-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sff0ylYyhmwlwUoZspB42khqEL9rhdIoNCxy8zN6S78piPlkSzV02C5/kreXwBov rBotDX+5mmdnmkTP7iTFWQ== 0000950152-98-008798.txt : 19981113 0000950152-98-008798.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950152-98-008798 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PRECISION INDUSTRIES INC CENTRAL INDEX KEY: 0000005657 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 161284388 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05601 FILM NUMBER: 98745103 BUSINESS ADDRESS: STREET 1: 2777 WALDEN AVE CITY: BUFFALO STATE: NY ZIP: 14225 BUSINESS PHONE: 7166849700 MAIL ADDRESS: STREET 1: 2777 WALDEN AVENUE CITY: BUFFALO STATE: NY ZIP: 14225 10-Q 1 AMERICAN PRECISION INDUSTRIES INC. 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [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 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________ Commission file number 1-5601 AMERICAN PRECISION INDUSTRIES INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 16-1284388 - ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2777 WALDEN AVENUE, BUFFALO, NEW YORK 14225 - -------------------------------------- --------- (Address of principal executive offices) (Zip Code) (716) 684-9700 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 such filing requirements for the past 90 days. Yes X No . --- --- Number of shares of outstanding stock on November 10, 1998 7,478,533 2 ITEM 1. FINANCIAL STATEMENTS -------------------- AMERICAN PRECISION INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS ---------------------------------- (Unaudited)
THIRD QUARTER ENDED NINE MONTHS ENDED ---------------------------- ---------------------------- SEPTEMBER 30, OCTOBER 3, SEPTEMBER 30, OCTOBER 3, (In thousands, except per share data) 1998 1997 1998 1997 ------------- ------------- ------------- ------------- NET SALES $ 54,995 $ 55,014 $163,667 $130,429 COSTS AND EXPENSES Cost of products sold 38,542 38,592(1) 114,668 90,461(1) Selling and administrative 11,627 11,283 36,012 26,382 Research and product development 1,096 1,021 3,594 2,527 Interest and debt expense, net of investment income 784 870 2,411 1,889 Other expense - 210(1) - 210(1) -------- -------- -------- -------- 52,049 51,976 156,685 121,469 -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES 2,946 3,038 6,982 8,960 INCOME TAXES 1,060 780 2,513 2,847 -------- -------- -------- -------- NET EARNINGS $ 1,886 $ 2,258 $ 4,469 $ 6,113 ======== ======== ======== ======== EARNINGS PER COMMON SHARE BASIC $ 0.25 $ 0.30 $ 0.60 $ 0.83 ======== ======== ======== ======== DILUTED $ 0.20 $ 0.24 $ 0.48 $ 0.74 ======== ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 7,473 7,412 7,459 7,365 ======== ======== ======== ======== Diluted 9,463 9,383 9,406 8,310 ======== ======== ======== ========
(1) Cost of products sold includes a pre-tax inventory charge of $816,000. Other expense includes $331,000 of pre-tax cost related to a dispute settlement with the U.S. Government, offset by non-operating income of $121,000. Total after-tax impact of these items is $636,000. 2 3 AMERICAN PRECISION INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - -------------------------- (Unaudited)
SEPTEMBER 30, DECEMBER 31, (In thousands, except share and per share data) 1998 1997 ------------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,109 $ 2,313 Accounts receivable less allowance for doubtful accounts of $996 and $1,124 36,257 32,163 Inventories - net 41,663 38,510 Prepaid expenses 2,200 4,744 Deferred income taxes 4,224 4,338 -------- -------- TOTAL CURRENT ASSETS 87,453 82,068 INVESTMENTS - 686 OTHER ASSETS Cost in excess of net assets acquired - net 20,446 19,853 Prepaid pension costs 1,635 1,669 Net cash value of life insurance 3,750 3,199 Other 2,417 2,251 -------- -------- 28,248 26,972 DEFERRED INCOME TAXES 314 297 PROPERTY, PLANT AND EQUIPMENT Land 3,596 3,409 Buildings and improvements 20,753 20,327 Machinery, equipment and furniture 58,455 51,427 Construction in process 3,834 2,689 -------- -------- 86,638 77,852 Less accumulated depreciation 31,695 25,205 -------- -------- NET PROPERTY, PLANT AND EQUIPMENT 54,943 52,647 -------- -------- TOTAL ASSETS $170,958 $162,670 ======== ========
3 4 AMERICAN PRECISION INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - -------------------------- (Unaudited)
SEPTEMBER 30, DECEMBER 31, (In thousands, except share and per share data) 1998 1997 ------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings $ 13,844 $ 14,086 Accounts payable 15,244 15,792 Accrued compensation and payroll taxes 7,863 6,585 Other liabilities and accrued expenses 8,145 7,980 Current portion of long-term obligations 1,372 1,329 --------- --------- TOTAL CURRENT LIABILITIES 46,468 45,772 DEFERRED INCOME TAXES 1,977 1,926 OTHER NONCURRENT LIABILITIES 3,113 3,488 LONG-TERM OBLIGATIONS, LESS CURRENT PORTION 36,186 34,884 SHAREHOLDERS' EQUITY Series B seven percent (7%) convertible preferred stock, par value $1.00 a share, 1,236,337 shares issued and outstanding 26,156 26,156 Common stock, par value $.66 2/3 a share: Authorized - 30,000,000 shares Issued - 7,847,223 and 7,812,215 shares 5,231 5,207 Additional paid-in capital 13,390 13,107 Retained earnings 40,041 35,572 Accumulated other comprehensive income 1,234 (604) --------- --------- 86,052 79,438 Less cost of 374,262 treasury shares 2,838 2,838 --------- --------- TOTAL SHAREHOLDERS' EQUITY 83,214 76,600 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 170,958 $ 162,670 ========= =========
4 5 AMERICAN PRECISION INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - ------------------------------------------------- (Unaudited)
Nine Months Ended ----------------------------- September 30, October 3, (Dollars in thousands) 1998 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 4,469 $ 6,113 Adjustments to reconcile net income to cash and cash equivalents provided by operating activities: Depreciation/Amortization 6,985 4,624 Gain on sale of investments/fixed assets 14 51 Stock compensation programs (309) 281 Change in various allowance accounts 364 72 Other 186 302 (Increase) Decrease in: Accounts receivable (3,627) (6,819) Inventory (2,186) 1,015 Prepaid expenses 1,646 (416) Prepaid income taxes 1,054 - Deferred income tax assets 236 (492) Other assets, net (971) (356) Increase (Decrease) in: Accounts payable (911) 2,302 Accrued expenses 875 (3,764) Federal, state and foreign income taxes 118 44 Other noncurrent liabilities (280) (6) --------- --------- Net Cash Provided by Operating Activities 7,663 2,951 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Investments in acquisitions, net of cash & cash equivalents acquired (9) (7,708) Purchases of investments and marketable securities (15) (55) Additions to property, plant and equipment (7,419) (6,640) Proceeds from investments, marketable securities 718 2,944 --------- --------- Net Cash (Used) by Investing Activities (6,725) (11,459) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Exercise of stock options 306 1,070 Payment of long-term obligations, including current maturities (1,002) (978) Dividends paid - (471) Increase in long-term obligations 1,909 6,527 Increase (Decrease) in short-term borrowings (1,175) 3,832 --------- --------- Net Cash Provided by Financing Activities 38 9,980 --------- --------- Effect of Exchange Rate Changes (180) - Net Increase (Decrease) in Cash and Cash Equivalents 796 1,472 Cash and Cash Equivalents at Beginning of Year 2,313 2,412 --------- --------- Cash and Cash Equivalents at End of Year $ 3,109 $ 3,884 ========= =========
5 6 AMERICAN PRECISION INDUSTRIES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Third Quarter Ended September 30, 1998 ------------------------------------------ Note A Consolidated Financial Statements - ------ --------------------------------- The Consolidated Balance Sheet as of September 30, 1998, and the Consolidated Statement of Earnings and the Consolidated Statement of Cash Flows for the periods ended September 30, 1998 and October 3, 1997 have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations, and changes in cash flow at September 30, 1998 and for all periods presented have been made. The Consolidated Balance Sheets include the assets, liabilities and resulting goodwill of all subsidiaries. The Consolidated Statements of Earnings and Cash Flows for the nine months ended October 3, 1997 include the results of API Schmidt-Bretten and API Portescap since January 31, 1997 and July 8, 1997, the dates of their respective acquisitions. Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles have been condensed or omitted. It is suggested these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 1997 Annual Report to Shareholders. Note B Inventories - ------ ----------- The major classes of inventories are as follows:
September 30, December 31, (In thousands) 1998 1997 ------------- ------------ Finished goods $ 6,688 $ 9,133 Work in process 10,983 10,807 Raw materials 23,992 18,570 ------- ------- $41,663 $38,510 ======= =======
Had the cost of all inventories at September 30, 1998 and December 31, 1997 been determined by the FIFO method, these amounts would have been greater by $1,052 for both periods. 6 7 Note C Long-Term Obligations - ------ ---------------------
September 30, 1998 December 31, 1997 ------------------------------------------------------------------------------------ Out- Long- Out- Long- (In thousands) standing Current Term standing Current Term --------- -------- -------- -------- ------- ------- Industrial Revenue Bonds $11,443 $ 1,146 $10,297 $12,294 $ 1,130 $11,164 Revolving Credit Debt 19,250 - 19,250 17,300 - 17,300 Supplemental Benefit Program 750 1,034 199 835 976 226 Portescap Debt- Mortgage and Other Long-Term Loans 5,889 - 5,889 5,585 - 5,585 ------- ------- ------- ------- ------- ------- $37,558 $ 1,372 $36,186 $36,213 $ 1,329 $34,884 ======= ======= ======= ======= ======= =======
Note D Earnings Per Share - ------ ------------------ All earnings per share amounts reflect the implementation of Statement of Financial Accounting Standards No. 128 Earnings per Share ("SFAS 128"). SFAS 128 established new standards for computing and presenting earnings per share and requires all prior period earnings per share data to be restated to conform with the provisions of the statement. 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 using the weighted average number of shares determined for the basic computations 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. Note E Foreign Currency Translation - ------ ---------------------------- The financial statements of subsidiaries outside the United States are measured using the local currency as the functional currency. Assets, including goodwill, and liabilities are translated at the rates of exchange at the balance sheet date. The resulting translation adjustments are included in equity adjustment from foreign currency translation, a separate component of shareholders' equity reported in Accumulated other comprehensive income. Income and expense items are translated at average monthly rates of exchange. The Company utilizes forward foreign currency exchange contracts to manage exposures resulting from fluctuations in foreign currency exchange rates on monetary assets and liabilities denominated in foreign currencies arising from its operations. Gains and losses on foreign currency transactions are recorded in income and are not material during the periods presented. The Company does not engage in foreign currency speculation. As of September 30, 1998 and December 31, 1997 foreign exchange contracts outstanding were not significant. 7 8 Note F Selected Segment Data - ------ --------------------- The Company conducts operations in two major industrial classifications: Heat Transfer Technology and Motion Technologies. Information about the net sales and operating profit of these segments is set forth below:
THIRD QUARTER ENDED NINE MONTHS ENDED ------------------------- -------------------------- SEPTEMBER 30, OCTOBER 3, SEPTEMBER 30, OCTOBER 3, (Dollars in thousands) 1998 1997 1998 1997 ------------- --------- -------------------------- NET SALES: Heat Transfer 24,676 24,715 71,547 69,591 Motion 30,319 30,299 92,120 60,838 -------- -------- -------- -------- 54,995 55,014 163,667 130,429 ======== ======== ======== ======== OPERATING PROFIT: Heat Transfer 2,696 2,073 6,637 6,432 Motion 2,214 3,366 6,074 7,342 -------- -------- -------- -------- 4,910 5,439 12,711 13,774 GENERAL CORPORATE EXPENSE, NET (1,180) (1,531) (3,318) (2,925) INTEREST AND DEBT EXPENSE (784) (870) (2,411) (1,889) -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES 2,946 3,038 6,982 8,960 ======== ======== ======== ========
Note G Adoption of SFAS No. 130 - ------ ------------------------ In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income is defined as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources". Under SFAS 130, the term "comprehensive income" is used to describe the total net earnings plus other comprehensive income which for the Company includes foreign currency translation adjustments and minimum pension liability not yet recognized as net periodic pension cost. The adoption of SFAS 130 did not impact the calculation of net earnings or earnings per share nor did it impact reported assets, liabilities or total shareholders' equity. It did impact the presentation of the components of shareholders' equity within the balance sheet and will result in the presentation of the components of comprehensive income within an annual financial statement, which must be displayed with the same prominence as other financial statements. 8 9 The components of the Company's total comprehensive income (loss) were:
NINE MONTHS ENDED -------------------------- SEPTEMBER 30, OCTOBER 3, (In thousands) 1998 1997 ------------- ---------- Net earnings $ 4,469 $ 6,113 Other comprehensive income (loss): Foreign currency translation adjustments 1,312 (215) Minimum pension liability, net of tax (78) (74) ------- ------- Total comprehensive income (loss) $ 5,703 $ 5,824 ======= =======
The foreign currency translation adjustments are not currently adjusted for income taxes since they relate to investments which are permanent in nature. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------ SALES American Precision Industries Inc. ("API") consolidated sales for the third quarter of 1998 were $55.0 million, equal to the similar period of 1997. For the first nine months of 1998, consolidated sales of $163.7 million were 25.5% above sales for the first nine months of 1997. The acquisition of Portescap, a Swiss micromotor company acquired July 8, 1997 and of Schmidt-Bretten, a German heat exchanger company acquired January 31, 1997, accounted for $31.1 million of the $33.2 million increase in nine-month comparative sales. The remaining $2.1 million sales increase resulted from higher sales of API Motion's brakes, clutches, resolvers and magnetic components and of API Heat Transfer's air-cooled products offset by lower demand for other Motion Control products (weak semi-conductor industry demand), including Gettys turbo motors (delayed new product introduction) and for shell and tube heat exchangers (weak refrigeration market demand). COST OF PRODUCTS SOLD Cost of products sold for the third quarter and first nine months of 1998 were $38.5 million and $114.7 million respectively as compared to $38.6 million and $90.5 million for similar periods in 1997. The third quarter of 1998 cost of goods sold was $.8 million higher than the similar period in 1997 when third quarter 1997 is adjusted to exclude one-time inventory write-downs. The majority of the higher cost was related to manufacturing inefficiencies at the Company's air-cooled heat exchanger facility. The causes of these inefficiencies were resolved late in the third quarter of 1998 by the addition of furnace capacity. The acquisition of Portescap and Schmidt-Bretten accounted for $21.2 million of the increase in cost of goods sold for the nine-month period compared with the similar period in 1997. The remaining $3.0 million increase was the result of the manufacturing inefficiencies mentioned above and the higher sales volume. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative costs in the third quarter 1998 were $11.6 million, a $.3 million increase as compared to 1997's third quarter. Currency rate fluctuations increased the dollar value of selling, general and administrative expenses at the Company's foreign operations, accounting for the comparative increase. Selling and administrative costs for the nine-month period of 1998 are $36.0 million, up $9.6 million compared with the prior year. The Portescap and Schmidt-Bretten acquisitions account for $7.2 million of the increase. In addition, higher selling costs related to volume growth of brakes and clutches, resolvers, magnetic components and plate and frame heat exchangers, costs to support market introduction of Gettys' turbo motors, and the currency rate fluctuations mentioned above account for the balance of the comparative increase. 10 11 RESEARCH AND PRODUCT DEVELOPMENT Product development spending was $1.1 million and $3.6 million for the third quarter and nine-month periods of 1998 compared with $1.0 million and $2.5 million for similar periods in 1997. Development spending for product redesigns of Gettys motors and Portescap micromotors account for the quarterly comparative increase. For the nine months, the Portescap acquisition accounts for $1.0 million of the comparative increase. INTEREST AND DEBT EXPENSE Interest and Debt Expense, net of investment income, was $.8 million in the third quarter of 1998 compared with $.9 million last year. The lower expense reflects the lower interest resulting from the fourth quarter 1997 restructuring of Portescap's Swiss franc debt following the July 8, 1997 Portescap acquisition. For the first nine months of 1998 compared with the similar period for 1997, interest and debt expense increased to $2.4 million from $1.9 million principally as a result of interest on the debt acquired with Portescap. OTHER EXPENSE The 1997 other expense reflected a September 1997 agreement with the United States government relating to government sub-contract work performed by API's former Rapidsyn Division between 1987 and 1995. This cost was partially offset by a $121,000 gain from the sale of a non-operating investment. TAXES The year-to-date tax rate for the nine-month period of 1998 was 36.0% compared to a rate of 31.8% for the same period last year. The 1997 rate included non-recurring benefits from adjustments to pre-1997 tax provisions as audits were successfully completed. The geographic mix of the Company's earnings, most notably increased profits in Germany, account for the remainder of the rate increase in 1998 when compared with 1997. During the fourth quarter of 1998, API Portescap was granted a 10-year exemption from Cantonal taxes on profits from its new products produced in Switzerland. The Canton of Neuchatel also recommended to the federal authorities that a similar exemption from federal taxes be approved. The statutory federal income tax rate is 8.5%. The Company is currently discussing with Swiss authorities the details for the calculations of the tax holidays' benefits. NET EARNINGS Net Earnings for the third quarter and first nine months of 1998 were $1.9 million and $4.5 million respectively as compared to $2.3 million and $6.1 million for the similar periods of 1997. For the third quarter, excluding one-time items in 1997, 1998 net income was $1.0 million below the similar quarter of 1997 due to the lower semi-conductor demand for API's motion control products, the design, development and product introduction costs for API's new turbo motors, and the higher tax rate. For the first nine months of 1998, the increased net income from the acquisitions of Portescap and Schmidt-Bretten were more than offset by the 11 12 production issues related to air-cooled heat exchangers, costs related to the introduction of new motor and drive products at API Motion, higher corporate costs and a higher tax rate. SEGMENT DATA DISCUSSION Heat Transfer - ------------- Third quarter 1998 sales in the heat transfer segment were $24.7 million, equal to the third quarter of 1997. 1998 third quarter operating profit was $2.7 million, $.6 million or 30% above the third quarter of last year. When adjusted to exclude a one-time $.4 million third quarter 1997 inventory write-down, comparative operating profit increased by 8%. - - For the shell and tube product line, lower sales to the refrigeration market caused third quarter 1998 sales to be 8% below last year. Manufacturing cost reductions were more than offset by the lower sales volume resulting in operating profit to fall 5% below (excluding 1997's inventory adjustment) the third quarter 1997 level. - - The plate and frame heat exchanger product line had third quarter sales and operating profit increase by 1% and 158% compared with the third quarter of 1997. The third quarter of 1997 included a large systems order. Excluding this order, 1998's sales and operating profit were respectively 11% and 51% above the similar quarter of 1997. - - For air-cooled products, third quarter 1998 sales were up 8% compared with the third quarter of 1997. On a comparative basis, third quarter 1998 profits were 38% lower than last year's third quarter results. Progress in resolving manufacturing inefficiencies improved significantly following the mid-July start-up of a new furnace. September sales were at record levels and operating profit exceeded that of the similar month of 1997. For the nine months of 1998, Heat Transfer sales of $71.5 million were 2.8% above the similar period last year. Operating profit of $6.6 million was 3.2% higher comparatively. Ownership of Schmidt-Bretten, acquired January 31, 1997, for a full nine months in 1998 and increased sales of air-cooled products offset lower shell and tube heat exchanger sales. Lower operating profit due to manufacturing inefficiencies related to air-cooled products was more than offset by cost reductions and margin improvements in the other products. Motion - ------ 1998 third quarter sales for Motion (including sales of magnetic components previously reported as the Electronic Components segment) were $30.3 million, equal to sales in the third quarter 1997. Operating profit was $2.2 million, down $1.2 million when compared to third quarter 1997's operating profit, and down $1.6 million excluding a $.4 million one-time inventory write-down in 1997's third quarter. 12 13 - - For Controls and for Gettys motors products, weak semi-conductor industry demand for both current and new motion control products and the phase out of older motor products as Gettys continued its new turbo motor development and introduction reduced third quarter 1998 sales by 34% as compared to the same period in 1997. The sales decline plus turbo motor development and market introduction costs lowered operating profit by $1.1 million in 1998's third quarter when compared to the third quarter of 1997. - - Motion's brakes, clutches and resolver sales increased 22% in the third quarter of 1998 when compared with the third quarter of 1997. Price competition in the markets served by these products and added marketing resources offset the profit from the higher sales. - - Micromotor manufacturing productivity at Motion's Portescap facility in Switzerland attained higher levels during the third quarter, 1998, similar to our experience late in the second quarter. This followed the low productivity levels in April 1998 during Portescap's conversion to a flow manufacturing process. Sequentially, third quarter 1998 operating profits increased 78% as compared with the second quarter of 1998. - - When adjusted to exclude the impact of currency fluctuation, sales in the third quarter of 1998 were $1.1 million lower when compared with sales in the third quarter of 1997. The lower sales reflect 1997 order timing, which experienced lower early year demand and stronger second half shipments. The lower comparative volume accounted for the majority of the $.9 million lower third quarter 1998 operating profit compared with 1997's third quarter result. The balance of the shortfall is the net result of lower margins related to the work-off of old, higher cost inventory offset by cost savings from earlier restructuring activities. - - The magnetic components product line showed a 151% sales increase in the third quarter of 1998 compared with the prior year. Higher sales and cost control produced a 17% increase in quarterly operating profit compared to the prior year. For the first nine month 1998 period, sales of $92.1 million were up $31.3 million compared with the similar period of 1997. Portescap's acquisition on July 8, 1997 accounts for $29.4 million of the increase. Higher demand for brakes, clutches, resolvers and components offset by lower sales of controls and Gettys motors account for the remainder of the increase. Operating profit for the nine months was $6.1 million, $1.3 million below operating profit for the first nine months of 1997. 13 14 FINANCIAL POSITION Comparative information on the Company's liquidity position follows (000 omitted).
September 30, October 3, ------------- ------------- 1998 1997 ------------- ------------- Net Working Capital $40,985 $31,764 Current Ratio 1.9 1.6 Cash and Cash Equivalents $ 3,109 $ 3,884 Nine Months Ended ------------------------------- September 30, October 3, 1998 1997 ------------- ------------- Cash Flow from Operations $ 7,663 $ 2,951 Capital Expenditures $ 7,419 $ 6,640
The Company has available short-term lines of credit which it utilizes to fund current operations. On August 31, 1998, the Company signed a loan agreement with Marine Midland Bank and Fleet Bank for a $100 million, multi-currency, five-year unsecured Revolving Credit Facility with a variable rate of interest based on either the prime rate or LIBOR, with $50 million of the facility available in foreign currencies selected by the Company. The new credit facility replaced the Company's $20 million Revolving Credit Facility with Marine Midland Bank. Twenty-five million dollars ($25 million) of the new facility will be used to repay the existing line and for general corporate purposes. The balance of the facility is available for acquisitions and the possible redemption of some or all of the Company's Series B 7% Cumulative Convertible preferred stock which has an aggregate redemption value of approximately $26 million. The facility is guaranteed by the Company's U.S. domestic subsidiaries. YEAR 2000 The Company is addressing through its Heat Transfer, Motion, Components and Corporate Groups the business and technology issues presented by the year 2000 ("Y2K") and the possibility that computer programs may not properly recognize a year that begins with a "20" instead of the familiar "19." The Company oversees and coordinates its Y2K efforts through a management committee which is chaired by the Company's Chief Financial Officer and which includes a business executive and information technology ("IT") managers from each Group. The members also comprise the leadership team for their Group. The Y2K Committee and the various Groups utilize outside computer consultants as the need arises. Periodic status reports are provided to the Company's Audit Committee. The Y2K Committee has organized its efforts into four categories: 1. IT Systems - hardware and software for operational and administrative systems 14 15 2. Non-IT Areas - production and testing equipment, office equipment and facilities 3. Products and customers 4. Suppliers (material and services) In all areas, the primary focus is on assuring that mission critical systems are or will become Y2K compliant. The Company's Y2K efforts can best be summarized by discussing separately its U.S. and European operations. U.S. Business and Corporate Groups: - ----------------------------------- The Company's U.S. IT environment consists of relatively new mainframe hardware, a mixed age range of personal computers and package software purchased or licensed from recognized software providers. The Company policy has been to not customize source code. An inventory and assessment of its IT systems for Y2K compliance occurred in mid-1997. This effort indicated a few non-compliant critical systems and identified remedies which were not difficult or costly to implement. Most non-compliant systems required software upgrades to Y2K compliant release levels available from the software package suppliers. Such upgrades are either complete or will be so by the second quarter of 1999. Written certification of compliance is being secured from the suppliers of the release upgrades. Reviews of non-IT areas were undertaken in early 1998. No mission critical non-compliance issues have been identified. The Company intends to continue to monitor this area. Product reviews have not identified any products containing embedded logic which would be non-compliant. However, the Company is limited in its ability to identify and review all products that were sold in the past, particularly by its Motion Group, and, therefore, the Company cannot be certain that there are not older products still in use which contain embedded logic which may be non-Y2K compliant. Supplier surveys have begun to assess the compliance status of the Company's critical suppliers and the Company intends to continue to survey its suppliers throughout the Y2K period. European Businesses: - -------------------- The Company made two European acquisitions in 1997 - Schmidt Bretten, a German heat transfer company, and Portescap, a Swiss micromotor company. Status reviews of Y2K compliance for these units identified critical systems requiring upgrade. Schmidt-Bretten is in the process of replacing its operating and administrative systems. This project is scheduled to be completed in mid-1999. Portescap will require upgrades to certain of its software and expects to complete these by mid-1999. The Company's European units will be conducting reviews of non-IT areas, products and suppliers similar to those undertaken in the U.S., and plans are to have these reviews completed in mid-1999. 15 16 Costs and Contingency Plans: - ---------------------------- Domestically, the Company's Y2K compliance costs have not been material. Management estimates that costs incurred to date for Y2K related hardware and software upgrades to be less than $.2 million and costs for outside consultants to be less than $.1 million. Future costs are currently not expected to exceed an additional $.3 million. Internationally the Company has budgeted the equivalent of $.3 million to replace the outdated administrative system at its German heat transfer subsidiary. This replacement provides a number of operating improvements, including Y2K compliance. The Company has begun implementing a general upgrade of IT systems at its Swiss micromotor subsidiary. Future costs specifically related to Y2K compliance at the swiss micromotor subsidiary are currently estimated to be less than $.2 million. At this time the Company does not have reason to believe that there will be any significant interruption in the Company's operations caused by a Y2K problem that is unique to the Company, and, therefore, the Company has not adopted a contingency plan for that event. However, the Y2K Committee will continue to monitor this possibility and will attempt to identify cost effective and timely solutions should a problem in this regard be likely. 16 17 AMERICAN PRECISION INDUSTRIES INC. AND SUBSIDIARIES Components of Consolidated Statement of Earnings Expressed as a Percentage of Net Sales ------------------------------------------------
Third Quarter Ended --------------------------- September 30, October 3, 1998 1997 ------------- ---------- Net Sales 100.0 100.0 ----- ----- Costs and Expenses Cost of products sold 70.1 70.1 Selling and administrative 21.1 20.5 Research and product development 2.0 1.9 Interest and debt expense, net of investment income 1.4 1.6 Other expense - 0.4 ----- ----- 94.6 94.5 ----- ----- Earnings before Income Taxes 5.4 5.5 Income Taxes 1.9 1.4 ----- ----- Net Earnings 3.5 4.1 ===== ===== Income Taxes as a percentage of Earnings Before Income Taxes 36.0% 25.7% ===== =====
17 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings - ------- ----------------- None Item 2. Changes in Securities and Use of Proceeds - ------- ----------------------------------------- None Item 3. Defaults Upon Senior Securities - ------- ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- None Item 5. Other Information - ------- ----------------- None Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits See the index to exhibits immediately preceding the exhibits filed with this report. (b) Reports on Form 8-K The Company filed a Report on Form 8-K on September 8, 1998 reporting under Item 5 its new Credit Agreement with Marine Midland Bank and Fleet National Bank dated August 31, 1998. 18 19 AMERICAN PRECISION INDUSTRIES INC. AND SUBSIDIARIES * * * * * * SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES -------------------------------------------------- LITIGATION REFORM ACT OF 1995 ----------------------------- Certain statements made in this report constitute forward-looking statements based upon current expectations and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve certain assumptions, risks and uncertainties that could cause actual results to differ materially from those included in, or contemplated, by the statements. These assumptions, risks and uncertainties include, but are not limited to, the successful transition of the acquisitions of Schmidt-Bretten and Portescap into the Company, the continued improvement at the Company's air-cooled heat exchanger operation, customer acceptance of the new line of motors and drives, the successful installation of the new flow manufacturing system at Portescap, improvements in the semi-conductor and refrigeration markets, stability in the interest rate and foreign currency environment, the Company's ability to deal with issues raised by the Year 2000, as well as the risks and uncertainties associated with general economic cycles in North America, Europe or the Far East. The Company expressly disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date hereof. * * * * * * 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. AMERICAN PRECISION INDUSTRIES INC. /s/ Bruce McH. Kirchner - ---------------------------------- Bruce McH. Kirchner Chief Financial Officer /s/ Mark E. Wood - ---------------------------------- Mark E. Wood Corporate Controller November 11, 1998 19 20 EXHIBIT INDEX ------------- 2A Credit Agreement, with exhibits and schedules, dated August 31, 1998, by and among American Precision Industries Inc., and Marine Midland Bank, as agent and lender, and Fleet National Bank, as lender (incorporated by reference to Exhibit 4(A) in the Registrant's Form 8-K dated September 8, 1998). 4A Rights Agreement, dated as of July 24, 1998, between American Precision Industries Inc. and American Securities Transfer & Trust, Inc., as Rights Agent (incorporated by reference to Exhibit 4 in the Registrant's Form 8-A dated July 24, 1998). 10A Amendment No. 1 to the American Precision Industries Inc. 1997 Officers Stock Option Plan 10B Amendment No. 1 to the American Precision Industries Inc. 1995 Directors Stock Option Plan 10C Amendment No. 2 to the American Precision Industries Inc. 1998 Employees Stock Option Plan 10D Amendment No. 2 to the American Precision Industries Inc. 1995 Employees Stock Option Plan 10E Amendment No. 2 to the American Precision Industries Inc. 1993 Employees Stock Option Plan 10F Amendment No. 2 to the American Precision Industries Inc. 1989 Employees Stock Option Plan 11 Computation of net income per share 27 Financial Data Schedule 20 EX-10.A 2 EXHIBIT 10(A) 1 EXHIBIT 10A ----------- Amendment No. 1 to the AMERICAN PRECISION INDUSTRIES INC. 1997 OFFICERS STOCK OPTION PLAN WHEREAS, American Precision Industries Inc. (the "Company") adopted the American Precision Industries Inc. 1997 Officers Stock Option Plan (the "Plan") effective April 25, 1997, and WHEREAS, Section 8.3 of the Plan authorizes the Board of Directors of the Company (the "Board") to amend the Plan in its discretion, except to the extent approval of the Company's shareholders would be required by law, and WHEREAS, on July 24, 1998, the Board approved and authorized the amendment to the Plan set out below, NOW, THEREFORE, the Plan is amended as follows: 1. A new Section 8.3A is added to the Plan to read as follows: 8.3A RESTRICTIONS ON AMENDMENTS AND GRANTS. Notwithstanding any contradictory provisions of the Plan, and except as provided in Section 7.1 or as approved by the Company's shareholders, an Option may not be amended to reduce the exercise price or cancelled and replaced with another Option having a lower exercise price. 2. This amendment is effective July 24, 1998. IN WITNESS WHEREOF, this document is executed this 27th day of October, 1998, pursuant to the authorization of the Board of Directors. AMERICAN PRECISION INDUSTRIES INC. By /s/ James R. Schwinger ---------------------------------- Vice President - Human Resources 21 EX-10.B 3 EXHIBIT 10(B) 1 EXHIBIT 10B ----------- Amendment No. 1 to the AMERICAN PRECISION INDUSTRIES INC. 1995 DIRECTORS STOCK OPTION PLAN as Restated WHEREAS, American Precision Industries Inc. (the "Company") adopted the American Precision Industries Inc. 1995 Directors Stock Option Plan (the "Plan") effective July 1, 1995, amended the Plan effective February 25, 1997, and amended and restated the Plan effective February 20, 1998, and WHEREAS, Section 10.3 of the Plan authorizes the Board of Directors of the Company (the "Board") to amend the Plan in its discretion, except to the extent approval of the Company's shareholders would be required by law, and WHEREAS, on July 24, 1998, the Board approved and authorized the amendment to the Plan set out below, NOW, THEREFORE, the Plan is amended as follows: 1. A new Section 10.3A is added to the Plan to read as follows: 10.3A Restrictions on Amendments and Grants. Notwithstanding any contradictory provisions of the Plan, and except as provided in Section 9.1 or as approved by the Company's shareholders, an Option may not be amended to reduce the exercise price or cancelled and replaced with another Option having a lower exercise price. 2. This amendment is effective July 24, 1998. IN WITNESS WHEREOF, this document is executed this 27th day of October, 1998, pursuant to the authorization of the Board of Directors. AMERICAN PRECISION INDUSTRIES INC. By /s/ James R. Schwinger ---------------------------------- Vice President - Human Resources 22 EX-10.C 4 EXHIBIT 10(C) 1 EXHIBIT 10C ----------- Amendment No. 2 to the AMERICAN PRECISION INDUSTRIES INC. 1998 EMPLOYEES STOCK OPTION PLAN WHEREAS, American Precision Industries Inc. (the "Company") adopted the American Precision Industries Inc. 1998 Employees Stock Option Plan (the "Plan") effective February 20, 1998, and amended the Plan effective April 24, 1998, and WHEREAS, Section 8.3 of the Plan authorizes the Board of Directors of the Company (the "Board") to amend the Plan in its discretion, except to the extent approval of the Company's shareholders would be required by law, and WHEREAS, on July 24, 1998, the Board approved and authorized the amendment to the Plan set out below, NOW, THEREFORE, the Plan is amended as follows: 1. A new Section 8.3A is added to the Plan to read as follows: 8.3A RESTRICTIONS ON AMENDMENTS AND GRANTS. Notwithstanding any contradictory provisions of the Plan, and except as provided in Section 7.1 or as approved by the Company's shareholders, an Option may not be amended to reduce the exercise price or cancelled and replaced with another Option having a lower exercise price. 2. This amendment is effective July 24, 1998. IN WITNESS WHEREOF, this document is executed this 27th day of October, 1998, pursuant to the authorization of the Board of Directors. AMERICAN PRECISION INDUSTRIES INC. By /s/ James R. Schwinger ---------------------------------- Vice President - Human Resources 23 EX-10.D 5 EXHIBIT 10(D) 1 EXHIBIT 10D ----------- Amendment No. 2 to the AMERICAN PRECISION INDUSTRIES INC. 1995 EMPLOYEES STOCK OPTION PLAN WHEREAS, American Precision Industries Inc. (the "Company") adopted the American Precision Industries Inc. 1995 Employees Stock Option Plan (the "Plan") effective December 16, 1994, and amended the Plan effective April 24, 1998, and WHEREAS, Article II(e) of the Plan authorizes the Board of Directors of the Company (the "Board") to amend the Plan in its discretion, except to the extent approval of the Company's shareholders would be required by law, and WHEREAS, on July 24, 1998, the Board approved and authorized the amendment to the Plan set out below, NOW, THEREFORE, the Plan is amended as follows: 1. A new Article II(h) is added to the Plan to read as follows: (h) RESTRICTIONS ON AMENDMENTS AND GRANTS. Notwithstanding any contradictory provisions of the Plan, and except as provided in Article V(e)(vii) or as approved by the Company's shareholders, an Option may not be amended to reduce the exercise price or cancelled and replaced with another Option having a lower exercise price. 2. This amendment is effective July 24, 1998. IN WITNESS WHEREOF, this document is executed this 27th day of October, 1998, pursuant to the authorization of the Board of Directors. AMERICAN PRECISION INDUSTRIES INC. By /s/ James R. Schwinger ---------------------------------- Vice President - Human Resources 24 EX-10.E 6 EXHIBIT 10(E) 1 EXHIBIT 10E ----------- Amendment No. 2 to the AMERICAN PRECISION INDUSTRIES INC. 1993 EMPLOYEES STOCK OPTION PLAN WHEREAS, American Precision Industries Inc. (the "Company") adopted the American Precision Industries Inc. 1993 Employees Stock Option Plan (the "Plan") effective December 16, 1992, and amended the Plan effective December 16, 1994, and WHEREAS, Article II(e) of the Plan authorizes the Board of Directors of the Company (the "Board") to amend the Plan in its discretion, except to the extent approval of the Company's shareholders would be required by law, and WHEREAS, on July 24, 1998, the Board approved and authorized the amendment to the Plan set out below, NOW, THEREFORE, the Plan is amended as follows: 1. A new Article II(f) is added to the Plan to read as follows: (f) RESTRICTIONS ON AMENDMENTS AND GRANTS. Notwithstanding any contradictory provisions of the Plan, and except as provided in Article V(e)(vii) or as approved by the Company's shareholders, an Option may not be amended to reduce the exercise price or cancelled and replaced with another Option having a lower exercise price. 2. This amendment is effective July 24, 1998. IN WITNESS WHEREOF, this document is executed this 27th day of October, 1998, pursuant to the authorization of the Board of Directors. AMERICAN PRECISION INDUSTRIES INC. By /s/ James R. Schwinger ---------------------------------- Vice President - Human Resources 25 EX-10.F 7 EXHIBIT 10(F) 1 EXHIBIT 10F ----------- Amendment No. 2 to the AMERICAN PRECISION INDUSTRIES INC. 1989 EMPLOYEES STOCK OPTION PLAN WHEREAS, American Precision Industries Inc. (the "Company") adopted the American Precision Industries Inc. 1989 Employees Stock Option Plan (the "Plan") effective February 27, 1989, and amended the Plan effective December 16, 1994, and WHEREAS, Article II(e) of the Plan authorizes the Board of Directors of the Company (the "Board") to amend the Plan in its discretion, except to the extent approval of the Company's shareholders would be required by law, and WHEREAS, on July 24, 1998, the Board approved and authorized the amendment to the Plan set out below, NOW, THEREFORE, the Plan is amended as follows: 1. A new Article II(f) is added to the Plan to read as follows: (f) RESTRICTIONS ON AMENDMENTS AND GRANTS. Notwithstanding any contradictory provisions of the Plan, and except as provided in Article V(e)(vii) or as approved by the Company's shareholders, an Option may not be amended to reduce the exercise price or cancelled and replaced with another Option having a lower exercise price. 2. This amendment is effective July 24, 1998. IN WITNESS WHEREOF, this document is executed this 27th day of October, 1998, pursuant to the authorization of the Board of Directors. AMERICAN PRECISION INDUSTRIES INC. By /s/ James R. Schwinger ---------------------------------- Vice President - Human Resources 26 EX-11 8 EXHIBIT 11 1 EXHIBIT 11 ---------- AMERICAN PRECISION INDUSTRIES INC. COMPUTATION OF NET INCOME PER SHARE (Shares and dollars in thousands except per share amounts)
THIRD QUARTER ENDED NINE MONTHS ENDED ---------------------------- --------------------------- SEPTEMBER 30, OCTOBER 3, SEPTEMBER 30, OCTOBER 3, 1998 1997 1998 1997 ------------ --------- ------------- ---------- Net Income $1,886 $2,258 $4,469 $6,113 ------ ------ ------ ------ Weighted average common shares outstanding Basic 7,473 7,412 7,459 7,365 Incremental shares from assumed conversions: Stock options and warrants 322 432 408 432 Series B convertible preferred stock 1,539 1,539 1,539 513 ------ ------ ------ ------ Weighted average common shares outstanding Diluted 9,334 9,383 9,406 8,310 ------ ------ ------ ------ Earnings per share: Basic $ 0.25 $ 0.30 $ 0.60 $ 0.83 Diluted $ 0.20 $ 0.24 $ 0.48 $ 0.74
27 EX-27 9 EXHIBIT 27
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 3,109 0 37,253 996 41,663 87,453 86,638 31,695 170,958 46,468 36,186 0 26,156 5,231 51,827 170,958 163,667 163,667 114,668 114,668 3,594 0 2,411 6,982 2,513 0 0 0 0 4,469 .60 .48
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