<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 March 31, 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)
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 April 30, 1998
- ---------------------------------- -----------------------------
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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<PAGE> 2
INDEX
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
<S> <C>
a) Consolidated Balance Sheet, March 31, 1998 3
b) Consolidated Statement of Income, Three Months Ended
March 31, 1998 and 1997 4
c) Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Signatures 11
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
MARCH 31, 1998
($000's omitted except per share data)
(Unaudited)
<TABLE>
<S> <C>
Assets
Current assets:
Cash $ 963
Accounts receivable 2,334
Inventories 8,103
Prepaid income taxes 143
Deferred tax asset 640
Other 1,654
------------
Total current assets 13,837
Property, plant and equipment, net 7,400
Other assets 436
------------
$ 21,673
============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 248
Demand loan 200
Accounts payable 1,112
Accrued employee compensation and benefit costs 989
Other accrued liabilities 323
------------
Total current liabilities 2,872
------------
Long-term debt 6,340
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 2,217
------------
16,009
Employee stock ownership trust commitment (2,842)
Treasury stock, at cost 259,028 shares (1,240)
------------
Total shareholders' equity 11,927
------------
$ 21,673
============
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 4,438 $ 3,473
Costs and expenses:
Cost of goods sold 3,201 2,402
Selling, general and administrative 806 721
Interest 79 79
Depreciation and amortization 158 158
--------- ----------
4,244 3,360
--------- ----------
Income before income taxes 194 113
Income tax provision 81 38
--------- ----------
Net income $ 113 $ 75
========= ==========
Net income per share - Basic $ 0.07 $ 0.04
========= ==========
Net income per share - Diluted $ 0.06 $ 0.04
========= ==========
</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>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows related to operating activities:
Net income $ 113 $ 75
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 158 158
Change in assets and liabilities -
Accounts receivable (132) 670
Inventories (75) (614)
Prepaid income taxes (105) (102)
Other current assets (268) 57
Other assets 4 4
Accounts payable 82 300
Accrued employee compensation & benefit costs 180 36
Other accrued liabilities 64 (58)
Accrued income taxes 0 (200)
--------- ----------
Net cash provided by operating activities 21 326
--------- ---------
Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (187) (395)
---------- ----------
Net cash used in investing activities (187) (395)
---------- ----------
Cash flows related to financing activities:
Increase in demand loan 150 0
Payments on demand loan (150) 0
Principal payments on long-term debt (56) (59)
---------- ----------
Net cash used in financing activities (56) (59)
---------- ----------
Net decrease in cash (222) (128)
Cash at beginning of period 1,185 1,389
--------- ---------
Cash at end of period $ 963 $ 1,261
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000's 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 $910,000 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 March 31, 1998
----------- --------------
<S> <C>
Raw materials and common parts $ 1,149
Work-in-process (including engineering and other
support costs) 6,338
Finished goods 852
----------
8,339
Less common parts expected to be used after one year (236)
----------
$ 8,103
==========
</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.
3. Property, plant and equipment
-----------------------------
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
Land $ 11
Buildings 6,129
Machinery, equipment and tooling 8,202
----------
14,342
Less accumulated depreciation (6,942)
----------
$ 7,400
==========
</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>
March 31, 1998
--------------
<S> <C>
Industrial Development Revenue Bonds; secured by a letter of credit
from a bank with interest payable monthly at a floating rate
(3.95% at March 31, 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
March 31, 1998); quarterly principal
payments of $34,439 through November 1, 2000 344
Various other secured term notes payable to government agencies 1,244
---------
6,588
Less current portion (248)
---------
$ 6,340
=========
</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
$200,000 outstanding at March 31, 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)
Net income -- -- -- 113 -- --
--------- -------- ----------- -------- -------- ----------
Balance March
31, 1998 2,614,506 $ 523 $ 13,269 $ 2,217 ($ 2,842) ($ 1,240)
========= ======== =========== ======== ======== ==========
</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 ("SFAS
128"). 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
March 31,
($000's omitted, except per 1998 1997
- ---------------------------- ---- ----
share data)
- -----------
<S> <C> <C>
Net earnings $113 $75
Weighted average common shares
outstanding (basic) 1,727 1,693
Incremental shares from assumed
conversions of stock options 48 27
Weighted average common
shares outstanding (diluted) 1,775 1,720
Earnings per share:
Basic $0.07 $0.04
Diluted $0.06 $0.04
</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
net sales period $
quarter ended increase
March 31, (decrease)
1998 1997 98-97
---- ---- -----
<S> <C> <C> <C>
Net sales
Advanced technology products 60.6% 53.2% 45.4%
Consumer products 39.4% 46.8% 7.7%
----- ----- ----
100.0% 100.0% 27.8%
Cost of goods sold, exclusive of
depreciation 72.1% 69.2% 33.3%
----- ----- -----
Gross profit 27.9% 30.8% 15.5%
----- ----- -----
Selling, general and administrative 18.2% 20.8% 11.8%
Interest 1.8% 2.3% 0.0%
Depreciation and amortization 3.6% 4.5% 0.0%
---- ---- ----
23.6% 27.6% 11.8%
----- ----- -----
Income before provision for income taxes 4.3% 3.2% 71.7%
Income tax provision 1.8% 1.1% 113.2%
---- ---- ------
Net income 2.5% 2.1% 50.7%
==== ==== =====
</TABLE>
-8-
<PAGE> 9
Management Discussion
- ---------------------
For the first quarter of 1998 and 1997, approximately 20% and 21%
respectively, of the Company's revenues were derived from contracts with
agencies of the U.S. 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, 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 three month
period ended March 31, 1998 showed an approximate 28% increase in net sales and
an increase in net income of approximately 50% when compared to the same three
month 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 March 31, 1998 increased by approximately 25% from a year earlier. The March
31, 1998 total backlog is approximately $57,400,000 as compared to $45,900,000
of which $50,000,000 and $37,700,000 were unfunded in each of the respective
comparative periods. Approximately $38,000,000 of the March 31, 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 three month
period ended March 31, 1998 increased to 4.3% from 3.2% for the same three month
period of 1997. The fluctuations in operating profit as a percentage of net
sales is a result of differences in product mix in combination with increased
sales.
Selling, general and administrative costs increased for the quarter
ended March 31, 1998 when compared to the comparable periods of 1997 due to an
increase in selling and professional costs.
Income taxes for the quarter ended March 31, 1998 increased as a
percentage of income before taxes when compared to the comparable periods of
1997 due to 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 March 31, 1998, 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 three month period ended March 31, 1998, the Company
expended $187,000 on capital expenditures. The Company also has a $1,000,000
line of credit at March 31, 1998 of which $200,000 is outstanding at March 31,
1998.
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<PAGE> 10
There are no material commitments for capital expenditures at March 31,
1998.
Year 2000 Initiatives
- ---------------------
The Company is currently working to resolve the potential impact of "Year
2000" issues on the processing of date-sensitive information by the Company's
computer systems. The Year 2000 problem relates to the ability of computer
systems to be able to distinguish date data between the twentieth and
twenty-first centuries.
The Company does not currently expect that these "Year 2000" issues will
have a material adverse impact on the Company's financial position, results or
cash flows in the future.
The Company is also taking steps to assess the Year 2000 status of its
significant product and service suppliers.
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 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: May 8, 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 963
<SECURITIES> 0
<RECEIVABLES> 2,334
<ALLOWANCES> 0
<INVENTORY> 8,103
<CURRENT-ASSETS> 13,837
<PP&E> 7,400
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,673
<CURRENT-LIABILITIES> 2,872
<BONDS> 6,340
0
0
<COMMON> 523
<OTHER-SE> 11,404
<TOTAL-LIABILITY-AND-EQUITY> 21,673
<SALES> 4,438
<TOTAL-REVENUES> 4,438
<CGS> 3,201
<TOTAL-COSTS> 4,244
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 194
<INCOME-TAX> 81
<INCOME-CONTINUING> 113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.06
</TABLE>
