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 March 31, 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
------------------------------- -------------------
(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 .
--- --
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ; No X
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at April 30, 2007
---------------------------- ------------------------------
Common Stock, $.20 par value 1,957,734
Transitional Small Business Disclosure Format (Check one):
Yes ; No X
--- ---
INDEX
-----
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited)
a) Consolidated balance sheet, March 31, 2007 3
b) Consolidated statement of operations for the three months ended
March 31, 2007 and 2006 4
c) Consolidated statement of cash flows for the three months ended
March 31, 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)
March 31, 2007
ASSETS --------------
Current assets:
Cash and cash equivalents $ 3,997
Accounts receivable 4,013
Inventories 7,262
Deferred income taxes 545
Other assets 720
------------
Total current assets 16,537
Property, plant and equipment, net 5,880
Other non-current assets 375
------------
$ 22,792
LIABILITIES AND SHAREHOLDERS' EQUITY ============
Current liabilities:
Current portion of long-term debt $ 384
Accounts payable 1,483
Accrued employee compensation and benefit costs 1,254
Accrued income taxes 16
Other accrued liabilities 215
------------
Total current liabilities 3,352
Long-term debt 4,577
Deferred income taxes 515
Shareholders' equity:
Common stock, par value $.20; authorized
4,000,000 shares; issued 2,614,506 shares;
outstanding 1,957,734 shares 523
Capital in excess of par value 13,033
Retained earnings 4,906
Accumulated other comprehensive loss (278)
-------------
18,184
Employee stock ownership trust commitment (1,933)
Treasury stock, at cost 285,404 shares (1,903)
-------------
Total shareholders' equity 14,348
------------
$ 22,792
============
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,
2007 2006
--------- ---------
Revenues $ 6,530 $ 5,435
Costs, expenses:
Cost of goods sold, exclusive of depreciation 5,117 4,125
Selling, general and administrative 911 886
Interest 62 61
Depreciation and amortization 139 172
Other income, net (34) (243)
--------- ---------
6,195 5,001
--------- ---------
Income before income tax provision 335 434
Income tax provision 131 161
--------- ---------
Net income $ 204 $ 273
========= =========
Income per share:
BASIC
Net income per share $ 0.10 $ 0.13
========= =========
DILUTED
Net income per share $ 0.10 $ 0.12
========= =========
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,
2007 2006
---------- ----------
CASH FLOWS RELATED TO OPERATING ACTIVITIES:
Net income $ 204 $ 273
Adjustments to reconcile net income to net
cash provided by (used in) operating activities -
Depreciation and amortization 139 172
Change in assets and liabilities -
Accounts receivable 213 15
Inventories (401) (920)
Other assets (157) 35
Other non-current assets 24 57
Accounts payable 278 (12)
Accrued employee compensation and benefit costs 165 19
Other accrued liabilities (105) (18)
Accrued income taxes (31) (248)
---------- ----------
Net cash provided by (used in) operating activities 329 (627)
--------- ----------
CASH FLOWS RELATED TO INVESTING ACTIVITIES:
Capital expenditures - property, plant and
equipment (79) (56)
---------- ----------
Net cash used in investing activities (79) (56)
---------- ----------
CASH FLOWS RELATED TO FINANCING ACTIVITIES:
Principal payments on long-term debt (54) (53)
Purchase of treasury shares (303) (266)
---------- ----------
Net cash used in financing activities (357) (319)
---------- ----------
Net decrease in cash and cash equivalents (107) (1,002)
Cash and cash equivalents at beginning of period 4,104 4,637
--------- ---------
Cash and cash equivalents at end of period $ 3,997 $ 3,635
========= =========
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 months ending
March 31, 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 and separate state
income tax returns.
EMPLOYEE STOCK OWNERSHIP PLAN
Contributions to the employee stock ownership plan are determined
annually by the Company according to plan formula.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable based on undiscounted future operating cash
flow analyses. If an impairment is determined to exist, any related impairment
loss is calculated based on fair value. Impairment losses on assets to be
disposed of, if any, are based on the estimated proceeds to be received, less
costs of disposal. The Company has determined that no impairment of long-lived
assets existed at March 31, 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 March 31, 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 cumulative effect of adopting FIN 48
-7-
is recorded in retained earnings. 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.
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
March 31, 2007
--------------
($000's omitted)
Raw materials and common parts $ 2,642
Work-in-process 3,677
Finished goods 1,073
---------
7,392
Less common parts expected to be used after one year
(classified as long-term) (130)
---------
$ 7,262
=========
-8-
4. PROPERTY, PLANT AND EQUIPMENT
March 31, 2007
--------------
($000's omitted)
Land $ 25
Buildings 6,555
Machinery, equipment and tooling 11,021
---------
17,601
Less accumulated depreciation and amortization (11,721)
---------
$ 5,880
=========
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, 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 March 31, 2007
amounted to $139,000 and $172,000 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
March 31, 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 (3.85% at March 31, 2007) (A) $ 3,810
Term loan payable to a financial institution;
interest at LIBOR plus 2%, not to exceed 6.00% (6.00% at
March 31, 2007); quarterly principal payments of
$17,500; payable in full in the fourth quarter
of 2009, partially secured by equipment 343
Term loan payable to a financial institution;
interest at LIBOR plus 2% (7.24% at March 31, 2007);
quarterly principal payments of $26,786 through the
fourth quarter of 2011 509
Secured term loan payable to a government agency;
monthly payments of approximately $1,455 with
interest waived payable through second quarter of 2012 121
Secured term loan payable to a government agency;
monthly payments of $1,950 including interest
fixed at 3% payable through fourth quarter of 2015 178
----------
4,961
Less current portion (384)
----------
$ 4,577
==========
(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
-9-
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 March 31, 2007.
Certain lenders require the Company to comply with debt covenants as
described in the specific loan documents, including a debt service ratio. At
March 31, 2007, the Company was in compliance with all of its debt covenants.
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. Included in the first quarter is approximately $120,000 of accrued
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 SFAS No. 109, "Accounting for
Income Taxes" (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.
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 - - - 204 - - - 204
Purchase/receipt of
treasury shares - - - - - (303) - (303)
Other - - - (1) - - - (1)
---------- ---- ------- ------- ------- ------- ------ --------
Balance March 31, 2007 2,614,506 $523 $13,033 $4,906 ($ 1,933) ($ 1,903) ($ 278) $ 14,348
========= ==== ======= ====== ======= ======= ====== ========
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 March 31, 2007, the
Company has purchased 144,357 shares for a total of $1,221,896 under this
program.
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
-10-
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
March 31,
2007 2006
---- ----
($000's omitted
except per share data)
Net income $ 204 $ 273
====== =====
Weighted average common shares
outstanding (basic) 1,979 2,085
Incremental shares from assumed
conversions of stock options 164 136
------ -----
Weighted average common
shares outstanding (diluted) 2,143 2,221
BASIC
Net income per share $ 0.10 $ 0.13
====== ======
DILUTED
Net income per share $ 0.10 $ 0.12
====== ======
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 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
----- ----- ------------
Three months ended Three months ended Three months ended
March 31, March 31, March 31,
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
Revenues from unaffiliated customers $ 3,930 $ 3,475 $ 2,600 $ 1,960 $ 6,530 $ 5,435
========= ========= ======== ========= ========= ========
Profit (loss) $ 924 $ 825 $ (256) $ (214) $ 668 $ 611
========= ========= ======== =========
Interest expense $ (56) $ (54) $ (6) $ (7) (62) (61)
========= ========= ======== =========
Depreciation and amortization $ (97) $ (128) $ (42) $ (44) (139) (172)
========= ========= ======== =========
Other income, net $ 29 $ 231 $ 5 $ 12 34 243
========= ========= ======== =========
General corporate expense (166) (187)
---------- ---------
Income before income taxes $ 335 $ 434
========== =========
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.
-11-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------- ---------------------------------------------------------
MANAGEMENT DISCUSSION
During the three month period ended March 31, 2007 and for the
comparable period ended March 31, 2006, approximately 34% and 28% 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 a net of approximately
$600,000 when comparing the results of 2007 to 2006 due to increased orders and
shipments as well as expected differences in timing of government order
placement and required shipping schedules at both the CPG and Advanced
Technology Group (ATG). 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
three month period ended March 31, 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. 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.
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 month period ended March 31, 2006 were
reclassified to conform with classifications adopted in the current year.
-12-
Relationship to Period to Period to
revenues period $ period %
three months ended increase increase
March 31, (decrease) (decrease)
2007 2006 07-06 07-06
---- ---- ----- -----
Revenues
Advanced Technology Group 60.2% 63.9% $ 455 13.1%
Consumer Products Group 39.8 36.1 640 32.7
---- ---- ---- -----
100.0 100.0 1,095 20.1
Cost of goods sold, exclusive of
depreciation 78.4 75.9 992 24.0
---- ---- ---- ----
Gross profit 21.6 24.1 103 7.9
---- ---- ---- ---
Selling, general and administrative 14.0 16.3 25 2.8
Interest 0.9 1.1 1 1.6
Depreciation and amortization 2.1 3.2 (33) (19.2)
Other income, net (0.5) (4.5) 209 (86.0)
----- ----- ---- ------
16.5 16.1 202 23.1
Income before income tax provision 5.1 8.0 (99) (22.8)
Income tax provision 2.0 3.0 (30) (18.6)
--- --- ---- ------
Net income 3.1% 5.0% $ (69) (25.3)%
=== === ====== ======
The Company's consolidated revenues increased approximately $1,095,000
for the three month period ended March 31, 2007 when compared to the same three
month period in 2006 as a result of increased shipments. The Company's CPG has
recently received two significant contracts for CPG developed products for the
military. These contracts amount to approximately $4,000,000 and have schedules
that start product deliveries in 2007 and continue into 2008.
Gross profit for the three month period ended March 31, 2007 increased
by 7.9% as compared to the same three month period in 2006. Increased sales
volume attributed to the dollar value increase in gross profit despite a
decrease in gross profit as a percentage of sales that 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 increased by approximately $25,000 or 2.8% for the three month
period ended March 31, 2007 when compared to the same three month 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 the increase. Also, consistent with GAAP, these costs are
expensed as they are incurred and because of this may result in timing
differences and fluctuations from period to period.
Interest expense remained relatively consistent for the three month
period ended March 31, 2007 when compared to the same 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.
Depreciation and amortization expense decreased approximately 19.2% for
the three month period ended March 31, 2007 when compared to the same three
month period in 2006 due to variable estimated useful lives of depreciable
property (as identified in Note 2 to the consolidated financial statements) and
the reduction in capital expenditures.
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 March
31, 2007 when compared to the same three month period in 2006 is primarily due
-13-
to a $193,000 partial payment of a recovery in 2006. There was no such recovery
in 2007.
The Company's effective tax rate was 39% in 2007 and 37% in 2006. 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 decreased $69,000 when comparing the three month period
ended March 31, 2007 to the same three month period in 2006. The decrease can
more than be accounted for by a decrease in other income received in 2006 not
related to the sale of the Company's products. This decrease was partially
offset by an increase of $110,000 in net income from operations resulting from
increased consolidated revenues and the effects of 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 March 31 2007 the Company had working capital of approximately $13.2
million of which $4 million was comprised of cash and cash equivalents. The
Company generated approximately $329,000 in cash from operations in the first
quarter of 2007. The most significant use of cash included payment of income
taxes as well as increases in inventory levels related to timing of shipments of
product.
At March 31, 2007, there are no material commitments for capital
expenditures.
The Company had an increase in the uses of cash in its financing and
investing activities in the first quarter of 2007 primarily related to capital
expenditures for equipment, principle payments on long-term debt and investment
in treasury shares of approximately $303,000. 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 March 31, 2007, the Company has purchased 144,357 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 March 31, 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 March 31, 2007. Based upon
that evaluation, the CEO and CFO concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to the material
information relating to the Company (or the Company's consolidated subsidiaries)
required to be included in the Company's periodic filings with the SEC, such
that the information relating to the Company, required to be disclosed in SEC
reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) is accumulated and
communicated to the Company's management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
-14-
(b) CHANGES IN INTERNAL CONTROLS
During the three month period ended March 31, 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 PURCHASES
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
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
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
January 1 - 31, 2007 - - - 139,509
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
February 1 - 28, 2007 3,866 8.34 3,866 135,643
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
March 1 - 31, 2007 30,000 9.00 30,000 105,643
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
Total 33,866 8.92 33,866 105,643
--------------------------------------- --------------- -------------------- ---------------------- -----------------------
Item 3. DEFAULTS UPON SENIOR SECURITIES
------ -------------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------ ---------------------------------------------------
None.
Item 5. OTHER INFORMATION
------ -----------------
None.
-15-
Item 6. EXHIBITS
------ --------
31.1 Certification of Chief Financial Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange act
of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Executive Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange act
of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Financial Officer pursuant to
18 U.S.C. 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Executive Officer pursuant to
18 U.S.C. 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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: May 14, 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
-17-