tenktenten.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.   20549
Form 10-K
 
(Mark One)
 x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
or
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
Commission File No. 1-07109
 
 
SERVOTRONICS, INC.
 
(Exact name of registrant as specified in its charter) 
Delaware
 
16-0837866
(State or other jurisdiction of
 
(I. R. S. Employer
incorporation or organization)
 
Identification No.)
 
1110 Maple Street
 
 
Elma, New York    14059
 
(Address of Principal Executive Office) (Zip Code)
Registrant’s telephone number, including area code (716) 655-5990
     
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class
 
Name of each exchange on which registered
Common Stock, $.20 par value
 
NYSE Amex
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o                      No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o                      No x
 
Indicate by checkmark 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, and (2) has been subject to the filing requirements for the past 90 days.
Yes x                      No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
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. (Check one):
 
 
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
 
Based on the closing price of the Common Stock on June 30, 2009 ($5.95) (the last day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the voting stock held by non-affiliates of the registrant was $8,975,757.82.
 
As of February 28, 2010 the number of $.20 par value common shares outstanding was 2,237,371.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders are incorporated by reference in Part III.

 
 

 

 
TABLE OF CONTENTS
 
PART I
   
Item 1.
Business
3
Item 1A.
Risk Factors
5
Item 1B.
Unresolved Staff Comments
5
Item 2.
Properties
6
Item 3.
Legal Proceedings
6
Item 4.
Removed and Reserved
6
PART II
   
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
   and Issuer Purchases of Equity Securities
7
Item 6.
Selected Financial Data
9
Item 7.
Management’s Discussion and Analysis of Financial Condition and
   Results of Operations
9
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
17
Item 8.
Financial Statements and Supplementary Data
17
Item 9.
Changes in and Disagreements with Accountants on Accounting and
   Financial Disclosure
17
Item 9A(T).
Controls and Procedures
17
Item 9B.
Other Information
18
PART III
   
Item 10.
Directors, Executive Officers and Corporate Governance
18
Item 11.
Executive Compensation
18
Item 12.
Security Ownership of Certain Beneficial Owners and
   Management and Related Stockholder Matters
18
Item 13.
Certain Relationships and Related Transactions, and
   Director Independence
19
Item 14.
Principal Accountant Fees and Services
19
PART IV
   
Item 15.
Exhibits and Financial Statement Schedules
20


-2-
 
 
 

 
 
PART I
 
 
Item 1.                      Business
 
General
 
Servotronics, Inc. and its subsidiaries (collectively the “Registrant” or the “Company”) design, manufacture and market advanced technology products consisting primarily of control components and consumer products consisting of knives and various types of cutlery.
 
The Company was incorporated in New York in 1959. In 1972, the Company was merged into a wholly-owned subsidiary organized under the laws of the State of Delaware, thereby changing the Company’s state of incorporation from New York to Delaware.
 
The Company’s shares currently trade on the NYSE Amex under the symbol SVT.
 
Products
 
Advanced Technology Products
 
The Company designs, manufactures and markets a variety of servo-control components which convert an electrical current into a mechanical force or movement and other related products. The principal servo-control components produced include torque motors, electromagnetic actuators, hydraulic valves, pneumatic valves and similar devices, all of which perform the same general function. These are sold principally to the commercial aerospace, missile, aircraft and government related industries, as well as medical and industrial markets.
 
To fill most of its orders for components, the Company must either modify a standard model or design a new item in order to satisfy the customer’s particular requirements. The Company also produces unique products based on specifications provided by its customers. The Company produces under long-term contracts and other types of orders.
 
The Company may from time to time produce metallic seals of various cross-sectional configurations. These seals fit between two surfaces, usually metal, to produce a more secure and leak-proof joint. The Company manufactures these seals to close tolerances from standard and special alloy steels. Ductile coatings are often applied to the seals in order to increase their effectiveness.
 
From time to time, the Company has also produced other products of its own and/or of a given design to meet customers’ requirements.
 
Consumer Products
 
The Company designs, manufactures and sells a variety of cutlery products. These products include a wide range of cutlery items such as steak, carving, bread, butcher and paring knives for household use and for use in restaurants, institutions and private industry, and pocket and other types of knives for hunting, fishing and camping. The Company sells cutlery products to the U.S. Government and related agencies. These products include machetes, bayonets and other types of knives that are primarily for military use. The Company also produces and markets other cutlery items such as various specialty tools, putty knives, linoleum sheet cutters, field knives and other edged products. The Company manufactures its cutlery products from stainless or high carbon steel in numerous styles, designs, models and sizes. Substantially all of the Company’s commercial cutlery related products are intended for the medium to premium priced markets.
 
The Company sells many of its cutlery products under its own brand names including “Old Hickory” and “Queen.” In the fourth quarter of 2009 the Company acquired the capability to manufacture hot forged edged products which expands the commercial and government markets for the Consumer Products Group.

-3-
 
 

 
 
 
 
Sales, Marketing and Distribution
 
Advanced Technology Products
 
The Company’s Advanced Technology Group products (ATG) are marketed throughout the United States and in selected foreign markets. Products are primarily non-seasonal in nature. These products are sold to the United States Government, government prime contractors, government subcontractors, commercial manufacturers and end users. Sales are made primarily by the Company’s professional staff.
 
During the Company’s 2009 fiscal year, sales of advanced technology products pursuant to subcontracts with prime contractors or subcontractors for various branches of the United States Government or pursuant to prime contracts directly with the government accounted for approximately 23% of the Company’s total sales as compared to 20% in 2008. In 2009 and 2008, the Company’s sales of advanced technology products to one customer, including various divisions and subsidiaries of a common parent company, amounted to approximately 18% in 2009 and 23% in 2008. The Company also had sales to another customer that amounted to approximately 12% of total sales in 2009 and 2008. No other single customer represented more than 10% of the Company’s sales in any of these years.
 
The Company’s prime contracts and subcontracts with the United States Government are subject to termination for the convenience of the Government. In the event of such termination, the Company is ordinarily entitled to receive payment for its costs and profits on work done prior to termination. Since the inception of the Company’s business, less than 1% of its Government contracts have been terminated for convenience.
 
Consumer Products
 
The Company’s consumer products are marketed throughout the United States and in selected foreign markets. Consumer sales are moderately seasonal. Sales are to hardware, supermarket, variety, department, discount, gift and drug stores. The Company’s Consumer Products Group (CPG) also sells its cutlery products (principally machetes, bayonets, survival knives and kitchen knives) to various branches of the United States Government which accounted for approximately 28% of the Company’s total sales in 2009 as compared to 22% in 2008. No other single customer of the CPG represented more than 10% of the Company’s sales in 2009. The Company sells its products through its own sales personnel and through independent manufacturers’ representatives.
 
Business Segments
 
Business segment information is presented in Note 12, Business Segments, of the accompanying consolidated financial statements.
 
Intellectual Properties
 
The Company has rights under certain copyrights, trademarks, patents, and registered domain names. In the view of management, the Company’s competitive position is not dependent on patent protection.
 
Research Activities
 
The amount spent by the Company in research and development activities during its 2009 and 2008 fiscal years was not significant.
 
-4-
 
 

 
 
 
 
Environmental Compliance
 
The Company does not anticipate that the cost of compliance with current environmental laws will be material.
 
Manufacturing
 
The Company manufactures its consumer products in Franklinville, New York, Titusville, Pennsylvania and Nashville, Arkansas and its advanced technology products in Elma, New York.
 
Raw Materials and Other Supplies
 
The Company purchases raw materials and certain components for its products from outside vendors. The Company is generally not dependent upon a single source of supply for any raw material or component used in its operations.
 
Competition
 
Although no reliable industry statistics are available to enable the Company to determine accurately its relative competitive position with respect to any of its products, the Company believes that it is a significant factor with respect to certain of its servo-control components. The Company’s share of the overall cutlery market is not significant.
 
The Company encounters active competition with respect to its products from numerous companies, many of which are larger in terms of manufacturing capacity, financial resources and marketing organization. Its principal competitors vary depending upon the customer and/or the products involved. The Company believes that it competes primarily with more than 20 companies with respect to its consumer products, in addition to foreign imports. To the Company’s knowledge, its principal competitors with regard to cutlery include World Kitchen, Inc., Benchmade Knife Company, Inc., Tramontina, Inc., Dexter-Russell Inc., W. R. Case & Sons Cutlery Company, Lifetime Hoan Corp., and Gerber.
 
The Company has many different competitors with respect to servo-control components because of the nature of that business and the fact that these products also face competition from other types of control components which, at times, can accomplish the desired result.
 
The Company markets most of its products throughout the United States and to a lesser extent in selected foreign markets. The Company believes that it competes in marketing its consumer products primarily on the basis of price, quality and delivery, and its control products primarily on the basis of operating performance, adherence to rigid specifications, quality, price and delivery.
 
Employees
 
The Company, at December 31, 2009, had approximately 292 employees of which approximately 280 are full time; 214 in Western New York, 43 in Pennsylvania and 23 in Arkansas. In excess of 83% of its employees are engaged in production, inspection, packaging or shipping activities. The balance is engaged in executive, engineering, administrative, clerical or sales capacities.
 
Item 1A.                      Risk Factors
 
The Company is a smaller reporting company by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
 
Item 1B.                      Unresolved Staff Comments
 
None
-5-
 
 

 
 
 
 
Item 2.                      Properties
 
The Company’s executive offices are located on premises under a capital lease by the Company at 1110 Maple Street, Elma, a suburb of Buffalo, New York. The Company owns, leases and/or has options on real property as set forth in the following table:

     
Number of
 
   
Principal
buildings and
Approx.
 
Approx.
product
type of
floor area
Location
acreage
manufactured
construction
(sq. feet)
         
Elma, New York
38.4
Advanced
1 concrete block/
82,000
   
technology
   steel
 
   
products
   
         
Franklinville,
12.7
Cutlery products
1-tile/wood
 
New York
   
1-concrete/metal
 
     
1-concrete block
154,000
         
Titusville,
       
Pennsylvania
0.4
Cutlery products
2-brick
25,000
         
Nashville,
       
Arkansas
4.65
Cutlery products
1-concrete/metal
39,000
         
 
In Elma, New York, the Company leases and/or has options on approximately 38.4 acres of land and a facility from a local industrial development agency. The lease is accounted for as a capital lease and entitles the Company to purchase the property for a nominal amount. The balance outstanding on the capital lease at December 31, 2009 was approximately $3.3 million. In the fourth quarter of 2009, the Company also entered into a one year real property operating lease agreement with a related party. See Note 10, Related Party Transactions, of the accompanying consolidated financial statements. The above properties are appropriately covered by insurance consistent with the advice of the Company’s insurance consultant.
 
See the accompanying consolidated financial statements, including Note 9, Commitments, thereto, for further information with respect to the Company’s lease commitments.
 
The Company possesses modern precision manufacturing and testing equipment suitable for the development, manufacture, assembly and testing of its advanced technology products. The Company uses computer-aided technology throughout its processes, procedures, designs, manufacturing and administrative functions. The Company designs and makes most of the tools, dies, jigs and specialized testing equipment necessary for the production of the advanced technology products. The Company also possesses automatic and semi-automatic grinders, tumblers, presses and miscellaneous metal finishing machinery and equipment for use in the manufacture of consumer products.
 
Item 3.                      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 have a material adverse affect on the business or earnings of the Company.
 
Item 4.                      Removed and Reserved
-6-
 
 

 
 
 
PART II
 
  Item 5.
 
         Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
(a)
Price Range of Common Stock
 
 
The following table shows the range of high and low prices for the Company’s common stock as reported by the NYSE Amex (symbol SVT) for 2009 and 2008.

       
High
Low
   
2009
     
     
Fourth Quarter
$9.90
$7.05
     
Third Quarter
8.35
5.91
     
Second Quarter
10.89
5.50
     
First Quarter
8.20
4.85
   
2008
     
     
Fourth Quarter
$8.75
$5.12
     
Third Quarter
16.30
7.50
     
Second Quarter
21.65
14.90
     
First Quarter
22.00
12.95
 
 
(b)
Approximate Number of Holders of Common Stock

     
Title
Approximate number of
     
 of
record holders (as of
     
class
February 28, 2010)
   
Common Stock, $.20 par value per share
456

 
(c)
Dividends on Common Stock
 
 
On January 31, 2008, the Company announced that its Board of Directors declared a $0.15 per share cash dividend. The dividend was paid on March 14, 2008 to shareholders of record on February 20, 2008 and was approximately $348,000 in the aggregate.
 
 
On April 1, 2009, the Company announced that its Board of Directors declared a $0.15 per share cash dividend. The dividend was paid on May 15, 2009 to shareholders of record on April 20, 2009 and was approximately $336,000 in the aggregate.
 
 
On February 22, 2010, the Company announced that its Board of Directors declared a $0.15 per share cash dividend. The dividend will be paid on March 31, 2010 to shareholders of record on March 10, 2010 and will be approximately $336,000 in the aggregate. This third consecutive annual dividend does not represent that the Company will pay dividends on a regular or scheduled basis.

-7-
 
 

 
 
 
(d)
Securities Authorized for Issuance Under Equity Compensation Plans
 
 
The following table sets forth the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2009.
 
               
Number of securities
 
   
Number of securities
         
remaining available for
 
   
to be issued upon
   
Weighted-average
   
future issuance under
 
   
exercise of outstanding
   
exercise price of
   
equity compensation
 
   
options, warrants
   
outstanding options,
   
plans (excluding securities
 
   
and rights
   
warrants and rights
   
reflected in column (a))
 
Plan category
 
(a)
   
(b)
   
(c)
 
                   
Equity compensation
plans approved by
security holders
    314,000       $3.47       17,000  
                         
Equity compensation
plans not approved
by security holders
    93,700       $3.81       84,100  
                         
Total
    407,700       $3.55       101,100  
                         
 
 
Under the Company’s 2000 Employees Stock Option Plan (the “2000 Plan”), which was not required to be approved by the Company’s security holders, a total of 110,000 shares of common stock of the Company were authorized for grant as stock options. As of December 31, 2009, 25,900 unexercised options were outstanding and an additional 84,100 shares were available for future grant under the 2000 Plan. Unless terminated earlier by the Board of Directors, the 2000 Plan will terminate on July 6, 2010. In addition, on July 7, 2000 the Company granted options to purchase an aggregate of 67,800 shares of common stock pursuant to stand-alone stock option agreements, which were not required to be approved by the Company’s security holders, with certain directors of the Company. See Item 15, Exhibits, of this Form 10-K for information with respect to the 2000 Plan and the stand-alone stock option agreements.
 
 
(e)
Company Purchases of Company’s Equity Securities
 
Period
Total Number
of Shares
Purchased
Weighted
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
October 1 – October 31, 2009
-
-
-
211,912
November 1 – November 30, 2009
-
-
-
211,912
December 1 – December 31, 2009
-
-
-
211,912
Total
-
-
-
211,912
 
In January 2006, the Board of Directors authorized the purchase of up to 250,000 shares of the Company’s outstanding common stock. The shares may be purchased in the open market or in privately negotiated transactions; and at times and in amounts that the Company deems appropriate. 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 February 28, 2010, the Company has purchased 238,088 shares and there remain 211,912 shares available to purchase under this program.
 
-8-
 
 

 

 
Item 6.                      Selected Financial Data
 
The Company is a smaller reporting company by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
 
Item 7.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Business Overview
 
         The aviation and aerospace industries as well as markets for the Company’s consumer products are facing new and evolving challenges on a global basis. The operations of the Company can be affected by the trends of the economy, including interest rates, income tax laws, government regulation, legislation, and other factors. In addition, uncertainties in today’s global economy, competition from expanding manufacturing capabilities and technical sophistication of low-cost developing countries, particularly in South and East Asia, currency policies in relation to the U.S. dollar of some major foreign exporting countries so as to maintain or increase a pricing advantage of their exports vis-à-vis U.S. manufactured goods, the effect of terrorism, difficulty in predicting defense and other government 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, volatile market demand and the continued market acceptance of the Company’s advanced technology and cutlery products make it difficult to predict the impact on future financial results.
 
         Both the ATG and CPG markets are sensitive to domestic and foreign economic conditions and policies, which may create volatility in operating results, from period to period. For example, the airline industry is sensitive to fuel price increases and economic conditions. These factors directly impact the demand for aircraft production as well as the amount of repair and overhaul required on in-service aircraft.
 
Government procurements are subject to Congressional appropriations and priorities that may change from year to year. Such changes could result in, but are not limited thereto, the expansion and/or contraction of Government procurement requirements, a reduction in funding, the continuation or termination of existing programs, the introduction of new programs requiring the funds that were originally directed to current programs, a stretch-out in Government delivery requirements or such other U.S. Government determinations that could result in increases or reductions of Government purchase orders for the ATG and/or the CPG products.
 
The Company’s suppliers are also subjected to all the pressures and volatility being generated by the current Global economic conditions. Any interruption of the Company’s continuous flow of material and product parts that are required for the manufacture of the Company’s products could adversely impact the Company’s ability to meet the Company’s Customers’ delivery requirements. Consistent with the evolving requirements of the Aerospace Industry, companies are increasingly being requested to operate under Long-Term Agreements with their Customers on the basis of fixed prices, on the basis of targeted year to year price reductions and/or on the basis of year to year price adjustments predicated on mutually agreed indices and/or a combination of some or all of the above described pricing arrangements and/or otherwise. Therefore, productivity improvements and cost containment strategies are continuously sought within the Company’s concept of continuous improvement. The Company’s products are labor intensive and as such productivity improvements are expected to have positive effects on the Company’s operating results. However, increased costs for raw material, purchased parts and/or labor will have the reverse effect. Therefore, there are strong incentives to continuously improve productivity and to contain/reduce costs.
 
-9-
 
 

 
 
If any adverse economic events reduce the number of Airliners and/or Aircraft being produced by the Company’s relevant prime contractors, the negative effects of that reduction will in turn flow down through the supply chain. Also, certain major manufacturers have successfully imposed extended payment terms to their suppliers. At times, these extended terms of payment are not available to the Company when purchasing raw material such as aluminum, magnetic material, steel, etc. and/or other product support items and services. If the Company’s Customers delay their payments until after the extended due date or fail to pay, it could adversely impact the Company’s operating results.
 
The Company’s ability to manufacture products on a timely basis also depends on the Company’s Suppliers’ on-time delivery of raw material, sub components, machined parts and other necessary product support supplies. Interruptions of this flow of purchased materials could adversely affect the Company’s operations.
 
Maximizing the Company’s operations requires continued dedicated performances from the Company’s key and other personnel. In the Company’s markets and business arenas there is substantial competition for the services of the highest performing individuals. Competitors, Customers and other companies who may have interest in the Company’s most experienced and educated/highly trained personnel (i.e., Managerial, Engineering and Accounting/Administrative) are a continuing consequence of the Company’s history of successful operational performance. Any unplanned replacement of such personnel may require the hiring of new personnel on an expedited basis (provided they are available) and may temporarily interrupt the Company’s operations and efforts for continuous improvement.
 
The final resolution of the U.S. and foreign economic uncertainties, notwithstanding the Stimulus Plans, may have significant adverse effects on access to capital markets and borrowings for all companies. However, the Company currently enjoys an attractive long-term debt/equity ratio and has a strong balance sheet.
 
Management Discussion
 
During the years ended December 31, 2009 and 2008, approximately 51% and 42%, 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 increased when comparing the results of 2009 to 2008, due to increased shipments at both the ATG and CPG. The Company believes that government involvement in military operations overseas will continue to have an impact on the financial results in both the Advanced Technology and Consumer Products markets. While the Company is optimistic in relation to these potential opportunities, it recognizes that sales to the government are affected by defense budgets, the foreign policies of the U.S. and other nations, the level of military operations and other factors and, as such, it is difficult to predict the impact on future financial results.
 
The Company’s 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 stretch-outs being considered and to a lesser degree, being implemented which in turn may adversely affect the Company’s sales revenues in 2010 and beyond. Although the ATG backlog continues to be strong, actual scheduled shipments may be
 
-10-
 
 

 
delayed as a function of the Company’s customers final delivery determinations that may be based on changes in the Global Economy and other factors.
 
The Company’s Consumer Products Group (CPG) develops new commercial products and products for Government and Military applications. Included in the significant uncertainties in the near and long term are the effects of the U. S. and World’s Stimulus Plans and the difficulty to accurately project the net effect of the vagaries inherent in the government procurement process and programs. The ATG and CPG continue to respond to U.S. government procurement Requests for Quotes. New product development activities are ongoing along with the acquisition of new product lines.
 
See also Note 12, Business Segments, of the accompanying consolidated financial statements for information concerning business segment operating results.
 
Results of Operations - Year 2009 as Compared to 2008
 
         The following table compares the Company’s statements of income data for the twelve months ended December 31, 2009 and 2008 ($000’s omitted).
 
   
         Twelve Months Ended December 31,
 
               
2009 vs. 2008
 
   
2009
   
2008
   
Dollar
   
% Increase
 
   
Dollars
   
% of Sales
   
Dollars
   
% of Sales
   
Change
   
(Decrease)
 
Revenue:
                                   
  Advanced Technology
  $ 18,000       54.5 %   $ 20,882       61.1 %   $ (2,882 )     (13.8 %)
  Consumer Products
    15,008       45.5 %     13,288       38.9 %     1,720       12.9 %
      33,008       100.0 %     34,170       100.0 %     (1,162 )     (3.4 %)
Cost of sale, exclusive of depreciation and
   amortization
     24,968       75.6 %      24,405       71.4 %      563       2.3 %
Gross profit
    8,040       24.4 %     9,765       28.6 %     (1,725 )     (17.7 %)
Selling, general and administrative
    4,948       15.0 %     4,550       13.3 %     398       8.7 %
Depreciation and amortization
    564       1.7 %     552       1.6 %     12       2.2 %
Total costs and expenses
    30,480       92.3 %     29,507       86.4 %     973       3.3 %
Operating income
    2,528       7.7 %     4,663       13.6 %     (2,135 )     (45.8 %)
Interest expense
    84       0.3 %     178       0.5 %     (94 )     (52.8 %)
Other income, net
    (62 )     (0.2 %)     (87 )     (0.3 %)     25       (28.7 %)
Income tax provision
    603       1.8 %     1,517       4.4 %     (914 )     (60.3 %)
Net income
  $ 1,903       5.8 %   $ 3,055       8.9 %   $ (1,152 )     (37.7 %)
                                                 

Sales
 
The Company’s consolidated sales decreased approximately $1,162,000 or 3.4% for the twelve month period ended December 31, 2009 when compared to the same period in 2008. The decrease in sales is the result of decreased shipments for commercial applications at both the ATG and CPG not fully off-set by increased shipments for government related applications at both operating groups. Shipments for commercial applications were down approximately $3,800,000 as a result of economic driven customer order stretch-outs and to a lesser extent, order cancellations while shipments for government related applications were up approximately $2,600,000. Procurement and time of shipment under Government contracts can significantly impact operating results from period to period.
 
Gross Profit
 
As shown in the above table, gross profit decreased approximately $1,725,000 or 17.7% for the twelve month period ended December 31, 2009 compared to the same period in 2008. The ATG gross profit decreased approximately $1,955,000 as a result of decreased sales volume, product mix and price increases for raw material and for labor related expenses. The CPG gross profit increased by $231,000 due to increased sales and product mix and after accounting for a $250,000 reserve for possible cost overruns. Gross profit as a percentage of sales is affected by many factors including, but not limited to, the mix of products sold in the period within the ATG and CPG as well as the composition of ATG and CPG sales to the total consolidated sales. See Note 12, Business Segments.
 
-11-
 
 

 
 
Selling, General and Administrative Expenses
 
Selling, general and administrative (SG&A) expenses that include variable costs increased for the twelve month period ended December 31, 2009 compared to the same period in 2008 by approximately $398,000 or 8.7%. In 2009, the Company expended approximately $844,000 for Information Technology upgrades some of which are related to anticipated Sarbanes-Oxley 404 requirements. For the period ended December 31, 2009, the Company’s SG&A expenses include general corporate, intellectual properties and asset acquisition related activity costs which include, among other things, the support for additional and new manufacturing capabilities which expanded the cutlery product line to include hot forged edged products. As required by generally accepted accounting principles (GAAP) the Company expensed such costs in the period incurred. The trend is for SG&A expenses to increase as a function of increased regulations, market expansion and company growth.
 
Interest Expense
 
Interest expense decreased for the twelve month period ended December 31, 2009 compared to the same period in 2008 due to the decrease in the average outstanding debt and interest rates for the majority of 2009. See also Note 4, 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 twelve month period ended December 31, 2009 compared to the same period in 2008. Depreciation expense fluctuates due to variable estimated useful lives of depreciable property (as identified in Note 1, Summary of Significant Accounting Policies, of the accompanying consolidated financial statements) as well as the amount and nature of capital expenditures in current and previous periods. It is anticipated that the Company’s future capital expenditures will, at a minimum, follow the Company’s requirements to support its delivery commitments and to meet the information technology related capital expenditure requirements.
 
Other Income
 
Components of other income include interest income on cash and cash equivalents, and other amounts not directly related to the sale of the Company’s products. The decrease in other income for the twelve month period ended December 31, 2009 when compared to the same twelve month period in 2008 is primarily due to the market driven decline in interest rates on cash and cash equivalents.
 
Income Taxes
 
The Company’s effective tax rate was 24.0% in 2009 and 33.3% in 2008. The effective tax rate in both years reflects state income taxes, permanent non-deductible expenditures and the tax benefit for manufacturing deductions allowable under the American Jobs Creation Act of 2004 as well as reductions in New York State’s statutory tax rate and income apportionment formula. See also Note 7, Income Tax Provision, of the accompanying consolidated financial statements for information concerning income taxes.
 
-12-
 
 

 
 
Net Income
 
Net income decreased $1,152,000 or 37.7% when comparing the twelve month period ended December 31, 2009 to the same period in 2008. The decrease in net income is primarily the result of decreased sales, product mix, costs associated with the acquisition of assets, increased costs for material procurements, increased labor costs, Information Technology costs, some of which are related to Sarbanes-Oxley 404 requirements, and elevated consulting and legal fees as previously described under Selling, General and Administrative Expenses herein.
 
Results of Operations - Year 2008 as Compared to 2007
 
The following table compares the Company’s statements of income data for the twelve months ended December 31, 2008 and 2007 ($000’s omitted).
 
    Twelve Months Ended December 31,  
               
2008 vs. 2007
 
   
2008
   
2007
   
Dollar
   
% Increase
 
   
Dollars
   
% of Sales
   
Dollars
   
% of Sales
   
Change
   
(Decrease)
 
Revenue:
                                   
  Advanced Technology
  $ 20,882       61.1 %   $ 17,071       54.4 %   $ 3,811       22.3 %
  Consumer Products
    13,288       38.9 %     14,307       45.6 %     (1,019 )     (7.1 %)
      34,170       100.0 %     31,378       100.0 %     2,792       8.9 %
Cost of sale, exclusive of depreciation and
   amortization
    24,405       71.4 %     23,294       74.2 %     1,111       4.8 %
Gross profit
    9,765       28.6 %     8,084       25.8 %     1,681       20.8 %
Selling, general and administrative
    4,550       13.3 %     4,184       13.3 %     366       8.7 %
Depreciation and amortization
    552       1.6 %     551       1.8 %     1       0.2 %
Total costs and expenses
    29,507       86.4 %     28,029       89.3 %     1,478       5.3 %
Operating income
    4,663       13.6 %     3,349       10.7 %     1,314       39.2 %
Interest expense, net
    178       0.5 %     255       0.8 %     (77 )     (30.2 %)
Other income
    (87 )     (0.3 %)     (144 )     (0.5 %)     57       (39.6 %)
Income tax expense
    1,517       4.4 %     1,186       3.8 %     331       27.9 %
Net income
  $ 3,055       8.9 %   $ 2,052       6.5 %   $ 1,003       48.9 %
                                       
 
 
       
 
Sales
 
The Company’s consolidated sales increased approximately $2,792,000 or 8.9% for the twelve month period ended December 31, 2008 when compared to the same period in 2007. The increase in sales is the result of increased shipments for commercial applications at both the ATG and CPG as well as increased government related shipments of ATG products. Shipments for government related products at the CPG were down approximately 18% or $1,600,000 when comparing 2008 to 2007. This decrease was partially offset by an approximate 11% or $600,000 year to year increase in commercial shipments at the CPG. The reduction in government shipments is primarily attributed to the timing of the scheduled deliveries under existing government contracts. The inherent volatility of Government procurements are expected to contribute to periodic revenue fluctuations going forward.

-13-
 
 

 

 
Gross Profit
 
As shown in the above table, gross profit increased approximately $1,681,000 or 20.8% for the twelve month period ended December 31, 2008 compared to the same period in 2007. The ATG gross profit increased approximately $1,765,000. Increased sales revenue and cost containment activities for ATG products are primarily the reasons for the increase in gross profit at the ATG. The CPG gross profit decreased by $386,000. Decreased sales volume and product mix at the CPG in addition to price increases for raw material and certain piece part procurements contributed to the decrease in margins at the CPG. Gross profit as a percentage of sales is affected by many factors including, but not limited to, the mix of products sold in the period within the ATG and CPG as well as the composition of ATG and CPG sales to the total consolidated sales. See Note 12, Business Segments.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative (SG&A) expenses that include variable costs increased for the twelve month period ended December 31, 2008 compared to the same period in 2007 by approximately $366,000 or 8.7% which compares to an 8.9% increase in sales. The $366,000 increase in SG&A includes approximately $215,000 of increased expenses relative to contract administration/negotiations, product line acquisition, product protection (i.e., trademarks, patents) and other costs associated with the expansion of the ATG and CPG foreign and domestic markets. The trend is for SG&A expenses to increase as a function of increased regulations, market expansion and company growth.
 
Interest Expense
 
Interest expense decreased for the twelve month period ended December 31, 2008 compared to the same period in 2007 due to the decrease in the average outstanding debt and interest rates. Average debt outstanding will continue to decline as the Company repays its scheduled debt obligations and assuming the Company does not incur additional debt. See also Note 4, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expense remained consistent for the twelve month period ended December 31, 2008 compared to the same period in 2007. Depreciation expense fluctuates due to variable estimated useful lives of depreciable property (as identified in Note 1, Summary of Significant Accounting Policies, of the accompanying consolidated financial statements) as well as the amount and nature of capital expenditures in current and previous periods. It is anticipated that the Company’s future capital expenditures will, at a minimum, follow the Company’s requirements to support its delivery commitments and to meet the information technology related capital expenditure requirements that are associated with Sarbanes-Oxley and other new regulatory requirements.
 
Other Income
 
Components of other income include interest income on cash and cash equivalents, and other amounts not directly related to the sale of the Company’s products. The decrease in other income for the twelve month period ended December 31, 2008 when compared to the same twelve month period in 2007 is primarily due to the market driven decline in interest rates on cash and cash equivalents.

-14-
 
 

 

 
Income Taxes
 
The Company’s effective tax rate was 33.3% in 2008 and 36.6% in 2007. The effective tax rate in both years reflects state income taxes, permanent non-deductible expenditures and the tax benefit for manufacturing deductions allowable under the American Jobs Creation Act of 2004 as well as reductions in New York State’s statutory tax rate and income apportionment formula. See also Note 7, Income Tax Provision, of the accompanying consolidated financial statements for information concerning income taxes.
 
Net Income
 
Net income increased $1,003,000 or 48.9% when comparing the twelve month period ended December 31, 2008 to the same period in 2007. The increase in net income is primarily a result of increased sales at the ATG and a favorable mix of products and cost containment activities at the ATG. The CPG’s year to year reduction in profit of $386,000 as depicted in Note 12, Business Segments, is primarily attributed to the reduction in sales, the mix of products sold and increased costs for raw material and purchased parts. As previously described under Selling, General and Administrative Expenses herein, there were increased expenses amounting to approximately $215,000 relative to contract administration/negotiations, product line acquisition and product protection (i.e., trademarks, patents) in addition to certain administrative expenses associated with the expansion of the ATG and CPG foreign and domestic markets.
 
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 December 31, 2009, the Company had working capital of approximately $17,698,000 ($16,227,000 – 2008) of which approximately $4,320,000 ($4,709,000 – 2008) was comprised of cash and cash equivalents and certificates of deposit. The Company generated approximately $952,000 in cash from operations during the twelve months ended December 31, 2009 as compared to $2,169,000 during the twelve months ended December 31, 2008. Cash was generated from operations through net income and a decrease in accounts receivable of approximately $920,000. The primary uses of cash for the Company’s operating activities for the twelve months ended December 31, 2009 include payments of approximately $867,000 in income taxes and increases in inventory of $1,366,000 and decreases of $1,278,000 in accounts payable. ATG and CPG customers are increasingly requesting and/or requiring stock inventory in order to facilitate assurance of meeting their often volatile delivery schedule needs. As these requirements increase, they directly impact comparative cash flows when implemented and increases inventory levels when it is a continuing requirement. Additionally, at times, the Company takes advantage of price discounts on volume purchases for common parts. 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 during the twelve months ended December 31, 2009 includes current principal payments on long-term debt as well as approximately $336,000 for a cash dividend paid on May 15, 2009 to shareholders of record on April 20, 2009. Under the Company’s stock repurchase program (as of February 28, 2010) the Company repurchased 238,088 shares of which 943 shares and 42,788 shares were purchased in 2009 and 2008, respectively. There remain 211,912 shares to be purchased under this program. See

-15-
 
 

 
 
Note 8, Common Shareholders’ Equity, of the accompanying consolidated financial statements for further discussion of the current purchase program.
 
At December 31, 2009, there are no material commitments for capital expenditures except for the contingency related to an asset acquisition which may require the Company to acquire an operating facility at its appraised value of $506,000 contingent on the Company receiving certain incentives from the state and/or development agencies. This facility is currently leased from a related party of the Company.
 
The Company also has a $1,000,000 line of credit on which there was no balance outstanding at December 31, 2009 or 2008. If needed, this can be used to fund cash flow required for operations.
 
The Company believes that it has adequate internal and external resources available to fund expected working capital and capital expenditure requirements through fiscal 2009 as supported by the level of cash/cash equivalents on hand, cash flow from operations and bank lines of credit.
 
Off Balance Sheet Arrangements
 
None.
 
Critical Accounting Policies
 
The Company prepares its consolidated financial statements in accordance with GAAP. As such, the Company is required to make certain estimates, judgments and assumptions that the Company believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and which require the Company’s most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Note 1, Summary of Significant Accounting Policies, of the accompanying consolidated financial statements includes a summary of the significant accounting policies used in the preparation of the consolidated financial statements.
 
Revenue Recognition
 
Revenues are recognized as services are rendered or as units are shipped 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, which approximates actual cost (first-in, first-out). Market provisions in respect to net realizable value and obsolescence are applied to the gross value of the inventory. Pre-production and start-up costs are expensed as incurred.
 
Employee Benefit Plans
 
The Company provides a range of benefits to its employees and retired employees. The Company records annual amounts relating to these plans based on calculations specified by GAAP, which includes various actuarial assumptions, such as discount rates, assumed rates of return on plan assets and health care cost trend rates. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on advice from its actuaries. The Company’s defined benefit plans were settled in 2008 with no future costs associated with them after 2008.

-16-
 
 

 
 
 
Use of Estimates
 
The preparation of the consolidated financial statements in conformity with 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. Such estimates include, but are not limited to, reserves and allowances for inventories and trade receivables. Actual results could differ from those estimates.
 
Item 7A.                   Quantitative and Qualitative Disclosures about Market Risk
 
The Company is a smaller reporting company by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
 
Item 8.                      Financial Statements and Supplementary Data
 
The consolidated financial statements of the Company which are included in this Form 10-K Annual Report are described in the accompanying Index to Consolidated Financial Statements on Page F1.
 
Item 9.                      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A(T).              Controls and Procedures
 
(i)      Disclosure Controls and Procedures
 
The Company carried out an evaluation under the supervision and with the participation of its management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2009. Based upon that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to the material information relating to the Company (or the Company’s consolidated subsidiaries) required to be included in the Company’s periodic filings with the SEC, such that the information relating to the Company, required to be disclosed in SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
 
(ii)      Management’s Report on Internal Control over Financial Reporting
 
The Company’s management, with the participation of the Company’s CEO and CFO, is responsible for establishing and maintaining adequate internal controls over financial reporting. The Company’s management has assessed the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this assessment management has concluded that, as of December 31, 2009, the Company’s internal controls over financial reporting are effective based on those criteria.
 
-17-
 
 

 
 
 
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting because the management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
 
(iii)              Changes in Internal Control Over Financial Reporting
 
There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2009 that have materially affected, or are reasonably likely to affect, the Company’s internal controls over financial reporting.
 
Item 9B.                  Other Information
 
None.
 
PART III
 
 
Item 10.                   Directors, Executive Officers and Corporate Governance
 
Information regarding directors and executive officers of the Company, compliance with Section 16(a) of the Securities Exchange Act and the Company’s Audit Committee, its members and the Audit Committee financial expert is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2009 fiscal year or such information will be included by amendment to this Form 10-K.
 
Code of Ethics
 
The Company has adopted a Code of Ethics and Business Conduct that applies to all directors, officers and employees of the Company as required by the listing standards of the NYSE Amex. The Code is available on the Company’s website at www.servotronics.com and the Company intends to disclose on this website any amendment to the Code. Waivers under the Code, if any, will be disclosed under the rules of the SEC and the NYSE Amex.
 
Item 11.                   Executive Compensation
 
Information regarding executive compensation is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2009 fiscal year or such information will be included by amendment to this Form 10-K.
 
Item 12.                   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2009 fiscal year or such information will be included by amendment to this Form 10-K.
 
Also incorporated by reference is the information in the table under the heading “Securities Authorized for Issuance Under Equity Compensation Plans” included in Item 5 of this Form 10-K.

-18-
 
 

 

Item 13.                      Certain Relationships and Related Transactions, and Director Independence
 
Information regarding certain relationships and related transactions and director independence is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2009 fiscal year or such information will be included by amendment to this Form 10-K.
 
Item 14.                      Principal Accountant Fees and Services
 
Information regarding principal accountant fees and services is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2009 fiscal year or such information will be included by amendment to this Form 10-K.

-19-
 
 

 
 
PART IV
 
 
                    
 
 Item 15.    Exhibits and Financial Statement Schedules    
         
 
(a)
Exhibits
   
   
Exhibit
number
      Presentation
     Reference
   
 3(A)(1)
Certificate of Incorporation
Exhibit 3(A)(1) to 1996
   Form 10-KSB*
   
 3(A)(2)
Amendments to Certificate
   of Incorporation dated
   August 27, 1984
Exhibit 3(A)(2) to 1996
   Form 10-KSB*
 
   
 3(A)(3)
Certificate of designation
   regarding Series I
   preferred stock
Exhibit 4(A) to 1987
   Form 10-K*
   
 3(A)(4)
Amendments to Certificate
   of Incorporation dated
   June 30, 1998
Exhibit 3(A)(4) to 1998
   Form 10-KSB*
 
   
 3(B)(1)
By-laws
Exhibit 3(B) to 1986
   Form 10-K*
   
 3(B)(2)
Amendment to By-laws
   dated January 2008
Exhibit 3.1 to Form 8-K
   filed February 4, 2008*
   
 4.1(A)
First amended and restated
   term loan agreement with
   Fleet Bank of New York
   dated October 4, 1993
Exhibit 4(A) to 1993
   Form 10-KSB*
   
 4.1(B)
Second amended and restated
   term loan agreement with
   Fleet Bank of New York
   dated February 26, 1999
Exhibit 4.1(B) to 1999
   Form 10-KSB*
   
 4.1(C)
First amendment to second
   amended and restated term
   loan agreement with
   Fleet Bank of New York
   dated December 17, 1999
Exhibit 4.1(C) to 1999
   Form 10-KSB*
_____________________________________________________________
   *Incorporated herein by reference (File No. 1-07109)
  **Indicates management contract or compensatory plan or arrangement

-20-
 
 

 
 
     
Exhibit
number
 
 
     Presentation
 
 
     Reference
   
 4.1(D)
Second amendment to a second
   amended and restated term
   loan agreement with
   Fleet National Bank
   dated December 20, 2004
Exhibit 4.1(D) to 2004
   Form 10-KSB*
   
 4.2(A)
Letter of Credit Reimbursement
   Agreement with Fleet Bank
   dated December 1, 1994
Exhibit 4(B)(1) to
   1994 10-KSB*
   
 4.2(B)
First Amendment and
   Extension to Letter of
   Credit and Reimbursement
   Agreement with Fleet Bank
   of New York dated as of
   December 17, 1999
Exhibit 4.2(B) to 1999
   Form 10-KSB*
   
 4.2(C)
Second Amendment and
   Extension to Letter of
   Credit and Reimbursement
   Agreement originally dated
   December 1, 1994, with
   Fleet National Bank, dated as
   of December 20, 2004
Exhibit 4.2(C) to 2004
   Form 10-KSB*
   
 4.3
Agency Mortgage and Security
   Agreement dated as of
   December 1, 1994 from the
   Registrant and its subsidiaries
Exhibit 4(B)(2) to
   1994 10-KSB*
   
 4.4
Guaranty Agreement dated as
   of December 1, 1994 from
   the Registrant and its
   subsidiaries to the Erie
   County Industrial
   Development Agency
    (“ECIDA”), Norwest Bank
   Minnesota, N.A., as Trustee,
   and Fleet Bank
Exhibit 4(B)(3) to
   1994 10-KSB*
   
 4.5
Shareholder Rights Plan
   dated as of August 27,
   2002
Exhibit 4 to Form
   8-K filed August 27,
   2002*
_____________________________________________________________
   *Incorporated herein by reference (File No. 1-07109)
  **Indicates management contract or compensatory plan or arrangement

 
-21-
 
 

 

 
   
Exhibit
number
      Presentation
     Reference
   
10(A)(1)
Employment contract for
   Dr. Nicholas D. Trbovich,
   Chief Executive Officer**
Exhibit 10(A)(1) to Form
   8-K filed August 18,
   2005*
   
10(A)(2)
Amendment to employment
   contract for Dr. Nicholas D.
   Trbovich, Chief Executive
   Officer**
Exhibit 10(A)(2) to Form
   8-K filed February 22, 2010*
   
10(A)(3)
Amendment to employment
   contract for Dr. Nicholas D.
   Trbovich, Chief Executive
   Officer**
Exhibit 10(A)(3) to Form
   8-K filed July 10, 2008*
   
10(A)(4)
Employment contract for
   Nicholas D. Trbovich, Jr.**
Exhibit 10(A)(1) to Form
   8-K filed August 18,
   2005*
   
10(A)(5)
Amendment to employment
   contract for Nicholas D.
   Trbovich, Jr.**
Exhibit 10(A)(5) to Form
   8-K filed February 22, 2010*
   
10(A)(6)
Amendment to employment
   contract for Nicholas D.
   Trbovich, Jr.**
Exhibit 10(A)(6) to Form
   8-K filed July 10, 2008*
   
10(B)
Form of Indemnification
   Agreement between the
   Registrant and each of
   its Directors and Officers**
Exhibit 10(E) to 1986
   Form 10-K*
   
10(C)(1)
Loan agreement between
   the Company and its
   employee stock ownership
   trust, as amended
Exhibit 10(C)(1)
   to 1991 Form 10-K*
   
10(C)(2)
Stock purchase agreement
   between the Company
   and its employee
   stock ownership trust
Exhibit 10(D)(2) to
   1988 Form 10-K*
   
10(D)(2)
Stock Option Agreement
   for Donald W. Hedges
   dated July 7, 2000**
Exhibit 10(D)(2)(a) to 2000
   Form 10-KSB*
_____________________________________________________________
   *Incorporated herein by reference (File No. 1-07109)
  **Indicates management contract or compensatory plan or arrangement
 

-22-
 
 

 
 
   
Exhibit
number
      Presentation
     Reference
   
10(D)(3)
Stock Option Agreement
   for Nicholas D.
   Trbovich dated
   July 7, 2000**
Exhibit 10(D)(3)(c) to 2000
   Form 10-KSB*
   
10(D)(4)
Stock Option Agreement
   for William H. Duerig
   dated July 7, 2000**
Exhibit 10(D)(4)(a) to 2000
   Form 10-KSB*
   
10(D)(9)
Land Lease Agreement
   between TSV, Inc.
   (wholly-owned subsidiary
   of the Registrant) and the
   ECIDA dated as of May 1,
   1992, and Corporate
   Guaranty of the Registrant
   dated as of May 1, 1992
Exhibit 10(D)(9) to 1992
   Form 10-KSB*
   
10(D)(10)
Amendment to Land Lease
   Agreement and Interim
   Lease Agreement dated
   November 19, 1992
Exhibit 10(D) (11) to 1993
   Form 10-KSB*
   
10(D)(11)
Lease Agreement dated as of
   December 1, 1994 between
   the Erie County Industrial
   Development Agency
   (“ECIDA”) and TSV, Inc.
Exhibit 10(D)(11) to
   1994 10-KSB*
   
10(D)(12)
Sublease Agreement dated
   as of December 1, 1994
   between TSV, Inc. and
   the Registrant
Exhibit 10(D)(12) to
   1994 10-KSB*
   
10(D)(13)(a)
2001 Long-Term Stock
   Incentive Plan**
Appendix A to 2001
   Proxy*
   
10(D)(13)(b)
Amendment to the 2001
   Long-Term Stock
   Incentive Plan**
Exhibit 10(D)(13)(b)
   to 2007 10-KSB*
   
10(E)(1)
Personal Property Lease
   between Aero Metal
   Products, Inc. (wholly-owned
   subsidiary of the Registrant)
   and Aero, Inc. (related party)
   dated as of November 3, 2009
Exhibit 10.1 to Form 8-K
   filed November 3, 2009*
_____________________________________________________________
   *Incorporated herein by reference (File No. 1-07109)
  **Indicates management contract or compensatory plan or arrangement

-23-
 
 

 
 
   
Exhibit
number
      Presentation
     Reference
   
10(E)(2)
Lease Agreement
   between Aero Metal
   Products, Inc. (wholly-owned
   subsidiary of the Registrant)
   and Aero, Inc. (related party)
   dated as of November 3, 2009
Exhibit 10.2 to Form 8-K
   filed November 3, 2009*
   
10(E)(3)
Asset Purchase Agreement
   between Aero Metal
   Products, Inc. (wholly-owned
   subsidiary of the Registrant)
   and Aero, Inc. (related party)
   dated as of November 3, 2009
Exhibit 10.3 to Form 8-K
   November 3, 2009*
   
21
Subsidiaries of the
   Registrant
Filed herewith
   
23.1
Consent of Freed Maxick &
   Battaglia, CPAs, P.C.
Filed herewith
   
31.1
Certification of Chief Financial
   Officer pursuant to
   Rule 13a-14 or 15d-14 of the
   Securities Exchange act of
   1934, as adopted pursuant to
   Section 302 of the Sarbanes-
   Oxley Act of 2002
Filed herewith
   
31.2
Certification of Chief Executive
   Officer pursuant to
   Rule 13a-14 or 15d-14 of the
   Securities Exchange act of
   1934, as adopted pursuant to
   Section 302 of the Sarbanes-
   Oxley Act of 2002
Filed herewith
   
32.1
Certification of Chief Financial
   Officer pursuant to 18 U.S.C.
   1350 as adopted pursuant to
   Section 906 of the Sarbanes-
   Oxley Act of 2002
Filed herewith
_____________________________________________________________
   *Incorporated herein by reference (File No. 1-07109)
  **Indicates management contract or compensatory plan or arrangement

-24-
 
 

 
 
     
Exhibit
number
 
 
     Presentation
 
 
     Reference
   
32.2
Certification of Chief Executive
   Officer pursuant to 18 U.S.C.
   1350 as adopted pursuant to
   Section 906 of the Sarbanes-
   Oxley Act of 2002.
Filed herewith
______________________________________________________________
   *Incorporated herein by reference (File No. 1-07109)
  **Indicates management contract or compensatory plan or arrangement
 
The Company hereby agrees that it will furnish to the Securities and Exchange Commission upon request a copy of any instrument defining the rights of holders of long-term debt not filed herewith.
 
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-K 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, global competition, 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 operations of the Company can be affected by the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those factors discussed elsewhere in this Form 10-K. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements.

-25-
 
 

 

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
SERVOTRONICS, INC.
 
March 30, 2010                                                                By          /s/ Nicholas D. Trbovich, President
Nicholas D. Trbovich
President, Chief Executive Officer
and Chairman of the Board
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
/s/ Nicholas D. Trbovich
President, Chief Executive
March 30, 2010
Nicholas D. Trbovich
Officer, Chairman of the
 
 
Board and Director
 
     
/s/ Nicholas D. Trbovich Jr.
Executive Vice President, Chief
 
Nicholas D. Trbovich Jr.
Operating Officer and Director
March 30, 2010
     
/s/ Cari L. Jaroslawsky
Chief Financial Officer,
March 30, 2010
Cari L. Jaroslawsky
Treasurer
 
     
/s/ Donald W. Hedges
Director
March 30, 2010
Donald W. Hedges
   
     
/s/ William H. Duerig
Director
March 30, 2010
William H. Duerig
   


-26-
 
 

 

SERVOTRONICS, INC. AND SUBSIDIARIES
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page
Report of Independent Registered Public Accounting Firm
F2
Consolidated Balance Sheets at December 31, 2009 and 2008
F3
Consolidated Statements of Income for the years ended
   December 31, 2009 and 2008
 
F4
Consolidated Statements of Cash Flows for the years ended
   December 31, 2009 and 2008
 
F5
Notes to Consolidated Financial Statements
F6-F17

Consolidating financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.

-F1-
 
 

 
 

Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders
Servotronics, Inc. and Subsidiaries

We have audited the consolidated balance sheets of Servotronics, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor have we been engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Servotronics, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.


/s/ Freed Maxick & Battaglia, CPAs, P.C.
Buffalo, New York

March 30, 2010
 
-F2-
 
 

 

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

Assets
 
December 31,
 
   
2009
   
2008
 
Current assets:
           
  Cash and cash equivalents
  $ 3,825     $ 4,229  
  Certificates of deposit
    495       480  
  Accounts receivable, net
    4,086       5,006  
  Inventories, net
    11,526       10,160  
  Prepaid income taxes
    205       84  
  Deferred income taxes
    540       494  
  Other assets
    450       387  
     Total current assets
    21,127       20,840  
Property, plant and equipment, net
    6,307       5,838  
Other non-current assets
    200       207  
Total Assets
  $ 27,634     $ 26,885  
Liabilities and Shareholders’ Equity
               
Current liabilities:
               
  Current portion of long-term debt
  $ 321     $ 539  
  Current portion of capital lease related party
    79       -  
  Accounts payable
    1,115       2,393  
  Accrued employee compensation and benefit costs
    1,059       1,335  
  Other accrued liabilities
    855       346  
     Total current liabilities
    3,429       4,613  
Long-term debt
    3,381       3,702  
Long-term portion of capital lease related party
    495       -  
Deferred income taxes
    515       501  
Shareholders’ equity:
               
  Common stock, par value $.20; authorized
               
    4,000,000 shares; issued 2,614,506 shares;
               
    outstanding 1,961,018 (1,933,253 – 2008) shares
    523       523  
  Capital in excess of par value
    13,296       13,296  
  Retained earnings
    10,248       8,680  
  Accumulated other comprehensive loss
    (61 )     (98 )
      24,006       22,401  
  Employee stock ownership trust commitment
    (1,468 )     (1,614 )
  Treasury stock, at cost 377,135 (376,192 – 2008) shares
    (2,724 )     (2,718 )
     Total shareholders’ equity
    19,814       18,069  
Total Liabilities and Shareholders’ Equity
  $ 27,634     $ 26,885  

See notes to consolidated financial statements
-F3-
 
 
 
 

 

SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($000’s omitted except per share data)
 
   
Years Ended
December 31,
 
   
2009
   
2008
 
Revenue
  $ 33,008     $ 34,170  
Costs, expenses and other income:
               
   Cost of goods sold, exclusive of depreciation and amortization
    24,968       24,405  
   Selling, general and administrative
    4,948       4,550  
   Interest expense
    84       178  
   Depreciation and amortization
    564       552  
   Other income, net
    (62 )     (87 )
      30,502       29,598  
Income before income tax provision
    2,506       4,572  
Income tax provision
    603       1,517  
Net income
  $ 1,903     $ 3,055  
Income per share:
               
Basic
               
Net income per share
  $ 0.98     $ 1.58  
Diluted
               
Net income per share
  $ 0.92     $ 1.45  
 
See notes to consolidated financial statements
-F4-
 
 
 
 

 

SERVOTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
 
    Years Ended
December 31,
 
 
   
2009
   
2008
 
Cash flows related to operating activities:
           
   Net income
  $ 1,903     $ 3,055  
   Adjustments to reconcile net income to net
               
          cash provided by operating activities -
               
        Depreciation and amortization
    564       552  
        Deferred income taxes (benefit)
    (70 )     37  
Change in assets and liabilities -
               
        Accounts receivable
    920       (436 )
        Inventories
    (1,366 )     (2,149 )
        Prepaid income taxes
    (121 )     (84 )
        Other assets
    (63 )     185  
        Other non-current assets
    8       11  
        Accounts payable
    (1,278 )     974  
        Accrued employee compensation and benefit costs
    (201 )     57  
        Other accrued liabilities
    509       49  
        Accrued income tax
    -       (300 )
        Employee stock ownership trust payment
    147       218  
Net cash provided by operating activities
    952       2,169  
Cash flows related to investing activities:
               
  Capital expenditures - property, plant and equipment
    (446 )     (510 )
  Purchase of Certificates of Deposit
    (495 )     (480 )
  Proceeds from Certificates of Deposit
    480       -  
Net cash used in investing activities
    (461 )     (990 )
Cash flows related to financing activities:
               
   Principal payments on long-term debt
    (553 )     (387 )
   Purchase of treasury shares
    (6 )     (329 )
   Cash dividend
    (336 )     (348 )
   Purchase of stock options
    -       (772 )
   Proceeds from exercise of stock options
    -       7  
Net cash used in financing activities
    (895 )     (1,829 )
Net decrease in cash and cash equivalents
    (404 )     (650 )
Cash and cash equivalents at beginning of year
    4,229       4,879  
Cash and cash equivalents at end of year
  $ 3,825     $ 4,229  
                 
Supplemental disclosures:
               
   Income taxes paid
  $ 867     $ 1,814  
   Interest paid
  $ 90     $ 193  
   Equipment acquired under capital lease – related party
  $ 588     $ -  

See notes to consolidated financial statements
-F5-
 
 
 
 

 
 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Summary of Significant Accounting Policies
 
 
Principles of Consolidation
 
 
The consolidated financial statements include the accounts of Servotronics, Inc. and its wholly-owned subsidiaries (the “Company”).
 
 
Cash and Cash Equivalents
 
 
The Company considers cash and cash equivalents to include all cash accounts and short-term investments purchased with an original maturity of three months or less. Cash equivalents consist primarily of short-term certificates of deposits.
 
 
Certificates of Deposit
 
 
The Company purchased a six month and nine month certificate of deposit in 2008 and at maturity has reinvested the principle and earned interest for the current certificates of deposit with similar maturity periods and at the competitive market interest rates available. Short term investments are classified as available for sale, and are carried at fair value. The investments plus interest earned amounted to approximately $495,000 and approximately $480,000 as of December 31, 2009 and 2008 respectively. There were no unrealized gains or losses since cost approximates fair value as of December 31, 2009 and 2008. In accordance with ASC 820, the valuation of short term investments is determined by observing market value and are classified as Level 1 investments.
 
 
Revenue Recognition
 
 
Revenues are recognized as services are rendered or as units are shipped and at the designated FOB point consistent with the transfer of title, risks and rewards of ownership. Such purchase orders generally include specific terms relative to quantity, item description, specifications, price, customer responsibility for in-process costs, delivery schedule, shipping point, payment and other standard terms and conditions of purchase.
 
 
Inventories
 
 
Inventories are stated at the lower of standard cost or net realizable value. Cost includes all cost incurred to bring each product to its present location and condition, which approximates actual cost (first-in, first-out). Market provisions in respect of net realizable value and inventory expected to be used in greater than one year are applied to the gross value of the inventory through a reserve of approximately $548,000 and $524,000 at December 31, 2009 and 2008, 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.
 

-F6-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
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 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 a separate Pennsylvania state income tax return.
 
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company did not have any accrued interest or penalties included in its consolidated balance sheets at December 31, 2009 or 2008, and therefore did not recognize any interest and/or penalties in its consolidated statements of income during the years ended December 31, 2009 and 2008.
 
During the third Quarter of 2009, the New York State Department of Taxation and Finance (NYS) commenced an examination of the Company’s New York State franchise tax return for the years 2005 through 2007. The Company anticipates that the current NYS examination will be effectively settled within the next twelve months.  An estimate of the range of the reasonably possible change to tax benefits recognized or unrecognized that may occur as a result of the anticipated settlement cannot be made.
 
Employee Stock Ownership Plan
 
Contributions to the employee stock ownership plan are determined annually by the Company according to plan formula.
 
Impairment of Long-Lived Assets
 
The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable based on undiscounted future operating cash flow analyses. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. The Company has determined that no impairment of long lived assets existed at December 31, 2009 and 2008.
 

-F7-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
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 of December 31, 2008 were reclassified to conform with classifications adopted in the current year.
 
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, inventories, accounts payable and accrued expenses are
reasonable estimates of their fair value due to their short maturity. Based on variable interest rates and the borrowing rates currently
available to the Company for loans similar to its long-term debt, the fair value approximates its carrying amount.
 
         
2.
Inventories
 
December 31,
 
        2009       2008  
     
($000’s omitted)
 
 
Raw materials and common parts, net of reserve
  $ 6,441     $ 4,621  
 
Work-in-process
    3,425       4,153  
 
Finished goods
    1,660       1,386  
 
Total inventories, net of reserve
  $ 11,526     $ 10,160  

-F8-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 3.     Property, Plant and Equipment  
December 31,
 
   
2009
   
2008
 
   
($000’s omitted)
 
        Land
  $ 25     $ 25  
        Buildings
    6,881       6,761  
        Machinery, equipment and tooling (including capital lease)
    12,130       11,728  
      19,036       18,514  
        Less accumulated depreciation and amortization
    (12,729 )     (12,676 )
        Total property, plant and equipment
  $ 6,307     $ 5,838  

Property, plant and equipment includes land and building under a $5,000,000 capital lease which can be purchased for a nominal amount at the end of the lease term. As of December 31, 2009, amortization expense and accumulated amortization on the building amounted to approximately $140,000 and $2,163,000 respectively ($140,000 and $2,040,000, respectively for 2008). The associated current and long-term liabilities are discussed in Note 4, Long-Term Debt, of the consolidated financial statements. Depreciation expense for the year ended December 31, 2009 and 2008 amounted to $424,000 and $412,000, respectively. The combined depreciation and amortization expense for December 31, 2009 and 2008 were $564,000 and $552,000, respectively. The Company believes that it maintains property and casualty insurance in amounts adequate for the risk and nature of its assets and operations and which are generally customary in its industry.
 
 
4.  
Long-Term Debt
  December 31,   
          2009       2008  
        ($000’s omitted)   
   
Industrial Development Revenue Bonds; secured by an equivalent
               
   
   letter of credit from a bank with interest payable monthly
               
   
   at a floating rate (0.45% at December 31, 2009)(A)
  $ 3,300     $ 3,470  
   
 
Term loan payable to a financial institution;
               
   
   interest at LIBOR plus 2%, (2.23% at December 31, 2009);
               
   
   quarterly principal payments of $26,786 through the
               
   
   fourth quarter of 2011
    214       321  
   
 
Term loan payable to a financial institution;
               
   
   interest at LIBOR plus 2%, not to exceed 6.00%; quarterly
               
   
   principal payments of $17,500; paid in full in the fourth
               
   
   quarter of 2009
    -       220  
   
 
Secured term loan payable to a government agency;
               
   
   monthly payments of $1,950 including interest
               
   
   fixed at 3% payable through fourth quarter of 2015
    127       146  
   
 
Secured term loan payable to a government agency;
               
   
   monthly principal payments of approximately $1,900 with
               
   
   interest waived payable through second quarter of 2012
    61       84  
          3,702       4,241  
   
Less current portion
    (321 )     (539 )
        $ 3,381     $ 3,702  


-F9-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
 
 
 (A)       The Industrial Development Revenue Bonds were issued by a government agency to finance the construction of the Company’s headquarters/Advanced Technology facility. Annual sinking fund payments of $170,000 commenced December 1, 2000 and continue through 2013, with a final payment of $2,620,000 due December 1, 2014. The Company has agreed to reimburse the issuer of the letter of credit if there are draws on that letter of credit. The Company pays the letter of credit bank an annual fee of 1% of the amount secured thereby and pays the remarketing agent for the bonds an annual fee of .25% of the principal amount outstanding. The Company’s interest under the facility capital lease has been pledged to secure its obligations to the government agency, the bank and the bondholders.     
 
 
Principal maturities of long-term debt are as follows:  2010 - $321,000, 2011 - $323,000, 2012 - $202,000, 2013 - $192,000, 2014 - $2,642,000 and thereafter - $21,000.
 
 
     The Company also has an unsecured $1,000,000 line of credit on which there was no balance outstanding at December 31, 2009 or 2008.
 
 
     Certain lenders require the Company to comply with debt covenants as described in the specific loan documents, including a debt service ratio. At December 31, 2009 and 2008, the Company was in compliance with all of its debt covenants.
 
5.
Capital Lease – Related Party
 
 
On November 3, 2009, the Company entered into a capital lease with a related party of the Company for certain equipment to be used in the expansion of the Company’s capabilities and product lines which was appropriately disclosed in the Company’s Form 8-K filing on November 3, 2009. See Note 10, Related Party Transactions, of the accompanying consolidated financial statements for information on the related party transaction. Monthly payments of $7,500 which includes an imputed fixed interest rate of 2.00% commenced November 3, 2009 and continue through the fourth quarter of 2016. The present value of the minimal lease payment is approximately $574,000 (after subtracting approximately $41,000 of imputed interest.)
 
 
     Aggregate payments required under the capital lease subsequent to December 31, 2009 are as follows: 2010 - $90,000, 2011 - $90,000, 2012 - $90,000, 2013 - $90,000, 2014 - $90,000 and thereafter $165,000.


-F10-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
6.
Employee Benefit Plans
 
Employee Stock Ownership Plan (ESOP)
In 1985, the Company established an employee stock ownership plan (ESOP) for the benefit of employees who meet certain minimum age and service requirements. Upon inception of the ESOP, the Company borrowed $2,000,000 from a bank and lent the proceeds to the trust established under the ESOP to purchase shares of the Company’s common stock. The Company’s loan to the trust is at an interest rate approximating the prime rate and is repayable to the Company over a 40-year term ending in December 2024. During 1987 and 1988, the Company loaned an additional $1,942,000 to the trust under terms similar to those under the Company’s original loan.
 
ESOP shares are held by the plan trustees in a suspense account until allocated to participant accounts. Each year the Company makes contributions to the trust sufficient to enable the trust to repay the principal and interest due to the Company under the trust loans. As the loans are repaid, shares are released from the suspense account pro rata based on the portion of the aggregate loan payments that are paid during the year. In 2009 approximately $46,000 in dividends on ESOP shares were used to pay down the loan as compared to approximately $117,000 in 2008. ESOP shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation and/or on the participant’s account balance. For this purpose, “compensation” means taxable pay.
 
If Servotronics shares are not readily tradable on an established securities market at the times of an ESOP participant’s termination of employment or retirement and if such ESOP participant requests that his/her ESOP distributed shares be repurchased by the Company, the Company is obligated to do so. The Company’s shares currently trade on NYSE Amex, formerly known as the American Stock Exchange. There were no outstanding shares subject to the repurchase obligation at December 31, 2009.
 
Since inception of the ESOP, approximately 458,206 shares have been allocated, exclusive of shares distributed to ESOP participants. At December 31, 2009 and 2008 approximately 276,353 and 305,061 shares, respectively, purchased by the ESOP remain unallocated.
 
Related compensation expense associated with the Company’s ESOP, which is equal to the principal reduction on the loans receivable from the trust, amounted to $147,000 in 2009 and $218,000 in 2008. Included as a reduction to shareholders’ equity is the ESOP trust commitment which represents the remaining indebtedness of the trust to the Company. Employees are entitled to vote allocated shares and the ESOP trustees are entitled to vote unallocated shares and those allocated shares not voted by the employees.
 
Other Postretirement Benefit Plans
 
The Company provides certain post retirement health and life insurance benefits for certain executives of the Company. Upon retirement and after attaining at least the age of 65, the Company will pay the annual cost of health insurance for the retired executives and dependents and will continue the Company provided life insurance offered at the time of retirement. The retiree’s health insurance benefits ceases upon the death of the retired executive. The actuarially
 
 


-F11-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
calculated future obligation of the benefits at December 31, 2009 and 2008 is $236,982 and $257,044, respectively, and is being amortized into expense at a rate of approximately $31,000 per year. Estimated future annual expenses associated with the plan are immaterial. Included in accumulated other comprehensive loss for 2009 and 2008 is approximately $61,000 and $98,000, respectively, net of deferred taxes, associated with the unrecognized service cost of the plan.
 
 
7.
   
Income Tax Provision
 
     
 
There are no uncertain tax positions or unrecognized tax benefits for 2009.
 
     
The income tax provision (benefit) for income taxes included in the consolidated statements of operations consists of the following:
 
                   
            2009       2008  
         
($000’s omitted)
 
     
Current:
               
     
   Federal
  $ 659     $ 1,468  
     
   State
    14       12  
            673       1,480  
     
Deferred:
               
     
   Federal
    (69 )     33  
     
   State
    (1 )     4  
            (70 )     37  
          $ 603     $ 1,517  
     
 
The reconciliation of the difference between the Company’s effective tax rate based upon the total income tax provision (benefit) and the federal statutory income tax rate is as follows:
 
                       
            2009       2008  
     
Federal statutory rate
    34.0 %     34.0 %
     
Business credits
    (4.2 %)     -  
      ESOP dividend      (3.2 %)       -  
      Prior year temporary differences     (2.3 %)       -  
      DPAD      (1.2 %)       -  
     
Other
    0.5 %     (0.9 %) 
     
State income taxes (less federal effect)
    0.4 %     (0.2 %)
     
Effective tax rate
    24.0 %     33.3 %
                       
     
At December 31, 2009 and 2008, the deferred tax assets (liabilities) were comprised of the following:
               
                       
            2009       2008  
         
($000’s omitted)
 
     
Inventories
  $ 259     $ 240  
     
Accrued employee compensation and benefit costs
    283       303  
     
Operating loss and credit carryforwards
    11       11  
     
Other
    126       27  
     
Total deferred tax assets
    679       581  
     
Valuation allowance
    (8 )     (9 )
     
Net deferred tax asset
    671       572  
                       
     
Minimum pension liability
    (77 )     (38 )
     
Property, plant and equipment
    (568 )     (541 )
     
Total deferred tax liabilities
    (645 )     (579 )
     
Net deferred tax asset (liability)
  $ 26     $ (7 )

-F12-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
At December 31, 2009, the Company has New York State net operating loss carryforwards of approximately $453,000 (approximately a $2,000 net tax benefit) that begin to expire in 2019. The Company also has a State of Pennsylvania net operating loss carryforward of approximately $1,569,000 (approximately a $103,000 net tax benefit) that began to expire in 2006 which is fully reserved for at December 31, 2009.
 
During the third Quarter of 2009, the New York State Department of Taxation and Finance (NYS) commenced an examination of the Company’s New York State franchise tax return for the years 2005 through 2007. The Company anticipates that the current NYS examination will be effectively settled within the next twelve months.  An estimate of the range of the reasonably possible change to tax benefits recognized or unrecognized that may occur as a result of the anticipated settlement cannot be made.
 
8.
Common Shareholders’ Equity
 
                         ($000's omitted)               
      Common stock                             
Accumulated
       
     
Number
         
Capital in
                     
Other
   
Total
 
     
of shares
         
excess of
   
Retained
         
Treasury
   
Comprehensive
   
Shareholders’
 
     
issued
   
Amount
   
par value
   
earnings
   
ESOP
   
stock
   
Loss
   
Equity
 
      ($000’s omitted except share amounts)   
Balance December
                                                 
  31, 2007       2,614,506     $ 523     $ 13,033     $ 6,753     ($ 1,832 )   ($ 2,404 )   ($ 67 )   $ 16,006  
Comprehensive income:
                                                                 
  Net income
      -       -       -     $ 3,055       -       -       -     $ 3,055  
  Other comprehensive
                                                                 
  loss, net of tax
                                                                 
    Retirement benefits
                                                                 
      adjustment
      -       -       -       -       -       -       (31 )     (31 )
Total comprehensive income
      -       -       -       -       -       -       -       3,024  
Compensation expense
      -       -       -       -       101       -       -       101  
  Purchase of
                                                                 
    treasury shares
      -       -       -       -       -       (329 )     -       (329 )
  Cash dividend
      -       -       -       (348 )     117       -       -       (231 )
  Surrender of unexercised stock
                                                                 
  options, net of tax benefit
      -       -       263       (772 )     -       -       -       (509 )
  Exercise of stock options
      -       -       -       (8 )     -       15       -       7  
Balance December
                                                                 
  31, 2008       2,614,506     $ 523     $ 13,296     $ 8,680     ($ 1,614 )   ($ 2,718 )   ($ 98 )   $ 18,069  
Comprehensive income:
                                                                 
  Net income
      -       -       -     $ 1,903       -       -       -     $ 1,903  
  Other comprehensive
                                                                 
    income, net of tax
                                                                 
  Retirement benefits
                                                                 
    adjustment
      -       -       -       -       -       -       37       37  
Total comprehensive income
      -       -       -       -       -       -       -       1,940  
Compensation expense
      -       -       -       -       101       -       -       101  
  Purchase of
                                                                 
  treasury shares
      -       -       -       -       -       (6 )     -       (6 )
  Cash dividend
      -       -       -       (336 )     46       -       -       (290 )
  Other
      -       -       -       1       (1 )     -       -       -  
Balance December
                                                                 
  31, 2009       2,614,506     $ 523     $ 13,296     $ 10,248     ($ 1,468 )   ($ 2,724 )   ($ 61 )   $ 19,814  


-F13-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 February 28, 2010, the Company has purchased 238,088 shares and there remain 211,912 shares available to purchase under this program.
 
On April 1, 2009, the Company announced that its Board of Directors declared a $0.15 per share cash dividend. The dividend was paid on May 15, 2009 to shareholders of record on April 20, 2009 and was approximately $336,000 in the aggregate. This dividend does not represent that the Company will pay dividends on a regular or scheduled basis.
 
Other Comprehensive Loss
 
The only component of other comprehensive loss included in equity at December 31, 2009 is $61,000 of unrecognized actuarial losses and net transition obligations for post retirement, health and life insurance benefits (see Note 6 Employee Benefit Plans). These amounts are shown net of income tax benefit of $36,000.
 
Earnings Per Share
 
Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on earnings per share were outstanding for the period. Incremental shares from assumed conversions are calculated as the number of shares that would be issued, net of the number of shares that could be purchased in the marketplace with the cash received upon stock option exercise.
 
 
   
Year Ended
December 31,
 
   
2009
   
2008
 
   
($000’s omitted
except per share data)
 
Net income
  $ 1,903     $ 3,055  
Weighted average common shares
               
   outstanding (basic)
    1,935       1,929  
Incremental shares from assumed
               
   conversions of stock options
    134       180  
Weighted average common
               
   shares outstanding (diluted)
    2,069       2,109  
Basic
               
Net income per share
  $ 0.98     $ 1.58  
Diluted
               
Net income per share
  $ 0.92     $ 1.45  


-F14-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
Share Based Payments
 
Under the Servotronics, Inc. 2000 Employee Stock Option Plan authorized by the Board of Directors and the 2001 Long-Term Stock Incentive Plan authorized by the Board of Directors and the Shareholders, and other separate agreements authorized by the Board of Directors, the Company has granted options to certain Directors, Officers and employees. No options were granted in 2009 or 2008. At December 31, 2009, 101,100 stock options were available for issuance under these plans (84,100 under the Servotronics, Inc. 2000 Employee Stock Option Plan and 17,000 under the 2001 Long-Term Stock Incentive Plan). Options granted under these plans have durations of ten years and vesting periods ranging from immediate vesting to four (4) years.
 
A summary of the status of options granted under all employee plans is presented below:
 
               
Weighted
   
         
Weighted
   
Average
 
Aggregate
         
Average
   
Remaining
 
Intrinsic
   
Options
   
Exercise
   
Contractual
 
Value
   
Outstanding
   
Price ($)
   
Life
 
($)
Outstanding as of December 31, 2007
    513,900       4.41       4.29    
Granted in 2008
    -       -            
Exercised in 2008
    2,000       -            
Surrendered in 2008
    104,200       -            
Outstanding as of December 31, 2008
    407,700       3.55       6.11    
Granted in 2009
    -       -            
Exercised in 2009
    -       -            
Surrendered in 2009
    -       -            
Exercisable as of December 31, 2009
    407,700       3.55       5.11  
2,393,483

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value based on the closing stock price of $9.42 at December 31, 2009.
 
   Shareholders’ Rights Plan
 
During 2002, the Company’s Board of Directors adopted a shareholders’ rights plan (the “Rights Plan”) and simultaneously declared a dividend distribution of one Right for each outstanding share of the Company’s common stock outstanding at August 28, 2002. The Rights Plan replaced a previous shareholders rights plan that was adopted in 1992 and expired on August 28, 2002. The Rights do not become exercisable until the earlier of (i) the date of the Company’s public announcement that a person or affiliated group other than Dr. Nicholas D. Trbovich or the ESOP trust (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 25% or more of the Company’s common stock (excluding shares held by the ESOP trust) or (ii) ten business days following the commencement of a tender offer that would result in a person or affiliated group becoming an Acquiring Person.
 
The exercise price of a Right has been established at $32.00. Once exercisable, each Right would entitle the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock. In the event that any person becomes an Acquiring Person, each Right would entitle any holder other than the Acquiring Person to purchase common stock or other securities of

 
-F15-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
the Company having a value equal to three times the exercise price. The Board of Directors has the discretion in such event to exchange two shares of common stock or two one-hundredths of a share of preferred stock for each Right held by any holder other than the Acquiring Person.
 
9.
Commitments
 
 
The Company leases certain equipment and real property pursuant to operating lease arrangements. Total rental expense in 2009 and 2008 and future minimum payments under such leases are not material to the consolidated financial statements. The Company also leases certain personal property being accounted for under a capital lease. See also Note 5, Capital Lease, 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 5, Capital Lease, of the accompanying consolidated financial statements. The Company also entered into a real property lease agreement, with the same related party, which provides for annual rental of $60,000. In addition, in the event the Company is successful in obtaining certain tax and/or other incentives from the state the entity operates in, the Company will be required to purchase the building at the appraised value of $506,000. Additionally, in the event that the Company purchases the building, there is an arrangement payable to the related party, providing a threshold in annual earnings is reached by the new subsidiary, which will result in a percentage payment which could be as low as Zero dollars to a maximum total in the aggregate of $600,000 which is non-recurring. These transactions are disclosed as related party transactions because the wife of an officer of Servotronics, Inc. is a sole shareholder of the company that is leasing/selling the assets. The Company considered the impact of the above transactions as if the acquisition had occurred as of the beginning of each of the fiscal periods presented and determined that the pro forma impact did not have a material effect on the Company’s revenues, net income or earnings per share.
 
11.
Litigation
 
 
There are no legal proceedings which are material to the Company currently pending by or against the Company other than ordinary routine litigation incidental to the business which is not expected to materially adversely affect the business or earnings of the Company.
 
12.
Business Segments
 
 
The Company operates in two business segments, Advanced Technology Group (ATG) and Consumer Products Group (CPG). The Company’s reportable segments are strategic business units that offer different products and services. The segments are composed of separate corporations and are managed separately. Operations in 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 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.

-F16-
 
 

 
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
 
Information regarding the Company’s operations in these segments is summarized as follows
   
($000’s omitted):
       
Advanced Technology
Group
Years ended
December 31,
 
Consumer Products
 Group
Years ended
December 31,
 
Consolidated
Years ended
December 31,
 
       
2009
   
2008
 
2009
 
2008
 
2009
   
2008
 
   
Revenues from unaffiliated customers
 
$
18,000
   
$
20,882
 
$
15,008
 
$
13,288
 
$
33,008
   
$
34,170
 
   
Profit
 
$
4,109
   
$
5,515
 
$
375
 
$
710
 
$
4,484
   
$
6,225
 
   
Depreciation and amortization
 
$
(409
)
 
$
(390
)
$
(155
)
$
(162
)
 
(564
)
   
(552
)
   
Interest expense
 
$
(78
)
 
$
(161
)
$
(6
)
$
(17
)
 
(84
)
   
(178
)
   
Other income, net
 
$
54
   
$
62
 
$
8
 
$
25
   
62
     
87
 
   
General corporate expense
                             
(1,392
)
   
(1,010
)
   
Income before income tax provision
                           
$
2,506
   
$
4,572
 
   
Identifiable assets
 
$
16,164
   
$
16,668
 
$
11,470
 
$
10,197
 
$
27,634
   
$
26,885
 
   
Capital expenditures
 
$
287
   
$
439
 
$
747
 
$
71
 
$
1,034
   
$
510
 
                   
   
The Company engages in a significant amount of business with the United States Government through sales to its prime contractors and otherwise. Such contracts by the Advanced Technology Group accounted for revenues of approximately $7,500,000 in 2009 and $6,900,000 in 2008. Similar contracts by the Consumer Products Group accounted for revenues of approximately $9,400,000 in 2009 and $7,500,000 in 2008. Sales of advanced technology products to one customer, including various divisions and subsidiaries of a common parent company, amounted to approximately 12% in 2009 and 2008. The Company also had sales to another customer that amounted to approximately 18% of total revenues in 2009 and 23% in 2008. No other single customer represented more than 10% of the Company’s revenues in any of these years.
                   
  13.  
Other Income
             
                     
     
Components of other income include interest income on cash and cash equivalents and other minor amounts not directly related to the sale of the Company’s products.
                     
  14.  
Subsequent Events
             
                     
     
On February 22, 2010, the Company announced that its Board of Directors declared a $0.15 per share cash dividend. The dividend will be paid on March 31, 2010 to shareholders of record on March 10, 2010 and will be approximately $336,000 in the aggregate. This third consecutive annual dividend does not represent that the Company will pay dividends on a regular or scheduled basis.
                     
     
On February 22, 2010, the Company’s Board of Directors authorized amendments extending the Company’s employment agreements with the Chief Executive Officer to December 31, 2013 and the Chief Operating Officer to December 31, 2015.
 
-F17-