<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, 1998
- --- 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, IAC)
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, 1998
---------------------------- -------------------------------
Common Stock, $.20 par value 2,376,494
(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>
Item 1. Financial Statements
a) Consolidated Balance Sheet, September 30, 1998 3
b) Consolidated Statement of Income for the Three and Nine months Ended
September 30, 1998 and 1997 4
c) Consolidated Statement of Cash Flows for the Nine months Ended
September 30, 1998 and 1997 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
PART II. OTHER INFORMATION
Signatures 11
Item 6(a). Exhibits
27 Financial Data Schedule
</TABLE>
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PART I FINANCIAL INFORMATION
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1998
($000's omitted except per share data)
(Unaudited)
<TABLE>
<S> <C>
Assets
Current assets:
Cash $ 821
Accounts receivable 2,533
Inventories 8,490
Deferred tax asset 640
Other 1,433
--------
Total current assets 13,917
Property, plant and equipment, net 7,271
Other assets 429
--------
$ 21,617
========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 248
Accounts payable 1,021
Accrued employee compensation and benefit costs 979
Accrued income taxes 86
Other accrued liabilities 243
--------
Total current liabilities 2,577
--------
Long-term debt 6,197
Non-current deferred tax liability 534
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 2,515
--------
16,307
Employee stock ownership trust commitment (2,842)
Treasury stock, at cost 238,012 shares (1,156)
--------
Total shareholders' equity 12,309
--------
$ 21,617
========
</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,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,231 $ 3,578 $ 13,161 $ 11,278
Costs and expenses:
Cost of goods sold 3,033 2,418 9,207 7,612
Selling, general and administrative 769 743 2,434 2,319
Interest 77 92 240 252
Depreciation and amortization 154 159 472 475
--------- --------- --------- ----------
4,033 3,412 12,353 10,658
--------- --------- --------- ----------
Income before income taxes 198 166 808 620
Income tax provision 83 61 339 229
--------- --------- --------- ----------
Net income $ 115 $ 105 $ 469 $ 391
========= ========= ========= ==========
Net income per share - Basic $ 0.07 $ 0.06 $ 0.27 $ 0.23
========= ========= ========= ==========
Net income per share - Diluted $ 0.06 $ 0.06 $ 0.27 $ 0.23
========= ========= ========= ==========
</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,
1998 1997
---- ----
Cash flows related to operating activities:
<S> <C> <C>
Net income $ 469 $ 391
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 472 475
Change in assets and liabilities -
Accounts receivable (331) 526
Inventories (462) (911)
Prepaid income taxes 38 (249)
Other current assets (47) 160
Other assets 11 11
Accounts payable (9) 30
Accrued employee compensation & benefit costs 170 6
Other accrued liabilities (16) 42
Accrued income taxes 86 (101)
Change in current portion of long-term debt 0 (3)
--------- ----------
Net cash provided by operating activities 381 377
--------- ---------
Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (372) (607)
---------- ----------
Net cash used in investing activities (372) (607)
---------- ----------
Cash flows related to financing activities:
Increase in demand loan 250 250
Principal payments on long-term debt (199) (159)
Payments on demand loan (450) (250)
Issuance of common stock 26 0
--------- ---------
Net cash used in financing activities (373) (159)
--------- ---------
Net decrease in cash (364) (389)
Cash at beginning of period 1,185 1,389
--------- ---------
Cash at end of period $ 821 $ 1,000
========= =========
</TABLE>
See notes to consolidated financial statements
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<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000 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 are $651,000 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 September 30, 1998
----------- ------------------
<S> <C>
Raw materials and common parts $ 1,227
Work-in-process (including engineering and other
support costs) 6,642
Finished goods 857
----------
8,726
Less common parts expected to be used after one year (236)
----------
$ 8,490
==========
</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.
During 1997, the Accounting Standards Executive Committee (AsSEC) of
the AICPA released a Statement of Position on Reporting on the Costs of Start-Up
Activities which is effective for fiscal years beginning after December 15,
1998. The SoP requires that these one-time costs associated with the
introduction of a new product line be expensed in the period incurred. No
start-up costs have been capitalized during 1998. Servotronics will be required
to write-off any unamortized balances relating to start-up activities on January
1, 1999 which is estimated to be approximately $151,000.
<TABLE>
<CAPTION>
3. Property, plant and equipment
-----------------------------
September 30, 1998
------------------
<S> <C>
Land $ 11
Buildings 6,143
Machinery, equipment and tooling 8,373
----------
14,527
Less accumulated depreciation (7,256)
----------
$ 7,271
==========
</TABLE>
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<PAGE> 7
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, 1998
------------------
<S> <C>
Industrial Development Revenue Bonds; secured by a letter of credit
from a bank with interest payable monthly at a floating rate
(4.20% at September 30, 1998 convertible to
a fixed rate at the option of the Company) $ 5,000
Unsecured term note; payable to a bank with
interest at prime plus 1/4% (8.75% at
September 30, 1998); quarterly principal
payments of $34,439 through November 1, 2000 276
Various other secured term notes payable to government agencies 1,169
---------
6,445
Less current portion (248)
---------
$ 6,197
=========
</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 letter of
credit is for the full amount of the Industrial Development Revenue Bonds. 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.
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.
The Company also has a $1,000,000 line of credit on which there was no
amount outstanding at September 30, 1998.
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, 1997 2,614,506 $ 523 $ 13,269 $ 2,104 ($ 2,842) ($ 1,240)
Issuance of common stock -- -- -- (58) -- 84
Net income -- -- -- 469 --
--------- -------- ----------- -------- -------- ----------
Balance September
30, 1998 2,614,506 $ 523 $ 13,269 $ 2,515 ($ 2,842) ($ 1,156)
========= ======== =========== ======== ======== ==========
</TABLE>
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<PAGE> 8
Earnings per share
- ------------------
All earnings per share amounts reflect the implementation of the
Statement of Financial Accounting Standards No. 128 Earnings per Share. Basic
earnings per share is computed by dividing net earnings by the weighted average
number of shares outstanding during the period. Diluted earnings per share is
computed by dividing net earnings by the weighted average number of shares
outstanding during the period 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.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
($000's omitted, except per share data) 1998 1997 1998 1997
- --------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Net earnings $ 115 $ 105 $ 469 $ 391
Weighted average common shares
outstanding (basic) 1,742 1,693 1,736 1,693
Incremental shares from assumed
conversions of stock options 29 34 29 34
Weighted average 1,771 1,727 1,765 1,727
common
shares outstanding (diluted)
Earnings per share:
Basic $ 0.07 $ 0.06 $ 0.27 $ 0.23
Diluted $ 0.06 $ 0.06 $ 0.27 $ 0.23
</TABLE>
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)
1998 1997 98-97 1998 1997 98-97
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales
Advanced technology products 63.2% 58.1% 27.4% 62.3% 57.9% 24.1%
Consumer products 36.8% 41.9% 3.0% 37.7% 42.1% 3.4%
----- ----- ---- ----- ----- ----
100.0% 100.0% 18.3% 100.0% 100.0% 16.7%
Cost of goods sold, exclusive of
depreciation 71.7% 67.6% 25.4% 70.0% 67.5% 21.0%
----- ----- ----- ----- ----- -----
Gross profit 28.3% 32.4% 3.3% 30.0% 32.5% 7.9%
----- ----- ---- ----- ----- ----
Selling, general and administrative 18.2% 20.8% 3.5% 18.5% 20.6% 5.0%
Interest 1.8% 2.6% -16.3% 1.8% 2.2% -4.8%
Depreciation and amortization 3.6% 4.4% -3.1% 3.6% 4.2% -0.6%
23.6% 27.8% -15.9% 23.9% 27.0% -0.4%
----- ----- ------ ----- ----- -----
Income before provision for income taxes 4.7% 4.6% 19.3% 6.1% 5.5% 30.3%
Income tax provision 2.0% 1.7% 36.1% 2.5% 2.0% 48.0%
---- ---- ----- ---- ---- -----
Net income 2.7% 2.9% 9.5% 3.6% 3.5% 19.9%
==== ==== ==== ==== ==== =====
</TABLE>
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<PAGE> 9
Management Discussion
- ---------------------
During the nine month period ended September 30, 1998 and for the
comparable period ended September 30, 1997, approximately 23% and 20%
respectively, 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 1998 and 1997, approximately 24% and 20% 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, and difficulty in predicting defense
appropriations (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, 1998 showed an approximate 16.7% increase in net
sales and an increase in net income of approximately 19.9% when compared to the
same nine month period of 1997. For the third quarter of 1998, net sales
increased approximately 18.3% with an increase in net income of 9.5% compared to
the same period of 1997. The increase in sales is the result of increased
shipments at both the Advanced Technology and Consumer Products operations.
The Advanced Technology Group's total backlog (funded and unfunded) as
of September 30, 1998 increased by approximately 19.5% from a year earlier. The
September 30, 1998 total backlog is approximately $54,000,000 as compared to
$45,000,000 of which $45,800,000 and $37,000,000 were unfunded in each of the
respective comparative periods. Approximately $35,700,000 of the September 30,
1998 backlog is for product deliveries beyond 2000. 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 nine month period
ended September 30, 1998 increased to 6.1% from 5.5% as reported for the same
nine month period of 1997. For the third quarter of 1998 operating profit as a
percent of net sales increased to 4.7% from 4.6% when compared to the same
period of 1997. The fluctuations in operating profit as a percentage of net
sales are primarily the result of differences in product mix in combination with
increased sales.
Selling, general and administrative costs increased for the nine month
period and quarter ended September 30, 1998 when compared to the comparable
periods of 1997 primarily because of an increase in selling and professional
costs.
Income taxes for the nine month period and quarter ended September 30,
1998 increased as a percentage of income before taxes when compared to the
comparable periods of 1997 because of the effects of variable state income
taxes.
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. The inventories at September 30, 1998, include
costs associated with the initiation and maintenance of certain programs and
costs in anticipation of increased
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<PAGE> 10
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, 1998, the Company
expended $372,000 on capital expenditures.
There are no material commitments for capital expenditures at September
30, 1998.
Year 2000 Initiatives
- ---------------------
Year 2000 concerns generally include possible failures, errors, delays or
other events resulting directly or indirectly from the inability of the
software, hardware or embedded chips to accurately and without interruption
process or handle dates on and after January 1, 2000. Servotronics is reliant on
such systems, which utilize time-based mechanisms for information technology
(IT) systems as well as non-IT systems.
During 1997, the Company initiated the formulation of a year 2000 plan
and began its implementation. The plan includes three phases: (1) identification
of internal systems and third parties who have a material relationship with the
company (i.e., suppliers, customers, financial institutions, etc.) for year 2000
compliance; (2) assessment of year 2000 readiness; (3) solution implementation
and contingency plans. The Company has finished phase one and is in phase two.
All phases are expected to be completed prior to the end of 1999.
The Company believes that the cost of year 2000 compliance activities
will not be material. Based on current information the cost of internal year
2000 issues is expected to be less than $40,000. The Company cannot predict the
outcome of the assessment of those third parties considered critical to the
Company's business or the ability of those parties to achieve year 2000
compliance by the end of 1999.
PART II OTHER INFORMATION
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 23% 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 of
the date hereof. The Company assumes no obligation to update forward-looking
statements.
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<PAGE> 11
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 4, 1998
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
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000089140
<NAME> SERVOTRONICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 821
<SECURITIES> 0
<RECEIVABLES> 2,533
<ALLOWANCES> 0
<INVENTORY> 8,490
<CURRENT-ASSETS> 13,917
<PP&E> 7,271
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,617
<CURRENT-LIABILITIES> 2,577
<BONDS> 6,197
0
0
<COMMON> 523
<OTHER-SE> 11,786
<TOTAL-LIABILITY-AND-EQUITY> 21,617
<SALES> 13,161
<TOTAL-REVENUES> 13,161
<CGS> 9,207
<TOTAL-COSTS> 12,353
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240
<INCOME-PRETAX> 808
<INCOME-TAX> 339
<INCOME-CONTINUING> 469
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
