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, 2004
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 - 07109
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)
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, 2004
------------------------------- -----------------------------
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 at March 31, 2004 3
b) Consolidated statement of operations for the three months ended
March 31, 2004 and 2003 4
c) Consolidated statement of cash flows for the three months ended
March 31, 2004 and 2003 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 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities 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
($000's omitted except share data)
(Unaudited)
March 31, 2004
Assets --------------
Current assets:
Cash $ 1,758
Accounts receivable 3,405
Inventories 6,774
Prepaid income taxes 73
Deferred income taxes 368
Other assets (See Note 1 to consolidated financial statements) 1,475
------------
Total current assets 13,853
Property, plant and equipment, net 6,518
Other non-current assets 548
------------
$ 20,919
============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 463
Accounts payable 840
Accrued employee compensation and benefit costs 946
Other accrued liabilities 449
Accrued income taxes 94
------------
Total current liabilities 2,792
Long-term debt 5,159
Deferred income taxes 357
Other non-current liability 244
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 1,674
Accumulated other comprehensive loss (107)
------------
15,123
Employee stock ownership trust commitment (2,236)
Treasury stock, at cost 121,605 shares (520)
------------
Total shareholders' equity 12,367
------------
$ 20,919
============
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,
2004 2003
---- ----
Net revenues $ 5,328 $ 3,829
Costs and expenses:
Cost of goods sold, exclusive of depreciation 3,997 2,885
Selling, general and administrative 881 835
Interest 36 43
Depreciation and amortization 162 178
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5,076 3,941
---------- ---------
Income (loss) before income taxes 252 (112)
Income tax provision (benefit) 94 (41)
---------- ---------
Net income (loss) $ 158 $ (71)
========== =========
Income (Loss) Per Share:
Basic
-----
Net income (loss) per share $ 0.08 $ (0.04)
========== =========
Diluted
-------
Net income (loss) per share $ 0.08 $ (0.04)
========== =========
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,
2004 2003
---- ----
Cash flows related to operating activities:
Net income (loss) $ 158 $ (71)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation and amortization 162 178
Change in assets and liabilities -
Accounts receivable (917) 109
Inventories 36 (261)
Other assets and prepaid income taxes 1 (48)
Other current assets 111 (167)
Accounts payable 291 218
Accrued employee compensation and benefit costs 214 34
Accrued income taxes 94 0
Other accrued liabilities 274 96
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Net cash provided by operating activities 424 88
------- -------
Cash flows related to investing activities:
Capital expenditures - property, plant and
equipment (120) (14)
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Net cash used in investing activities (120) (14)
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Cash flows related to financing activities:
Increase in demand loan 0 50
Payments on demand loan 0 (50)
Principal payments on long-term debt (52) (52)
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Net cash used in financing activities (52) (52)
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Net increase in cash 252 22
Cash at beginning of period 1,506 679
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Cash at end of period $ 1,758 $ 701
======= =======
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
------------------------------------------
Risk factors
------------
The aviation and aerospace industries as well as markets for the
Company's consumer products are facing new and different challenges on a global
basis. The success of the Company depends upon the trends of the economy,
including interest rates, income tax laws, governmental regulation, legislation,
and other risk factors. In addition, uncertainties in today's global economy,
global competition, the effect of terrorism, difficulty in predicting defense
and other government 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, volatile market
demand and the continued market acceptance of the Company's advanced technology
and cutlery products make it difficult to predict the impact on future financial
results.
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 is $622,000 of unbilled revenues which
represents revenue earned under the percentage of completion method
(cost-to-cost) not yet billable under the terms of the contracts.
2. Inventories
-----------
March 31, 2004
----------------
($000's omitted)
Raw materials and common parts $ 3,175
Work-in-process 3,498
Finished goods 337
---------
7,010
Less common parts expected to be used after one year (236)
---------
$ 6,774
=========
Inventories are stated generally at the lower of standard cost and 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), and market provisions in respect of net realizable value and
obsolescence are applied to the gross value of the inventory. Pre-production and
start-up costs are expensed as incurred.
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3. Property, plant and equipment
----------------------------- March 31, 2004
----------------
($000's omitted)
Land $ 25
Buildings 6,452
Machinery, equipment and tooling 9,880
---------
16,357
Less accumulated depreciation (9,839)
---------
$ 6,518
=========
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 which are generally customary in its industry.
4. Long-term debt
-------------- March 31, 2004
----------------
($000's omitted)
Industrial Development Revenue Bonds; secured by a
letter of credit from a bank with interest
payable monthly at a floating rate (1.27% at
March 31, 2004) $ 4,320
Term loan payable to a financial institution
interest at LIBOR plus 2% (3.16% at March 31,
2004); quarterly principal payments of $17,500
commencing January 1, 2005; payable in full
October 1, 2009 500
Term loan payable to a financial institution
interest at a rate of 3.38% at March 31, 2004;
quarterly principal payments of $35,714
through February 1, 2006 286
Secured term loan payable to a government agency
interest fixed at 6%, monthly payments of
$2,778; payable in full second quarter of 2004 108
Secured term loan payable to a government agency
interest fixed at 6%, monthly payments of
$2,774 through second quarter of 2012 176
Secured term loan payable to a government agency
interest fixed at 3%; monthly payments of
$1,950 through fourth quarter of 2015 232
--------
Less current portion (463)
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$ 5,159
========
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
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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 is no
balance outstanding at March 31, 2004.
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 loss
-------------------------------------------------------------------------------------
Balance December
31, 2003 2,614,506 $523 $13,033 $1,516 ($ 2,236) ($ 520) ($107)
========= ==== ======= ===== ======= ======= =====
Comprehensive income
Net income - - - $ 158 - - $ 158 -
Other comprehensive income,
net of tax - - - - - - - -
Minimum pension liability
adjustment - - - - - - - -
Other comprehensive
income - - - - - - - -
-----
Comprehensive income - - - - - - $ 158 -
=====
Compensation expense - - - - - - -
--------- ---- ------- ------ -------- -------- -----
Balance March 31, 2004 2,614,506 $523 $13,033 $1,674 ($ 2,236) ($ 520) ($107)
========= ==== ======= ====== ======== ======== =====
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,
2004 2003
---- ----
($000's omitted
except per share data)
Net income (loss) $ 158 $ (71)
====== ======
Weighted average common shares
outstanding (basic) 2,048 1,922
Incremental shares from assumed
conversions of stock options 47 0
Weighted average common
shares outstanding (diluted) 2,095 1,922
Basic
-----
Net income (loss) per share $ 0.08 $(0.04)
====== =======
Diluted
-------
Net income (loss) per share $ 0.08 $(0.04)
====== =======
-8-
6. Business segments
-----------------
The Company operates in two business segments, the Advanced Technology
Group and the 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 the Advanced Technology Group involve the design, manufacture, and
marketing of servo-control components for government and commercial
applications. The 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 portion of finished products are for foreign
customers and/or use.
Three Month Advanced Consumer
Period Ended Technology Products
March 31, 2004 Group Group Consolidated
-------------- ----- ----- ------------
Revenues from unaffiliated customers $ 2,671 $ 2,657 $ 5,328
========= ========= ==========
Profit $ 398 $ 184 $ 582
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Depreciation and amortization (162)
Interest expense (36)
General corporate expense (132)
----------
Income before income taxes $ 252
==========
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
net revenues period $
three months ended increase
March 31, (decrease)
2004 2003 04-03
---- ---- -----
Net revenues
Advanced technology products 50.1% 65.5% 6.6%
Consumer products 49.9% 34.5% 100.9%
----- ----- ------
100.0% 100.0% 39.2%
Cost of goods sold, exclusive of depreciation 75% 75.3% 38.5%
----- ----- ------
Gross profit 25% 24.7% 41.0%
----- ----- ------
Selling, general and administrative 16.5% 21.8% 5.5%
Interest 0.7% 1.1% (16.3)%
Depreciation and amortization 3.0% 4.6% (9.0)%
----- ----- ------
20.2% 27.5% 2.2%
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Income (loss) before income taxes 4.8% (2.8)% 325.2%
Income tax provision (benefit) 1.8% (0.9)% 329.3%
----- ----- ------
Net income (loss) 3.0% (1.9)% 322.8%
===== ===== ======
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Management Discussion
---------------------
During the three month period ended March 31, 2004 and for the
comparable period ended March 31, 2003, approximately 43% and 36% 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's
business is performed under fixed price contracts. Continued government
involvement in military operations overseas has had a direct impact on the
financial results in both the Advanced Technology and Consumer Product's
markets. Sales of products sold for government applications have increased
approximately 65% when comparing the three month period ended March 31, 2004 to
the comparable period of 2003 and are expected to remain strong. While the
Company remains optimistic in relation to these opportunities, it recognizes
that sales to the government are affected by defense budgets, U.S. and foreign
policy and the level of military operations and as such, it is difficult to
predict the impact on future financial results.
Results of Operations
---------------------
The Company's consolidated results of operations for the period ended
March 31, 2004 showed an approximate $1,500,000 or 39.2% increase in net
revenues with a turnaround in income before taxes of approximately $360,000. The
increase in revenues is primarily attributed to increased government business.
Gross profit increased 41.0% for the three month period ended March 31,
2004. During 2003, the Company incurred significant front-end costs associated
with prototype, preproduction and start-up activities for the Consumer Products
Group's combination combat knife and bayonet. The majority of such up-front
costs were incurred and expensed in 2003 and prior. While the Company continues
to incur such costs on an ongoing basis associated with products for both the
Advanced Technology Group (ATG) and Consumer Products Group (CPG), the timing of
such costs directly contributes to the fluctuation in gross profit from period
to period because these costs are expensed as they occur and, as such, are not
matched to their future revenues and benefits.
Selling, general and administrative (SG&A) costs increased
approximately 5.5% when compared to the same period in 2003. The increase in
SG&A costs is primarily attributed to increased marketing and expanded sales
efforts of the ATG and CPG and the increased costs for professional services and
corporate governance necessitated by the Sarbanes-Oxley Act and related
regulations. Such costs are expected to continue to be significant expense
factors.
Interest expense decreased for the quarter ended March 31, 2004 when
compared to the same period in 2003 primarily due to a decrease in 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 in 2004 have been from positive cash flows.
As of March 31, 2004 there are no material commitments for capital
expenditures.
Off Balance Sheet Arrangements
------------------------------
None.
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Critical Accounting Policies
----------------------------
The Company prepares the consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. As such, we are required to make certain estimates, judgments and
assumptions that the Company believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the periods presented. Actual
results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses our most critical accounting policies, which are those that are most
important to the portrayal of our financial condition and results of operations
and which require our most difficult and subjective judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. Note 1 to the accompanying consolidated financial statements includes
a summary of the significant accounting policies used in the preparation of the
consolidated financial statements.
Item 3. CONTROLS AND PROCEDURES
------- -----------------------
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 have a significant adverse
affect on internal controls subsequent to the date of their last evaluation.
PART II
OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
----------------------------------------------------------------------------
SECURITIES
----------
The Company's Board of Directors has previously authorized the
repurchase of shares of its outstanding common stock. The Company did not
repurchase any shares during the three months ended March 31, 2004. There are
88,955 shares that are still available for repurchase under this general
authorization.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------------
(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
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 14, 2004
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
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