|
Assets |
|
March 31, 2005 |
|
|
Current assets: |
|
|
|
|
Cash |
|
$ |
1,964 |
|
|
Accounts receivable |
|
|
3,792 |
|
|
Inventories |
|
|
6,852 |
|
|
Prepaid income taxes |
|
|
15 |
|
|
Deferred income taxes |
|
|
471 |
|
|
Other assets |
|
|
1,503 |
|
|
Total current assets |
|
|
14,597 |
|
|
Property, plant and equipment, net |
|
|
6,520 |
|
|
Other non-current assets |
|
|
557 |
|
| |
|
$ |
21,674 |
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Current portion of long-term debt |
|
$ |
381 |
|
|
Accounts payable |
|
|
890 |
|
|
Accrued employee compensation and benefit costs |
|
|
849 |
|
|
Other accrued liabilities |
|
|
255 |
|
|
Accrued income taxes |
|
|
57 |
|
|
Total current liabilities |
|
|
2,432 |
|
|
Long-term debt |
|
|
5,348 |
|
|
Deferred income taxes |
|
|
434 |
|
|
Other non-current liability |
|
|
304 |
|
|
Shareholders' equity: |
|
|
|
|
|
Common stock, par value $.20; authorized |
|
|
|
|
|
4,000,000 shares; Issued 2,614,506 shares |
|
|
523 |
|
|
Capital in excess of par value |
|
|
13,033 |
|
|
Retained earnings |
|
|
2,380 |
|
|
Accumulated other comprehensive loss |
|
|
(125 |
) |
| |
|
|
15,811 |
|
|
Employee stock ownership trust commitment |
|
|
(2,135) |
|
|
Treasury stock, at cost 121,605 shares |
|
|
(520) |
|
|
Total shareholders' equity |
|
|
13,156 |
|
| |
|
$ |
21,674 |
|
| 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 |
|
|
|
|
March 31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
Net revenues |
|
$ |
5,684 |
|
$ |
5,328 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of goods sold, exclusive of depreciation |
|
|
4,250 |
|
|
3,997 |
|
|
Selling, general and administrative |
|
|
1,008 |
|
|
881 |
|
|
Interest |
|
|
48 |
|
|
36 |
|
|
Depreciation and amortization |
|
|
166 |
|
|
162 |
|
| |
|
|
5,472 |
|
|
5,076 |
|
|
Income before income taxes |
|
|
212 |
|
|
252 |
|
|
Income tax provision |
|
|
78 |
|
|
94 |
|
|
Net income |
|
$ |
134 |
|
$ |
158 |
|
| |
|
|
|
|
|
|
|
|
Income Per Share: |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.06 |
|
$ |
0.08 |
|
|
Diluted |
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.06 |
|
$ |
0.08 |
|
| See notes to consolidated financial statements |
| |
-4- |
|
|
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
($000’s omitted)
(Unaudited)
| |
|
Three Months Ended |
|
|
|
March 31, |
|
| |
|
2005 |
|
2004 |
|
|
Cash flows related to operating activities: |
|
|
|
|
|
|
Net income |
$ |
134 |
$ |
158 |
|
|
Adjustments to reconcile net income to net |
|
|
|
|
|
|
cash provided by operating activities - |
|
|
|
|
|
|
Depreciation and amortization |
|
|
166 |
|
|
162 |
|
|
Change in assets and liabilities - |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(458 |
) |
|
(917 |
) |
|
Inventories |
|
|
(11 |
) |
|
36 |
|
|
Prepaid income taxes |
|
|
(15 |
) |
|
- |
|
|
Other assets |
|
|
41 |
|
|
111 |
|
|
Other current assets |
|
|
(20 |
) |
|
1 |
|
|
Accounts payable |
|
|
95 |
|
|
291 |
|
|
Accrued employee compensation & benefit costs |
|
|
44 |
|
|
214 |
|
|
Accrued income taxes |
|
|
(10 |
) |
|
94 |
|
|
Other accrued liabilities |
|
|
104 |
|
|
274 |
|
|
Net cash provided by operating activities |
|
|
70 |
|
|
424 |
|
|
Cash flows related to investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures - property, plant & |
|
|
|
|
|
|
|
|
equipment |
|
|
(160 |
) |
|
(120 |
) |
|
Net cash used in investing activities |
|
|
(160 |
) |
|
(120 |
) |
|
Cash flows related to financing activities: |
|
|
|
|
|
|
|
|
Principal payments on long-term debt |
|
|
(52 |
) |
|
(52 |
) |
|
Net cash used in financing activities |
|
|
(52 |
) |
|
(52 |
) |
|
Net (decrease) increase in cash |
|
|
(142 |
) |
|
252 |
|
|
Cash at beginning of period |
|
|
2,106 |
|
|
1,506 |
|
|
Cash at end of period |
|
$ |
1,964 |
|
$ |
1,758 |
|
| See notes to consolidated financial statements |
| |
-5- |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000 omitted in tables except for per share data)
1. Basis of presentation
The consolidated financial statements include the accounts of Servotronics, Inc. (the “Company”) and its majority owned subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
The accompanying 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 months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. The financial statements should be read in conjunction with the annual report and the notes thereto.
2. Summary of risk factors and significant accounting policies
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, global competition, the effect of terrorism, difficulty in predicting defense and other government appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company’s customers to fund long-term purchase programs, volatile market demand and the continued market acceptance of the Company’s advanced technology and cutlery products make it difficult to predict the impact on future financial results.
Revenue recognition
The Company’s revenues are principally recognized as units are shipped and as terms and conditions of purchase orders are met.
3. Inventories
|
March 31, 2005 |
|
Raw materials and common parts |
|
$ |
3,312 |
|
|
Work-in-process |
|
|
3,085 |
|
|
Finished goods |
|
|
703 |
|
| |
|
|
7,100 |
|
|
Less common parts expected to be used after one year |
|
|
(248) |
|
| |
|
$ |
6,852 |
|
Inventories are stated generally 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.
4. Property, plant and equipment
| |
March 31, 2005 |
|
Land |
|
$ |
25 |
|
|
Buildings |
|
|
6,484 |
|
|
Machinery, equipment and tooling |
|
|
10,509 |
|
| |
|
|
17,018 |
|
|
Less accumulated depreciation |
|
|
(10,498) |
|
| |
|
$ |
6,520 |
|
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 March 31, 2005, accumulated amortization on the building amounted to approximately $1,417,000. The associated current and long-term liabilities are discussed in footnote 5 to the consolidated financial statements. The Company believes that it maintains property and casualty insurance in amounts adequate for the risk and nature of its assets and operations and which are generally customary in its industry.
5. Long-term debt
| |
March 31, 2005 |
|
Industrial Development Revenue Bonds; secured by a |
|
|
|
|
letter of credit from a bank with interest payable monthly |
|
|
|
|
at a floating rate (2.48% at March 31, 2005) |
$ |
4,150 |
|
| |
|
|
|
|
|
Term loan payable to a financial institution |
|
|
|
|
|
interest at LIBOR plus 2% (4.56% at |
|
|
|
|
|
March 31, 2005); quarterly principal payments of |
|
|
|
|
|
$17,500 commencing January 1, 2005; payable in full |
|
|
|
|
|
in the fourth quarter of 2009 |
|
|
482 |
|
| |
|
|
|
|
|
Term loan payable to a financial institution |
|
|
|
|
|
interest at LIBOR plus 2% (4.56% at March 31, 2005) |
|
|
|
|
|
quarterly principal payments of $26,786 through the |
|
|
|
|
|
fourth quarter of 2011 |
|
|
723 |
|
| |
|
|
|
|
|
Secured term loan payable to a government agency, |
|
|
|
|
|
monthly payments of approximately $1,455 with |
|
|
|
|
|
interest waived payable through second quarter of 2012 |
|
|
159 |
|
| |
|
|
|
|
|
Secured term loan payable to a government agency |
|
|
|
|
|
monthly payments of $1,950 including interest |
|
|
|
|
|
fixed at 3% payable through fourth quarter of 2015 |
|
|
215 |
|
| |
|
|
5,729 |
|
|
Less current portion |
|
|
(381) |
|
| |
$ |
|
5,348 |
|
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 March 31, 2005.
6. 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 |
|
loss |
|
|
Balance December |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31, 2004 |
|
|
2,614,506 |
|
$ |
523 |
|
$ |
13,033 |
|
$ |
2,246 |
|
($ |
2,135 |
) |
($ |
520 |
) |
|
|
|
($ |
125 |
) |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
- |
|
|
- |
|
$ |
134 |
|
|
- |
|
|
- |
|
$ |
134 |
|
|
- |
|
|
Comprehensive income |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
$ |
134 |
|
|
- |
|
|
Balance March 31, 2005 |
|
|
2,614,506 |
|
$ |
523 |
|
$ |
13,033 |
|
$ |
2,380 |
|
($ |
2,135 |
) |
($ |
520 |
) |
|
|
|
($ |
125 |
) |
Earnings per share
Basic earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period.
| |
|
Three Months Ended |
|
|
|
|
March 31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
Net income |
|
$ |
134 |
|
$ |
158 |
|
|
Weighted average common shares |
|
|
|
|
|
|
|
|
outstanding (basic) |
|
|
2,071 |
|
|
2,048 |
|
|
Incremental shares from assumed |
|
|
|
|
|
|
|
|
conversions of stock options |
|
|
20 |
|
|
47 |
|
|
Weighted average common |
|
|
|
|
|
|
|
|
shares outstanding (diluted) |
|
|
2,091 |
|
|
2,095 |
|
|
Basic |
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.06 |
|
$ |
0.08 |
|
|
Diluted |
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.06 |
|
$ |
0.08 |
|
7. 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 (i.e., control valves, actuators, etc.) 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.
|
Three Month |
|
Advanced |
|
Consumer |
|
|
|
|
Period Ended |
|
Technology |
|
Products |
|
|
|
|
March 31, 2005 |
|
Group |
|
Group |
|
Consolidated |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers |
|
$ |
2,870 |
|
$ |
2,813 |
|
$ |
5,684 |
|
|
Profit |
|
$ |
413 |
|
$ |
197 |
|
|
610 |
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
(166 |
) |
|
Interest expense |
|
|
|
|
|
|
|
|
(48 |
) |
|
General corporate expense |
|
|
|
|
|
|
|
|
(184 |
) |
|
Income before income taxes |
|
|
|
|
|
|
|
$ |
212 |
|
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 operations to net revenues, and the percentage increase or decrease of such items as compared to the indicated prior period.
| |
|
Relationship to |
|
Period to |
|
|
|
|
net revenues |
|
period $ |
|
|
|
|
three months ended |
|
increase |
|
|
|
|
March 31, |
|
(decrease) |
|
|
|
|
2005 |
|
2004 |
|
05-04 |
|
|
Net revenues |
|
|
|
|
|
|
|
|
Advanced technology products |
|
|
50.5 |
% |
|
50.1 |
% |
|
7.5 |
% |
|
Consumer products |
|
|
49.5 |
% |
|
49.9 |
% |
|
5.9 |
% |
| |
|
|
100 |
% |
|
100 |
% |
|
6.7 |
% |
|
Cost of goods sold, exclusive of |
|
|
|
|
|
|
|
|
|
|
|
depreciation |
|
|
74.8 |
% |
|
75 |
% |
|
6.3 |
% |
|
Gross profit |
|
|
25.2 |
% |
|
25 |
% |
|
7.7 |
% |
|
Selling, general and administrative |
|
|
17.7 |
% |
|
16.5 |
% |
|
14.4 |
% |
|
Interest |
|
|
0.8 |
% |
|
0.7 |
% |
|
33.3 |
% |
|
Depreciation and amortization |
|
|
2.9 |
% |
|
3 |
% |
|
2.5 |
% |
| |
|
|
21.4 |
% |
|
20.2 |
% |
|
13.3 |
% |
|
Income before income taxes |
|
|
3.8 |
% |
|
4.8 |
% |
|
(16.1 |
%) |
|
Income tax provision |
|
|
1.4 |
% |
|
1.8 |
% |
|
(17 |
%) |
|
Net income |
|
|
2.4 |
% |
|
3 |
% |
|
(15.6 |
%) |
Management Discussion
During the three month period ended March 31, 2005 and for the comparable period ended March 31, 2004, approximately 45% and 43% respectively, of the Company’s revenues were derived from contracts with agencies of the U.S. Government or their prime contractors and their subcontractors. Total government sales are anticipated to decrease in 2005 as a result of the scheduled completion of a significant government order to the CPG as previously reported. The Company’s business is performed under fixed price contracts. Allocations of defense expenditures and government involvement in overseas military operations have had an impact on the Company’s financial results. Sales of products sold for government applications have increased approximately 12% for the three month period ended March 31, 2005 compared to the corresponding period of 2004. While the Company remains optimistic in relation to these opportunities, it recognizes that sales to the government are affected by defense budgets, the foreign policies of the U.S. and other nations, the level of military operations and other factors and, as such, it is difficult to predict the impact on future financial results. The Company’s commercial business is affected by such factors as uncertainties in today’s global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, market demand and acceptance both for the Company’s products and its customers’ products which incorporate Company-made components.
Results of Operations
The Company’s consolidated results of operations for the three month period ended March 31, 2005 showed an approximate $356,000 or 6.7% increase in net revenues to $5,684,000 with a decrease in net income of approximately $25,000 or 15.6% when compared to the same three month period of 2004. The increase in revenues is primarily attributed to increased government shipments.
Gross profit for the three month period ended March 31, 2005, when compared to the same period in 2004 remained consistent as a percentage of sales and includes approximately $66,000 in revenues as a result of a retroactive price increase. The Company continues to incur costs associated with prototype and preproduction activities that are expensed in the period incurred. These costs as well as product mix can contribute to fluctuations in gross profit from period to period.
Selling, general and administrative (SG&A) costs increased approximately $127,000 or 14.4% when compared to the same three month period in 2004. The increase is primarily attributable to costs incurred for professional services and corporate governance necessitated by the Sarbanes-Oxley Act as well as increased marketing of the expanded sales effort of the ATG and CPG. The Company expects these costs to continue to be significant components of SG&A in the future.
Interest expense increased for the three months ended March 31, 2005 when compared to the same period in 2004 primarily due to an increase in institutional debt and market driven interest rates.
The Company continues to take advantage of the tax benefit for extraterritorial sales as well as the new manufacturing deductions allowable under the American Jobs Creation Act of 2004, which is reflected in the effective tax rate of approximately 37%.
Liquidity and Capital Resources
The Company’s primary liquidity and capital requirements relate to the Company’s working capital needs; primarily inventory, accounts receivable, capital investments in facilities, machinery, tools/dies and equipment and principal/interest payments on indebtedness. The Company’s primary sources of liquidity in 2005 have been from positive cash flows from operations.
As of March 31, 2005 there are no material commitments for capital expenditures.
The Company also has a $1,000,000 line of credit on which there was no balance outstanding at March 31, 2005.
Off Balance Sheet Arrangements
None.
Critical Accounting Policies
The Company prepares the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that the Company believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and which require our most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Note 2 to the accompanying consolidated financial statements includes a summary of the significant accounting policies used in the preparation of the consolidated financial statements.
Item 3. CONTROLS AND PROCEDURES
Our management has reviewed our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15). Our management believes that as of the end of the Company's most recent fiscal quarter, such disclosure controls and procedures are adequate to ensure that material information relating to the Company is made known to management by others within the Company.
In addition, our management reviewed our internal controls and, to management's knowledge, during the quarter ended March 31, 2005, there has been no change that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 6. EXHIBITS
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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. |
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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. |
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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. |
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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.
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: May 12, 2005
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