| x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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PART
I. FINANCIAL INFORMATION
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Page No.
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Item
1.
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Financial
Statements (Unaudited)
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a) Consolidated
balance sheets, June 30, 2009 and December 31, 2008
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3
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b) Consolidated
statements of operations for the three and six months
ended
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June
30, 2009 and 2008
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4
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c) Consolidated
statements of cash flows for the six months ended
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June
30, 2009 and 2008
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5
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d) Notes
to consolidated financial statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition
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and
Results of Operations
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13
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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17
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Item
4T.
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Controls
and Procedures
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18
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PART
II. OTHER INFORMATION
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Item
1.
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Legal
Proceedings
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18
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Item
1A.
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Risk
Factors
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18
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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18
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Item
3.
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Defaults
Upon Senior Securities
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18
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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19
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Item
5.
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Other
Information
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19
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Item
6.
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Exhibits
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19
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Signatures
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20
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June
30,
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December
31,
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|||||||
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2009
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2008
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|||||||
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(Unaudited)
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Assets
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 3,136 | $ | 4,709 | ||||
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Accounts
receivable
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5,533 | 5,006 | ||||||
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Inventories
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11,426 | 10,160 | ||||||
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Prepaid
income taxes
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- | 84 | ||||||
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Deferred
income taxes
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494 | 494 | ||||||
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Other
assets
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442 | 387 | ||||||
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Total
current assets
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21,031 | 20,840 | ||||||
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Property,
plant and equipment, net
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5,778 | 5,838 | ||||||
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Other
non-current assets
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202 | 207 | ||||||
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Total
Assets
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$ | 27,011 | $ | 26,885 | ||||
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Liabilities
and Shareholders’ Equity
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||||||||
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Current
liabilities:
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||||||||
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Current
portion of long-term debt
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$ | 504 | $ | 539 | ||||
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Accounts
payable
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1,833 | 2,393 | ||||||
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Accrued
employee compensation and benefit costs
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1,437 | 1,335 | ||||||
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Accrued
income taxes
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148 | - | ||||||
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Other
accrued liabilities
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352 | 346 | ||||||
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Total
current liabilities
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4,274 | 4,613 | ||||||
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Long-term
debt
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3,628 | 3,702 | ||||||
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Deferred
income taxes
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501 | 501 | ||||||
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Shareholders’
equity:
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||||||||
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Common
stock, par value $.20; authorized
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||||||||
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4,000,000
shares; issued 2,614,506 shares;
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||||||||
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outstanding
1,932,310 (1,933,253 – 2008) shares
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523 | 523 | ||||||
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Capital
in excess of par value
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13,296 | 13,296 | ||||||
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Retained
earnings
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9,179 | 8,680 | ||||||
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Accumulated
other comprehensive loss
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(98 | ) | (98 | ) | ||||
| 22,900 | 22,401 | |||||||
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Employee
stock ownership trust commitment
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(1,568 | ) | (1,614 | ) | ||||
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Treasury
stock, at cost 377,135 (376,192 – 2008) shares
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(2,724 | ) | (2,718 | ) | ||||
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Total
shareholders’ equity
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18,608 | 18,069 | ||||||
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Total
Liabilities and Shareholders’ Equity
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$ | 27,011 | $ | 26,885 | ||||
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Three
Months Ended
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Six
Months Ended
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June
30,
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June
30,
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|||||||||||||||
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2009
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2008
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2009
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2008
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|||||||||||||
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Revenue
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$ | 9,106 | $ | 7,732 | $ | 16,644 | $ | 16,717 | ||||||||
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Costs,
expenses and other income:
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Cost
of goods sold, exclusive of depreciation
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6,617 | 5,617 | 12,756 | 12,085 | ||||||||||||
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Selling,
general and administrative
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1,271 | 1,021 | 2,350 | 2,044 | ||||||||||||
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Interest
expense
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19 | 40 | 43 | 87 | ||||||||||||
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Depreciation
and amortization
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143 | 141 | 282 | 281 | ||||||||||||
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Other
income, net
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(11 | ) | (15 | ) | (40 | ) | (53 | ) | ||||||||
| 8,039 | 6,804 | 15,391 | 14,444 | |||||||||||||
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Income
before income tax provision
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1,067 | 928 | 1,253 | 2,273 | ||||||||||||
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Income
tax provision
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357 | 340 | 418 | 832 | ||||||||||||
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Net
income
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$ | 710 | $ | 588 | $ | 835 | $ | 1,441 | ||||||||
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Income
per share:
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Basic
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||||||||||||||||
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Net
income per share
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$ | 0.37 | $ | 0.3 | $ | 0.43 | $ | 0.74 | ||||||||
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Diluted
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||||||||||||||||
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Net
income per share
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$ | 0.34 | $ | 0.27 | $ | 0.41 | $ | 0.67 | ||||||||
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Six
Months Ended
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June
30,
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||||||||
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2009
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2008
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Cash
flows related to operating activities:
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Net
income
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$ | 835 | $ | 1,441 | ||||
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Adjustments
to reconcile net income to net
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||||||||
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cash
(used in) provided by operating activities -
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||||||||
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Depreciation
and amortization
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282 | 281 | ||||||
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Change
in assets and liabilities -
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Accounts
receivable
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(527 | ) | (157 | ) | ||||
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Inventories
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(1,266 | ) | (792 | ) | ||||
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Prepaid
income taxes
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84 | - | ||||||
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Other
assets
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(55 | ) | (273 | ) | ||||
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Other
non-current assets
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1 | 5 | ||||||
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Accounts
payable
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(560 | ) | 60 | |||||
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Accrued
employee compensation and benefit costs
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102 | 223 | ||||||
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Other
accrued liabilities
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6 | (1 | ) | |||||
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Accrued
income taxes
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148 | (300 | ) | |||||
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Employee
stock ownership trust payment
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46 | - | ||||||
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Net
cash (used in) provided by operating activities
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(904 | ) | 487 | |||||
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Cash
flows related to investing activities:
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Capital
expenditures - property, plant and equipment
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(218 | ) | (186 | ) | ||||
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Net
cash used in investing activities
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(218 | ) | (186 | ) | ||||
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Cash
flows related to financing activities:
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Principal
payments on long-term debt
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(109 | ) | (108 | ) | ||||
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Purchase
of treasury shares
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(6 | ) | - | |||||
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Cash
dividend
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(336 | ) | (348 | ) | ||||
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Purchase
of stock options
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- | (772 | ) | |||||
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Proceeds
from exercise of stock options
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- | 7 | ||||||
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Net
cash used in financing activities
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(451 | ) | (1,221 | ) | ||||
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Net
decrease in cash and cash equivalents
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(1,573 | ) | (920 | ) | ||||
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Cash
and cash equivalents at beginning of period
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4,709 | 4,879 | ||||||
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Cash
and cash equivalents at end of period
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$ | 3,136 | $ | 3,959 | ||||
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1.
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Basis
of presentation
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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-Q
and Article 8 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by U.S. generally accepted
accounting principles for complete financial
statements.
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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 six months ending
June 30, 2009 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009. The consolidated financial
statements should be read in conjunction with the annual report and the
notes thereto.
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2.
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Summary
of Significant Accounting Policies
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Principles
of Consolidation
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The
consolidated financial statements include the accounts of Servotronics,
Inc. and its wholly-owned subsidiaries (the
“Company”).
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Cash
and cash equivalents
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The
Company considers cash and cash equivalents to include all cash accounts
and short-term investments purchased with an original maturity of six
months or less.
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Revenue
Recognition
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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.
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Inventories
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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 inventory
expected to be used in greater than one year are applied to the gross
value of the inventory through a reserve of approximately $544,000 at June
30, 2009 and $524,000 at December 31, 2008. Pre-production and start-up
costs are expensed as incurred.
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The
purchase of suppliers’ minimum economic quantities of material such as
steel, etc. may result in a purchase of quantities exceeding one year of
customer requirements. Also, in order to maintain a reasonable and/or
agreed to lead time, certain larger quantities of other product support
items may have to be purchased and may result in over one year’s
supply.
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Shipping
and Handling Costs
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Shipping
and handling costs are classified as a component of cost of goods
sold.
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Property,
Plant and Equipment
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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.
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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:
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Buildings
and improvements
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5-39
years
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Machinery
and equipment
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5-15
years
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Tooling
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3-5
years
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Income
Taxes
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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 basis of assets and
liabilities. The Company and its subsidiaries file a consolidated federal
income tax return, a combined New York State income tax return and a
separate Pennsylvania state income tax
return.
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The
Company’s practice is to recognize interest and/or penalties related to
income tax matters in income tax expense. The Company did not have any
accrued interest or penalties included in its consolidated balance sheets
at June 30, 2009 or December 31, 2008, and did not recognize any interest
and/or penalties in its consolidated statements of operations during the
periods ended June 30, 2009 and
2008.
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Supplemental
cash flow information
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Income
taxes paid during the three months ended June 30, 2009 and 2008 amounted
to approximately $198,000 and $404,000, respectively, and amounted to
$201,000 and $1,138,000 for the six months ended June 30, 2009 and 2008,
respectively. Interest paid during the three months ended June 30, 2009
and 2008 amounted to approximately $21,000 and $44,000, respectively, and
amounted to $47,000 and $102,000 for the six months June 30, 2009 and
2008, respectively.
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Employee
Stock Ownership Plan
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Contributions
to the employee stock ownership plan are determined annually by the
Company according to plan formula.
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Impairment
of Long-Lived Assets
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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. The Company has determined that no
impairment of long lived assets existed at June 30, 2009 and December 31,
2008.
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Use
of Estimates
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The
preparation of the consolidated financial statements in conformity with
U.S. generally accepted accounting principles (GAAP) 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.
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Research
and development costs are expensed as incurred as defined in SFAS No. 2,
Accounting for Research and Development
Costs.
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Concentration
of Credit Risks
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Financial
instruments that potentially subject the Company to concentration of
credit risks principally consist of cash accounts in financial
institutions. Although the accounts exceed the federally insured deposit
amount, management does not anticipate nonperformance by the financial
institutions.
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New
Accounting Pronouncements
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In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement No. 157 “Fair Value Measurement.” This Statement defines fair
value, establishes a framework for measuring fair value in GAAP, and
expands disclosures about fair value measurements. The Company adopted the
provisions of SFAS 157 in the first quarter of 2008 which did not have an
impact on the Company’s consolidated financial statements or disclosures.
In February of 2008, the FASB issued FASB Staff Position 157-2 which
delays the effective date of SFAS 157 for non-financial assets and
liabilities which are not measured at fair value on a recurring basis (at
least annually) until fiscal years beginning after November 15, 2008. The
Company is currently evaluating the impact, if any, of adopting the
provisions of SFAS 157 for our non-financial assets and liabilities on the
Company’s consolidated financial
statements.
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In
February 2007, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No.159
permits companies to elect to follow fair value accounting for certain
financial assets and liabilities in an effort to mitigate volatility in
earnings without having to apply complex hedge accounting provisions. The
standard also establishes presentation and disclosure requirements
designed to facilitate comparison between entities that choose different
measurement attributes for similar types of assets and liabilities. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007.
The Company adopted SFAS 159 in 2008 and elected not to apply the fair
value measurement option for any of our financial assets or
liabilities.
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Management
does not believe that any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on
the accompanying consolidated financial
statements.
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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.
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| 3. |
Inventories
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|||||||||
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June
30,
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December
31,
|
|||||||||
|
2009
|
2008
|
|||||||||
|
($000's
omitted)
|
||||||||||
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Raw
materials and common parts
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$ | 5,011 | $ | 4,621 | ||||||
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Work-in-process
|
5,200 | 4,153 | ||||||||
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Finished
goods
|
1,215 | 1,386 | ||||||||
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Total
inventories, net of reserve
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$ | 11,426 | $ | 10,160 | ||||||
| 4. |
Property,
Plant and Equipment
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|||||||||
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June
30,
|
December
31,
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|||||||||
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2009
|
2008
|
|||||||||
|
($000's
omitted)
|
||||||||||
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Land
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$ | 25 | $ | 25 | ||||||
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Buildings
|
6,803 | 6,761 | ||||||||
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Machinery,
equipment and tooling
|
11,393 | 11,728 | ||||||||
| 18,221 | 18,514 | |||||||||
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Less
accumulated depreciation and amortization
|
(12,443 | ) | (12,676 | ) | ||||||
|
Total
property, plant and equipment
|
$ | 5,778 | $ | 5,838 | ||||||
|
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Property,
plant and equipment include 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 June 30, 2009 and December 31, 2008, accumulated amortization
on the building amounted to approximately $2,093,000 and $2,040,000,
respectively. Amortization expense amounted to $35,000 and $70,000 for the
three and six month periods ended June 30, 2009 and 2008, respectively.
The associated current and long-term liabilities are discussed in Note 5,
Long-term debt, of the consolidated financial statements. Depreciation
expense for the three months ended June 30, 2009 and 2008 amounted to
$106,000 and $105,000, respectively and $208,000 and $207,000 for the six
month periods ended June 30, 2009 and 2008, respectively. 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.
|
| 5. |
Long-Term
Debt
|
||||||||||
| June 30, | December 31, | ||||||||||
|
2009
|
2008
|
||||||||||
|
($000's
omitted)
|
|||||||||||
|
Industrial
Development Revenue Bonds; secured by an equivalent
|
|||||||||||
|
letter
of credit from a bank with interest payable monthly
|
|||||||||||
|
at
a floating rate (0.55% at June 30, 2009) (A)
|
$ | 3,470 | $ | 3,470 | |||||||
|
Term
loan payable to a financial institution;
|
|||||||||||
|
interest
at LIBOR plus 2%, (3.21% at June 30, 2009);
|
|||||||||||
|
quarterly
principal payments of $26,786 through the
|
|||||||||||
|
fourth
quarter of 2011
|
268 | 321 | |||||||||
|
Term
loan payable to a financial institution;
|
|||||||||||
|
interest
at LIBOR plus 2%, not to exceed 6.00% (3.21% at
|
|||||||||||
|
June
30, 2009); quarterly principal payments
|
|||||||||||
|
of
$17,500; payable in full in the fourth quarter
|
|||||||||||
|
of
2009; partially secured by equipment
|
185 | 220 | |||||||||
|
Secured
term loan payable to a government agency;
|
|||||||||||
|
monthly
payments of $1,950 including interest
|
|||||||||||
|
fixed
at 3% payable through fourth quarter of 2015
|
136 | 146 | |||||||||
|
Secured
term loan payable to a government agency;
|
|||||||||||
|
monthly
principal payments of approximately $1,800 with
|
|||||||||||
|
interest
waived payable through second quarter of 2012
|
73 | 84 | |||||||||
| 4,132 | 4,241 | ||||||||||
|
Less
current portion
|
(504 | ) | (539 | ) | |||||||
| $ | 3,628 | $ | 3,702 | ||||||||
|
|
(A)
The 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, 2009
and December 31, 2008.
|
|
|
Certain
lenders require the Company to comply with debt covenants as described in
the specific loan documents, including a debt service ratio. At June 30,
2009 and December 31, 2008, the Company was in compliance with all of its
debt covenants.
|
|
6.
|
Income
Taxes
|
|
|
In
June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position,
taken or expected to be taken, in a tax return. The Company adopted FIN 48
as of the beginning of 2007 and the adoption of FIN 48 did not have a
material impact on its consolidated financial statements. The Company did
not have any unrecognized tax benefits or obligations as of June 30, 2009
and December 31, 2008.
|
|
|
If
interest and penalties would need to be accrued related to unrecognized
tax obligations, it is the Company’s policy to recognize interest and
penalties accrued related to unrecognized tax obligations as a component
of income taxes. The Company and/or its subsidiaries file income tax
returns in the United States federal jurisdiction, New York State and
Pennsylvania. The Company is no longer subject to U.S. federal, state and
local income tax examinations by tax authorities for years before
2004.
|
|
|
In
May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 Definition
of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1
provides guidance on how to determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized
tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2008.
The implementation of this standard did not have a material impact on the
Company’s consolidated financial position or results of
operations.
|
|
|
During
the second quarter of 2007, the Internal Revenue Service (IRS) commenced
an examination of the Company’s U.S. income tax return for the year 2005.
In the third quarter of 2007, the IRS examination was completed and
settled resulting in a $3,000 refund to the
Company.
|
|
7.
|
Common
Shareholders’ Equity
|
|
|
($000’s
omitted)
|
||||||||||||||||
|
Common stock
|
Accumulated
|
||||||||||||||||
|
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, 2008
|
2,614,506
|
$523
|
$13,296
|
$8,680
|
($1,614)
|
($2,718)
|
($98)
|
$18,069
|
|||||||||
|
Net
income
|
-
|
-
|
-
|
835
|
-
|
-
|
-
|
835
|
|||||||||
|
Purchase
of treasury shares
|
-
|
-
|
-
|
-
|
-
|
(6)
|
-
|
(6)
|
|||||||||
|
Cash
dividend
|
-
|
-
|
-
|
(336)
|
46
|
-
|
-
|
(290)
|
|||||||||
|
Balance
June 30, 2009
|
2,614,506
|
$523
|
$13,296
|
$9,179
|
($1,568)
|
($2,724)
|
($98)
|
$18,608
|
|||||||||
|
|
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. On October 31, 2008, the
Company announced that its Board of Directors authorized the purchase of
an additional 200,000 shares of the Company’s common stock under the
Company’s current purchase program. As of June 30, 2009, the Company has
purchased 238,088 shares and there remain 211,912 shares available to
purchase under this program.
|
|
|
As
previously reported, on April 1, 2009, the Company announced that its
Board of Directors declared a $0.15 per share cash dividend. The dividend
was paid on May 15, 2009 to shareholders of record on April 20, 2009 and
was approximately $336,000 in the aggregate. This second consecutive
annual dividend does not represent that the Company will pay dividends on
a regular or scheduled basis.
|
|
|
Earnings
Per Share
|
|
|
Basic
earnings per share is computed by dividing net earnings by the weighted
average number of shares outstanding during the period. Diluted earnings
per share is 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
|
Six
Months Ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
($000’s
omitted
|
||||||||||||||||
|
except
per share data)
|
||||||||||||||||
|
Net
income
|
$ | 710 | $ | 588 | $ | 835 | $ | 1,441 | ||||||||
|
Weighted
average common shares
|
||||||||||||||||
|
outstanding
(basic)
|
1,933 | 1,936 | 1,933 | 1,935 | ||||||||||||
|
Incremental
shares from assumed
|
||||||||||||||||
|
conversions
of stock options
|
143 | 206 | 122 | 207 | ||||||||||||
|
Weighted
average common
|
||||||||||||||||
|
shares
outstanding (diluted)
|
2,076 | 2,142 | 2,055 | 2,142 | ||||||||||||
|
Basic
|
||||||||||||||||
|
Net
income per share
|
$ | 0.37 | $ | 0.3 | $ | 0.43 | $ | 0.74 | ||||||||
|
Diluted
|
||||||||||||||||
|
Net
income per share
|
$ | 0.34 | $ | 0.27 | $ | 0.41 | $ | 0.67 | ||||||||
|
8.
|
Commitments
|
|
|
The
Company leases certain equipment pursuant to operating lease arrangements.
Total rental expense in the six month periods ended June 30, 2009 and 2008
and future minimum payments under such leases are not material to the
consolidated financial statements.
|
|
9.
|
Litigation
|
|
|
There
are no legal proceedings which are material to the Company currently
pending by or against the Company other than ordinary routine litigation
incidental to the business which is not expected to materially adversely
affect the business or earnings of the
Company.
|
|
10.
|
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 the ATG involve the design, manufacture, and marketing of
servo-control components (i.e., torque motors, 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 various government agencies. The
Company derives its primary sales revenue from domestic customers,
although a portion of finished products are for foreign end
use.
|
|
|
Information
regarding the Company’s operations in these segments is summarized as
follows
|
|
|
($000’s
omitted):
|
|
Advanced
Technology
|
Consumer
Products
|
|||||||||||||||||||||||
|
Group
|
Group
|
Consolidated
|
||||||||||||||||||||||
|
Six
months ended
|
Six
months ended
|
Six
months ended
|
||||||||||||||||||||||
|
June
30,
|
June
30,
|
June
30,
|
||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
|
Revenues
from unaffiliated customers
|
$ | 8,959 | $ | 9,894 | $ | 7,685 | $ | 6,823 | $ | 16,644 | $ | 16,717 | ||||||||||||
|
Profit
|
$ | 1,928 | $ | 2,740 | $ | 115 | $ | 320 | 2,043 | 3,060 | ||||||||||||||
|
Interest
expense
|
$ | (39 | ) | $ | (78 | ) | $ | (4 | ) | $ | (9 | ) | (43 | ) | (87 | ) | ||||||||
|
Depreciation
and amortization
|
$ | (204 | ) | $ | (195 | ) | $ | (78 | ) | $ | (86 | ) | (282 | ) | (281 | ) | ||||||||
|
Other
income, net
|
$ | 38 | $ | 36 | $ | 2 | $ | 17 | 40 | 53 | ||||||||||||||
|
General
corporate expense
|
(505 | ) | (472 | ) | ||||||||||||||||||||
|
Income
before income tax provision
|
$ | 1,253 | $ | 2,273 | ||||||||||||||||||||
|
Capital
expenditures
|
$ | 131 | $ | 168 | $ | 87 | $ | 18 | $ | 218 | $ | 186 | ||||||||||||
|
June 30,
|
December 31,
|
June 30,
|
December 31,
|
June 30,
|
December 31,
|
|||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
|
Identifiable
assets
|
$ | 16,212 | $ | 16,688 | $ | 10,799 | $ | 10,197 | $ | 27,011 | $ | 26,885 | ||||||||||||
|
Advanced
Technology
|
Consumer
Products
|
|||||||||||||
|
Group
|
Group
|
Consolidated
|
||||||||||||
|
Three
months ended
|
Three
months ended
|
Three
months ended
|
||||||||||||
|
June
30,
|
June
30,
|
June
30,
|
||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||
|
Revenues
from unaffiliated customers
|
$ | 4,446 | $ | 5,247 | $ | 4,660 | $ | 2,485 | $ | 9,106 | $ | 7,732 | ||||||||||||
|
Profit
(loss)
|
$ | 930 | $ | 1,638 | $ | 540 | $ | (308 | ) | $ | 1,470 | $ | 1,330 | |||||||||||
|
Interest
expense
|
$ | (18 | ) | $ | (36 | ) | $ | (1 | ) | $ | (4 | ) | (19 | ) | (40 | ) | ||||||||
|
Depreciation
and amortization
|
$ | (104 | ) | $ | (98 | ) | $ | (39 | ) | $ | (43 | ) | (143 | ) | (141 | ) | ||||||||
|
Other
income, net
|
$ | 9 | $ | 8 | $ | 2 | $ | 7 | 11 | 15 | ||||||||||||||
|
General
corporate expense
|
(252 | ) | (236 | ) | ||||||||||||||||||||
|
Income
before income
tax provision
|
$ | 1,067 | $ | 928 | ||||||||||||||||||||
|
Capital
expenditures
|
$ | 31 | $ | 66 | $ | 63 | $ | 1 | $ | 94 | $ | 67 |
|
11.
|
Other
Income
|
|
|
Components
of other income include interest income on cash and cash equivalents, and
other minor amounts not directly related to the sale of the Company’s
products.
|
|
12.
|
Subsequent
Events
|
|
|
These
financial statements have not been updated for subsequent events occurring
after August 12, 2009 which is the date these financial statements were
available to be issued.
|
|
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
Management
Discussion
|
|
|
During
the three months ended June 30, 2009 and 2008 approximately 56% and
37%, respectively and 50% and 43%, for the six months ended June 30,
2009 and 2008 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 believes that government involvement
in military operations overseas will continue to have an impact on the
Company’s revenues. 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, the effects of
terrorism and the threat of terrorism, market demand and acceptance both
for the Company’s products and its customers’ products which incorporate
Company-made components.
|
|
|
The
Company’s Advanced Technology Group’s revenue decreased approximately
$801,000 and $935,000 for the three and six months ended June 30,
2009, respectively, compared to the same periods in 2008 due to
stretch-outs of customer orders across various product lines and, to a
lesser extent, cancellations. The ATG continues its aggressive business
development efforts in its primary markets and is broadening its focus to
include new domestic and foreign markets that are consistent with its core
competencies. There are substantial uncertainties in the current Global
Economy that are compounded with certain Airliner delivery stretch-outs
being implemented which in turn are adversely affecting the Company’s
sales revenues in 2009. Although the ATG backlog continues to be
significant, actual scheduled shipments may be delayed as a function of
the Company’s customers’ delivery determinations that are affected by
changes in the Global Economy and other
factors.
|
|
|
The
Company’s Consumer Products Group’s (CPG) revenue increased
approximately $2,175,000 and $862,000 for the three and six months
ended June 30, 2009, respectively, compared to the same periods in 2008
primarily because of shipments under several significant government
contracts. The Company’s Consumer Products Group (CPG) develops new
commercial products and products for Government and Military applications.
Included in the significant uncertainties in the near and long term are
the effects of the current recession and the difficulty to accurately
project the net effect of the change in the U.S. Administration on the
government’s procurement programs. Approximately 69% and 62% of the CPG’s
revenues are derived from contracts with agencies of the U.S. Government
or their prime contractors for the three and six months ended June 30,
2009, respectively.
|
|
|
See
also Note 10, Business Segments, of the accompanying consolidated
financial statements for information concerning business segment operating
results.
|
|
|
Results
of Operations
|
|
|
The
following tables compare the Company’s statements of operations data for
the six and three months ended June 30, 2009 and 2008 ($000’s
omitted).
|
|
Six Months Ended
June
30,
|
||||||||||||||||||||||||
|
2009 vs. 2008
|
||||||||||||||||||||||||
|
2009
|
|
2008
|
|
Dollar
|
%
Increase
|
|||||||||||||||||||
|
Dollars
|
% of Sales
|
Dollars
|
% of Sales
|
Change
|
(Decrease)
|
|||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||
|
Advanced
Technology
|
$ | 8,959 | 53.8 | % | $ | 9,894 | 59.2 | % | $ | (935 | ) | (9.5 | %) | |||||||||||
|
Consumer
Products
|
7,685 | 46.2 | % | 6,823 | 40.8 | % | 862 | 12.6 | % | |||||||||||||||
| 16,644 | 100.0 | % | 16,717 | 100.0 | % | (73 | ) | (0.4 | %) | |||||||||||||||
|
Cost
of sale, exclusive of depreciation
|
||||||||||||||||||||||||
|
and
amortization
|
12,756 | 76.6 | % | 12,085 | 72.3 | % | 671 | 5.6 | % | |||||||||||||||
|
Gross
profit
|
3,888 | 23.4 | % | 4,632 | 27.7 | % | (744 | ) | (16.1 | %) | ||||||||||||||
|
Selling,
general and administration
|
2,350 | 14.1 | % | 2,044 | 12.2 | % | 306 | 15.0 | % | |||||||||||||||
|
Depreciation
and amortization
|
282 | 1.7 | % | 281 | 1.7 | % | 1 | 0.4 | % | |||||||||||||||
|
Total
costs and expenses
|
15,388 | 92.4 | % | 14,410 | 86.2 | % | 978 | 6.8 | % | |||||||||||||||
|
Operating
income
|
1,256 | 7.6 | % | 2,307 | 13.8 | % | (1,051 | ) | (45.6 | %) | ||||||||||||||
|
Interest
expense
|
43 | 0.3 | % | 87 | 0.5 | % | (44 | ) | (50.6 | %) | ||||||||||||||
|
Other
income, net
|
(40 | ) | (0.2 | %) | (53 | ) | (0.3 | %) | 13 | (24.5 | %) | |||||||||||||
|
Income
tax provision
|
418 | 2.5 | % | 832 | 5.0 | % | (414 | ) | (49.8 | %) | ||||||||||||||
|
Net
income
|
$ | 835 | 5.0 | % | $ | 1,441 | 8.6 | % | $ | (606 | ) | (42.1 | %) | |||||||||||
|
Three
Months Ended June 30,
|
||||||||||||||||||||||||
| 2009 vs. 2008 | ||||||||||||||||||||||||
|
2009
|
|
2008
|
|
Dollar
|
%
Increase
|
|||||||||||||||||||
|
Dollars
|
% of Sales
|
Dollars
|
% of Sales
|
Change
|
(Decrease)
|
|||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||
|
Advanced
Technology
|
$ | 4,446.00 | 48.8 | % | $ | 5,247 | 67.9 | % | $ | (801 | ) | (15.3 | %) | |||||||||||
|
Consumer
Products
|
4,660 | 51.2 | % | 2,485 | 32.1 | % | 2,175 | 87.5 | % | |||||||||||||||
| 9,106 | 100.0 | % | 7,732 | 100.0 | % | 1,374 | 17.8 | % | ||||||||||||||||
|
Cost
of sale, exclusive of depreciation
|
||||||||||||||||||||||||
|
and
amortization
|
6,617 | 72.7 | % | 5,617 | 72.6 | % | 1,000 | 17.8 | % | |||||||||||||||
|
Gross
profit
|
2,489 | 27.3 | % | 2,115 | 27.4 | % | 374 | 17.7 | % | |||||||||||||||
|
Selling,
general and administration
|
1,271 | 14.0 | % | 1,021 | 13.2 | % | 250 | 24.5 | % | |||||||||||||||
|
Depreciation
and amortization
|
143 | 1.6 | % | 141 | 1.8 | % | 2 | 1.4 | % | |||||||||||||||
|
Total
costs and expenses
|
8,031 | 88.3 | % | 6,779 | 87.6 | % | 1,252 | 18.5 | % | |||||||||||||||
|
Operating
income
|
1,075 | 11.7 | % | 953 | 12.4 | % | 122 | 12.8 | % | |||||||||||||||
|
Interest
expense
|
19 | 0.2 | % | 40 | 0.5 | % | (21 | ) | (52.5 | %) | ||||||||||||||
|
Other
income, net
|
(11 | ) | (0.1 | %) | (15 | ) | (0.2 | %) | 4 | (26.7 | %) | |||||||||||||
|
Income
tax provision
|
357 | 3.9 | % | 340 | 4.4 | % | 17 | 5.0 | % | |||||||||||||||
|
Net
income
|
$ | 710 | 7.7 | % | $ | 588 | 7.7 | % | $ | 122 | 20.7 | % | ||||||||||||
|
|
As
shown in the above table, gross profit for the three month period ended
June 30, 2009 increased while gross profit for the six month period ended
June 30, 2009 decreased as compared to the same three and six month
periods in 2008. The primary reason for the variations in gross profit was
the mix of products sold at the CPG. The current mix of
products sold in the period within the ATG and CPG segments as well as the
composition of ATG and CPG sales to the total consolidated sales directly
attributed to dollar value and percentage variations in gross
profit.
|
|
|
Selling,
General and Administrative Expenses
|
|
|
Selling,
general and administrative (SG&A) expenses that include variable costs
increased for the three and six month periods ended June 30, 2009 as
compared to the same three and six month periods in 2008. The increase in
SG&A includes increased expenses relative to contract/ product
administration/negotiations, product protection (i.e., trademarks,
patents) and other costs associated with the expansion of the ATG and CPG
foreign and domestic markets. The trend is for SG&A expenses to
increase as a function of increased regulations, market expansion, company
growth and the continued implementation of the Sarbanes-Oxley
Act.
|
|
|
Interest
Expense
|
|
|
Interest
expense decreased for the three and six month periods ended June 30, 2009
compared to the same periods in 2008 due to the decrease in average
outstanding debt and interest rates. Average debt outstanding will
continue to decline as the Company repays its scheduled debt obligations
and assuming the Company does not incur additional debt. See also Note 5,
Long-Term Debt, of the accompanying consolidated financial statements for
information on long-term debt.
|
|
|
Depreciation
and Amortization Expense
|
|
|
Depreciation
and amortization expense remained consistent for the three and six month
periods ended June 30, 2009 compared to the same periods in 2008.
Depreciation expense fluctuates due to variable estimated useful lives of
depreciable property (as identified in Note 2, Summary of Significant
Accounting Policies, of the accompanying consolidated financial
statements) as well as the amount and nature of capital expenditures in
current and previous periods. It is anticipated that the Company’s future
capital expenditures will, at a minimum, follow the Company’s requirements
to support its delivery commitments and to meet the information technology
related capital expenditure requirements that are associated with
Sarbanes-Oxley and other new regulatory
requirements.
|
|
|
Other
Income
|
|
|
Components
of other income include interest income on cash and cash equivalents, and
other amounts not directly related to the sale of the Company’s products.
The decrease in other income for the three and six month periods ended
June 30, 2009 when compared to the same three and six month periods in
2008 is due to the decline in market driven interest rates on cash
and cash equivalents.
|
|
|
Income
Taxes
|
|
|
The
Company’s effective tax rate was 33.4% for the six months ended June 30,
2009 as compared to 36.6% for the six month period ended June 30, 2008.
The effective tax rate in both periods reflects state income taxes,
permanent non-deductible expenditures and the tax benefit for the domestic
manufacturing deduction allowable under the American Jobs Creation Act of
2004 as well as a reduction in New York State’s statutory tax rate and
apportioned income. See also Note 6, Income Taxes, of the consolidated
financial statements for information concerning income
tax.
|
|
|
Net
Income
|
|
|
Net
income for the three month period ended June 30, 2009 increased $122,000
or 20.7% and decreased $606,000 or 42.1% for the six month period
ended June 30, 2009 when compared to net income for the same two periods
ended June 30, 2008. These period to period differences in net income are
primarily attributable to decreased sales at ATG offset by increased
sales at the CPG in the second quarter of 2009. Also, affecting net income
were increases in selling, general and administrative expenses and changes
in gross margin as the result of product mix in the respective
periods.
|
|
|
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, tax payments and principal
and interest payments on debt.
|
|
|
At
June 30, 2009, the Company had working capital of approximately
$16,757,000 of which approximately $3,136,000 was comprised of cash and
cash equivalents. The Company used approximately $904,000 in cash from
operations during the six months ended June 30, 2009 as compared to
generating $487,000 during the six months ended June 30, 2008. The primary
uses of cash for the Company’s operating activities for the six months
ended June 30, 2009 were for increases in inventory and accounts
receivable and payments to vendors aggregating
$2,353,000.
|
|
|
The
Company’s primary use of cash in its financing and investing activities in
the first six months of 2009 related to capital expenditures for equipment
and principal payments on long-term debt as well as approximately $336,000
for a cash dividend paid on May 15, 2009 to shareholders of record on
April 20, 2009.
|
|
|
At
June 30, 2009, there are no material commitments for capital
expenditures.
|
|
|
The
Company also has a $1,000,000 line of credit on which there is no balance
outstanding at June 30, 2009. If needed, this can be used to fund cash
flow requirements.
|
|
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
|
|
The
Company is a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and is not required to provide the information required under
this item.
|
|
Item
4T.
|
CONTROLS
AND PROCEDURES
|
|
|
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 June 30, 2009.
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.
|
|
|
Changes
in Internal Controls
|
|
|
During
the six month period ended June 30, 2009, there were no changes in
internal controls over financial reporting that have materially affected,
or are reasonably likely to affect, the Company’s internal control over
financial reporting.
|
|
Item
1.
|
LEGAL
PROCEEDINGS
|
|
|
None.
|
|
Item
1A.
|
RISK
FACTORS
|
|
|
The
Company is a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and is not required to provide the information required under
this item.
|
|
Item
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
|
2009
Periods
|
Total
Number of Shares Purchased
|
Average
Price $ Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number of Shares that may yet be Purchased under the Plans or
Programs
|
|
January
1– March 31, 2009
|
-
|
-
|
-
|
212,855
|
|
April
1 – June 30, 2009
|
943
|
6.34
|
943
|
211,912
|
|
Total
|
943
|
6.34
|
943
|
211,912
|
|
|
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. On October 31, 2008, the
Company announced that its Board of Directors authorized the purchase of
an additional 200,000 shares of the Company’s common stock under the
Company’s current purchase program. As of April 30, 2009, the Company has
purchased 238,088 shares and there remain 211,912 shares available to
purchase under this program
|
|
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
|
|
|
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.
|
| SERVOTRONICS, INC. | |||
|
Date:
August 12, 2009
|
By:
|
/s/ Cari L. Jaroslawsky, Chief Financial Officer | |
| Cari L. Jaroslawsky | |||
| Chief Financial Officer | |||
|
|
By:
|
/s/ Dr. Nicholas D. Trbovich, Chief Executive Officer | |
| Dr. Nicholas D. Trbovich | |||
| Chief Executive Officer | |||