XASE:SVT Servotronics Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 1-07109
SERVOTRONICS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware     16-0837866
(State or other jurisdiction of   (I. R. S. Employer
incorporation or organization)   Identification No.)
 
1110 Maple Street
Elma, New York   14059
(Address of principal executive offices) (zip code)
 
(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 checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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 July 31, 2012
Common Stock, $.20 par value   2,383,013
 
 
 

 
 
INDEX
 
     
Page No.
PART I. FINANCIAL INFORMATION    
     
Item 1.
Financial Statements (Unaudited):    
       
 
a)
Consolidated Balance Sheets, June 30, 2012 and December 31, 2011
3
 
         
 
b)
Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011
4
 
         
 
c)
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011
5
 
         
 
d)
Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011
6
 
         
 
e)
Notes to Consolidated Financial Statements
7
 
         
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
 
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
21
 
       
Item 4.
Controls and Procedures
21
 
       
PART II. OTHER INFORMATION    
     
Item 1.
Legal Proceedings
22
 
       
Item 1A.
Risk Factors
22
 
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
22
 
       
Item 3.
Defaults Upon Senior Securities
22
 
       
Item 4.
Mine Safety Disclosures
22
 
       
Item 5.
Other Information
22
 
       
Item 6.
Exhibits
23
 
       
  Signatures
24
 
 
 
- 2 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
($000s omitted except share and per share data)
 
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Assets
           
Current assets:
           
   Cash and cash equivalents
  $ 4,266     $ 4,948  
   Accounts receivable, net
    6,162       6,031  
   Inventories, net
    11,684       11,607  
   Prepaid income taxes
    447       133  
   Deferred income taxes
    754       754  
   Other assets
    808       505  
   Assets held for sale
    650       -  
          Total current assets
    24,771       23,978  
Property, plant and equipment, net
    5,881       6,103  
Other non-current assets
    353       342  
Total Assets
  $ 31,005     $ 30,423  
Liabilities and Shareholders Equity
               
Current liabilities:
               
   Current portion of long-term debt
  $ 191     $ 202  
   Current portion of capital lease related party
    81       81  
   Accounts payable
    1,439       1,451  
   Accrued employee compensation and benefit costs
    1,515       1,434  
    Dividends payable
    358       -  
   Other accrued liabilities
    191       327  
          Total current liabilities
    3,775       3,495  
Long-term debt
    2,845       2,855  
Long-term portion of capital lease related party
    292       333  
Deferred income taxes
    496       496  
Shareholders equity:
               
Common stock, par value $.20; authorized 4,000,000 shares; issued 2,614,506 shares; 
outstanding 2,148,992  (2,074,257   2011) shares
    523       523  
   Capital in excess of par value
    13,926       13,774  
   Retained earnings
    12,158       12,490  
   Accumulated other comprehensive loss
    (67 )     (67 )
   Employee stock ownership trust commitment
    (1,266 )     (1,266 )
   Treasury stock, at cost 230,400  (305,135 2011) shares
    (1,677 )     (2,210 )
          Total shareholders equity
    23,597       23,244  
Total Liabilities and Shareholders’ Equity
  $ 31,005     $ 30,423  
 
See notes to consolidated financial statements
 
 
- 3 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($000’s omitted except per share data)
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue
  $ 7,856     $ 8,147     $ 16,007     $ 16,191  
Costs, expenses and other income:
                               
   Cost of goods sold, exclusive of depreciation and amortization
    5,534       5,698       11,991       11,619  
   Selling, general and administrative
    1,272       1,230       2,573       2,494  
   Interest expense
    14       15       27       30  
   Depreciation and amortization
    169       166       340       331  
   Other income, net
    (2 )     (4 )     (10 )     (14 )
Total expenses     6,987       7,105       14,921       14,460  
Income from continuing operations before income tax provision
    869       1,042       1,086       1,731  
Income tax provision
    247       313       309       520  
Income from continuing operations
    622       729       777       1,211  
Discontinued Operations:
                               
Loss from operations of a discontinued component, net of income tax benefit
    (74 )     (13 )     (160 )     (77 )
Write-down of assets associated with a discontinued component, net of income tax benefit
    (268 )     -       (268 )     -  
Loss from discontinued operations
    (342 )     (13 )     (428 )     (77 )
Net income
  $ 280     $ 716     $ 349     $ 1,134  
Income (loss) per share:
                               
Basic
                               
Income per share from continuing operations
  $ 0.29     $ 0.37     $ 0.37     $ 0.61  
Loss per share from discontinued operations
    (0.16 )     (0.01 )     (0.20 )     (0.04 )
Total net income per share
  $ 0.13     $ 0.36     $ 0.17     $ 0.57  
Diluted
                               
Income per share from continuing operations
  $ 0.29     $ 0.35     $ 0.36     $ 0.57  
Loss per share from discontinued operations
    (0.16 )     (0.01 )     (0.20 )     (0.04 )
Total net income per share
  $ 0.13     $ 0.34     $ 0.16     $ 0.53  
 
See notes to consolidated financial statements
 
 
- 4 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($000’s omitted except per share data)
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
 
Net income
  $ 280     $ 716     $ 349     $ 1,134  
Other comprehensive income:
                               
   Retirement benefits adjustment     -       -       -       -  
Total comprehensive income
  $ 280     $ 716     $ 349     $ 1,134  
 
See notes to consolidated financial statements
 
 
- 5 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)
 
   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
Cash flows related to operating activities:
           
Net income
  $ 349     $ 1,134  
Adjustments to reconcile net income to net cash (used) generated in operating activities:
               
Depreciation and amortization
    340       335  
Write-down of assets associated with discontinued operations
    406       -  
Increase (decrease) in inventory reserve
    53       (7 )
Change in assets and liabilities:
               
Accounts receivable
    (131 )     (159 )
Inventories
    (1,168 )     (353 )
Prepaid income taxes
    (163 )     226  
Other assets
    (303 )     (205 )
Other non-current assets
    (11 )     (14 )
Accounts payable
    (12 )     (157 )
Accrued employee compensation and benefit costs
    81       207  
Other accrued liabilities
    (136 )     (79 )
Accrued income taxes
    -       57  
Net cash (used) generated in operating activities
    (695 )     985  
Cash flows related to investing activities:
               
Capital expenditures - property, plant and equipment
    (136 )     (185 )
Net cash used in investing activities
    (136 )     (185 )
Cash flows related to financing activities:
               
Principal payments on long-term debt
    (22 )     (77 )
Proceeds from exercise of stock options
    234       -  
Principal payments on capital lease related party
    (41 )     (40 )
Purchase of treasury shares
    (22 )     -  
Cash dividend
    -       (336 )
Net cash generated (used) in financing activities
    149       (453 )
Net (decrease) increase in cash and cash equivalents
    (682 )     347  
Cash and cash equivalents at beginning of period
    4,948       4,447  
Cash and cash equivalents at end of period
  $ 4,266     $ 4,794  
 
See notes to consolidated financial statements
 
 
- 6 -

 
 

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 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, 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.
 
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 $108,000 at June 30, 2012 and $101,000 at December 31, 2011.
 
 
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 $576,000 and $773,000 at June 30, 2012 and December 31, 2011, respectively. Pre-production and start-up costs are expensed as incurred.
 
 
- 7 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
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
   
5-15 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, a 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, 2012 or December 31, 2011, and did not recognize any interest and/or penalties in its consolidated statements of income during the three and six months ended June 30, 2012 and 2011.
 
 
Supplemental Cash Flow Information
 
 
Income taxes paid during the three months ended June 30, 2012 and 2011 amounted to approximately $248,500 and $204,000, respectively, and amounted to $256,000 and $226,000 for the six months ended June 30, 2012 and 2011 respectively. Interest paid during the three months ended June 30, 2012 and 2011 amounted to approximately $14,000 and $15,000, respectively, and amounted to $27,000 and $30,000 for the six months ended June 30, 2012 and 2011, respectively. During the three and six months ended June 30, 2012, the Company reduced its tax liability by approximately $152,000 related to the exercise of stock options and was credited directly to capital in excess of par value. During the three and six months ended June 30, 2012, there were approximately $358,000 in dividends declared and recognized as a current liability and a decrease in retained earnings. During the three and six months ended June 30, 2012, there was approximately $20,000 of property, plant and equipment and approximately $630,000 of inventories reclassified to assets held for sale.
 
 
- 8 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
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, 2012 and December 31, 2011.
 
 
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. 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 and capital lease, the fair value approximates its carrying amount.
 
Recent Accounting Pronouncements
 
In June 2011, the FASB issued new accounting guidance related to the presentation of comprehensive income that eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company adopted this pronouncement in the first quarter of 2012 and is presenting separate statements of comprehensive income in the consolidated financial statements. For the three and six month periods ended June 30, 2012 and 2011, there were no items affecting comprehensive income.
 
 
- 9 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3.
Discontinued operations
 
 
The Company is in the process of further evaluating existing product lines and the consolidation of facilities. During the second quarter of 2012, the Company committed to a plan to enhance profit margins through the expected sale of a component in the next twelve months. As such, in the second quarter of 2012, the Company recorded a write down of certain assets to lower of cost or market resulting in an after tax loss of approximately $268,000 and has reclassified related inventory and property, plant and equipment in the amount of $650,000 to assets held for sale as of June 30, 2012 in the accompanying consolidated balance sheet. Revenues and losses from operations before income tax benefit related to this component amounted to approximately $465,000 and $241,000, respectively, for the six months ended June 30, 2012 and $497,000 and $110,000, respectively, for the same period in 2011. Revenues and losses from operations before income tax benefit related to this component amounted to approximately $247,000 and $112,000, respectively, for the three months ended June 30, 2012 and $266,000 and $18,000, respectively, for the same period in 2011.
 
 
On the accompanying consolidated statements of income, loss from operations of a discontinued component is presented net of an income tax benefit of approximately $45,000 and $82,000 for the three and six months ended June 30, 2012. Loss from operations of a discontinued component is presented net of an income tax benefit of approximately $5,000 and $33,000 for the three and six months ended June 30, 2011. For the three and six months ended June 30, 2012, write down on assets associated with a discontinued component is presented net of an income tax benefit of approximately $138,000.
 
4.
Inventories
 
 
June 30,
 
December 31,
 
   
2012
   
2011
 
   
($000’s omitted)
 
Raw materials and common parts
  $ 6,284     $ 5,727  
Work-in-process
    3,138       3,511  
Finished goods
    2,262       2,369  
Total inventories, net of reserve
  $ 11,684     $ 11,607  
 
5.
Property, Plant and Equipment
 
 
June 30,
 
December 31,
 
      2012       2011  
   
($000’s omitted)
 
                 
Land
  $ 21     $ 25  
Buildings
    7,013       7,181  
Machinery, equipment and tooling (including capital lease)
    12,478       12,930  
 
    19,512       20,136  
Less accumulated depreciation and amortization
    (13,631 )     (14,033 )
Total property, plant and equipment
  $ 5,881     $ 6,103  
 
 
- 10 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
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 June 30, 2012 and December 31, 2011, accumulated amortization on the building amounted to approximately $2,487,000 and $2,423,000, respectively. Amortization expense amounted to $33,000 for the three month periods ended June 30, 2012 and 2011, respectively and amounted to $65,000 for the six month periods ended June 30, 2012 and 2011, respectively. The associated current and long-term liabilities are discussed in Note 6, 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 June 30, 2012 and December 31, 2011, accumulated amortization on the machinery and equipment amounted to approximately $224,000 and $182,000, respectively. Amortization expense amounted to $21,000 for the three month periods ended June 30, 2012 and 2011, and amounted to $42,000 for the six month periods ended June 30, 2012 and 2011. The associated current and long-term liabilities are discussed in Note 7, Capital Lease – Related Party, of the accompanying consolidated financial statements.
 
 
Depreciation expense amounted to $111,000 and $110,000 for the three month periods ended June 30, 2012 and 2011, respectively, and amounted to $228,000 and $220,000 for the six month periods ended June 30, 2012 and 2011, respectively. The combined depreciation and amortization expense were $169,000 and $166,000 for the three month periods ended June 30, 2012 and 2011, respectively, and amounted to $340,000 and $331,000 for the six month periods ended June 30, 2012 and 2011, respectively.
 
6.
Long-Term Debt
 
   
June 30,
2012
   
December 31,
2011
 
   
($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 (0.43% at June 30, 2012) (A)
  $ 2,960     $ 2,960  
 
Secured term loan payable to a government agency; monthly payments of $1,950 including interest fixed at 3% payable through fourth quarter of 2015
    76       86  
 
Secured term loan payable to a government agency; monthly principal payments of approximately $2,200 with interest waived, payable through second quarter of 2012
    -       11  
      3,036       3,057  
Less current portion
    (191 )     (202 )
    $ 2,845     $ 2,855  
 
(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 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.
 
 
- 11 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
During the three and six months ended June 30, 2012, the Company increased the amount available on the unsecured line of credit from $1,000,000 to $2,000,000. There was no balance outstanding at June 30, 2012 and December 31, 2011. The line of credit is available through June of 2013.
 
 
Certain lenders require the Company to comply with debt covenants as described in the specific loan documents, including a debt service ratio. At June 30, 2012 and December 31, 2011, the Company was in compliance with its debt covenants.
 
7.
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. See Note 11, Related Party Transactions, of the accompanying consolidated financial statements for information on the related party transaction. Under the original terms of the agreements, monthly payments of $7,500, which include an imputed fixed interest rate of 2.00%, commenced November 3, 2009 and continues through the fourth quarter of 2016. At June 30, 2012, the present value of the minimum lease payments is approximately $373,000 (after subtracting approximately $17,000 of imputed interest). See Note 14, Subsequent Events for cancellation of lease agreement during July 2012.
 
8.
Income Taxes
 
 
The Company did not have any material uncertain tax positions or unrecognized tax benefits or obligations as of June 30, 2012 and December 31, 2011.
 
 
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.
 
9.
Shareholders’ Equity
 
                     
($000’s omitted except for share data)
           
   
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, 2011
    2,614,506     $ 523     $ 13,774     $ 12,490     $ ( 1,266 )   $ ( 2,210 )   $ ( 67 )   $ 23,244  
Net income
    -       -       -       349       -       -       -       349  
Dividends payable
    -       -       -       (358 )     -       -       -       (358 )
Purchase of treasury shares
    -       -       -       -       -       (22 )     -       (22 )
Exercise of stock options, net
of income tax benefit
    -       -       152       (323 )     -       555       -       384  
Balance June 30, 2012
    2,614,506     $ 523     $ 13,926     $ 12,158     $ ( 1,266 )   $ ( 1,677 )   $ ( 67 )   $ 23,597  
 
 
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 June 30, 2012, the Company has purchased 240,853 shares and there remain 209,147 shares available to purchase under this program. There were 2,765 and zero shares purchased by the Company during the six month periods ended June 30, 2012 and 2011.
 
 
- 12 -

 
 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
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 for net proceeds of approximately $215,000. Such transactions were properly reported on Form 4 with the Securities and Exchange Commission. A tax benefit to the Company of approximately $152,000 associated with these transactions reduced taxes payable and was credited directly to capital in excess of par value. Also in the first quarter of 2012, one option holder elected to exercise 9,000 options, resulting in 9,000 shares issued out of treasury stock for proceeds of approximately $18,000.
 
 
On May 14, 2012 the Company announced that its Board of Directors declared a $0.15 per share cash dividend. The dividend was subsequently paid on July 2, 2012 to shareholders of record on June 1, 2012 and was approximately $358,000 in the aggregate. These dividends do not represent that the Company will pay dividends on a regular or scheduled basis. The amount is recorded in dividends payable on the accompanying consolidated balance sheet.
 
 
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.
 
 
- 13 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
($000’s omitted except per share data)
 
Income from continuing operations
  $ 622     $ 729     $ 777     $ 1,211  
Loss from discontinued operations
    (342 )     (13 )     (428 )     (77 )
Net income
  $ 280     $ 716     $ 349     $ 1,134  
Weighted average common shares outstanding (basic)
    2,151       1,982       2,114       1,982  
Incremental shares from assumed conversions of stock options
    7       131       25       131  
Weighted average common shares outstanding (diluted)
    2,158       2,113       2,139       2,113  
Basic
                               
Income per share from continuing operations
  $ 0.29     $ 0.37     $ 0.37     $ 0.61  
Loss per share from discontinued operations
    (0.16 )     (0.01 )     (0.20 )     (0.04 )
Total net income per share
  $ 0.13     $ 0.36     $ 0.17     $ 0.57  
Diluted
                               
Income per share from continuing operations
  $ 0.29     $ 0.35     $ 0.36     $ 0.57  
Loss per share from discontinued operations
    (0.16 )     (0.01 )     (0.20 )     (0.04 )
Total net income per share
  $ 0.13     $ 0.34     $ 0.16     $ 0.53  
 
10.
Commitments
 
 
The Company leases certain equipment and real property pursuant to operating lease arrangements. Total rental expense in the three and six month periods ended June 30, 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 5, Property, Plant and Equipment, Note 6, Long-Term Debt and Note 7, Capital Lease – Related Party, of the accompanying consolidated financial statements for information on the capital leases.
 
11.
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 7, 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 an option to purchase the building that is appraised at $549,000 for a price 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 six months ended June 30, 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.
 
 
- 14 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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 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.
 
 
As of June 30, 2012, the Company had identifiable assets of approximately $31,005,000 ($30,423,000 – December 31, 2011) of which approximately $18,990,000 ($18,004,000 – December 31, 2011) was for ATG and approximately $12,015,000 ($12,419,000 – December 31, 2011) was for CPG.
 
 
Information regarding the Company’s operations in these segments is summarized as follows ($000’s omitted):
 
   
ATG
   
CPG
   
Consolidated
 
    Six Months Ended     Six Months Ended    
Six Months Ended
 
   
June 30,
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2012
   
2011
 
Revenues from unaffiliated customers
  $ 10,889     $ 10,409     $ 5,118     $ 5,782     $ 16,007     $ 16,191  
Cost of goods sold, exclusive of depreciation and amortization
    (7,364 )     (7,048 )     (4,627 )     (4,571 )     (11,991 )     (11,619 )
Selling, general and administrative
    (1,569 )     (1,497 )     (1,004 )     (997 )     (2,573 )     (2,494 )
Interest expense
    (23 )     (25 )     (4 )     (5 )     (27 )     (30 )
Depreciation and amortization
    (219 )     (214 )     (121 )     (117 )     (340 )     (331 )
Other income, net
    4       8       6       6       10       14  
Income (loss) from continuing operations before income tax provision
    1,718       1,633       (632 )     98       1,086       1,731  
Income tax provision (benefit)
    489       491       (180 )     29       309       520  
Income (loss) from continuing operations
    1,229       1,142       (452 )     69       777       1,211  
Discontinued operations:
                                               
Loss from operations of a discontinued component, net of income tax benefit
    -       -       (160 )     (77 )     (160 )     (77 )
Write-down of assets associated with a discontinued component, net of income tax benefit
    -       -       (268 )     -       (268 )     -  
Loss from discontinued operations
    -       -       (428 )     (77 )     (428 )     (77 )
Net income (loss)
  $ 1,229     $ 1,142     $ (880 )   $ (8 )   $ 349     $ 1,134  
Capital expenditures
  93     $ 81     43     $ 104     $ 136     $ 185  
 
 
- 15 -

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
ATG
   
CPG
   
Consolidated
 
   
Three Months Ended
   
Three Months Ended
   
Three Months Ended
 
   
June 30,
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2012
   
2011
 
Revenues from unaffiliated customers
  $ 5,587     $ 5,293     $ 2,269     $ 2,854     $ 7,856     $ 8,147  
Cost of goods sold, exclusive of depreciation and amortization
    (3,584 )     (3,577 )     (1,950 )     (2,121 )     (5,534 )     (5,698 )
Selling, general and administrative
    (838 )     (768 )     (434 )     (462 )     (1,272 )     (1,230 )
Interest expense
    (12 )     (12 )     (2 )     (3 )     (14 )     (15 )
Depreciation and amortization
    (110 )     (107 )     (59 )     (59 )     (169 )     (166 )
Other income, net
    -       1       2       3       2       4  
Income (loss) from continuing operations before income tax provision
    1,043       830       (174 )     212       869       1,042  
Income tax provision (benefit)
    297       250       (50 )     63       247       313  
Income (loss) from continuing operations
    746       580       (124 )     149       622       729  
Discontinued operations:
                                               
Loss from operations of a discontinued component, net of income tax benefit
    -       -       (74 )     (13 )     (74 )     (13 )
Write-down of assets associated with a discontinued component, net of income tax benefit
    -       -       (268 )     -       (268 )     -  
Loss from discontinued operations
    -       -       (342 )     (13 )     (342 )     (13 )
Net income (loss)
  $ 746     $ 580     $ (466 )   $ 136     $ 280     $ 716  
Capital expenditures
  $ 43     $ 53     $ 6     $ 31     $ 49     $ 84  
 
13.
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. Other income is immaterial in relationship to the consolidated financial statements.
 
14.
Subsequent Events
 
 
On July 23, 2012, the Company gave notice of termination of the related party personal property being accounted for as a capital lease in the accompanying consolidated financial statements. Under the terms of the agreement, monthly payments of $7,500 still continue to July 2013. As a result of this notice, beginning in July 2012, this lease will be accounted for as an operating lease rather than a capital lease for the remaining term and the related assets and liabilities will be removed from the consolidated balance sheet. There is no material gain or loss associated with the cancellation of such agreement.
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations Management Discussion
 
 
During the three months ended June 30, 2012 and 2011 approximately 29% and 40%, respectively, and 32% and 41% for the six months ended June 30, 2012 and 2011, respectively, of the Company’s revenues from continuing operations 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 three and six months ended June 30, 2012 to June 30, 2011, due to decreased government shipments at the Consumer Products Group in the amount of approximately $917,000 and $1,425,000, respectively, while shipments to the government at the Advanced Technology Group remained consistent. 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.
 
 
- 16 -

 
 
 
The Company’s commercial business is affected by such factors as uncertainties in today’s global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, the effects of terrorism and the threat of terrorism, market demand and acceptance both for the Company’s products and its customers’ products which incorporate Company made components.
 
 
The 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 lesser 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.
 
 
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.
 
 
- 17 -

 
 
 
Results of Operations
 
 
The following table compares the Company’s consolidated statements of income data for the six and three months ended June 30, 2012 and 2011 ($000’s omitted).
 
    Six Months Ended June 30,  
                           
2012 vs. 2011
 
   
2012
   
2011
   
Dollar
   
% Increase
 
   
Dollars
   
% of Sales
   
Dollars
   
% of Sales
   
Change
   
(Decrease)
 
Revenue:
                                   
Advanced Technology
  $ 10,889       68.0 %   $ 10,409       64.3 %   $ 480       4.6 %
Consumer Products
    5,118       32.0 %     5,782       35.7 %     (664 )     (11.5 )%
      16,007       100.0 %     16,191       100.0 %     (184 )     (1.1 )%
Cost of goods sold, exclusive of depreciation and amortization
    11,991       74.9 %     11,619       71.8 %     372       3.2 %
Selling, general and administrative
    2,573       16.1 %     2,494       15.4 %     79       3.2 %
Depreciation and amortization
    340       2.1 %     331       2.0 %     9       2.7 %
Total costs and expenses
    14,904       93.1 %     14,444       89.2 %     460       3.2 %
Operating income, net
    1,103       6.9 %     1,747       10.8 %     (644 )     (36.9 )%
Interest expense
    27       0.2 %     30       0.2 %     (3 )     (10.0 )%
Other income, net
    (10 )     (0.1 )%     (14 )     (0.1 )%     4       (28.6 )%
Income tax provision
    309       1.9 %     520       3.2 %     (211 )     (40.6 )%
Income from continuing operations
    777       4.9 %     1,211       7.5 %     (434 )     (35.8 )%
Loss from operations of a discontinued component, net of income tax benefit
  (160     (1.0 )%     (77 )     (0.5 )%     (83 )     107.8 %
Write-down of assets associated with a discontinued component, net of income tax benefit
    (268 )     (1.7 )%     -       0.0 %     (268 )     100.0 %
Loss from discontinued operations
    (428 )     (2.7 )%     (77 )     (0.5 )%     (351 )     455.8 %
Net income
  $ 349       2.2 %   $ 1,134       7.0 %   $ (785 )     (69.2 )%
 
 
- 18 -

 
 
    Three Months Ended June 30,  
                           
2012 vs. 2011
 
   
2012
   
2011
   
Dollar
   
% Increase
 
   
Dollars
   
% of Sales
   
Dollars
   
% of Sales
   
Change
   
(Decrease)
 
Revenue:
                                   
Advanced Technology
  $ 5,587       71.1 %   $ 5,293       65.0 %   $ 294       5.6 %
Consumer Products
    2,269       28.9 %     2,854       35.0 %     (585 )     (20.5 )%
      7,856       100.0 %     8,147       100.0 %     (291 )     (3.6 )%
Cost of goods sold, exclusive of depreciation and amortization
    5,534       70.4 %     5,698       69.9 %     (164 )     (2.9 )%
Selling, general and administrative
    1,272       16.2 %     1,230       15.1 %     42       3.4 %
Depreciation and amortization
    169       2.2 %     166       2.0 %     3       1.8 %
Total costs and expenses
    6,975       88.8 %     7,094       87.0 %     (119 )     (1.7 )%
Operating income, net
    881       11.2 %     1,053       13.0 %     (172 )     (16.3 )%
Interest expense
    14       0.2 %     15       0.2 %     (1 )     (6.7 )%
Other income, net
    (2 )     0.0 %     (4 )     0.0 %     2       (50.0 )%
Income tax provision
    247       3.1 %     313       3.8 %     (66 )     (21.1 )%
Income from continuing operations
    622       7.9 %     729       9.0 %     (107 )     (14.7 )%
Loss from operations of a discontinued component, net of income tax benefit
    (74 )     (1.0 )%     (13 )     (0.2 )%     (61 )     469.2 %
Write-down of assets associated with a discontinued component, net of income tax benefit
    (268 )     (3.4 )%     -       0.0 %     (268 )     100.0 %
Loss from discontinued operations
    (342 )     (4.4 )%     (13 )     (0.2 )%     (329 )     2530.8 %
Net income
  $ 280       3.6 %   $ 716       8.8 %   $ (436 )     (60.9 )%
 
 
Revenue
 
The Company’s consolidated revenues for continuing operations decreased approximately $291,000 or 3.6% for the three month period ended June 30, 2012 and $184,000 or 1.1% for the six month period ended June 30, 2012 when compared to the same three and six month periods in 2011. The decrease is due to decreased shipments at the Consumer Products Group (CPG) mainly due to a decrease in shipments related to orders from the U.S. Government and its prime vendors. These decreases are not fully offset by increases in combined commercial and government shipments at the Advanced Technology Group (ATG). Procurements and timing of shipments under Government contracts at the CPG may, at times, significantly impact operating results from period to period.
 
 
Cost of Goods Sold
 
Cost of goods sold as a percentage of revenues increased for the three and six month periods ended June 30, 2012 and 2011 primarily due to a decrease in government sales at the CPG with disproportionate decreases in labor and overhead costs. Additional production inefficiencies and start up costs associated with new product lines have a direct impact on cost of goods sold as they are expensed as incurred.
 
The Company continues to aggressively pursue cost saving opportunities in material procurements and other operating efficiencies through capital investments in updated and new equipment/machinery as well as investing in the development and training of its labor force.
 
 
- 19 -

 
 
 
Selling, General and Administrative Expenses
 
Selling, general and administrative (SG&A) expenses as a percentage of revenue remained relatively consistent for the three and six month periods ended June 30, 2012 as compared to the same period in 2011. Selling, general and administrative expenses are attributable to marketing of products (i.e., costs of internal and external sales efforts, catalog production, and the promotion of new and existing products in current and new markets). Also included in SG&A expenses are the labor and related costs for general and administrative support, accounting, professional, legal and information technology costs.
 
 
Interest Expense
 
 
Interest expense remained relatively consistent for the three and six month periods ended June 30, 2012 compared to the same period in 2011 interest rates which have remained consistent. See also Note 6, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.
 
 
Depreciation and Amortization Expense
 
 
Depreciation and amortization expense remained relatively consistent for the three and six month periods ended June 30, 2012 compared to the same periods 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.
 
 
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. Other income is immaterial in relationship to the consolidated financial statements.
 
 
Income Taxes
 
 
The Company’s continuing operations effective tax rate was approximately 28.5% and 30.0% for the three and six month periods ended June 30, 2012 and 2011, respectively and the discontinued operations effective tax rate was approximately 34.0% for the three and six month periods ended June 30, 2012 and 2011. The effective tax rates reflect the estimated annual effective rates 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 continuing operations effective tax rate decreased due to benefits relating to manufacturing deductions and other tax incentives. See also Note 8, Income Taxes, of the accompanying consolidated financial statements for information concerning income tax.
 
 
Income From Continuing Operations
 
 
Income from continuing operations for the three month period ended June 30, 2012 decreased $107,000 or 14.7% when compared to the same period ended June 30, 2011. Income from continuing operations for the six month period ended June 30, 2012 decreased $434,000 or 35.8% when compared to the same period ended June 30, 2011. The decrease in income from continuing operations is primarily the result of decreased revenues and shipments of products with lower margins at the Company’s Consumer Products Group.
 
 
Discontinued Operations
 
 
The Company is in the process of further evaluating existing product lines and the consolidation of facilities. During the second quarter of 2012, the Company committed to a plan to enhance profit margins through the expected sale of a component. As such, in the second quarter of 2012, the Company recorded a write down of certain assets resulting in an after tax loss of $268,000.
 
 
- 20 -

 
 
 
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 June 30, 2012, the Company had working capital of approximately $20,996,000 ($20,483,000 – December 31, 2011) of which approximately $4,266,000 ($4,948,000– December 31, 2011) was comprised of cash and cash equivalents.
 
 
The Company used approximately $695,000 in cash from operations during the six months ended June 30, 2012. Cash was generated primarily through net income and an increase in accrued employee compensation and benefit costs. The primary use of cash for the Company’s operating activities for the six months ended June 30, 2012 include working capital requirements, mainly inventory, prepayments on insurances and property tax, other accrued liabilities and prepaid income 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 six months of 2012 included current principal payments on long-term debt and related party capital lease. The Company expended approximately $136,000 for capital expenditures during the six months ended June 30, 2012.
 
 
At June 30, 2012, there are no material commitments for capital expenditures. The Company also has an unsecured $2,000,000 line of credit on which there is no balance outstanding at June 30, 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.
 
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 4.
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 defined in Exchange Act Rule 13a-15(e)) as of June 30, 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.
 
 
Changes in Internal Controls
 
 
During the six month period ended June 30, 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.
 
 
- 21 -

 
 
PART II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
 
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.
 
Item 1A.
Risk Factors
 
 
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
(c)   Company Purchases of Company’s Equity Securities
2012 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, 2012
-
    -
-
211,912
April 1 – June 30, 2012
2,765
8.00
2,765
209,147
Total
2,765
8.00
2,765
209,147
 
 
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 July 31, 2012, the Company has purchased 241,946 shares and there remain 208,054 shares available to purchase under this program.
 
Item 3.
Defaults Upon Senior Securities
 
 
None.
 
Item 4.
Mine Safety Disclosures
 
 
Not applicable.
 
Item 5.
Other Information
 
 
On July 23, 2012, the Company gave notice of termination on certain Personal Property dated as of November 3, 2009 (the “Agreement”).  Under the Agreement, the Company was required to give 12 months’ notice of termination, accordingly, such termination will become effective July 2013.  See Note 7 (Capital Lease – Related Party) and Note 14 (Subsequent Events) to the Company’s consolidated financial statements for additional information relating to the Agreement and termination thereof.

 
- 22 -

 
 
Item 6.
Exhibits
 
 
10.1
Servotronics, Inc. 2012 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement for the 2012 Annual Meeting of Shareholders)
 
 
31.1
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)
 
 
31.2
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)
 
 
32.1
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)
 
 
32.2
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)
 
 
101
The following materials from Servotronics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 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.**

**  Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
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.
 
 
- 23 -

 
 
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: August 14, 2012
 
  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  
 
 
- 24 -
 

XASE:SVT Servotronics Inc Quarterly Report 10-Q Filling

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XASE:SVT Servotronics Inc Quarterly Report 10-Q Filing - 6/30/2012
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