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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| Delaware (State or other jurisdiction of incorporation or organization) |
16-0837866 (I. R. S. Employer Identification No.) |
| Class | Outstanding at April 30, 2012 | |
| Common Stock, $.20 par value | 2,386,871 |
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Page No.
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||||||
| PART I. FINANCIAL INFORMATION | ||||||
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Item 1.
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Financial Statements (Unaudited):
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|||||
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a)
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Consolidated Balance Sheets, March 31, 2012 and December 31, 2011
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3
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||||
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b)
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Consolidated Statements of Income for the three months ended March 31, 2012 and 2011
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4 | ||||
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c)
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Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011
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5
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d)
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Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011
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6
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e)
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Notes to Consolidated Financial Statements
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7
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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15 | ||||
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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18
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Item 4.
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Controls and Procedures
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18
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| PART II. OTHER INFORMATION | ||||||
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Item 1.
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Legal Proceedings
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18
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Item 1A.
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Risk Factors
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18
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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19
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Item 3.
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Defaults Upon Senior Securities
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19
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Item 4.
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Mine Safety Disclosures
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19
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Item 5.
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Other Information
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19
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Item 6.
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Exhibits
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20
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Signatures
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21
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March 31,
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December 31,
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|||||||
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2012
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2011
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|||||||
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Assets
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||||||||
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Current assets:
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||||||||
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Cash and cash equivalents
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$ | 5,009 | $ | 4,948 | ||||
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Accounts receivable, net
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5,671 | 6,031 | ||||||
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Inventories, net
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11,747 | 11,607 | ||||||
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Prepaid income taxes
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106 | 133 | ||||||
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Deferred income taxes
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754 | 754 | ||||||
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Other assets
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833 | 505 | ||||||
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Total current assets
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24,120 | 23,978 | ||||||
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Property, plant and equipment, net
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6,022 | 6,103 | ||||||
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Other non-current assets
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344 | 342 | ||||||
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Total Assets
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$ | 30,486 | $ | 30,423 | ||||
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Liabilities and Shareholders’ Equity
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||||||||
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Current liabilities:
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||||||||
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Current portion of long-term debt
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$ | 195 | $ | 202 | ||||
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Current portion of capital lease related party
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81 | 81 | ||||||
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Accounts payable
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1,331 | 1,451 | ||||||
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Accrued employee compensation and benefit costs
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1,711 | 1,434 | ||||||
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Other accrued liabilities
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183 | 327 | ||||||
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Total current liabilities
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3,501 | 3,495 | ||||||
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Long-term debt
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2,850 | 2,855 | ||||||
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Long-term portion of capital lease related party
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313 | 333 | ||||||
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Deferred income taxes
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496 | 496 | ||||||
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Shareholders’ equity:
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||||||||
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Common stock, par value $.20; authorized 4,000,000 shares; issued 2,614,506 shares; outstanding 2,083,257 (2,074,257 - 2011) shares
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523 | 523 | ||||||
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Capital in excess of par value
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13,774 | 13,774 | ||||||
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Retained earnings
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12,507 | 12,490 | ||||||
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Accumulated other comprehensive loss
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(67 | ) | (67 | ) | ||||
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Employee stock ownership trust commitment
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(1,266 | ) | (1,266 | ) | ||||
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Treasury stock, at cost 296,135 (305,135 -2011) shares
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(2,145 | ) | (2,210 | ) | ||||
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Total shareholders’ equity
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23,326 | 23,244 | ||||||
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Total Liabilities and Shareholders’ Equity
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$ | 30,486 | $ | 30,423 | ||||
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Three Months Ended
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||||||||
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March 31,
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||||||||
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2012
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2011
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Revenue
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$ | 8,369 | $ | 8,275 | ||||
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Costs, expenses and other income:
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||||||||
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Cost of goods sold, exclusive of depreciation and amortization
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6,773 | 6,209 | ||||||
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Selling, general and administrative
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1,332 | 1,297 | ||||||
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Interest expense
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13 | 15 | ||||||
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Depreciation and amortization
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171 | 167 | ||||||
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Other income, net
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(8 | ) | (10 | ) | ||||
| 8,281 | 7,678 | |||||||
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Income before income tax provision
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88 | 597 | ||||||
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Income tax provision
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25 | 179 | ||||||
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Net income
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$ | 63 | $ | 418 | ||||
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Income per share:
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Basic
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||||||||
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Net income per share
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$ | 0.03 | $ | 0.21 | ||||
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Diluted
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||||||||
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Net income per share
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$ | 0.03 | $ | 0.19 | ||||
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Three Months Ended
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March 31,
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||||||||
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2012
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2011
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Net income
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$ | 63 | $ | 418 | ||||
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Other comprehensive income:
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Retirement benefits adjustment
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-
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-
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||||||
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Total comprehensive income
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$ | 63 | $ | 418 | ||||
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Three Months Ended
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March 31,
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||||||||
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2012
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2011
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Cash flows related to operating activities:
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Net income
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$ | 63 | $ | 418 | ||||
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Adjustments to reconcile net income to net cash generated (used) in operating activities:
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Depreciation and amortization
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171 | 167 | ||||||
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Increase in inventory reserve
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14 | 4 | ||||||
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Change in assets and liabilities:
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||||||||
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Accounts receivable
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360 | (551 | ) | |||||
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Inventories
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(154 | ) | (130 | ) | ||||
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Prepaid income taxes
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27 | 170 | ||||||
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Other assets
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(328 | ) | (327 | ) | ||||
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Other non-current assets
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(2 | ) | (6 | ) | ||||
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Accounts payable
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(120 | ) | (44 | ) | ||||
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Accrued employee compensation and benefit costs
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274 | 231 | ||||||
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Other accrued liabilities
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(144 | ) | (50 | ) | ||||
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Net cash generated (used) in operating activities
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161 | (118 | ) | |||||
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Cash flows related to investing activities:
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Capital expenditures - property, plant and equipment
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(87 | ) | (101 | ) | ||||
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Net cash used in investing activities
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(87 | ) | (101 | ) | ||||
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Cash flows related to financing activities:
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Principal payments on long-term debt
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(12 | ) | (38 | ) | ||||
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Proceeds from exercise of stock options
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19 | - | ||||||
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Principal payments on capital lease related party
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(20 | ) | (20 | ) | ||||
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Net cash used in financing activities
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(13 | ) | (58 | ) | ||||
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Net increase (decrease) in cash and cash equivalents
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61 | (277 | ) | |||||
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Cash and cash equivalents at beginning of period
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4,948 | 4,447 | ||||||
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Cash and cash equivalents at end of period
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$ | 5,009 | $ | 4,170 | ||||
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1.
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Basis of Presentation
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The accompanying unaudited consolidated financial statements have been prepared in accordance with United States 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 United States generally accepted accounting principles for complete financial statements.
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The accompanying consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The consolidated financial statements should be read in conjunction with the 2011 annual report and the notes thereto.
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2.
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Business Description and Summary of Significant Accounting Policies
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Business Description
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Servotronics, Inc. and its subsidiaries design, manufacture and market advanced technology products consisting primarily of control components and consumer products consisting of knives and various types of cutlery and other edged products.
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Principles of Consolidation
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The consolidated financial statements include the accounts of Servotronics, Inc. and its wholly-owned subsidiaries (the “Company”). All intercompany balances and transactions have been eliminated upon consolidation.
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Cash and Cash Equivalents
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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.
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Accounts Receivable
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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 $116,000 at March 31, 2012 and $101,000 at December 31, 2011.
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Revenue Recognition
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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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Inventories
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Inventories are stated at the lower of standard cost or net realizable value. Cost includes all costs incurred to bring each product to its present location and condition. Market provisions in respect of lower of cost or market adjustments 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 $787,000 and $773,000 at March 31, 2012 and December 31, 2011, respectively. Pre-production and start-up costs are expensed as incurred.
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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.
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Shipping and Handling Costs
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Shipping and handling costs are classified as a component of cost of goods sold.
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Property, Plant and Equipment
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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.
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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:
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| Buildings and improvements | 5-39 years |
| Machinery and equipment | 5-15 years |
| Tooling | 3-5 years |
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Income Taxes
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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 and separate Pennsylvania, Arkansas and Texas state income tax returns.
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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 March 31, 2012 or December 31, 2011, and did not recognize any interest and/or penalties in its consolidated statements of income during the three months ended March 31, 2012 and 2011.
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Supplemental cash flow information
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Income taxes paid during the three months ended March 31, 2012 and 2011 amounted to approximately $7,500 and $22,000, respectively. Interest paid during the three months ended March 31, 2012 and 2011 amounted to approximately $13,000 and $15,000, respectively.
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Employee Stock Ownership Plan
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Contributions to the employee stock ownership plan are determined annually by the Company according to plan formula.
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Impairment of Long-Lived Assets
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The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate, or at least annually, that the carrying amount of the assets may not be fully recoverable based on undiscounted future operating cash flow analyses. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. The Company has determined that no impairment of long lived assets existed at March 31, 2012 and December 31, 2011.
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Use of Estimates
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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.
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Reclassifications
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Certain balances as previously reported were reclassified to conform with classifications adopted in the current period.
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Research and Development Costs
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Research and development costs are expensed as incurred.
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Concentration of Credit Risks
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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. Refer to Note 11, Business Segments, for disclosures related to customer concentrations.
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Fair Value of Financial Instruments
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The carrying amount of cash and cash equivalents, accounts receivable, 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 and capital lease, the fair value approximates its carrying amount.
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3.
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Inventories
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March 31,
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December 31,
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|||||||
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2012
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2011
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|||||||
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($000’s omitted)
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Raw materials and common parts
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$ | 5,641 | $ | 5,727 | ||||
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Work-in-process
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3,825 | 3,511 | ||||||
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Finished goods
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2,281 | 2,369 | ||||||
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Total inventories, net of reserve
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$ | 11,747 | $ | 11,607 | ||||
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4.
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Property, Plant and Equipment
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March 31,
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December 31,
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|||||||
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2012
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2011
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|||||||
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($000’s omitted)
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Land
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$ | 25 | $ | 25 | ||||
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Buildings
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7,189 | 7,181 | ||||||
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Machinery, equipment and tooling (including capital lease)
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13,010 | 12,930 | ||||||
| 20,224 | 20,136 | |||||||
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Less accumulated depreciation and amortization
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(14,202 | ) | (14,033 | ) | ||||
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Total property, plant and equipment
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$ | 6,022 | $ | 6,103 | ||||
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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 March 31, 2012 and December 31, 2011, accumulated amortization on the building amounted to approximately $2,455,000 and $2,423,000, respectively. Amortization expense amounted to $32,000 for the three month periods ended March 31, 2012 and 2011. 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 a related party. As of March 31, 2012 and December 31, 2011, accumulated amortization on the machinery and equipment amounted to approximately $203,000 and $182,000, respectively. Amortization expense amounted to $21,000 for the three month periods ended March 31, 2012 and 2011. The associated current and long-term liabilities are discussed in Note 6, Capital Lease – Related Party, of the accompanying consolidated financial statements.
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Depreciation expense amounted to $115,000 and $112,000 for the three month periods ended March 31, 2012 and 2011, respectively. The combined depreciation and amortization expense were $171,000 and $167,000 for the three month periods ended March 31, 2012 and 2011, respectively.
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5.
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Long-Term Debt
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March 31,
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December 31,
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||||||||
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2012
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2011
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||||||||
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($000’s omitted)
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|||||||||
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Industrial Development Revenue Bonds; secured by an equivalent
letter of credit from a bank with interest payable monthly
at a floating rate (0.47% at March 31, 2012)(A)
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$ | 2,960 | $ | 2,960 | |||||
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|||||||||
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Secured term loan payable to a government agency;
monthly payments of $1,950 including interest
fixed at 3% payable through fourth quarter of 2015
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81 | 86 | |||||||
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Secured term loan payable to a government agency;
monthly principal payments of approximately $2,200 with
interest waived payable through second quarter of 2012
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4 | 11 | |||||||
| 3,045 | 3,057 | ||||||||
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Less current portion
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(195 | ) | (202 | ) | |||||
| $ | 2,850 | $ | 2,855 | ||||||
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(A)
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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 1/4% 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.
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The Company also has an unsecured $1,000,000 line of credit on which there was no balance outstanding at March 31, 2012 and December 31, 2011.
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Certain lenders require the Company to comply with debt covenants as described in the specific loan documents, including a debt service ratio. At March 31, 2012 and December 31, 2011, the Company was in compliance with its debt covenants.
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6.
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Capital Lease – Related Party
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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. 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 March 31, 2012, the present value of the minimum lease payment is approximately $394,000 (after subtracting approximately $19,000 of imputed interest).
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7.
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Income Taxes
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The Company did not have any material uncertain tax positions or unrecognized tax benefits or obligations as of March 31, 2012 and December 31, 2011.
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The Company and/or its subsidiaries file income tax returns in the United States federal jurisdiction and in the states of New York, Pennsylvania, Arkansas and Texas. Also, during the third quarter of 2010, the Internal Revenue Service commenced an examination of the Company’s Federal Income tax returns for years 2008 and 2009. In the first quarter of 2011, the examination was completed and resulted in no material adjustments to the originally filed returns. The 2008 through 2011 federal and state tax returns remain open under statute.
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8.
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Shareholders’ Equity
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| ($000’s omitted except for share data) | ||||||||||||||||||||||||||||||||
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Common stock
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||||||||||||||||||||||||||||||||
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Number
of shares issued |
Amount
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Capital in excess of
par value |
Retained earnings
|
ESOP
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Treasury Stock
|
Accumulated Other Comprehensive Loss
|
Total Shareholders’
Equity |
|||||||||||||||||||||||||
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Balance December 31, 2011
|
2,614,506 | $ | 523 | $ | 13,774 | $ | 12,490 | $ | (1,266 | ) | $ | (2,210 | ) | $ | (67 | ) | $ | 23,244 | ||||||||||||||
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Net income
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- | - | - | 63 | - | - | - | 63 | ||||||||||||||||||||||||
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Exercise of Stock Options
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- | - | - | (46 | ) | - | 65 | - | 19 | |||||||||||||||||||||||
|
Balance March 31, 2012
|
2,614,506 | $ | 523 | $ | 13,774 | $ | 12,507 | $ | (1,266 | ) | $ | (2,145 | ) | $ | (67 | ) | $ | 23,326 | ||||||||||||||
|
|
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 March 31, 2012, the Company has purchased 238,088 shares and there remain 211,912 shares available to purchase under this program. There were no shares purchased by the Company during the three month periods ended March 31, 2012 and 2011.
|
|
|
During the three month period ended March 31, 2012, one option holder elected to exercise 9,000 options, resulting in 9,000 shares issued out of treasury stock.
|
|
|
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 the earnings per share that 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.
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|
Three Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
($000’s omitted
except per share data) |
||||||||
|
Net income
|
$ | 63 | $ | 418 | ||||
|
Weighted average common shares outstanding (basic)
|
2,077 | 1,982 | ||||||
|
Incremental shares from assumed conversions of stock options
|
44 | 171 | ||||||
|
Weighted average common shares outstanding (diluted)
|
2,121 | 2,153 | ||||||
|
Basic
|
||||||||
|
Net income per share
|
$ | 0.03 | $ | 0.21 | ||||
|
Diluted
|
||||||||
|
Net income per share
|
$ | 0.03 | $ | 0.19 | ||||
|
9.
|
Commitments
|
|
|
The Company leases certain equipment and real property pursuant to operating lease arrangements. Total rental expense in the three month periods ended March 31, 2012 and 2011 and future minimum payments under such leases are not material to consolidated financial statements. The Company also leases certain real and personal property being accounted for under capital leases. See also Note 4, Property, Plant and Equipment, Note 5, Long-Term Debt and Note 6, Capital Lease – Related Party, 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. The Company has the option to purchase the building at the appraised value of $506,000. 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. The Company did not obtain the incentives and did not exercise its purchase option in 2011 or during the three months ended March 31, 2012. However, during November 2011, the lessor and the Company extended the lease including purchase option through November 2012. 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 subsidiary, which will result in a percentage payment which could be as low as 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 the Company’s President/COO is the sole shareholder of the company that is leasing/selling the assets.
|
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11.
|
Business Segments
|
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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 ATG primarily 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 and other edged products for use by consumers and government agencies. The Company derives its primary sales revenue from domestic customers, although a portion of finished products are for foreign end use.
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As of March 31, 2012, the Company had identifiable assets of approximately $30,486,000 ($30,423,000 – December 31, 2011) of which approximately $18,405,000 ($18,004,000 – December 31, 2011) was for ATG and approximately $12,081,000 ($12,419,000 – December 31, 2011) was for CPG.
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Information regarding the Company’s operations in these segments is summarized as follows ($000’s omitted):
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ATG
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CPG
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Consolidated
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Three Months Ended
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Three Months Ended
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Three Months Ended
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March 31,
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March 31,
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March 31,
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2012
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2011
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2012
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2011
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2012
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2011
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Revenues from unaffiliated customers
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$ | 5,302 | $ | 5,116 | $ | 3,067 | $ | 3,159 | $ | 8,369 | $ | 8,275 | ||||||||||||
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Cost of goods sold, exclusive of depreciation and amortization
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(3,781 | ) | (3,472 | ) | (2,992 | ) | (2,737 | ) | (6,773 | ) | (6,209 | ) | ||||||||||||
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Selling, general and administrative
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(731 | ) | (729 | ) | (601 | ) | (568 | ) | (1,332 | ) | (1,297 | ) | ||||||||||||
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Interest expense
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(11 | ) | (13 | ) | (2 | ) | (2 | ) | (13 | ) | (15 | ) | ||||||||||||
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Depreciation and amortization
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(109 | ) | (107 | ) | (62 | ) | (60 | ) | (171 | ) | (167 | ) | ||||||||||||
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Other income, net
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4 | 7 | 4 | 3 | 8 | 10 | ||||||||||||||||||
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Net income (loss) before income tax provision
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$ | 674 | $ | 802 | $ | (586 | ) | $ | (205 | ) | $ | 88 | $ | 597 | ||||||||||
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Capital expenditures
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$ | 50 | $ | 28 | $ | 37 | $ | 73 | $ | 87 | $ | 101 | ||||||||||||
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12.
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Other Income
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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. Other income is immaterial in relationship to the consolidated financial statements.
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13.
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Subsequent Events
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In the second quarter of 2012 certain option holders, including the independent directors, Chief Executive Officer and the Chief Operating Officer, elected to exercise 71,000 options, of which 2,500 were bought back by the Company resulting in 68,500 net shares issued out of treasury stock. Such transactions were properly reported on Form 4 with the Securities and Exchange Commission. An expected tax benefit to the Company of approximately $151,000 associated with these transactions will reduce taxes payable and will be credited directly to capital in excess of par value.
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On May 14, 2012 the Company announced that its Board of Directors declared a $0.15 per share cash dividend. The dividend will be paid on July 2, 2012 to shareholders of record on June 1, 2012 and will be approximately $355,000 in the aggregate. These dividends do not represent that the Company will pay dividends on a regular or scheduled basis.
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations Management Discussion
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During the three months ended March 31, 2012 and 2011 approximately 34% and 40%, respectively, of the Company’s revenues were derived from contracts with agencies of the U.S. Government or their prime contractors and their subcontractors. Sales of products sold for government applications decreased when comparing the results of March 31, 2012 to March 31, 2011, due to decreased government shipments at the Consumer Products Group in the amount of approximately $509,000 partially offset by an increase in shipments at the Advanced Technology Group. The Company believes that government involvement in military operations overseas will continue to have an impact on the financial results for both the ATG’s and CPG’s 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.
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The Company’s commercial business is affected by such factors as uncertainties in today’s global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, the effects of terrorism and the threat of terrorism, market demand and acceptance both for the Company’s products and its customers’ products which incorporate Company made components.
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The ATG continues its aggressive business development efforts in its primary markets and is broadening its activities 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 ramp-ups and other delivery stretch outs being considered to a lessor degree, being implemented which in turn may affect the Company’s sales revenues from period to period in 2012 and beyond. Although the ATG backlog continues to be strong, actual scheduled shipments may be delayed/changed as a function of the Company’s customers’ final delivery determinations that are based on changes in the global economy and other factors.
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The Company’s 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 stimulus plans and the difficulty to accurately project the net effect of the vagaries inherent in the government procurement process and programs notwithstanding that the U.S government may not process or otherwise delay subject procurements. 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 and development of new product lines.
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Results of Operations
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The following table compares the Company’s consolidated statements of income data for the three months ended March 31, 2012 and 2011 ($000’s omitted).
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Three Months Ended March 31,
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2012 vs. 2011
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2012
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2011
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Dollar
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% Increase
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Dollars
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% of Sales
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Dollars
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% of Sales
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Change
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(Decrease)
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Revenue:
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Advanced Technology
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$ | 5,302 | 63.4 | % | $ | 5,116 | 61.8 | % | $ | 186 | 3.6 | % | ||||||||||||
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Consumer Products
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3,067 | 36.6 | % | 3,159 | 38.2 | % | (92 | ) | (2.9 | )% | ||||||||||||||
| 8,369 | 100.0 | % | 8,275 | 100.0 | % | 94 | 1.1 | % | ||||||||||||||||
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Cost of goods sold, exclusive of
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depreciation and amortization
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6,773 | 80.9 | % | 6,209 | 75.0 | % | 564 | 9.1 | % | |||||||||||||||
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Selling, general and administrative
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1,332 | 15.9 | % | 1,297 | 15.7 | % | 35 | 2.7 | % | |||||||||||||||
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Depreciation and amortization
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171 | 2.0 | % | 167 | 2.0 | % | 4 | 2.4 | % | |||||||||||||||
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Total costs and expenses
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8,276 | 98.8 | % | 7,673 | 92.7 | % | 603 | 7.9 | % | |||||||||||||||
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Operating income, net
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93 | 1.2 | % | 602 | 7.3 | % | (509 | ) | (84.6 | )% | ||||||||||||||
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Interest expense
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13 | 0.2 | % | 15 | 0.2 | % | (2 | ) | (13.3 | )% | ||||||||||||||
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Other income, net
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(8 | ) | (0.1 | )% | (10 | ) | (0.1 | )% | 2 | (20.0 | )% | |||||||||||||
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Income tax provision
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25 | 0.3 | % | 179 | 2.2 | % | (154 | ) | (86.0 | )% | ||||||||||||||
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Net income
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$ | 63 | 0.8 | % | $ | 418 | 5.0 | % | $ | (355 | ) | (84.9 | )% | |||||||||||
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Revenue
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Cost of Goods Sold
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Selling, General and Administrative Expenses
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Interest Expense
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Interest expense decreased for the three month periods ended March 31, 2012 compared to the same period in 2011 due to the decrease in average outstanding debt coupled with interest rates which have remained consistent. See also Note 5, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.
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Depreciation and Amortization Expense
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Depreciation and amortization expense remained relatively consistent for the three month period ended March 31, 2012 compared to the same period in 2011. 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 manufacturing delivery commitments and to meet certain information technology related capital expenditure requirements.
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Other Income
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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. Other income is immaterial in relationship to the consolidated financial statements.
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Income Taxes
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The Company’s effective tax rate was approximately 28.5% and 30.0% for the three month periods ended March 31, 2012 and 2011, respectively. The effective tax rate reflects the estimated annual effective rate for federal and state income taxes, permanent non-deductible expenditures and the expected tax benefit for manufacturing deductions allowable under the American Jobs Creation Act of 2004. The effective tax rate decreased due to benefits relating to R&D tax credits and other tax incentives. See also Note 7, Income Taxes, of the accompanying consolidated financial statements for information concerning income tax.
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Net Income
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Net income for the three month period ended March 31, 2012 decreased $355,000 or 84.9% when compared to the same period ended March 31, 2011. The decrease in net income is primarily the result of decreased revenues and shipments of products with lower margins at the Company’s Consumer Products Group.
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Liquidity and Capital Resources
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The Company’s primary liquidity and capital requirements relate to working capital needs; primarily inventory, accounts receivable, capital expenditures for property, plant and equipment and principal and interest payments on debt. At March 31, 2012, the Company had working capital of approximately $20,619,000 ($20,483,000 – December 31, 2011) of which approximately $5,009,000 ($4,948,000– December 31, 2011) was comprised of cash and cash equivalents.
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The Company generated approximately $161,000 in cash from operations during the three months ended March 31, 2012. Cash was generated primarily through net income, collection of accounts receivable and an increase in accrued employee compensation and benefit costs. The primary use of cash for the Company’s operating activities for the three months ended March 31, 2012 include working capital requirements, mainly inventory, prepayments on insurances and payments for employment and property taxes. Cash generated and used in operations is consistent with sales volume, customer expectations and competitive pressures. The Company’s primary use of cash in its financing and investing activities in the first three months of 2012 included current principal payments on long-term debt and related party capital lease. The Company expended approximately $87,000 for capital expenditures.
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At March 31, 2012, 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 March 31, 2012. If needed, this can be used to fund cash flow requirements. The Company believes that it has adequate internal and external resources available to fund expected working capital and capital expenditure requirements through fiscal 2012 as supported by the level of cash/cash equivalents on hand, cash flow from operations and bank line of credit.
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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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.
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Item 4.
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Controls and Procedures
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Disclosure Controls and Procedures
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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 defined in Exchange Act Rule 13a-15(e)) as of March 31, 2012. Based upon that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in SEC reports under the Exchange Act (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.
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Changes in Internal Controls
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During the three month period ended March 31, 2012, 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.
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Item 1.
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Legal Proceedings
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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.
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Item 1A.
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Risk Factors
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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.
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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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 March 31, 2012, the Company has purchased 238,088 shares during prior periods and there remain 211,912 shares available to purchase under this program. There were no shares purchased by the Company during the three month periods ended March 31, 2012 and 2011.
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Item 3.
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Defaults Upon Senior Securities
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None.
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Item 4.
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Mine Safety Disclosures
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Not applicable.
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Item 5.
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Other Information
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None.
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Item 6.
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Exhibits
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10
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Material Contracts (*Indicates management contract or compensatory plan or arrangement)
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10.1*
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Amendment to employment contract for Dr. Nicholas D. Trbovich, Chief Executive Officer dated January 27, 2012 (Filed herewith)
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10.2*
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Amendment to employment contract for Nicholas D. Trbovich, Jr., President/COO dated January 27, 2012 (Filed herewith)
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31.1
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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)
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31.2
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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)
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32.1
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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)
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32.2
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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)
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101
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The following materials from Servotronics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of cash flows and (iv) the notes to the consolidated financial statements, tagged as block of text.**
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| SERVOTRONICS, INC. | |||
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By:
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/s/ Dr. Nicholas D. Trbovich, Chief Executive Officer | |
| Dr. Nicholas D. Trbovich | |||
| Chief Executive Officer | |||
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By:
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/s/ Cari L. Jaroslawsky, Chief Financial Officer | |
| Cari L. Jaroslawsky | |||
| Chief Financial Officer |