SERVOTRONICS INC /DE/ - Quarter Report: 2013 June (Form 10-Q)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

(Registrant’s telephone number, including area code)

 

Large accelerated filer o Accelerated filer o  Non-accelerated filer o  Smaller reporting company x

 

 

	Class			Outstanding at July 31, 2013
	Common Stock, $.20 par value			2,528,134

 

 

 

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2013				2012				2013				2012
Revenue		$	8,067			$	7,719			$	15,409			$	15,786
Costs, expenses and other income:
Cost of goods sold, exclusive of depreciation and amortization			5,873				5,286				11,570				11,545
Selling, general and administrative			1,335				1,220				2,634				2,478
Interest expense			11				12				21				23
Depreciation and amortization			155				149				308				296
Other income, net			-				(2	)			(1	)			(10	)
Total expenses			7,374				6,665				14,532				14,332
Income from continuing operations before income tax provision			693				1,054				877				1,454
Income tax provision			189				309				196				428
Income from continuing operations			504				745				681				1,026
Discontinued Operations:
Loss from operations of a discontinued component, net of income tax benefit			-				(197	)			-				(409	)
Loss on disposal of QCC and AMP, net of income tax benefit			-				(268	)			-				(268	)
Loss from discontinued operations			-				(465	)			-				(677	)
Net income		$	504			$	280			$	681			$	349
Income (loss) per share:
Basic
Income per share from continuing operations		$	0.22			$	0.35			$	0.30			$	0.49
Loss per share from discontinued operations			-				(0.22	)			-				(0.32	)
Total net income per share		$	0.22			$	0.13			$	0.30			$	0.17
Diluted
Income per share from continuing operations		$	0.22			$	0.35			$	0.30			$	0.48
Loss per share from discontinued operations			-				(0.22	)			-				(0.32	)
Total net income per share		$	0.22			$	0.13			$	0.30			$	0.16

See notes to consolidated financial statements

 

 

1.	Basis of Presentation

 

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.

 

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 six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The consolidated financial statements should be read in conjunction with the 2012 annual report and the notes thereto.

 

2.	Business Description and Summary of Significant Accounting Policies

 

Business Description

 

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.

 

Principles of Consolidation

 

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.

 

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.

 

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 $112,000 at June 30, 2013 and $130,000 at December 31, 2012. The Company does not accrue interest on past due receivables.

 

Revenue Recognition

 

Revenues are recognized as services are rendered or as units are shipped and at the designated FOB point consistent with the transfer of title, risks and rewards of ownership. Such purchase orders generally include specific terms relative to quantity, item description, specifications, price, customer responsibility for in-process costs, delivery schedule, shipping point, payment and other standard terms and conditions of purchase.

 

Inventories

 

Inventories are stated at the lower of standard cost or net realizable value. Cost includes all 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 $734,000 and $778,000 at June 30, 2013 and December 31, 2012, respectively. 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. The estimated useful lives of depreciable properties are generally as follows:

 

Buildings and improvements	5-39 years
Machinery and equipment	5-20 years
Tooling	3-5 years

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities 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, combined New York and Texas state income tax returns and separate Pennsylvania and Arkansas state income tax returns.

 

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 June 30, 2013 or December 31, 2012, and did not recognize any interest and/or penalties in its consolidated statements of income during the three and six months ended June 30, 2013 and 2012.

 

The 2009 through 2012 Federal and state returns remain open under statute.

 

Supplemental Cash Flow Information

 

Income taxes paid during the three months ended June 30, 2013 and 2012 amounted to approximately zero and $248,500, respectively, and amounted to approximately $2,700 and $256,000 for the six months ended June 30, 2013 and 2012, respectively. Interest paid during the three months ended June 30, 2013 and 2012 amounted to approximately $11,000 and $14,000, respectively, and amounted to $21,000 and $27,000 for the six months ended June 30, 2013 and 2012, respectively. In the first quarter of 2013, the Company reduced its tax liability by approximately $21,000 related to the exercise of stock options and was credited directly to capital in excess of par value.

 

 

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, 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 June 30, 2013 and December 31, 2012.

 

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 consolidated 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. Refer to Note 12, Business Segments, for disclosures related to customer concentrations.

 

Fair Value of Financial Instruments

 

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, the fair value approximates its carrying amount.

 

3.	Discontinued Operations

 

During the second quarter of 2012, the Company committed to a plan to enhance profit margins through the expected sale of a component. On September 18, 2012, Queen Cutlery Company (QCC), a wholly owned subsidiary of Servotronics Inc., completed the disposition of substantially all of its assets for cash consideration of $650,000. QCC is accounted for as a discontinued operation in the accompanying consolidated financial statements. During the three and six months ended June 30, 2013 there was no loss from discontinued operations related to QCC. A loss before income taxes of approximately $112,000 and $241,000 from discontinued operations was reported for the same three and six month periods in 2012.

 

 

 

On July 23, 2013, Aero Metal Products, Inc. (“AMP”), a wholly owned subsidiary of Servotronics, Inc., gave notice of termination of a personal property capital lease for machinery and equipment previously reported under a $588,000 capital lease with a related party. Due to the termination, beginning in July 2012, this lease is accounted for as an operating lease rather than a capital lease for the remaining term and the related assets and liabilities were removed from the consolidated balance sheet. In the third quarter of 2012, AMP ceased all manufacturing operations and in the fourth quarter of 2012, the Company surrendered all assets under the personal property and real property lease to the lessor, Aero Inc., a previously reported related party. During the three and six months ended June 30, 2013, there was no loss from discontinued operations related to AMP. A loss before income taxes of approximately $186,000 and $368,000 from discontinued operations was reported for the same three and six month periods in 2012.

 

The following is a summary of discontinued operations:

 

 

4.	Inventories

5.	Property, Plant and Equipment