Edgar Filing: SERVOTRONICS INC /DE/

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, 2010

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 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, 2010
Common Stock, $.20 par value		2,237,371

INDEX
			Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	a)	Consolidated Balance Sheets, September 30, 2010 and December 31, 2009		3

	b)	Consolidated Statements of Income for the three and nine months ended September 30, 2010 and 2009		4

	c)	Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009		5

	d)	Notes to Consolidated Financial Statements		6

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3.		Quantitative and Qualitative Disclosures About Market Risk		18

Item 4T.		Controls and Procedures		18

	PART II. OTHER INFORMATION

Item 1.		Legal Proceedings		19

Item 1A.		Risk Factors		19

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		19

Item 3.		Defaults Upon Senior Securities		19

Item 4.		Other Information		19

Item 5.		Exhibits		19

		Signatures		21

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($000’s omitted except share and per share data)

	September 30,			December 31,
	2010			2009
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	4,559		$	3,825
Certificates of deposit		253			495
Accounts receivable, net		4,546			4,086
Inventories, net		11,160			11,526
Prepaid income taxes		56			205
Deferred income taxes		540			540
Other assets		505			450
Total current assets		21,619			21,127
Property, plant and equipment, net		6,144			6,307
Other non-current assets		296			200
Total Assets	$	28,059		$	27,634
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	321		$	321
Current portion of capital lease related party		79			79
Accounts payable		965			1,115
Accrued employee compensation and benefit costs		1,362			1,059
Other accrued liabilities		412			855
Total current liabilities		3,139			3,429
Long-term debt		3,268			3,381
Capital lease related party		436			495
Deferred income taxes		515			515
Shareholders’ equity:
Common stock, par value $.20; authorized
4,000,000 shares; issued 2,614,506 shares;
outstanding 1,961,018 (1,961,018 – 2009) shares		523			523
Capital in excess of par value		13,486			13,296
Retained earnings		10,945			10,248
Accumulated other comprehensive loss		(61	)		(61	)
		24,893			24,006
Employee stock ownership trust commitment		(1,468	)		(1,468	)
Treasury stock, at cost 377,135 (377,135 – 2009) shares		(2,724	)		(2,724	)
Total shareholders’ equity		20,701			19,814
Total Liabilities and Shareholders’ Equity	$	28,059		$	27,634

See notes to consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

($000’s omitted except share and per share data)

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Revenue	$	7,346		$	8,224		$	23,433		$	24,868

Costs, expenses and other income:
Cost of goods sold, exclusive of
depreciation and amortization		5,643			5,637			16,839			18,393
Selling, general and administrative		1,225			1,191			3,682			3,541
Interest expense		16			17			50			60
Depreciation and amortization		159			133			483			415
Other income, net		(6	)		(2	)		(29	)		(42	)
		7,037			6,976			21,025			22,367
Income before income tax provision		309			1,248			2,408			2,501
Income tax provision		104			415			802			833
Net income	$	205		$	833		$	1,606		$	1,668

Income per share:
Basic
Net income per share	$	0.10		$	0.43		$	0.82		$	0.86
Diluted
Net income per share	$	0.10		$	0.40		$	0.75		$	0.81

See notes to consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

($000’s omitted except share and per share data)

(Unaudited)


	Nine Months Ended
	September 30,
	2010			2009
Cash flows related to operating activities:
Net income	$	1,606		$	1,668
Adjustments to reconcile net income to net
Cash generated in operating activities -
Depreciation and amortization		483			415
Change in assets and liabilities -
Accounts receivable		(460	)		508
Inventories		366			(1,737	)
Prepaid income taxes		339			84
Other assets		(55	)		(208	)
Other non-current assets		(104	)		3
Accounts payable		(150	)		(1,188	)
Accrued employee compensation and benefit costs		303			44
Other accrued liabilities		(443	)		247
Accrued income taxes		-			378
Employee stock ownership trust payment		-			46

Net cash generated in operating activities		1,885			260

Cash flows related to investing activities:
Capital expenditures - property, plant and equipment		(312	)		(305	)
Proceeds from Certificates of Deposit		242			-

Net cash used in investing activities		(70	)		(305	)

Cash flows related to financing activities:
Principal payments on long-term debt		(113	)		(163	)
Principal payments on capital lease related party		(59	)		(6	)
Cash dividend		(336	)		(336	)
Purchase of stock options		(573	)		-

Net cash used in financing activities		(1,081	)		(505	)
Net increase (decrease) in cash and cash equivalents		734			(550	)
Cash and cash equivalents at beginning of period		3,825			4,709
Cash and cash equivalents at end of period	$	4,559		$	4,159

See notes to consolidated financial statements

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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 United States (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 three and nine months ending September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The consolidated financial statements should be read in conjunction with the 2009 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 three months or less. Cash equivalents consist primarily of short-term certificates of deposit.

Certificates of Deposit

Certificates of Deposit are classified as available for sale, and are carried at fair value. The investments plus interest earned amounted to approximately $253,000 at September 30, 2010 and $495,000 at December 31, 2009. There were no unrealized gains or losses since cost approximates fair value as of September 30, 2010 and December 31, 2009. In accordance with ASC 820, the valuations of Certificates of Deposit are determined by observing Level 1 - market value inputs.

Accounts Receivable

The Company grants credit to substantially all of its customers and carries its accounts receivable at original invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on history of past write-offs, collections, and current credit conditions. The allowance for doubtful accounts amounted to approximately $92,000 at September 30, 2010 and $91,000 at December 31, 2009.

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.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $623,000 at September 30, 2010 and $548,000 at December 31, 2009. 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.

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 over the shorter of their estimated useful life or the lease term. 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 recognizes 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 consolidated New York State income tax return, a separate Pennsylvania state income tax return and a separate Arkansas 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, 2010 or December 31, 2009, and did not recognize any interest and/or penalties in its consolidated statements of income during the three and nine months ended September 30, 2010 and 2009.

During the third quarter of 2009, the New York State Department of Taxation and Finance (NYS) commenced an examination of the Company’s New York State franchise tax return for the years 2005 through 2007. In the third quarter of 2010, the examination was complete resulting in no change to the Company’s originally filed returns.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental cash flow information

Income taxes paid during the three months ended September 30, 2010 and 2009 amounted to approximately $62,000 and $191,000, respectively, and amounted to $475,000 and $392,000 for the nine months ended September 30, 2010 and 2009, respectively. Interest paid during the three months ended September 30, 2010 and 2009 amounted to approximately $16,000 and $17,000, respectively, and amounted to $50,000 and $64,000 for the nine months ended September 30, 2010 and 2009, respectively. The Company recognized a non-cash tax benefit of approximately $190,000 related to the surrender of unexercised stock options.

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 no circumstances that would require testing of impairment of long lived assets existed at September 30, 2010 and December 31, 2009.

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.

Reclassifications

Certain balances as previously reported were reclassified to conform with classifications adopted in the current period.

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. The Company engages in a significant amount of business with the United States Government through sales to its prime contractors and otherwise.

Total sales to United States Government at Advanced Technology Group (ATG) and Consumer Products Group (CPG) amounted to approximately 39% and 56% for the three months ended September 30, 2010 and 2009, respectively, and 43% and 52% for the nine months ended September 30, 2010 and 2009, respectively. Sales to one customer, including various divisions and subsidiaries of a common parent company, amounted to approximately 24% and 18% as of September 30, 2010 and 2009, respectively. The Company also had sales to another customer that amounted to approximately 12% and 11% as of September 30, 2010 and 2009, respectively. No other single customer represented more than 10% of the Company’s revenues in any of these periods.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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,
	2010		2009
	($000’s omitted)

Raw materials and common parts, net of reserve	$	5,797	$	6,441
Work-in-process		3,647		3,425
Finished goods		1,716		1,660

Total inventories, net of reserve	$	11,160	$	11,526

4.	Property, Plant and Equipment

	September 30,			December 31,
		2010			2009
	($000’s omitted)

Land	$	25		$	25
Buildings		6,912			6,881
Machinery, equipment and tooling (including capital lease)		12,413			12,130
		19,350			19,036
Less accumulated depreciation and amortization		(13,206	)		(12,729	)
Total property, plant and equipment, net	$	6,144		$	6,307

Property, plant and equipment includes land and building in Elma, New York, 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, 2010 and December 31, 2009, accumulated amortization on the building amounted to approximately $2,261,000 and $2,163,000, respectively. Amortization expense amounted to $31,000 and $35,000 for the three month periods ended September 30, 2010 and 2009, respectively, and amounted to $98,000 and $105,000 for the nine month periods ended September 30, 2010 and 2009, respectively. The associated current and long-term liabilities are discussed in Note 5, Long-Term Debt, of the accompanying consolidated financial statements. Property, plant and equipment also includes machinery and equipment under a $588,000 capital lease with related party. As of September 30, 2010 and December 31, 2009, accumulated amortization on the machinery and equipment amounted to approximately $77,000 and $14,000, respectively. Amortization expense amounted to $21,000 and $0 (zero) for the three month periods ended September 30, 2010 and 2009, respectively, and amounted to $63,000 and $0 (zero) for the nine month periods ended September 30, 2010 and 2009, respectively. The associated current and long-term liabilities are discussed in Note 6, Capital Lease – Related Party, of the accompanying consolidated financial statements. Depreciation expense amounted to $105,000 and $96,000 for the three month periods ended September 30, 2010 and 2009, respectively, and amounted to $316,000 and $304,000 for the nine month periods ended September 30, 2010 and 2009, respectively. The combined depreciation and amortization expense for the three month periods ended September 30, 2010 and 2009 were $159,000 and $133,000, respectively and $483,000 and $415,000 for the nine month periods ended September 30, 2010 and 2009, respectively. 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.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.	Long-Term Debt

	September 30,			December 31,
	2010			2009
	($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 (0.47% at September 30, 2010) (A)	$	3,300		$	3,300

Term loan payable to a financial institution;
interest at LIBOR plus 2%, (2.26% at September 30, 2010);
quarterly principal payments of $26,786 through the
fourth quarter of 2011		134			214

Secured term loan payable to a government agency;
monthly payments of $1,950 including interest
fixed at 3% payable through fourth quarter of 2015		112			127

Secured term loan payable to a government agency;
monthly principal payments of approximately $2,000 with
interest waived payable through second quarter of 2012		43			61
		3,589			3,702
Less current portion		(321	)		(321	)
	$	3,268		$	3,381

(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.

The Company also has an unsecured $1,000,000 line of credit on which there was no balance outstanding at September 30, 2010 and December 31, 2009.

Certain lenders require the Company to comply with debt covenants as described in the specific loan documents. At September 30, 2010 and December 31, 2009, the Company was in compliance with all of its debt covenants.

6.	Capital Lease – Related Party

On November 3, 2009, the Company entered into a capital lease with a related party of the Company for certain equipment to be used in the expansion of the Company’s capabilities and product lines which was appropriately disclosed in the Company’s Form 8-K filing on November 3, 2009. See Note 10, Related Party Transactions, of the accompanying consolidated financial statements for information on the related party transaction. Monthly payments of $7,500, which include an imputed fixed interest rate of 2.00%, commenced November 3, 2009 and will continue through the fourth quarter of 2016. At September 30, 2010, the present value of the minimal lease payment is approximately $515,000 (after subtracting approximately $32,000 of imputed interest).

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.	Income Taxes

The Company did not have any material unrecognized tax benefits or obligations as of September 30, 2010 and December 31, 2009.

The Company and/or its subsidiaries file income tax returns in the United States federal jurisdiction, New York State, Pennsylvania and Arkansas. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2005.

8.	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, 2009	2,614,506	$	523	$	13,296	$	10,248		$	(1,468	)	$	(2,724	)	$	(61	)	$	19,814
Net income	-		-		-		1,606			-			-			-			1,606
Surrender of unexercised stock
options, net of tax benefit	-		-		190		(573	)		-			-			-			(383	)
Cash dividend	-		-		-		(336	)		-			-			-			(336	)
Balance September 30, 2010	2,614,506	$	523	$	13,486	$	10,945		$	(1,468	)	$	(2,724	)	$	(61	)	$	20,701

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, 2010, the Company has purchased 238,088 shares and there remain 211,912 shares available to purchase under this program.

Consistent with the Company’s current policy to reduce the number of outstanding Company shares thereby increasing the reported earnings per share, the Executive Officers, Directors and certain employees elected on May 20, 2010 to surrender 101,200 unexercised options to the Company in exchange for a cash payment equal to the difference between the exercise price and closing market price of the Company’s common stock on the day of surrender less an administrative charge. Such transactions aggregated $573,000. A tax benefit of approximately $190,000 associated with these transactions reduced taxes payable and was credited directly to capital in excess of par value.

As previously reported, on February 22, 2010, the Company announced that its Board of Directors declared a $0.15 per share cash dividend. The dividend was paid on March 31, 2010 to shareholders of record on March 10, 2010 and was approximately $336,000 in the aggregate. This third consecutive annual dividend does not represent that the Company will pay dividends on a regular or scheduled basis.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
	($000's omitted except per share data)
Net income	$	205	$	833	$	1,606	$	1,668
Weighted average common shares
outstanding (basic)		1,961		1,933		1,961		1,933
Incremental shares from assumed
conversions of stock options		167		136		168		127
Weighted average common
shares outstanding (diluted)		2,128		2,069		2,129		2,060
Basic
Net income per share	$	0.10	$	0.43	$	0.82	$	0.86
Diluted
Net income per share	$	0.10	$	0.40	$	0.75	$	0.81

9.	Commitments

The Company leases certain equipment and real property pursuant to operating lease arrangements. Total rental expense in the three and nine month periods ended September 30, 2010 and 2009 and future minimum payments under such leases are not material to the accompanying consolidated financial statements. The Company also leases certain personal property being accounted for under a capital lease. See also Note 5, Long-Term Debt, Note 6, Capital Lease – Related Party, and Note 10, Related Party Transactions, of the accompanying consolidated financial statements for information on the capital leases.

10.	Related Party Transactions

During 2009, the Company formed a new wholly owned Subsidiary that leased certain personal property from a related party through the execution of a capital lease. See Note 6, Capital Lease – Related Party, of the accompanying consolidated financial statements. The Company also entered into a real property lease agreement, with the same related party, which provides for annual rental of $60,000. In addition, in the event the Company is successful in obtaining certain tax and/or other incentives from the state the entity operates in, the Company will be required to purchase the building at the appraised value of $506,000. Additionally, in the event that the Company purchases the building, there is an arrangement payable to the related party, providing a threshold in annual earnings is reached by the new subsidiary, which will result in a percentage payment which could be as low as $0 (zero) dollars to a maximum total in the aggregate of $600,000 which is non-recurring. These transactions are disclosed as related party transactions because the wife of an officer/director of Servotronics, Inc. is the sole shareholder of the company that is leasing/selling the assets. The Company considered the impact of the above transactions as if the acquisition had occurred as of the beginning of each of the fiscal periods presented and determined that the pro forma impact did not have a material effect on the Company’s revenues, net income or earnings per share.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.	Litigation

There are no legal proceedings which are material to the Company currently pending by or against the Company other than ordinary routine litigation incidental to the business which is not expected to materially adversely affect the business or earnings of the Company.

12.	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. An immaterial 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
	Nine Months Ended						Nine Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,
	2010			2009			2010			2009			2010			2009

Revenues from unaffiliated customers	$	13,713		$	13,319		$	9,720		$	11,549		$	23,433		$	24,868

Profit	$	3,226		$	2,806		$	729		$	885		$	3,955		$	3,691

Interest expense	$	(42	)	$	(55	)	$	(8	)	$	(5	)		(50	)		(60	)

Depreciation and amortization	$	(311	)	$	(304	)	$	(172	)	$	(111	)		(483	)		(415	)

Other income, net	$	16		$	38		$	13		$	4			29			42

General corporate expense														(1,043	)		(757	)

Income before income tax provision													$	2,408		$	2,501

Capital expenditures	$	203		$	212		$	109		$	93		$	312		$	305

	ATG				CPG				Consolidated
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2010		2009		2010		2009		2010		2009
Identifiable assets	$	15,328	$	16,164	$	12,731	$	11,470	$	28,059	$	27,634

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Advanced Technology						Consumer Products
	Group						Group						Consolidated
	Three Months Ended						Three Months Ended						Three Months Ended
	September 30,						September 30,						September 30,
		2010			2009			2010			2009			2010			2009
Revenues from unaffiliated customers	$	4,636		$	4,360		$	2,710		$	3,864		$	7,346		$	8,224

Profit	$	975		$	878		$	(148	)	$	770		$	827		$	1,648

Interest expense	$	(14	)	$	(16	)	$	(2	)	$	(1	)		(16	)		(17	)

Depreciation and amortization	$	(102	)	$	(100	)	$	(57	)	$	(33	)		(159	)		(133	)

Other income, net	$	1		$	-		$	5		$	2			6			2

General corporate expense														(349	)		(252	)

Income before income tax provision													$	309		$	1,248

Capital expenditures	$	126		$	81		$	80		$	6		$	206		$	87

13.	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.

14.	Subsequent Events

These financial statements have not been updated for subsequent events occurring after November 11, 2010 which is the date these financial statements were available to be issued.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management Discussion

During the three months ended September 30, 2010 and 2009 approximately 39% and 56%, respectively and 43% and 52%, for the nine months ended September 30, 2010 and 2009 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 financial results in both the Advanced Technology and Consumer Product markets. While the Company is optimistic in relation to these potential 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 ATG revenue increased approximately $276,000 and $394,000 for the three and nine months ended September 30, 2010, respectively, compared to the same period in 2009. 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. This may adversely affect the Company’s sales revenues in 2010 and beyond. Although the ATG backlog continues to be significant, actual scheduled shipments may be delayed as a function of the Company’s customers final delivery determinations that may be based on changes in the global economy and other factors.

- 13 -

The Company’s CPG revenue decreased approximately $1,154,000 and $1,829,000 for the three and nine months ended September 30, 2010, respectively, compared to the same period in 2009 primarily due to decreased shipments under several significant government contracts. The 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 U.S. and World’s Stimulus Plans and the difficulty to accurately project the net effect of the vagaries inherent in the government’s procurement process programs. Approximately 56% of the CPG’s revenues are derived from contracts with agencies of the U.S. Government or their prime contractors for both the three and nine months ended September 30, 2010.

The ATG and CPG continue to respond to U.S. Government procurement Requests for Quotes. New product development activities are ongoing along with the acquisition of new product lines. See also Note 12, Business Segments, of the accompanying consolidated financial statements for information concerning business segment operating results.

Results of Operations

The following tables compare the Company’s statements of income data for the nine and three months ended September 30, 2010 and 2009 ($000’s omitted).

	Nine Months Ended September 30,
													2010 vs. 2009
	2010						2009							Dollar			% Increase
	Dollars			% of Sales			Dollars			% of Sales				Change			(Decrease)
Revenue:
Advanced Technology	$	13,713			58.5	%	$	13,319			53.6	%		$	394			3.0	%
Consumer Products		9,720			41.5	%		11,549			46.4	%			(1,829	)		(15.8	%)
		23,433			100.0	%		24,868			100.0	%			(1,435	)		(5.8	%)
Cost of sale, exclusive of depreciation
and amortization		16,839			71.9	%		18,393			74.0	%			(1,554	)		(8.4	%)
Gross profit		6,594			28.1	%		6,475			26.0	%			119			1.8	%
Selling, general and administration		3,682			15.7	%		3,541			14.2	%			141			4.0	%
Depreciation and amortization		483			2.1	%		415			1.7	%			68			16.4	%
Total costs and expenses		21,004			89.7	%		22,349			89.9	%			(1,345	)		(6.0	%)
Operating income		2,429			10.3	%		2,519			10.1	%			(90	)		(3.6	%)
Interest expense		50			0.2	%		60			0.2	%			(10	)		(16.7	%)
Other income, net		(29	)		(0.1	%)		(42	)		(0.2	%)			13			(31.0	%)
Income tax provision		802			3.4	%		833			3.3	%			(31	)		(3.7	%)
Net income	$	1,606			6.8	%	$	1,668			6.8	%		$	(62	)		(3.7	%)

- 14 -

	Three Months Ended September 30,
													2010 vs. 2009
	2010						2009						Dollar			% Increase
	Dollars			% of Sales			Dollars			% of Sales			Change			(Decrease)
Revenue:
Advanced Technology	$	4,636			63.1	%	$	4,360			53.0	%	$	276			6.3	%
Consumer Products		2,710			36.9	%		3,864			47.0	%		(1,154	)		(29.9	%)
		7,346			100.0	%		8,224			100.0	%		(878	)		(10.7	%)
Cost of sale, exclusive of depreciation
and amortization		5,643			76.8	%		5,637			68.5	%		6			0.1	%
Gross profit		1,703			23.2	%		2,587			31.5	%		(884	)		(34.2	%)
Selling, general and administration		1,225			16.7	%		1,191			14.5	%		34			2.9	%
Depreciation and amortization		159			2.2	%		133			1.6	%		26			19.5	%
Total costs and expenses		7,027			95.7	%		6,961			84.6	%		66			0.9	%
Operating income		319			4.3	%		1,263			15.4	%		(944	)		(74.7	%)
Interest expense		16			0.2	%		17			0.2	%		(1	)		(5.9	%)
Other income, net		(6	)		(0.1	%)		(2	)		0.0	%		(4	)		200.0	%
Income tax provision		104			1.4	%		415			5.0	%		(311	)		(74.9	%)
Net income	$	205			2.8	%	$	833			10.2	%	$	(628	)		(75.4	%)

Sales

The Company’s consolidated sales decreased approximately $878,000 or 10.7% for the three month period ended September 30, 2010 and $1,435,000 or 5.8% for the nine month period ended September 30, 2010 when compared to the same three and nine month periods in 2009. Such results are due to decreased shipments at the CPG under several significant Government contracts partially off-set by increased shipments at the ATG for commercial applications. 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 preceding tables, gross profit decreased for the three month period and increased for the nine month period ended September 30, 2010 as compared to the same three and nine month periods in 2009. The primary reason for the variations in gross profit was the mix of products sold at the CPG. Gross profit as a percentage of sales is affected by many factors including, but not limited to, 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. See Note 12, Business Segments.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses that include variable costs increased for the nine month period ended September 30, 2010 as compared to the same nine month period in 2009 primarily due to an increase in employee compensation, and related expenses and customary expenses in support of its expanding product lines. The Company’s SG&A expenses can include general corporate, intellectual properties and asset acquisition related activity costs which include, among other things, the support for additional and new manufacturing capabilities which expanded the cutlery product line to include hot-forged edged products. As required by United States generally accepted accounting principles (GAAP), the Company expensed such costs in the period incurred. The trend is for SG&A expenses to increase as a function of increased government regulations, market expansion and company growth.

- 15 -

Interest Expense

Interest expense decreased for the three and nine month periods ended September 30, 2010 as compared to the same periods in 2009 due to the decrease in average outstanding debt and interest rates. 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 increased for the three and nine month periods ended September 30, 2010 as compared to the same periods in 2009. 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. The increase is also due to 2010 being the first full year of depreciation expense related to the Capital Lease with Related Party for machinery and equipment. See Note 4, Property, Plant and Equipment. 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.

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 nine month period ended September 30, 2010 when compared to the same nine month period in 2009 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 three and nine month periods ended September 30, 2010 and September 30, 2009. The effective tax rate reflects federal and state income taxes, permanent non-deductible expenditures and the tax benefit for manufacturing deductions allowable under the American Jobs Creation Act of 2004 as well as reductions in New York State’s statutory tax rate and income apportionment formula. See also Note 7, Income Taxes, of the accompanying consolidated financial statements for information concerning income tax.

Net Income

Net income for the three month period ended September 30, 2010 decreased $628,000 or 75.4% and $62,000 or 3.7% for the nine month period ended September 30, 2010 when compared to the same two periods ended September 30, 2009. The decrease in net income is primarily the result of decreased sales and profit margins at the CPG.

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 September 30, 2010, the Company had working capital of approximately $18,480,000 ($17,698,000–December 31, 2009) of which approximately $4,812,000 ($4,320,000– December 31, 2009) was comprised of cash and cash equivalents and certificates of deposit. The Company generated approximately $1,885,000 in cash from operations during the nine months ended September 30, 2010 as compared to using $260,000 during the nine months ended September 30, 2009. Cash was generated through net income and a decrease in inventory, prepaid income taxes and increase in accrued employee compensations costs aggregating $1,008,000. The primary use of cash for the Company’s operating activities for the nine months ended September 30, 2010 include increases in accounts receivable, decreases in accounts payable and payments on other accrued liabilities aggregating $1,053,000. Cash generated and used in operations is consistent with sales volume, customer expectations and competitive pressures.

- 16 -

The Company’s primary use of cash in its financing and investing activities in the first nine months of 2010 included current principal payments on long-term debt, as well as approximately $336,000 for a cash dividend paid on March 31, 2010 to shareholders of record on March 10, 2010. The Company also expended $573,000 to purchase outstanding stock options and $312,000 for capital expenditures.

At September 30, 2010, there are no material commitments for capital expenditures.

The Company also has an unsecured $1,000,000 line of credit on which there is no balance outstanding at September 30, 2010. 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.

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, 2010. 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 three and nine month periods ended September 30, 2010, there were no changes in internal controls over financial reporting that have materially affected, or are reasonably likely to affect, the Company’s internal controls over financial reporting.

- 17 -

PART II

OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

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

2010 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, 2010				211,912
April 1– June 30, 2010	-	-	-	211,912
July 1 – September 30, 2010	-	-	-	211,912
Total	-	-	-	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 September 30, 2010, the Company has purchased 238,088 shares during prior periods and there remain 211,912 shares available to purchase under this program.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.

OTHER INFORMATION

None.

Item 5.

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 (Filed herewith)

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 (Filed herewith)

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 (Filed herewith)

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 (Filed herewith)

- 18 -

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.

- 19 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 11, 2010

	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