UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
Form 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172022
or
or
☐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 incorporation or organization) | (I. R. S. Employer | |
Identification No.) |
1110 Maple Street
Elma, New York14059
(Address of principal executive offices) (zip code)
(716) (716) 655-5990
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Ticker symbol(s) | Name of each exchange on which registered |
Common Stock | SVT | NYSE American |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx☒ No¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx☒ No¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act.
Large accelerated filer¨☐ Accelerated filer¨☐Non-accelerated filer¨☒ Smaller reporting companyx☒ Emerging growth company¨◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨☐ Nox☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at | |
Common Stock, $.20 par value | 2,510,042 |
INDEX
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SERVOTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($000’s omitted except per share data) (Unaudited) September 30, December 31, 2022 2021 (Unaudited) (Audited) Current assets: Cash $ 4,261 $ 9,546 Accounts receivable, net 11,412 7,198 Inventories, net 18,852 20,132 Prepaid income taxes 265 792 Other current assets 904 647 Total current assets 35,694 38,315 Property, plant and equipment, net 10,558 10,557 Deferred income taxes 876 900 Other non-current assets 316 321 Total Assets $ 47,444 $ 50,093 Liabilities and Shareholders’ Equity Current liabilities: Current portion of long-term debt and finance leases $ 240 $ 276 Accounts payable 3,274 663 Accrued employee compensation and benefits costs 1,645 1,759 Current portion of post retirement obligation 136 136 Other accrued liabilities 1,317 1,414 Total current liabilities 6,612 4,248 Long-term debt 326 4,750 Post retirement obligation 5,749 5,729 Shareholders’ equity: Common stock, par value $0.20; authorized 4,000,000 shares; issued 2,614,506 shares; outstanding 2,453,406 (2,435,032 - 2021) shares 523 523 Capital in excess of par value 14,535 14,500 Retained earnings 25,057 25,858 Accumulated other comprehensive loss (3,842) (3,908) Employee stock ownership trust commitment (258) (258) Treasury stock, at cost 104,464 (122,839 - 2021) shares (1,258) (1,349) Total shareholders’ equity 34,757 35,366 Total Liabilities and Shareholders’ Equity $ 47,444 $ 50,093 See notes to condensed consolidated financial statements - 3 -($000’s omitted except share and per share data) September 30, December 31, 2017 2016 (Unaudited) Current assets: Cash and cash equivalents $ 2,045 $ 3,515 Accounts receivable, net 9,100 7,439 Inventories, net 12,993 13,293 Prepaid income taxes 363 182 Other current assets 363 387 Total current assets 24,864 24,816 Property, plant and equipment, net 11,021 9,937 Deferred income taxes 491 491 Other non-current assets 385 376 Total Assets $ 36,761 $ 35,620 Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 548 $ 548 Accounts payable 2,500 2,080 Accrued employee compensation and benefits costs 2,414 1,945 Other accrued liabilities 680 426 Total current liabilities 6,142 4,999 Long-term debt 2,567 2,976 Post retirement obligation 528 528 Shareholders' equity: Common stock, par value $0.20; authorized 4,000,000 shares; issued 2,614,506 shares; outstanding 2,290,527 (2,310,148 - 2016) shares 523 523 Capital in excess of par value 14,168 14,160 Retained earnings 15,194 14,768 Accumulated other comprehensive loss (20 ) (20 ) Employee stock ownership trust commitment (763 ) (763 ) Treasury stock, at cost 183,983 (164,066 - 2016) shares (1,578 ) (1,551 ) Total shareholders' equity 27,524 27,117 Total Liabilities and Shareholders' Equity $ 36,761 $ 35,620 See notes to consolidated financial statements- 3 -SERVOTRONICS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 Revenue $ 11,325 $ 9,465 $ 30,044 $ 28,708 Cost, expenses and other (income): Cost of goods sold, exclusive of depreciation and amortization 8,036 7,043 22,706 20,888 Selling, general and administrative 2,080 1,658 5,523 4,815 Depreciation and amortization 209 198 637 610 Interest expense 18 18 56 54 Other income, net (6 ) (9 ) (11 ) (19 ) Total expenses 10,337 8,908 28,911 26,348 Income before income tax provision 988 557 1,133 2,360 Income tax provision 317 191 331 732 Net income $ 671 $ 366 $ 802 $ 1,628 Income per share: Basic Net Income per share $ 0.30 $ 0.17 $ 0.35 $ 0.74 Diluted Net income per share $ 0.29 $ 0.16 $ 0.35 $ 0.71
SERVOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($000’s omitted except per share data)
(Unaudited)
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
| | | | | | | | | | | | |
Revenue | | $ | 10,991 | | $ | 10,915 | | $ | 33,389 | | $ | 30,003 |
| |
| | | | | | | | | | |
Costs of goods sold, inclusive of depreciation and amortization | |
| 9,468 | | | 9,143 | | | 28,060 | | | 25,366 |
Gross profit | |
| 1,523 | | | 1,772 | | | 5,329 | | | 4,637 |
| |
| | | | | | | | | | |
Operating Expenses: | |
| | | | | | | | | | |
Selling, general and administrative | |
| 1,943 | | | 2,721 | | | 6,196 | | | 6,903 |
Legal settlement awards | | | — | | | 1,890 | | | — | | | 1,890 |
Total selling, general and administrative | | | 1,943 | | | 4,611 | | | 6,196 | | | 8,793 |
Total operating costs and expenses | | | 11,411 | | | 13,754 | | | 34,256 | | | 34,159 |
Operating loss | | | (420) | | | (2,839) | | | (867) | | | (4,156) |
| | | | | | | | | | | | |
Other (expense)/income: | |
| | | | | | | | | | |
Other income: Employee retention credit (ERC) | |
| — | | | 1,978 | | | — | | | 5,622 |
Other income: Paycheck Protection Program loan forgiveness | | | — | | | 4,000 | | | — | | | 4,000 |
Interest expense | |
| (50) | | | (5) | | | (194) | | | (132) |
Gain on sale of equipment | | | — | | | — | | | 26 | | | — |
Total other (expense)/income, net | |
| (50) | | | 5,973 | | | (168) | | | 9,490 |
| |
| | | | | | | | | | |
(Loss)/income before income taxes | |
| (470) | | | 3,134 | | | (1,035) | | | 5,334 |
| | | | | | | | | | | | |
Income tax (benefit)/provision | |
| (154) | | | (104) | | | (234) | | | 369 |
| |
| | | | | | | | | | |
Net (loss)/income | | $ | (316) | | $ | 3,238 | | $ | (801) | | $ | 4,965 |
| | | | | | | | | | | | |
Income per share: | | | | | | | | | | | | |
Basic | | | | | | | | | | | | |
Net (loss)/income per share | | $ | (0.13) | | $ | 1.34 | | $ | (0.33) | | $ | 2.07 |
| | | | | | | | | | | | |
Diluted | | | | | | | | | | | | |
Net (loss)/income per share | | $ | (0.13) | | $ | 1.34 | | $ | (0.33) | | $ | 2.06 |
See notes to condensed consolidated financial statements
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SERVOTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME ($000’s omitted except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net (loss)/income $ (316) $ 3,238 $ (801) $ 4,965 Other comprehensive income items: Actuarial gain 28 19 84 58 Income tax expense on actuarial gain (6) (4) (18) (12) Other comprehensive income: Retirement benefits adjustments, net of income taxes 22 15 66 46 Total comprehensive (loss)/income $ (294) $ 3,253 $ (735) $ 5,011 See notes to condensed consolidated financial statements - 5 -
SERVOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)omitted except per share data)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows related to operating activities: | ||||||||
Net Income | $ | 802 | $ | 1,628 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||
Depreciation and amortization | 637 | 610 | ||||||
Loss on disposal of property | 16 | - | ||||||
Stock based compensation | 176 | 386 | ||||||
Increase in inventory reserve | 43 | 14 | ||||||
Increase (decrease) in allowance for doubtful accounts | 72 | (8 | ) | |||||
Change in assets and liabilities: | ||||||||
Accounts receivable | (1,733 | ) | (501 | ) | ||||
Inventories | 257 | (1,466 | ) | |||||
Prepaid income taxes | (181 | ) | 63 | |||||
Other current assets | 24 | (75 | ) | |||||
Other non-current assets | (9 | ) | (6 | ) | ||||
Accounts payable | (88 | ) | 598 | |||||
Accrued employee compensation and benefit costs | 469 | (16 | ) | |||||
Other accrued liabilities | 254 | 145 | ||||||
Net cash provided by operating activities | 739 | 1,372 | ||||||
Cash flows related to investing activities: | ||||||||
Capital expenditures - property, plant and equipment | (1,401 | ) | (786 | ) | ||||
Proceeds from sale of assets | 180 | - | ||||||
Net cash used in investing activities | (1,221 | ) | (786 | ) | ||||
Cash flows related to financing activities: | ||||||||
Principal payments on long-term debt | (409 | ) | (410 | ) | ||||
Purchase of treasury shares | (203 | ) | (197 | ) | ||||
Cash dividend | (376 | ) | (380 | ) | ||||
Net cash used in financing activities | (988 | ) | (987 | ) | ||||
Net decrease in cash and cash equivalents | (1,470 | ) | (401 | ) | ||||
Cash and cash equivalents at beginning of period | 3,515 | 3,268 | ||||||
Cash and cash equivalents at end of period | $ | 2,045 | $ | 2,867 |
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2022 |
| 2021 | ||
Cash flows related to operating activities: |
| |
|
| |
|
Net (loss)/income | | $ | (801) | | $ | 4,965 |
Adjustments to reconcile net (loss)/income to net cash provided by operating activities: | |
| | |
|
|
Paycheck Protection Program loan forgiveness | | | — | | | (4,000) |
Depreciation and amortization | |
| 916 | |
| 1,043 |
Gain on disposal of property | | | (26) | | | — |
Stock based compensation | |
| 126 | |
| 81 |
Increase (decrease) in doubtful accounts | |
| 9 | |
| (34) |
Decrease in inventory reserve | | | (111) | | | (75) |
Increase in warranty reserve | | | 32 | | | 14 |
Deferred income taxes | | | 24 | | | 12 |
Change in assets and liabilities: | |
| | |
| |
Accounts receivable | |
| (4,223) | |
| (481) |
Other receivables: employee retention credit | | | — | | | (1,028) |
Inventories | |
| 1,391 | |
| 2,861 |
Prepaid income taxes | |
| 527 | |
| 18 |
Other current assets | |
| (257) | |
| (242) |
Accounts payable | |
| 2,611 | |
| (43) |
Accrued employee compensation and benefit costs | |
| (114) | |
| 509 |
Other accrued liabilities | | | (128) | | | 2,665 |
Postretirement benefits | | | 86 | | | 73 |
Net cash provided by operating activities | |
| 62 | |
| 6,338 |
| |
|
| |
|
|
Cash flows related to investing activities: | |
|
| |
|
|
Capital expenditures - property, plant and equipment | |
| (925) | |
| (68) |
Proceeds from sale of assets | | | 38 | | | — |
Net cash used by investing activities | | | (887) | | | (68) |
| | | | | | |
Cash flows related to financing activities: | |
|
| |
|
|
Principal payments on long-term debt | |
| (4,250) | |
| (911) |
Principal payments on equipment financing lease obligations | |
| (210) | |
| (271) |
Proceeds from equipment note and equipment financing lease obligations | | | — | | | 384 |
Proceeds from the line of credit | |
| — | |
| 500 |
Purchase of treasury shares | | | — | | | (81) |
| | | | | | |
Net cash used by financing activities | |
| (4,460) | |
| (379) |
| | | | | | |
Net (decrease)/increase in cash | |
| (5,285) | |
| 5,891 |
| | | | | | |
Cash at beginning of period | |
| 9,546 | |
| 5,935 |
| | | | | | |
Cash at end of period | | $ | 4,261 | | $ | 11,826 |
See notes to condensed consolidated financial statements
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1. Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements (“consolidated financial statements”) have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.
The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three and nine months ended September 30, 20172022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 2022.
The accompanying condensed consolidated financial statements should be read in conjunction with the 2016 annual reportConsolidated Financial Statements and related Notes to such statements included in the notes thereto.Annual Report on Form 10-K for the year ended December 31, 2021 that was previously filed by the Company.
Risks and Uncertainties
Global economic challenges, including the COVID-19 pandemic, severe and sustained inflation, rising interest rates, and supply chain disruptions could cause economic uncertainty and volatility. The impact of these issues on the Company’s operations will vary by market and product line, specific impacts to our business could potentially include delayed or reduced customer orders and sales, restrictions on travel, and delays in shipments to and from certain countries. The Company monitors economic conditions closely. In response to fluctuations in revenue and product demand, the Company can take actions to align its cost structure with changes in demand and manage its working capital. Failure to achieve expected opeating results could have a material adverse effect on our liquidity, our ability to obtain financing, and our operations in the future. However, there can be no assurance as to the effectiveness of these efforts to mitigate any impact of the current and future adverse economic conditions and other developments. 2. Business Description and Summary of Significant Accounting Policies |
Business Description
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 ofincluding knives and various types of cutlery and other edged products.
The Company operates through two primary segments: the Advanced Technology Group (ATG) and the Consumer Products Group (CPG).
Principles of Consolidation
The consolidated financial statements include the accounts of Servotronics, Inc. and its wholly-owned subsidiaries (the “Company”). All intercompany balances and transactions have been eliminated upon consolidation.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include all cashcurrency and coins owned by the Company as well as all deposits in the bank including checking accounts and short-term investments purchased with an original maturitysavings accounts.
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Table of three months or less.Contents
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounts Receivable
The Company grants credit to substantially all of its customers and carries its accounts receivable at original invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on history of past write-offs, collections, and current credit conditions. The allowance for doubtful accounts amounted to approximately $149,000$140,000 at September 30, 20172022 and $77,000$131,000 at December 31, 2016.2021. The Company does not accrue interest on past due receivables.
Revenue Recognition
Revenues are recognized as services are rendered or as units are shipped and at the designated FOB point consistent with thetime of shipment of goods, transfer of title risks and rewardscustomer acceptance, as required. Our revenue transactions generally consist of ownership. Such purchasea single performance obligation to transfer contracted goods and are not accounted for under industry-specific guidance. 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. Service sales, principally representing repair, are recognized at the time of shipment of goods. The costs incurred for nonrecurring engineering, development and repair activities of our products under agreements with commercial customers are expensed as incurred. Subsequently, the revenue is recognized as products are delivered to the customers with the approval by the customers.
Revenue is recognized at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods and services to a customer. The Company determines revenue recognition using the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when the company satisfies a performance obligation.
InventoriesRevenue excludes taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (e.g., sales and use taxes). Revenue includes payments for shipping activities that are reimbursed by the customer to the Company.
Performance obligations are satisfied as of a point in time. Performance obligations are supported by contracts with customers, providing a framework for the nature of the distinct goods, services or bundle of goods and services. The timing of satisfying the performance obligation is typically indicated by the terms of the contract. As a significant portion of the Company’s revenue is recognized at the time of shipment, transfer of title and customer acceptance, there is no significant judgment applied to determine the timing of the satisfaction of performance obligations or transaction price. Shipping and handling activities that occur after the customer obtains control of the promised goods are considered fulfillment activities.
The timing of satisfaction of our performance obligations does not significantly vary from the typical timing of payment. The Company generally receives payment for these contracts within the payment terms negotiated and agreed upon by each customer contract.
Warranty and repair obligations are assessed on all returns. Revenue is not recorded on any warranty returns. The Company warrants its products against design, materials and workmanship based on an average of twenty-seven months. The Company determines warranty reserves needed based on actual average costs of warranty units shipped and current facts and circumstances. As of September 30, 2022 and December 31, 2021 under the guidance of ASC460 the Company has recorded a warranty reserve of approximately $543,000 and $511,000, respectively. This amount is reflected in other accrued expenses in the accompanying balance sheet. Revenue is recognized on repair returns, covered under a customer contract, at the contractual price upon shipment to the customer.
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SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost includes all costs incurred to bring each product to its present location and condition. Market provisions in respect of lower of cost or market adjustments and inventory expected to be used in greater than one yeartwo years are applied to the gross value of the inventory through a reserve of approximately $1,556,000$1,631,000 and $1,513,000$1,742,000 at September 30, 20172022 and December 31, 2016,2021, respectively. Pre-production and start-up costs are expensed as incurred.
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SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase of suppliers’ minimum economic quantities of material such as steel, etc. may result in a purchase of quantities exceeding one year of customer requirements. Also, in order to maintain a reasonable and/or agreed to lead time, certain larger quantities of other product support items may have to be purchased and may result in over one year’s supply. These amounts are not included in the inventory reserve discussed above.
Shipping and Handling Costs
Shipping and handling costs are classified as a component of cost of goods sold.
Property, Plant and Equipment
Property, plant and equipment is carried at cost; expenditurescost. 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 income tax purposes. Depreciation expense includes the amortization of capital lease assets.right-of-use (“ROU”) assets accounted for as finance leases. The estimated useful lives of depreciable properties are generally as follows:
| | |
Buildings and improvements | 5-40 years | |
Machinery and equipment | | 5-20 years |
Tooling | | 3‑5 years |
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities, as well as operating loss and credit carryforwards. The Company and its subsidiaries file a consolidated federal income tax return, combined New York, Texas, California and TexasConnecticut state income tax returns and a separate Pennsylvania and Arkansas state income tax returns.
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 September 30, 20172022 or December 31, 2016,2021, and did not recognize any interest and/or penalties in its consolidated statements of incomeoperations during the three and nine months ended September 30, 20172022 and 2016.2021. The Company did not have any material uncertain tax positions or unrecognized tax benefits or obligations as of September 30, 20172022 and December 31, 2016.2021. The 20142018 through 20162021 federal and state tax returns remain subject to examination.
Supplemental Cash Flow Information
There were income tax refunds received of approximately $811,000 and $345,000 for the nine month periods ended September 30, 2022 and 2021, respectively. Income taxestax paid amounted to approximately $50,000 and $720,000 for the nine month periods ended September 30, 2022 and 2021, respectively. Interest paid during the nine monthsmonth periods ended September 30, 20172022 and 20162021 amounted to approximately $165,000$76,000 and $644,000,$110,000, respectively. Interest paid amounted to approximately $56,000 and $54,000, respectively, during the nine months ended September 30, 2017 and 2016. Equipment received but not placed in service and included in accounts payable at September 30, 2017 amounted to approximately $508,000.
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SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 annually or 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. Due to the historical losses incurred by our Consumer Products Group (“CPG”), we performed a test for recoverability of the long-lived assets by comparing its carrying value to the future undiscounted cash flows that we expect will be generated by the asset group. 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 September 30, 20172022 and December 31, 2016.
2021.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain balances, as previously reported, were reclassified to conform withto classifications adopted in the current period.
Research and Development Costs
Research and development costs are expensed as incurred.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentration of credit risks principally consist of cash accounts in financial institutions. Although the accounts exceed the federally insured deposit amount, management does not anticipateassesses the risk of nonperformance by the financial institutions.
institutions to be low.
Fair Value of Financial Instruments
The carrying amount of cash, and cash equivalents, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value due to their short maturity. Based on variable interest rates and the borrowing rates currently available to the Company for loans similar to its long-term debt, the fair value approximates its carrying amount.
Recent Accounting Pronouncements
Effective January 1, 2017, the Company adopted new guidance issued by the Financial Accounting Standards Board (“FASB”) ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. The ASU changes the measurement principle for certain inventory methods from the lower of cost or market to the lower of cost and net realizable value. Adoption of this new guidance had no impact on the Company’s consolidated results of operations and financial position.
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SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Effective January 1, 2017, the Company adopted new guidance issued by the FASB ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. The guidance requires that all deferred tax assets and deferred tax liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. Adoption of this new guidance during the reporting period resulted in the reclassification of a deferred tax liability, of $661,000 from current to noncurrent at September 30, 2017 and December 31, 2016. The deferred tax liability, for both reporting periods offsets the deferred tax asset, as presented on the balance sheet at September 30, 2017 and December 31, 2016.
Effective January 1, 2017, the Company adopted new guidance issued by the FASB ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentRecent Accounting” which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments to how excess tax benefits and a Company’s payments for tax withholdings should be classified. Adoption of this new guidance has not had a material impact on the Company’s consolidated results of operations and financial position.
Effective January 1, 2017, the Company selected early adoption of the new guidance issued by the FASB ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. Adoption of this new guidance has not had a material impact on the Company’s consolidated results of operations and financial position.
Pronouncements Adopted
In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires employers to present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. The other components of net periodic benefit cost will be presented separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. This update is effective for annual periods beginning after December 15, 2017.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The new revenue recognition standard outlines a comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In August 2015, the FASB affirmed its proposal to defer the effective date of the standard to annual reporting periods (and interim reporting periods within those years) beginning after December 15, 2017. Entities are permitted to apply the new revenue standard early, but not before the original effective date of annual periods beginning after December 15, 2016. The Company’s revenues are recognized as services are rendered or as units are shipped and at the designated FOB point. The Company does not believe the adoption will have a material impact on our consolidated financial statements.
In FebruaryJune 2016, the FASB issued ASU 2016-02, “Leases2016-13, Financial Instruments-Credit Losses (Topic 842).” There326): Measurement of Credit Losses on Financial Instruments, which creates a new credit impairment standard for financial assets measured at amortized cost and available-for-sale debt securities. The ASU requires financial assets measured at amortized cost (including loans, trade receivables and held-to-maturity debt securities) to be presented at the net amount expected to be collected, through an allowance for credit losses that are elementsexpected to occur over the remaining life of the new standard that could impact almost all entitiesasset, rather than incurred losses. The measurement of credit losses for newly recognized financial assets (other than certain purchased assets) and subsequent changes in the allowance for credit losses are recorded in the statement of income as the amounts expected to some extent, although the lessees will likely see the most significant changes. Lessee will need to recognize virtually all of their leases on the balance sheet, by recording the right-of-use asset and a lease liability. Public business entities are required to adopt the new leasing standardbe collected change. The ASU is effective for fiscal years andbeginning after December 15, 2022, including interim periodperiods within those fiscal years, beginning December 15, 2018. For calendar year-end public companies, this means an adoption dateyears. ASU 2016-13 will be adopted by the Company as of January 1, 2019. Early adoption is permitted.2023. The Company does not believeis currently evaluating the adoption will have a material impact of adopting this new guidance on theits consolidated financial statements and disclosures.does not expect the impact to be significant.
- 9 -
SERVOTRONICS, INC. AND SUBSIDIARIES
3. Inventories
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2022 |
| 2021 | ||
| | ($000’s omitted) | ||||
Raw material and common parts | | $ | 15,007 | | $ | 15,952 |
Work-in-process | |
| 3,078 | |
| 3,432 |
Finished goods | |
| 2,398 | |
| 2,490 |
| |
| 20,483 | |
| 21,874 |
Less inventory reserve | |
| (1,631) | |
| (1,742) |
Total inventories | | $ | 18,852 | | $ | 20,132 |
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
($000's omitted) | ||||||||
Raw material and common parts, net of reserve | $ | 7,930 | $ | 7,618 | ||||
Work-in-process | 3,123 | 2,062 | ||||||
Finished goods, net of reserve | 1,940 | 3,613 | ||||||
Total inventories | $ | 12,993 | $ | 13,293 |
4. Property, Plant and Equipment |
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
($000's omitted) | ||||||||
Land | $ | 7 | $ | 21 | ||||
Buildings | 10,144 | 10,422 | ||||||
Machinery, equipment and tooling | 16,285 | 15,826 | ||||||
Construction in progress | 1,544 | 77 | ||||||
27,980 | 26,346 | |||||||
Less accumulated depreciation | (16,959 | ) | (16,409 | ) | ||||
$ | 11,021 | $ | 9,937 |
As previously disclosed, the Company through a wholly-owned subsidiary, entered into a contract to sell unused commercial real property in Franklinville, New York for approximately $180,000. The sale transaction closed on March 9, 2017 and the wholly-owned subsidiary recognized a de minimis loss on the sale.
| | | | | | |
|
| September 30, |
| December 31, | ||
| | 2022 | | 2021 | ||
| | ($000’s omitted) | ||||
Land | | $ | 7 | | $ | 7 |
Buildings | |
| 11,831 | |
| 11,363 |
Machinery, equipment and tooling | |
| 20,648 | |
| 20,689 |
Construction in progress | |
| 837 | |
| 414 |
| |
| 33,323 | |
| 32,473 |
Less accumulated depreciation and amortization | |
| (22,765) | |
| (21,916) |
Total property, plant and equipment | | $ | 10,558 | | $ | 10,557 |
The Company has purchased and received two pieces of equipment in the amount of approximately $688,000. Both pieces of equipment will be paid using the Company’s new lease line of credit for equipment financing dated August 17, 2017. As of September 30, 2017 neither piece of equipment has been put into service.
Depreciation and amortization expense amounted to approximately $637,000$294,000 and $610,000$329,000 for the ninethree months ended September 30, 20172022 and 2016,2021, respectively. Amortization expense primarily related to ROU assets amounted to approximately $8,000 and $8,000 for the three months ended September 30, 2022 and 2021, respectively. Depreciation and amortization expense amounted to approximately $209,000$916,000 and $198,000$1,043,000 for the threenine months ended September 30, 20172022 and 2016,2021, respectively. Amortization expense, primarily related to ROU assets, amounted to approximately $23,000 and $42,000 for the nine months ended September 30, 2022 and 2021, 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.
As of September 30, 2022, there is approximately $837,000 ($414,000 – December 31, 2021) of construction in progress (CIP) included in property, plant and equipment all of which is related to capital projects. This includes approximately $418,000 for building improvements ($110,000 - December 2021) and $419,000 in CIP for machinery & equipment ($304,000 – December 2021 ) primarily related to the Advanced Technology Group.
- 1011 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Long-Term Debt
As
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2022 |
| 2021 | ||
| | ($000’s omitted) | ||||
| | | | | | |
Line of credit payable to a financial institution; Interest rate is the BSBY Daily Floating Rate (A) | | $ | — | | $ | 4,250 |
| | | | | | |
Equipment note obligations; Interest rate fixed for term of each funding based upon the Lender’s lease pricing at time of funding. (Interest rate/factor 1.795535% - 1.835015% as of September 30, 2022) (B) | |
| 547 | |
| 712 |
| | | | | | |
Equipment financing lease obligations; Interest rate fixed for term of each funding based upon the Lender’s lease pricing at time of funding. (Interest rate/ factor 1.822758% - 1.869304% at time of funding) (C) | | | 19 | | | 64 |
| |
| 566 | |
| 5,026 |
Less current portion | |
| (240) | |
| (276) |
Long-term debt | | $ | 326 | | $ | 4,750 |
A.) | The Company has a $6,000,000 line of credit. The interest rate is a rate per year equal to the sum (i) the greater of the Bloomberg’s Short-term Bank Yield (BSBY) Daily Floating Rate or the Index Floor, plus (ii) 1.65 percentage point(s). For purpose of this paragraph “Index Floor” means 0.5%. In addition, the Company is required to pay a commitment fee of 0.25% on the unused portion of the line of credit. The line of credit expires December 31, 2023. |
On January 11, 2022, the Company executed an amendment to the loan agreement, which extended the line of credit availability period from December 31, 2022 to December 31, 2023. The amended agreement suspended the Debt Service Coverage Ratio loan covenant up through and including the third quarter of 2022. A Quarterly Minimum Cash Flow measurement loan covenant replaced the Debt Service Coverage Ratio loan covenant. Minimum Cash Flow means net income, plus depreciation, depletion, and amortization expense, plus interest expense, plus non-cash expense related to the Servotronics, Inc. Employee Stock Ownership Plan, plus non-cash stock and stock option transactions. Also, the amended agreement requires the Company to maintain a minimum liquidity, defined as cash on hand plus line of credit availability of at least $9,000,000. At September 30, 2022 and December 31, 2021 the Company was in compliance with its loan covenants.
Although the Company meets the current covenant requirements as of September 30, 2017, there2022, it is approximately $1,544,000($77,000– 2016) of construction in progress included in property, plantprobable that the Company will fail to meet the Debt Service Coverage Ratio loan covenant up through and equipment primarily related to capital projects at the Advanced Technology Group (“ATG”), including the equipment covered underfourth quarter of 2022. As the equipment financing agreement. See Note 7, Commitments and Contingencies, for more information on anticipated capital expenditures.
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
($000's omitted) | ||||||||
Term loan payable to a financial institution; Interest rate option of bank prime or Libor plus 1.4% (2.64% as of September 30, 2017), monthly principal payments of $21,833 through 2021 with a balloon payment of $786,000 due December 1, 2021 | $ | 1,901 | $ | 2,096 | ||||
Term loan payable to a financial institution; Interest rate option of bank prime or Libor plus 1.4% (2.64% as of September 30, 2017), monthly principal payments of $23,810 through December 1, 2021 | 1,214 | 1,428 | ||||||
3,115 | 3,524 | |||||||
Less current portion | (548 | ) | (548 | ) | ||||
$ | 2,567 | $ | 2,976 |
The Company renewed a $2,000,000has no term loan or line of credit available until June 20, 2018. There was no balance outstanding atbalances as of September 30, 20172022 and the Debt to Worth Ratio is expected to be in compliance at December 31, 2016.
2022, the Company does not anticipate adverse consequences of its probable failure to satisfy future covenants.
The term loans areline of credit is secured by all personal property of the Company with the exception of certain equipment that was purchased from proceeds of government grants.
Certain lenders require the Company to comply with debt covenants as described in the specific loan documents, including a debt service ratio. At September 30, 2017 and December 31, 2016 the Company was in compliance with these covenants.
The Company established a lease line of credit for equipment financing in the amount of $1,000,000 available until June 28, 2018. This line is non-revolving and non-renewable. The lease term for equipment covered by the lease line of credit is sixty months. Monthly payments will be fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding. There was no balanceapproximately $0 and $4,250,000 outstanding at September 30, 2017.2022 and December 31, 2021, respectively.
B.) | The Company had an equipment loan facility in the amount of $1,000,000 available until July 9, 2021. This line was non-revolving and non-renewable. The loan term for the equipment covered by the agreement is 60 months. Monthly payments are fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding. There was approximately $547,000 outstanding at September 30, 2022 and $712,000 outstanding at December 31, 2021. |
- 1112 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Principal maturities of long-term debt are as follows: 2022 - $66,000; 2023 - $231,000; 2024 - $182,000; 2025 - $77,000; and 2026 - $10,000. Remaining principal payments and interest payments for the capital note and capital equipment financing lease obligations for each of the next five years:
($000's omitted except for share data) | ||||||||||||||||||||||||||||||||
Common Stock | Accumulated | |||||||||||||||||||||||||||||||
Number | Capital in | Other | Total | |||||||||||||||||||||||||||||
of shares | excess of | Retained | Treasury | Comprehensive | shareholders' | |||||||||||||||||||||||||||
issued | Amount | par value | earnings | ESOT | stock | Loss | equity | |||||||||||||||||||||||||
Balance at December 31, 2016 | 2,614,506 | $ | 523 | $ | 14,160 | $ | 14,768 | $ | (763 | ) | $ | (1,551 | ) | $ | (20 | ) | $ | 27,117 | ||||||||||||||
Net income | 802 | 802 | ||||||||||||||||||||||||||||||
Purchase of treasury shares | - | (203 | ) | (203 | ) | |||||||||||||||||||||||||||
Cash dividend | (376 | ) | (376 | ) | ||||||||||||||||||||||||||||
Stock based compensation, net of tax benefit | - | - | 8 | - | - | 176 | - | 184 | ||||||||||||||||||||||||
Balance at September 30, 2017 | 2,614,506 | $ | 523 | $ | 14,168 | $ | 15,194 | $ | (763 | ) | $ | (1,578 | ) | $ | (20 | ) | $ | 27,524 |
| | | | | | |
| | September 30, | | December 31, | ||
Year |
| 2022 |
| 2021 | ||
| | ($000’s omitted) | ||||
| | | | | | |
2022 |
| $ | 83 |
| $ | 296 |
2023 |
| | 246 |
| | 246 |
2024 |
| | 192 |
| | 192 |
2025 |
| | 83 |
| | 83 |
2026 |
| | 11 |
| | 11 |
Total principal and interest payments |
| | 615 |
| | 828 |
Less amount representing interest |
| | (49) |
| | (52) |
Present value of net minimum lease payments |
| | 566 |
| | 776 |
Less current portion |
| | (240) |
| | (276) |
Long-term principle payments | | $ | 326 | | $ | 500 |
6.Postretirement Benefit Plan
The Company provides certain postretirement benefits for two former executives of the Company (the Plan). Under the Plan, the Company pays the annual cost of health insurance coverage and provides life insurance at the same level of coverage provided to the former employee at the time of termination of employment. The Plan also provides a benefit to reimburse the participants for certain out-of-pocket medical or health related expenses. The participant’s benefits under the Plan cease upon the death of the former executive. The Plan is unfunded and the actuarially determined future accumulated postretirement benefit obligation at September 30, 2022 and December 31, 2021 was approximately $5,885,000 and $5,865,000, respectively and has been accrued and reflected in Post Retirement Obligation and Current Portion of Post Retirement Obligation in the accompanying consolidated balance sheets.
Benefit costs for the three months ended September 30, 2022 and 2021 totaled $70,000 and $48,000, respectively. Benefit costs for the nine months ended September 30, 2022 and 2021 totaled $208,000 and $143,000, respectively.
- 13 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | |
| | Nine-month Period Ended September 30, 2022 | |||||||||||||||||||
| | | | | Accumulated | |
| | |
| | |
| | | | |
| | ||
| |
| | | Other | |
| | | Capital in | |
| | | | | Total | ||||
| | Retained | | Comprehensive | | | | excess of | | | | Treasury | | shareholders’ | |||||||
|
| Earnings |
| Income |
| Common Stock |
| par value |
| ESOT |
| stock |
| equity | |||||||
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
December 31, 2021 |
| $ | 25,858 | | $ | (3,908) | | $ | 523 | | $ | 14,500 | | $ | (258) | | $ | (1,349) | | $ | 35,366 |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Retirement benefits adjustment | | | — | | | 22 | | | — | | | — | | | — | | | — | | | 22 |
Stock based compensation |
|
| — | |
| — | |
| — | |
| 2 | |
| — | |
| 23 | |
| 25 |
Net Income |
|
| 325 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 325 |
| | | | | | | | | | | | | | | | | | | | | |
March 31, 2022 | | $ | 26,183 | | $ | (3,886) | | $ | 523 | | $ | 14,502 | | $ | (258) | | $ | (1,326) | | $ | 35,738 |
| | | | | | | | | | | | | | | | | | | | | |
Retirement benefits adjustment | | | — | | | 22 | | | — | | | — | | | — | | | — | | | 22 |
Stock based compensation | | | — | | | — | | | — | | | 7 | | | — | | | 35 | | | 42 |
Net Loss | |
| (810) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (810) |
| | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | | $ | 25,373 | | $ | (3,864) | | $ | 523 | | $ | 14,509 | | $ | (258) | | $ | (1,291) | | $ | 34,992 |
Retirement benefits adjustment | | | — | | | 22 | | | — | | | — | | | — | | | — | | | 22 |
Stock based compensation | | | — | | | — | | | — | | | 26 | | | — | | | 33 | | | 59 |
Net Loss | | | (316) | | | — | | | — | | | — | | | — | | | — | | | (316) |
| | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 |
| $ | 25,057 | | $ | (3,842) | | $ | 523 | | $ | 14,535 | | $ | (258) | | $ | (1,258) | | $ | 34,757 |
| | | | | | | | | | | | | | | | | | | | | |
| | Nine-month Period Ended September 30, 2021 | |||||||||||||||||||
| | | | | Accumulated | |
| | |
| | |
| | | | |
| | ||
| |
| | | Other | |
| | | Capital in | |
| | | | | Total | ||||
| | Retained | | Comprehensive | | | | excess of | | | | Treasury | | shareholders’ | |||||||
|
| Earnings |
| Income |
| Common Stock |
| par value |
| ESOT |
| stock |
| equity | |||||||
December 31, 2020 |
| $ | 21,803 | | $ | (1,356) | | $ | 523 | | $ | 14,481 | | $ | (359) | | $ | (1,355) | | $ | 33,737 |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Retirement benefits adjustment | | | — | | | 15 | | | — | | | — | | | — | | | — | | | 15 |
Stock based compensation | | | — | | | — | | | — | | | 11 | | | — | | | 20 | | | 31 |
Purchase of treasury shares |
|
| — | |
| — | |
| — | |
| — | |
| — | |
| (81) | |
| (81) |
Net Income |
|
| 541 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 541 |
| | | | | | | | | | | | | | | | | | | | | |
March 31, 2021 | | $ | 22,344 | | $ | (1,341) | | $ | 523 | | $ | 14,492 | | $ | (359) | | $ | (1,416) | | $ | 34,243 |
| | | | | | | | | | | | | | | | | | | | | |
Retirement benefits adjustment | | | — | | | 16 | | | — | | | — | | | — | | | — | | | 16 |
Stock based compensation | | | — | | | — | | | — | | | 5 | | | — | | | 20 | | | 25 |
Net Income | |
| 1,186 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 1,186 |
| | | | | | | | | | | | | | | | | | | | | |
June 30, 2021 |
| $ | 23,530 | | $ | (1,325) | | $ | 523 | | $ | 14,497 | | $ | (359) | | $ | (1,396) | | $ | 35,470 |
| | | | | | | | | | | | | | | | | | | | | |
Retirement benefits adjustment | | | — | | | 15 | | | — | | | — | | | — | | | — | | | 15 |
Stock based compensation | | | — | | | — | | | — | | | 1 | | | — | | | 24 | | | 25 |
Net Income | | | 3,238 | | | — | | | — | | | — | | | — | | | — | | | 3,238 |
| | | | | | | | | | | | | | | | | | | | | |
September 30, 2021 |
| $ | 26,768 | | $ | (1,310) | | $ | 523 | | $ | 14,498 | | $ | (359) | | $ | (1,372) | | $ | 38,748 |
- 14 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company’s Board of Directors authorized the purchase of up to 450,000 shares of its common stock in the open market or in privately negotiated transactions. As of September 30, 2017,2022, the Company has purchased 349,330360,615 shares and there remains 100,670remain 89,385 shares available to purchase under this program. There were 19,917no shares purchased by the Company during the nine month periodperiods ended September 30, 2017.2022 and 2021, respectively.
On April 11, 2016, the Company issued 51,000 shares of restricted stock to Executive Officers and certain key management of the Company under the Company’s 2012 Long-Term Incentive Plan. The restricted share awards have varying vesting periods between January 2017 and January 2018; however, these shares have voting rights and accrue dividends prior to vesting. The aggregate amount of expense to the Company, measured based on grant date fair value is expected to be approximately $370,000 and will be recognized over the requisite service period.
Included in the nine months ended September 30, 2017 and 2016 is approximately $176,000 and $386,000, respectively, of stock-based compensation expense related to the restrictive share awards.
On January 1, 2017, 39,7502021, 25,250 shares of restricted stock vested of which15,991 9,920 shares were withheld and repurchased by the Company for approximately $160,000$81,000 to satisfy statutory minimum withholding tax requirements for those participants who elected this option as permitted under the applicable equity plan.
The Company’s 2012 Long-Term Incentive Plan. Additionally,director compensation policy provides that non-employee directors receive a portion of their annual retainer in the form of restricted stock. These shares vest quarterly over a twelve month service period, have voting rights and accrue dividends that are paid upon vesting. The aggregate amount of expense to the deathCompany, measured based on the grant date fair value, will be recognized over the requisite service period. An aggregate of Servotronics’ Chairman of the Board and Chief Executive Officer (CEO), 15,00018,375 restricted shares awardedwere issued during the nine month period ended September 30, 2022 with an approximate grant date fair value of $203,000.
Included in nine months ended September 30, 2022 and September 30, 2021 is approximately $126,000 and $75,000, respectively, of stock-based compensation expense related to the Chairman and CEO vested.restrictive share awards.
| | | | | |
| | | | Weighted Average | |
| | | | Grant Date Fair | |
|
| Shares |
| Value | |
| | | | | |
Unvested at December 31, 2021 |
| 6,576 | | $ | 7.60 |
| | | | | |
Granted |
| 18,375 | | $ | 11.03 |
Vested |
| 9,652 | | $ | 8.69 |
Unvested at September 30, 2022 |
| 15,299 | | $ | 11.03 |
- 15 -
On May 16, 2017 the Company announced that its Board of Directors declared a $0.15 per share cash dividend. The dividend was subsequently paid on July 14, 2017 to shareholders of record on June 30, 2017 and was approximately $376,000 in the aggregate. These dividends do not represent that the Company will pay dividends on a regular or scheduled basis. The amount is a reduction to retained earnings on the accompanying consolidated balance sheet.SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period. The weighted average number of common shares outstanding does not include any potentially dilutive securities or any unvested restricted shares of common stock. These unvested restricted shares, although classified as issued and outstanding, are considered forfeitable until the restrictions lapse and will not be included in the basic EPS calculation until the shares are vested. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on the earnings per share that were outstanding for the period. The dilutive effect of unvested restrictive stock is determined using the treasury stock method. However, if the assumed common shares are anti-dilutive, basic and diluted earnings per share are the same. As a result of the net losses generated in 2022, all outstanding common shares would be antidilutive. As of the three and nine month period ended September 30, 2022 and 2021 there were 15,299 and 9,868 common shares, respectively, that could potentially dilute basic earnings per share in the future. 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.
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
| | ($000’s omitted except per share data) | ||||||||||
Net (loss)/income | | $ | (316) | | $ | 3,238 | | $ | (801) | | $ | 4,965 |
Weighted average common shares outstanding (basic) | |
| 2,427 | |
| 2,410 | |
| 2,424 | |
| 2,404 |
Unvested restricted stock | |
| — | |
| 10 | |
| — | |
| 10 |
Weighted average common shares outstanding (diluted) | |
| 2,427 | |
| 2,420 | |
| 2,424 | |
| 2,414 |
Basic | |
|
| |
|
| |
| | |
| |
Net (loss)/income per share | | $ | (0.13) | | $ | 1.34 | | $ | (0.33) | | $ | 2.07 |
Diluted | |
| | |
|
| |
|
| |
|
|
Net (loss)/income per share | | $ | (0.13) | | $ | 1.34 | | $ | (0.33) | | $ | 2.06 |
8. Litigation
In the course of its business, the Company is subject to a variety of claims and lawsuits that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. Because litigation outcomes are inherently unpredictable, the Company’s evaluation of legal proceedings often involves a series of complex assessments by management, after consulting with legal counsel, about future events and can rely heavily on estimates and assumptions. The dilutive effectCompany carries liability insurance, subject to certain deductibles and policy limits, for such claims as they arise and may from time to time establish reserves for litigation that is considered probable of unvested restrictive stocka loss. The Company does not accrue liabilities when the likelihood that the liability has been incurred is determined usingprobable but the treasury stock method.amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.
- 1216 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
($000's omitted except per share data) | ||||||||||||||||
Net Income | $ | 671 | $ | 366 | $ | 802 | $ | 1,628 | ||||||||
Weighted average common shares outstanding (basic) | 2,262 | 2,219 | 2,264 | 2,203 | ||||||||||||
Unvested restricted stock | 29 | 92 | 29 | 92 | ||||||||||||
Weighted average common shares outstanding (diluted) | 2,291 | 2,311 | 2,293 | 2,295 | ||||||||||||
Basic | ||||||||||||||||
Net income per share | $ | 0.30 | $ | 0.17 | $ | 0.35 | $ | 0.74 | ||||||||
Diluted | ||||||||||||||||
Net income per share | $ | 0.29 | $ | 0.16 | $ | 0.35 | $ | 0.71 |
Post retirement obligation. As previously disclosedOn June 7, 2021, a Summons and Complaint was filed by an employee in filings with the Securities and Exchange Commission (“SEC”)Supreme Court of the State of New York, County of Erie, against Servotronics, Inc., the Servotronics Board of Directors, The Ontario Knife Company under an employment agreement, is expected to pay post employment health related benefits toand Kenneth D. Trbovich (collectively, the former Executive Officer of the Company. Approximately $528,000 has been accrued as of September 30, 2017 and is reflected as Post Retirement Obligation in the accompanying balance sheet.
Facility Expansion.As previously disclosed, the Company has commenced a multi-year investment plan designed to consolidate the operations of the Consumer Products Group (“CPG”“Defendants”). The five year plan includedComplaint alleges certain violations under the construction of an approximate 28,000 square foot addition, capital improvementsNew York Human Rights Law by the Defendants relating to the existing plant,employee’s employment by the reconfigurationCompany as well as intentional and negligent infliction of emotional distress. The Complaint also alleges certain purported derivative causes of action against all Defendants, including breach of fiduciary duties, fraud and corporate waste. The Complaint seeks monetary damages in an amount not less than $5,000,000 with respect to the direct causes of action and equitable relief with respect to the purported derivative causes of action. The Defendants filed a motion to dismiss the Complaint on August 6, 2021. On January 13, 2022, the Defendants’ motion to dismiss was granted, in part, and denied, in part. This litigation is still in its production process within the expanded facility, and the addition of new state of the art knife-making equipment.earliest stages. The Company broke ground in the second quarter of 2014 and began manufacturing in the newly constructed facility in the fourth quarter of 2015. The cost of the project was approximately $4,000,000 over a five year period of which $3,432,000 was completed as of September 30, 2017 and is included in property, plant and equipment.
The CPG was awarded certain incentives from the County of Cattaraugus Industrial Development Agency (CCIDA) in connection with the expansion of the Company’s facility in Franklinville, New York and other proposed capital expenditures. The incentives include certain real property tax and sales tax abatements in connection with the proposed project. The Company’s CPG entered into customary lease and leaseback arrangements with the CCIDA to facilitate the various tax incentives.
- 13 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s CPG was awarded a $300,000 grant from Cattaraugus County, New York. The grant was used towards new manufacturing equipment in connection with the proposed expansion project. As part of the terms of the Grant Contract with Cattaraugus County, the Company’s CPG has agreed to maintain certain employment levelsinsured for a period of five years from the date of the agreement, March 13, 2014. If the employment levels are not maintained, the Company will be required to repay the grant proceeds on a prorated basis. The Company has maintained the required employment levels as of September 30, 2017.
Litigation. The Company has pending litigation relative to leases of certain equipment and real property with a former related party, Aero, Inc. Aero, Inc. is suing Servotronics, Inc. and its wholly owned subsidiary and has alleged damagessuch matters in the amount of $3,000,000. The$3 million with a retention of $1 million. Additionally, there is excess coverage policy for $3 million that considers the payment from the earlier insurance policy as the $3 million retention. Based on the information known by the Company has filed a response toas of the Aero, Inc. lawsuit and has also filed a counter-claim indate of this filing, the amount of $3,191,000. The Company considersdoes not consider the risk of loss remote,to be probable and is unable to reasonably or accurately estimate the likelihood and amount of any liability or benefit that may be realized as a result of this litigation. Accordingly, no gain or loss has been recognized in the accompanying financials statements related to this litigation. The Company intends to vigorously defend against this litigation.
On December 21, 2021, the Company’s former Chief Executive Officer (“Former CEO”) delivered his Notice of Termination and alleged that the Company breached the terms of the Employment Agreement between the Company and the Former CEO by, among others, placing the Former CEO on paid administrative leave in June 2021 pending an internal investigation. On December 22, 2021, the Board of Directors accepted the Former CEO’s resignation from the Company but rejected his request to treat his resignation as resignation for good reason under Paragraph 10 of his Employment Agreement. The Board also determined, based on the findings of its investigation that the Former CEO committed willful malfeasance in violation of his Employment Agreement, and that such willful malfeasance would have justified termination of employment pursuant to Paragraph 9 of the Employment Agreement, but for his earlier resignation. The Former CEO claims that he is entitled to a severance payment equal to 2.99 times his average annual compensation as set forth in the Employment Agreement, plus the reimbursement of certain expenses and the value of any lost benefits. As noted above, the Board of Directors rejected the Former CEO’s claim that the Company breached the Employment Agreement. Accordingly, the Company is classifying the Former CEO’s termination as a voluntary resignation for which no severance is due. The Employment Agreement provides that disputes arising thereunder shall be settled by arbitration. To date, neither party has commenced an arbitration proceeding with respect to these matters. Based on the information known by the Company as of the date of this filing, if a claim is ultimately asserted, the Company does not consider the risk of loss to be probable and is unable to reasonably or accurately estimate the likelihood and amount of any liability that may be realized with respect to this matter.
There are no other legal proceedings currently pending by or against the Company other than litigation incidental to the business which is not expected to have a material adverse effect on the business or earnings of the Company.
9. Related Party Transactions
There were related party legal fees refunded for the three month period ended September 30, 2022 of approximately $3,155 and related party legal fees paid for the three month period ended September 30, 2021 of approximately $13,000 for services provided by a law firm that is owned by a member of the Company’s Board of Directors. The Company paid legal fees and disbursements ofto that firm amounting to approximately $188,000$51,000 and $65,000$59,000 in the nine month period ended September 30, 20172022 and 2016,2021, respectively, for services provided by a law firm that is owned by a member of the Company’s Board of Directors. Legal fees paid for the three month period ended September 30, 2017 and 2016 amounted to approximately $44,000 and $41,000, respectively. As of September 30, 2017,Additionally, the Company had accrued additionalunbilled legal fees at September 30, 2022 and 2021 of approximately $39,000$5,000 and $13,000, respectively, with this firm.
- 17 - SERVOTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) |
The Company operates in two business segments, ATG and 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.
As of September 30, 2017,2022, the Company had identifiable assets of approximately $36,761,000$47,444,000 ($35,620,00050,093,000 ��� December 31, 2021) of which approximately $37,340,000 ($40,871,000 – December 31, 2016) of which approximately $25,477,000($24,037,000 – December 31, 2016)2021) was for ATG and approximately $11,284,000$10,104,000 ($11,583,0009,222,000 – December 31, 2016)2021) was for CPG.
- 14 -
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) | ||||||||||||||||||||||||
ATG | CPG | Consolidated | ||||||||||||||||||||||
Nine Months Ended | Nine Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 30, | September 30, | September 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Revenues from unaffiliated customers | $ | 23,968 | $ | 23,023 | $ | 6,076 | $ | 5,685 | $ | 30,044 | $ | 28,708 | ||||||||||||
Cost of goods sold, exclusive of depreciation and amortization | (17,407 | ) | (16,060 | ) | (5,299 | ) | (4,828 | ) | (22,706 | ) | (20,888 | ) | ||||||||||||
Selling, general and administrative | (4,133 | ) | (3,477 | ) | (1,390 | ) | (1,338 | ) | (5,523 | ) | (4,815 | ) | ||||||||||||
Depreciation and amortization | (443 | ) | (412 | ) | (194 | ) | (198 | ) | (637 | ) | (610 | ) | ||||||||||||
Interest expense | (32 | ) | (32 | ) | (24 | ) | (22 | ) | (56 | ) | (54 | ) | ||||||||||||
Other income, net | 9 | 19 | 2 | - | 11 | 19 | ||||||||||||||||||
Income (loss) before income tax provision (benefits) | 1,962 | 3,061 | (829 | ) | (701 | ) | 1,133 | 2,360 | ||||||||||||||||
Income tax provision (benefits) | 580 | 949 | (249 | ) | (217 | ) | 331 | 732 | ||||||||||||||||
Net income (loss) | $ | 1,382 | $ | 2,112 | $ | (580 | ) | $ | (484 | ) | $ | 802 | $ | 1,628 | ||||||||||
Capital expenditures | $ | 1,777 | $ | 613 | $ | 124 | $ | 173 | $ | 1,901 | $ | 786 |
| | | | | | | | | | | | | | | | | | | |
| | ($000’s omitted except per share data) | | ||||||||||||||||
| | ATG | | CPG | | Consolidated | | ||||||||||||
| | Three Months Ended | | Three Months Ended | | Three Months Ended |
| ||||||||||||
| | September 30, | | September 30, | | September 30, |
| ||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Revenues from unaffiliated customers | | $ | 8,823 | | $ | 8,449 | | $ | 2,168 | | $ | 2,466 | | $ | 10,991 | | $ | 10,915 |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
Cost of goods sold, inclusive of dep. & amort. | |
| (7,973) | |
| (6,762) | |
| (1,495) | |
| (2,381) | |
| (9,468) | | | (9,143) | |
Gross profit | |
| 850 | |
| 1,687 | |
| 673 | |
| 85 | |
| 1,523 | |
| 1,772 | |
Gross margin % |
|
| 9.6 | % |
| 20.0 | % |
| 31.0 | % |
| 3.4 | % |
| 13.9 | % |
| 16.2 | % |
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
Selling, general and administrative | |
| (1,541) | |
| (2,240) | |
| (402) | |
| (481) | |
| (1,943) | |
| (2,721) | |
Legal settlement awards | | | — | | | (1,800) | | | — | | | (90) | | | — | | | (1,890) | |
Total operating costs and expenses | |
| (9,514) | |
| (10,802) | |
| (1,897) | |
| (2,952) | |
| (11,411) | |
| (13,754) | |
Operating (loss)/income | |
| (691) | |
| (2,353) | |
| 271 | |
| (486) | |
| (420) | |
| (2,839) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
Employee retention credit (ERC) | | | — | | | 1,598 | | | — | | | 380 | | | — | | | 1,978 | |
Paycheck Protection Program loan forgiveness | | | — | | | 4,000 | | | — | | | — | | | — | | | 4,000 | |
Interest expense | | | (50) | | | (5) | | | — | | | — | | | (50) | | | (5) | |
Total other (expense)/income | | | (50) | | | 5,593 | | | — | | | 380 | | | (50) | | | 5,973 | |
| | | | | | | | | | | | | | | | | | | |
(Loss)/ income before income taxes | | | (741) | | | 3,240 | | | 271 | | | (106) | | | (470) | | | 3,134 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
Income tax (benefit)/provision | |
| (203) | |
| (83) | |
| 49 | |
| (21) | |
| (154) | |
| (104) | |
Net (loss)/income | | $ | (538) | | $ | 3,323 | | $ | 222 | | $ | (85) | | $ | (316) | | $ | 3,238 | |
Capital expenditures | | $ | 451 | | $ | 54 | | $ | 46 | | $ | 1 | | $ | 497 | | $ | 55 | |
($000's omitted) | ||||||||||||||||||||||||
ATG | CPG | Consolidated | ||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | September 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Revenues from unaffiliated customers | $ | 8,918 | $ | 7,658 | $ | 2,407 | $ | 1,807 | $ | 11,325 | $ | 9,465 | ||||||||||||
Cost of goods sold, exclusive of depreciation and amortization | (6,062 | ) | (5,418 | ) | (1,974 | ) | (1,625 | ) | (8,036 | ) | (7,043 | ) | ||||||||||||
Selling, general and administrative | (1,640 | ) | (1,240 | ) | (440 | ) | (418 | ) | (2,080 | ) | (1,658 | ) | ||||||||||||
Depreciation and amortization | (143 | ) | (137 | ) | (66 | ) | (61 | ) | (209 | ) | (198 | ) | ||||||||||||
Interest expense | (9 | ) | (11 | ) | (9 | ) | (7 | ) | (18 | ) | (18 | ) | ||||||||||||
Other income, net | 5 | 9 | 1 | - | 6 | 9 | ||||||||||||||||||
Income (loss) before income tax provision (benefits) | 1,069 | 861 | (81 | ) | (304 | ) | 988 | 557 | ||||||||||||||||
Income tax provision (benefits) | 341 | 289 | (24 | ) | (98 | ) | 317 | 191 | ||||||||||||||||
Net income (loss) | $ | 728 | $ | 572 | $ | (57 | ) | $ | (206 | ) | $ | 671 | $ | 366 | ||||||||||
Capital expenditures | $ | 1,282 | $ | 70 | $ | 48 | $ | 15 | $ | 1,330 | $ | 85 |
Components of other income include interest income on cash and cash equivalents, and other amounts not directly related to the sale of the Company’s products. Other income is immaterial in relationship to the consolidated financial statements.
None.
- 1518 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | | | | | | | | | | | | | |
| | ($000’s omitted except per share data) |
| ||||||||||||||||
| | ATG | | CPG | | Consolidated |
| ||||||||||||
| | Nine Months Ended | | Nine Months Ended | | Nine Months Ended |
| ||||||||||||
| | September 30, | | September 30, | | September 30, |
| ||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Revenues from unaffiliated customers | | $ | 26,739 | | $ | 23,495 | | $ | 6,650 | | $ | 6,508 | | $ | 33,389 | | $ | 30,003 | |
| |
|
| |
| | |
|
| |
|
| |
|
| |
|
| |
Cost of goods sold, inclusive of dep. & amort. | |
| (22,843) | |
| (19,214) | |
| (5,217) | |
| (6,152) | | | (28,060) | | | (25,366) | |
Gross profit | |
| 3,896 | |
| 4,281 | |
| 1,433 | |
| 356 | |
| 5,329 | |
| 4,637 | |
Gross margin % |
|
| 14.6 | % |
| 18.2 | % |
| 21.5 | % |
| 5.5 | % |
| 16.0 | % |
| 15.5 | % |
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
Selling, general and administrative | |
| (4,890) | |
| (5,586) | |
| (1,306) | |
| (1,317) | |
| (6,196) | |
| (6,903) | |
Legal settlement awards | | | — | | | (1,800) | | | — | | | (90) | | | — | | | (1,890) | |
Total operating costs and expenses | |
| (27,733) | |
| (26,600) | |
| (6,523) | |
| (7,559) | |
| (34,256) | |
| (34,159) | |
Operating (loss)/income | |
| (994) | |
| (3,105) | |
| 127 | |
| (1,051) | |
| (867) | |
| (4,156) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
Employee retention credit (ERC) | | | — | | | 4,584 | | | — | | | 1,038 | | | — | | | 5,622 | |
Paycheck Protection Program loan forgiveness | | | — | | | 4,000 | | | — | | | — | | | — | | | 4,000 | |
Interest expense | | | (194) | | | (130) | | | — | | | (2) | | | (194) | | | (132) | |
Gain on sale of equipment | | | 26 | | | — | | | — | | | — | | | 26 | | | — | |
Total other (expense)/income | | | (168) | | | 8,454 | | | — | | | 1,036 | | | (168) | | | 9,490 | |
| | | | | | | | | | | | | | | | | | | |
(Loss)/income before income taxes | |
| (1,162) | |
| 5,349 | |
| 127 | |
| (15) | |
| (1,035) | |
| 5,334 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
Income tax (benefit)/provision | | | (263) | | | 370 | | | 29 | | | (1) | | | (234) | | | 369 | |
Net (loss)/income | | $ | (899) | | $ | 4,979 | | $ | 98 | | $ | (14) | | $ | (801) | | $ | 4,965 | |
Capital expenditures | | $ | 841 | | $ | 64 | | $ | 46 | | $ | 4 | | $ | 887 | | $ | 68 | |
- 19 -
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview |
DuringThere was an increase in consolidated revenue in the threenine months ended September 30, 2017,2022 from 2021 of approximately 13%$3,386,000, 11.3%. This is primarily due to price increases at the ATG of approximately $1,130,000 and the Company’s revenues were derived from contracts with agenciesCPG of approximately $174,000 and an increase in the U.S. Government or their prime contractorsnumber of units shipped at the ATG of approximately $2,975,000. This is partially offset by an unfavorable product mix shipped at the ATG of approximately $861,000 and their subcontractors. This compares toa decrease in the number of units shipped at the CPG of approximately 10% for the same three months ended 2016.$32,000. During the nine months ended September 30, 2017,2022 and 2021, approximately 11%80% and 78%, respectively, of the Company’s consolidated revenues were derived from contracts with agenciesthe ATG sale of the U.S. Government or their prime contractors and their subcontractors. This comparesproduct to a small base of customers. During the approximately 9% for the same nine months ended 2016.The Company believes that government involvement in military operations overseas will continue to have an impact on the financial results in both the Advanced TechnologySeptember 30, 2022 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 policies2021, approximately 20% and 22%, respectively, of the U.S. and other nations,Company’s consolidated revenues were derived from the levelCPG sale of military operations and other factors, and as such, it is difficultproduct to predict the impact on future financial results.a large base of retail customers.
The Company’sOur 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 and threats of terrorism, and increasing market demand could impact our ability to produce and acceptance both for the Company’s products and its customers’ products which incorporate Company made components.
deliver product on time.
The ATG engages inits 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. We believe our business remains particularly well positioned in the strong commercial aircraft market driven by the recovery of business with increased demand post COVID, the replacement of older aircraft with more fuel efficientfuel-efficient alternatives and the increasing demand for air travel in emerging markets. Although the ATG backlog continues to be strong, actual scheduled shipments may be delayed/delayed or changed as a function of the Company’sour customers’ final delivery determinations based on changes in the global economy and other factors.
In response to ongoing reductions in military spending, the CPG continues to diversify its revenue streams with a broader government focus and new commercial channels, including the addition of national retailers, international accounts, and a direct-to-consumer business line. The CPG is also actively growing its custom manufacturing business to provide a wide range of metal and plastic fabrication services to a variety of consumer and industrial companies. New product development is focused on the commercialization of products with applications that span government and civilian requirements to maximize demand or that open up new lines of business entirely.
determinations.
See also Note 10, Business Segments, of the accompanying condensed consolidated financial statements for information concerning business segment operating results.
Business Environment
There still remains uncertainty resulting from the COVID-19 pandemic. The ultimate impact depends on the severity and duration of the pandemic, including emergence and spread of new COVID-19 variants and resurgences and actions taken by government authorities and other third parties in response to the pandemic.
U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions. Disruptions in normal operating levels continue to create supply chain interruptions, volatility in commodity prices, credit and capital markets, and inflationary cost pressures within our end-markets.
We continue to actively monitor the impact of the supply chain constraints, and anticipate the inflationary environment will continue throughout the remainder of 2022. We are focused on ensuring ample liquidity to meet our business needs. For the nine months ended September 30, 2022, the impacts of COVID-19 have not been material.
- 1620 -
Results of Operations
The following table compares the Company’s consolidated statements of incomeoperations data for the ninethree months and threenine months ended September 30, 20172022 and 20162021 ($000’s omitted):
($000's omitted except per share data) | ||||||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2017 vs 2016 | ||||||||||||||||||||||||
2017 | 2016 | Dollar | % Increase | |||||||||||||||||||||
Dollars | % of Sales | Dollars | % of Sales | Change | (Decrease) | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Advanced Technology | $ | 23,968 | 79.8 | % | $ | 23,023 | 80.2 | % | $ | 945 | 4.1 | % | ||||||||||||
Consumer Products | 6,076 | 20.2 | % | 5,685 | 19.8 | % | 391 | 6.9 | % | |||||||||||||||
30,044 | 100.0 | % | 28,708 | 100.0 | % | 1,336 | 4.7 | % | ||||||||||||||||
Cost of goods sold, exclusive of depreciation and amortization | 22,706 | 75.6 | % | 20,888 | 72.8 | % | 1,818 | 8.7 | % | |||||||||||||||
Selling, general and administrative | 5,523 | 18.4 | % | 4,815 | 16.8 | % | 708 | 14.7 | % | |||||||||||||||
Depreciation and amortization | 637 | 2.1 | % | 610 | 2.1 | % | 27 | 4.4 | % | |||||||||||||||
Total costs and expenses | 28,866 | 96.1 | % | 26,313 | 91.7 | % | 2,553 | 9.7 | % | |||||||||||||||
Operating income, net | 1,178 | 3.9 | % | 2,395 | 8.3 | % | (1,217 | ) | -50.8 | % | ||||||||||||||
Interest expense | 56 | 0.2 | % | 54 | 0.2 | % | 2 | 3.7 | % | |||||||||||||||
Other income, net | (11 | ) | -0.1 | % | (19 | ) | -0.1 | % | 8 | -42.1 | % | |||||||||||||
Income tax provision (benefits) | 331 | 1.1 | % | 732 | 2.5 | % | (401 | ) | -54.8 | % | ||||||||||||||
Net income | $ | 802 | 2.7 | % | $ | 1,628 | 5.7 | % | $ | (826 | ) | -50.7 | % |
| | | | | | | | | | | | | | | | |
| | ($000’s omitted except per share data) |
|
| |
|
|
| ||||||||
| | Three months ending September 30, | | | | | |
| ||||||||
| | 2022 | | 2021 | | 2022 vs 2021 |
| |||||||||
| | | | | % of | | | | | % of | | Dollar | | % Favorable/ |
| |
|
| Dollars |
| Sales |
| Dollars |
| Sales |
| Change |
| (Unfavorable) |
| |||
Revenues: |
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Advanced Technology Group | | $ | 8,823 |
| 80.3 | % | $ | 8,449 |
| 77.4 | % | $ | 374 |
| 4.4 | % |
Consumer Products Group | |
| 2,168 |
| 19.7 | % |
| 2,466 |
| 22.6 | % |
| (298) |
| (12.1) | % |
| |
| 10,991 |
| 100.0 | % |
| 10,915 |
| 100.0 | % |
| 76 |
| 0.7 | % |
| | | | | | | | | | | | | | | | |
Costs of goods sold, inclusive of depreciation and amortization | |
| (9,468) |
| 86.1 | % |
| (9,143) |
| 83.8 | % |
| (325) |
| (3.6) | % |
Gross profit | |
| 1,523 |
| 13.9 | % |
| 1,772 |
| 16.2 | % |
| (249) |
| (14.1) | % |
Gross margin % | |
| 13.9 | % | | |
| 16.2 | % | | |
| |
|
| |
| | | | | | | | | | | | | | | | |
Selling, general and administrative | |
| (1,943) |
| 17.7 | % |
| (2,721) |
| 24.9 | % |
| 778 |
| 28.6 | % |
Legal settlement award | | | — | | 0.0 | % | | (1,890) | | 17.3 | % | | 1,890 | | 100.0 | % |
Total operating costs and expenses | |
| (11,411) |
| 103.8 | % |
| (13,754) |
| 126.0 | % |
| 2,343 |
| 17.0 | % |
Operating (loss) | |
| (420) |
| 3.8 | % |
| (2,839) |
| 26.0 | % |
| 2,419 |
| 85.2 | % |
| | | | | | | | | | | | | | | | |
Other income: employee retention credit (ERC) | |
| — |
| 0.0 | % |
| 1,978 |
| 18.1 | % |
| (1,978) |
| (100.0) | % |
Other income: PPP loan forgiveness | | | — | | 0.0 | % | | 4,000 | | 36.6 | % | | (4,000) | | (100.0) | % |
Interest expense | |
| (50) |
| (0.5) | % |
| (5) |
| 0.0 | % |
| (45) |
| (900.0) | % |
Total other (expense)/income | |
| (50) |
| (0.5) | % |
| 5,973 |
| 54.7 | % |
| (6,023) |
| (100.8) | % |
| | | | | | | | | | | | | | | | |
(Loss) income before income taxes | |
| (470) |
| (4.3) | % |
| 3,134 |
| 28.7 | % |
| (3,604) |
| (115.0) | % |
| | | | | | | | | | | | | | | | |
Income tax benefit | |
| (154) |
| (1.4) | % |
| (104) |
| (1.0) | % |
| (50) |
| (48.1) | % |
Net (loss)/income | | $ | (316) |
| (2.9) | % | $ | 3,238 |
| 29.7 | % | $ | (3,554) |
| (109.8) | % |
($000's omitted except per share data) | ||||||||||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
2017 vs 2016 | ||||||||||||||||||||||||
2017 | 2016 | Dollar | % Increase | |||||||||||||||||||||
Dollars | % of Sales | Dollars | % of Sales | Change | (Decrease) | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Advanced Technology | $ | 8,918 | 78.7 | % | $ | 7,658 | 80.9 | % | $ | 1,260 | 16.5 | % | ||||||||||||
Consumer Products | 2,407 | 21.3 | % | 1,807 | 19.1 | % | 600 | 33.2 | % | |||||||||||||||
11,325 | 100.0 | % | 9,465 | 100.0 | % | 1,860 | 19.7 | % | ||||||||||||||||
Cost of goods sold, exclusive of depreciation and amortization | 8,036 | 71.0 | % | 7,043 | 74.4 | % | 993 | 14.1 | % | |||||||||||||||
Selling, general and administrative | 2,080 | 18.4 | % | 1,658 | 17.5 | % | 422 | 25.5 | % | |||||||||||||||
Depreciation and amortization | 209 | 1.8 | % | 198 | 2.1 | % | 11 | 5.6 | % | |||||||||||||||
Total costs and expenses | 10,325 | 91.2 | % | 8,899 | 94.0 | % | 1,426 | 16.0 | % | |||||||||||||||
Operating income, net | 1,000 | 8.8 | % | 566 | 6.0 | % | 434 | 76.7 | % | |||||||||||||||
Interest expense | 18 | 0.2 | % | 18 | 0.2 | % | - | 0.0 | % | |||||||||||||||
Other income, net | (6 | ) | -0.1 | % | (9 | ) | -0.1 | % | 3 | -33.3 | % | |||||||||||||
Income tax provision (benefits) | 317 | 2.8 | % | 191 | 2.0 | % | 126 | 66.0 | % | |||||||||||||||
Net income | $ | 671 | 5.9 | % | $ | 366 | 3.9 | % | $ | 305 | 83.3 | % |
- 21 -
Revenue
| | | | | | | | | | | | | | | | |
|
| ($000’s omitted except per share data) |
|
| |
|
|
| ||||||||
| | Nine Months Ended September 30, | | | | | |
| ||||||||
| | 2022 | | 2021 | | 2022 vs 2021 |
| |||||||||
| | | | | % of | | | | | % of | | Dollar | | % Favorable/ |
| |
|
| Dollars |
| Sales |
| Dollars |
| Sales |
| Change |
| (Unfavorable) | | |||
Revenues: | | | | | | | | | | | | | | | |
|
Advanced Technology Group | | $ | 26,739 |
| 80.1 | % | $ | 23,495 |
| 78.3 | % | $ | 3,244 |
| 13.8 | % |
Consumer Products Group | |
| 6,650 |
| 19.9 | % |
| 6,508 |
| 21.7 | % |
| 142 |
| 2.2 | % |
| |
| 33,389 |
| 100.0 | % |
| 30,003 |
| 100.0 | % |
| 3,386 |
| 11.3 | % |
| | | | | | | | | | | | | | | | |
Cost of goods sold, inclusive of depreciation and amortization | |
| (28,060) |
| 84.0 | % |
| (25,366) |
| 84.5 | % |
| (2,694) |
| 10.6 | % |
Gross profit | |
| 5,329 |
| 16.0 | % |
| 4,637 |
| 15.5 | % |
| 692 |
| 14.9 | % |
Gross margin % | |
| 16.0 | % | | |
| 15.5 | % |
| |
| |
|
| |
| | | | | | | | | | | | | | | | |
Selling, general and administrative | |
| (6,196) |
| 18.6 | % |
| (6,903) |
| 23.0 | % |
| 707 |
| (10.2) | % |
Legal settlement award | | | — | | 0.0 | % | | (1,890) | | 6.3 | % | | 1,890 | | (100.0) | % |
Total operating costs and expenses | |
| (34,256) |
| 102.6 | % |
| (34,159) |
| 113.9 | % |
| (97) |
| 0.3 | % |
Operating (loss) | |
| (867) |
| (2.6) | % |
| (4,156) |
| (13.9) | % |
| 3,289 |
| 79.1 | % |
| | | | | | | | | | | | | | | | |
Other income: Employee retention credit (ERC) | | | — | | 0.0 | % | | 5,622 | | 18.7 | % | | (5,622) | | (100.0) | % |
Other income: Paycheck Protection Program loan forgiveness | | | — | | 0.0 | % | | 4,000 | | 13.3 | % | | (4,000) | | (100.0) | % |
Interest expense | |
| (194) |
| (0.6) | % |
| (132) |
| (0.4) | % |
| (62) |
| 47.0 | % |
Gain on sale of equipment | | | 26 | | 0.1 | % | | — | | 0.0 | % | | 26 | | 100.0 | % |
Total other (expense)/income, net | |
| (168) |
| (0.5) | % |
| 9,490 |
| 31.6 | % |
| (9,658) |
| (101.8) | % |
| | | | | | | | | | | | | | | | |
(Loss) income before income taxes | |
| (1,035) |
| (3.1) | % |
| 5,334 |
| 17.8 | % |
| (6,369) |
| (119.4) | % |
| | | | | | | | | | | | | | | | |
Income tax (benefit) provision | | $ | (234) |
| (0.8) | % |
| 369 |
| 1.2 | % |
| (603) |
| (163.4) | % |
Net (loss)/income | | $ | (801) |
| (2.4) | % | $ | 4,965 |
| 16.5 | % | $ | (5,766) |
| (116.1) | % |
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||||||||||||||||||||||||||
| | ATG |
| CPG |
| Servotronics, Inc. |
| ATG |
| CPG |
| Servotronics, Inc. |
| ||||||||||||||||||||||||
($000’s omitted) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 8,823 | | $ | 8,449 | | $ | 2,168 | | $ | 2,466 | | $ | 10,991 | | $ | 10,915 | | $ | 26,739 | | $ | 23,495 | | $ | 6,650 | | $ | 6,508 | | $ | 33,389 | | $ | 30,003 | |
Cost of goods sold | |
| (7,973) | |
| (6,762) | |
| (1,495) | |
| (2,381) | |
| (9,468) | |
| (9,143) | |
| (22,843) | |
| (19,214) | |
| (5,217) | |
| (6,152) | |
| (28,060) | |
| (25,366) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | |
| 850 | |
| 1,687 | |
| 673 | |
| 85 | |
| 1,523 | |
| 1,772 | |
| 3,896 | |
| 4,281 | |
| 1,433 | |
| 356 | |
| 5,329 | |
| 4,637 | |
Gross margin % | |
| 9.6 | % |
| 20.0 | % |
| 31.0 | % |
| 3.4 | % |
| 13.9 | % |
| 16.2 | % |
| 14.6 | % |
| 18.2 | % |
| 21.5 | % |
| 5.5 | % |
| 16.0 | % |
| 15.5 | % |
The Company’s consolidatedConsolidated revenues from operations increased approximately$1,336,000 $76,000 or4.7% 0.7% for the three month period ended September 30, 2022 when compared to the same period in 2021. This benefited from price increases at the ATG of approximately $739,000. Although the ATG is experiencing an increase in volume due to the recovery of business within the commercial aircraft market it is offset by an unfavorable product mix of product shipped of approximately $365,000. Additionally, the CPG had a decrease in prices of approximately $205,000 and a decrease in the number of units shipped amounting to approximately $93,000 as compared to the same three month period ended September 30, 2021.
Consolidated revenues from operations increased approximately $3,386,000 or 11.3% for the nine month period ended September 30, 20172022 when compared to the same period in 2016. During this2021. This is due to the recovery of business within the commercial aircraft market and an increase in price at the ATG of approximately $3,244,000 or 13.8% and price increases at the CPG approximately $174,000, partially offset by a slightly lower number of units shipped of approximately $32,000 for the nine month period both ATG and CPG increased government shipments by approximately $941,000and commercial shipments by $395,000.ended September 30, 2022 when compared to the same period in 2021.
- 1722 -
The Company’s consolidated revenuesATG’s revenue improved for the three and nine month period ended September 30, 2022 as compared to the same periods ended September 30, 2021. Although the CPG’s revenue for the three month period declined, the CPG revenue is slightly higher for the nine month period ended September 30, 2022 as compared to the same period ended September 30, 2021.
Gross Profit
Consolidated gross profit from operations increaseddecreased approximately $1,860,000$249,000 or 19.7%(14.1)% for the three month period ended September 30, 20172022 when compared to the same period in 2016. During2021. The gross profit decreased at the ATG by approximately $837,000 or (49.6)% offset by an increase at the CPG of approximately $588,000 or 691.8%.
Gross profit benefited in the three months period from the recovery of business within the commercial aircraft market with increased volume and price increases offset by an unfavorable product mix shipped at the ATG of a net decrease of approximately $180,000 and increased operating costs of approximately $657,000. The increase in operating costs is primarily due to increased compensation and benefits of approximately $413,000, recruiting costs for the ramp-up of production of approximately $169,000, warranty expenses of approximately $41,000, and a net increase of approximately $34,000 for all other operating expenses as compared to the same period in 2021. We have added staff during this period both ATGin anticipation of increasing production in future periods to satisfy demand. Additionally, gross profit increased in the three month period at the CPG due to an improvement in operating variances of approximately $341,000, and a decrease in operating costs of approximately $339,000. The decrease in operating costs is primarily due to a decrease in compensation and benefits of approximately $73,000, an increase in the utilization of production resources of approximately $199,000, a decrease in net freight costs of approximately $87,000 and a net increase of approximately $20,000 for all other operating expenses. This is partially offset by an unfavorable product mix shipped, and decreases in volume and prices at the CPG increased government shipments byof approximately $601,000 and commercial shipments by $1,259,000.$92,000 as compared to the same period in 2021.
Cost of Goods Sold
Cost of goods soldConsolidated gross profit from operations increased approximately$1,818,000 $692,000 or 8.7%14.9% for the nine month period ended September 30, 20172022 when compared to the same period in 2021. The gross profit decreased at the ATG by approximately $385,000 or (8.9)% and increased at the CPG by approximately $993,000$1,077,000 or 14.1%302.5%.
Gross margin benefited in the nine months period from the recovery of business within the commercial aircraft market and favorable product mix shipped at the ATG of approximately $283,000 and price increases of approximately $709,000. However, this was more than offset by an increase in operating costs of approximately $1,377,000. This is primarily due to increased compensation and benefits of approximately $539,000, recruiting costs for the ramp-up of production of approximately $216,000, and the underutilization of production resources of approximately $650,000 and a net decrease of approximately $28,000 for all other operating expenses as compared to the same period in 2021. As previously noted, we have added staff during this period in anticipation of increasing production in future periods to satisfy customer demand. At the CPG, gross profit increased in the nine month period due to favorable product mix shipped at the CPG of approximately $526,000, and price increases of approximately $180,000, and a decrease in operating costs of approximately $371,000. The decrease in operating costs is primarily due to a decrease in compensation and benefits of approximately $41,000, an increase in the utilization of production resources of approximately $213,000, a decrease in net freight costs of approximately $229,000 offset by an increase in repair and maintenance expenses of approximately $69,000 and a net increase of approximately $43,000 for all other operating expenses as compared to the same period in 2021.
Since mid-2020, both Segments have experienced the challenge of fully utilizing their production resources, increasing the cost per unit produced. The CPG is starting to experience favorable production costs in the nine months ending September 30, 2022. Additionally, both Segments have incurred increased costs for raw materials associated with the production of our products. The ATG has incurred the costs of ramping up staffing to support future production. We will continue to monitor all purchases at both Segments. Despite these challenges, the consolidated gross margin and gross margin percent for the first nine month period of 2022 is higher than the same period in 2021.
- 23 -
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||||||||||||||||||||||||||
| | ATG |
| CPG |
| Servotronics, Inc. |
| ATG |
| CPG |
| Servotronics, Inc. |
| ||||||||||||||||||||||||
($000’s omitted) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SG&A: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
Selling, general & admin |
| | (1,541) |
| | (2,240) |
| | (402) |
| | (481) |
| | (1,943) |
| | (2,721) | | | (4,890) |
| | (5,586) |
| | (1,306) |
| | (1,317) |
| | (6,196) |
| | (6,903) | |
Legal settlement awards | | | — | | | (1,800) | | | — | | | (90) | | | — | | | (1,890) | | | — | | | (1,800) | | | — | | | (90) | | | — | | | (1,890) | |
Total SG&A | | $ | (1,541) | | $ | (4,040) | | $ | (402) | | $ | (571) | | $ | (1,943) | | $ | (4,611) | | $ | (4,890) | | $ | (7,386) | | $ | (1,306) | | $ | (1,407) | | $ | (6,196) | | $ | (8,793) | |
% SG&A to Revenues | |
| 17.5 | % |
| 47.8 | % |
| 18.5 | % |
| 23.2 | % |
| 17.7 | % |
| 42.2 | % |
| 18.3 | % |
| 31.4 | % |
| 19.6 | % |
| 21.6 | % |
| 18.6 | % |
| 29.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating (loss)/income | | $ | (691) | | $ | (2,353) | | $ | 271 | | $ | (486) | | $ | (420) | | $ | (2,839) | | $ | (994) | | $ | (3,105) | | $ | 127 | | $ | (1,051) | | $ | (867) | | $ | (4,156) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating (loss)/income % | |
| (7.8) | % |
| (27.8) | % |
| 12.5 | % |
| (19.7) | % |
| (3.8) | % |
| (26.0) | % |
| (3.7) | % |
| (13.2) | % |
| 1.9 | % |
| (16.1) | % |
| (2.6) | % |
| (13.9) | % |
Selling, general and administrative expenses (SG&A) decreased approximately $778,000 or 28.6% for the three month period ended September 30, 20172022 when compared to the same periodsperiod in 2016. Although2021. The improvement is driven by the Company continuesATG due to experience labor inefficiencies due in partlower legal fees of approximately $758,000 and a net decrease of all other SG&A expenses of approximately $20,000 as compared to the mix of product sold, new employee training and increased costs for employee benefits, the three month period showsended September 30, 2021.
SG&A expenses decreased approximately $707,000 or 10.2% for the nine month period ended September 30, 2022 when compared to the same period in 2021. The decrease is due to lower legal fees at the ATG of approximately $678,000 and a net decrease of all other SG&A expenses of approximately $29,000 as compared to the same period in 2021.
With the decrease in consolidated SG&A expenses in the three and nine month periods and the increasing revenue, the percentage of SG&A to revenue declined at both Segments.
Operating Losses
Losses from operations decreased approximately $2,419,000 or 85.2% when comparing to the three month period ended September 30, 2022 to the same period in 2021. Losses from operations decreased approximately $3,289,000 or 79.1% when comparing the nine month period ended September 30, 2022 to the same period in 2021. The consolidated improvement overin the operating losses for the first halfthree and nine month periods are discussed above.
- 24 -
Other (Expense)/Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||||||||||||||||||||||||||
| | ATG |
| CPG |
| Servotronics, Inc. |
| ATG |
| CPG |
| Servotronics, Inc. |
| ||||||||||||||||||||||||
($000’s omitted) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other (Expense)/Income: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
ERC |
| $ | — |
| $ | 1,598 |
| $ | — |
| $ | 380 |
| $ | — |
| $ | 1,978 | | $ | — |
| $ | 4,584 |
| $ | — |
| $ | 1,038 |
| $ | — |
| $ | 5,622 | |
PPP Loan foregiveness | | | — | | | 4,000 | | | | | | | | | — | | | 4,000 | | | — | | | 4,000 | | | — | | | — | | | — | | | 4,000 | |
Interest expense | | | (50) | | | (5) | | | — | | | — | | | (50) | | | (5) | | | (194) | | | (130) | | | — | | | (2) | | | (194) | | | (132) | |
Gain sale of equipment | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 26 | |
| — | |
| — | |
| — | |
| 26 | |
| — | |
Total other (expense)/income, net | | $ | (50) | | $ | 5,593 | | $ | — | | $ | 380 | | $ | (50) | | $ | 5,973 | | $ | (168) | | $ | 8,454 | | $ | — | | $ | 1,036 | | $ | (168) | | $ | 9,490 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
(Loss)/income before income tax (benefits)/provision | | $ | (741) | | $ | 3,240 | | $ | 271 | | $ | (106) | | $ | (470) | | $ | 3,134 | | $ | (1,162) | | $ | 5,349 | | $ | 127 | | $ | (15) | | $ | (1,035) | | $ | 5,334 | |
EBIT % | |
| (8.4) | % |
| 38.3 | % |
| (12.5) | % |
| 4.3 | % |
| (4.3) | % |
| 28.7 | % |
| (4.3) | % |
| 22.8 | % |
| (1.9) | % |
| 0.2 | % |
| (3.1) | % |
| 17.8 | % |
As discussed in our Annual Report on Form 10-K, the Company qualified for the Employee Retention Credit (ERC) for all quarters allowed under the federal government program. The Infrastructure Investment and Jobs Act of 2021, enacted November 15, 2021 terminated the employee retention credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses. As a result, for the three month and nine month periods ended September 30, 2022 there was no recognition of an ERC as compared to approximately $1,978,000 recognized in the three month period and the approximately $5,622,000 recognized in the nine month period ended September 30, 2021.
Additionally, in our Annual Report on Form 10-K, the Company executed a promissory note under the Paycheck Protection Program (the “PPP” loan) in the amount of $4,000,000. During the third quarter of 2021, the entire loan in the amount of $4,000,000 and the accrued interest of $57,000 was forgiven by the SBA and a gain of $4,057,000 was recorded in “Other (expense)/income” in the Company’s consolidated statements of operations.
Interest Expense
Interest expense increased by 900.0% and 47.0% in the three and nine month periods ended September 30, 2022, respectively, when compared to the same period in 2021. This is primarily due to the increase in costinterest recognized for postretirement benefits offset by the elimination of goods soldthe interest resulting from the pay down of our term loans as of December 2021. See also Note 5, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.
(Loss)/income before Income Taxes
Consolidated loss before income taxes for the three month period ended September 30, 20172022 decreased approximately $3,604,000 or (115.0)% when compared to the same period in 20162021. The consolidated decrease is primarily due to the result of the elimination of the ERC credit and the one-time event of the Paycheck Protection Program (PPP) loan forgiveness within the three months ended September 30, 2021. This is partially offset by an increase in revenue at the ATG segment, an improvement in operating performance at the CPG, decreases in SG&A expenses at both segments and decreases for that same period.2021 legal awards as discussed above. The Company continues to pursue cost saving opportunities in material procurements and operating efficiencies including capital investments and technical developments in updated and new equipment/machinery as well as investing in the development and training of its labor force.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) increased approximately$708,000 or 14.7%consolidated loss before income taxes for the nine month period ended September 30, 20172022 decreased approximately $6,369,000 or (119.4)% when compared to the same period in 2021. The consolidated decrease is primarily the result of the elimination of the ERC credit and increasedthe one-time event of the PPP loan forgiveness within the three months ended September 30, 2021. This is partially offset by an increase in revenue at the ATG segment, an improvement in operating performance at the CPG, decreases in SG&A expenses at both segments and decreases for 2021 legal awards as discussed above.
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Net (Loss) Income
Net income for the three and nine month periods ended September 30, 2022 decreased approximately $422,000$3,554,000 or 25.5% for(109.8)% and approximately $5,766,000 or (108.1)%, respectively, when compared to the same period in 2021. The consolidated decrease in net income is primarily the result of the elimination of the ERC credit and the one-time event of the Paycheck Protection Program (PPP) loan forgiveness within the three month period ended September 30, 2017 when compared to the same periods in 2016. The2021. This is offset by an increase in revenue at the ATG segment, an improvement in operating performance at the CPG, decreases in SG&A expenseexpenses at both Segments and decreases for legal awards as discussed above.
Liquidity and Capital Resources
| | | | | | |
| | Nine months ended September 30, | ||||
($000’s omitted) |
| 2022 |
| 2021 | ||
| | | | | | |
CASH FLOW DATA: |
| |
|
| |
|
Net Cash Flows from: |
| |
|
| |
|
Operating Activities | | $ | 62 | | $ | 6,338 |
Investing Activities (1) | | $ | (887) | | $ | (68) |
Financing Activities | | $ | (4,460) | | $ | (379) |
| | | | | | |
FINANCIAL POSITION: | |
|
| |
|
|
Working Capital | | $ | 29,082 | | $ | 34,636 |
Long-term Debt | | $ | 326 | | $ | 4,829 |
Liquidity (2) | | $ | 9,695 | | $ | 5,770 |
| | | | | | |
CAPITAL EXPENDITURES (1): | | $ | (887) | | $ | (68) |
(1) | NET OF PROCEEDS FROM SALE OF EQUIPMENT AND EQUIPMENT FINANCING |
(2) | CASH, LESS DEBT, PLUS LOC AVAILABLE |
Operating Activities:
We generated approximately $62,000 in both the nine month and three month period is primarily driven by the reserve of approximately $449,000 for the employment contract for Servotronics’ former Chairman of the Board and Chief Executive Officer. The death benefit equals 50% of base pay, payable to the Estate of Dr. Trbovichcash from the date of death through December 31, 2018. Approximately 15% of SG&A expense is attributable to professional and legal services foroperations during the nine month period ended September 30, 2017 increasing from 9% of SG&A expense2022 as compared to generating approximately $6,338,000 for the same period endedin 2021. At September 30, 2016. Such expenses increased2022, we had working capital of approximately $380,000 primarily due to ongoing legal proceedings slightly offset by decreases in staffing costs and computer supplies.
Depreciation and Amortization Expense
Depreciation and amortization remained relatively consistent for the nine and three month periods ended September 30, 2017 when compared to the same period in 2016. Depreciation expense fluctuates due to variable estimated useful lives$29,082,000 ($34,067,000 – December 2021) of depreciable property (as identified in Note 2, Business Description and Summarywhich approximately $4,261,000 ($9,546,000 – December 2021) was comprised 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 and related depreciation and amortization expense will follow the Company’s requirements to support its manufacturing delivery commitments and to implement certain information technology improvements.
Interest Expense
Interest expense remained relatively consistent for the nine and three month periods ended September 30, 2017 when compared to the same period in 2016. See also Note 5, Long-Term Debt, for information on long-term debt.
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Other Income
See Note 11, Other Income, for information on other income.
Income Taxes
cash.
The Company’s effective tax ratedecrease in cash flow from operating activities is primarily attributable to a decrease in net income of approximately $5,766,000 as explained previously. In addition, there was significant accounts receivable increase, and offsetting PPP forgiveness of a net usage of approximately 29.2%$223,000. A usage of cash for all other accounts netted to approximately $287,000.
Our cash flow from operations and 31.0% foravailable line of credit capacity provide us with the nine month periods ended September 30, 2017financial resources needed to run our operations and 2016, respectively. The Company’s effective tax rate wasreinvest in our business. Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing, and our operations in the future.
Investing Activities:
We used approximately 32.1% and 34.2% for the three month periods ended September 30, 2017 and 2016, respectively. The effective tax rate for$887,000 in cash from investing activities during the nine month period ended September 30, 2017 includes2022 as compared to a usage of cash of approximately $19,000$68,000 during the same period in 2021. The investing activities were primarily related to ATG projects and facilities improvement. Cash was generated through the sale of tax benefit resulting from the vestingCompany car.
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Financing Activities:
Our primary usage of cash in both years reflects federal and state income taxes, permanent non-deductible expenditures and the federal tax credit for research and development expenditures.
Net Income
Net incomeforour financing activities in the nine month period ended September 30, 2017decreased approximately$826,000 and increased approximately $305,000 for2022 includes the three month period ended September 30, 2017,when compared to the same periods in 2016. The decreaserepayment of net income for the nine month period is the resultour line of the increased costs in cost of goods sold and SG&A as discussed above. The increase for the three month period ended September 30, 2017 when compared to the same period in 2016 is primarily due to the increase in revenues.
Liquidity and Capital Resources
The Company’s primary liquidity and capital requirements relate to working capital needs; primarily inventory, accounts receivable and accounts payable as well as capital expenditures for property, plant and equipment and principal and interest payments on debt. At September 30, 2017, the Company had working capitalcredit of approximately$18,722,000of which approximately$2,045,000was comprised of cash $4,250,000 and cash equivalents.
The Company generated approximately $739,000 in cash from operations during the nine months ended September 30, 2017. The primary generations of cash for the Company’s operating activities for the nine month period ended September 30, 2017 includes net income, managing inventory and accrued payroll costs partially offset by using cash primarily due to the timing of the collections of accounts receivable due to revenue increases. The Company’s primary use of cash in its financing and investing activities in the nine months ended September 30, 2017 included approximately $409,000 of current principal payments on long-term debt, approximately $203,000 for the purchase of treasury shares, as well as the payment of the dividendequipment financing obligations of approximately $376,000. The Company also expended approximately $1,901,000 for capital expenditures during the nine months ended September 30, 2017.$210,000.
As discussed, approximately $688,000of the capital expenditures will be financed through the lease line of credit. The capital expenditure uses are partially offset by cash generated in the amount of $180,000 for the sale of commercial real property.
The Company renewed a $2,000,000March 20, 2020, we increased our line of credit available until June 20, 2018.from $4,000,000 to $6,000,000. On January 11, 2022, we executed an amendment to the loan agreement, which extended our line of credit availability period from December 31, 2022 to December 31, 2023. The amended agreement suspended the Debt Service Coverage Ratio up through and including the third quarter of 2022. A Quarterly Minimum Cash Flow measurement replaced the Debt Service Coverage Ratio. Minimum Cash Flow means net income, plus depreciation, depletion, and amortization expense, plus interest expense, plus non-cash expense related to the Servotronics, Inc. Employee Stock Ownership Plan, plus non-cash stock and stock option transactions.
Through the third quarter of 2022, the amended agreement also requires us to maintain a minimum liquidity, defined as cash on hand plus line of credit availability of at least $9,000,000.
The interest rate is a rate per year equal to the sum of (i) the greater of the Bloomberg’s Short-Term Bank Yield (BSBY) Daily Floating Rate or the Index Floor, plus (ii) 1.65 percentage point(s). For purposes of this paragraph, “Index Floor” means 0.5 percent.
The line of credit is secured by all personal property of the Company with the exception of certain equipment that was purchased from proceeds of government grants. There was no balance outstanding at September 30, 20172022 and approximately $4,250,000 outstanding at December 31, 2016.2021. The phase out of LIBOR and transition to the BSBY Daily Floating Rate does not have a significant impact on our operating results, financial position, or cash flows.
The Company establishedWe had an equipment loan facility in the amount of $1,000,000 available until July 9, 2021. This line was non-revolving and non-renewable. The loan term for the equipment covered by the agreement is 60 months. Monthly payments are fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding. There is approximately $547,000 outstanding as of September 30, 2022 and $712,000 outstanding at December 31, 2021.
We had a lease line of credit for equipment financing in the amount of $1,000,000 available until June 28, 2018. This line was non-revolving and non-renewable. The lease term for equipment covered by the lease line of credit is sixty60 months. Monthly payments are fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding. There was no balanceapproximately $19,000 outstanding at September 30, 2017.2022 and $64,000 at December 31, 2021.
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We believe that we should retain the capital generated from operating activities for investment in research and development and programs to retain the Company’s human resources talent as well as other operating and strategic improvements. Accordingly, there are no plans to institute a cash dividend within the next year.
The Company believes itsWe believe our cash generating capability and financial condition, together with available credit facilities will be adequate to meet our future operating investing and financinginvesting needs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
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Item 4. Controls and Procedures |
Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of its management, including the Company’s President, who was designated the Company’s PrincipalChief Executive Officer (“PEO”CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2017.2022. Based upon that evaluation, the PEOCEO and CFO concluded that the Company’s disclosure controls and procedures arewere not effective to ensure that the information required to be disclosed by the Company in SEC reports under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicateddue to the material weakness in the Company’s management, includinginternal control over financial reporting reported in the PEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Company’s Form 10-K for the year ended December 31, 2021.
Changes in Internal Controls
DuringAs reported in the nine month periodCompany’s Form 10-K for the year ended September 30, 2017,December 31, 2021, management identified certain control deficiencies that, individually and in the aggregate, constitute a material weakness in the Company’s internal control over financial reporting. The Company began its remediation efforts in 2021 and continues with its remediation plan which includes a comprehensive technology assessment by a third party, including the establishment and implementation of an information technology strategy and improvement of its risk assessment and documentation over the monitoring of internal controls. Except for the implementation of the remediation plan, there werehave been no changes induring the period covered by this report to the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to affect, the Company’s internal controls over financial reporting.
Notwithstanding the existence of the above-mentioned material weakness, the Company believes that the consolidated financial statements in this filing fairly present, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. generally accepted accounting principles.
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OTHER INFORMATION
Item 1. Legal Proceedings |
ExceptRefer to disclosure as set forth in Note 8, Litigation, there are no other legal proceedings which are material toLitigation. Additionally, the Company currentlyis subject to various claims and litigation arising in the normal course of business. In the opinion of management, such pending legal matters are either adequately covered by insurance or, against the Company other than litigation incidental to the business, which isif not insured, are not expected to have a material adverse effect onmaterially adversely affect the business or earnings of the Company. The Company maintains insurance to cover liabilities in excess of certain self-insured retention levels. While the Company believes its insurance coverage is adequate, future claims could exceed existing insurance coverage or insurance may not continue to be available at commercially reasonable rates.
Item 1A. Risk Factors |
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
(c) Company Purchases of Company’s Equity Securities
2017 Periods | Total Number of Shares Purchased | Weighted Average Price $ Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares that may yet be Purchased under the Plans or Programs (1) | |||||||||||||||||||||
| | | | | | | | | | ||||||||||||||||
| | | | | | | Total Number of Shares | | Maximum Number of Shares | ||||||||||||||||
| | | | | | | Purchased as Part of Publicly | | that may yet be Purchased | ||||||||||||||||
| | Total Number of Shares | | Weighted Average Price $ | | Announced Plans or Programs | | under the Plans or Programs | |||||||||||||||||
2021 Periods |
| Purchased |
| Paid Per Share |
| (1) |
| (1) | |||||||||||||||||
January - March | 15,991 | (2) | $ | 9.97 | - | 104,596 |
| — | | $ | — |
| — |
| 89,385 | ||||||||||
April - June | - | - | - | 104,596 | | — | | | — | | — | | 89,385 | ||||||||||||
July | - | - | - | 104,596 | | — | | | — | | — | | 89,385 | ||||||||||||
August | - | - | - | 104,596 | | — | | | — | | — | | 89,385 | ||||||||||||
September | 3,926 | 9.05 | 3,926 | 100,670 | | — | | | — | | — | | 89,385 | ||||||||||||
Total | 19,917 | $ | 9.79 | 3,926 | 100,670 | | — | | $ | — | | — | | 89,385 |
(1) | The Company’s Board of Directors authorized the purchase of up to 450,000 shares of its common stock in the open market or in privately negotiated transactions. As of September 30, 2022, the Company has purchased 360,615 shares and there remains 89,385 shares available to purchase under this program. There were no shares purchased by the Company during the nine month period ended September 30, 2022. |
(1) The Company’s Board of Directors authorized the purchase of up to 450,000 shares of its common stock in the open market or in privately negotiated transactions. As of September 30, 2017, the Company has purchased 349,330 shares and there remains 100,670 shares available to purchase under this program.
(2) Includes15,991shares withheld/purchased by the Company in January 2017 to satisfy statutory minimum withholding tax requirements for those participants who elected this option as permitted under the Company’s 2012 Long-Term Incentive Plan.
Item 3. Defaults Upon Senior Securities |
Not applicable.
Item 4. Mine Safety Disclosures |
Not applicable.
Item 5. Other Information |
Not applicableapplicable.
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Item 6. Exhibits |
| | |
31.1 |
| | |
31.2 | |
| | |
32.1 | |
| | |
32.2 | |
| | |
101 | | The following materials from Servotronics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, |
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company’s capital resources and profitability, the timingseverity, magnitude and amountduration of payment obligation relatingthe COVID-19 pandemic, including impacts of the pandemic and of businesses’ and governments’ responses to the arbitration awardpandemic on the Company’s operations and personnel, and on commercial activity and demand across the Company’s and its customers’ businesses, and on global supply chains; and the Company’s abilityinability to pay these obligations.predict the extent to which the COVID-19 pandemic and related impacts will continue to adversely impact our business operations. Forward-looking statements involve numerous risks and uncertainties. The Company derives a material portion of its revenues from contracts with agencies of the U.S. Government or their prime contractors. The Company’s business is performed under fixed price contracts and the following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: uncertainties in today’s global economy and global competition, and difficulty in predicting defense appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company’s customers to fund long-term purchase programs, and market demand and acceptance both for the Company’s products and its customers’ products which incorporate Company-made components. The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company assumes no obligation to update forward-looking statements.
.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 13, 201714, 2022
SERVOTRONICS, INC. | |||
By: | /s/ | ||
William F. Farrell, Jr. | |||
Chief Executive Officer | |||
By: | /s/ Lisa F. Bencel, Chief Financial Officer | ||
Lisa F. Bencel | |||
Chief Financial Officer |
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