-----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, SOQOtebbRov03lwNcFFzVbX/hsQffPIUtkvx9KJyYKctjYnS6Q8bgqYwmOukefVN Wr27g1oVMbZKwZBeElgNcQ== 0000950152-98-008568.txt : 19981106 0000950152-98-008568.hdr.sgml : 19981106 ACCESSION NUMBER: 0000950152-98-008568 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVOTRONICS INC /DE/ CENTRAL INDEX KEY: 0000089140 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 160837866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-07109 FILM NUMBER: 98738777 BUSINESS ADDRESS: STREET 1: 1110 MAPLE ST CITY: ELMA STATE: NY ZIP: 14059 BUSINESS PHONE: 7166335990 MAIL ADDRESS: STREET 1: P O BOX 300 STREET 2: ELMA STATE: NY ZIP: 14059-0300 10QSB 1 SERVOTRONICS, INC. 10QSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the quarterly period ended September 30, 1998 - --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission File No. 1 - 7109 SERVOTRONICS, INC. - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 16-0837866 ------------------------------ ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1110 Maple Street, Elma, New York 14059-0300 -------------------------------------------- (Address of principal executive offices) 716-655-5990 ------------ (Issuer's telephone number, IAC) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X ; No --- --- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at October 31, 1998 ---------------------------- ------------------------------- Common Stock, $.20 par value 2,376,494 (See Note 5 to Consolidated Financial Statements) Transitional Small Business Disclosure Format (Check one): Yes ; No X --- --- -1- 2 INDEX
PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements a) Consolidated Balance Sheet, September 30, 1998 3 b) Consolidated Statement of Income for the Three and Nine months Ended September 30, 1998 and 1997 4 c) Consolidated Statement of Cash Flows for the Nine months Ended September 30, 1998 and 1997 5 d) Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis or Plan of Operation 8 PART II. OTHER INFORMATION Signatures 11 Item 6(a). Exhibits 27 Financial Data Schedule
-2- 3 PART I FINANCIAL INFORMATION SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, 1998 ($000's omitted except per share data) (Unaudited) Assets Current assets: Cash $ 821 Accounts receivable 2,533 Inventories 8,490 Deferred tax asset 640 Other 1,433 -------- Total current assets 13,917 Property, plant and equipment, net 7,271 Other assets 429 -------- $ 21,617 ======== Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 248 Accounts payable 1,021 Accrued employee compensation and benefit costs 979 Accrued income taxes 86 Other accrued liabilities 243 -------- Total current liabilities 2,577 -------- Long-term debt 6,197 Non-current deferred tax liability 534 Shareholders' equity: Common stock, par value $.20; authorized 4,000,000 shares; Issued 2,614,506 shares 523 Capital in excess of par value 13,269 Retained earnings 2,515 -------- 16,307 Employee stock ownership trust commitment (2,842) Treasury stock, at cost 238,012 shares (1,156) -------- Total shareholders' equity 12,309 -------- $ 21,617 ========
See notes to consolidated financial statements -3- 4 SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME ($000's omitted except per share data) (Unaudited)
Three Months Ended Nine months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $ 4,231 $ 3,578 $ 13,161 $ 11,278 Costs and expenses: Cost of goods sold 3,033 2,418 9,207 7,612 Selling, general and administrative 769 743 2,434 2,319 Interest 77 92 240 252 Depreciation and amortization 154 159 472 475 --------- --------- --------- ---------- 4,033 3,412 12,353 10,658 --------- --------- --------- ---------- Income before income taxes 198 166 808 620 Income tax provision 83 61 339 229 --------- --------- --------- ---------- Net income $ 115 $ 105 $ 469 $ 391 ========= ========= ========= ========== Net income per share - Basic $ 0.07 $ 0.06 $ 0.27 $ 0.23 ========= ========= ========= ========== Net income per share - Diluted $ 0.06 $ 0.06 $ 0.27 $ 0.23 ========= ========= ========= ==========
See notes to consolidated financial statements -4- 5 SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS ($000's omitted) (Unaudited)
Nine months Ended September 30, 1998 1997 ---- ---- Cash flows related to operating activities: Net income $ 469 $ 391 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 472 475 Change in assets and liabilities - Accounts receivable (331) 526 Inventories (462) (911) Prepaid income taxes 38 (249) Other current assets (47) 160 Other assets 11 11 Accounts payable (9) 30 Accrued employee compensation & benefit costs 170 6 Other accrued liabilities (16) 42 Accrued income taxes 86 (101) Change in current portion of long-term debt 0 (3) --------- ---------- Net cash provided by operating activities 381 377 --------- --------- Cash flows related to investing activities: Capital expenditures - property, plant & equipment (372) (607) ---------- ---------- Net cash used in investing activities (372) (607) ---------- ---------- Cash flows related to financing activities: Increase in demand loan 250 250 Principal payments on long-term debt (199) (159) Payments on demand loan (450) (250) Issuance of common stock 26 0 --------- --------- Net cash used in financing activities (373) (159) --------- --------- Net decrease in cash (364) (389) Cash at beginning of period 1,185 1,389 --------- --------- Cash at end of period $ 821 $ 1,000 ========= =========
See notes to consolidated financial statements -5- 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($000 omitted in tables except for per share data) 1. The information set forth herein is unaudited. This financial information reflects all normal accruals and adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. Revenue recognition ------------------- The Company incurred costs for certain contracts which are long term. These contracts are accounted for under the percentage of completion method (cost-to-cost) which recognizes revenue as the work progresses towards completion. Revenues on the remaining contracts are recognized when the terms of purchase orders are met. Included in other current assets are $651,000 of unbilled revenues which represent revenue earned under the percentage of completion method (cost-to-cost) not yet billable under the terms of the contracts. Reclassification of prior year balances --------------------------------------- Certain prior year balances have been reclassified to conform with the current year presentation.
2. Inventories September 30, 1998 ----------- ------------------ Raw materials and common parts $ 1,227 Work-in-process (including engineering and other support costs) 6,642 Finished goods 857 ---------- 8,726 Less common parts expected to be used after one year (236) ---------- $ 8,490 ==========
Engineering and other support costs are incurred in fulfilling certain contracts which have a production cycle longer than one year. A portion of these costs will, therefore, not be realized within one year. During 1997, the Accounting Standards Executive Committee (AsSEC) of the AICPA released a Statement of Position on Reporting on the Costs of Start-Up Activities which is effective for fiscal years beginning after December 15, 1998. The SoP requires that these one-time costs associated with the introduction of a new product line be expensed in the period incurred. No start-up costs have been capitalized during 1998. Servotronics will be required to write-off any unamortized balances relating to start-up activities on January 1, 1999 which is estimated to be approximately $151,000.
3. Property, plant and equipment ----------------------------- September 30, 1998 ------------------ Land $ 11 Buildings 6,143 Machinery, equipment and tooling 8,373 ---------- 14,527 Less accumulated depreciation (7,256) ---------- $ 7,271 ==========
-6- 7 Property, plant and equipment includes land and building under a $5,000,000 capital lease which can be purchased for a nominal amount at the end of the lease term. 4. Long-term debt --------------
September 30, 1998 ------------------ Industrial Development Revenue Bonds; secured by a letter of credit from a bank with interest payable monthly at a floating rate (4.20% at September 30, 1998 convertible to a fixed rate at the option of the Company) $ 5,000 Unsecured term note; payable to a bank with interest at prime plus 1/4% (8.75% at September 30, 1998); quarterly principal payments of $34,439 through November 1, 2000 276 Various other secured term notes payable to government agencies 1,169 --------- 6,445 Less current portion (248) --------- $ 6,197 =========
Industrial Development Revenue Bonds were issued by a government agency to finance the construction of the Company's new headquarters/Advanced Technology facility. Annual sinking fund payments of $170,000 commence December 1, 2000 and continue through 2013, with a final payment of $2,620,000 due December 1, 2014. The Company has agreed to reimburse the issuer of the letter of credit if there are draws on that letter of credit. The letter of credit is for the full amount of the Industrial Development Revenue Bonds. The Company pays the letter of credit bank an annual fee of 1% of the amount secured thereby and pays the remarketing agent for the bonds an annual fee of .25% of the principal amount outstanding. The Company's interest under the facility capital lease has been pledged to secure its obligations to the government agency, the bank and the bondholders. The letter of credit reimbursement agreement, the unsecured term note agreement and a secured term note contain, among other things, covenants relative to maintenance of working capital and tangible net worth and restrictions on capital expenditures, leases and additional borrowings. The Company also has a $1,000,000 line of credit on which there was no amount outstanding at September 30, 1998. 5. Common shareholders' equity ---------------------------
Common stock ------------ Number Capital in of shares excess of Retained Treasury issued Amount par value earnings ESOP stock ------ ------ --------- -------- ---- ----- Balance December 31, 1997 2,614,506 $ 523 $ 13,269 $ 2,104 ($ 2,842) ($ 1,240) Issuance of common stock -- -- -- (58) -- 84 Net income -- -- -- 469 -- --------- -------- ----------- -------- -------- ---------- Balance September 30, 1998 2,614,506 $ 523 $ 13,269 $ 2,515 ($ 2,842) ($ 1,156) ========= ======== =========== ======== ======== ==========
-7- 8 Earnings per share - ------------------ All earnings per share amounts reflect the implementation of the Statement of Financial Accounting Standards No. 128 Earnings per Share. Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period.
Three months ended Nine months ended September 30, September 30, ($000's omitted, except per share data) 1998 1997 1998 1997 - --------------------------------------- ------ ------ ------ ------ Net earnings $ 115 $ 105 $ 469 $ 391 Weighted average common shares outstanding (basic) 1,742 1,693 1,736 1,693 Incremental shares from assumed conversions of stock options 29 34 29 34 Weighted average 1,771 1,727 1,765 1,727 common shares outstanding (diluted) Earnings per share: Basic $ 0.07 $ 0.06 $ 0.27 $ 0.23 Diluted $ 0.06 $ 0.06 $ 0.27 $ 0.23
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - ------- --------------------------------------------------------- The following table sets forth for the periods indicated the percentage relationship of certain items in the consolidated statement of income to net sales and the percentage increase or decrease of such items as compared to the indicated prior period.
Relationship to Period to Relationship to Period to net sales period $ net sales period $ quarter ended increase nine months ended increase September 30 (decrease) September 30 (decrease) 1998 1997 98-97 1998 1997 98-97 ---- ---- ----- ---- ---- ----- Net sales Advanced technology products 63.2% 58.1% 27.4% 62.3% 57.9% 24.1% Consumer products 36.8% 41.9% 3.0% 37.7% 42.1% 3.4% ----- ----- ---- ----- ----- ---- 100.0% 100.0% 18.3% 100.0% 100.0% 16.7% Cost of goods sold, exclusive of depreciation 71.7% 67.6% 25.4% 70.0% 67.5% 21.0% ----- ----- ----- ----- ----- ----- Gross profit 28.3% 32.4% 3.3% 30.0% 32.5% 7.9% ----- ----- ---- ----- ----- ---- Selling, general and administrative 18.2% 20.8% 3.5% 18.5% 20.6% 5.0% Interest 1.8% 2.6% -16.3% 1.8% 2.2% -4.8% Depreciation and amortization 3.6% 4.4% -3.1% 3.6% 4.2% -0.6% 23.6% 27.8% -15.9% 23.9% 27.0% -0.4% ----- ----- ------ ----- ----- ----- Income before provision for income taxes 4.7% 4.6% 19.3% 6.1% 5.5% 30.3% Income tax provision 2.0% 1.7% 36.1% 2.5% 2.0% 48.0% ---- ---- ----- ---- ---- ----- Net income 2.7% 2.9% 9.5% 3.6% 3.5% 19.9% ==== ==== ==== ==== ==== =====
-8- 9 Management Discussion - --------------------- During the nine month period ended September 30, 1998 and for the comparable period ended September 30, 1997, approximately 23% and 20% respectively, of the Company's revenues were derived from contracts with agencies of the U.S. Government or their prime contractors. For the third quarter of 1998 and 1997, approximately 24% and 20% respectively, of the Company's revenues were derived from comparable sources. The Company's business is performed under fixed price contracts. It is noted that the many uncertainties in today's global economy, and difficulty in predicting defense appropriations (both actual and proposed) preclude any guarantees or even assurances that current programs will be continued or that programs in the prototype stages will ultimately result in production applications. It is because of such uncertainties and because such adverse occurrences may not be counterbalanced with new programs or otherwise, that cyclical downturns in operational performances are realistic expectations. Results of Operations - --------------------- The Company's consolidated results of operations for the nine month period ended September 30, 1998 showed an approximate 16.7% increase in net sales and an increase in net income of approximately 19.9% when compared to the same nine month period of 1997. For the third quarter of 1998, net sales increased approximately 18.3% with an increase in net income of 9.5% compared to the same period of 1997. The increase in sales is the result of increased shipments at both the Advanced Technology and Consumer Products operations. The Advanced Technology Group's total backlog (funded and unfunded) as of September 30, 1998 increased by approximately 19.5% from a year earlier. The September 30, 1998 total backlog is approximately $54,000,000 as compared to $45,000,000 of which $45,800,000 and $37,000,000 were unfunded in each of the respective comparative periods. Approximately $35,700,000 of the September 30, 1998 backlog is for product deliveries beyond 2000. The unfunded portion of the backlog is based on the Company's customers' estimated quantities for multi-year agreements for which the Company has not received firm orders. Operating profit as a percentage of net sales for the nine month period ended September 30, 1998 increased to 6.1% from 5.5% as reported for the same nine month period of 1997. For the third quarter of 1998 operating profit as a percent of net sales increased to 4.7% from 4.6% when compared to the same period of 1997. The fluctuations in operating profit as a percentage of net sales are primarily the result of differences in product mix in combination with increased sales. Selling, general and administrative costs increased for the nine month period and quarter ended September 30, 1998 when compared to the comparable periods of 1997 primarily because of an increase in selling and professional costs. Income taxes for the nine month period and quarter ended September 30, 1998 increased as a percentage of income before taxes when compared to the comparable periods of 1997 because of the effects of variable state income taxes. Liquidity and Capital Resources - ------------------------------- Certain contracts of the Advanced Technology Group require development and engineering costs in addition to hardware and the maintenance of inventory for replacement and/or overhaul. The replacement and/or overhaul units are billed at the time of shipment. The inventories at September 30, 1998, include costs associated with the initiation and maintenance of certain programs and costs in anticipation of increased -9- 10 demands upon the Company to support new programs and the request of customers for shorter production lead times. During the nine month period ended September 30, 1998, the Company expended $372,000 on capital expenditures. There are no material commitments for capital expenditures at September 30, 1998. Year 2000 Initiatives - --------------------- Year 2000 concerns generally include possible failures, errors, delays or other events resulting directly or indirectly from the inability of the software, hardware or embedded chips to accurately and without interruption process or handle dates on and after January 1, 2000. Servotronics is reliant on such systems, which utilize time-based mechanisms for information technology (IT) systems as well as non-IT systems. During 1997, the Company initiated the formulation of a year 2000 plan and began its implementation. The plan includes three phases: (1) identification of internal systems and third parties who have a material relationship with the company (i.e., suppliers, customers, financial institutions, etc.) for year 2000 compliance; (2) assessment of year 2000 readiness; (3) solution implementation and contingency plans. The Company has finished phase one and is in phase two. All phases are expected to be completed prior to the end of 1999. The Company believes that the cost of year 2000 compliance activities will not be material. Based on current information the cost of internal year 2000 issues is expected to be less than $40,000. The Company cannot predict the outcome of the assessment of those third parties considered critical to the Company's business or the ability of those parties to achieve year 2000 compliance by the end of 1999. PART II OTHER INFORMATION FORWARD-LOOKING STATEMENTS In addition to historical information, certain sections of this Form 10-QSB contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company's capital resources and profitability. Forward-looking statements involve numerous risks and uncertainties. The Company derives approximately 23% of its revenues from contracts with agencies of the U.S. Government or their prime contractors. The Company's business is performed under fixed price contracts and the following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: uncertainties in today's global economy, the growth of the national deficit and difficulty in predicting defense appropriations, the discontinuance of current defense programs, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company's customers to fund and issue substantial follow-on orders to the Company for long-term programs, competitive products and pricing, difficulties in the development or commercialization of products, product demand and market acceptance, both for the Company's products and its customers' products which incorporate components supplied by the Company, enforceability of intellectual property rights, capacity and supply, the effects of foreign competition, and the Company's future accounting policies. The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-QSB. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as of the date hereof. The Company assumes no obligation to update forward-looking statements. -10- 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 4, 1998 SERVOTRONICS, INC. By: /s/Lee D. Burns, Treasurer -------------------------------------- Lee D. Burns, Treasurer and Chief Financial Officer By: /s/Raymond C. Zielinski, Vice President -------------------------------------- Raymond C. Zielinski, Vice President -11- EX-27 2 EXHIBIT 27
5 0000089140 SERVOTRONICS, INC. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 821 0 2,533 0 8,490 13,917 7,271 0 21,617 2,577 6,197 0 0 523 11,786 21,617 13,161 13,161 9,207 12,353 0 0 240 808 339 469 0 0 0 469 0.27 0.27
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