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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number: 0-23996

SCHMITT INDUSTRIES, INC.
(Exact name of registrant's principal executive office)

        Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 of 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    ý        No    o

        The number of shares of each class of common stock outstanding as of August 31, 2002

SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q

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PART I—FINANCIAL INFORMATION

    Item 1. Financial Statements

SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements

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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 2002 and 2001
(UNAUDITED)

The accompanying notes are an integral part of these financial statements

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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 2002 AND 2001
(UNAUDITED)

The accompanying notes are an integral part of these financial statements

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SCHMITT INDUSTRIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 2002 AND 2001

Note 1:

        These financial statements are those of the Company and its wholly owned subsidiaries. In the opinion of management, the accompanying Consolidated Financial Statements of Schmitt Industries, Inc. contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of August 31, 2002 and 2001 and its results of operations and its cash flows for the three-months ended August 31, 2002 and 2001. Operating results for the three-month period ended August 31, 2002 are not necessarily indicative of the results that may be experienced for the fiscal year ending May 31, 2003.

Note 2: Revenue Recognition

        The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. For sales to all customers, including manufacturer representatives, distributors or their third-party customers, these criteria are met at the time product is shipped. When other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled.

Note 3: New Accounting Pronouncements

        During Fiscal 2002, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which requires the recognition, as an Asset Retirement Obligation (ARO), of a liability for dismantlement and restoration costs associated with the retirement of tangible long-lived assets in the period in which the liability is incurred. SFAS No. 143 must be applied for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact of SFAS 143 and expects there to be no material financial statement effect relating to the adoption of this pronouncement.

        During 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of long-lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of long-lived Assets and for long-lived Assets to Be Disposed Of. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for the measurement and recognition of the impairment of long-lived assets to be held and used, as well as the measurement of long-lived assets to be disposed of by sale. SFAS No. 144 resolves significant implementation issues related to SFAS No. 121, broadens the component of an entity to be included in the presentation for discontinued operations, and measures long-lived assets held for sale at the lower of their carrying amount or fair value (less cost to sell), while ceasing depreciation. The Company adopted this statement effective June 1, 2002 and has determined the impact of FAS 144 will not have a material impact on the Company's results of operations and financial position as of the adoption date.

Note 4: EPS Reconciliation

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Note 5: Long-term investments

        The Company owns 1,375,716 shares or approximately 11% of the outstanding shares of Air Packaging Technologies, Inc. That company is engaged in the design, manufacture, marketing and sales of "Air Box" patented packaging systems used in the retail, industrial protective and promotional packaging markets worldwide. This long-term investment is classified as an "Available-for-sale security". As required under Statement of Financial Accounting Standards No. 115, all unrealized gains and losses, net of tax benefits, are included in Accumulated Other Comprehensive Income (Loss) and reported as a separate component of Other Comprehensive Income (Loss) in Stockholders Equity until realized. At August 31, 2002, the adjusted acquisition cost exceeded the market value by $509,000, resulting in a reported asset value of $110,000.

Note 6: Line of credit

        The Company has a $500,000 short-term line of credit agreement with a commercial bank, secured by U.S. accounts receivable and inventories. The line is guaranteed by the Company's wholly owned subsidiary, Schmitt Measurement Systems, Inc. Interest is payable at the bank's prime rate plus 1.50% and expires on February 1, 2003. At August 31, 2002 there was no balance outstanding on this line of credit while, as of May 31, 2002, $200,000 was outstanding. There are certain covenants related to the earnings of the Company and the current ratio. As of August 31, 2002 the Company was in compliance with those covenants.

Note 7: Segments of Business

Segment Information

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Geographic Information
    Geographic Sales

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        Long-term Assets

        Note—Europe is defined as the two European subsidiaries, Schmitt Europe, Ltd. and Schmitt Europa, GmbH

Note 8: Comprehensive (Loss) Income

        The long-term investment is classified as an "Available-for-sale security". As required under Statement of Financial Accounting Standards No. 115, all unrealized gains and losses, net of tax benefits, are included in Accumulated Other Comprehensive Income (Loss) and reported as a separate component of Other Comprehensive Income (Loss) in Stockholders' Equity until realized. The cumulative translation adjustment consists of unrealized gains/losses from translation adjustments on intercompany foreign currency transactions that are of a long-term nature.

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Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations:

        These financial statements are those of the Company and its wholly owned subsidiaries. In the opinion of management, the accompanying Consolidated Financial Statements of Schmitt Industries, Inc. contain all adjustments, consisting only of normal recurring adjustments, necessary to fairly state its financial position as of August 31, 2002 and 2001 and its results of operations and its cash flows for the three-month periods ended August 31, 2002 and 2001. Operating results for the three-month period ended August 31, 2002 are not necessarily indicative of the results that may be experienced for the fiscal year ending May 31, 2003.

RESULTS OF OPERATIONS

        Sales in the first quarter of fiscal 2003 increased to $2,001,191 versus $1,585,244 in the same period last year, with increases in both business segments. Worldwide sales of Balancer products were $1,483,330 in the first quarter of fiscal 2003 compared to $1,337,726 for the same period last year. Conditions in the European markets improved in the most recent quarter while those in North America were essentially equal to those in the same period in the prior fiscal year. Measurement product sales totaled $517,861 in the first quarter of fiscal 2003 compared to $247,518 in the first quarter of fiscal 2002. Sales of this segment's products improved due to the sale of two surface measurement products during the most recent fiscal quarter.

        The improved sales in the quarter ended August 31, 2002 compared to the same quarter in the prior year are encouraging but have not occurred for a sufficient period to determine if they are sustainable. The slowdown in the global economy had impacted the sales of both segments over the past few fiscal quarters through reduced demand for both balancer and measurement devices. Beyond that, there are not other specific or quantifiable reasons for the decline in sales. The balancer segment sales focus on end-users, rebuilders and original equipment manufacturers throughout the world. Sales people, representatives and distributors throughout these geographic areas spend a large amount of time with the targeted customers. Over the past several months they have found many of the customers in the automotive, bearing and aircraft industries have referred to the state of the economy and its impact on the machine tool industry as reasons for their reduced ordering activity. Our customers are seeing lack of demand for their products and as a result their demand for Schmitt Dynamic Balancing Systems has declined in recent fiscal periods.

        The primary target markets for Measurement products have historically been disk drive and silicon wafer manufacturers. Management and the sales staff monitor industry publications and public financial information in order to judge the potential demand for products by the targeted industries. Over the past several months, this information has discussed at length declining demand for and sales of the products of those two industries and have generally defined industries that are in a severe recession. Also, frequent discussions with customers have confirmed the information presented in the public information and their inability to purchase measurement products due to their lack of a capital budget.

        Sales by the foreign subsidiaries totaled $541,072 for the most recent quarter versus $381,912 for the same quarter last year. The increase is due to improving market conditions in Europe as well as improving sales and marketing efforts by the European sale staff.

        First quarter cost-of-sales decreased to 41% of sales versus 45% in the same period last year. Cost-of-sales of Balancer products was 48% and 46% for the three months ended August 31, 2002 and 2001 respectively while the cost of sales percentage of Measurement products was 22% for the first quarter of fiscal 2003 versus 42% in the same period last year. The increase in the Balancer segment cost of sales is due to the sales mix. Competitive market conditions in Europe result in lower sales prices and therefore higher materials costs than in other geographical areas. As sales in Europe in the most recent fiscal quarter were a higher proportion of total sales than in the prior fiscal year, this served to increase overall cost of sales percentages on balancer products. The decrease in the cost of

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sales in the Measurement segment was due to the sales mix as, with the high volume, direct labor costs were over absorbed by the level of sales.

        First quarter general, administrative and R&D expenses totaled $1,166,485 versus $1,122,044 for the same period last year. As a percentage of revenues, operating expenses (including R&D) during the first quarter of fiscal 2003 were 58% compared to 71% for the same period last year. In future fiscal periods, Management believes the Company's costs will not increase at the same rate that sales are anticipated to increase, although there can be no such assurance.

        In the three-month period ended August 31, 2002, the net income was $55,315 compared to a net loss of $(251,640) for the same period last year. Three-month earnings (loss) per share, basic and diluted, were $.01 and $(.03) for the three months ended August 31, 2002 and 2001 respectively.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's ratio of current assets to current liabilities increased to 6.7 to 1 at August 31, 2002 compared to 5.7 to 1 at May 31, 2002. As of August 31, 2002 the Company had $433,191 in cash compared to $447,679 at May 31, 2002. During the three-months ended August 31, 2002, cash provided from operating activities amounted to $237,205 with the changes described as follows:

•

Net income for the three-months ended August 31, 2002 of $55,315 plus two noncach items: depreciation and amortization of $60,948 and a decrease in the long-term deferred tax asset of $13,000.



•

Accounts receivable used cash as the balance increased $87,994 to an August 31, 2002 balance of $1,223,030 compared to $1,135,036 at May 31, 2001. At August 31, 2002, no significant accounts receivable were considered a doubtful collection. The Company generally experiences a payment cycle of 30-90 days on invoices. Management believes its credit and collection policies are effective and appropriate for the marketplace. There can be no assurance that the Company's collection procedures will continue to be successful, particularly with current economic conditions.



•

Inventories decreased $18,983 from the balance at May 31, 2002 with inventories in the Balancer segment decreasing by $36,731 and those in the Measurement segment increasing by $17,748. The Company maintains levels of inventory sufficient to satisfy normal customer demands plus an increasing short-term delivery requirement for a majority of its Balancer products. Management believes its ability to provide prompt delivery gives it a competitive advantage for certain sales.



•

Prepaid expenses increased by $9,427 due to the addition of prepaid trade show costs less the amortization of several items including prepaid trade show costs, professional fees and various business and life insurance costs.



•

Income taxes receivable declined by $99,777 with $125,887 received from Federal and local tax refunds less $26,110 in State and local estimated tax payments made during the quarter ended August 31, 2002.



•

Trade accounts payable increased by $88,090 with the increase due to increased purchasing activities of the Balancer segment, particularly for items related to two new product lines. The purchasing activities of that segment were higher in the weeks proceeding August 31, 2002 than in the weeks preceding May 31, 2002.



•

Other accrued liabilities (including commission, payroll items and other accrued expenses) decreased by $1,487.

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        During the three months ended August 31, 2002, net cash used in investing activities was $32,338, consisting of net additions to property and equipment. Net cash used in financing activities amounted to $228,459, which consists of repayments of long-term debt of $28,459 and the credit line of $200,000.

        The following summarizes contractual obligations at August 31, 2002 and the effect on future liquidity and cash flows:

        Specific business challenges faced by the Company over the past few years have had a negative impact on operations and liquidity. Management has responded to these challenges by reducing operating expenses, developing new products and penetrating new markets for the Company's products. As a result of these efforts, Management believes its cash flows from operations, available credit resources and its cash position will provide adequate funds on both a short-term and long-term basis to cover currently foreseeable debt payments, lease commitments and payments under existing and anticipated supplier agreements. Management believes that such cash flow (without the raising of external funds) is sufficient to finance current operations, projected capital expenditures, anticipated long-term sales agreements and other expansion-related contingencies during Fiscal 2003. However, in the event the Company fails to achieve its operating and financial goals for fiscal 2003, management may be required to take certain actions to finance operations in that time period. These actions could include, but are not limited to, implementation of additional cost cutting measures, increased borrowings from existing credit facilities or entering into additional borrowing arrangements collateralized by assets.

Item 3—Quantitative and Qualitative Disclosures About Market Risk:

Interest Rate Risk

        The Company did not have any derivative financial instruments as of August 31, 2002. However, the Company is exposed to interest rate risk. The Company employs established policies and procedures to manage its exposure to changes in the market risk of its marketable securities.

        The Company's interest income and expense are most sensitive to changes in the general level of U.S. and European interest rates. In this regard, changes in U.S. and European interest rates affect the interest earned on the Company's cash equivalents as well as interest paid on debt.

        The Company has a line of credit whose interest rate is based on various published prime rates that may fluctuate over time based on economic changes in the environment. The Company is subject to interest rate risk and could be subject to increased interest payments if market interest rates fluctuate. The Company does not expect any change in the interest rates to have a material adverse effect on the Company's results from operations.

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Foreign Currency Risk

        The Company operates subsidiaries in the United Kingdom and Germany. Therefore, the Company's business and financial condition is sensitive to currency exchange rates or any other restrictions imposed on their currencies. To date, the foreign currency exchange rates have not significantly impacted the Company's profitability.

Business Risks

        This report includes "forward-looking statements" as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "anticipates," or "hopeful," or the negative of those terms or other comparable terminology, or by discussions of strategy, plans or intentions. For example, this section contains numerous forward-looking statements. All forward-looking statements in this report are made based on management's current expectations and estimates, which involve risks and uncertainties, including those described in the following paragraphs. Among these factors are the following:

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Demand for company products may change.



•

New products may not be developed to satisfy changes in consumer demands.



•

Failure to protect intellectual property rights could adversely affect future performance and growth.



•

Production time and the overall cost of products could increase if any of the primary suppliers are lost or if any primary supplier increased the prices of raw materials.



•

Fluctuations in quarterly and annual operating results make it difficult to predict future performance.



•

The Company may not be able to reduce operating costs quickly enough if sales decline further.



•

The Company maintains a significant investment in inventories in anticipation of future sales.



•

The limited duration of the bank credit agreement could impact future liquidity.



•

Future success depends in part on attracting and retaining key management and qualified technical and sales personnel.



•

The Company faces risks from international sales and currency fluctuations.



•

Future operations may not generate sufficient earnings to fully realize the US Federal tax net operating loss carryforwards.

        Such risks and uncertainties could cause actual results to be materially different from those in the forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements in this report. We assume no obligation to update such information.

Demand for Company products may change:

        For several months, the Company has experienced soft market demand for its Balancer products. While specific reasons are difficult to pinpoint, these can generally be attributed to worldwide economic conditions, specifically those in the grinding machine industry, the primary market for the Company's Balancer products. Based upon analysis by management and the sales staff, the decline in sales does not appear to arise from the customer base shifting to competitor products.

        Management has responded to these soft market conditions in several ways. First, it appears there is a significant portion of the marketplace that is not using the automatic balancing products of the

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Company or any of its competitors. To capitalize on this opportunity, two new sales people have been hired, one late in Fiscal 2001 and the second in May 2002. Second, the Company will devote a significant part of its R&D efforts in Fiscal 2003 and 2004 toward developing products that will both broaden the scope of products offered to the current customer base plus offer products for new markets thereby reducing the reliance on historic markets. Third, management initiated a restructuring plan in Europe in the fourth fiscal quarter of 2001 that was intended to increase worldwide operating efficiency. All engineering design and manufacturing operations are now consolidated in the United States, a step that is expected to reduce operating costs. In addition, all European operations are now focused totally on marketing and sales. Finally, management will continue to evaluate all operating costs and seek to reduce costs where necessary.

        The Measurement segment has relied heavily upon sales to disk drive and silicon wafer manufacturers. Conditions in those markets adversely affected sales beginning in Fiscal 1999 and those poor conditions continued into Fiscal 2002. Disk drive demand is largely tied to and dependent upon demand for personal computers. In Fiscal 2001, personal computer manufacturers warned of lower sales expectations and many initiated actions to significantly reduce costs. These soft market conditions have continued into Fiscal Years 2002 and 2003. Consequently, demand for drives has fallen and operations of those companies have suffered with one result being reduced capital spending. This has resulted in minimal demand for and sales of the Company's TMS products. Industry forecasts are for these conditions to continue in the foreseeable future.

        The semiconductor industry is also currently facing a down cycle. Beginning in Fiscal 2001 the semiconductor industry experienced backlog cancellations, resulting in slower revenue growth and these conditions continued into Fiscal 2002. The result is similar to disk drive manufacturers in that capital spending has declined significantly and consequently so has demand for and sales of the Company's wafer products. Forecasts for that industry are for improvements in market conditions to begin sometime in calendar 2003.

        Management will continue to market these products to these historic markets as it appears no other technology has been introduced that would make the TMS products technologically obsolete. There is the belief that once market conditions improve in the disk drive and silicon wafer markets, demand for the Company's products and technology will increase. Also, there are other uses for the Company's laser light scatter technology and efforts will be directed toward the R&D efforts to develop new products and introduce them to the marketplace.

New products may not be developed to satisfy changes in consumer demands:

        The failure to develop new technologies, or react to changes in existing technologies, could materially delay development of new products, which could result in decreased revenues and a loss of market share to competitors. Financial performance depends on the ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. New product opportunities may not be identified and developed and brought to market in a timely and cost-effective manner. Products or technologies developed by other companies may render products or technologies obsolete or noncompetitive or a fundamental shift in technologies in the product markets could have a material adverse effect on the Company's competitive position within historic industries.

Failure to protect intellectual property rights could adversely affect future performance and growth:

        Failure to protect existing intellectual property rights may result in the loss of valuable technologies or having to pay other companies for infringing on their intellectual property rights. The Company relies on patent, trade secret, trademark and copyright law to protect such technologies.

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There can be no assurance that any of the Company's U.S. patents will not be invalidated, circumvented, challenged or licensed to other companies.

Production time and the overall cost of products could increase if any of the primary suppliers are lost or if a primary supplier increased the prices of raw materials:

        Manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. The results of operations could be adversely affected if adequate supplies of raw materials cannot be obtained in a timely manner or if the costs of raw materials increased significantly.

Fluctuations in quarterly and annual operating results make it difficult to predict future performance:

        Quarterly and annual operating results are likely to fluctuate in the future due to a variety of factors, some of which are beyond management's control. As a result of quarterly operating fluctuations, it is important to realize quarter-to-quarter comparisons of operating results are not necessarily meaningful and should not be relied upon as indicators of future performance.

The Company may not be able to reduce operating costs quickly enough if sales decline:

        Operating expenses are generally fixed in nature and largely based on anticipated sales. During the second quarter of Fiscal 2002, Management responded to declining sales by instituting an expense reduction program that significantly reduced the break-even sales point. However, should sales decline, there is no guarantee management could take actions that would further reduce operating expenses in either a timely manner or without seriously impacting the operations of the Company.

The Company maintains a significant investment in inventories in anticipation of future sales:

        The Company has always sought to maintain a competitive advantage by shipping product to its customers more rapidly than its competitors. Therefore, the Company has a significant investment in finished goods and raw materials inventories. These inventories are recorded using the lower-of-cost or market method, which requires Management to make certain estimates. Management evaluates the recorded inventory values based on customer demand, market trends and expected future sales and changes these estimates accordingly. A significant shortfall of sales may result in carrying higher levels of inventories of finished goods and raw materials thereby increasing the risk of inventory obsolescence and corresponding inventory write-downs. As a result, the Company may not carry adequate reserves to offset such write-downs.

The limited duration of the bank credit agreement could impact future liquidity:

        The short-term credit line expires on February 1, 2003 and there is no guarantee the arrangement will be renewed beyond that date. Should the credit line not be renewed, Management would seek such an arrangement from other sources. While management believes it could secure credit from another source, there is no guarantee this can be accomplished or, if it is accomplished, the terms will be as favorable as those under the current line of credit.

Future success depends in part on attracting and retaining key management and qualified technical and sales personnel:

        Future success depends on the efforts and services of key management, technical and sales personnel. Significant competition exists for such personnel and there is no assurance key technical and sales personnel can be retained nor assurances there will be the ability to attract, assimilate and retain other highly qualified technical and sales personnel as required. There is also no guarantee key employees will not leave and subsequently compete against the Company. The inability to retain key personnel could adversely impact the business, financial condition and results of operations.

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The Company faces risks from international sales and currency fluctuations:

        The Company markets and sells its products worldwide and international sales have accounted for and are expected to continue to account for a significant portion of future revenue. International sales are subject to a number of risks, including: the imposition of governmental controls; trade restrictions; difficulty in collecting receivables; changes in tariffs and taxes; difficulties in staffing and managing international operations; political and economic instability; general economic conditions; and fluctuations in foreign currencies. No assurances can be given these factors will not have a material adverse effect on future international sales and operations and, consequently, on business, financial condition and results of operations.

The Company maintains a significant investment in another publicly held company where the fair market value of the stock is below acquisition cost:

        The Company maintains an investment in Air Packaging Technologies, Inc. (AIRP). As required under Statement of Financial Accounting Standards No. 115, this investment is classified as "Available-for-sale securities" with all unrealized gains and losses (net of taxes) included in Accumulated Other Comprehensive Loss and reported as a separate component in Other Comprehensive Loss in Stockholders' Equity until realized. Management reviews the investment each quarter in order to evaluate if the unrealized loss is temporary or a permanent impairment in value. If conditions lead to the conclusion the difference appears to be "other than temporary", the investment is required to be written down to the estimated fair market value with the loss included in earnings. As of August 31, 2002 Management did not believe the unrealized loss was permanent in nature. However, there can be no guarantees that in future periods Management's analysis of this investment will lead to the same conclusion.

Future operations may not generate sufficient earnings to fully realized the US Federal Tax net operating loss carryforwards:

        As of August 31, 2002, the Company had a net deferred tax asset of $623,006 that relates to net operating loss carryforwards from prior periods. These net operating loss carryforwards will provide a benefit in future periods by reducing the liability for Federal taxes on income. However, to the extent there is no income through the expiration of the NOLs, (currently through 2009) the deferred tax asset could be worthless. The prospects for future earnings are therefore evaluated by Management each quarter so as to properly assess the likelihood there will be sufficient operating income (for US Federal income tax purposes) to fully utilize this asset. As of August 31, 2002 the assessment by Management concluded there appeared to be sufficient earnings potential through the year ended May 31, 2009 so that these NOLs and therefore the deferred tax asset could be utilized. However, there can be no guarantees that future analysis by Management will lead to the same conclusion.

Part II—OTHER INFORMATION

Item 1.    Legal Proceedings—None

Item 2.    Changes in Securities—None

Item 3.    Default Upon Senior Securities—None

Item 4.    Submission of Matters to a Vote of Security Holders—None

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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.

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QuickLinks

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements

Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3—Quantitative and Qualitative Disclosures About Market Risk
Part II—OTHER INFORMATION