10QSB 1 tenq.txt 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ACT OF 1934 For the quarterly period ended September 30, 2002 __ 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 - 7109 SERVOTRONICS, INC. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 16-0837866 ------------------------------- -------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1110 Maple Street, Elma, New York 14059-0300 -------------------------------------------- (Address of principal executive offices) 716-655-5990 (Issuer's telephone number, including area code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X ; No ------ ------ State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at October 31, 2002 ------------------------------------ ------------------------------- Common Stock, $.20 par value 2,392,141 Transitional Small Business Disclosure Format (Check one): Yes ; No X ------ ------ - 1 -
INDEX ----- PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements a) Consolidated Balance Sheet, September 30, 2002 3 b) Consolidated Statement of Income for the Three and Nine Months Ended September 30, 2002 and 2001 4 c) Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 5 d) Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis or Plan of Operation 9 Item 3. Controls and Procedures 11 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K 11 Signatures 13 Certifications 14
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PART I FINANCIAL INFORMATION SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, 2002 ($000's omitted except per share data) (Unaudited) Assets Current assets: Cash $ 632 Accounts receivable 2,366 Inventories 7,235 Prepaid income taxes 97 Deferred income taxes 461 Other (See Note 1 to consolidated financial statements) 2,076 ------------ Total current assets 12,867 ------------ Property, plant and equipment, net 7,014 Other assets 566 ------------ $ 20,447 ============ Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 377 Demand loan 300 Accounts payable 483 Accrued employee compensation and benefit costs 952 Other accrued liabilities 178 Accrued income tax 58 ------------ Total current liabilities 2,348 ------------ Long-term debt 5,397 Deferred income taxes 384 Other non-current liability 248 Shareholders' equity: Common stock, par value $.20; authorized 4,000,000 shares; Issued 2,614,506 shares 523 Capital in excess of par value 13,361 Retained earnings 1,736 Accumulated other comprehensive income (58) ------------- 15,562 Employee stock ownership trust commitment (2,438) Treasury stock, at cost 222,365 shares (1,054) ------------- Total shareholders' equity 12,070 ------------ $ 20,447 ============
See notes to consolidated financial statements - 3 -
SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME ($000's omitted except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net revenues $ 3,761 $ 4,225 $ 11,895 $ 13,421 Costs and expenses: Cost of goods sold 2,739 3,104 8,590 9,890 Selling, general and administrative 804 719 2,283 2,173 Interest 49 63 148 216 Depreciation and amortization 161 158 492 427 ---------- ---------- ---------- ---------- 3,753 4,044 11,513 12,706 ---------- ---------- ---------- ---------- Income before income taxes 8 181 382 715 Income taxes 2 69 137 267 ---------- ---------- ---------- ---------- Net income $ 6 $ 112 $ 245 $ 448 ========== ========== ========== ========== Income Per Share: Basic ----- Net income per share $ - $ 0.06 $ 0.13 $ 0.24 ========== ========= ========== ========= Diluted ------- Net income per share $ - $ 0.06 $ 0.13 $ 0.24 ========== ========= ========== =========
See notes to consolidated financial statements - 4 -
SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS ($000's omitted) (Unaudited) Nine Months Ended September 30, 2002 2001 -------- ------- Cash flows related to operating activities: Net income $ 245 $ 448 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 492 427 Change in assets and liabilities - Accounts receivable 333 (585) Inventories (196) (338) Prepaid income taxes - 218 Other current assets 12 (240) Accounts payable (377) 182 Accrued employee compensation & benefit costs 60 50 Accrued income taxes 58 120 Other accrued liabilities (8) 12 -------- ------- Net cash provided by operating activities 619 294 -------- ------- Cash flows related to investing activities: Capital expenditures - property, plant & equipment (481) (250) Purchase of treasury shares - (77) -------- ------- Net cash used in investing activities (481) (327) -------- ------- Cash flows related to financing activities: Increase in demand loan 400 300 Payments on demand loan (300) (300) Principal payments on long-term debt (326) (167) -------- ------- Net cash used in financing activities (226) (167) -------- ------- Net decrease in cash (88) (200) Cash at beginning of period 720 659 -------- ------- Cash at end of period $ 632 $ 459 ======== =======
See notes to consolidated financial statements - 5 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($000 omitted in tables except for per share data) The information set forth herein is unaudited. This financial information reflects all normal accruals and adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. 1. Summary of significant accounting policies ------------------------------------------ Revenue recognition ------------------- The Company's revenues are principally recognized as units are shipped and as terms and conditions of purchase orders are met. The Company also incurred costs for certain contracts which are long term. These contracts are accounted for under the percentage of completion method (cost-to-cost) which recognizes revenue as the work progresses towards completion. Included in other current assets are $1,297,000 of unbilled revenues which represent revenue earned under the percentage of completion method (cost-to-cost) not yet billable under the terms of the contracts. 2. Inventories September 30, 2002 ----------- ------------------ Raw materials and common parts $ 1,492 Work-in-process 5,030 Finished goods 949 ---------- 7,471 Less common parts expected to be used after one year (236) ---------- $ 7,235 ========== 3. Property, plant and equipment September 30, 2002 ----------------------------- ------------------ Land $ 25 Buildings 6,356 Machinery, equipment and tooling 9,472 ---------- 15,853 Less accumulated depreciation (8,839) ---------- $ 7,014 ========== Property, plant and equipment includes land and building under a $5,000,000 capital lease which can be purchased for a nominal amount at the end of the lease term. The Company believes that it maintains property and casualty insurance in amounts adequate for the risk and nature of its assets and operations and which are generally customary in its industry. - 6 -
4. Long-term debt September 30, 2002 ------------------ Industrial Development Revenue Bonds; secured by a letter of credit from a bank with interest payable monthly at a floating rate (1.95% at September 30, 2002) $ 4,660 Unsecured term note; payable to a financial institution with interest at a current rate of 5.82%; quarterly principal payments of $35,714 through February 1, 2006 500 Various other secured term notes payable to government agencies 614 ---------- 5,774 Less current portion (377) ---------- $ 5,397 ==========
Industrial Development Revenue Bonds were issued by a government agency to finance the construction of the Company's new 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's unsecured term note is payable in equal quarterly installments, maturing in 2006. The loan is collateralized by any and all equipment purchased with the proceeds of the term loan. The letter of credit reimbursement agreement, the unsecured term note agreement and the secured term notes contain, among other things, covenants relative to maintenance of working capital and tangible net worth and restrictions on capital expenditures, leases and additional borrowings. The Company also has a $1,000,000 line of credit on which there was a $300,000 balance outstanding at September 30, 2002 at an interest rate of 4.75%. - 7 -
5. Common shareholders' equity --------------------------- Common stock Accumulated ------------ Number Capital in other of shares excess of Retained Treasury Comprehensive comprehensive issued Amount par value earnings ESOP stock income income -------------------------------------------------------------------------------------- Balance December 31, 2001 2,614,506 $523 $13,361 $1,491 ($ 2,438) ($ 1,054) ($ 58) ========= ==== ======= ===== ======= ======= ===== Comprehensive income Net income - - - $ 245 - - $ 245 - Other comprehensive income, net of tax - - - - - - - - Minimum pension liability adjustment - - - - - - - - Other comprehensive income - - - - - - - - ----- Comprehensive income - - - - - - $ 245 - ===== Issuance of common stock - - - - - - - Compensation expense - - - - - - - Treasury stock - - - - - - - Exercise of stock options - - - - - - - --------- ---- ------- ------ ------ ------ ---- Balance September 30, 2002 2,614,506 $523 $13,361 $1,736 ($ 2,438) ($ 1,054) ($ 58) ========= ==== ======= ====== ======== ======== =====
Earnings per share ------------------ Basic earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period.
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Net earnings $ 6 $ 112 $ 245 $ 448 ====== ====== ====== ===== Weighted average common shares outstanding (basic) 1,894 1,867 1,894 1,878 Incremental shares from assumed conversions of stock options 1 9 14 - Weighted average common shares outstanding (diluted) 1,895 1,876 1,908 1,878 Basic Net income per share $ - $ 0.06 $ 0.13 $ 0.24 ====== ====== ====== ====== Diluted Net income per share $ - $ 0.06 $ 0.13 $ 0.24 ====== ====== ====== ======
- 8 - 6. Business segments ----------------- The Company operates in two business segments, Advanced Technology Group and Consumer Products Group. The Company's reportable segments are strategic business units that offer different products and services. The segments are composed of separate corporations and are managed separately. Operations in Advanced Technology Group involve the design, manufacture, and marketing of servo-control components for government and commercial industrial applications. Consumer Products Group's operations involve the design, manufacture and marketing of a variety of cutlery products for use by consumers and government agencies. The Company derives its primary sales revenue from domestic customers, although a significant portion of finished products are for foreign end use.
Nine Month Advanced Consumer Period Ended Technology Products September 30, 2002 Group Group Consolidated ------------------ ----- ----- ------------ Revenues from unaffiliated customers $ 7,772 $ 4,123 $ 11,895 ========= ========= =========== Profit (Loss) $ 1,459 $ (98) $ 1,361 ========= ========= Depreciation expense (492) Interest expense (148) General corporate expense (339) ----------- Income before income taxes $ 382 ===========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ------ --------------------------------------------------------- The following table sets forth for the period indicated the percentage relationship of certain items in the consolidated statement of income to net revenues, and the percentage increase or decrease of such items as compared to the indicated prior period.
Relationship to Period to Relationship to Period to net revenues period $ net revenues period $ three months ended increase Nine Months ended increase September 30, (decrease) September 30, (decrease) 2002 2001 02-01 2002 2001 02-01 ---- ---- ----- ---- ---- ----- Net revenues Advanced technology products 63.0% 69.0% (18.8%) 65.3% 67.5% (14.2%) Consumer products 37.0% 31.0% 6.3% 34.7% 32.5% (5.5%) ----- ----- ----- ----- 100.0% 100.0% (11.0%) 100.0% 100.0% (11.4%) Cost of goods sold, exclusive of Depreciation 72.8% 73.5% (11.8%) 72.2% 73.7% (13.1%) ----- ----- ----- ----- Gross profit 27.2% 26.5% (8.8%) 27.8% 26.3% (6.4%) ----- ----- ----- ----- Selling, general and administrative 21.4% 17.0% 11.8% 19.2% 16.2% 5.1% Interest 1.3% 1.5% (22.2%) 1.2% 1.6% (31.5%) Depreciation and amortization 4.3% 3.7% 1.9% 4.1% 3.2% 15.2% ---- ---- ---- ---- 27.0% 22.2% 7.9% 24.5% 21.0% 3.8% ----- ----- ----- ----- Income before income taxes 0.2% 4.3% (95.7%) 3.3% 5.3% (46.5%) Income tax provision - 1.6% (97.1%) 1.2% 2.0% (48.7%) -------- ---- ---- ---- Net income 0.2% 2.7% (94.8%) 2.1% 3.3% (45.2%) ==== ==== ==== ====
- 9 - Management Discussion --------------------- During the nine month period ended September 30, 2002 and for the comparable period ended September 30, 2001, approximately 23% and 18% respectively, of the Company's revenues were derived from contracts with agencies of the U.S. Government or their prime contractors. The Company's business is performed under fixed price contracts. It is noted that the many uncertainties in today's global economy and the difficulty in predicting defense appropriations (both actual and proposed) preclude any guarantees or even assurances that current government and/or commercial programs will be continued or that programs in the prototype stages will ultimately result in production applications. On September 11, 2001, the United States was attacked by terrorists using four hijacked commercial airline jets. These tragic events have had a significant negative impact on the US and world economies. As previously reported, the commercial aerospace industry and other industries such as the edged products industry (i.e., cutlery products, knives, etc.) have been adversely impacted. In particular, the cutbacks in the commercial aerospace industry (i.e., Boeing, Airbus, etc.) have resulted in the reduction and/or stretch-outs in the production requirements for certain of the Company's products. Certain defense programs have offset some of these effects on the Company's business. The Company is unable to predict or quantify with certainty the extent that these events will have on the future financial results of the Company in totality. However, it is anticipated that the growth in the defense industry will be a positive influence to what appears to be a depressed economy. Results of Operations --------------------- The Company's consolidated results of operations for the nine month period ended September 30, 2002 showed an approximate 11.4% decrease in net revenues and a decrease in net income of approximately 45.2% when compared to the same nine month period of 2001. For the third quarter ended September 30, 2002, net revenues decreased approximately 11.0% with a decrease in net income of 94.8% compared to the same period of 2001. The decrease in revenues for the nine month period and quarter ended September 30, 2002 can be attributed to previously reported reductions and stretch-outs in the commercial markets for the advanced technology products combined with a loss of revenues at the Consumer Products Group due both to a regionalization of markets by a significant customer, certain reprioritizations of government procurements and the general decline in retail markets for household knives. Gross profit decreased for both the nine month period and quarter ended September 30, 2002 due primarily to a decrease in net revenues along with increased expenses to adapt existing capabilities to procure new applications and the engineering of new products which are expensed as incurred. Both operating groups have also incurred an increase in expenses due to rising insurance costs. Selling, general and administrative (SG&A) expenses increased as a percentage of revenues for both the nine month period and quarter ended September 30, 2002 when compared to the same periods in 2001 substantially because the fixed portion of SG&A costs automatically becomes a larger percentage when it is divided by reduced revenues. Also, the Company has incurred increased costs for resources dedicated to the investigation of mergers and acquisitions, new reporting requirements for public companies and expanded sales and marketing activities. Interest expense decreased for both the nine month period and the quarter ended September 30, 2002 as the Company continues to pay down institutional debt coupled with a decline in interest rates. - 10 - The Company continues to take advantage of the tax benefit for extraterritorial sales realizing an effective tax rate of approximately 36%. Liquidity and Capital Resources ------------------------------- The Company's primary liquidity and capital requirements relate to the working capital needs; primarily inventory, accounts receivable, capital investments in facilities, machinery, tools/dies and equipment and principal/interest payments on indebtedness. The Company's primary sources of liquidity have been from positive cash flows and from bank financing. As of September 30, 2002 there are no material commitments for capital expenditures. Item 3. CONTROLS AND PROCEDURES ------- ----------------------- Our management has reviewed our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to this report. Our management believes that such disclosure controls and procedures are adequate to ensure that material information relating to the Company is made known to management by others within the Company. In addition, our management reviewed our internal controls and, to management's knowledge, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their last evaluation. PART II OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------ --------------------------------------------------- The annual meeting of shareholders of the Registrant was held on July 3, 2002. 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. William H. Duerig 1,570,138 4,382 Donald W. Hedges 1,570,138 4,382 Nicholas D. Trbovich, Jr. 1,570,195 4,325 Dr. Nicholas D. Trbovich 1,570,195 4,325 Item 6. EXHIBITS AND REPORTS ON FORM 8-K ------- -------------------------------- (a) Exhibits None (b) Reports on Form 8-K (1) Form 8-K Filed August 14, 2002 Regulation FD Disclosure. Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 to accompany the - 11 - Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2002. (2) Form 8-K Filed August 27, 2002 Other Events. Announcement of the adoption of the Company's Shareholder Rights Plan. 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. - 12 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 11, 2002 SERVOTRONICS, INC. By: /s/Lee D. Burns, Treasurer ------------------------------------------ Lee D. Burns, Treasurer and Chief Financial Officer By: /s/Raymond C. Zielinski, Vice President ------------------------------------------- Raymond C. Zielinski, Vice President - 13 - CERTIFICATION I, Lee D. Burns, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Servotronics, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Lee D. Burns, C.F.O. ----------------------------------------- Lee D. Burns C.F.O. - 14 - CERTIFICATION I, Nicholas D. Trbovich, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Servotronics, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Nicholas D. Trbovich, C.E.O. ------------------------------------------------- Nicholas D. Trbovich C.E.O. - 15 -