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, 2006
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 - 07109
SERVOTRONICS, INC.
------------------
(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
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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 .
--- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes ; No X
--- ---
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, 2006
----- -------------------------------
Common Stock, $.20 par value 2,362,968
Transitional Small Business Disclosure Format (Check one):
Yes ; No X
--- ---
- 1 -
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
a) Consolidated balance sheet, September 30, 2006 3
b) Consolidated statement of operations for the three and nine months ended
September 30, 2006 and 2005 4
c) Consolidated statement of cash flows for the nine months ended
September 30, 2006 and 2005 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 12
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 15
Signatures 17
- 2 -
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($000's omitted except per share data)
(Unaudited)
September 30, 2006
------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,290
Accounts receivable 4,175
Inventories 7,144
Deferred income taxes 391
Prepaid income taxes 12
Other assets 635
-------------
Total current assets 15,647
-------------
Property, plant and equipment, net 6,016
Other non-current assets 503
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$ 22,166
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 382
Accounts payable 835
Accrued employee compensation and benefit costs 847
Other accrued liabilities 369
-------------
Total current liabilities 2,433
-------------
Long-term debt 4,856
Deferred income taxes 388
Other non-current liabilities 386
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; issued 2,614,506 shares 523
Capital in excess of par value 13,033
Retained earnings 4,364
Accumulated other comprehensive loss (186)
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17,734
Employee stock ownership trust commitment (2,034)
Treasury stock, at cost 250,988 shares (1,597)
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Total shareholders' equity 14,103
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$ 22,166
============
See notes to consolidated financial statements
- 3 -
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,
2006 2005 2006 2005
--------- --------- --------- ---------
Revenues $ 5,646 $ 5,741 $ 17,811 $ 17,398
Costs and expenses:
Cost of goods sold, exclusive of depreciation 4,353 4,083 13,685 12,950
Selling, general and administrative 774 1,113 2,665 3,109
Interest 65 67 191 163
Depreciation and amortization 134 164 480 501
Other income, net (40) (85) (413) (247)
--------- --------- --------- ---------
5,286 5,342 16,608 16,476
--------- --------- --------- ---------
Income before income tax provision 360 399 1,203 922
Income tax provision 133 147 445 341
--------- --------- --------- ---------
Net income $ 227 $ 252 $ 758 $ 581
========= ========= ========= =========
Income per share:
Basic
-----
Net income per share $ 0.12 $ 0.12 $ 0.38 $ 0.28
========= ========= ========= =========
Diluted
-------
Net income per share $ 0.11 $ 0.12 $ 0.35 $ 0.27
========= ========= ========= =========
See notes to consolidated financial statements
- 4 -
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000's omitted)
(Unaudited)
Nine Months Ended
September 30,
2006 2005
--------- ---------
CASH FLOWS RELATED TO OPERATING ACTIVITIES:
Net income $ 758 $ 581
Adjustments to reconcile net income to net
cash (used) provided by operating activities -
Depreciation and amortization 480 501
Receipt of treasury shares (160) -
Change in assets and liabilities -
Accounts receivable (400) (129)
Inventories (586) 688
Prepaid income taxes (12) (18)
Other assets 295 325
Other non-current assets 144 (34)
Accounts payable (55) (183)
Accrued employee compensation and benefit costs (269) 66
Accrued income taxes (329) 31
Other accrued liabilities 90 296
--------- ---------
Net cash (used) provided by operating activities (44) 2,124
--------- ---------
CASH FLOWS RELATED TO INVESTING ACTIVITIES:
Capital expenditures - property, plant and
equipment (226) (284)
--------- ---------
Net cash used in investing activities (226) (284)
--------- ---------
CASH FLOWS RELATED TO FINANCING ACTIVITIES:
Principal payments on long-term debt (160) (159)
Purchase of treasury shares (917) -
--------- ---------
Net cash used in financing activities (1,077) (159)
--------- ---------
Net (decrease) increase in cash and cash equivalents (1,347) 1,681
Cash and cash equivalents at beginning of period 4,637 2,106
--------- ---------
Cash and cash equivalents at end of period $ 3,290 $ 3,787
========= =========
See notes to consolidated financial statements
- 5 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000's omitted in tables except for per share data)
1. Basis of presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Item
310 of Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements.
The accompanying consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three and nine
months ended September 30, 2006 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2006. The consolidated
financial statements should be read in conjunction with the annual report and
the notes thereto.
2. Summary of significant accounting policies
------------------------------------------
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of
Servotronics, Inc. and its wholly-owned subsidiaries (the "Company"). All
inter-company accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
-------------------------
The Company considers cash and cash equivalents to include all cash
accounts and short-term investments purchased with an original maturity of three
months or less.
Revenue recognition
-------------------
Revenues are recognized as services are rendered or as units are
shipped and at the designated FOB point consistent with the transfer of title,
risks and rewards of ownership. Such purchase orders generally include specific
terms relative to quantity, item description, specifications, price, customer
responsibility for in-process costs, delivery schedule, shipping point, payment
and other standard terms and conditions of purchase and may provide for progress
payments based on in-process costs as they are incurred.
Inventories
-----------
Inventories are stated at the lower of standard cost or net realizable
value. Cost includes all cost incurred to bring each product to its present
location and condition, which approximates actual cost (first-in, first-out).
Market provisions in respect of net realizable value and obsolescence are
applied to the gross value of the inventory. Pre-production and start-up costs
are expensed as incurred.
Shipping and handling costs
---------------------------
Shipping and handling costs are classified as a component of cost of
goods sold.
Property, plant and equipment
-----------------------------
Property, plant and equipment is carried at cost; expenditures for new
facilities and equipment, and expenditures which substantially increase the
useful lives of existing plant and equipment are capitalized; expenditures for
maintenance and repairs are expensed as incurred. Upon disposal of properties,
the related cost and accumulated depreciation are removed from the respective
accounts and any profit or loss on disposition is included in income.
- 6 -
Depreciation is provided on the basis of estimated useful lives of
depreciable properties, primarily by the straight-line method for financial
statement purposes and by accelerated methods for tax purposes. Depreciation
expense includes the amortization of capital lease assets. The estimated useful
lives of depreciable properties are generally as follows:
Buildings and improvements 5-39 years
Machinery and equipment 5-15 years
Tooling 3-5 years
Income taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of operating
loss and credit carryforwards and temporary differences between the carrying
amounts and the tax bases of assets and liabilities. The Company and its
subsidiaries file a consolidated federal income tax return and separate state
income tax returns.
Employee stock ownership plan
-----------------------------
Contributions to the employee stock ownership plan are determined
annually by the Company according to plan formula.
Impairment of long-lived assets
-------------------------------
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable based on undiscounted future operating cash
flow analyses. If an impairment is determined to exist, any related impairment
loss is calculated based on fair value. Impairment losses on assets to be
disposed of, if any, are based on the estimated proceeds to be received, less
costs of disposal.
Use of estimates
----------------
The preparation of the consolidated financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New accounting pronouncements
-----------------------------
During the year ended December 31, 2005, the Financial Accounting
Standards Board (FASB) issued a revision to SFAS 123 entitled SFAS 123 R -
"Share-Based Payment", requiring companies to include the fair value of stock
options granted as an expense in the statement of operations. This revision
became effective and was adopted by the Company on January 1, 2006. See note 6,
Common shareholders' equity.
During the year ended December 31, 2004, the FASB issued SFAS 151,
"Inventory Costs". This Statement amends the guidance in Accounting Research
Bulletin (ARB) No. 43, Chapter 4, "Inventory Pricing", to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). SFAS 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of
"abnormal". In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Statement 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005, with earlier
application permitted in certain circumstances. The Company adopted SFAS 151 on
January 1, 2006 and the adoption of this new standard did not have a significant
impact on the Company's consolidated financial statements.
- 7 -
Risk Factors
------------
The aviation and aerospace industries as well as markets for the
Company's consumer products are facing new and evolving 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,
competition from expanding manufacturing capabilities and technical
sophistication of low-cost developing countries, particularly in South and East
Asia, currency policies in relation to the U.S. dollar of some major foreign
exporting countries so as to maintain or increase a pricing advantage of their
exports vis-a-vis U.S. manufactured goods, 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.
Fair Value of Financial Instruments
-----------------------------------
The carrying amount of cash and cash equivalents, accounts receivable,
inventories, accounts payable and accrued expenses are reasonable estimates of
their fair value due to their short maturity. Based on variable interest rates
and the borrowing rates currently available to the Company for loans similar to
its long-term debt, the fair value approximates its carrying amount.
Reclassification of prior year balances
---------------------------------------
Certain prior period balances have been reclassified to conform with
the current period presentation.
3. Inventories
-----------
September 30, 2006
------------------
Raw materials and common parts $ 3,130
Work-in-process 3,502
Finished goods 699
---------
7,331
Less common parts expected to be used after one year
(classified as long-term) (187)
---------
$ 7,144
=========
4. Property, plant and equipment
-----------------------------
September 30, 2006
------------------
Land $ 25
Buildings 6,553
Machinery, equipment and tooling 10,905
---------
17,483
Less accumulated depreciation and amortization (11,467)
---------
$ 6,016
=========
Property, plant and equipment includes land and building under a
$5,000,000 capital lease which can be purchased for a nominal amount at the end
of the lease term. As of September 30, 2006, accumulated amortization on the
building amounted to approximately $1,700,000. The associated current and
long-term liabilities are discussed in footnote 5 to the consolidated financial
statements. 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.
- 8 -
5. Long-term debt
--------------
September 30, 2006
------------------
Industrial Development Revenue Bonds; secured by an equivalent
letter of credit from a bank with interest payable monthly
at a floating rate (3.94% at September 30, 2006) (A) $ 3,980
Term loan payable to a financial institution;
interest at LIBOR plus 2% (6.00% at
September 30, 2006); quarterly principal payments of
$17,500 commencing January 1, 2005; payable in full
in the fourth quarter of 2009 378
Term loan payable to a financial institution;
interest at LIBOR plus 2% (6.41% at September 30, 2006)
quarterly principal payments of $26,786 through the
fourth quarter of 2011 562
Secured term loan payable to a government agency;
monthly payments of approximately $1,455 with
interest waived payable through second quarter of 2012 131
Secured term loan payable to a government agency;
monthly payments of $1,950 including interest
fixed at 3% payable through fourth quarter of 2015 187
-----------
5,238
Less current portion (382)
-----------
$ 4,856
===========
(A) 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 bank an annual
fee for the letter of credit 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 September 30, 2006.
Certain lenders require the Company to comply with debt covenants as
described in the specific loan documents, including a debt service ratio. At
September 30, 2006, the Company was in compliance with all of its debt
covenants.
- 9 -
6. Common shareholders' equity
---------------------------
Common stock
------------
Number Capital in Other Total
of shares excess of Retained Treasury comprehensive shareholders'
issued Amount par value earnings ESOP stock loss equity
-------------------------------------------------------------------------------------------
Balance December
31, 2005 2,614,506 $523 $13,033 $3,609 ($ 2,034) ($ 520) ($ 186) $ 14,425
Net income - - - 758 - - - 758
Purchase/receipt of
treasury shares - - - - - (1,077) - (1,077)
Other - - - (3) - - - (3)
--------- ---- ------- ------ -------- -------- ------ --------
Balance September 30, 2006 2,614,506 $523 $13,033 $4,364 ($ 2,034) ($ 1,597) ($ 186) $ 14,103
========= ==== ======= ====== ======== ======== ====== ========
In January of 2006, the Company's Board of Directors authorized the
purchase by the Company of up to 250,000 shares of its common stock in the open
market or in privately negotiated transactions. As of September 30, 2006, the
Company has purchased 109,941 shares under this program. As of September 30,
2006, there remained 140,059 shares available to be purchased under the current
buyback program. The Company has also received approximately 19,400 shares
recorded at fair market value for the partial settlement of an obligation.
In December 2004, the Financial Accounting Standards Board issued SFAS
123R, Share-Based Payment ("SFAS 123R"). SFAS 123R supersedes SFAS 123,
Accounting for Stock Based Compensation, and Accounting Principles Board Opinion
25, Accounting for Stock Issued to Employees ("APB 25") and its related
implementation guidance. On January 1, 2006, the Company adopted the provisions
of SFAS 123R using the modified prospective transition method. Under this
method, the Company is required to record compensation expense for all stock
based awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding as of the beginning of the
adoption and prior periods that have not been restated. Under SFAS 123R,
compensation expense related to stock based payments are recorded over the
requisite service period based on the grant date fair value of the awards.
Prior to the adoption of SFAS 123R, the Company accounted for employee
stock options using the intrinsic value method in accordance with APB 25.
Accordingly, no compensation expense was recognized for stock options issued to
employees as long as the exercise price is greater than or equal to the market
value of the common stock at the date of grant. In accordance with SFAS 123, the
Company disclosed the summary of pro forma effects to reported net income as if
the Company had elected to recognize compensation costs based on the fair value
of the awards at the grant date.
There were no options granted or exercised in the nine month periods
ended September 30, 2006 or 2005. As of September 30, 2006, there was $3,000 of
total unrecognized compensation cost related to non-vested options granted under
the plan. That cost is expected to be recognized over a weighted average period
of three years. During the nine month periods ended September 30, 2006 and 2005,
no shares vested. As of September 30, 2006, 511,900 options of 513,900 options
outstanding were exercisable. Exercisable options had a weighted average price
of $4.40 and a weighted average remaining contractual life of 6.3 years. The
aggregate pretax intrinsic value based on the Company's closing price of $6.15
as of September 30, 2006 was approximately $1,092,184.
- 10 -
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.
Incremental shares from assumed conversions are calculated as the number of
shares that would be issued, net of the number of shares that could be purchased
in the marketplace with the cash received upon stock option exercise.
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
---- ---- ---- ----
Net income $ 227 $ 252 $ 758 $ 581
====== ====== ====== =====
Weighted average common shares
outstanding (basic) 1,969 2,071 2,011 2,071
Incremental shares from assumed
conversions of stock options 121 66 131 69
------ ------ ------ -----
Weighted average common
shares outstanding (diluted) 2,090 2,137 2,142 2,140
====== ====== ====== =====
Basic
-----
Net income per share $ 0.12 $ 0.12 $ 0.38 $0.28
====== ====== ====== =====
Diluted
-------
Net income per share $ 0.11 $ 0.12 $ 0.35 $0.27
====== ====== ====== =====
7. Business segments
-----------------
The Company operates in two business segments, Advanced Technology
Group (ATG) and Consumer Products Group (CPG). The Company's reportable segments
are strategic business units that offer different products and services. The
segments are composed of separate corporations and are managed separately.
Operations in ATG involve the design, manufacture, and marketing of
servo-control components (i.e., control valves, actuators, etc.) for government,
commercial and industrial applications. CPG's operations involve the design,
manufacture and marketing of a variety of cutlery products for use by consumers
and government agencies. The Company derives its primary sales revenue from
domestic customers, although a significant portion of finished products are for
foreign end use.
Advanced Technology Consumer Products
Group Group Consolidated
----- ----- ------------
Nine Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30,
2006 2005 2006 2005 2006 2005
---- ---- ---- ---- ---- ----
Revenues from unaffiliated customers $ 11,346 $ 10,013 $ 6,465 $ 7,385 $ 17,811 $ 17,398
======== ======== ======= ======== ========= =========
Profit (loss) $ 2,517 $ 1,769 $ (496) $ 122 $ 2,021 $ 1,891
======== ======== ======= ========
Interest expense $ (170) $ (142) $ (21) $ (21) (191) (163)
======== ======== ======= ========
Depreciation and amortization $ (350) $ (380) $ (130) $ (121) (480) (501)
======== ======== ======= ========
Other income, net $ 312 $ 99 $ 101 $ 148 413 247
======== ======== ======= ========
General corporate expense (560) (552)
--------- ---------
Income before income tax provision $ 1,203 $ 922
========= =========
- 11-
Advanced Technology Consumer Products
Group Group Consolidated
----- ----- ------------
Three Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
2006 2005 2006 2005 2006 2005
Revenues from unaffiliated customers $ 3,838 $ 3,709 $ 1,808 $ 2,032 $ 5,646 $ 5,741
======== ======== ======= ======== ========= ========
Profit (loss) $ 841 $ 857 $ (135) $ (128) $ 706 $ 729
======== ======== ======= ========
Interest expense $ (58) $ (60) $ (7) $ (7) (65) (67)
======== ======== ======= ========
Depreciation and amortization $ (94) $ (125) $ (40) $ (39) (134) (164)
======== ======== ======= ========
Other income, net $ 23 $ 38 $ 17 $ 47 40 85
======== ======== ======= ========
General corporate expense (187) (184)
--------- --------
Income before income tax provision $ 360 $ 399
========= ========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------- ---------------------------------------------------------
Management Discussion
---------------------
During the nine month period ended September 30, 2006 and for the
comparable period ended September 30, 2005, approximately 31% and 43%
respectively, of the Company's revenues were derived from contracts with
agencies of the U.S. Government or their prime contractors and their
subcontractors. Sales of products sold for government applications have
decreased as the result of the previously reported scheduled completion of a
significant government order to the CPG. The Company believes that government
involvement in military operations overseas will continue to have a direct
impact on the financial results in both the Advanced Technology and Consumer
Products markets. While the Company remains optimistic in relation to these
opportunities, it recognizes that sales to the government are affected by
defense budgets, the foreign policies of the U.S. and other nations, the level
of military operations and other factors and, as such, it is difficult to
predict the impact on future financial results. The Company's commercial
business is affected by such factors as uncertainties in today's global economy,
global competition, the vitality and ability of the commercial aviation industry
to purchase new aircraft, market demand and acceptance both for the Company's
products and its customers' products which incorporate Company-made components.
- 12 -
Results of Operations
---------------------
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 period to period dollar and percentage increase or decrease of
such items as compared to the indicated prior period.
Relationship to Period to Period to Relationship to Period to Period to
net revenues period $ period % net revenues period $ period %
three months ended increase increase nine months ended increase increase
September 30, (decrease) (decrease) September 30, (decrease) (decrease)
2006 2005 06-05 06-05 2006 2005 06-05 06-05
---- ---- ----- ----- ---- ---- ----- -----
Net revenues
Advanced Technology Group 68.0% 64.6% $ 129 3.5% 63.7% 57.6% $ 1,333 13.3%
Consumer Products Group 32.0 35.4 (224) (11.0) 36.3 42.4 (920) (12.5)
---- ---- ----- ---- ---- -----
100.0 100.0 (95) (1.7) 100.0 100.0 413 2.4
Cost of goods sold, exclusive of
depreciation 77.1 71.1 270 6.6 76.8 74.4 735 5.7
---- ---- ----- ---- ---- -----
Gross profit 22.9 28.9 (365) (22.0) 23.2 25.6 (322) (7.2)
---- ---- ----- ---- ---- -----
Selling, general and administrative 13.7 19.4 (339) (30.5) 15.0 17.9 (444) (14.3)
Interest 1.2 1.2 (2) (3.0) 1.1 0.9 28 17.2
Depreciation and amortization 2.4 2.9 (30) (18.3) 2.7 2.9 (21) (4.2)
Other income, net (0.7) (1.5) 45 (52.9) (2.3) (1.4) (166) 67.2
---- ---- ----- ---- ---- -----
16.6 22.0 (326) (25.9) 16.5 20.3 (603) (17.1)
---- ---- ----- ---- ---- -----
Income before income tax provision 6.3 6.9 (39) (9.8) 6.7 5.3 281 30.5
Income tax provision 2.3 2.5 (14) (9.5) 2.4 2.0 104 30.5
---- ---- ----- ---- ---- -----
Net income 4.0% 4.4% $ (25) (9.9)% 4.3% 3.3% $ 177 30.5%
==== ==== ===== ==== ==== =====
The Company's consolidated net revenues increased approximately 2.4%
for the nine month period and decreased approximately 1.7% for the three month
period ended September 30, 2006 when compared to the same nine and three month
periods in 2005. Increases in shipments in combination with certain price
increases at the Company's ATG more than offset the decreases in nine month
revenue at the Company's CPG, but did not fully offset the decrease in quarterly
revenues at the CPG. The decrease in revenues at the CPG resulted from the
scheduled and previously reported essential completion of a significant
government contract as well as a decrease in shipments in commercial custom
knives. Continued demand for the Company's ATG products drive increases in
revenues.
Gross margins for the nine and three month periods ended September 30,
2006 decreased as a percentage of sales when compared to the same periods in
2005. Gross margins are affected by many factors including the mix of products
sold in the period within the ATG and CPG as well as the composition of ATG and
CPG sales to the total consolidated sales and, consistent with GAAP, the
expensing of preproduction and development costs as they are incurred.
Selling, general and administrative (SG&A) expenses include variable
costs such as legal and professional. There were expanded sales/marketing
activities and costs at both the ATG and the CPG. Also, consistent with GAAP,
these costs are expensed as they are incurred and because of this may result in
timing differences and fluctuations from period to period. Therefore, these
costs are not necessarily matched to their respective benefits.
Interest expense remained relatively consistent in both the nine and
three month periods ended September 30, 2006 when compared to the same periods
in 2005. The Company continues to reduce its outstanding debt during a period of
increasing market driven interest rates.
Other income/expense for the nine month period ended September 30, 2006
includes approximately $220,000 of net recovery, before tax, from a previously
reported defalcation.
The Company's effective tax rate continues to be approximately 37% of
pretax profits.
Net income increased by $177,000 to $758,000 for the nine months ended
September 30, 2006 when compared to the same period of 2005 primarily due to the
increase in revenues at the Company's ATG and positive effects of price
increases and containment of variable cost activities.
- 13 -
Liquidity and Capital Resources
-------------------------------
The Company's primary liquidity and capital requirements relate to
working capital needs; primarily inventory, accounts receivable, capital
expenditures for property, plant and equipment and principal and interest
payments on debt.
At September 30, 2006 the Company has working capital of approximately
$13.2 million of which $3.3 million was comprised of cash and cash equivalents.
The Company had a use of cash for the nine month period ended September 30, 2006
of $44,000 from operations which was primarily related to the funding and
payment of employee benefit/pension obligations, payment of income taxes as well
as increases in accounts receivable and inventory aggregating $986,000 related
to timing of shipments of product. Additional uses of cash related to investment
in treasury shares and capital expenditures for equipment as well as principal
payments on long-term debt.
As of September 30, 2006 there are no material commitments for capital
expenditures.
The Company also has a $1,000,000 line of credit on which there was no
balance outstanding at September 30, 2006. The Company's projected debt
maturities are consistent with prior years.
Item 3. CONTROLS AND PROCEDURES
------- -----------------------
(a) Disclosure Controls and Procedures
---------------------------------------
The Company carried out an evaluation under the supervision and with
the participation of its management, including the Company's Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures as of September 30, 2006. Based
upon that evaluation, the CEO and CFO concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to the material
information relating to the Company (or the Company's consolidated subsidiaries)
required to be included in the Company's periodic filings with the SEC, such
that the information relating to the Company, required to be disclosed in SEC
reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) is accumulated and
communicated to the Company's management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
--------------------------------
During the nine month period ended September 30, 2006, there were no
changes in internal controls over financial reporting that have materially
affected, or is reasonably likely to affect, our internal control over financial
reporting.
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PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
------- -----------------
None.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
------- -----------------------------------------------------------
Purchases of Equity Securities by the Company and Affiliated Purchases
----------------------------------------------------------------------
Total Number of
Shares Purchased as Maximum Number of
Part of Publicly Shares that may yet
Total Number of Average Price $ Announced Plans or be Purchased under
Period Shares Purchased Paid Per Share Programs the Plans or Programs
---------------------------------- -------------------- -------------------- ---------------------- -----------------------
July 1 - July 31, 250 6.23 250 144,959
2006
---------------------------------- -------------------- -------------------- ---------------------- -----------------------
August 1 - August 31, 400 6.55 400 144,559
2006
---------------------------------- -------------------- -------------------- ---------------------- -----------------------
September 1 - September 30, 4,500 6.20 4,500 140,059
2006
---------------------------------- -------------------- -------------------- ---------------------- -----------------------
Total 5,150 6.23 5,150 140,059
---------------------------------- -------------------- -------------------- ---------------------- -----------------------
Item 3. DEFAULTS UPON SENIOR SECURITIES
------- -------------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------
None.
Item 5. OTHER INFORMATION
------- -----------------
None.
Item 6. EXHIBITS
------- --------
10(A)(2) Amendment to employment contract for Dr. Nicholas D.
Trbovich, Chief Executive Officer dated August 4, 2006
(Incorporated by reference to August 9, 2006 Form 8-K)
10(A)(5) Amendment to employment contract for Nicholas D. Trbovich,
Jr., Vice President dated August 4, 2006 (Incorporated by
reference to August 9, 2006 Form 8-K)
10(A)(6) Amendment to employment contract for Nicholas D. Trbovich,
Jr., Vice President dated August 4, 2006 (Incorporated by
reference to August 9, 2006 Form 8-K)
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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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 13, 2006
SERVOTRONICS, INC.
By: /s/ Dr. Nicholas D. Trbovich, Chief Executive Officer
-----------------------------------------------------
Dr. Nicholas D. Trbovich
Chief Executive Officer
By: /s/ Cari L. Jaroslawsky, Chief Financial Officer
-----------------------------------------------------
Cari L. Jaroslawsky
Chief Financial Officer
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