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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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Delaware
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16-0837866
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(State
or other jurisdiction of
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(I.
R. S. Employer
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incorporation
or organization)
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Identification
No.)
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1110
Maple Street
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Elma,
New York 14059
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(Address
of principal executive offices)
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(716)
655-5990
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(Registrant’s
telephone number, including area code)
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Class
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Outstanding at April 30,
2009
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Common
Stock, $.20 par value
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2,238,314
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PART
I. FINANCIAL INFORMATION
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Page No.
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Item
1.
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Financial
Statements (Unaudited)
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a)
Consolidated balance sheets, March 31, 2009 and December 31,
2008
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3
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b)
Consolidated statements of operations for the three months
ended
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March 31, 2009 and
2008
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4
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c)
Consolidated statements of cash flows for the three months
ended
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March 31, 2009 and
2008
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5
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d)
Notes to consolidated financial statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition
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and Results of
Operations
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13
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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17
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Item
4T.
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Controls
and Procedures
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17
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PART
II. OTHER INFORMATION
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Item
1.
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Legal
Proceedings
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17
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Item
1A.
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Risk
Factors
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17
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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18
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Item
3.
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Defaults
Upon Senior Securities
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18
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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18
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Item
5.
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Other
Information
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18
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Item
6.
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Exhibits
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19
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Signatures
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|||
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March
31,
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December
31,
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|||||||
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2009
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2008
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|||||||
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(Unaudited)
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||||||||
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Assets
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 3,986 | $ | 4,709 | ||||
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Accounts
receivable
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4,522 | 5,006 | ||||||
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Inventories
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11,445 | 10,160 | ||||||
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Prepaid
income taxes
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20 | 84 | ||||||
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Deferred
income taxes
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494 | 494 | ||||||
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Other
assets
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560 | 387 | ||||||
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Total
current assets
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21,027 | 20,840 | ||||||
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Property,
plant and equipment, net
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5,833 | 5,838 | ||||||
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Other
non-current assets
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205 | 207 | ||||||
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Total
Assets
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$ | 27,065 | $ | 26,885 | ||||
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Liabilities
and Shareholders’ Equity
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||||||||
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Current
liabilities:
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||||||||
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Current
portion of long-term debt
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$ | 522 | $ | 539 | ||||
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Accounts
payable
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2,073 | 2,393 | ||||||
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Accrued
employee compensation and benefit costs
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1,388 | 1,335 | ||||||
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Other
accrued liabilities
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722 | 346 | ||||||
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Total
current liabilities
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4,705 | 4,613 | ||||||
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Long-term
debt
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3,665 | 3,702 | ||||||
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Deferred
income taxes
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501 | 501 | ||||||
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Shareholders’
equity:
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||||||||
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Common
stock, par value $.20; authorized
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||||||||
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4,000,000
shares; issued 2,614,506 shares;
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||||||||
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outstanding
1,933,253 shares
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523 | 523 | ||||||
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Capital
in excess of par value
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13,296 | 13,296 | ||||||
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Retained
earnings
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8,805 | 8,680 | ||||||
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Accumulated
other comprehensive loss
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(98 | ) | (98 | ) | ||||
| 22,526 | 22,401 | |||||||
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Employee
stock ownership trust commitment
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(1,614 | ) | (1,614 | ) | ||||
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Treasury
stock, at cost 376,192 shares
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(2,718 | ) | (2,718 | ) | ||||
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Total
shareholders’ equity
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18,194 | 18,069 | ||||||
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Total
Liabilities and Shareholders’ Equity
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$ | 27,065 | $ | 26,885 | ||||
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Three
Months Ended
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||||||||
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March
31,
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||||||||
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2009
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2008
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Revenue
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$ |
7,538 | $ | 8,985 | ||||
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Costs,
expenses and other income:
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||||||||
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Cost
of goods sold, exclusive of depreciation
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6,139 | 6,468 | ||||||
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Selling,
general and administrative
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1,079 | 1,023 | ||||||
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Interest
expense
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24 | 47 | ||||||
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Depreciation
and amortization
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139 | 140 | ||||||
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Other
income, net
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(29 | ) | (38 | ) | ||||
| 7,352 | 7,640 | |||||||
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Income
before income tax provision
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186 | 1,345 | ||||||
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Income
tax provision
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61 | 492 | ||||||
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Net
income
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$ | 125 | $ | 853 | ||||
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Income
per share:
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||||||||
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Basic
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||||||||
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Net
income per share
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$ | 0.06 | $ | 0.44 | ||||
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Diluted
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||||||||
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Net
income per share
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$ | 0.06 | $ | 0.40 | ||||
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Three
Months Ended
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||||||||
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March
31,
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||||||||
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2009
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2008
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|||||||
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Cash
flows related to operating activities:
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||||||||
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Net
income
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$ | 125 | $ | 853 | ||||
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Adjustments
to reconcile net income to net
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||||||||
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cash
(used in) provided by operating activities -
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||||||||
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Depreciation
and amortization
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139 | 140 | ||||||
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Change
in assets and liabilities -
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||||||||
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Accounts
receivable
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484 | (400 | ) | |||||
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Inventories
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(1,285 | ) | 241 | |||||
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Prepaid
income taxes
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64 | - | ||||||
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Other
assets
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(173 | ) | (267 | ) | ||||
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Other
non-current assets
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2 | 2 | ||||||
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Accounts
payable
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(320 | ) | (24 | ) | ||||
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Accrued
employee compensation and benefit costs
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53 | 47 | ||||||
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Other
accrued liabilities
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376 | 73 | ||||||
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Accrued
income taxes
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- | (242 | ) | |||||
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Net
cash (used in) provided by operating activities
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(535 | ) | 423 | |||||
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Cash
flows related to investing activities:
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||||||||
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Capital
expenditures - property, plant and equipment
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(133 | ) | (119 | ) | ||||
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Net
cash used in investing activities
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(133 | ) | (119 | ) | ||||
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Cash
flows related to financing activities:
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||||||||
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Principal
payments on long-term debt
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(55 | ) | (54 | ) | ||||
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Cash
dividend
|
- | (348 | ) | |||||
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Purchase
of stock options
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- | (772 | ) | |||||
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Proceeds
from exercise of stock options
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- | 7 | ||||||
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Net
cash used in financing activities
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(55 | ) | (1,167 | ) | ||||
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Net
decrease in cash and cash equivalents
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(723 | ) | (863 | ) | ||||
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Cash
and cash equivalents at beginning of period
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4,709 | 4,879 | ||||||
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Cash
and cash equivalents at end of period
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$ | 3,986 | $ | 4,016 | ||||
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1.
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Basis
of presentation
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The
accompanying unaudited consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 8 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by U.S. generally accepted
accounting principles for complete financial
statements.
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The
accompanying consolidated financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of
the results for the interim periods presented. All such adjustments are of
a normal recurring nature. Operating results for the three months ending
March 31, 2009 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009. The consolidated financial
statements should be read in conjunction with the annual report and the
notes thereto.
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2.
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Summary
of Significant Accounting Policies
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Principles
of Consolidation
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The
consolidated financial statements include the accounts of Servotronics,
Inc. and its wholly-owned subsidiaries (the
“Company”).
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Cash
and cash equivalents
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The
Company considers cash and cash equivalents to include all cash accounts
and short-term investments purchased with an original maturity of three
months or less.
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Revenue
Recognition
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Revenues
are recognized as services are rendered or as units are shipped and at the
designated FOB point consistent with the transfer of title, risks and
rewards of ownership. Such purchase orders generally include specific
terms relative to quantity, item description, specifications, price,
customer responsibility for in-process costs, delivery schedule, shipping
point, payment and other standard terms and conditions of
purchase.
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Inventories
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Inventories
are stated at the lower of standard cost or net realizable value. Cost
includes all cost incurred to bring each product to its present location
and condition, which approximates actual cost (first-in, first-out).
Market provisions in respect of net realizable value and inventory
expected to be used in greater than one year are applied to the gross
value of the inventory through a reserve of approximately $524,000 at
March 31, 2009 and December 31, 2008. Pre-production and start-up costs
are expensed as incurred.
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The
purchase of suppliers’ minimum economic quantities of material such as
steel, etc. may result in a purchase of quantities exceeding one year of
customer requirements. Also, in order to maintain a reasonable and/or
agreed to lead time, certain larger quantities of other product support
items may have to be purchased and may result in over one year’s
supply.
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Shipping
and Handling Costs
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Shipping
and handling costs are classified as a component of cost of goods
sold.
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Property,
Plant and Equipment
|
|
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Property,
plant and equipment is carried at cost; expenditures for new facilities
and equipment and expenditures which substantially increase the useful
lives of existing plant and equipment are capitalized; expenditures for
maintenance and repairs are expensed as incurred. Upon disposal of
properties, the related cost and accumulated depreciation are removed from
the
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|
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respective
accounts and any profit or loss on disposition is included in
income.
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Depreciation is
provided on the basis of estimated useful lives of depreciable properties,
primarily by the straight-line method for financial statement purposes and
by accelerated methods for tax purposes. Depreciation expense includes the
amortization of capital lease assets. The estimated useful lives of
depreciable properties are generally as
follows:
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Income
Taxes
|
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|
The
Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes.” SFAS No. 109 requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of operating loss and credit carryforwards and temporary
differences between the carrying amounts and the tax basis of assets and
liabilities. The Company and its subsidiaries file a consolidated federal
income tax return, a consolidated New York State income tax return and a
separate Pennsylvania state income tax
return.
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The
Company’s practice is to recognize interest and/or penalties related to
income tax matters in income tax expense. The Company did not have any
accrued interest or penalties included in its consolidated balance sheets
at March 31, 2009 or December 31, 2008, and did not recognize any interest
and/or penalties in its consolidated statements of operations during the
periods ended March 31, 2009 and
2008.
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Supplemental
cash flow information
|
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Income
taxes paid during the three months ended March 31, 2009 and 2008 amounted
to approximately $3,000 and $740,000, respectively. Interest paid during
the three months ended March 31, 2009 and 2008 amounted to approximately
$26,000 and $58,000, respectively.
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Employee
Stock Ownership Plan
|
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Contributions
to the employee stock ownership plan are determined annually by the
Company according to plan formula.
|
|
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Impairment
of Long-Lived Assets
|
|
|
The
Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable based on undiscounted future operating
cash flow analyses. If an impairment is determined to exist, any related
impairment loss is calculated based on fair value. Impairment losses on
assets to be disposed of, if any, are based on the estimated proceeds to
be received, less costs of disposal. The Company has determined that no
impairment of long lived assets existed at March 31, 2009 and December 31,
2008.
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Use
of Estimates
|
|
|
The
preparation of the consolidated financial statements in conformity with
U.S. generally accepted accounting principles (GAAP) requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
|
|
|
Research
and development costs are expensed as incurred as defined in SFAS No. 2,
Accounting for Research and Development
Costs.
|
|
|
Concentration
of Credit Risks
|
|
|
Financial
instruments that potentially subject the Company to concentration of
credit risks principally consist of cash accounts in financial
institutions. Although the accounts exceed the federally insured deposit
amount, management does not anticipate nonperformance by the financial
institutions.
|
|
|
New
Accounting Pronouncements
|
|
|
In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement No. 157 “Fair Value Measurement.” This Statement defines fair
value, establishes a framework for measuring fair value in GAAP, and
expands disclosures about fair value measurements. The Company adopted the
provisions of SFAS 157 in the first quarter of 2008 which did not have an
impact on the Company’s consolidated financial statements or disclosures.
In February of 2008, the FASB issued FASB Staff Position 157-2 which
delays the effective date of SFAS 157 for non-financial assets and
liabilities which are not measured at fair value on a recurring basis (at
least annually) until fiscal years beginning after November 15, 2008. The
Company is currently evaluating the impact, if any, of adopting the
provisions of SFAS 157 for our non-financial assets and liabilities on the
Company’s consolidated financial
statements.
|
|
|
In
February 2007, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No.159
permits companies to elect to follow fair value accounting for certain
financial assets and liabilities in an effort to mitigate volatility in
earnings without having to apply complex hedge accounting provisions. The
standard also establishes presentation and disclosure requirements
designed to facilitate comparison between entities that choose different
measurement attributes for similar types of assets and liabilities. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007.
The Company adopted SFAS 159 in 2008 and elected not to apply the fair
value measurement option for any of our financial assets or
liabilities.
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|
Management does
not believe that any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on
the accompanying consolidated financial
statements.
|
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The
carrying amount of cash and cash equivalents, accounts receivable,
inventories, accounts payable and accrued expenses are reasonable
estimates of their fair value due to their short maturity. Based on
variable interest rates and the borrowing rates currently available to the
Company for loans similar to its long-term debt, the fair value
approximates its carrying
amount.
|
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3.
|
Inventories
|
|
March
31,
|
December
31,
|
||||||||
|
2009
|
2008
|
||||||||
|
($000’s
omitted)
|
|||||||||
|
Raw materials and common parts, net of reserve
|
$ | 4,884 | $ | 4,621 | |||||
|
Work-in-process
|
5,057 | 4,153 | |||||||
|
Finished goods
|
1,504 | 1,386 | |||||||
| $ | 11,445 | $ | 10,160 | ||||||
|
4.
|
Property,
Plant and Equipment
|
|
March
31,
|
December
31,
|
||||||||
|
2009
|
2008
|
||||||||
|
($000’s
omitted)
|
|||||||||
|
Land
|
$ | 25 | $ | 25 | |||||
|
Buildings
|
6,775 | 6,761 | |||||||
|
Machinery, equipment and tooling
|
11,847 | 11,728 | |||||||
| 18,647 | 18,514 | ||||||||
|
Less accumulated depreciation and amortization
|
(12,814 | ) | (12,676 | ) | |||||
| $ | 5,833 | $ | 5,838 | ||||||
|
|
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. As of March 31, 2009 and December 31, 2008, accumulated amortization
on the building amounted to approximately $2,075,000 and $2,040,000,
respectively. Amortization expense amounted to $35,000 for the three month
periods ended March 31, 2009 and 2008. The associated current and
long-term liabilities are discussed in Note 5, Long-term debt, of the
consolidated financial statements. Depreciation expense for the period
ended March 31, 2009 and 2008 amounted to $139,000 and $140,000,
respectively. The Company believes that it maintains property and casualty
insurance in amounts adequate for the risk and nature of its assets and
operations and which are generally customary in its
industry.
|
|
5.
|
Long-Term
Debt
|
|
|
March
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
||||||||
| ($000’s omitted) | |||||||||
|
Industrial Development Revenue Bonds; secured by an
equivalent
|
|||||||||
|
letter
of credit from a bank with interest payable monthly
|
|||||||||
|
at
a floating rate (0.74% at March 31, 2009) (A)
|
$ | 3,470 | $ | 3,470 | |||||
|
Term loan payable to a financial institution;
|
|||||||||
|
interest
at LIBOR plus 2%, (5.83% at March 31, 2009);
|
|||||||||
|
quarterly
principal payments of $26,786 through the
|
|||||||||
|
fourth
quarter of 2011
|
295 | 321 | |||||||
|
Term loan payable to a financial institution;
|
|||||||||
|
interest
at LIBOR plus 2%, not to exceed 6.00% (3.21% at
|
|||||||||
|
March
31, 2009); quarterly principal payments
|
|||||||||
|
of
$17,500; payable in full in the fourth quarter
|
|||||||||
|
of
2009; partially secured by equipment
|
202 | 220 | |||||||
|
Secured term loan payable to a government agency;
|
|||||||||
|
monthly
payments of $1,950 including interest
|
|||||||||
|
fixed
at 3% payable through fourth quarter of 2015
|
141 | 146 | |||||||
|
Secured term loan payable to a government agency;
|
|||||||||
|
monthly
principal payments of approximately $1,800 with
|
|||||||||
|
interest
waived payable through second quarter of 2012
|
79 | 84 | |||||||
| 4,187 | 4,241 | ||||||||
|
Less
current portion
|
(522 | ) | (539 | ) | |||||
| $ | 3,665 | $ | 3,702 | ||||||
|
|
(A)
The Industrial Development Revenue Bonds were issued by a government
agency to finance the construction of the Company’s headquarters/Advanced
Technology facility. Annual sinking fund payments of $170,000 commenced
December 1, 2000 and continue through 2013, with a final payment of
$2,620,000 due December 1, 2014. The Company has agreed to reimburse the
issuer of the letter of credit if there are draws on that letter of
credit. The Company pays the letter of credit bank an annual fee of 1% of
the amount secured thereby and pays the remarketing agent for the bonds an
annual fee of .25% of the principal amount outstanding. The Company’s
interest under the facility capital lease has been pledged to secure its
obligations to the government agency, the bank and the
bondholders.
|
|
|
The
Company also has a $1,000,000 line of credit on which there was no balance
outstanding at March 31, 2009 and December 31,
2008.
|
|
|
Certain
lenders require the Company to comply with debt covenants as described in
the specific loan documents, including a debt service ratio. At March 31,
2009 and December 31, 2008, the Company was in compliance with all of its
debt covenants.
|
|
6.
|
Income
Taxes
|
|
|
In
June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Company adopted FIN 48
as of the beginning of 2007 and the adoption of FIN 48 did not have a
material impact on its consolidated financial statements. The
Company did not have any unrecognized
|
|
|
tax
benefits or obligations as of March 31, 2009 and December 31,
2008.
|
|
|
If
interest and penalties would need to be accrued related to unrecognized
tax obligations, it is the Company’s policy to recognize interest and
penalties accrued related to unrecognized tax obligations as a component
of income taxes. The Company and/or its subsidiaries file income tax
returns in the United States federal jurisdiction, New York State and
Pennsylvania. The Company is no longer subject to U.S. federal, state and
local income tax examinations by tax authorities for years before
2004.
|
|
|
In May
2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 Definition of
Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1
provides guidance on how to determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized
tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2008.
The implementation of this standard did not have a material impact on the
Company’s consolidated financial position or results of
operations.
|
|
|
During
the second quarter of 2007, the Internal Revenue Service (IRS) commenced
an examination of the Company’s U.S. income tax return for the year 2005.
In the third quarter of 2007, the IRS examination was completed and
settled resulting in a $3,000 refund to the
Company.
|
|
7.
|
Common
Shareholders’ Equity
|
| ($000’s omitted) | ||||||||||||||||
|
|
Common stock
|
Accumulated
|
||||||||||||||
|
Number
|
Capital
in
|
other
|
Total
|
|||||||||||||
|
of
shares
|
excess
of
|
Retained
|
Treasury
|
comprehensive
|
shareholders’
|
|||||||||||
|
issued
|
Amount
|
par value
|
earnings
|
ESOP
|
stock
|
loss
|
equity
|
|||||||||
|
Balance
December 31, 2008
|
2,614,506
|
$
|
523
|
$
|
13,296
|
$
|
8,680
|
($
|
1,614)
|
($
|
2,718)
|
($
|
98)
|
$
|
18,069
|
|
|
Net
income
|
-
|
-
|
-
|
125
|
-
|
-
|
-
|
125
|
||||||||
|
Balance
March 31, 2009
|
2,614,506
|
$
|
523
|
$
|
13,296
|
$
|
8,805
|
($
|
1,614)
|
($
|
2,718)
|
($
|
98)
|
$
|
18,194
|
|
|
|
In
January of 2006, the Company’s Board of Directors authorized the purchase
by the Company of up to 250,000 shares of its common stock in the open
market or in privately negotiated transactions. On October 31, 2008, the
Company announced that its Board of Directors authorized the purchase of
an additional 200,000 shares of the Company’s common stock under the
Company’s current purchase program. As of April 30, 2009, the Company has
purchased 237,145 shares and there remain 212,855 shares available to
purchase under this program.
|
|
|
As
previously reported, on April 1, 2009, the Company announced that its
Board of Directors declared a $0.15 per share cash dividend. The dividend
will be paid on May 15, 2009 to shareholders of record on April 20, 2009.
This second consecutive annual dividend does not represent that the
Company will pay dividends on a regular or scheduled
basis.
|
|
|
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. Incremental shares from assumed conversions are calculated as
the number of shares that would be issued, net of the number of shares
that could be purchased in the marketplace with the cash received upon
stock option exercise.
|
|
|
Three
Months Ended
|
||||||||
|
March
31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
($000’s
omitted
|
|||||||||
|
except
per share data)
|
|||||||||
|
Net
income
|
$ | 125 | $ | 853 | |||||
|
Weighted
average common shares
|
|||||||||
|
outstanding
(basic)
|
1,933 | 1,935 | |||||||
|
Incremental
shares from assumed
|
|||||||||
|
conversions
of stock options
|
102 | 208 | |||||||
|
Weighted
average common
|
|||||||||
|
shares
outstanding (diluted)
|
2,035 | 2,143 | |||||||
|
Basic
|
|||||||||
|
Net
income per share
|
$ | 0.06 | $ | 0.44 | |||||
|
Diluted
|
|||||||||
|
Net
income per share
|
$ | 0.06 | $ | 0.40 | |||||
|
8.
|
Commitments
|
|
|
The
Company leases certain equipment pursuant to operating lease arrangements.
Total rental expense in the three month periods ended March 31, 2009 and
2008 and future minimum payments under such leases are not material to the
consolidated financial statements.
|
|
9.
|
Litigation
|
|
|
There
are no legal proceedings which are material to the Company currently
pending by or against the Company other than ordinary routine litigation
incidental to the business which is not expected to materially adversely
affect the business or earnings of the
Company.
|
|
10.
|
Business
segments
|
|
|
The
Company operates in two business segments, Advanced Technology Group (ATG)
and Consumer Products Group (CPG). The Company’s reportable segments are
strategic business units that offer different products and services. The
segments are composed of separate corporations and are managed separately.
Operations in the ATG involve the design, manufacture, and marketing of
servo-control components (i.e., torque motors, control valves, actuators,
etc.) for government, commercial and industrial applications. CPG’s
operations involve the design, manufacture and marketing of a variety of
cutlery products for use by consumers and various government agencies. The
Company derives its primary sales revenue from domestic customers,
although a portion of finished products are for foreign end
use.
|
|
|
Information
regarding the Company’s operations in these segments is summarized as
follows
|
|
|
($000’s
omitted):
|
|
|
Advanced
Technology
|
Consumer
Products
|
|||||||||||||||||||||||
|
Group
|
Group
|
Consolidated
|
|||||||||||||||||||||||
|
Three
months ended
|
Three
months ended
|
Three
months ended
|
|||||||||||||||||||||||
|
March
31,
|
March
31,
|
March
31,
|
|||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||||
|
Revenues from unaffiliated customers
|
$ | 4,513 | $ | 4,647 | $ | 3,025 | $ | 4,338 | $ | 7,538 | $ | 8,985 | |||||||||||||
|
Profit (loss)
|
$ | 997 | $ | 1,103 | $ | (425 | ) | $ | 627 | 572 | 1,730 | ||||||||||||||
|
Interest expense
|
$ | (21 | ) | $ | (42 | ) | $ | (3 | ) | $ | (5 | ) | (24 | ) | (47 | ) | |||||||||
|
Depreciation and amortization
|
$ | (101 | ) | $ | (97 | ) | $ | (38 | ) | $ | (43 | ) | (139 | ) | (140 | ) | |||||||||
|
Other income, net
|
$ | 29 | $ | 28 | $ | - | $ | 10 | 29 | 38 | |||||||||||||||
|
General corporate expense
|
(252 | ) | (236 | ) | |||||||||||||||||||||
|
Income before income tax provision
|
$ | 186 | $ | 1,345 | |||||||||||||||||||||
|
Capital expenditures
|
$ | 109 | $ | 102 | $ | 24 | $ | 17 | $ | 133 | $ | 119 | |||||||||||||
|
March 31,
|
December 31,
|
March 31,
|
December 31,
|
March 31,
|
December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||||
|
Identifiable assets
|
$ | 16,907 | $ | 16,688 | $ | 10,158 | $ | 10,197 | $ | 27,065 | $ | 26,885 | |||||||||||||
|
11.
|
Other
Income
|
|
|
Components
of other income include interest income on cash and cash equivalents, and
other minor amounts not directly related to the sale of the Company’s
products.
|
|
12.
|
Subsequent
Events
|
|
|
On
April 1, 2009, the Company announced that its Board of Directors declared
a $0.15 per share cash dividend. The dividend will be paid on May 15, 2009
to shareholders of record on April 20, 2009. This second consecutive
annual dividend does not represent that the Company will pay dividends on
a regular or scheduled basis.
|
|
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
Management
Discussion
|
|
|
During
the three month periods ended March 31, 2009 and 2008, approximately 43%
and 49%, respectively, of the Company’s revenues were derived from
contracts with agencies of the U.S. Government or their prime contractors
and their subcontractors. The Company believes that government involvement
in military operations overseas will continue to have a direct impact on
the financial results in both the Advanced Technology and Consumer
Products markets. While the Company remains optimistic in relation to
these opportunities, it recognizes that sales to the Government are
affected by defense budgets, the foreign policies of the U.S. and other
nations, the level of military operations and other factors and, as such,
it is difficult to predict the impact on future financial results. The
Company’s commercial business is affected by such factors as uncertainties
in today’s global economy, global competition, the vitality and ability of
the commercial aviation industry to purchase new aircraft, the effects of
terrorism and the threat of terrorism, market demand and acceptance both
for the Company’s products and its customers’ products which incorporate
Company-made components.
|
|
|
In
December of 2008, the Aerospace Industries Association (AIA) stated that
the aerospace industry is showing resiliency in trying economic times, but
has not been immune to
|
|
|
the
effects of the ongoing global financial crisis. These extremely volatile
economic times create circumstances that may have effects on the Aerospace
Industry. The Company’s Advanced Technology Group revenue decreased
approximately 3% for the three months ended March 31, 2009 compared to the
same period in 2008 due to stretch-outs of customer orders across various
product lines and, to a lesser extent, cancellations. The ATG continues
its aggressive business development efforts in its primary markets and is
broadening its focus to include new – domestic and foreign – markets that
are consistent with its core competencies. There are substantial
uncertainties in the current Global Economy that are compounded with
certain Airliner delivery stretch-outs being implemented which in turn may
adversely affect the Company’s sales revenues in 2009 and beyond. Although
the ATG backlog continues to be significant, actual scheduled shipments
may be delayed as a function of the Company’s customers’ delivery
determinations that may be based on changes in the Global Economy and
other factors.
|
|
|
The
Company’s Consumer Products Group (CPG) develops new commercial products
and products for Government and Military applications. Included in the
significant uncertainties in the near and long term are the effects of the
U. S. and World’s Stimulus Plans and the difficulty to accurately project
the net effect of the change in the U.S. Administration on the
government’s procurement programs. Approximately 50% of the CPG’s revenues
are derived from contracts with agencies of the U.S. Government or their
prime contractors. Procurement and time of shipments under such
contracts significantly impact the operating results for the CPG from
period to period. During the three months ended March 31, 2009
compared to the same period in 2008 the CPG revenue decreased by
approximately 30% due to the completion of a significant contract in the
first quarter of 2008. The drop in revenues coupled with the reduction in
margins under existing contracts contributed significantly to the
reduction in gross profit of approximately $1
million.
|
|
|
See
also Note 10, Business Segments, of the accompanying consolidated
financial statements for information concerning business segment operating
results.
|
|
|
Results
of Operations
|
|
Three Months Ended March
31,
|
|||||||||||||||||||||||||
|
2009
vs. 2008
|
|||||||||||||||||||||||||
|
2009
|
2008
|
Dollar
|
%
Increase
|
||||||||||||||||||||||
|
Dollars
|
% of
Sales
|
Dollars
|
% of Sales
|
Change
|
(Decrease)
|
||||||||||||||||||||
|
Revenue:
|
|||||||||||||||||||||||||
|
Advanced
Technology
|
$ | 4,513 | 59.9 | % | $ | 4,647 | 51.7 | % | $ | (134 | ) | (2.9 | %) | ||||||||||||
|
Consumer
Products
|
3,025 | 40.1 | % | 4,338 | 48.3 | % | (1,313 | ) | (30.3 | %) | |||||||||||||||
| 7,538 | 100.0 | % | 8,985 | 100.0 | % | (1,447 | ) | (16.1 | %) | ||||||||||||||||
|
Cost
of sale, exclusive of depreciation
and
amortization
|
6,139 | 81.4 | % | 6,468 | 72.0 | % | (329 | ) | (5.1 | %) | |||||||||||||||
|
Gross
profit
|
1,399 | 18.6 | % | 2,517 | 28.0 | % | (1,118 | ) | (44.4 | %) | |||||||||||||||
|
Selling,
general and administration
|
1,079 | 14.3 | % | 1,023 | 11.4 | % | 56 | 5.5 | % | ||||||||||||||||
|
Depreciation
and amortization
|
139 | 1.8 | % | 140 | 1.6 | % | (1 | ) | (0.7 | %) | |||||||||||||||
|
Total
costs and expenses
|
7,357 | 97.6 | % | 7,631 | 84.9 | % | (274 | ) | (3.6 | %) | |||||||||||||||
|
Operating
income
|
181 | 2.4 | % | 1,354 | 15.1 | % | (1,173 | ) | (86.6 | %) | |||||||||||||||
|
Interest
expense
|
24 | 0.3 | % | 47 | 0.5 | % | (23 | ) | (48.9 | %) | |||||||||||||||
|
Other
income, net
|
(29 | ) | (0.4 | %) | (38 | ) | (0.4 | %) | 9 | (23.7 | %) | ||||||||||||||
|
Income
tax provision
|
61 | 0.8 | % | 492 | 5.5 | % | (431 | ) | (87.6 | %) | |||||||||||||||
|
Net
income
|
$ | 125 | 1.7 | % | $ | 853 | 9.5 | % | $ | (728 | ) | (85.3 | %) | ||||||||||||
|
|
The
Company’s consolidated revenues decreased approximately $1,447,000 or
16.1% for the three month period ended March 31, 2009 when compared to the
same three month period in 2008. Such decreases are the result of customer
stretch-outs of existing orders and, to a lesser extent, order
cancellations at the ATG combined with decreased shipments of military
products at the CPG. While the CPG anticipates follow-up Government
contracts on existing products as well as orders for new products, there
is uncertainty as to the amount and timing of these orders as a result of
the current Global Economy, the transitional U.S. Administration and
geographic troop focus.
|
|
|
Gross
Profit
|
|
|
As
shown in the above table, gross profit and gross profit as a percentage of
net revenues for the three month period ended March 31, 2009 decreased as
compared to the same three month period in 2008. The primary reason for
the decrease in gross profit was the decrease in net revenue and the mix
of products sold at the CPG. The current mix of products sold in the
period within the ATG and CPG segments as well as the composition of ATG
and CPG sales to the total consolidated sales directly attributed to
dollar value and percentage decrease in gross
profit.
|
|
|
Selling,
General and Administrative Expenses
|
|
|
Selling,
general and administrative (SG&A) expenses that include variable costs
increased for the three month period ended March 31, 2009 as compared to
the same three month period in 2008 by approximately 5%. The increase in
SG&A includes increased expenses relative to contract
administration/negotiations, product line acquisition, product protection
(i.e., trademarks, patents) and other costs associated with the expansion
of the ATG and CPG foreign and domestic markets. The trend is for SG&A
expenses to increase as a function
of
|
|
|
increased
regulations, market expansion, company growth and the full implementation
of the Sarbanes-Oxley Act.
|
|
|
Interest
Expense
|
|
|
Interest
expense decreased for the three month period ended March 31, 2009 compared
to the same period in 2008 due to the decrease in the average outstanding
debt and interest rates. Average debt outstanding will continue to decline
as the Company repays its scheduled debt obligations and assuming the
Company does not incur additional debt. See also Note 5, Long-term debt,
of the accompanying consolidated financial statements for information on
long-term debt.
|
|
|
Depreciation
and Amortization Expense
|
|
|
Depreciation
and amortization expense remained consistent for the three month period
ended March 31, 2009 compared to the same period in 2008. Depreciation
expense fluctuates due to variable estimated useful lives of depreciable
property (as identified in Note 2, Summary of significant accounting
policies, of the accompanying consolidated financial statements) as well
as the amount and nature of capital expenditures in current and previous
periods. It is anticipated that the Company’s future capital expenditures
will, at a minimum, follow the Company’s requirements to support its
delivery commitments and to meet the information technology related
capital expenditure requirements that are associated with Sarbanes-Oxley
and other new regulatory
requirements.
|
|
|
Other
Income
|
|
|
Components
of other income include interest income on cash and cash equivalents, and
other amounts not directly related to the sale of the Company’s products.
The decrease in other income for the three month period ended March 31,
2009 when compared to the same three month period in 2008 is due to the
decline in market driven interest rates on cash and cash
equivalents.
|
|
|
Income
Taxes
|
|
|
The
Company’s effective tax rate was 33.1% in the first quarter of 2009 as
compared to 36.6% for the three month period ended March 31, 2008. The
effective tax rate in both periods reflects state income taxes, permanent
non-deductible expenditures and the tax benefit for manufacturing
deductions allowable under the American Jobs Creation Act of 2004 as well
as reductions in New York State’s statutory tax rate and income
apportionments formula. See also Note 6, Income taxes, of the consolidated
financial statements for information concerning income
tax.
|
|
|
Net
Income
|
|
|
Net
income for the three month period ended March 31, 2009 decreased $728,000
when it is compared to the net income for the same period ended in 2008.
The decrease in net income is the result of decreased sales at the ATG and
CPG as well the less favorable margins on the mix of products sold at the
CPG during the three month period ended March 31,
2009.
|
|
|
Liquidity
and Capital Resources
|
|
|
The
Company’s primary liquidity and capital requirements relate to working
capital needs; primarily inventory, accounts receivable, capital
expenditures for property, plant and equipment and principal and interest
payments on debt.
|
|
|
At
March 31, 2009, the Company had working capital of approximately
$16,300,000 of which approximately $3,986,000 was comprised of cash and
cash equivalents. The Company
|
|
|
used
approximately $535,000 in cash from operations during the three months
ended March 31, 2009 as compared to generating $423,000 during the three
months ended March 31, 2008. The primary uses of cash for the Company’s
operating activities for the three months ended March 31, 2009 were for
increases in inventory and payments to vendors aggregating $1,605,000 off
set by reductions in accounts receivable of approximately
$484,000.
|
|
|
The
Company’s primary use of cash in its financing and investing activities in
the first three months of 2009 related to capital expenditures for
equipment and principal payments on long-term
debt.
|
|
|
At
March 31, 2009, there are no material commitments for capital
expenditures.
|
|
|
The
Company also has a $1,000,000 line of credit on which there is no balance
outstanding at March 31, 2009. If needed, this can be used to fund cash
flow requirements.
|
|
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
|
|
The
Company is a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and is not required to provide the information required under
this item.
|
|
Item
4T.
|
CONTROLS
AND PROCEDURES
|
|
|
Disclosure
Controls and Procedures
|
|
|
The
Company carried out an evaluation under the supervision and with the
participation of its management, including the Company’s Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness
of the Company’s disclosure controls and procedures as of March 31, 2009.
Based upon that evaluation, the CEO and CFO concluded that the Company’s
disclosure controls and procedures are effective in timely alerting them
to the material information relating to the Company (or the Company’s
consolidated subsidiaries) required to be included in the Company’s
periodic filings with the SEC, such that the information relating to the
Company required to be disclosed in SEC reports (i) is recorded,
processed, summarized and reported within the time periods specified in
SEC rules and forms, and (ii) is accumulated and communicated to the
Company’s management, including the CEO and CFO, as appropriate to allow
timely decisions regarding required
disclosure.
|
|
|
Changes
in Internal Controls
|
|
|
During
the three month period ended March 31, 2009, there were no changes in
internal controls over financial reporting that have materially affected,
or are reasonably likely to affect, the Company’s internal control over
financial reporting.
|
|
Item
1.
|
LEGAL
PROCEEDINGS
|
|
|
None.
|
|
Item
1A.
|
RISK
FACTORS
|
|
|
The
Company is a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and is not required to provide the information required under
this item.
|
|
Item
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
|
Total
Number of
|
Maximum
Number
|
||||
|
Shares
Purchased as
|
of
Shares that may
|
||||
|
Total
Number
|
Part
of Publicly
|
yet
be Purchased
|
|||
|
of
Shares
|
Average
Price $
|
Announced
Plans or
|
under
the Plans or
|
||
|
2009
Periods
|
Purchased
|
Paid
Per Share
|
Programs
|
Programs
|
|
|
January
1– March 31, 2009
|
-
|
-
|
-
|
212,855
|
|
|
Total
|
-
|
-
|
-
|
212,855
|
|
|
In
January of 2006, the Company’s Board of Directors authorized the purchase
by the Company of up to 250,000 shares of its common stock in the open
market or in privately negotiated transactions. On October 31, 2008, the
Company announced that its Board of Directors authorized the purchase of
an additional 200,000 shares of the Company’s common stock under the
Company’s current purchase program. As of April 30, 2009, the Company has
purchased 237,145 shares and there remain 212,855 shares available to
purchase under this program
|
|
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
|
|
|
31.1
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the
Securities
Exchange act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002.
|
|
|
31.2
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the
Securities
Exchange act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002.
|
|
|
32.1
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
FORWARD-LOOKING
STATEMENTS
|
| SERVOTRONICS, INC. | |||
|
|
By:
|
/s/ Cari L. Jaroslawsky, Chief Financial Officer | |
| Cari L. Jaroslawsky | |||
| Chief Financial Officer | |||
|
|
By:
|
/s/ Dr. Nicholas D. Trbovich, Chief Executive Officer | |
| Dr. Nicholas D. Trbovich | |||
| Chief Executive Officer | |||