SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934 For the quarterly period ended September 30, 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 October 31, 2003
--------------------------------- --------------------------------
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, September 30, 2003 3
b) Consolidated Statement of Operations for the Three and Nine Months Ended
September 30, 2003 and 2002 4
c) Consolidated Statement of Cash Flows for the Nine Months Ended
September 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 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 13
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PART I FINANCIAL INFORMATION
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2003
($000's omitted except per share data)
(Unaudited)
Assets
Current assets:
Cash $ 981
Accounts receivable 2,603
Inventories 7,182
Prepaid income taxes 145
Deferred income taxes 393
Other (See Note 1 to consolidated financial statements) 1,751
------------
Total current assets 13,055
Property, plant and equipment, net 6,685
Other assets 568
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$ 20,308
============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 378
Accounts payable 776
Accrued employee compensation and benefit costs 880
Other accrued liabilities 251
Accrued income taxes 115
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Total current liabilities 2,400
Long-term debt 5,518
Deferred income taxes 213
Other non-current liabilities 268
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; Issued 2,614,506 shares 523
Capital in excess of par value 13,033
Retained earnings 1,292
Accumulated other comprehensive loss (82)
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14,766
Employee stock ownership trust commitment (2,337)
Treasury stock, at cost 121,605 shares (520)
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Total shareholders' equity 11,909
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$ 20,308
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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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net revenues $ 4,487 $ 3,761 $ 12,261 $ 11,895
Costs and expenses:
Cost of goods sold 3,339 2,739 9,145 8,590
Selling, general and administrative 756 804 2,436 2,283
Interest 38 49 122 148
Depreciation and amortization 158 161 509 492
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4,291 3,753 12,212 11,513
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Income before income taxes 196 8 49 382
Income tax provision 73 2 19 137
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Net income $ 123 $ 6 $ 30 $ 245
========= ========= ========= ==========
Income Per Share:
Basic
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Net income per share $ 0.06 $ - $ 0.02 $ 0.13
========= ========= ========= ==========
Diluted
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Net income per share $ 0.06 $ - $ 0.02 $ 0.13
========= ========= ========= ==========
See notes to consolidated financial statements
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SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000's omitted)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
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Cash flows related to operating activities:
Net income $ 30 $ 245
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 509 492
Change in assets and liabilities -
Accounts receivable 30 333
Inventories (419) (196)
Other current assets (291) 12
Other assets 5 -
Accounts payable 359 (377)
Accrued employee compensation & benefit costs 91 60
Accrued income taxes 115 58
Other accrued liabilities 142 (8)
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Net cash provided by operating activities 571 619
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Cash flows related to investing activities:
Capital expenditures - property, plant &
equipment (113) (481)
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Net cash used in investing activities (113) (481)
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Cash flows related to financing activities:
Increase in demand loan 250 400
Payments on demand loan (250) (300)
Principal payments on long-term debt (156) (326)
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Net cash used in financing activities (156) (226)
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Net increase (decrease) in cash 302 (88)
Cash at beginning of period 679 720
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Cash at end of period $ 981 $ 632
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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 $985,000 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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September 30, 2003
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Raw materials and common parts $ 1,083
Work-in-process 5,415
Finished goods 920
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7,418
Less common parts expected to be used after one year (236)
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$ 7,182
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3. Property, plant and equipment
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September 30, 2003
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Land $ 25
Buildings 6,452
Machinery, equipment and tooling 9,724
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16,201
Less accumulated depreciation (9,516)
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$ 6,685
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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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September 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 (1.44% at September 30, 2003) $ 4,490
Term loans; payable to a financial institution;
$500,000 at LIBOR plus 2% (3.11% at
September 30, 2003); quarterly principal payments of
$17,500 commencing January 1, 2005; payable in full
October 1, 2009; and $357,000 at a rate of 3.40% at
September 30, 2003; quarterly principal
payments of $35,714 through February 1, 2006 857
Various other secured term notes payable to government agencies 549
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5,896
Less current portion (378)
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$ 5,518
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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 September 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 income
Net income - - - $ 30 - - $ 30 -
Other comprehensive income,
net of tax - - - - - - - -
Minimum pension liability
adjustment - - - - - - - -
Other comprehensive
income - - - - - - - -
-----
Comprehensive income - - - - - - $ 30 -
=====
Compensation expense - - - - - - -
Treasury shares issued for
deferred compensation
obligation - - (328) - 534 -
--------- ---- ------- ------ --------- -------- -----
Balance September 30, 2003 2,614,506 $523 $13,033 $1,292 ($ 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
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Net income $ 123 $ 6 $ 30 $ 245
====== ====== ====== =====
Weighted average common shares
outstanding (basic) 2,022 1,894 1,989 1,894
Incremental shares from assumed
conversions of stock options 7 1 4 14
Weighted average common
shares outstanding (diluted) 2,029 1,895 1,993 1,908
Basic
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Net income per share $ 0.06 $ 0.00 $ 0.02 $ 0.13
======= ====== ====== ======
Diluted
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Net income per share $ 0.06 $ 0.00 $ 0.02 $ 0.13
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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 primarily 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.
Nine Month Advanced Consumer
Period Ended Technology Products
September 30, 2003 Group Group Consolidated
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Revenues from unaffiliated customers $ 7,514 $ 4,747 $ 12,261
========= ========= ==========
Profit $ 1,052 $ 7 $ 1,059
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Depreciation and amortization (509)
Interest expense (122)
General corporate expense (379)
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Income before income taxes $ 49
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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 nine months ended increase
September 30, (decrease) September 30, (decrease)
2003 2002 03-02 2003 2002 03-02
---- ---- ----- ---- ---- -----
Net revenues
Advanced technology products 56.2% 63.0% 6.4% 61.3% 65.3% (3.3%)
Consumer products 43.8% 37.0% 41.2% 38.7% 34.7% 15.1%
----- ----- ----- -----
100.0% 100.0% 19.3% 100.0% 100.0% 3.1%
Cost of goods sold, exclusive of
depreciation 74.4% 72.8% 21.9% 74.6% 72.2% 6.5%
----- ----- ----- -----
Gross profit 25.6% 27.2% 12.3% 25.4% 27.8% (5.7%)
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Selling, general and administrative 16.8% 21.4% (6.0%) 19.9% 19.2% 6.7%
Interest 0.8% 1.3% (22.4%) 1.0% 1.2% (17.6%)
Depreciation and amortization 3.5% 4.3% (1.9%) 4.2% 4.1% 3.5%
---- ---- ---- ----
21.1% 27.0% 6.1% 25.1% 24.5% 4.9%
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Income before income taxes 4.5% 0.2% 2350.0% 0.3% 3.3% (87.2%)
Income tax provision 1.8% - 3550.0% 0.1% 1.2% (86.1%)
---- ----- ---- ----
Net income 2.7% 0.2% 1950.0% 0.2% 2.1% (87.8%)
==== ==== ==== ====
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Management Discussion
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During the nine month period ended September 30, 2003 and for the
comparable period ended September 30, 2002, approximately 39% and 23%
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 of these events on future financial results. In addition, the
continued real and perceived threats to the airline industry have lowered
post-9/11 commercial passenger traffic and have had a direct adverse 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 September 30, 2003, when compared to same three month period of 2002
showed a 19.3% increase in net revenues (approximately $726,000) and a 1950.0%
increase in net income (approximately $117,000). For the nine month period ended
September 30, 2003 when compared to the same nine month period of 2002 net
revenues increased $366,000 while net income decreased $215,000. The increases
in revenues for the nine month period and quarter ended September 30, 2003 are
primarily attributed to increases in government sales at the Advanced Technology
Group (ATG) and the Consumer Products Group (CPG). Significant production
shipments of the previously reported contract for the new U.S. Marine Corps'
combination combat knife and bayonet commenced in the third quarter of 2003.
While revenues are still being adversely affected by the overall economic
softness in the commercial aerospace industry, the Company continues to be
successful in procuring new applications while maintaining a strong backlog.
Notwithstanding the immediate expensing of front-end costs associated with
prototype, preproduction and start-up activities at both the ATG and CPG (i.e.,
in advance of the costs being matched with their anticipated related sales), the
Company generated significantly improved results in the third quarter of 2003.
Selling, general and administrative expenses increased as a percentage of
revenues for the nine month period and decreased for the quarter ended September
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 procedure and professional costs relative to the financial reporting
and corporate disclosure requirements of the Sarbanes-Oxley Act.
Interest expense decreased for both the nine month period and the quarter
ended September 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's current effective tax rate is approximately 39%.
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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 September 30, 2003.
As of September 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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The annual meeting of shareholders of the Registrant was held on July 3,
2003. At the meeting, each of the four directors of the Registrant was elected
to serve until the next annual meeting of shareholders and until his successor
is elected and qualified. The following table shows the results of the voting at
the meeting.
Withheld
Name of Nominee For Authority
--------------- --- ---------
Dr. Nicholas D. Trbovich 2,306,985 7,227
Nicholas D. Trbovich, Jr 2,306,985 7,227
Dr. William H. Duerig. 2,305,109 9,103
Donald W. Hedges 2,305,109 9,103
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.
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(b) Reports on Form 8-K
An 8-K was filed on August 14, 2003 incorporating the Press
Release of Servotronics, Inc. dated August 13, 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: November 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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