SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
-- ACT OF 1934
For the quarterly period ended June 30, 2007
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
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(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
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at July 31, 2007
---------------------------- ----------------------------
Common Stock, $.20 par value 1,907,734
Transitional Small Business Disclosure Format (Check one):
Yes ; No X
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- 1 -
INDEX
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PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited)
a) Consolidated balance sheet, June 30, 2007 3
b) Consolidated statement of operations for the three and six months ended
June 30, 2007 and 2006 4
c) Consolidated statement of cash flows for the six months ended
June 30, 2007 and 2006 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 16
Signatures 17
- 2 -
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
($000's omitted except per share data)
(Unaudited)
June 30, 2007
-------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,102
Accounts receivable 4,518
Inventories 7,717
Deferred income taxes 545
Other assets 721
------------
Total current assets 17,603
Property, plant and equipment, net 5,788
Other non-current assets 308
------------
$ 23,699
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 384
Accounts payable 1,951
Accrued employee compensation and benefit costs 1,575
Accrued income taxes 168
Other accrued liabilities 297
------------
Total current liabilities 4,375
Long-term debt 4,523
Deferred income taxes 515
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; issued 2,614,506 shares;
outstanding 1,907,734 shares 523
Capital in excess of par value 13,033
Retained earnings 5,345
Accumulated other comprehensive loss (278)
------------
18,623
Employee stock ownership trust commitment (1,933)
Treasury stock, at cost 335,404 shares (2,404)
------------
Total shareholders' equity 14,286
------------
$ 23,699
============
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 Six Months Ended
June 30, June 30,
2007 2006 2007 2006
--------- --------- --------- ---------
Revenues $ 8,374 $ 6,730 $ 14,904 $ 12,166
Costs, expenses:
Cost of goods sold, exclusive of depreciation 6,477 5,207 11,594 9,332
Selling, general and administrative 1,011 1,005 1,922 1,891
Interest 64 65 126 126
Depreciation and amortization 141 174 280 346
Other income, net (37) (130) (71) (372)
--------- --------- --------- ---------
7,656 6,321 13,851 11,323
--------- --------- --------- ---------
Income before income tax provision 718 409 1,053 843
Income tax provision 279 151 410 312
--------- --------- --------- ---------
Net income $ 439 $ 258 $ 643 $ 531
========= ========= ========= =========
Income per share:
Basic
-----
Net income per share $ 0.23 $ 0.13 $ 0.33 $ 0.26
========= ========= ========= =========
Diluted
-------
Net income per share $ 0.21 $ 0.12 $ 0.30 $ 0.25
========= ========= ========= =========
See notes to consolidated financial statements
- 4 -
SERVOTRONICS, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
($000's omitted)
(Unaudited)
Six Months Ended
June 30,
2007 2006
--------- ---------
CASH FLOWS RELATED TO OPERATING ACTIVITIES:
Net income $ 643 $ 531
Adjustments to reconcile net income to net
cash provided by (used in) operating activities -
Depreciation and amortization 280 346
Receipt of treasury shares - (160)
Change in assets and liabilities -
Accounts receivable (292) (466)
Inventories (856) (656)
Other assets (158) 242
Other non-current assets 91 104
Accounts payable 746 22
Accrued employee compensation and benefit costs 486 (19)
Accrued income taxes 121 (306)
Other accrued liabilities (23) 291
--------- ---------
Net cash provided by (used in) operating activities 1,038 (71)
--------- ---------
CASH FLOWS RELATED TO INVESTING ACTIVITIES:
Capital expenditures - property, plant and
equipment (129) (180)
--------- ---------
Net cash used in investing activities (129) (180)
--------- ---------
CASH FLOWS RELATED TO FINANCING ACTIVITIES:
Principal payments on long-term debt (107) (107)
Purchase of treasury shares (804) (884)
--------- ---------
Net cash used in financing activities (911) (991)
--------- ---------
Net decrease in cash and cash equivalents (2) (1,242)
Cash and cash equivalents at beginning of period 4,104 4,637
--------- ---------
Cash and cash equivalents at end of period $ 4,102 $ 3,395
========= ==========
See notes to consolidated financial statements
- 5 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 six months ending June 30,
2007 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2007. 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 intercompany
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, combined New York
and standalone Pennsylvania 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. The Company has determined that no impairment of long-lived
assets existed at June 30, 2007 and 2006.
Use of estimates
----------------
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.
Research and development costs
------------------------------
Research and development costs are expensed as incurred as defined in SFAS
No. 2, "Accounting for Research and Development Costs."
Reclassifications
-----------------
Certain balances as of June 30, 2006 were reclassified to conform with
classifications adopted in the current year.
New accounting pronouncements
-----------------------------
In June 2006, the FASB issued Interpretation No. 48 ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES, an interpretation of SFAS109 ACCOUNTING FOR INCOME
TAXES (FIN 48), to create a single model to address accounting for uncertain tax
positions. FIN 48 clarifies the accounting for income taxes, by prescribing a
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company has adopted FIN 48 as of
January 1, 2007, as required. The adoption of FIN 48 did not have a material
impact on the Company's financial position and results of operations. See Note 7
to the consolidated financial statements.
- 7 -
Other recently issued FASB Statements or Interpretations, SEC Staff
Accounting Bulletins, and AICPA Emerging Issue Task Force Consensuses have
either been implemented or are not applicable to the Company.
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 effects of terrorism, including the
threat 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.
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.
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.
3. Inventories
-----------
June 30, 2007
---------------
($000's omitted)
Raw materials and common parts $ 3,041
Work-in-process 3,770
Finished goods 978
---------
7,789
Less common parts expected to be used after one year
(classified as long-term) (72)
---------
$ 7,717
=========
4. Property, plant and equipment
-----------------------------
June 30, 2007
($000's omitted)
Land $ 25
Buildings 6,557
Machinery, equipment and tooling 11,067
---------
17,649
Less accumulated depreciation and amortization (11,861)
---------
$ 5,788
=========
- 8 -
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 June 30, 2007, accumulated amortization on the building
amounted to approximately $1,800,000. The associated current and long-term
liabilities are discussed in Note 5 to the consolidated financial statements.
Depreciation expense for the three months ended June 30, 2007 amounted to
$280,000 and $346,000 for the same period in 2006. 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.
5. Long-term debt
--------------
June 30, 2007
---------------
($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 (3.93% at June 30, 2007) (A) $ 3,810
Term loan payable to a financial institution;
interest at LIBOR plus 2%, not to exceed 6.00% (6.00% at
June 30, 2007); quarterly principal payments of
$17,500; payable in full in the fourth quarter
of 2009, partially secured by equipment 325
Term loan payable to a financial institution;
interest at LIBOR plus 2% (7.24% at June 30, 2007);
quarterly principal payments of $26,786 through the
fourth quarter of 2011 482
Secured term loan payable to a government agency;
monthly payments of approximately $1,455 with
interest waived payable through second quarter of 2012 116
Secured term loan payable to a government agency;
monthly payments of $1,950 including interest
fixed at 3% payable through fourth quarter of 2015 174
----------
4,907
Less current portion (384)
----------
$ 4,523
==========
(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 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 is no
balance outstanding at June 30, 2007.
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, 2007, the Company was in compliance with all of its debt covenants.
- 9 -
6. Employee benefit plans
----------------------
During the fourth quarter of 2006, the Company gave notice of its intent to
terminate its qualified defined benefit plans with a proposed termination date
of October 31, 2006. The termination is expected to be settled during 2007.
During the six months ended June 30, 2007, the Company has accrued approximately
$250,000 of expenses related to the plan settlement in 2007. Benefits expected
to be paid in the form of annuity and lump sum payments are approximately
$560,000 in 2007, which will be disbursed from the plans' funded assets. No
additional Company contributions are anticipated in 2007.
7. 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. It is the
Company's policy to recognize interest and penalties accrued related to
unrecognized tax benefits in 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 2003.
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, 2007. The implementation of
this standard did not have a material impact on our 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. The Company anticipates that the current IRS examination will be
effectively settled within the next twelve months. An estimate of the range of
the reasonably possible change to tax benefits recognized or unrecognized that
may occur as a result of the anticipated settlement cannot be made.
8. Common shareholders' equity
---------------------------
Common stock ($000's omitted)
------------
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, 2006 2,614,506 $523 $13,033 $4,703 ($ 1,933) ($ 1,600) ($ 278) $ 14,448
--------- ---- ------- ------ --------- --------- -- ---- --------
Net income - - - 643 - - - 643
Purchase of
treasury shares - - - - - (804) - (804)
Other - - - (1) - - - (1)
Balance June 30, 2007 2,614,506 $523 $13,033 $5,345 ($1,933) ($ 2,404) ($ 278) $ 14,286
=== ==== ========= ==== ======= ====== ======= ======== ======= =========
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 June 30, 2007, the Company
has purchased 194,357 shares for a total of $1,721,896 under this program.
- 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 Six Months Ended
June 30, June 30,
2007 2006 2007 2006
---- ---- ---- ----
($000's omitted except per share data)
Net income $ 439 $ 258 $ 643 $ 531
====== ====== ======= ======
Weighted average common shares
outstanding (basic) 1,941 1,979 1,960 2,032
Incremental shares from assumed
conversions of stock options 169 135 167 135
------ ------ ------- ------
Weighted average common
shares outstanding (diluted) 2,110 2,114 2,127 2,167
====== ====== ======= ======
Basic
-----
Net income per share $ 0.23 $ 0.13 $ 0.33 $ 0.26
====== ====== ======= ======
Diluted
-------
Net income per share $ 0.21 $ 0.12 $ 0.30 $ 0.25
====== ====== ======= ======
9. 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. 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 the government. 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,
2007 2006 2007 2006 2007 2006
-------- -------- -------- -------- -------- --------
Revenues from unaffiliated customers $ 8,386 $ 7,509 $ 6,518 $ 4,657 $ 14,904 $ 12,166
======== ======== ======== ======== ======== ========
Profit (loss) $ 1,871 $ 1,676 $ (150) $ (361) $ 1,721 $ 1,315
======== ======== ======== ========
Interest expense $ (114) $ (112) $ (12) $ (14) (126) (126)
======== ======== ======== ========
Depreciation and amortization $ (193) $ (256) $ (87) $ (90) (280) (346)
======== ======== ======== ========
Other income, net $ 58 $ 289 $ 13 $ 84 71 373
======== ======== ======== ========
General corporate expense (333) (373)
-------- --------
Income before income tax provision $ 1,053 $ 843
======== ========
- 11 -
Advanced Technology Consumer Products
Group Group Consolidated
----- ----- ------------
Three months ended Three months ended Three months ended
June 30, June 30, June 30,
2007 2006 2007 2006 2007 2006
-------- -------- -------- -------- -------- --------
Revenues from unaffiliated customers $ 4,456 $ 4,033 $ 3,918 $ 2,697 $ 8,374 $ 6730
======== ======== ======== ======== ======== ========
Profit (loss) $ 946 $ 851 $ 106 $ (146) $ 1,052 $ 705
======== ======== ======== ========
Interest expense $ (58) $ (58) $ (6) $ (7) (64) (65)
======== ======== ======== ========
Depreciation and amortization $ (97) $ (128) $ (44) $ (46) (141) (174)
======== ======== ======== ========
Other income, net $ 30 $ 57 $ 7 $ 73 37 130
======== ======== ======== ========
General corporate expense (166) (187)
-------- --------
Income before income tax provision $ 718 $ 409
======== ========
10. 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------- ---------------------------------------------------------
Management Discussion
---------------------
During the six month period ended June 30, 2007 and for the comparable
period ended June 30, 2006, approximately 41% and 32% 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 increased approximately
$2,100,000 when comparing the results of 2007 to 2006 primarily due to increased
shipments on previously reported contracts for CPG developed products. 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, 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 Aerospace Industry Association (AIA) stated that the civil aircraft
sector was particularly strong and that, based on the current backlog of
commercial aircraft orders and otherwise, they believe this upward trend will
continue in 2007. The Company's Advanced Technology Group's revenue for the six
month period ended June 30, 2007 reflects this upward trend and the Company
anticipates, based on the ATG's current forecast, that the ATG's shipments
should remain strong for 2007.
The Company's Consumer Products Group has developed products for government
and military applications. Forecasted procurements for certain of these items
are forming the basis for projected deliveries in 2007. Procurement proposals
and product development activities are ongoing. As previously reported, in the
first quarter of 2007, the CPG received two significant contracts for CPG
developed products for the military. The contracts amount to approximately
$4,000,000 and require deliveries in 2007 and into 2008.
See also Note 9 to the consolidated financial statements for information
concerning business segment operating results.
- 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
revenues and the period to period dollar ($000's omitted) and percentage
increase or decrease of such items as compared to the indicated prior period.
Certain balances for the three and six month periods ended June 30, 2006 were
reclassified to conform with classifications adopted in the current year.
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 six months ended increase increase
June 30, (decrease) (decrease) June 30, (decrease) (decrease)
2007 2006 07-06 07-06 2007 2006 07-06 07-06
---- ---- ----- ----- ---- ---- ----- -----
Revenues
Advanced Technology Group 53.2% 59.9% $ 423 10.5% 56.3% 61.7% $ 877 11.7%
Consumer Products Group 46.8 40.1 1,221 45.3 43.7 38.3 1,861 40.0
---- ---- ----- ----- ---- ---- ----- -----
100.0 100.0 1,644 24.4 100.0 100.0 2,738 22.5
Cost of goods sold, exclusive of
depreciation 77.3 77.4 1,270 24.4 77.8 76.7 2,262 24.2
---- ---- ----- ----- ---- ---- ----- -----
Gross profit 22.7 22.6 374 24.6 22.2 23.3 476 16.8
---- ---- ----- ----- ---- ---- ----- -----
Selling, general and administrative 12.1 14.9 6 0.6 12.9 15.5 31 1.6
Interest 0.8 1.0 (1) (1.5) 0.8 1.0 0 0.0
Depreciation and amortization 1.7 2.6 (33) (19.0) 1.9 2.8 (66) (19.1)
Other income, net (0.4) (1.9) 93 (71.5) (0.5) (3.1) 301 (80.9)
---- ---- ----- ----- ---- ---- ----- -----
14.2 16.6 65 5.8 15.1 16.2 266 13.4
Income before income tax provision 8.5 6.0 309 75.6 7.1 7.1 210 24.9
Income tax provision 3.3 2.2 128 84.8 2.8 2.7 98 31.4
---- ---- ----- ----- ---- ---- ----- -----
Net income 5.2% 3.8% $ 181 70.2% 4.3% 4.4% $ 112 21.1%
---- ---- ----- ----- ---- ---- ----- -----
The Company's consolidated revenues increased approximately $2,738,000 for
the six month period ended June 30, 2007 and $1,644,000 for the three month
period ended June 30, 2007 when compared to the same six and three month periods
in 2006. The increase in revenue is the result of increased shipments for
commercial applications as well as continued strong demand for government
products at the ATG as well as increased government related shipments of CPG
products under existing contracts.
Gross profit for the six and three month periods ended June 30, 2007
increased by 16.8% and 24.6% as compared to the same six and three month periods
in 2006. Increased sales volume is primarily the source for the dollar value
increase in gross profit. Gross profit as a percentage of sales is 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 U.S. generally accepted accounting principles (GAAP),
the expensing of preproduction and development costs as they are incurred.
Selling, general and administrative (SG&A) expenses that include variable
costs remained relatively consistent for the six and three month periods ended
June 30, 2007 when compared to the same six period in 2006. Expanded
sales/marketing activities at both the ATG and the CPG as well as costs
associated with the settlement of the Company's qualified defined benefit plans
contribute to fluctuations from period to period.
Interest expense remained relatively consistent for the six and three month
periods ended June 30, 2007 when compared to the same six and three month period
in 2006 despite increases in the market driven interest rates. Average debt
outstanding was lower and 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 to the consolidated financial statements for information
on long-term debt.
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Depreciation and amortization expense decreased approximately 19% for the
six and three month periods ended June 30, 2007 when compared to the same six
and three months period in 2006 due to variable estimated useful lives of
depreciable property (as identified in Note 2 to the consolidated financial
statements) as well as the amount of capital expenditures in current and
previous periods.
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 month period ended June 30,
2007 when compared to the same three month period in 2006 is primarily due to a
$204,000 partial payment of a recovery in 2006, as well as reclassification of
certain income/expense items for financial statement presentation. There was no
such recovery in 2007.
The Company's effective tax rate was 39% in 2007 and 37% in 2006 for both
the six and three month periods ended June 30, 2007. The effective tax rate in
both years reflects state income taxes, permanent non-deductible expenditures
and the tax benefit for extraterritorial sales as well as manufacturing
deductions allowable under the American Jobs Creation Act of 2004. See also Note
7 to the consolidated financial statements for information concerning income
tax.
Net income increased $112,000 and $181,000 when comparing the six and three
month periods ended June 30, 2007 to the same six and three months period in
2006. The increase in income is the result of increased sales at both the ATG
and CPG for products with favorable margins as well as cost containment
activities that directly affect the after-tax reported income.
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 June 30 2007, the Company had working capital of approximately
$13,200,000 of which $4,100,000 was comprised of cash and cash equivalents. Cash
provided by operations was $1,038,000 as compared to a use of cash of $71,000 in
the comparable period of 2006. The primary difference is attributed to the
timing of vendor payments and other accrued expenses related to employee
compensation.
At June 30, 2007, there are no material commitments for capital
expenditures.
The Company's primary use of cash in its financing and investing activities
in the first six months of 2007 related to capital expenditures for equipment,
principle payments on long-term debt and investment in treasury shares of
approximately $804,000. 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 June 30,
2007, the Company has purchased 194,357 shares under this program. The Company
has financed this purchase program through its cash reserves.
The Company also has a $1,000,000 line of credit on which there is no
balance outstanding at June 30, 2007. If needed, this can be used to fund cash
flow required for operations.
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 June 30, 2007. Based upon
that evaluation, the CEO and CFO concluded that the Company's disclosure
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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 three month period ended June 30, 2007, 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.
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 Purchasers
-----------------------------------------------------------------------
Total Number of
Shares Purchased as Maximum Number of
Total Number Part of Publicly Shares that may yet
of Shares Average Price $ Announced Plans or be Purchased under
Period Purchased Paid Per Share Programs the Plans or Programs
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
April 1 - 30, 2007 - - - 105,643
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
May 1 - 31, 2007 - - - 105,643
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
June 1 - 30, 2007 50,000 10.00 50,000 55,643
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
Total 50,000 10.00 50,000 55,643
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
Item 3. DEFAULTS UPON SENIOR SECURITIES
------- -------------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------
The annual meeting of shareholders of the Registrant was held on June 29,
2007. At the meeting, each of the four directors of the Registrant was elected
to serve until the next annual meeting of shareholders and until his successor
is elected and qualified. The following table shows the results of the voting at
the meeting.
Withheld
Name of Nominee For Authority
--------------- --- ---------
Dr. Nicholas D. Trbovich 1,483,840 28,353
Nicholas D. Trbovich, Jr. 1,482,238 29,955
Dr. William H. Duerig. 1,495,512 16,682
Donald W. Hedges 1,495,505 16,689
Item 5. OTHER INFORMATION
------- -----------------
None.
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Item 6. EXHIBITS
------- --------
10(A)(2) Amendment to employment contract for Dr. Nicholas D.
Trbovich, Chief Executive Officer
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.
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.
- 16 -
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 13, 2007
SERVOTRONICS, INC.
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
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