tenqnov.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.   20549
Form 10-Q
 
     
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 1-07109
SERVOTRONICS, INC.
(Exact name of registrant as specified in its charter)
           Delaware                                                                                                                                 16-0837866
(State or other jurisdiction of                                                                                                                       (I. R. S. Employer
 incorporation or organization)                                                                                                                       Identification No.)
 
1110 Maple Street
Elma, New York   14059
(Address of principal executive offices)
(716) 655-5990
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o    Accelerated filer o    Non-accelerated filer o    Smaller reporting company x

Indicate by check mark whether the registrant: has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o     No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No x

 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 


 
Class
Outstanding at October 31, 2009
  
 
Common Stock, $.20 par value
2,237,371
  


 
 
- 1 -
 
 
INDEX
  
     
     
 
PART I. FINANCIAL INFORMATION
Page No.
     
Item 1.
Financial Statements (Unaudited)
  
     
 
a)    Consolidated balance sheets, September 30, 2009 and December 31, 2008
3
     
 
b)    Consolidated statements of operations for the three and nine months ended
  
 
September 30, 2009 and 2008
4
     
 
c)    Consolidated statements of cash flows for the nine months ended
  
 
September 30, 2009 and 2008
5
     
 
d)    Notes to consolidated financial statements
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition
  
 
and Results of Operations
13
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
16
     
Item 4T.
Controls and Procedures
17
     
 
PART II. OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
17
     
Item 1A.
Risk Factors
17
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17
     
Item 3.
Defaults Upon Senior Securities
18
     
Item 4.
Submission of Matters to a Vote of Security Holders
18
     
Item 5.
Other Information
18
     
Item 6.
Exhibits
18
     
 
Signatures
19

 
- 2 -
 

SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($000’s omitted except share and per share data)
                                                                                  
 

   
September 30,
    
December 31,
  
   
2009
    
2008
  
   
(Unaudited)
        
Assets
            
Current assets:
            
  Cash and cash equivalents
   $ 4,159     $ 4,709  
  Accounts receivable, net
     4,498       5,006  
  Inventories, net
     11,897       10,160  
  Prepaid income taxes
     -       84  
  Deferred income taxes
     494       494  
  Other assets
     595       387  
     Total current assets
     21,643       20,840  
Property, plant and equipment, net
     5,733       5,838  
Other non-current assets
     200       207  
Total Assets
   $ 27,576     $ 26,885  
Liabilities and Shareholders’ Equity
                
Current liabilities:
                
  Current portion of long-term debt
   $ 487     $ 539  
  Accounts payable
     1,205       2,393  
  Accrued employee compensation and benefit costs
     1,379       1,335  
  Accrued income taxes
     378       -  
  Other accrued liabilities
     593       346  
     Total current liabilities
     4,042       4,613  
Long-term debt
     3,592       3,702  
Deferred income taxes
     501       501  
Shareholders’ equity:
                
  Common stock, par value $.20; authorized
                
    4,000,000 shares; issued 2,614,506 shares;
                
   outstanding 1,932,310 (1,933,253 – 2008) shares
     523       523  
  Capital in excess of par value
     13,296       13,296  
  Retained earnings
     10,012       8,680  
  Accumulated other comprehensive loss
     (98)       (98)  
      23,733       22,401  
  Employee stock ownership trust commitment
     (1,568)       (1,614)  
  Treasury stock, at cost 377,135 (376,192 – 2008) shares
     (2,724)       (2,718)  
     Total shareholders’ equity
     19,441       18,069  
Total Liabilities and Shareholders’ Equity
   $ 27,576     $ 26,885  

  See notes to consolidated financial statements
 - 3 -
 
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($000’s omitted except share and per share data)
(Unaudited)


   
 
          
 
        
   
 
          
 
        
     
Three Months Ended
September 30,
      
Nine Months Ended
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
Revenue
   $ 8,224     $ 7,818     $ 24,868     $ 24,535  
Costs, expenses and other income:
                                
   Cost of goods sold, exclusive of depreciation
     5,637       5,568       18,393       17,653  
   Selling, general and administrative
     1,191       1,139       3,541       3,183   
   Interest expense
     17       42       60       129   
   Depreciation and amortization
     133       129       415       410   
   Other income, net
     (2)       (14)       (42)       (67)   
      6,976       6,864       22,367       21,308   
Income before income tax provision
     1,248       954       2,501       3,227   
Income tax provision
     415       349       833       1,181   
Net income
   $ 833     $ 605     $ 1,668     $ 2,046  
                                 
Income per share:
                                
Basic
                                
Net income per share
   $ 0.43     $ 0.31     $ 0.86     $ 1.06  
Diluted
                                
Net income per share
   $ 0.40     $ 0.29     $ 0.81     $ 0.96  
 
 
 

 
See notes to consolidated financial statements
- 4 -
 
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)
 
 

 
   
Nine Months Ended
  
   
September 30,
  
   
2009
    
2008
  
             
Cash flows related to operating activities:
            
   Net income
   $ 1,668     $ 2,046  
   Adjustments to reconcile net income to net
                
          cash provided by operating activities -
                
        Depreciation and amortization
     415       410  
                 
Change in assets and liabilities -
                
        Accounts receivable
     508       (405 )
        Inventories
     (1,737 )     (1,273 )
        Prepaid income taxes
     84       -  
        Other assets
     (208 )     (302 )
        Other non-current assets
     3       7  
        Accounts payable
     (1,188 )     202  
        Accrued employee compensation and benefit costs
     44       282  
        Other accrued liabilities
     247       -  
        Accrued income taxes
     378       46  
        Employee stock ownership trust payment
     46       -  
                 
Net cash provided by operating activities
     260       1,013  
                 
Cash flows related to investing activities:
                
   Capital expenditures - property, plant and equipment
     (305 )     (287 )
                 
Net cash used in investing activities
     (305 )     (287 )
                 
Cash flows related to financing activities:
                
   Principal payments on long-term debt
     (163 )     (165 )
   Purchase of treasury shares
     (6 )     (239 )
   Cash dividend
     (336 )     (348 )
   Purchase of stock options
     -       (772 )
   Proceeds from exercise of stock options
     -       7  
                 
Net cash used in financing activities
     (505 )     (1,517 )
                 
Net decrease in cash and cash equivalents
     (550 )     (791 )
                 
Cash and cash equivalents at beginning of period
     4,709       4,879  
                 
Cash and cash equivalents at end of period
   $ 4,159     $ 4,088  


See notes to consolidated financial statements
-  5 -
 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
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-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
 
     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 nine months ending September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The consolidated financial statements should be read in conjunction with the annual report and the notes thereto.
 
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”).
 
 
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 six 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.
 
 
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 inventory expected to be used in greater than one year are applied to the gross value of the inventory through a reserve of approximately $501,000 at September 30, 2009 and $524,000 at December 31, 2008. Pre-production and start-up costs are expensed as incurred.
 
 
     The purchase of suppliers’ minimum economic quantities of material such as steel, etc. may result in a purchase of quantities exceeding one year of customer requirements. Also, in order to maintain a reasonable and/or agreed to lead time, certain larger quantities of other product support items may have to be purchased and may result in over one year’s supply.
 
 
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 -
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
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 basis of assets and liabilities. The Company and its subsidiaries file a consolidated federal income tax return, a combined New York State income tax return and a separate Pennsylvania state income tax return.
 
 
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company did not have any accrued interest or penalties included in its consolidated balance sheets at September 30, 2009 or December 31, 2008, and did not recognize any interest and/or penalties in its consolidated statements of operations during the periods ended September 30, 2009 and 2008.
 
 
Supplemental cash flow information
 
 
Income taxes paid during the three months ended September 30, 2009 and 2008 amounted to approximately $191,000 and $9,000, respectively, and amounted to $392,000 and $1,153,000 for the nine months ended September 30, 2009 and 2008, respectively. Interest paid during the three months ended September 30, 2009 and 2008 amounted to approximately $17,000 and $35,000, respectively, and amounted to $64,000 and $137,000 for the nine months September 30, 2009 and 2008, respectively.
 
 
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 September 30, 2009 and December 31, 2008.
 
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.
 
 
 
- 7 -
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Research and Development Costs
 
 
Research and development costs are expensed as incurred.
 
 
Concentration of Credit Risks
 
 
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
 
   
September 30,
    
December 31,
  
   
2009
    
2008
  
   
($000’s omitted)
        
Raw materials and common parts
   $ 5,604     $ 4,621  
Work-in-process
     4,518       4,153  
Finished goods
     1,775       1,386  
Total inventories, net of reserve
   $ 11,897     $ 10,160  

4.
Property, Plant and Equipment
 
   
September 30,
    
December 31,
  
   
2009
    
2008
  
   
($000’s omitted)
        
Land
   $ 25     $ 25  
Buildings
     6,855       6,761  
Machinery, equipment and tooling
     11,428       11,728  
      18,308       18,514  
Less accumulated depreciation and amortization
     (12,575 )     (12,676 )
Total property, plant and equipment
   $ 5,733     $ 5,838  

 
Property, plant and equipment include land and building under a $5,000,000 capital lease which can be purchased for a nominal amount at the end of the lease term. As of September 30, 2009 and December 31, 2008, accumulated amortization on the building amounted to approximately $2,128,000 and $2,040,000, respectively. Amortization expense amounted to $35,000 and $105,000 for the three and nine month periods ended September 30, 2009 and 2008, respectively. The associated current and long-term liabilities are discussed in Note 5, Long-term debt, of the consolidated financial statements. Depreciation expense for the three months ended September 30, 2009 and 2008 amounted to $96,000 and $92,000, respectively and $304,000 and $299,000 for the nine month periods ended September 30, 2009 and 2008, respectively. The Company believes that it maintains property and casualty insurance in amounts adequate for the risk and nature of its assets and operations which are generally customary in its industry.
 
 
 
 
- 8 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5.
Long-Term Debt


   
September 30,
    
December 31,
  
   
2009
    
2008
  
   
($000’s omitted)
  
Industrial Development Revenue Bonds; secured by an equivalent
            
letter of credit from a bank with interest payable monthly
            
at a floating rate (0.60% at September 30, 2009) (A)
   $ 3,470     $ 3,470  
                 
Term loan payable to a financial institution;
                
interest at LIBOR plus 2%, (2.60% at September 30, 2009);
                
quarterly principal payments of $26,786 through the
                
fourth quarter of 2011
     241       321  
                 
Term loan payable to a financial institution;
                
interest at LIBOR plus 2%, not to exceed 6.00% (2.60% at
                
September 30, 2009); quarterly principal payments
                
of $17,500; repaid  in full in the fourth quarter
                
of 2009; partially secured by equipment (B)
     168       220  
                 
Secured term loan payable to a government agency;
                
monthly payments of $1,950 including interest
                
fixed at 3% payable through fourth quarter of 2015
     133       146  
                 
Secured term loan payable to a government agency;
                
monthly principal payments of approximately $1,900 with
                
interest waived payable through second quarter of 2012
     67       84  
      4,079       4,241  
Less current portion
     (487 )     (539 )
    $ 3,592     $ 3,702  


 
 
 
(A) The Industrial Development Revenue Bonds were issued by a government agency to finance the construction of the Company’s headquarters/Advanced Technology facility. Annual sinking fund payments of $170,000 commenced December 1, 2000 and continue through 2013, with a final payment of $2,620,000 due December 1, 2014. The Company has agreed to reimburse the issuer of the letter of credit if there are draws on that letter of credit. The Company pays the letter of credit bank an annual fee of 1% of the amount secured thereby and pays the remarketing agent for the bonds an annual fee of .25% of the principal amount outstanding. The Company’s interest under the facility capital lease has been pledged to secure its obligations to the government agency, the bank and the bondholders
 
(B) On October 1, 2009 the Company paid $168,000 on the term loan to the financial institution as full and final payment on the obligation prior to its scheduled maturity in 2012. The full amount is included in current portion of long term debt at September 30, 2009.
 
 
The Company also has a $1,000,000 line of credit on which there was no balance outstanding at September 30, 2009 and December 31, 2008.
 
 
Certain lenders require the Company to comply with debt covenants as described in the specific loan documents, including a debt service ratio. At September 30, 2009 and December 31, 2008, the Company was in compliance with all of its debt covenants.

6.
Income Taxes
 
 
The Company did not have any unrecognized tax benefits or obligations as of September 30, 2009 and December 31, 2008.
 
 
- 9 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
     The Company and/or its subsidiaries file income tax returns in the United States federal jurisdiction, New York State and Pennsylvania. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2004.
 
 
     During the third quarter of 2009, New York State Department of Taxation performed an examination of the New York State Corporation Tax for the years 2005, 2006 and 2007. The Company is awaiting notification as to the results of the examination but does not expect such results to have a material impact on the financial statements.
 
 
 
7.
Common Shareholders’ Equity
 

                            ($000’s omitted)                  
   
Common stock
                            
Accumulated
        
   
Number
          
Capital in
                      
other
    
Total
  
   
of shares
          
excess of
    
Retained
          
Treasury
    
comprehensive
    
shareholders’
  
   
issued
    
Amount
    
par value
    
earnings
    
ESOP
    
stock
    
loss
    
equity
  
Balance December 31, 2008
   2,614,506     $ 523     $ 13,296     $ 8,680     ($ 1,614 )   ($ 2,718 )   ($ 98 )   $ 18,069  
   Net income
   -       -       -       1,668       -       -       -       1,668  
   Purchase of treasury shares
   -       -       -       -       -       (6 )     -       (6 )
   Cash dividend
   -       -       -       (336 )     46       -       -       (290 )
Balance September 30, 2009
   2,614,506     $ 523     $ 13,296     $ 10,012     ($ 1,568 )   ($ 2,724 )   ($ 98 )   $ 19,441  
                                                                 


 
In January of 2006, the Company’s Board of Directors authorized the purchase by the Company of up to 250,000 shares of its common stock in the open market or in privately negotiated transactions. On October 31, 2008, the Company announced that its Board of Directors authorized the purchase of an additional 200,000 shares of the Company’s common stock under the Company’s current purchase program. As of September 30, 2009, the Company has purchased 238,088 shares and there remain 211,912 shares available to purchase under this program.
 
 
     As previously reported, on April 1, 2009, the Company announced that its Board of Directors declared a $0.15 per share cash dividend. The dividend was paid on May 15, 2009 to shareholders of record on April 20, 2009 and was approximately $336,000 in the aggregate. This second consecutive annual dividend does not represent that the Company will pay dividends on a regular or scheduled basis.
 
 
Earnings Per Share
 
 
Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period. Incremental shares from assumed conversions are calculated as the number of shares that would be issued, net of the number of shares that could be purchased in the marketplace with the cash received upon stock option exercise.
 

- 10  -
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
   
($000’s omitted except per share data)
  
                                 
Net income
   $ 833     $ 605     $ 1,668     $ 2,046  
                                 
Weighted average common shares
                                
   outstanding (basic)
     1,933       1,926       1,933       1,932  
                                 
Incremental shares from assumed
                                
   conversions of stock options
     136       188       127       201  
                                 
Weighted average common
                                
   shares outstanding (diluted)
     2,069       2,114       2,060       2,133  
                                 
Basic
                                
Net income per share
   $ 0.43     $ 0.31     $ 0.86     $ 1.06  
                                 
Diluted
                                
Net income per share
   $ 0.40     $ 0.29     $ 0.81     $ 0.96  

 
8.
Commitments
 
 
The Company leases certain equipment pursuant to operating lease arrangements. Total rental expense in the nine month periods ended September 30, 2009 and 2008 and future minimum payments under such leases are not material to the consolidated financial statements.
 
9.
Litigation
 
 
There are no legal proceedings which are material to the Company currently pending by or against the Company.
 
10.
Business segments
 
 
The Company operates in two business segments, Advanced Technology Group (ATG) and Consumer Products Group (CPG). The Company’s reportable segments are strategic business units that offer different products and services. The segments are composed of separate corporations and are managed separately. Operations in the ATG involve the design, manufacture, and marketing of servo-control components (i.e., torque motors, control valves, actuators, etc.) for government, commercial and industrial applications. CPG’s operations involve the design, manufacture and marketing of a variety of cutlery products for use by consumers and various government agencies. The Company derives its primary sales revenue from domestic customers, although a portion of finished products are for foreign end use.


 
 
- 11 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Information regarding the Company’s operations in these segments is summarized as follows
 
($000’s omitted):
 
   
Advanced Technology
    
Consumer Products
              
   
Group
    
Group
    
Consolidated
  
   
Nine Months Ended
    
Nine Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
    
September 30,
  
   
2009
    
2008
    
2009
    
2008
    
2009
    
2008
  
Revenues from unaffiliated customers
   $ 13,319     $ 15,313     $ 11,549     $ 9,222     $ 24,868     $ 24,535  
Profit
   $ 2,806     $ 4,217     $ 885     $ 191       3,691       4,408  
Interest expense
   $ (55 )   $ (117 )   $ (5 )   $ (12 )     (60 )     (129 )
Depreciation and amortization
   $ (304 )   $ (287 )   $ (111 )   $ (123 )     (415 )     (410 )
Other income, net
   $ 38     $ 47     $ 4     $ 20       42       67  
General corporate expense
                                     (757 )     (709 )
Income before income tax provision
                                   $ 2,501     $ 3,227  
Capital expenditures
   $ 212     $ 249     $ 93     $ 38     $ 305     $ 287  

   
September 30,
    
December 31,
    
September 30,
    
December 31,
    
September 30,
    
December 31,
  
   
2009
    
2008
    
2009
    
2008
    
2009
    
2008
  
Identifiable assets
   $ 16,469     $ 16,688     $ 11,107     $ 10,197     $ 27,576     $ 26,885  

 
                                     
   
Advanced Technology
    
Consumer Products
              
   
Group
    
Group
    
Consolidated
  
   
Three Months Ended
    
Three Months Ended
    
Three Months Ended
  
   
September 30,
    
September 30,
    
September 30,
  
   
2009
    
2008
    
2009
    
2008
    
2009
    
2008
  
Revenues from unaffiliated customers
   $ 4,360     $ 5,419     $ 3,864     $ 2,399     $ 8,224     $ 7,818  
Profit (loss)
   $ 878     $ 1,476     $ 770     $ (129 )   $ 1,648     $ 1,347  
Interest expense
   $ (16 )   $ (39 )   $ (1 )   $ (3 )     (17 )     (42 )
Depreciation and amortization
   $ (100 )   $ (92 )   $ (33 )   $ (37 )     (133 )     (129 )
Other income, net
   $ -     $ 11     $ 2     $ 3     $ 2     $ 14  
General corporate expense
                                     (252 )     (236 )
Income before income tax provision
                                   $ 1,248     $ 954  
Capital expenditures
   $ 81     $ 81     $ 6     $ 20     $ 87     $ 101  


11.
Other Income
 
 
Components of other income include interest income on cash and cash equivalents, and other minor amounts not directly related to the sale of the Company’s products.

12.
Subsequent Events
 
 
These financial statements have not been updated for subsequent events occurring after November 13, 2009 which is the date these financial statements were available to be issued.
 
     Subsequent to September 30, 2009 and before the filing of this Form 10-Q, the Company and a recently formed wholly-owned subsidiary, Aero Metal Products, Inc. (“AMP”) entered into Agreements with a related party which will provide hot-forged metal product capabilities and facilities in which to expand certain product lines.  The Agreements are fully described in the Form 8-K and Exhibits that were filed on November 3, 2009. The Agreements provide for rentals of $5,000.00 and $7,500.00 per month for certain real estate and personal property, respectively, with options to purchase which must be exercised if certain incentives, acceptable to the Company, are obtained from state agencies. The Agreements also provide for contingent earn out payments to the seller based on future performance of AMP.
 


 
- 12 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
Management Discussion
 
 
During the three months ended September 30, 2009 and 2008 approximately 56% and 37%, respectively and 52% and 41%, for the nine months ended September 30, 2009 and 2008 respectively, of the Company’s revenues were derived from contracts with agencies of the U.S. Government or their prime contractors and their subcontractors. The Company believes that government involvement in military operations overseas will continue to have an impact on the Company’s revenues. While the Company remains optimistic in relation to these opportunities, it recognizes that sales to the Government are affected by defense budgets, the foreign policies of the U.S. and other nations, the level of military operations and other factors and, as such, it is difficult to predict the impact on future financial results. The Company’s commercial business is affected by such factors as uncertainties in today’s global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, the effects of terrorism and the threat of terrorism, market demand and acceptance of both the Company’s products and its customers’ products which incorporate Company-made components.
 
 
     The Company’s Advanced Technology Group’s revenue decreased approximately $1,059,000 and $1,994,000 for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008 due to stretch-outs of customer orders across various product lines and, to a lesser extent, cancellations. The ATG continues its aggressive business development efforts in its primary markets and is broadening its focus to include new domestic and foreign markets that are consistent with its core competencies. There are substantial uncertainties in the current Global Economy that are compounded with certain Airliner delivery stretch-outs being implemented which in turn are adversely affecting the Company’s sales revenues in 2009. Although the ATG backlog continues to be significant, actual scheduled shipments may be delayed as a function of the Company’s customers’ delivery determinations that are affected by changes in the Global Economy and other factors.
 
 
     The Company’s Consumer Products Group’s (CPG) revenue increased approximately $1,465,000 and $2,327,000 for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008 primarily because of shipments under several significant government contracts. The Company’s Consumer Products Group (CPG) develops new commercial products and products for Government and Military applications. Included in the significant uncertainties in the near and long term are the effects of the current recession and the difficulty to accurately project the net effect of the change in the U.S. Administration on the government’s procurement programs. Approximately 70% and 65% of the CPG’s revenues are derived from contracts with agencies of the U.S. Government or their prime contractors for the three and nine months ended September 30, 2009, respectively.
 
 
     See also Note 10, Business Segments, of the accompanying consolidated financial statements for information concerning business segment operating results.

 
 
- 13 -
 
 
 
Results of Operations
 
 
The following tables compare the Company’s statements of operations data for the nine and three months ended September 30, 2009 and 2008 ($000’s omitted).
 


          Nine Months Ended September 30,      
               
 
            
2009 vs. 2008
  
   
2009
    
 
    
2008
    
 
       Dollar      
% Increase
  
   
Dollars
    
% of Sales
    
Dollars
    
% of Sales
    
Change
    
(Decrease)
  
Revenue:
                                    
   Advanced Technology
   $ 13,319       53.6 %   $ 15,313       62.4 %   $ (1,994 )     (13.0 %)
   Consumer Products
     11,549       46.4 %     9,222       37.6 %     2,327       25.2 %
      24,868       100.0 %     24,535       100.0 %     333       1.4 %
Cost of sale, exclusive of depreciation
                                                
   and amortization
     18,393       74.0 %     17,653       72.0 %     740       4.2 %
Gross profit
     6,475       26.0 %     6,882       28.0 %     (407 )     (5.9 %)
Selling, general and administration
     3,541       14.2 %     3,183       13.0 %     358       11.2 %
Depreciation and amortization
     415       1.7 %     410       1.7 %     5       1.2 %
Total costs and expenses
     22,349       89.9 %     21,246       86.7 %     1,103       5.2 %
Operating income
     2,519       10.1 %     3,289       13.3 %     (770 )     (23.4 %)
Interest expense
     60       0.2 %     129       0.5 %     (69 )     (53.5 %)
Other income, net
     (42 )        (0.2 %)     (67 )     (0.3 %)     25       (37.3 %)
Income tax provision
     833       3.3 %     1,181       4.8 %     (348 )     (29.5 %)
Net income
   $ 1,668       6.8 %   $ 2,046       8.3 %   $ (378 )     (18.5 %)
                                                 
   
Three Months Ended September 30,
  
                                      2009 vs. 2008  
      2009               2008            
Dollar
    
% Increase
  
   
Dollars
    
% of Sales
    
Dollars
    
% of Sales
    
Change
    
(Decrease)
  
Revenue:
                                                
   Advanced Technology
   $ 4,360       53.0 %   $ 5,419       69.3 %   $ (1,059 )     (19.5 %)
   Consumer Products
     3,864       47.0 %     2,399       30.7 %     1,465       61.1 %
      8,224       100.0 %     7,818       100.0 %     406       5.2 %
Cost of sale, exclusive of depreciation
                                                
   and amortization
     5,637       68.5 %     5,568       71.2 %     69       1.2 %
Gross profit
     2,587       31.5 %     2,250       28.8 %     337       15.0 %
Selling, general and administration
     1,191       14.5 %     1,139       14.6 %     52       4.6 %
Depreciation and amortization
     133       1.6 %     129       1.7 %     4       3.1 %
Total costs and expenses
     6,961       84.6 %     6,836       87.5 %     125       1.8 %
Operating income
     1,263       15.4 %     982       12.5 %     281       28.6 %
Interest expense
     17       0.2 %     42       0.5 %     (25 )     (59.5 %)
Other income, net
     (2 )     (0.0 %)     (14 )     (0.2 %)     12       (85.7 %)
Income tax provision
     415       5.0 %     349       4.5 %     66       18.9 %
Net income
   $ 833       10.2 %   $ 605       7.7 %   $ 228       37.7 %
                                                 
 
 

 
- 14 -
 
 
Sales
 
The Company’s consolidated revenues increased approximately $406,000 or 5.2% for the three month period ended September 30, 2009 and remained relatively consistent for the nine month period ended September 30, 2009 when compared to the same three and nine month periods in 2008. Such results are due to increased shipments at the CPG under several significant government contracts off-set by decreased shipments at the ATG due to customer stretch-outs of existing orders and, to a lesser extent, order cancellations. Procurement and time of shipments under Government contracts at the CPG significantly impact operating results from period to period.
 
Gross Profit
 
 
As shown in the above table, gross profit for the three month period ended September 30, 2009 increased while gross profit for the nine month period ended September 30, 2009 decreased as compared to the same three and nine month periods in 2008. The primary reason for the variations in gross profit was the mix of products sold at the CPG.  The current mix of products sold in the period within the ATG and CPG segments as well as the composition of ATG and CPG sales to the total consolidated sales directly attributed to dollar value and percentage variations in gross profit.
 
 
Selling, General and Administrative Expenses
 
 
Selling, general and administrative (SG&A) expenses that include variable costs increased for the three and nine month periods ended September 30, 2009 as compared to the same three and nine month periods in 2008.  The increase in SG&A includes increased legal and other expenses relative to contracts/product administration/negotiations, product protection (i.e., trademarks, patents, etc.) and employment associated issues including benefit plans’ amendments/updates and employee retention/separations and other costs associated with the expansion of the ATG and CPG foreign/domestic markets and product capabilities.  The trend is for SG&A expenses to increase as a function of increased regulations, market expansion, and the continued implementation of the Sarbanes-Oxley Act.
 
 
Interest Expense
 
 
Interest expense decreased for the three and nine month periods ended September 30, 2009 compared to the same periods in 2008 due to the decrease in average outstanding debt and interest rates. Average debt outstanding will continue to decline as the Company repays its scheduled debt obligations and assuming the Company does not incur additional debt. See also Note 5, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.
 
 
Depreciation and Amortization Expense
 
 
Depreciation and amortization expense remained consistent for the three and nine month periods ended September 30, 2009 compared to the same periods in 2008. Depreciation expense fluctuates due to variable estimated useful lives of depreciable property (as identified in Note 2, Summary of Significant Accounting Policies, of the accompanying consolidated financial statements) as well as the amount and nature of capital expenditures in current and previous periods. It is anticipated that the Company’s future capital expenditures will, at a minimum, follow the Company’s requirements to support its delivery commitments and to meet the information technology related capital expenditure requirements that are associated with Sarbanes-Oxley and other new regulatory requirements.

 
- 15 - 
 
 
 
Other Income
 
 
Components of other income include interest income on cash and cash equivalents, and other amounts not directly related to the sale of the Company’s products. The decrease in other income for the three and nine month periods ended September 30, 2009 when compared to the same three and nine month periods in 2008 is due to the decline in market driven interest rates on cash and cash equivalents.
 
 
Income Taxes
 
 
The Company’s effective tax rate was approximately 33.3% for the nine month period ended September 30, 2009 as compared to 36.6% for the nine month period ended September 30, 2008. The effective tax rate in both periods reflects state income taxes, permanent non-deductible expenditures and the tax benefit for the domestic manufacturing deduction allowable under the American Jobs Creation Act of 2004 as well as a reduction in New York State’s statutory tax rate and apportioned income. See also Note 6, Income Taxes, of the consolidated financial statements for information concerning income tax.
 
 
Net Income
 
 
Net income for the three month period ended September 30, 2009 increased $228,000 or 37.7% and decreased $378,000 or 18.5% for the nine month period ended September 30, 2009 when compared to net income for the same two periods ended September 30, 2008. These period to period differences in net income are primarily attributable to decreased sales at ATG offset by increased sales at the CPG. Also, affecting net income were increases in selling, general and administrative expenses and changes in gross margin as the result of product mix in the respective periods.
 
 
Liquidity and Capital Resources
 
 
The Company’s primary liquidity and capital requirements relate to working capital needs; primarily inventory, accounts receivable, capital expenditures for property, plant and equipment, tax payments and principal and interest payments on debt.
 
 
     At September 30, 2009, the Company had working capital of approximately $17,601,000 of which approximately $4,159,000 was comprised of cash and cash equivalents. The Company generated approximately $260,000 in cash from operations during the nine months ended September 30, 2009 as compared to generating $1,013,000 during the nine months ended September 30, 2008. The primary uses of cash for the Company’s operating activities for the nine months ended September 30, 2009 were for increases in inventory and payments to vendors aggregating $2,925,000.
 
 
     The Company’s primary use of cash in its financing and investing activities in the first nine months of 2009 related to capital expenditures for equipment and principal payments on long-term debt as well as approximately $336,000 for a cash dividend paid on May 15, 2009 to shareholders of record on April 20, 2009.
 
 
     At September 30, 2009, there are no material commitments for capital expenditures.
 
 
     The Company also has a $1,000,000 line of credit on which there is no balance outstanding at September 30, 2009. If needed, this can be used to fund cash flow requirements.
 
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

 
- 16 - 
 
 
Item 4T.
 
CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
 
The Company carried out an evaluation under the supervision and with the participation of its management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2009. Based upon that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to the material information relating to the Company (or the Company’s consolidated subsidiaries) required to be included in the Company’s periodic filings with the SEC, such that the information relating to the Company required to be disclosed in SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
 
 
Changes in Internal Controls
 
 
During the nine month period ended September 30, 2009, there were no changes in internal controls over financial reporting that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.
 
PART II
 
OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
 
 
None.
 
Item 1A.
RISK FACTORS
 
 
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
 
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(c)   Company Purchases of Company’s Equity Securities

2009 Periods
Total Number of Shares Purchased
Average Price $ Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that may yet be Purchased under the Plans or Programs
January 1– March 31, 2009
-
-
-
212,855
April 1 – June 30, 2009
943
6.34
943
211,912
July 1 – September 30, 2009
-
-
-
211,912
Total
943
6.34
943
211,912
 
 
In January of 2006, the Company’s Board of Directors authorized the purchase by the Company of up to 250,000 shares of its common stock in the open market or in privately negotiated transactions. On October 31, 2008, the Company announced that its Board of Directors authorized the purchase of an additional 200,000 shares of the Company’s common stock under the Company’s current purchase program. As of October 31, 2009, the Company has purchased 238,088 shares and there remain 211,912 shares available to purchase under this program.

 
- 17 -
 
 
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 July 2, 2009. 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
2,062,159
92,371
 
Nicholas D. Trbovich, Jr.
2,062,528
92,002
 
Dr. William H. Duerig.
2,133,920
20,610
 
Donald W. Hedges
2,134,182
20,348
       

Item 5.
OTHER INFORMATION
 
 
None.
 
Item 6.
EXHIBITS
 
 
31.1
Certification of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
FORWARD-LOOKING STATEMENTS
 
In addition to historical information, certain sections of this Form 10-Q 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-Q. 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.

 
- 18 -
 


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 12, 2009


  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  


 

 

 
- 19 -