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 SeptemberJune 30, 20172021
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.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 | 2,491,667 |
INDEX
Page No. | |||
PART I. FINANCIAL INFORMATION | |||
Item 1. | Financial Statements (Unaudited): | ||
| Condensed Consolidated Balance Sheets, | 3 | |
| | | |
Condensed Consolidated Statements of Operating Income for the three and | 4 | ||
5 | |||
6 | |||
e) Notes to Condensed Consolidated Financial Statements | 7 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||
22 | |||
22 | |||
| |||
24 | |||
24 | |||
24 | |||
24 | |||
24 | |||
24 | |||
25 | |||
25 | |||
| | ||
26 |
- 2 -
SERVOTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($000’s omitted except share and per share data) June 30, December 31, 2021 2020 (Unaudited) (Audited) Assets Current assets: Cash $ 9,640 $ 5,935 Accounts receivable, net 7,899 7,636 Other receivables-employee retention credit (ERC) 999 — Inventories, net 21,307 23,406 Prepaid income taxes 198 483 Other current assets 744 383 Total current assets 40,787 37,843 Property, plant and equipment, net 11,320 12,017 Deferred income taxes 129 137 Other non-current assets 327 331 Total Assets $ 52,563 $ 50,328 Liabilities and Shareholders’ Equity Current liabilities: Current portion of long-term debt $ 4,560 $ 2,334 Current portion of capitalized loan/lease obligations 376 301 Dividend payable — 12 Accounts payable 1,347 1,599 Accrued employee compensation and benefits costs 2,208 1,649 Other accrued liabilities 1,130 874 Total current liabilities 9,621 6,769 Long-term debt 4,925 7,293 Post retirement obligation 2,547 2,529 Shareholders’ equity: Common stock, par value $0.20; authorized 4,000,000 shares; issued 2,614,506 shares; outstanding 2,419,923 (2,416,683 - 2020) shares 523 523 Capital in excess of par value 14,497 14,481 Retained earnings 23,530 21,803 Accumulated other comprehensive loss (1,325) (1,356) Employee stock ownership trust commitment (359) (359) Treasury stock, at cost 122,839 (126,079 - 2020) shares (1,396) (1,355) Total shareholders’ equity 35,470 33,737 Total Liabilities and Shareholders’ Equity $ 52,563 $ 50,328 See notes to condensed consolidated financial statements - 3 - 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
SERVOTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATING INCOME ($000’s omitted except per share data) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Revenue $ 10,028 $ 13,504 $ 19,088 $ 28,952 Costs of goods sold, inclusive of depreciation and amortization 8,156 10,484 16,223 21,220 Gross margin 1,872 3,020 2,865 7,732 Operating Expenses: Selling, general and administrative 2,209 1,748 4,182 4,016 Operating (loss)/income (337) 1,272 (1,317) 3,716 Other income/(expense): Other income: employee retention credit (ERC) 1,914 — 3,644 — Interest expense (66) (50) (127) (92) Total other income/(expenses) 1,848 (50) 3,517 (92) Income before income tax provision 1,511 1,222 2,200 3,624 Income tax provision 325 257 473 761 Net income $ 1,186 $ 965 $ 1,727 $ 2,863 Income per share: Basic Net Income per share $ 0.49 $ 0.41 $ 0.72 $ 1.21 Diluted Net income per share $ 0.49 $ 0.40 $ 0.72 $ 1.20 See notes to condensed consolidated financial statements - 4 - 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 COMPREHENSIVE INCOME ($000’s omitted) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Net Income $ 1,186 $ 965 $ 1,727 $ 2,863 Other comprehensive income items: Actuarial gain 20 — 39 — Income tax expense on actuarial gain (4) — (8) — Other comprehensive income: Retirement obligation, net of taxes 16 — 31 — Total comprehensive income $ 1,202 $ 965 $ 1,758 $ 2,863 See notes to condensed consolidated financial statements - 5 -
SERVOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(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 |
| | | | | | |
| | Six Months Ended | ||||
| | June 30, | ||||
|
| 2021 |
| 2020 | ||
Cash flows related to operating activities: |
| |
|
| |
|
Net Income | | $ | 1,727 | | $ | 2,863 |
Adjustments to reconcile net income to net cash generated by operating activities: | |
|
| |
|
|
Depreciation and amortization | |
| 714 | |
| 718 |
Stock based compensation | |
| 56 | |
| 172 |
Increase/(Decrease) in allowance doubtful accounts | |
| 9 | |
| (181) |
(Decrease)/Increase in inventory reserve | |
| (19) | |
| 132 |
Increase/(Decrease) in warranty reserve | |
| 10 | |
| (133) |
Decrease in deferred income taxes | | | 8 | | | — |
Change in assets and liabilities: | |
|
| |
|
|
Accounts receivable | |
| (272) | |
| 3,106 |
Other receivables - ERC | | | (999) | | | — |
Inventories | |
| 2,118 | |
| (5,076) |
Prepaid income taxes | |
| 285 | |
| 583 |
Other current assets | |
| (361) | |
| (120) |
Accounts payable | |
| (264) | |
| (715) |
Accrued employee compensation and benefit costs | |
| 559 | |
| 3 |
Post retirement obligations | | | 49 | | | 198 |
Other accrued liabilities | |
| 246 | |
| (74) |
| |
|
| |
|
|
Net cash generated by operating activities | |
| 3,866 | |
| 1,476 |
| |
|
| |
|
|
Cash flows related to investing activities: | |
|
| |
|
|
Capital expenditures - property, plant and equipment | |
| (13) | |
| (593) |
| | | | | | |
Net cash used by investing activities | | | (13) | | | (593) |
| | | | | | |
Cash flows related to financing activities: | |
|
| |
|
|
Principal payments on long-term debt | |
| (774) | |
| (274) |
Principal payments on equipment financing lease obligations | |
| (177) | |
| (148) |
Proceeds from equipment note and equipment financing lease obligations | | | 384 | | | — |
Proceeds from line of credit | |
| 500 | |
| 750 |
Proceeds from paycheck protection program | | | — | | | 4,000 |
Purchase of treasury shares | | | (81) | | | (100) |
| |
|
| |
|
|
Net cash (used)/generated by financing activities | |
| (148) | |
| 4,228 |
| |
| | |
| |
Net increase in cash | |
| 3,705 | |
| 5,111 |
| |
| | |
| |
Cash at beginning of period | |
| 5,935 | |
| 2,029 |
| |
| | |
|
|
Cash at end of period | | $ | 9,640 | | $ | 7,140 |
See notes to condensed consolidated financial statements
- 56 -
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 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 ninesix months ended SeptemberJune 30, 20172021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2021. The consolidated financial statements should be read in conjunction with the 20162020 annual report and the notes thereto.
2. Business Description and Summary of Significant Accounting Policies |
Business Description
Servotronics, Inc. and its subsidiaries design, manufacture and market advanced technology products consisting primarily of control components, and consumer products consisting of knives and various types of cutlery and other edged products.
Principles of Consolidation
The consolidated financial statements include the accounts of Servotronics, Inc. and its wholly-owned subsidiaries (the “Company”). All intercompany balances and transactions have been eliminated upon consolidation.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include all 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 maturity of three months or less.
savings accounts.
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$197,000 at SeptemberJune 30, 20172021 and $77,000$188,000 at December 31, 2016.2020. 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.
- 7 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue 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 are 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.
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 June 30, 2021 and December 31, 2020 under the guidance of ASC460 the Company has recorded a warranty reserve of approximately $392,000 and $382,000, 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 and terms.
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 year2 years are applied to the gross value of the inventory through a reserve of approximately $1,556,000$1,701,000 and $1,513,000$1,720,000 at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively. Pre-production and start-up costs are expensed as incurred.
- 6 -
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 one1 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; 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 |
- 8 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
| | | | | | | | | |
| | For the Six Months Ended | | | | ||||
| | June 30, | | | | ||||
|
| 2021 |
| 2020 |
| % Change |
| ||
| | ($000's omitted) | | | | ||||
Income tax expense |
| $ | 473 |
| $ | 761 |
| (37.8) | % |
Effective tax rate |
| | 21.5 | % | | 21.0 | % | 2.4 | % |
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 SeptemberJune 30, 20172021 or December 31, 2016,2020, and did not recognize any interest and/or penalties in its consolidated statements of income during the ninethree and six months ended SeptemberJune 30, 20172021 and 2016.2020. The Company did not have any material uncertain tax positions or unrecognized tax benefits or obligations as of SeptemberJune 30, 20172021 and December 31, 2016.2020. The 20142017 through 20162020 federal and state tax returns remain subject to examination.
Supplemental Cash Flow Information
Income taxes paid during the ninesix months ended SeptemberJune 30, 20172021 and 20162020 amounted to approximately $165,000$180,000 and $644,000,$42,000, respectively. Interest paid during the six months ended June 30, 2021 and 2020 amounted to approximately $56,000$73,000 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.
- 7 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$84,000, respectively.
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 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 SeptemberJune 30, 20172021 and December 31, 2016.
2020.
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.
- 9 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentration of credit risks principally consist of cash accounts in financial institutions. Although the accounts exceed the federally insured deposit amount, management does not anticipate nonperformance by the financial institutions.
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 Adopted
Effective January 1, 2017,We consider the Company adopted new guidance issued by the Financial Accounting Standards Board (“FASB”) ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurementapplicability and impact of Inventory”. The ASU changes the measurement principle for certain inventory methods from the lower of costall ASUs. Recent ASUs were assessed and determined to be either not applicable, or markethad and are expected 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.
- 8 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Payment 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.
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 materialminimal impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” There are elements of the new standard that could impact almost all entities 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 standard for fiscal years, and interim period within those fiscal years, beginning December 15, 2018. For calendar year-end public companies, this means an adoption date of January 1, 2019. Early adoption is permitted. The Company does not believe the adoption will have a material impact on the financial statements and related disclosures.
- 9 -
SERVOTRONICS, INC. AND SUBSIDIARIES
3. Inventories
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | |
|
| June 30, |
| December 31, | ||
| | 2021 | | 2020 | ||
| | ($000's omitted) | ||||
Raw material and common parts | | $ | 16,161 | | $ | 16,989 |
Work-in-process | |
| 3,166 | |
| 4,273 |
Finished goods | |
| 3,681 | |
| 3,864 |
| |
| 23,008 | |
| 25,126 |
Less inventory reserve | |
| (1,701) | |
| (1,720) |
Total inventories | | $ | 21,307 | | $ | 23,406 |
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.
| | | | | | |
|
| June 30, |
| December 31, | ||
| | 2021 | | 2020 | ||
| | ($000's omitted) | ||||
Land | | $ | 7 | | $ | 7 |
Buildings | |
| 11,363 | |
| 11,359 |
Machinery, equipment and tooling | |
| 21,187 | |
| 21,146 |
Construction in progress | |
| 167 | |
| 198 |
| |
| 32,724 | |
| 32,710 |
Less accumulated depreciation and amortization | |
| (21,404) | |
| (20,693) |
Total property, plant and equipment | | $ | 11,320 | | $ | 12,017 |
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$358,000 and $610,000$363,000 for the ninethree months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. Amortization expense primarily related to ROU assets amounted to approximately $17,000 and $17,000 for the three months ended June 30, 2021 and 2020, respectively. Depreciation and amortization expense amounted to approximately $209,000$714,000 and $198,000$718,000 for the threesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. The Company believes that it maintains propertyAmortization expense, primarily related to ROU assets, amounted to approximately $34,000 and casualty insurance in amounts adequate$35,000 for the risksix months ended June 30, 2021 and nature2020, respectively.
As of itsJune 30, 2021, there is approximately $167,000 ($198,000 – December 31, 2020) of construction in progress (CIP) included in property, plant and equipment all of which is related to capital projects. There is approximately $160,000 in CIP for machinery & equipment and self-constructed assets ($191,000 – December 2020), $6,000 for computer equipment ($7,000 – December 2020) and operations and which are generally customary in its industry.$1,000 for building improvements ($0 – December 2020) primarily related to the Advanced Technology Group.
- 10 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Long-Term Debt
As of September 30, 2017, there is approximately $1,544,000($77,000– 2016) of construction in progress included in property, plant and equipment primarily related to capital projects at the Advanced Technology Group (“ATG”), including the equipment covered under the equipment financing agreement. See Note 7, Commitments and Contingencies, for more information on anticipated capital expenditures.
| | | | | | |
|
| June 30, |
| December 31, | ||
| | 2021 | | 2020 | ||
| | ($000’s omitted) | ||||
Paycheck protection program payable to financial institutions: Interest rate of 1% per annum. Unforgiven portion is payable monthly until April 20, 2022 (A) | | $ | 4,000 | | $ | 4,000 |
| | | | | | |
Line of credit payable to a financial institution; Interest rate option of bank prime or Libor plus 2.15000% (B)(C) | | | 4,250 | | | 3,750 |
| | | | | | |
Term loan payable to a financial institution; Interest rate option of bank prime or Libor plus 1.492130%, monthly principal payments of $21,833 through 2021 with a balloon payment of $286,000 due December 1, 2021(C). | | | 417 | | | 1,048 |
| |
| | |
|
|
Term loan payable to a financial institution; Interest rate option of bank prime or Libor plus 1.492130%, monthly principal payments of $23,810, maturity date December 1, 2021(C). | |
| 143 | |
| 286 |
| | | | | | |
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 1.795530% - 1.835015% as of June 30, 2021)(D) | |
| 819 | |
| 534 |
| | | | | | |
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)(E) | | | 232 | | | 310 |
| |
| 9,861 | |
| 9,928 |
Less current portion | |
| (4,936) | |
| (2,635) |
| | $ | 4,925 | | $ | 7,293 |
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 $2,000,000 line of credit available until June 20, 2018. There was no balance outstanding at September 30, 2017 and December 31, 2016.
The term loans are 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 balance outstanding at September 30, 2017.
B.) | The Company has a $6,000,000 line of credit. The interest rate is a rate per year equal to the bank’s prime rate or Libor plus 2.15%. 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 21, 2022. There was $4,250,000 balance outstanding at June 30, 2021 and $3,750,000 balance at December 31, 2020. |
C.) | The term loans and line of credit are 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 June 30, 2021 and December 31, 2020 the Company was in compliance with these covenants. |
D.) | The Company has an equipment loan facility in the amount of $1,000,000 available until July 9, 2021. This line is 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. During the six months ended June 30, 2021, approximately $384,500 was drawn on this facility. There was approximately $819,000 outstanding at June 30, 2021 and $534,000 balance outstanding at December 31, 2020. |
- 11 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Principal maturities of long-term debt are as follows: 2021 - $2,754,000; 2022 - $6,614,000; 2023 - $231,000; 2024 - $178,000; and 2025 and beyond - $84,000. 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 |
| | | | | | | | |
|
| |
| June 30, |
| December 31, | ||
| | Year | | 2021 | | 2020 | ||
| | | | ($000’s omitted) | ||||
| | | | | | | | |
|
| 2021 | | $ | 230 |
| $ | 331 |
|
| 2022 | | | 393 |
| | 316 |
|
| 2023 | | | 246 |
| | 169 |
|
| 2024 | | | 188 |
| | 112 |
|
| 2025+ | | | 90 |
| | — |
Total principal and interest payments |
| | | | 1,147 |
| | 928 |
Less amount representing interest |
| | | | (96) |
| | (83) |
Present value of net minimum lease payments |
| | | | 1,051 |
| | 845 |
Less current portion |
| | | | (376) |
| | (301) |
Long-term principle payments | | | | $ | 675 | | $ | 544 |
6.Postretirement Benefit Plan
The Company provides certain postretirement health and life insurance benefits for the Company’s Chief Executive Officer and President, and a former executive of the Company (the Plan). Upon retirement and after attaining at least the age of 65, the Company will pay the annual cost of health insurance coverage and provide life insurance offered at the time of retirement. The Plan also provides a benefit to reimburse the participants of certain out-of-pocket medical or health related expenses. The retirees’ insurance benefits cease upon the death of the retired executive. The Plan is unfunded and the actuarially determined future accumulated postretirement benefit obligation at June 30, 2021 and December 31, 2020 was approximately $2,547,000 and $2,529,000, respectively and has been accrued and reflected in Post Retirement Obligation in the accompanying condensed consolidated balance sheets.
Benefit cost for the three months ended June 30, 2021 and 2020 totaled $46,000 and $99,000, respectively. Benefit costs for the six months ended June 30, 2021 and 2020 totaled $92,000 and $198,000, respectively.
- 12 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | |
| | Six-month Period Ended June 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 obligation, net of taxes | | | 0 | | | 15 | | | 0 | | | 0 | | | 0 | | | 0 | | | 15 |
Stock based compensation |
|
| 0 | |
| 0 | |
| 0 | |
| 11 | |
| 0 | |
| 20 | |
| 31 |
Purchase of treasury shares |
|
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (81) | |
| (81) |
Net Income |
|
| 541 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 541 |
| | | | | | | | | | | | | | | | | | | | | |
March 31, 2021 | | $ | 22,344 | | $ | (1,341) | | $ | 523 | | $ | 14,492 | | $ | (359) | | $ | (1,416) | | $ | 34,243 |
| | | | | | | | | | | | | | | | | | | | | |
Retirement obligation, net of taxes | | | 0 | | | 16 | | | 0 | | | 0 | | | 0 | | | 0 | | | 16 |
Stock based compensation | | | 0 | | | 0 | | | 0 | | | 5 | | | 0 | | | 20 | | | 25 |
Net Income | | | 1,186 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 1,186 |
| | | | | | | | | | | | | | | | | | | | | |
June 30, 2021 | | $ | 23,530 | | $ | (1,325) | | $ | 523 | | $ | 14,497 | | $ | (359) | | $ | (1,396) | | $ | 35,470 |
| | | | | | | | | | | | | | | | | | | | | |
| | Six-month Period Ended June 30, 2020 | |||||||||||||||||||
| | | | | Accumulated | |
| | |
| | |
| | | | |
| | ||
| |
| | | Other | |
| | | Capital in | |
| | | | | Total | ||||
| | Retained | | Comprehensive | | | | excess of | | | | Treasury | | shareholders’ | |||||||
|
| Earnings |
| Income |
| Common Stock |
| par value |
| ESOT |
| stock |
| equity | |||||||
December 31, 2019 |
| $ | 20,484 | | $ | 98 | | $ | 523 | | $ | 14,358 | | $ | (460) | | $ | (1,471) | | $ | 33,532 |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Stock based compensation | | | 0 | | | 0 | | | 0 | | | 33 | | | 0 | | | 52 | | | 85 |
Purchase of treasury shares |
|
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (100) | |
| (100) |
Net Income |
|
| 1,898 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 1,898 |
| | | | | | | | | | | | | | | | | | | | | |
March 31, 2020 | | $ | 22,382 | | $ | 98 | | $ | 523 | | $ | 14,391 | | $ | (460) | | $ | (1,519) | | $ | 35,415 |
| | | | | | | | | | | | | | | | | | | | | |
Stock based compensation | | | 0 | | | 0 | | | 0 | | | 39 | | | 0 | | | 48 | | | 87 |
Net Income | |
| 965 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 965 |
| | | | | | | | | | | | | | | | | | | | | |
June 30, 2020 |
| $ | 23,347 | | $ | 98 | | $ | 523 | | $ | 14,430 | | $ | (460) | | $ | (1,471) | | $ | 36,467 |
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 SeptemberJune 30, 2017,2021, the Company has purchased 349,330360,615 shares and there remains 100,67089,385 shares available to purchase under this program. There were 19,9170 shares and 360 shares purchased by the Company during the ninesix month period ended SeptemberJune 30, 2017.2021 and 2020, 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 director compensation policy provides that non-employee directors receive a portion of their annual retainer in the form of restricted stock under the Company’s 2012 Long-Term Incentive Plan. Additionally,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’ Chairman11,328 restricted shares were issued on August 14, 2020 with a grant date fair value of $100,000.
The Company issued to the non-employee directors 13,160 shares of restricted stock to vest quarterly over a twelve month service period, have voting rights and accrue dividends that are paid upon vesting. The aggregate amount of the Board and Chief Executive Officer (CEO), 15,000expense to the Company, measured based on the grant date fair value, will be recognized over the requisite service period. The aggregate of 13,160 restricted shares awardedwere issued on May 14, 2021 with a grant date fair value of $100,000.
- 13 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Included in six months ended June 30, 2021 and December 31, 2020 is approximately $50,000 and $336,000, respectively, of stock-based compensation expense related to the Chairman and CEO vested.restrictive share awards.
| | | | | |
| | | | Weighted Average | |
| | | | Grant Date Fair | |
|
| Shares |
| Value | |
Restricted Share Activity: | | | | | |
Unvested at the year ended December 31, 2020 |
| 30,914 | | $ | 9.24 |
| | | | | |
Granted |
| 13,160 | | $ | 7.60 |
Vested |
| 30,914 | | $ | 9.24 |
Unvested at June 30, 2021 |
| 13,160 | | $ | 7.60 |
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.
Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the weighted average number of common 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 common shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on the earnings per share that were outstanding for the period. Incremental shares from assumed conversions are calculated as the number of shares that would be issued, net of the number of shares that could be purchased in the marketplace with the cash received upon stock option exercise. The dilutive effect of unvested restrictive stock is determined using the treasury stock method.
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | ($000’s omitted except per share data) | ||||||||||
Net Income | | $ | 1,186 | | $ | 965 | | $ | 1,727 | | $ | 2,863 |
Weighted average common shares outstanding (basic) | |
| 2,402 | |
| 2,364 | |
| 2,398 | |
| 2,364 |
Unvested restricted stock | |
| 13 | |
| 25 | |
| 13 | |
| 25 |
Weighted average common shares outstanding (diluted) | |
| 2,415 | |
| 2,389 | |
| 2,411 | |
| 2,389 |
Basic | |
|
| |
|
| |
| | |
|
|
Net income per share | | $ | 0.49 | | $ | 0.41 | | $ | 0.72 | | $ | 1.21 |
Diluted | |
| | |
|
| |
|
| |
|
|
Net income per share | | $ | 0.49 | | $ | 0.40 | | $ | 0.72 | | $ | 1.20 |
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 Company 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 a loss. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.
- 1214 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 disclosed in filings with the Securities and Exchange Commission (“SEC”), the Company, under an employment agreement, is expected to pay post employment health related benefits to 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”). The five year plan included the construction of an approximate 28,000 square foot addition, capital improvements to the existing plant, the reconfiguration of its production process within the expanded facility, and the addition of new state of the art knife-making equipment. 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 levels 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.party. Aero, Inc. is suing Servotronics, Inc. and its wholly owned subsidiary and has alleged damages in the amount of $3,000,000. The Company has filed a response to the Aero, Inc. lawsuit and has also filed a counter-claim in the amount of $3,191,000. The discovery of the action is complete, and a trial is scheduled to commence in the third quarter of 2021 in the Supreme Court of the State of New York, County of Erie. 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, no0 gain or loss has been recognized in the accompanying financials statements related to this litigation.
On June 7, 2021, a Summons and Complaint was filed by an employee in the Supreme Court of the State of New York, County of Erie, against Servotronics, Inc., the Servotronics Board of Directors, The Ontario Knife Company and Kenneth D. Trbovich (collectively, the "Defendants"). The Complaint alleges certain violations under the New York Human Rights Law by the Defendants relating to the employee's employment by the Company 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. This litigation is still in its earliest stages. Based on the information known by the Company as of the date of this filing, 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 as a result of this litigation. Accordingly, 0 loss has been recognized in the accompanying financials statements related to this litigation. The Company intends to vigorously defend against this litigation.
There are no other legal proceedings currently pending by or against the Company other than ordinary routine litigation incidental to the business which is not expected to have a material adverse effect on the business or earnings of the Company.
9. Related Party Transactions |
The Company paid legal fees and disbursements of approximately $188,000$44,000 and $65,000$132,000 in the ninesix month period ended SeptemberJune 30, 20172021 and 2016,2020, 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 SeptemberJune 30, 20172021 and 20162020 amounted to approximately $44,000$25,000 and $41,000,$37,000, respectively. As of September 30, 2017,Additionally, the Company had accrued additionalunbilled legal fees at June 30, 2021 and 2020 of approximately $39,000$20,000 and $25,000, respectively, with this firm.
The Company operates in two2 business segments, ATGAdvanced Technology Group (“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.
- 15 -
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of SeptemberJune 30, 2017,2021, the Company had identifiable assets of approximately $36,761,000$52,563,000 ($35,620,00050,328,000 – December 31, 2016)2020) of which approximately $25,477,000($24,037,000$43,300,000 ($40,826,000 – December 31, 2016)2020) was for ATG and approximately $11,284,000$9,263,000 ($11,583,0009,502,000 – December 31, 2016)2020) 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 | ||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | ($000's omitted except per share data) |
| ||||||||||||||||||||||||||||||||||||||||
| | ATG | | CPG | | Consolidated |
| ||||||||||||||||||||||||||||||||||||
| | Six Months Ended | | Six Months Ended | | Six Months Ended |
| ||||||||||||||||||||||||||||||||||||
| | June 30, | | June 30, | | June 30, |
| ||||||||||||||||||||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||||||||||||||||||||||||
Revenues from unaffiliated customers | $ | 23,968 | $ | 23,023 | $ | 6,076 | $ | 5,685 | $ | 30,044 | $ | 28,708 | | $ | 15,046 | | $ | 25,044 | | $ | 4,042 | | $ | 3,908 | | $ | 19,088 | | $ | 28,952 | | ||||||||||||
Cost of goods sold, exclusive of depreciation and amortization | (17,407 | ) | (16,060 | ) | (5,299 | ) | (4,828 | ) | (22,706 | ) | (20,888 | ) | |||||||||||||||||||||||||||||||
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | ||||||||||||||||||||||||
Cost of goods sold, inclusive of depreciation | |
| (12,452) | |
| (17,860) | |
| (3,771) | |
| (3,360) | | | (16,223) | | | (21,220) | | ||||||||||||||||||||||||
Gross margin | |
| 2,594 | |
| 7,184 | |
| 271 | |
| 548 | |
| 2,865 | |
| 7,732 | | ||||||||||||||||||||||||
|
|
| 17.2 | % |
| 28.7 | % |
| 6.7 | % |
| 14.0 | % |
| 15.0 | % |
| 26.7 | % | ||||||||||||||||||||||||
| |
| | |
|
| |
| | |
|
| |
| | |
|
| | ||||||||||||||||||||||||
Selling, general and administrative | (4,133 | ) | (3,477 | ) | (1,390 | ) | (1,338 | ) | (5,523 | ) | (4,815 | ) | |
| (3,346) | |
| (3,145) | |
| (836) | |
| (871) | |
| (4,182) | |
| (4,016) | | ||||||||||||
Depreciation and amortization | (443 | ) | (412 | ) | (194 | ) | (198 | ) | (637 | ) | (610 | ) | |||||||||||||||||||||||||||||||
Total operating costs and expenses | |
| (15,798) | |
| (21,005) | |
| (4,607) | |
| (4,231) | |
| (20,405) | |
| (25,236) | | ||||||||||||||||||||||||
Operating (loss)/income | |
| (752) | |
| 4,039 | |
| (565) | |
| (323) | |
| (1,317) | |
| 3,716 | | ||||||||||||||||||||||||
| |
| | |
| | |
| | |
| | |
| | |
| | | ||||||||||||||||||||||||
Other income: employee retention credit (ERC) | | | 2,986 | | | — | | | 658 | | | — | | | 3,644 | | | - | | ||||||||||||||||||||||||
Interest expense | (32 | ) | (32 | ) | (24 | ) | (22 | ) | (56 | ) | (54 | ) | | | (125) | | | (84) | | | (2) | | | (8) | | | (127) | | | (92) | | ||||||||||||
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 | |||||||||||||||||||||||||||||||||||
Total other income/(expense) | | | 2,861 | | | (84) | | | 656 | | | (8) | | | 3,517 | | | (92) | | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Income (loss) before income tax provision | |
| 2,109 | |
| 3,955 | |
| 91 | |
| (331) | |
| 2,200 | |
| 3,624 | | ||||||||||||||||||||||||
| |
| | |
| | |
| | |
| | |
| | |
| | | ||||||||||||||||||||||||
Income tax provision (benefits) | 580 | 949 | (249 | ) | (217 | ) | 331 | 732 | | $ | 453 | | $ | 830 | | $ | 20 | | $ | (69) | | $ | 473 | | $ | 761 | | ||||||||||||||||
Net income (loss) | $ | 1,382 | $ | 2,112 | $ | (580 | ) | $ | (484 | ) | $ | 802 | $ | 1,628 | |||||||||||||||||||||||||||||
Net income /(loss) | | $ | 1,656 | | $ | 3,125 | | $ | 71 | | $ | (262) | | $ | 1,727 | | $ | 2,863 | | ||||||||||||||||||||||||
Capital expenditures | $ | 1,777 | $ | 613 | $ | 124 | $ | 173 | $ | 1,901 | $ | 786 | | $ | 10 | | $ | 541 | | $ | 3 | | $ | 52 | | $ | 13 | | $ | 593 | |
($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 | ||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | ($000’s omitted except per share data) |
| ||||||||||||||||||||||||||||||||||||||||
| | ATG | | CPG | | Consolidated |
| ||||||||||||||||||||||||||||||||||||
| | Three Months Ended | | Three Months Ended | | Three Months Ended |
| ||||||||||||||||||||||||||||||||||||
| | June | | June | | June |
| ||||||||||||||||||||||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||||||||||||||||||||||||
Revenues from unaffiliated customers | $ | 8,918 | $ | 7,658 | $ | 2,407 | $ | 1,807 | $ | 11,325 | $ | 9,465 | | $ | 7,823 | | $ | 11,230 | | $ | 2,205 | | $ | 2,274 | | $ | 10,028 | | $ | 13,504 | | ||||||||||||
Cost of goods sold, exclusive of depreciation and amortization | (6,062 | ) | (5,418 | ) | (1,974 | ) | (1,625 | ) | (8,036 | ) | (7,043 | ) | |||||||||||||||||||||||||||||||
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | ||||||||||||||||||||||||
Cost of goods sold, inclusive of depreciation | |
| (6,242) | |
| (8,494) | |
| (1,914) | |
| (1,990) | |
| (8,156) | | | (10,484) | | ||||||||||||||||||||||||
Gross margin | |
| 1,581 | |
| 2,736 | |
| 291 | |
| 284 | |
| 1,872 | |
| 3,020 | | ||||||||||||||||||||||||
Gross margin % |
|
| 20.2 | % |
| 24.4 | % |
| 13.2 | % |
| 12.4 | % |
| 18.7 | % |
| 22.4 | % | ||||||||||||||||||||||||
| |
| | |
|
| |
| | |
|
| |
| | |
|
| | ||||||||||||||||||||||||
Selling, general and administrative | (1,640 | ) | (1,240 | ) | (440 | ) | (418 | ) | (2,080 | ) | (1,658 | ) | |
| (1,761) | |
| (1,402) | |
| (448) | |
| (346) | |
| (2,209) | |
| (1,748) | | ||||||||||||
Depreciation and amortization | (143 | ) | (137 | ) | (66 | ) | (61 | ) | (209 | ) | (198 | ) | |||||||||||||||||||||||||||||||
Total operating costs and expenses | |
| (8,003) | |
| (9,896) | |
| (2,362) | |
| (2,336) | |
| (10,365) | |
| (12,232) | | ||||||||||||||||||||||||
Operating (loss)/income | |
| (180) | |
| 1,334 | |
| (157) | |
| (62) | |
| (337) | |
| 1,272 | | ||||||||||||||||||||||||
| |
| | |
| | |
| | |
| | |
| | |
| | | ||||||||||||||||||||||||
Other income: employee retention credit (ERC) | |
| 1,573 | |
| — | |
| 341 | |
| - | |
| 1,914 | |
| — | | ||||||||||||||||||||||||
Interest expense | (9 | ) | (11 | ) | (9 | ) | (7 | ) | (18 | ) | (18 | ) | | | (65) | | | (46) | | | (1) | | | (4) | | | (66) | | | (50) | | ||||||||||||
Other income, net | 5 | 9 | 1 | - | 6 | 9 | |||||||||||||||||||||||||||||||||||||
Income (loss) before income tax provision (benefits) | 1,069 | 861 | (81 | ) | (304 | ) | 988 | 557 | |||||||||||||||||||||||||||||||||||
Total other income/(expense) | | | 1,508 | | | (46) | | | 340 | | | (4) | | | 1,848 | | | (50) | | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Income (loss) before income tax provision | | | 1,328 | | | 1,288 | | | 183 | | | (66) | | | 1,511 | | | 1,222 | | ||||||||||||||||||||||||
| |
| | |
| | |
| | |
| | |
| | |
| | | ||||||||||||||||||||||||
Income tax provision (benefits) | 341 | 289 | (24 | ) | (98 | ) | 317 | 191 | |
| 285 | |
| 270 | |
| 40 | |
| (13) | |
| 325 | |
| 257 | | ||||||||||||||||
Net income (loss) | $ | 728 | $ | 572 | $ | (57 | ) | $ | (206 | ) | $ | 671 | $ | 366 | |||||||||||||||||||||||||||||
Net income /(loss) | | $ | 1,043 | | $ | 1,018 | | $ | 143 | | $ | (53) | | $ | 1,186 | | $ | 965 | | ||||||||||||||||||||||||
Capital expenditures | $ | 1,282 | $ | 70 | $ | 48 | $ | 15 | $ | 1,330 | $ | 85 | | $ | — | | $ | 128 | | $ | (1) | | $ | 52 | | $ | (1) | | $ | 180 | |
Components
- 16 -
Item 2. Management’s Discussion and Analysis of other income include interest income on cashFinancial Condition and cash equivalents,Results of Operations Overview
During the six months ended June 30, 2021 and other amounts not directly related to the sale2020, approximately 79% and 87%, respectively, of the Company’s products. Other income is immaterial in relationship to the consolidated financial statements.
None.
- 15 -
During the three months ended September 30, 2017, approximately 13% of the Company’s revenues were derived from contracts with agenciesthe ATG sale of product to a small base of customers. During the six months ended June 30, 2021 and 2020, approximately 21% and 13%, respectively, of the U.S. Government or their prime contractors and their subcontractors. This compares to the approximately 10% for the same three months ended 2016. During the nine months ended September 30, 2017, approximately 11% of the Company’s consolidated revenues were derived from contracts with agenciesthe CPG sale of product to a large base of retail customers. There was a decrease in consolidated revenue in the U.S. Government or their prime contractors and their subcontractors. This compares to the approximately 9% for the same ninesix months ended 2016.The Company believes that government involvementJune 30, 2021 from 2020 of approximately $9,864,000. This is primary due to a decrease in military operations overseas will continue to haveshipments and price/mix at the ATG of approximately $9,998,000 partially offset by an impact onincrease in shipments and price/mix at the financial results in both the Advanced Technology and Consumer Products markets. While the Company is optimistic in relation to these potential opportunities, it recognizes that sales to the government are affected by defense budgets, the foreign policiesCPG of the U.S. and other nations, the level of military operations and other factors, and as such, it is difficult to predict the impact on future financial results.
approximately $134,000.
The Company’s commercial business is affected by such factors as uncertainties in today’s global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, the effects and threats of terrorism, market demand and acceptance both for the Company’s products and its customers’ products which incorporate Company made components.
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 replacement of older aircraft with more fuel 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/changed as a function of the Company’s customers’ final delivery determinations based on changes in the global economy and other factors.
In responseThe ATG and CPG continue to ongoing reductions in military spending, the CPG continuesrespond to diversify its revenue streams with a broaderU.S. 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.procurement requests for quotes. New product development is focused onactivities are ongoing along with the commercializationacquisition and development of products with applications that span government and civilian requirements to maximize demand or that open up new lines of business entirely.
product lines.
See also Note 10,11, Business Segments, of the accompanying consolidated financial statements for information concerning business segment operating results.
Business Environment
The COVID-19 pandemic has been, and continues to be, an unprecedented disruption in the economy and has negatively impacted, and may continue to negatively impact, the Company’s business and results. The COVID-19 pandemic and accompanying economic disruption have caused delays and declines in the placement of customer orders. Accordingly, the Company experienced declines in revenue for the most recently completed six months compared to the same period of the prior fiscal year. This trend may continue in the near-term and possibly longer, including, without limitation, if the pandemic increases in size and scope, its duration is prolonged or among other matters related thereto, governmental actions, including, without limitation, business restrictions are imposed. In response to the economic and business disruption, the Company has taken actions to reduce costs and spending across the organization. The Company continues to actively monitor the COVID-19 pandemic and may take further actions, including those that may alter business operations, if required by federal, state or local authorities or otherwise determined to be advisable by management.
The Company is focused on ensuring ample liquidity to meet its business needs. To that end, during April 2020, the Company received a loan under the Paycheck Protection Program (the “PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the aggregate principal amount of $4,000,000. See “Liquidity and Capital Resources” below for additional information regarding the Company’s credit facility and the PPP loan.
As of the date of this quarterly 10-Q, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. Factors arising from the COVID-19 pandemic that have impacted, or may negatively impact, the Company’s business and results, including sales and gross margin, include, but are not limited to: the Company’s ability to procure materials from suppliers or to meet delivery requirements and commitments to our customers; limitations on the ability of the Company’s employees to perform their work due to impacts caused by the pandemic or local, state, or federal orders that restrict the Company’s operations or the operations of its customers, or require that the employees be quarantined; limitations on the ability of carriers to deliver products to the Company’s facilities and customers; limitations on the ability or desire of the Company’s customers to conduct their business, purchase products and services and pay for purchases on a timely basis or at all; and decreased demand for products and services.
- 1617 -
The situation surrounding COVID-19 remains fluid. The Company is unable to determine or predict the nature, duration, or scope of the overall impact that the COVID-19 pandemic will have on the Company’s business, results of operations, liquidity, or financial condition, as such impact will depend on future developments, including the severity and duration of the pandemic and government and other actions taken in response thereto, all of which are highly uncertain. Further, even after the COVID-19 pandemic subsides, the Company may continue to experience adverse impacts to its business as a result of, among other things, any economic impact that has occurred or may occur in the future and changes in customer or supplier behavior.
In addition, the employee retention credit (“ERC”) is a refundable tax credit against certain employment taxes. The ERC was established under the CARES Act and amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “Relief Act”) and the American Rescue Plan Act of 2021 (“ARPA”). Under the CARES Act, a company needed a more than 50% decline in gross receipts in 2020, compared to the same quarter in 2019, in order to use the gross receipts test to be eligible for the credit. The Company determined it did not qualify for the ERC for 2020 as it did not satisfy the gross receipts test for any quarter in 2020.
The Relief Act provided for changes in the ERC for 2020 and provided an additional credit for the first and second quarters of 2021. The Relief Act revised the gross receipts test so a company that has had a more than 20% decline in gross receipts in 2021, compared to the same quarter in 2019, satisfies the gross receipts test. In addition, the Relief Act allows a company to elect to use the gross receipts from the immediately preceding quarter, and compare these prior quarter gross receipts to the same quarter in 2019, rather than the current quarter.
The Company evaluated its eligibility for the ERC for the first and second quarters of 2021. Under the aggregation rules of the Relief Act, the Company reviewed consolidated revenue when measuring the decline in gross receipts. All employees of the ATG and CPG are treated as a single employer for purposes of the ERC.
It was determined that the Company qualified for the ERC under both scenarios for the six and three month period ended June 30, 2021 and March 31, 2021. As a result, as of June 30, 2021 approximately $3,644,000 was recognized in other income for the ERC.
The ARPA extended the ERC to the third and fourth quarters of 2021. The Company will monitor for eligibility for the ERC for the remaining quarters of 2021.
- 18 -
Results of Operations
The following table compares the Company’s consolidated statements of income data for the ninesix months and three months ended SeptemberJune 30, 20172021 and 20162020 ($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) |
|
| |
|
|
| ||||||||
| | Six Months Ended June 30, | | | | | |
| ||||||||
| | 2021 | | 2020 | | 2021 vs 2020 |
| |||||||||
| | | | | % of | | | | | % of | | Dollar | | % Increase |
| |
|
| Dollars |
| Sales |
| Dollars |
| Sales |
| Change |
| (Decrease) |
| |||
Revenues: |
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Advanced Technology Group | | $ | 15,046 |
| 78.8 | % | $ | 25,044 |
| 86.5 | % | $ | (9,998) |
| (39.9) | % |
Consumer Products Group | |
| 4,042 |
| 21.2 | % |
| 3,908 |
| 13.5 | % |
| 134 |
| 3.4 | % |
| |
| 19,088 |
| 100.0 | % |
| 28,952 |
| 100.0 | % |
| (9,864) |
| (34.1) | % |
| | | | | | | | | | | | | | | | |
Cost of goods sold, inclusive of depreciation and amortization | |
| (16,223) |
| 85.0 | % |
| (21,220) |
| 73.3 | % |
| 4,997 |
| (23.5) | % |
Gross margin | |
| 2,865 |
| 15.0 | % |
| 7,732 |
| 26.7 | % |
| (4,867) |
| (62.9) | % |
Gross margin % | |
| 15.0 | % | | |
| 26.7 | % | | |
| |
|
| |
| | | | | | | | | | | | | | | | |
Selling, general and administrative | |
| (4,182) |
| 21.9 | % |
| (4,016) |
| 13.9 | % |
| (166) |
| 4.1 | % |
Total operating costs and expenses | |
| (20,405) |
| 106.9 | % |
| (25,236) |
| 87.2 | % |
| 4,831 |
| (19.1) | % |
Operating (loss)/income | |
| (1,317) |
| (6.9) | % |
| 3,716 |
| 12.8 | % |
| (5,033) |
| (135.4) | % |
| | | | | | | | | | | | | | | | |
Other income: employee retention credit (ERC) | |
| 3,644 |
| 19.1 | % |
| — |
| — | |
| 3,644 |
| — | |
Interest expense | |
| (127) |
| (0.7) | % |
| (92) |
| (0.3) | % |
| (35) |
| 38.0 | % |
Total other income/(expense) | |
| 3,517 |
| 18.4 | % |
| (92) |
| (0.3) | % |
| 3,609 |
| 3,922.8 | % |
| | | | | | | | | | | | | | | | |
Income before income tax provision | |
| 2,200 |
| 11.5 | % |
| 3,624 |
| 12.5 | % |
| (1,424) |
| (39.3) | % |
| | | | | | | | | | | | | | | | |
Income tax provision | |
| 473 |
| 2.5 | % |
| 761 |
| 2.6 | % |
| (288) |
| (37.8) | % |
Net income | | $ | 1,727 |
| 9.0 | % | $ | 2,863 |
| 9.9 | % | $ | (1,136) |
| (39.7) | % |
($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 | % |
| | | | | | | | | | | | | | | | |
|
| ($000's omitted except per share data) |
|
| |
|
|
| ||||||||
| | Three Months Ended June 30, | | | | | |
| ||||||||
| | 2021 | | 2020 | | 2021 vs 2020 |
| |||||||||
|
| | | | % of | | | | | % of | | Dollar | | % Increase |
| |
| | Dollars |
| Sales |
| Dollars |
| Sales |
| Change |
| (Decrease) | | |||
Revenues: | | | | | | | | | | | | | | | |
|
Advanced Technology Group | | $ | 7,823 |
| 78.0 | % | $ | 11,230 |
| 83.2 | % | $ | (3,407) |
| (30.3) | % |
Consumer Products Group | |
| 2,205 |
| 22.0 | % |
| 2,274 |
| 16.8 | % |
| (69) |
| (3.0) | % |
| |
| 10,028 |
| 100.0 | % |
| 13,504 |
| 100.0 | % |
| (3,476) |
| (25.7) | % |
| | | | | | | | | | | | | | | | |
Cost of goods sold, inclusive of depreciation and amortization | |
| (8,156) |
| 81.3 | % |
| (10,484) |
| 77.6 | % |
| 2,328 |
| (22.2) | % |
Gross margin | |
| 1,872 |
| (18.7) | % |
| 3,020 |
| (22.4) | % |
| (1,148) |
| (38.0) | % |
Gross margin % | |
| 18.7 | % | | |
| 22.4 | % |
| |
|
|
|
| |
| | | | | | | | | | | | | | | | |
Selling, general and administrative | |
| (2,209) |
| 22.0 | % |
| (1,748) |
| 12.9 | % |
| (461) |
| 26.4 | % |
Total operating costs and expenses | |
| (10,365) |
| 103.4 | % |
| (12,232) |
| 90.6 | % |
| 1,867 |
| (15.3) | % |
Operating (loss)/income | |
| (337) |
| (3.4) | % |
| 1,272 |
| 9.4 | % |
| (1,609) |
| (126.5) | % |
| | | | | | | | | | | | | | | | |
Other income: employee retention credit (ERC) | |
| 1,914 |
| 19.1 | % |
| — |
| — | % |
| 1,914 |
| — | |
Interest expense | |
| (66) |
| (0.7) | % |
| (50) |
| (0.4) | % |
| (16) |
| 32.0 | % |
Total other income/(expense) | |
| 1,848 |
| 18.4 | % |
| (50) |
| (0.4) | % |
| 1,898 |
| 3,796.0 | % |
| | | | | | | | | | | | | | | | |
Income before income tax provision | |
| 1,511 |
| 15.1 | % |
| 1,222 |
| 9.0 | % |
| 289 |
| 23.6 | % |
| | | | | | | | | | | | | | | | |
Income tax provision | |
| 325 |
| 3.2 | % |
| 257 |
| 1.9 | % |
| 68 |
| 26.5 | % |
Net income | | $ | 1,186 |
| 11.8 | % | $ | 965 |
| 7.1 | % | $ | 221 |
| 22.9 | % |
- 19 -
Revenue
The Company’s consolidated revenues from operations increaseddecreased approximately$1,336,000 $9,864,000 or4.7% (34.1)% for the ninesix month period ended SeptemberJune 30, 20172021 when compared to the same period in 2016. During this2020. This is due to a decrease in shipments offset by an increase in price/mix at the ATG of approximately $9,998,000 or (39.9)% offset by an increase in shipments and price/mix at the CPG of approximately $134,000 or 3.4%.
The decrease in revenue is attributable to a decrease in shipments at the ATG of approximately $10,717,000 partially offset by an increase in price/mix of units shipped of approximately $719,000. Additionally, there was an increase in shipments at the CPG of approximately $37,000 and an increase in price/mix of units shipped of approximately $97,000 for the six month period both ATG and CPG increased government shipments by approximately $941,000and commercial shipments by $395,000.
- 17 -
ended June 30, 2021 when compared to the same period in 2020.
The Company’s consolidated revenues from operations increaseddecreased approximately $1,860,000$3,476,000 or 19.7%(25.7)% for the three month period ended SeptemberJune 30, 20172021 when compared to the same period in 2016. During this period both2020. This is due to a decrease at the ATG and the CPG increased government shipments byof approximately $601,000$3,407,000 or (30.3)% and commercial shipments by $1,259,000.approximately $69,000 or (3.0)%, respectively.
Cost of Goods Sold
Cost of goods sold increased approximately$1,818,000 or 8.7% for the nine month period ended September 30, 2017 and increased approximately $993,000 or 14.1%The consolidated decrease for the three month period ended Septemberin June 30, 20172021 when compared to the same periods in 2016. Although the Company continues to experience labor inefficiencies due in part to the mix of product sold, new employee training and increased costs for employee benefits, the three month period shows improvement over the first half of 2017. The increase in cost of goods sold for the three month period ended SeptemberJune 30, 20172020 is attributable to a decrease in units shipped at the ATG of approximately $3,662,000 offset slightly by an increase in price/mix of units shipped of approximately $255,000. Additionally, there was a decrease in shipments at the CPG of approximately $112,000 and an increase of approximately $43,000 in price/mix of units shipped as compared to the same period ended June 30, 2020.
Gross Margin
The Company’s consolidated gross margins from operations decreased approximately $4,867,000 or (62.9)% for the six month period ended June 30, 2021 when compared to the same period in 2016 is primarily2020. The gross margins decreased at the ATG approximately $4,590,000 or (63.9)% and at the CPG approximately $277,000 or (50.5)%.
Gross margin decreased in the six month period due to an decrease in shipments at the ATG of approximately $1,891,000 and an increase in revenue for thatcosts per units shipped including the underutilization of production resources of approximately $2,699,000 as compared to the same period. The Company continues to pursue cost saving opportunitiesperiod in material procurements and operating efficiencies including capital investments and technical developments in updated and new equipment/machinery as well as investing2020.Additionally, gross margin decreased 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% for the ninesix month period ended September 30, 2017 and increaseddue to a slight increase in shipments at the CPG of approximately $422,000$14,000 offset by an increase in costs per units shipped of approximately $291,000 as compared to the same period in 2020.
The Company’s consolidated gross margins from operations decreased approximately $1,148,000 or 25.5%(38.0)% for the three month period ended SeptemberJune 30, 2017 when compared to the same periods in 2016. The increase in the SG&A expense 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. Trbovich from the date of death through December 31, 2018. Approximately 15% of SG&A expense is attributable to professional and legal services for the nine month period ended September 30, 2017 increasing from 9% of SG&A expense for the same period ended September 30, 2016. Such expenses increased 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, 20172021 when compared to the same period in 2016. Depreciation expense fluctuates2020. The gross margins decreased at the ATG approximately $1,155,000 or (42.2)% offset slightly by an increase at the CPG approximately $7,000 or 2.5%.
Gross margin decreased in the three month period due to variable estimated useful livesa decrease in shipments at the ATG of depreciable property (as identifiedapproximately $1,122,000 and an increase in Note 2, Business Descriptioncost per units shipped including the underutilization of production resources of approximately $33,000 as compared to the same period in 2020. This is partially offset by the CPG with a decrease in cost per units shipped of approximately $62,000 offset by a decrease in shipments of approximately $69,000 as compared to the same period in 2020.
Selling, General and Summary of Significant Accounting Policies, of the accompanying consolidated financial statements) as well as the amountAdministrative Expenses
Selling, general 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 consistentadministrative (SG&A) expenses increased approximately $166,000 or 4.1% for the nine and threesix month periodsperiod ended SeptemberJune 30, 20172021 when compared to the same period in 2016.2020. The increase is driven by the ATG due to higher legal and professional services fees of approximately $420,000 and an expense for bad debt in 2021 versus a reversal of bad debt expense for both ATG and CPG of approximately $211,000. This is partially offset by decrease in salary and wages for both companies of approximately $397,000. All other SG&A expenditures decreased approximately $68,000 for the six month period ended June 30, 2021 compared to the same period in 2020.
SG&A expenses increased approximately $461,000 or 26.4% for the three month period ended June 30, 2021 when compared to the same period in 2020. The increase is driven by the ATG due to higher legal and professional services fees of approximately $348,000 and a charge for bad debt in 2021 versus a reversal of bad debt expense for both ATG and CPG of approximately $249,000. This is partially offset by a net decrease in salary and wages at the ATG and CPG of approximately $210,000. All other SG&A expenditures increased approximately $74,000 for the three month period ended June 30, 2021 compared to the same period in 2020.
- 20 -
Other Income
The Company evaluated its eligibility for the ERC for the first and second quarter of 2021. Under the aggregation rules of the Relief Act, the Company reviewed consolidated revenue when measuring the decline in gross receipts. All employees of the ATG and CPG are treated as a single employer for purposes of the ERC.
It was determined that the Company qualified for the ERC for both the three month period ended June 30, 2021 and March 31, 2021. As a result, for the six month period ended June 30, 2021 the company recognized approximately $3,644,000 and for the three month period ended June 30, 2021 recognized approximately $1,914,000. The amounts were recorded in other income.
Operating (Loss)/Income
Income from operations decreased approximately $5,033,000 or (135.4)% when comparing the six month period ended June 30, 2021 to the same period in 2020 as operating income at the ATG was lower by approximately $4,791,000 and the CPG was lower by approximately $242,000. The consolidated decrease is primarily the result of decreases in revenue.
Income from operations decreased approximately $1,609,000 or (126.5)% when comparing the three month period ended June 30, 2021 to the same period in 2020 as operating income at the ATG was lower by approximately $1,514,000 and the CPG was lower by approximately $95,000. The consolidated decrease is primarily the result of decreases in revenue and increases in selling, general and administrative expenses.
Interest Expense
Interest expense increased by 38.0% and 32.0% in the six and three month periods ended June 30, 2021, respectively, when compared to the same period in 2020. This is primarily due to the equipment lease/note and usage of the line of credit for the ATG for the six and three month periods ended June 30, 2021 compared to the same period in 2020. See also Note 5, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.
- 18 -
Other Income
See Note 11, Other Income, for information on other income.
Income Taxes
The Company’sCompany's effective tax rate was approximately 29.2%21.5% and 31.0%21.0% for the ninethree and six month periods ended SeptemberJune 30, 20172021 and 2016,2020, respectively. The Company’s effective tax rate was approximately 32.1% and 34.2% for the three month periods ended September 30, 2017 and 2016, respectively. The effective tax rate for the nine month period ended September 30, 2017 includes approximately $19,000 of tax benefit resulting from the vesting of restricted stock awards. Without this tax benefit, the effective tax rate would be 30.9%. The effective tax rate 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 incomefor the ninesix month period ended SeptemberJune 30, 20172021 decreased approximately$826,000 and increased approximately $305,000 for the three month period ended September 30, 2017,when compared to the same periods in 2016. The decrease of net income for the nine month period is the result 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 $1,136,000 or (39.7)% when compared to the same period in 20162020. This decrease is primarily duethe result of a decrease in revenue at the ATG and a net increase in selling, general and administrative expenses. Net income for the three month period ended June 30, 2021 increased approximately $221,000 or 22.9% when compared to the same period in 2020. This increase is primarily the result of a decrease in revenue and an increase in revenues.
selling, general and administrative expenses at both business segments, offset by the inclusion of the employee retention credits for both business segments.
Liquidity and Capital Resources
The Company’s primary liquidity and capital expenditure 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 SeptemberJune 30, 2017,2021, the Company had working capital of approximately$18,722,000 $31,166,000 ($35,247,000 – June 2020) of which approximately$2,045,000 $9,640,000 ($7,140,000 – June 2020) was comprised of cashcash. The decrease in working capital is primarily attributable to a decrease in inventory at the ATG. The Company continues to focus on inventory management in light of this period of uncertainty with respect to short and cash equivalents.
long-term industry demand.
The Company generated approximately $739,000$3,866,000 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 ninesix month period ended SeptemberJune 30, 2017 includes2021 as compared to generating cash of approximately $1,476,000 during the same period in 2020. Cash was generated primarily through net income managingand adjustments to reconcile net income of approximately $2,505,000 and lower inventory and accrued payroll costs partiallyof approximately $2,118,000 offset by using cash primarily due to the timingnet usage of the collections of accounts receivable due to revenue increases. approximately $757,000 for all other accounts.
- 21 -
The Company’s primary use of cash in its financing and investing activities in the nine monthsthree month period ended SeptemberJune 30, 2017 included2021 are for building improvements of approximately $409,000$13,000 primarily for production requirements at the ATG.
The Company’s primary providing of currentcash in its financing activities in the six month period ended June 30, 2021 include proceeds from the line of credit of approximately $500,000 and proceeds from the equipment note of approximately $384,000, partially offset by approximately $774,000 of principal payments on long-term debt, approximately $203,000$177,000 of principal payments on equipment financing obligations and approximately $81,000 to satisfy statutory minimum withholding tax requirements for participants who elected this option as permitted under the purchaseapplicable equity plan.
The COVID-19 pandemic could impact our liquidity. Lower production schedules, possible inability of treasury shares, as well asour customers to make timely payments to us, and similar factors could lower cash generated from operations and adversely affect our financial position.
On March 20, 2020, the paymentCompany increased its line of credit from $4,000,000 to $6,000,000. As of July 31, 2020, the Company extended the line of credit to expire December 31, 2022. As of June 30, 2021, the interest rate is a rate per year equal to the bank’s prime rate or Libor plus 2.15%. In addition, the Company is required to pay a commitment fee of 0.25% on the unused portion of the dividend of approximately $376,000. The Company also expended approximately $1,901,000 for capital expenditures during the nine months ended September 30, 2017.
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.
There was $4,250,000 balance outstanding at June 30, 2021 and $3,750,000 balance at December 31, 2020.
The Company renewed a $2,000,000 line of credit available until June 20, 2018. There was no balance outstanding at September 30, 2017 and December 31, 2016.
The Company establishedhad an equipment lease line of creditloan facility in the amount of $1,000,000 available until June 28, 2018.July 9, 2021. This line was non-revolving and non-renewable. The leaseloan 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 linepricing in effect at the time of credit is sixty months.such funding. There was no balanceapproximately $819,000 outstanding at SeptemberJune 30, 2017.2021 and $534,000 outstanding as of December 31, 2020.
On April 21, 2020, the Company executed a promissory note (the “Note”) in the amount of $4,000,000 as part of the Paycheck Protection Program (the “PPP Loan”) administered by the Small Business Administration (the “SBA”) and authorized under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act”). The PPP Loan is being made through the Bank of America, NA (the “Lender”). The term of the PPP Loan is two years with an annual interest rate of 1.00%. Payments of principal and interest on the PPP Loan will be deferred until the SBA remits the loan forgiveness amount to the Lender. Payments on any unforgiven amounts will begin on the date on which loan forgiveness is determined.
- 19 -
At the time of application, the Company determined that the loan was necessary in order to secure the Company’s ability to meet its obligations in the face of potential disruptions in its business operations and the potential inability of its customers to pay their accounts when due. As of December 31, 2020, the Company incurred payroll costs and other eligible qualifying expenses within the 24-week covered period after receipt of the PPP loan, that the Company believes to be consistent with the terms of the PPP Loan. The Company submitted the PPP loan forgiveness application on August 4, 2021. The SBA has 90 days from the date of receipt to approve or reject the application. As of the date of this filing the Company has not received any determination of its application. No assurance can be given that we will obtain forgiveness of the PPP Loan in whole or in part.
The Company believes its cash generating capability and financial condition, together with available credit facilities will be adequate to meet our future operating, investing and financing 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.
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 Principal Executive Officer (“PEO”) 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 SeptemberJune 30, 2017.2021. Based upon that evaluation, the PEO 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 Company’s management, includingmaterial weakness in the PEO and CFO, as appropriate to allow timely decisions regarding required disclosure.Company's internal control over financial reporting reported in the Company's amended Annual Report on Form 10-K for the year ended December 31, 2020.
- 22 -
Changes in Internal Controls
DuringAs reported in the nine month periodCompany's amended Annual Report on Form 10-K for the year ended September 30, 2017,December 31, 2020, management identified a material weakness in the Company's internal control over financial reporting relating to the failure to monitor whether the components of internal control are present and functioning in accordance with the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 ("COSO"). The Company has begun its remediation process which includes the development of enhanced internal control review procedures and documentation standards aligned with the COSO components and principles, however, there werehave not been sufficient opportunities to conclude that the enhanced procedures and documentation is operating effectively. Except for the implementation of the remediation plan, there have 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.
- 2023 -
OTHER INFORMATION
Item 1. Legal Proceedings |
Except as set forth in Note 8, Litigation, there are no other legal proceedings which are material to the Company currently pending by or against the Company other than ordinary routine litigation incidental to the business which is not expected to have a material adverse effect onmaterially adversely affect the business or earnings of the Company.
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) | ||||||||||||
January - March | 15,991 | (2) | $ | 9.97 | - | 104,596 | ||||||||||
April - June | - | - | - | 104,596 | ||||||||||||
July | - | - | - | 104,596 | ||||||||||||
August | - | - | - | 104,596 | ||||||||||||
September | 3,926 | 9.05 | 3,926 | 100,670 | ||||||||||||
Total | 19,917 | $ | 9.79 | 3,926 | 100,670 |
| | | | | | | | | |
|
|
|
|
| |
| Total Number of |
|
|
| | | | | | | Shares Purchased as | | Maximum Number of |
| | | | | | | Part of Publicly | | Shares that may yet be |
| | Total Number of | | Weighted Average | | Announced Plans or | | Purchased under the | |
2021 Periods | | Shares Purchased |
| Price $ Paid Per Share | | Programs (1) | | Plans or Programs (1) | |
January - March |
| 9,920 | (2) | $ | 8.26 |
| — |
| 89,385 |
April |
| — |
|
| — |
| — |
| 89,385 |
May |
| — |
|
| — |
| — |
| 89,385 |
June |
| — |
| | — |
| — |
| 89,385 |
Total | | 9,920 | | $ | 8.26 | | — | | 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 June 30, 2021, 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 six month period ended June 30, 2021. |
(2) | Includes 9,920 shares withheld by the Company in January 2021 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. |
(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
As previously disclosed, on June 8, 2021, the Company's Board of Directors placed Kenneth D. Trbovich on a paid administrative leave from his positions as Chief Executive Officer and President of the Company pending an internal investigation. That investigation is ongoing as of the date of this filing. During Mr. Trbovich's absence, the responsibilities of the Chief Executive Officer and President of the Company will be carried out by other Company personnel, led by James C. Takacs, the Company's Chief Operating Officer.
- 24 -
Item 6. Exhibits
31.1 |
Not applicable
- 21 -
31.2 | |
32.1 | |
32.2 | |
101 | | The following materials from Servotronics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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 pertaining1934. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to the Company’s capital resources and profitability, the timing and amount of payment obligation relating to the arbitration award and the Company’s ability to pay these obligations.identify forward-looking statements. 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,appropriations; the duration and scope of the coronavirus (“COVID-19”) pandemic, actions governments, and businesses take in response to the COVID-19 pandemic, including mandatory business closures; the impact of the pandemic and actions taken on regional economies; the pace of recovery when the COVID-19 pandemic subsides; the vitality of the commercial aviation industry and its ability to purchase new aircraft,aircraft; the willingness and ability of the Company’s customers to fund long-term purchase programs,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.
.
- 2225 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 13, 2021
Date: November 13, 2017
SERVOTRONICS, INC. | |||
By: | /s/ | ||
James C. Takacs | |||
Principal Executive Officer | |||
By: | /s/ Lisa F. Bencel, Chief Financial Officer | ||
Lisa F. Bencel | |||
Chief Financial Officer |
- 2326 -