<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, 1999
__ 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, including area code)
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.
<TABLE>
<CAPTION>
Class Outstanding at April 30, 1999
- ----------------------------- -----------------------------
<S> <C>
Common Stock, $.20 par value 2,405,488
</TABLE>
(See Note 5 to Consolidated
Financial Statements)
Transitional Small Business Disclosure Format (Check one):
Yes ; No X
--- ---
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<PAGE> 2
INDEX
-----
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements
a) Consolidated Balance Sheet, March 31, 1999 3
b) Consolidated Statement of Income for the Three Months Ended
March 31, 1999 and 1998 4
c) Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Signatures 12
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, 1999
($000's omitted except per share data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash $ 1,213
Accounts receivable 2,231
Inventories 9,735
Prepaid income taxes 124
Deferred tax asset 539
Other 1,098
------------
Total current assets 14,940
------------
Property, plant and equipment, net 7,291
Other assets 626
------------
$ 22,857
============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 254
Accounts payable 965
Accrued employee compensation and benefit costs 846
Other accrued liabilities 270
------------
Total current liabilities 2,335
------------
Long-term debt 6,877
Non-current deferred tax liability 477
Other non-current liability 277
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; Issued 2,614,506 shares 523
Capital in excess of par value 13,324
Retained earnings 2,845
Accumulated other comprehensive income (43)
------------
16,649
Employee stock ownership trust commitment (2,741)
Treasury stock, at cost 209,018 shares (1,017)
------------
Total shareholders' equity 12,891
------------
$ 22,857
============
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE> 4
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
($000's omitted except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Net revenues $ 3,591 $ 4,438
Costs and expenses:
Cost of goods sold 2,505 3,201
Selling, general and administrative 696 806
Interest 67 79
Depreciation and amortization 157 158
--------- ----------
3,425 4,244
--------- ----------
Income before income taxes and cumulative
effect of a change in accounting principle 166 194
Income tax provision 66 81
--------- ----------
Income before cumulative effect of a change
in accounting principle 100 113
Cumulative effect of a change
in accounting principle (75) 0
---------- ----------
Net income $ 25 $ 113
========= ==========
Income (Loss) Per Share:
Basic
- -----
Income per share before cumulative effect of a
change in accounting principle $ 0.06 $ 0.07
Cumulative effect per share of a change in
accounting principle (0.04) 0.00
---------- ----------
Net income per share $ 0.02 $ 0.07
========= ==========
Diluted
- -------
Income per share before cumulative effect of a
change in accounting principle $ 0.06 0.06
Cumulative effect per share of a change in
accounting principle (0.04) 0.00
---------- ----------
Net income per share $ 0.02 $ 0.06
========= ==========
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE> 5
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000's omitted)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows related to operating activities:
Net income $ 25 $ 113
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 157 158
Cumulative effect of change in accounting principle 75 0
Change in assets and liabilities -
Accounts receivable (33) (132)
Inventories (876) (75)
Prepaid income taxes (59) (105)
Other current assets 278 (268)
Other assets 4 4
Accounts payable 75 82
Accrued employee compensation & benefit costs (84) 180
Other accrued liabilities 87 64
--------- ---------
Net cash (used in) provided by operating activities (351) 21
---------- ---------
Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (238) (187)
---------- ----------
Net cash used in investing activities (238) (187)
---------- ----------
Cash flows related to financing activities:
Increase in demand loan 0 150
Payments on demand loan 0 (150)
Acquisition of long-term debt 1,000 0
Principal payments on long-term debt (262) (56)
Tax benefit from stock options 55 0
---------- ----------
Net cash provided by (used in) financing activities 793 (56)
--------- ----------
Net increase (decrease) in cash 204 (222)
Cash at beginning of period 1,009 1,185
--------- ---------
Cash at end of period $ 1,213 $ 963
========= =========
</TABLE>
See notes to consolidated financial statements
-5-
<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 $635,000 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.
2. Inventories
-----------
<TABLE>
<CAPTION>
March 31, 1999
--------------
<S> <C>
Raw materials and common parts $ 1,445
Work-in-process (including engineering and other
support costs) 7,962
Finished goods 564
----------
9,971
Less common parts expected to be used after one year (236)
----------
$ 9,735
==========
</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.
On January 1, 1999, as required by the Accounting Standards Executive
Committee, the Company adopted the newly enacted Statement of Position No. 98-5
"Reporting on the Cost of Start-Up Activities" (SoP 98-5). The effect of
adopting SoP-98-5 resulted in the write-off of approximately $125,000 of
start-up costs which were appropriately capitalized to inventory in prior
years. An approximate $75,000 charge (net of tax of $50,000) was recorded as of
January 1, 1999, which was recorded as a cumulative effect of a change in
accounting principle in the March 31, 1999 Consolidated Statement of Income.
3. Property, plant and equipment
-----------------------------
<TABLE>
<CAPTION>
March 31, 1999
--------------
<S> <C>
Land $ 11
Buildings 6,155
Machinery, equipment and tooling 8,698
----------
14,864
Less accumulated depreciation (7,573)
----------
$ 7,291
==========
</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.
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<PAGE> 7
4. Long-term debt
--------------
<TABLE>
<CAPTION>
March 31, 1999
--------------
<S> <C>
Industrial Development Revenue Bonds; secured by a
letter of credit from a bank with interest payable monthly
at a floating rate (3.50% at March 31, 1999) $ 5,000
Unsecured term note; payable to a financial institution with
interest on $500,000 at LIBOR plus 2% (7.09% at March 31, 1999)
and interest on the remaining $500,000 at a current rate of 5.86%;
quarterly principal payments of $35,714 through February 1, 2006 1,000
Various other secured term notes payable to government agencies 1,131
---------
7,131
Less current portion (254)
---------
$ 6,877
=========
</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 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 March 31, 1999.
-7-
<PAGE> 8
5. Common shareholders' equity
---------------------------
<TABLE>
<CAPTION>
Common stock
------------ Accumulated
Number Capital in other
of shares excess of Retained Treasury Comprehensive comprehensive
issued Amount par value earnings ESOP stock income income
------ ------ --------- -------- ---- ----- ------ ------
Balance December
31, 1998 2,614,506 $523 $13,324 $2,904 ($ 2,741) ($ 1,156) ($ 43)
========= ==== ======= ===== ======= ======= =========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Comprehensive income
Net income - - - $ 25 - - $ 25 -
Other comprehensive income,
net of tax - - - - - - - -
Minimum pension liability
adjustment - - - - - - - -
Other comprehensive income - - - - - - - -
-------
Comprehensive income - - - - - - $ 25 -
=======
Issuance of common stock - - - (84) - - -
Compensation expense - - - - - - -
Treasury stock - - - - - 139 -
Exercise of stock options - - - - - - -
--------- ---- ------- ------ -------- -------- ------
Balance March 31, 1999 2,614,506 $523 $13,324 $2,845 ($ 2,741) ($ 1,017) ($ 43)
========= ==== ======= ===== ======= ======= =========
</TABLE>
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
March 31,
($000's omitted, except per share data) 1999 1998
--------------------------------------- ---- ----
<S> <C> <C>
Income before cumulative effect of a
change in accounting principle $ 100 $ 113
Cumulative effect of a change in
accounting principle (75) -
---- -----
Net earnings $ 25 $ 113
Weighted average common shares
outstanding (basic) 1,792 1,727
Incremental shares from assumed
conversions of stock options 5 48
Weighted average common
shares outstanding (diluted) 1,797 1,775
Income (Loss) Per Share
Basic
-----
Income per share before cumulative effect of a
change in accounting principle $ 0.06 $ 0.07
Cumulative effect per share of a change in
accounting principle (0.04) 0.00
-------- --------
Net income per share: $ 0.02 $ 0.07
======= ========
Diluted
-------
Income per share before cumulative effect of a
change in accounting principle $ 0.06 $ 0.06
Cumulative effect per share of a change in
accounting principle (0.04) 0.00
-------- --------
Net income per share $ 0.02 $ 0.06
======= ========
</TABLE>
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<PAGE> 9
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
revenues and the percentage increase or decrease of such items as compared to
the indicated prior period.
<TABLE>
<CAPTION>
Relationship to Period to
net revenues period $
three months ended increase
March 31 (decrease)
1999 1998 99-98
---- ---- -----
<S> <C> <C> <C>
Net revenues
Advanced technology products 58.6% 60.6% (22.0)%
Consumer products 41.4% 39.4% (13.3)%
----- ----- ----
100.0% 100.0% (19.1)%
Cost of goods sold, exclusive of
depreciation 69.8% 72.1% (21.7)%
---- ----- ----
Gross profit 30.2% 27.9% (12.2)%
---- ----- ----
Selling, general and administrative 19.4% 18.2% (13.6)%
Interest 1.9% 1.8% (15.2)%
Depreciation and amortization 4.4% 3.6% (0.6)%
---- ----- ----
25.7% 23.6% (29.4)%
----- ----- ----
Income before income taxes and cumulative
effect of a change in accounting principle 4.5% 4.3% (14.4)%
Income tax provision 1.7% 1.8% (18.5)%
---- ----- ----
Net income before cumulative effect of a change
in accounting principle 2.8% 2.5% (11.5)%
---- ----- ----
Cumulative effect of a change in accounting principle (2.1)% 0.0% --
----- ----- ----
Net income 0.7% 2.5% (77.9)%
==== ===== ====
</TABLE>
Management Discussion
- ---------------------
During the three month period ended March 31, 1999 and for the
comparable period ended March 31, 1998, approximately 13% and 20% 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, 1999 showed an approximate 19.1% decrease in net revenues
and a decrease in net income of approximately 11.5%, before the $75,000
cumulative effect of a change in accounting principle, when compared to the same
three month period of 1998. The decrease in revenues is primarily the result of
the stretch-out of certain Advanced Technology Group's deliveries.
The Advanced Technology Group's total backlog (funded and unfunded) as
of March
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<PAGE> 10
31, 1999 increased by approximately $3,200,000 from a year earlier. The March
31, 1999 total backlog is approximately $60,600,000 as compared to $57,400,000
of which $51,000,000 and $50,000,000 were unfunded in each of the respective
comparative periods. Approximately $36,700,000 of the March 31, 1999 backlog is
for product deliveries beyond 2001. 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 revenues for the three month
period ended March 31, 1999 decreased to 4.5% from 4.3% as reported for the same
three month period of 1998. The fluctuations in operating profit as a percentage
of net revenues are primarily the result of differences in product mix.
Selling, general and administrative costs decreased for the three month
period ended March 31, 1999 when compared to the comparable period of 1998
primarily because of an increase in professional costs.
Income taxes for the three month period ended March 31, 1999 decreased
as a percentage of income before taxes when compared to the comparable period of
1998 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 March 31, 1999, 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, 1999, the Company
expended $238,000 on capital expenditures.
There are no material commitments for capital expenditures at March 31,
1999.
Year 2000 Initiatives
- ---------------------
The Company is reliant on systems that use time-based mechanisms for
asset and information management. Management recognizes that such systems may
have potential problems affecting their capabilities because of the Year 2000
date change. The Company also has relationships with vendors, services and
product suppliers, customers and financial institutions among others, which are
reliant on such systems. It is possible that Year 2000 problems encountered by
the Company or these outside parties could result in a loss of business that is
potentially material to the Company.
During the previous and current years, the Company formulated,
initiated and continued the implementation of a three-phase plan to determine
and, when appropriate, address any internal or external Year 2000 problems to
the extent they existed. Phase I identified internal and external (outside
parties with a material relationship to the Company) Year 2000 compliance
concerns. Phase II assessed the Year 2000 readiness of the Company. Phase III is
the implementation of solutions and contingency plans for the potential problems
identified during Phase I and Phase II.
To date, the Company has assessed its internal computing systems and
determined that there are no apparent material Year 2000 issues, although
certain reprogramming of internal systems were determined to be desirable and
are being accomplished. With respect to external
-10-
<PAGE> 11
compliance, the Company has developed and mailed a Year 2000 survey to its
suppliers, customers and financial institutions to determine their Year 2000
readiness and compliance. As of April 30, 1999, the Company has not received
notification from any such outside parties that any material Year 2000 readiness
or compliance issues have been identified.
The Company is implementing Phase III and is in the process of making
reprogramming changes to internal software as well as upgrading to Year 2000
compliant versions of purchased desktop software. The Company is unaware of any
internal Year 2000 issues that will not be resolved by the end of 1999. Should
the Company become aware of any internal or external Year 2000 issues that will
not be resolved by the end of 1999, it will immediately formulate and implement
the appropriate solutions and contingency plans. In any event, it is anticipated
that the Company will complete all phases of its Year 2000 plan by the end of
1999.
The Company does not believe that the costs of Year 2000 compliance
will be material and anticipates such costs will be funded out of working
capital. At this time, the Company cannot predict the final outcome of the
on-going survey and assessment of the outside parties considered important to
the Company's business or the ability of such outside parties to achieve Year
2000 Compliance by the end of 1999.
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 a material portion 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.
-11-
<PAGE> 12
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, 1999
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
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,213
<SECURITIES> 0
<RECEIVABLES> 2,231
<ALLOWANCES> 0
<INVENTORY> 9,735
<CURRENT-ASSETS> 14,940
<PP&E> 7,291
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,857
<CURRENT-LIABILITIES> 2,335
<BONDS> 6,877
0
0
<COMMON> 523
<OTHER-SE> 12,891
<TOTAL-LIABILITY-AND-EQUITY> 22,857
<SALES> 0
<TOTAL-REVENUES> 3,591
<CGS> 2,505
<TOTAL-COSTS> 3,425
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 166
<INCOME-TAX> 66
<INCOME-CONTINUING> 25
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (75)
<NET-INCOME> 25
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
