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 June 30, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
-- ACT OF 1934
For the transition period from to
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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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1110 Maple Street, Elma, New York 14059-0300
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(Address of principal executive offices)
716-655-5990
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(Issuer's telephone number, including area code)
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 July 31, 2003
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Common Stock, $.20 par value 2,492,901
Transitional Small Business Disclosure Format (Check one):
Yes ; No X
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INDEX
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PART I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements (Unaudited)
a) Consolidated Balance Sheet, June 30, 2003 3
b) Consolidated Statement of Operations for the Three and Six Months Ended
June 30, 2003 and 2002 4
c) Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 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
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PART I FINANCIAL INFORMATION
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2003
($000's omitted except per share data)
(Unaudited)
Assets
Current assets:
Cash $ 606
Accounts receivable 2,583
Inventories 7,172
Prepaid income taxes 145
Deferred income taxes 393
Other (See Note 1 to consolidated financial statements) 1,762
------------
Total current assets 12,661
Property, plant and equipment, net 6,808
Other assets 570
------------
$ 20,039
============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 378
Accounts payable 668
Accrued employee compensation and benefit costs 819
Other accrued liabilities 301
Accrued income taxes 36
------------
Total current liabilities 2,202
Long-term debt 5,570
Deferred income taxes 213
Other non-current liabilities 268
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; Issued 2,614,506 shares 523
Capital in excess of par value 13,033
Retained earnings 1,169
Accumulated other comprehensive loss (82)
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14,643
Employee stock ownership trust commitment (2,337)
Treasury stock, at cost 121,605 shares (520)
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Total shareholders' equity 11,786
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$ 20,039
============
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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- --------- --------- ----------
Net revenues $ 3,945 $ 4,300 $ 7,774 $ 8,134
Costs and expenses:
Cost of goods sold 2,921 3,153 5,806 5,851
Selling, general and administrative 845 719 1,680 1,479
Interest 41 51 84 99
Depreciation and amortization 173 167 351 331
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3,980 4,090 7,921 7,760
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Income (loss) before income taxes (35) 210 (147) 374
Income tax provision (benefit) (13) 77 (54) 135
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Net income (loss) $ (22) $ 133 $ (93) $ 239
========= ========= ========= ==========
Income (Loss) Per Share:
Basic
-----
Net income (loss) per share $ (0.01) $ 0.07 $ (0.05) $ 0.13
========= ========= ========= ==========
Diluted
-------
Net income (loss) per share $ (0.01) $ 0.07 $ (0.05) $ 0.12
========= ========= ========= ==========
See notes to consolidated financial statements
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SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000's omitted)
(Unaudited)
Six Months Ended
June 30,
2003 2002
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Cash flows related to operating activities:
Net income (loss) $ (93) $ 239
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation and amortization 351 331
Change in assets and liabilities -
Accounts receivable 50 (83)
Inventories (409) (135)
Other current assets (302) 110
Other assets 3 0
Accounts payable 251 (352)
Accrued employee compensation & benefit costs 30 54
Accrued income taxes 36 101
Other accrued liabilities 192 16
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Net cash provided by operating activities 109 281
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Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (78) (383)
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Net cash used in investing activities (78) (383)
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Cash flows related to financing activities:
Increase in demand loan 50 400
Payments on demand loan (50) (200)
Principal payments on long-term debt (104) (112)
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Net cash provided by (used in) financing activities (104) 88
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Net decrease in cash (73) (14)
Cash at beginning of period 679 720
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Cash at end of period $ 606 $ 706
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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
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Revenue recognition
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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 $1,053,000 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
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June 30, 2003
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Raw materials and common parts $ 1,051
Work-in-process 5,430
Finished goods 927
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7,408
Less common parts expected to be used after one year (236)
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$ 7,172
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3. Property, plant and equipment
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June 30, 2003
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Land $ 25
Buildings 6,452
Machinery, equipment and tooling 9,689
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16,166
Less accumulated depreciation (9,358)
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$ 6,808
=========
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
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June 30, 2003
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Industrial Development Revenue Bonds; secured by a
letter of credit
from a bank with interest payable monthly
at a floating rate (1.50% at June 30, 2003) $ 4,490
Term loans; payable to a financial institution;
$500,000 at LIBOR plus 2% (3.29% at
June 30, 2003); quarterly principal payments of
$17,500 commencing January 1, 2005; payable in full
October 1, 2009; and $393,000 at a rate of 3.40% at
June 30, 2003; quarterly principal
payments of $35,714 through February 1, 2006 893
Various other secured term notes payable to government agencies 565
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5,948
Less current portion (378)
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$ 5,570
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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 June 30, 2003.
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5. Common shareholders' equity
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Common stock
------------ Accumulated
Number Capital in other
of shares excess of Retained Treasury Comprehensive comprehensive
issued Amount par value earnings ESOP stock income income
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Balance December
31, 2002 2,614,506 $523 $13,361 $1,262 ($ 2,337) ($ 1,054) ($ 82)
========= ==== ======= ===== ======== ======== =====
Comprehensive loss
Net loss - - - $ (93) - - $ (93) -
Other comprehensive loss,
net of tax - - - - - - - -
Minimum pension liability
adjustment - - - - - - - -
Other comprehensive
loss - - - - - - - -
------
Comprehensive loss - - - - - - $ (93) -
======
Compensation expense - - - - - - -
Treasury shares issued for
deferred compensation
obligation - - (328) - - 534 -
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Balance June 30, 2003 2,614,506 $523 $13,033 $1,169 ($ 2,337) ($ 520) ($ 82)
========= ==== ======= ====== ======== ======== =====
Earnings per share
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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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
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Net income (loss) $ (22) $ 133 $ (93) $ 239
======= ====== ======= ======
Weighted average common shares
outstanding (basic) 1,972 1,894 1,972 1,894
Incremental shares from assumed
conversions of stock options 0 14 0 21
Weighted average common
shares outstanding (diluted) 1,972 1,908 1,972 1,915
Basic
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Net income (loss) per share $ (0.01) $ 0.07 $(0.05) $ 0.13
======= ====== ======= ======
Diluted
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Net income (loss) per share $ (0.01) $ 0.07 $(0.05) $ 0.12
======= ====== ======= ======
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6. Business segments
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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.
Six Month Advanced Consumer
Period Ended Technology Products
June 30, 2003 Group Group Consolidated
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Revenues from unaffiliated customers $ 4,993 $ 2,781 $ 7,774
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Profit (loss) $ 734 $ (193) $ 541
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Depreciation and amortization (351)
Interest expense (84)
General corporate expense (253)
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Loss before income taxes $ (147)
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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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 Relationship to Period to
net revenues period $ net revenues period $
three months ended increase six months ended increase
June 30, (decrease) June 30, (decrease)
2003 2002 03-02 2003 2002 03-02
---- ---- ----- ---- ---- -----
Net revenues
Advanced technology products 63.1% 64.3% (10.0%) 64.2% 66.4% (7.6%)
Consumer products 36.9% 35.7% (5.1%) 35.8% 33.6% 1.8%
----- ----- ----- -----
100.0% 100.0% (8.3%) 100.0% 100.0% (4.4%)
Cost of goods sold, exclusive of
depreciation 74.0% 73.3% (7.4%) 74.7% 71.9% (0.8%)
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Gross profit 26.0% 26.7% (10.7%) 25.3% 28.1% (13.8%)
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Selling, general and administrative 21.4% 16.7% 17.5% 21.6% 18.2% 13.6%
Interest 1.0% 1.2% (19.6%) 1.1% 1.2% (15.2%)
Depreciation and amortization 4.4% 3.9% 3.6% 4.5% 4.1% 6.0%
---- ---- ---- ----
26.8% 21.8% 13.0% 27.2% 23.5% 10.8%
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Income (loss) before income taxes (0.8%) 4.9% (116.7%) (1.9%) 4.6% (139.3%)
Income tax provision (benefit) (0.2%) 1.8% (116.9%) (0.7%) 1.7% (140.0%)
----- ---- ----- ----
Net income (loss) (0.6%) 3.1% (116.5%) (1.2%) 2.9% (138.8%)
===== ==== ===== ====
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Management Discussion
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During the six month period ended June 30, 2003 and for the comparable
period ended June 30, 2002, approximately 37% and 24% 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 to unfold, it is difficult to predict the impact
on future financial results. In addition, the continued real and perceived
threats to the airline industry have 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
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The Company's consolidated results of operations for the six month
period ended June 30, 2003 when compared to the same six month period of 2002
showed a decrease in net revenues of 4.4% and a decrease in net income of
approximately 138.8%. For the second quarter ended June 30, 2003, net revenues
decreased approximately 8.3% with a decrease in net income of 116.5% compared to
the same period of 2002. The decrease in revenues for the six month period and
quarter ended June 30, 2003 is primarily the result of decreased sales and
shipments at the Advanced Technology Group related to the previously reported
decrease in commercial aircraft production. While revenues continue to reflect
the overall economic softness in the commercial aerospace industry, the Company
continues to be successful in procuring new applications and the backlog remains
strong.
During the first six months 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 accounting standards, are expensed as they
occur and as such provide minimal or no benefit to revenue in the current
period. Such costs contribute to the decrease in gross profit for the six month
period ended June 30, 2003 when compared to the comparable period of 2002. Among
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 awarded a four million dollar order which began full production during the
third quarter of this year is scheduled through 2004 and into the year 2005.
Selling, general and administrative expenses increased as a percentage
of revenues for both the six month period and quarter ended June 30, 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 relative to the financial reporting and corporate
disclosure requirements of the Sarbanes-Oxley Act.
Interest expense decreased for both the six month period and the
quarter ended June 30, 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%.
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Liquidity and Capital Resources
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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 flow from operations and from bank
financing.
The Company also has a $1,000,000 line of credit on which there was no
balance outstanding at June 30, 2003.
As of June 30, 2003 there are no material commitments for capital
expenditures.
Item 3. DISCLOSURE CONTROLS AND PROCEDURES
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Our management has reviewed our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 and 15d-15). Our management believes that
as of the end of the Company's most recent fiscal quarter, 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
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.
(b) Reports on Form 8-K
An 8-K was filed on April 2, 2003 incorporating the Press
Release of Servotronics, Inc. dated March 30, 2003.
An 8-K was filed on May 15, 2003 incorporating the Press
Release of Servotronics, Inc. dated May 14, 2003
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
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 7, 2003
SERVOTRONICS, INC.
By: /s/Lee D. Burns, Treasurer
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Lee D. Burns, Treasurer and
Chief Financial Officer
By: /s/ Raymond C. Zielinski, Vice President
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Raymond C. Zielinski, Vice President
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