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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 and other edged products.
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 also 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 expanded the commercial and government markets for the Consumer Products Group.
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Sales, Marketing and Distribution
The Company’s Advanced Technology Group products (ATG) are marketed throughout the United States and in select 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 2011 fiscal year, sales of advanced technology products pursuant to contracts with prime or subcontractors for various branches of the United States Government accounted for approximately 18% of the Company’s sales as compared to 21% in 2010. The Company’s sales of advanced technology products to one customer, including various divisions and subsidiaries of a common parent company, amounted to approximately 25% in 2011 and 22% in 2010 of the Company’s consolidated sales. The Company also had sales to another ATG customer that amounted to approximately 10% of total revenues in 2011 and 9% in 2010. No other single customer represented more than 10% of the Company’s consolidated revenues in either of these years.
The Company’s prime contracts and subcontracts with the United States Government are subject to termination at 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.
The Company’s consumer products are marketed throughout the United States and in select 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, kitchen knives and scissors) to various branches of the United States Government which accounted for approximately 20% of the Company’s consolidated revenues in 2011 as compared to 21% in 2010. No other single customer of the CPG represented more than 10% of the Company’s consolidated sales in 2011. 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.
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Research Activities
The amount spent by the Company in research and development activities during its 2011 and 2010 fiscal years was not significant.
Environmental Compliance
The cost of compliance with current environmental laws has not been material and the Company does not anticipate that it will be in the future.
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 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 encounters active competition with respect to its consumer 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 markets most of its products throughout the United States and to a lesser extent in select foreign markets. The Company believes that it competes in marketing its servo-control products primarily on the basis of operating performance, adherence to rigid specifications, quality, price and delivery and its consumer products primarily on the basis of price, quality and delivery.
Employees
The Company, at December 31, 2011, had approximately 285 employees of which approximately 271 are full time; 231 in Western New York, 20 in Pennsylvania and 20 in Arkansas. Approximately 82% of its employees are engaged in production, inspection, packaging or shipping activities. The balance is engaged in executive, engineering, administrative, clerical or sales capacities.
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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
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:
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Number of
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Principal
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buildings and
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Approx.
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Approx.
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product
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type of
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floor area
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Location
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acreage
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manufactured
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construction
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(sq. feet)
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Elma, New York
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38.40 |
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Advanced
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1-concrete block/
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82,000 |
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technology
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steel
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products
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Franklinville,
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12.70 |
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Cutlery products
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1-tile/wood
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New York
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1-concrete/metal
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1-concrete block
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154,000 |
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Titusville,
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Pennsylvania
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0.40 |
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Cutlery products
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2-brick
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25,000 |
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Nashville,
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Arkansas
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4.65 |
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Cutlery products
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1-concrete/metal
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39,000 |
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Number of
Principal
buildings and
Approx.
product
type of
floor area
Location
acreage
manufactured
construction
(sq. feet)
Elma, New York
Advanced
1-concrete block/
technology
steel
products
Franklinville,
Cutlery products
1-tile/wood
New York
1-concrete/metal
1-concrete block
Titusville,
Pennsylvania
2-brick
Nashville,
Arkansas
Pursuant to agreements with a local industrial development agency (“IDA”) the Company leases and/or has options to purchase a facility and approximately 38.4 acres of land in Elma, New York. The Company occupies the facility, which serves as the Company’s headquarters and major manufacturing and research site for the Company’s Advanced Technology Group. The transaction is accounted for by the Company as a capital lease. The facility secures the payment of an outstanding Industrial Development Bond (the “Bond”) which financed construction of the facility.