<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Thirteen Weeks Ended August 31, 1997
Commission File Number 0-8796
SPECTRUM CONTROL, INC.
Exact name of registrant as specified in its charter
Pennsylvania 25-1196447
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6000 West Ridge Road, Erie, Pennsylvania 16506
(Address) (Zip Code)
Registrant's telephone number, including area code (814)835-4000
Not Applicable
Former name, former address and former fiscal year, if changed
since last report
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
CLASS NUMBER OF SHARES OUTSTANDING
as of September 15, 1997
Common, no par value 10,834,231
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets --
August 31, 1997 and November 30, 1996 3-4
Consolidated Condensed Statements of
Income - Thirteen Weeks Ended
and Thirty-Nine Weeks Ended
August 31, 1997 and 1996 5
Consolidated Condensed Statements of
Cash Flows - Thirteen Weeks Ended
and Thirty-Nine Weeks Ended
August 31, 1997 and 1996 6
Notes to Consolidated Condensed
Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-12
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8K 13
Signature 14
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
Aug. 31, 1997 Nov. 30, 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 870 $ 413
Accounts receivable, net of
allowances 8,532 10,202
Inventories
Finished goods 2,230 2,631
Work-in-process 5,124 5,549
Raw materials 5,075 3,897
Total inventories 12,429 12,077
Prepaid expenses and other
current assets 242 303
Total current assets 22,073 22,995
PROPERTY, PLANT AND EQUIPMENT,
at cost less accumulated
depreciation of $25,141
in 1997 and $22,731 in 1996 15,767 16,017
OTHER ASSETS
Intangible assets 388 524
Debt issuance costs 173 191
Deferred income taxes 281 281
Deferred charges 131 205
Total other assets 973 1,201
TOTAL ASSETS $38,813 $40,213
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
Aug. 31, 1997 Nov.30, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ -- $ 3,278
Accounts payable 2,615 3,038
Accrued salaries and wages 1,395 1,308
Accrued interest 55 48
Accrued federal and state
income taxes 221 72
Accrued other expenses 295 325
Current portion of long-term debt 1,944 2,392
Total current liabilities 6,525 10,461
LONG-TERM DEBT 3,777 4,072
DEFERRED INCOME TAXES 407 301
STOCKHOLDERS' EQUITY
Common stock, no par value,
authorized 25,000,000 shares,
issued and outstanding 10,834,231
shares in 1997 and 10,774,233
shares in 1996 13,952 13,755
Retained earnings 14,542 11,890
Foreign currency translation
adjustment (390) (266)
Total stockholders' equity 28,104 25,379
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $38,813 $40,213
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
(Thousands of Dollars Except Per Share Data)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
08/31/97 08/31/96 08/31/97 08/31/96
<S> <C> <C> <C> <C>
Net sales $13,969 $14,930 $41,058 $42,441
Cost of products sold 9,530 10,123 28,506 28,875
Selling, general and
administrative expense 2,940 3,301 8,588 9,534
12,470 13,424 37,094 38,409
Income from operations 1,499 1,506 3,964 4,032
Other income (expense)
Interest expense (109) (190) (363) (598)
Other income and expense,
net 80 (17) 80 (17)
(29) (207) (283) (615)
Income before provision
for income taxes 1,470 1,299 3,681 3,417
Provision for
income taxes 411 364 1,029 957
Net income $ 1,059 $ 935 $ 2,652 $2,460
Earnings per
common share $ 0.10 $ 0.09 $ 0.25 $ 0.23
Weighted average number
of common shares
outstanding 10,806,696 10,758,726 10,785,133 10,717,647
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
DOLLAR AMOUNTS IN THOUSANDS
(UNAUDITED)
<CAPTION>
Thirty-Nine Weeks Ended
Aug. 31, 1997 Aug. 31, 1996
<S> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES $6,261 $3,055
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of property,
plant and equipment -- 1,655
Purchase of property, plant
and equipment (2,230) (3,027)
Net cash used in investing
activities (2,230) (1,372)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net repayment of short-term
debt (3,278) (277)
Repayment of long-term debt (510) (1,336)
Net proceeds from issuance
of common stock 197 132
Net cash used in financing
activities (3,591) (1,481)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 17 (2)
NET INCREASE IN CASH 457 200
CASH BEGINNING OF PERIOD 413 202
CASH END OF PERIOD $ 870 $ 402
CASH PAID DURING THE PERIOD FOR:
Interest $ 356 $ 565
Income taxes 645 950
<FN>
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
AUGUST 31, 1997
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, the accompanying financial statements include all
adjustments which are normal, recurring and necessary to present
fairly the results for the interim periods. Operating results
for interim periods are not necessarily indicative of the results
that may be expected for the year. For further information,
refer to the consolidated financial statements and notes thereto
included in the Spectrum Control, Inc. and Subsidiaries annual
report on Form 10-K for the fiscal year ended November 30, 1996.
Note 1 - Principles of Consolidation
The consolidated condensed financial statements include the
accounts of Spectrum Control, Inc. and its subsidiaries (the
Company). To facilitate timely reporting, the fiscal quarters of
a foreign subsidiary are based upon a fiscal year which ends
October 31. All significant intercompany accounts are eliminated
upon consolidation.
Note 2 - Foreign Currency Translation
The assets and liabilities of the foreign subsidiary are
translated into U.S. dollars at current exchange rates. Revenue
and expense accounts of these operations are translated at
average exchange rates prevailing during the period. These
translation adjustments are accumulated in a separate component
of stockholders equity. Foreign currency transaction gains and
losses are included in determining net income for the period in
which the exchange rate changes.
Note 3 - Earnings Per Common Share
Earnings per common share is computed based on the weighted
average number of shares of common stock outstanding during the
period of computation. Although the Company has issued
potentially dilutive common stock equivalents in the form of
stock options, the dilutive effect of these securities in the
aggregate is less than three percent of earnings per common
share.
<PAGE>
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIRD QUARTER 1997 VERSUS THIRD QUARTER 1996
Results of Operations
Net sales decreased 6% during the period, with consolidated net
sales of $14.0 million in the third quarter of 1997 and $14.9
million in the comparable quarter of 1996. During the third
quarter of 1997, certain of the Company's telecommunication
customers rescheduled or delayed receipt of the Company's
electromagnetic interference ("EMI") filter products. However,
overall demand for the Company's EMI filter products remained
strong, with total customer orders received of $15.3 million
during the third quarter of 1997, an increase of 22% from the
third quarter of 1996.
As a percentage of sales, gross margin remained stable during the
period. During the thirteen weeks ended August 31, 1997, gross
margin was $4.4 million or 32% of sales, compared to $4.8 million
or 32% of sales for the comparable period of 1996.
Selling, general and administrative expense decreased during the
period, amounting to $2.9 million or 21% of sales for the third
quarter of 1997, compared to $3.3 million or 22% of sales for the
same period last year. As more fully discussed below, this
decrease principally reflects reduced expenses associated with
the Company's Rapid Response program.
As a result of the Company's continued debt reduction, interest
expense decreased by $81,000 during the period. For the third
quarter of 1997, interest expense amounted to $109,000 compared
to $190,000 for the comparable quarter of 1996.
During the thirteen weeks ended August 31, 1997, the Company
recognized other income or $80,000 in connection with certain
patent licensing activity.
<PAGE>
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THIRTY-NINE WEEKS 1997 VERSUS THIRTY-NINE WEEKS 1996
Results of Operations
Net sales decreased by 3% during the period, amounting to $41.1
million for the first thirty-nine weeks of 1997 and $42.4 million
for the comparable period of 1996. However, customer orders
received during the first nine months of 1997 amounted to $45.2
million, an increase of $507,000 from the same period last year.
As a result, Management believes shipment levels will increase
during the remainder of fiscal 1997. Overall, average selling
prices remained relatively stable throughout the period.
During the first thirty-nine weeks of 1997, gross margin was
$12.6 million or 31% of sales compared to $13.6 million or 32% of
sales for the same period last year. In addition to reduced
sales volume, the decrease in gross margin primarily reflects
changes in sales mix and the related impact of fixed
manufacturing overhead and lower production requirements at the
Company's ceramic capacitor manufacturing operation in
New Orleans, Louisiana.
During the third quarter of 1997, the Company completed a
restructuring and consolidation of its assembly divisions to
better reflect current market and manufacturing process
synergies. Management anticipates that this restructuring will
reduce manufacturing costs and improve gross margins. The
Company did not incur any significant costs or charges in
connection with this restructuring.
As a percentage of sales, selling expense remained constant
during the period at 11%, with total selling expense of $4.7
million in 1997 and $4.8 million in 1996. General and
administrative expense decreased during the period, amounting to
$3.9 million or 10% of sales during the first thirty-nine weeks
of 1997, compared to $4.7 million or 11% of sales for the
comparable period of 1996. The decrease in general and
administrative expense primarily reflects reduced expenses
associated with the implementation of the Company's Rapid
Response program. Although Rapid Response will continue to be
implemented throughout 1997 and 1998, the expenses associated
with the program were principally incurred by the Company during
fiscal 1996 in the form of consulting fees and employee
education. Accordingly, Management expects that overall general
and administrative expense in 1997 will be lower than fiscal 1996
levels.
<PAGE>
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Interest expense decreased by $235,000 during the period, from
$598,000 in 1996 to $363,000 in 1997. The decrease in interest
expense primarily reflects reduced bank indebtedness. Overall,
average interest rates remained stable throughout the period.
The Company's effective income tax rate also was constant at 28%
for the first thirty-nine weeks of fiscal 1997 and 1996, compared
to an applicable statutory income tax rate of approximately 40%.
Differences in the effective tax rate and statutory tax rate
primarily reflect changes in the deferred tax asset valuation
allowance relating to certain foreign net operating loss
carryforwards.
Liquidity, Capital Resources and Financial Condition
The Company has a $6.0 million line of credit with PNC Bank of
Erie, Pennsylvania (the Bank ). Prior to March 18, 1997,
borrowings and required payments under the revolving credit line
were based upon an asset formula involving accounts receivable
and inventories. On March 18, 1997, the line of credit agreement
was renewed through April 30, 1999. Under the terms of the
renewal, borrowings under the line of credit are no longer
limited by an asset formula. The revolving credit line is
collateralized by substantially all of the Company s tangible and
intangible property, with interest rates on borrowings at or
below the Bank s prevailing prime rate. At August 31, 1997,
there were no borrowings outstanding under this financing
arrangement.
The Company s wholly-owned foreign subsidiary maintains unsecured
Deutsche Mark lines of credit with German financial institutions
aggregating $1.1 million (2.0 million DM). At August 31, 1997,
there were no borrowings outstanding against these lines of
credit. Future borrowings, if any, under the lines of credit
will bear interest at rates at or below the prevailing prime rate
and will be payable upon demand.
The Company s working capital continued to increase during the
period. At August 31, 1997, the Company had net working capital
of $15.5 million, compared to $12.5 million at November 30, 1996.
The Company s current ratio also improved during the first
thirty-nine weeks of fiscal 1997, with current assets at 3.38
times current liabilities at August 31, 1997 and 2.20 at November
30, 1996.
<PAGE>
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
As a result of improved accounts receivable and inventory
turnover rates, net cash from operations increased significantly
during the period. During the first three quarters of fiscal
1997, net cash provided by operations amounted to $6.3 million,
an increase of $3.2 million from the comparable period of 1996.
With the ongoing implementation of the Company s Rapid Response
program, Management anticipates that inventory turnover rates
will continue to improve throughout 1997 and 1998.
During the first thirty-nine weeks of 1997, the Company s cash
expenditures for property, plant and equipment amounted to $2.2
million. These capital expenditures primarily related to
operating improvements and manufacturing equipment for new
product offerings, including resonator and band pass filter
products. During the first thirty-nine weeks of 1997, the
Company also repaid $3.8 million of bank indebtedness. Current
financial resources, including working capital and existing lines
of credit, and anticipated funds from operations are expected to
be sufficient to meet cash requirements throughout 1997,
including scheduled long-term debt repayment and planned capital
expenditures.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards ("FASB")
issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 supersedes
Accounting Principles Board Opinion No. 15 and specifies the
computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after
December 15, 1997 and early application is not permitted.
Accordingly, the Company will apply SFAS No. 128 for the quarter
ended February 28, 1998 and restate prior period information as
required under the statement. The Company does not expect the
adoption of SFAS No. 128 to have a material impact on reported
earnings per share.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting and Disclosures about Comprehensive
Income" and No. 131, "Disclosures about Segments of an
Enterprise", which are effective for fiscal years beginning after
December 15, 1997. The Company is currently evaluating the
effects of these new standards.
<PAGE>
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Forward-Looking Information
Management s Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements which
reflect Management s current views with respect to future
shipment and operating expense levels, inventory turnover rates,
and ongoing cash requirements. These forward-looking statements
are subject to certain risks and uncertainties, including those
identified below, which could cause actual results to differ
materially from historical results or those anticipated. The
words believe , expect , anticipate and similar expressions
identify forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements. The
following factors could cause actual results to differ materially
from historical results or those anticipated: (1) increased
competition in the Company s marketplace; (2) technology advances
affecting the demand for the Company s products; (3) other
changes in market demand, particularly among communications
customers; (4) market acceptance and penetration for the
Company s new product offerings; (5) changes in the overall
economic climate; (6) operating cost fluctuations and
availability of raw materials; and (7) unplanned capital
replacement or expansion.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
<PAGE>
SIGNATURE
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.
SPECTRUM CONTROL, INC.
(Registrant)
By: s/s John P. Freeman
John P. Freeman, Vice President
and Chief Financial Officer
(Principal Accounting and
Financial Officer)
Dated: September 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SPECTRUM
CONTROL, INC. CONSOLIDATED BALANCE SHEET AT AUGUST 31, 1997 AND CONSOLIDATED
STATEMENT OF INCOME FOR THE NINE MONTHS ENDED AUGUST 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO ITS FORM 10-Q FOR THE QUARTER ENDED AUGUST 31,
1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> AUG-31-1997
<CASH> 870
<SECURITIES> 0
<RECEIVABLES> 8928
<ALLOWANCES> 396
<INVENTORY> 12429
<CURRENT-ASSETS> 22073
<PP&E> 40908
<DEPRECIATION> 25141
<TOTAL-ASSETS> 38813
<CURRENT-LIABILITIES> 6525
<BONDS> 3777
0
0
<COMMON> 13952
<OTHER-SE> 14152
<TOTAL-LIABILITY-AND-EQUITY> 38813
<SALES> 41058
<TOTAL-REVENUES> 41058
<CGS> 28506
<TOTAL-COSTS> 28506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 363
<INCOME-PRETAX> 3681
<INCOME-TAX> 1029
<INCOME-CONTINUING> 2652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2652
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
