,701
<TOTAL-REVENUES> 7,701
<CGS> 5,194
<TOTAL-COSTS> 7,247
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161
<INCOME-PRETAX> 454
<INCOME-TAX> 168
<INCOME-CONTINUING> 286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 286
<EPS-PRIMARY> $0.17
<EPS-DILUTED> $0.17
</TABLE>
