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 MARCH 31, 2003
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.
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(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, including area code)
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 April 30, 2003
------------------------------------ -------------------------------------
Common Stock, $.20 par value 2,492,901
Transitional Small Business Disclosure Format (Check one):
Yes ; No X
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INDEX
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
a) Consolidated Balance Sheet, March 31, 2003 3
b) Consolidated Statement of Operations for the Three Months Ended
March 31, 2003 and 2002 4
c) Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2003 and 2002 5
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Item 3. Controls and Procedures 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Certifications 13
PART I FINANCIAL INFORMATION
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2003
($000's omitted except per share data)
(Unaudited)
Assets
Current assets:
Cash $ 701
Accounts receivable 2,524
Inventories 7,024
Prepaid income taxes 193
Deferred income taxes 393
Other (See Note 1 to consolidated financial statements) 1,628
-------------
Total current assets 12,463
Property, plant and equipment, net 6,916
Other assets 572
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$ 19,951
Liabilities and Shareholders' Equity =============
Current liabilities:
Current portion of long-term debt $ 378
Accounts payable 634
Accrued employee compensation and benefit costs 1,029
Other accrued liabilities 205
-------------
Total current liabilities 2,246
Long-term debt 5,622
Deferred income taxes 213
Other non-current liability 268
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; Issued 2,614,506 shares 523
Capital in excess of par value 13,361
Retained earnings 1,191
Accumulated other comprehensive income (loss) (82)
-------------
14,993
Employee stock ownership trust commitment (2,337)
Treasury stock, at cost 222,365 shares (1,054)
-------------
Total shareholders' equity 11,602
-------------
$ 19,951
=============
See notes to consolidated financial statements
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SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
($000's omitted except per share data)
(Unaudited)
Three Months Ended
March 31,
2003 2002
---------- ----------
Net revenues $ 3,829 $ 3,834
Costs and expenses:
Cost of goods sold 2,885 2,698
Selling, general and administrative 835 760
Interest 43 48
Depreciation 178 164
---------- ----------
3,941 3,670
----------- ----------
Income (loss) before income taxes (112) 164
Income tax provision (benefit) (41) 58
----------- ----------
Net income (loss) $ (71) $ 106
=========== ==========
Income (Loss) Per Share:
Basic
-----
Net income (loss) per share $ (0.04) $ 0.06
=========== =========
Diluted
-------
Net income (loss) per share $ (0.04) $ 0.06
=========== =========
See notes to consolidated financial statements
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SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000's omitted)
(Unaudited)
Three Months Ended
March 31,
2003 2002
----------- ----------
Cash flows related to operating activities:
Net income (loss) $ (71) $ 106
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation 178 164
Change in assets and liabilities -
Accounts receivable 109 150
Inventories (261) (340)
Prepaid income taxes (48) 0
Other current assets (167) 53
Accounts payable 218 (205)
Accrued employee compensation & benefit costs 34 98
Accrued income taxes 0 52
Other accrued liabilities 96 (46)
----------- ----------
Net cash provided by operating activities 88 32
----------- ----------
Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (14) (121)
----------- ----------
Net cash used in investing activities (14) (121)
----------- ----------
Cash flows related to financing activities:
Increase in demand loan 50 100
Payments on demand loan (50) (200)
Principal payments on long-term debt (52) (56)
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Net cash used in financing activities (52) (156)
----------- ----------
Net increase (decrease) in cash 22 (245)
Cash at beginning of period 679 720
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Cash at end of period $ 701 $ 475
=========== ==========
See notes to consolidated financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000 omitted in tables except for per share data)
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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
REVENUE RECOGNITION
-------------------
The Company's revenues are principally recognized as units are shipped and
as terms and conditions of purchase orders are met. The Company also 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.
Included in other current assets are $995,000 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.
2. INVENTORIES
-----------
March 31, 2003
--------------
Raw materials and common parts $ 1,042
Work-in-process 5,297
Finished goods 921
---------
7,260
Less common parts expected to be used after one year (236)
----------
$ 7,024
==========
3. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
March 31, 2003
--------------
Land $ 25
Buildings 6,452
Machinery, equipment and tooling 9,624
---------
16,101
Less accumulated depreciation (9,185)
----------
$ 6,916
==========
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. 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.
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4. LONG-TERM DEBT
--------------
March 31, 2003
--------------
Industrial Development Revenue Bonds; secured by a letter of credit
from a bank with interest payable monthly
at a floating rate (1.50% at March 31, 2003) $ 4,490
Term loans; payable to a financial institution
$500,000 at LIBOR plus 2% (3.38% at
March 31, 2003); quarterly principal payments of
$17,500 commencing January 1, 2005; payable in full
October 1, 2009; and $429,000 at a rate of 3.40% at
December 31, 2002; quarterly principal
payments of $35,714 through February 1, 2006 929
Various other secured term notes payable to government agencies 581
---------
6,000
Less current portion (378)
----------
$ 5,622
==========
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, 2003.
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5. COMMON SHAREHOLDERS' EQUITY
---------------------------
Common stock
------------ Accumulated
Number Capital in other
of shares excess of Retained Treasury Comprehensive comprehensive
issued Amount par value earnings ESOP stock income income
--------------------------------------------------------------------------------------
Balance December
31, 2002 2,614,506 $523 $13,361 $1,262 ($ 2,337) ($ 1,054) ($ 82)
========= ==== ======= ===== ======= ======= ===========
Comprehensive income (loss)
Net income (loss) - - - $ (71) - - $ (71) -
Other comprehensive income,
(loss) net of tax - - - - - - - -
Minimum pension liability
adjustment - - - - - - - -
Other comprehensive
Income (loss) - - - - - - - -
------
Comprehensive income (loss) - - - - - - $ (71) -
======
Compensation expense - - - - - - -
--------- ---- ------- ------ ------ ------
Balance March 31, 2003 2,614,506 $523 $13,361 $1,191 ($ 2,337) ($ 1,054) ($ 82)
========= ==== ======= ====== ======== ======== ===========
EARNINGS PER SHARE
------------------
Basic earnings per share are computed by dividing net earnings by the
weighted average number of shares outstanding during the period. Diluted
earnings per share are 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
March 31,
2003 2002
---- ----
Net income (loss) $ (71) $ 106
======= =====
Weighted average common shares
outstanding (basic) 1,922 1,894
Incremental shares from assumed
conversions of stock options 0 21
Weighted average common
shares outstanding (diluted) 1,922 1,915
Basic
-----
Net income (loss) per share $(0.04) $ 0.06
======= ======
Diluted
-------
Net income (loss) per share $(0.04) $ 0.06
======= ======
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6. BUSINESS SEGMENTS
-----------------
The Company operates in two business segments, Advanced Technology Group
and Consumer Products Group. 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
Advanced Technology Group involve the design, manufacture, and marketing of
servo-control components for government and commercial industrial applications.
Consumer Products Group's operations involve the design, manufacture and
marketing of a variety of cutlery products for use by consumers and government
agencies. The Company derives its primary sales revenue from domestic customers,
although a significant portion of finished products are for foreign end use.
Three Month Advanced Consumer
Period Ended Technology Products
March 31, 2003 Group Group Consolidated
-------------- ----- ----- ------------
Revenues from unaffiliated customers $ 2,506 $ 1,323 $ 3,829
========= ========= ==========
Profit (loss) $ 409 $ (174) $ 235
========= =========
Depreciation expense (178)
Interest expense (43)
General corporate expense (126)
-----------
Income (loss) before income taxes $ (112)
===========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------- ---------------------------------------------------------
The following table sets forth for the period indicated the percentage
relationship of certain items in the consolidated statement of operations to net
revenues, and the percentage increase or decrease of such items as compared to
the indicated prior period.
Relationship to Period to
net revenues period $
three months ended increase
March 31, (decrease)
2003 2002 03-02
---- ---- -----
Net revenues
Advanced technology products 65.5% 68.8% (5.0)%
Consumer products 34.5% 31.2% 10.6 %
----- -----
100.0% 100.0% (0.1)%
Cost of goods sold 75.3% 70.4% 6.9%
----- -----
Gross profit 24.7% 29.6% (16.9)%
----- -----
Selling, general and administrative 21.8% 19.8% 9.9%
Interest 1.1% 1.3% (10.4)%
Depreciation 4.6% 4.3% 8.5%
---- ----
27.5% 25.4% 8.6%
----- -----
Income (loss) before income taxes (2.8)% 4.2% (168.6)%
Income tax provision (benefit) (0.9)% 1.4% (170.7)%
------ ----
Net income (loss) (1.9)% 2.8% (167.4)%
====== ====
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MANAGEMENT DISCUSSION
---------------------
During the three month period ended March 31, 2003 and for the comparable
period ended March 31, 2002, approximately 36% and 25% respectively, of the
Company's revenues were derived from contracts with agencies of the U.S.
Government or their prime contractors. The Company's business is performed under
fixed price contracts. Sales to the government are affected by defense budgets,
U.S. & foreign policy and the level of military operations. As major
international events continue, it is difficult to predict the impact on future
financial results. In addition, restrictions on certain international travel,
along with the continued real and perceived threats to the airline industry have
significantly lowered commercial passenger traffic and have had a direct effect
on revenues in the commercial aerospace markets and, consequently, on aerospace
manufacturing.
RESULTS OF OPERATIONS
---------------------
The Company's consolidated results of operations for the three month period
ended March 31, 2003 when compared to the same three month period of 2002 showed
net revenues remaining consistent and a decrease in net income of approximately
167.4%. While revenues continue to reflect the overall economic softness in the
commercial aerospace industry and previously reported reductions and
stretch-outs in the commercial markets for the Company's Advanced Technology
Products, the Company continues to be successful in procuring new applications
and the backlog remains strong.
During the first quarter of 2003, the Company incurred significant
front-end costs associated with prototype, preproduction and start-up activities
in both the Advanced Technology Group (ATG) and the Consumer Products Group
(CPG). These costs, consistent with the changes in accounting standards, are
expensed as they occur and as such provide minimal or no benefit to revenue in
the current period. Such costs attribute to the decrease in gross profit for the
quarter ended March 31, 2003 when compared to the comparable period of 2002.
Specific to these costs, which are being expensed on a current basis, are those
related to the engineering and manufacturing of the Marine Corps' new
combination bayonet and combat knife. As the result of an intensive two- year
competition, the CPG was recently awarded a four million dollar order which is
scheduled to be in full production during the third quarter of this year and
will continue into the year 2005.
Selling, general and administrative expenses increased as a percentage of
revenues for the quarter ended March 31, 2003 when compared to the same period
in 2002. The Company has incurred expenses for costs dedicated to expanded sales
and marketing activities, and additional procedures and professional expenses to
assure the integrity of financial reporting and corporate disclosure following
passage of the Sarbanes-Oxley Act in 2002.
Interest expense decreased for the quarter ended March 31, 2003 when
compared to the same period in 2002 due to market driven interest rate
fluctuations and the decrease of institutional debt.
The Company continues to take advantage of the tax benefit for
extraterritorial sales, which is reflected in the effective tax rate of
approximately 37%.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's primary liquidity and capital requirements relate to the
working capital needs; primarily inventory, accounts receivable, capital
investments in facilities, machinery, tools/dies and equipment and
principal/interest payments on indebtedness. The Company's primary sources of
liquidity have been from positive cash flows and from bank financing.
As of March 31, 2003 there are no material commitments for capital
expenditures.
- 10 -
Item 3. CONTROLS AND PROCEDURES
------- -----------------------
Our management has reviewed our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days
prior to this report. Our management believes that such disclosure controls and
procedures are adequate to ensure that material information relating to the
Company is made known to management by others within the Company.
In addition, our management reviewed our internal controls and, to
management's knowledge, there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their last evaluation.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to 19 U.S.C.
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification of Chief Financial Officer pursuant to 19 U.S.C.
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K
None
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 a material portion 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 and global competition, and difficulty in predicting
defense appropriations, 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 long-term purchase programs, and market demand and acceptance
both for the Company's products and its customers' products which incorporate
Company-made components. 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.
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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.
Date: May 9, 2003
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
- 12 -
CERTIFICATION
I, Lee D. Burns, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Servotronics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/s/ Lee D. Burns, Chief Financial Officer
-----------------------------------------
Lee D. Burns
Chief Financial Officer
-13-
CERTIFICATION
I, Nicholas D. Trbovich, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Servotronics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/s/ Nicholas D. Trbovich, Chief Executive Officer
-------------------------------------------------
Nicholas D. Trbovich
Chief Executive Officer
-14-