Servotronics(SVT) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's analysis of financial condition and operations, market risk disclosures, and internal controls Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, and cash flows, along with detailed notes explaining accounting policies, business segments, debt, and other financial disclosures for the periods ended September 30, 2022 and December 31, 2021 Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheets (in $000's): | Item | September 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------------- | :-------------------- | | Cash | $4,261 | $9,546 | | Total current assets | $35,694 | $38,315 | | Total Assets | $47,444 | $50,093 | | Total current liabilities | $6,612 | $4,248 | | Long-term debt | $326 | $4,750 | | Total Shareholders' Equity | $34,757 | $35,366 | Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income or loss over specific reporting periods Condensed Consolidated Statements of Operations (in $000's, except per share data): | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $10,991 | $10,915 | $33,389 | $30,003 | | Gross profit | $1,523 | $1,772 | $5,329 | $4,637 | | Operating loss | $(420) | $(2,839) | $(867) | $(4,156) | | Net (loss)/income | $(316) | $3,238 | $(801) | $4,965 | | Basic Net (loss)/income per share | $(0.13) | $1.34 | $(0.33) | $2.07 | | Diluted Net (loss)/income per share | $(0.13) | $1.34 | $(0.33) | $2.06 | Condensed Consolidated Statements of Comprehensive (Loss) Income This statement presents the net income or loss and other comprehensive income items, reflecting the total change in equity from non-owner sources Condensed Consolidated Statements of Comprehensive (Loss) Income (in $000's): | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net (loss)/income | $(316) | $3,238 | $(801) | $4,965 | | Retirement benefits adjustments, net of income taxes | $22 | $15 | $66 | $46 | | Total comprehensive (loss)/income | $(294) | $3,253 | $(735) | $5,011 | Condensed Consolidated Statement of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (in $000's): | Item | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $62 | $6,338 | | Net cash used by investing activities | $(887) | $(68) | | Net cash used by financing activities | $(4,460) | $(379) | | Net (decrease)/increase in cash | $(5,285) | $5,891 | | Cash at end of period | $4,261 | $11,826 | Notes to Condensed Consolidated Financial Statement This section provides detailed explanations and additional information supporting the condensed consolidated financial statements - The Company operates through two primary segments: the Advanced Technology Group (ATG), which designs, manufactures, and markets control components, and the Consumer Products Group (CPG), which designs, manufactures, and markets cutlery products[22][73] - Global economic challenges, including the COVID-19 pandemic, severe inflation, rising interest rates, and supply chain disruptions, continue to create uncertainty and volatility, potentially impacting customer orders, sales, and shipments[21][81][82] Inventories (in $000's): | Category | September 30, 2022 | December 31, 2021 | | :----------------------- | :------------------- | :-------------------- | | Raw material and common parts | $15,007 | $15,952 | | Work-in-process | $3,078 | $3,432 | | Finished goods | $2,398 | $2,490 | | Less inventory reserve | $(1,631) | $(1,742) | | Total inventories | $18,852 | $20,132 | - The Company's $6,000,000 line of credit was amended to extend availability to December 31, 2023, and replaced the Debt Service Coverage Ratio covenant with a Quarterly Minimum Cash Flow measurement through Q3 2022. A minimum liquidity of $9,000,000 (cash + line of credit availability) is also required[52][113][114] - As of September 30, 2022, there was no outstanding balance on the line of credit, compared to $4,250,000 at December 31, 2021. The Company expects to fail the Debt Service Coverage Ratio covenant for Q4 2022 but anticipates no adverse consequences due to no outstanding term loan/line of credit and expected Debt to Worth Ratio compliance[53][54][115] - The Company's Board authorized the purchase of up to 450,000 shares of common stock. As of September 30, 2022, 360,615 shares have been purchased, with 89,385 shares remaining available. No shares were purchased during the nine months ended September 30, 2022 or 2021[60][127] - The Company is involved in litigation, including an employee lawsuit seeking not less than $5,000,000 and a dispute with its former CEO regarding severance. Management does not consider the risk of loss probable for these matters and has not recognized any related liabilities[69][70] Segment Performance (Nine Months Ended September 30, in $000's): | Item | ATG 2022 | ATG 2021 | CPG 2022 | CPG 2021 | Consolidated 2022 | Consolidated 2021 | | :---------------------------------- | :------- | :------- | :------- | :------- | :---------------- | :---------------- | | Revenues from unaffiliated customers | $26,739 | $23,495 | $6,650 | $6,508 | $33,389 | $30,003 | | Gross profit | $3,896 | $4,281 | $1,433 | $356 | $5,329 | $4,637 | | Operating (loss)/income | $(994) | $(3,105) | $127 | $(1,051) | $(867) | $(4,156) | | Capital expenditures | $841 | $64 | $46 | $4 | $887 | $68 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition, analyzing key financial metrics, operational drivers, and liquidity for the three and nine months ended September 30, 2022, compared to the prior year. It highlights revenue growth, changes in profitability, and cash flow dynamics Overview This section provides a high-level summary of the company's financial performance and key operational highlights for the reporting period - Consolidated revenue increased by approximately $3,386,000 (11.3%) for the nine months ended September 30, 2022, primarily driven by price increases at ATG ($1,130,000) and CPG ($174,000), and increased unit shipments at ATG ($2,975,000)[77] - For the nine months ended September 30, 2022, ATG accounted for approximately 80% of consolidated revenues, while CPG contributed approximately 20%[77] - The ATG backlog remains strong, benefiting from the recovery of the commercial aircraft market, increased demand post-COVID, and the replacement of older, less fuel-efficient aircraft[79] Business Environment This section discusses the external factors and challenges influencing the company's operations and financial results - The Company continues to face uncertainties from the COVID-19 pandemic, geopolitical tensions, supply chain disruptions, and inflationary cost pressures, though the direct impact of COVID-19 on operations for the nine months ended September 30, 2022, has not been material[81][82][83] Results of Operations This section provides a detailed analysis of the company's revenue, gross profit, operating expenses, and net income for the reporting periods Consolidated Revenue Performance (in $000's): | Period | 2022 Revenue | 2021 Revenue | Dollar Change | % Change | | :----------------------------- | :----------- | :----------- | :------------ | :--------- | | Three months ended Sep 30 | $10,991 | $10,915 | $76 | 0.7% | | Nine months ended Sep 30 | $33,389 | $30,003 | $3,386 | 11.3% | Segment Revenue Performance (Nine Months Ended Sep 30, in $000's): | Segment | 2022 Revenue | 2021 Revenue | Dollar Change | % Change | | :-------------------- | :----------- | :----------- | :------------ | :--------- | | Advanced Technology Group | $26,739 | $23,495 | $3,244 | 13.8% | | Consumer Products Group | $6,650 | $6,508 | $142 | 2.2% | Consolidated Gross Profit Performance (in $000's): | Period | 2022 Gross Profit | 2021 Gross Profit | Dollar Change | % Change | | :----------------------------- | :---------------- | :---------------- | :------------ | :--------- | | Three months ended Sep 30 | $1,523 | $1,772 | $(249) | (14.1)% | | Nine months ended Sep 30 | $5,329 | $4,637 | $692 | 14.9% | Segment Gross Profit Performance (Nine Months Ended Sep 30, in $000's): | Segment | 2022 Gross Profit | 2021 Gross Profit | Dollar Change | % Change | | :-------------------- | :---------------- | :---------------- | :------------ | :--------- | | Advanced Technology Group | $3,896 | $4,281 | $(385) | (8.9)% | | Consumer Products Group | $1,433 | $356 | $1,077 | 302.5% | - ATG's gross profit decreased for the nine-month period due to a significant increase in operating costs ($1,377,000), primarily from increased compensation and benefits ($539,000), recruiting costs ($216,000), and underutilization of production resources ($650,000), despite favorable product mix and price increases[94] - CPG's gross profit increased significantly for the nine-month period due to favorable product mix ($526,000), price increases ($180,000), and a decrease in operating costs ($371,000), including improved utilization of production resources ($213,000) and lower freight costs ($229,000)[94] Selling, General and Administrative Expenses (SG&A) (in $000's): | Period | 2022 SG&A | 2021 SG&A | Dollar Change | % Change | | :----------------------------- | :---------- | :---------- | :------------ | :--------- | | Three months ended Sep 30 | $(1,943) | $(2,721) | $778 | 28.6% | | Nine months ended Sep 30 | $(6,196) | $(6,903) | $707 | 10.2% | Key Driver for SG&A Decrease (Nine Months Ended Sep 30, in $000's): | Item | 2022 | 2021 | Change | | :-------------------- | :--- | :--- | :----- | | ATG lower legal fees | N/A | N/A | $678 | | Other SG&A expenses | N/A | N/A | $29 | | Total Decrease | N/A | N/A | $707 | - Operating losses decreased significantly by $2,419,000 (85.2%) for the three-month period and $3,289,000 (79.1%) for the nine-month period ended September 30, 2022, compared to 2021, driven by improved gross profit and lower SG&A expenses[100] - Net (loss)/income decreased by $3,554,000 (109.8%) for the three-month period and $5,766,000 (108.1%) for the nine-month period ended September 30, 2022, primarily due to the absence of the Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) loan forgiveness recognized in the prior year[102][103][106] Liquidity and Capital Resources This section analyzes the company's ability to generate and manage cash, including sources and uses of funds, working capital, and debt Liquidity and Capital Resources (Nine Months Ended September 30, in $000's): | Item | 2022 | 2021 | | :-------------------------- | :--- | :--- | | Net Cash Flows from Operating Activities | $62 | $6,338 | | Net Cash Flows from Investing Activities | $(887) | $(68) | | Net Cash Flows from Financing Activities | $(4,460) | $(379) | | Working Capital | $29,082 | $34,636 | | Long-term Debt | $326 | $4,829 | | Liquidity (Cash, less debt, plus LOC available) | $9,695 | $5,770 | - Cash generated from operations significantly decreased to $62,000 for the nine months ended September 30, 2022, from $6,338,000 in the prior year, mainly due to a $5,766,000 decrease in net income and an increase in accounts receivable[108][109] - Investing activities used $887,000 in cash, primarily for ATG projects and facilities improvement, a substantial increase from $68,000 in the prior year[111] - Financing activities used $4,460,000, mainly for the repayment of the $4,250,000 line of credit and $210,000 in principal payments on equipment financing obligations[112] - The Company believes its cash generating capability and financial condition, along with available credit facilities, will be adequate to meet future operating and investing needs, with no plans to institute a cash dividend within the next year, focusing instead on R&D and human resources investment[118] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Servotronics, Inc. is not required to provide quantitative and qualitative disclosures about market risk Item 4. Controls and Procedures This section addresses the effectiveness of the Company's disclosure controls and procedures and changes in internal controls over financial reporting, noting a material weakness and ongoing remediation efforts Disclosure Controls and Procedures This section evaluates the effectiveness of the company's controls designed to ensure timely and accurate disclosure of financial and non-financial information - The Company's disclosure controls and procedures were deemed not effective as of September 30, 2022, due to a material weakness in internal control over financial reporting, as previously reported in the Form 10-K for December 31, 2021[120] Changes in Internal Controls This section describes any changes in the company's internal control over financial reporting that occurred during the reporting period - Remediation efforts for the identified material weakness are ongoing, including a comprehensive technology assessment and improvements in risk assessment and documentation over internal control monitoring[121] - Despite the material weakness, management believes the consolidated financial statements fairly present the Company's financial position, results of operations, and cash flows in conformity with GAAP[122] PART II. OTHER INFORMATION This section includes disclosures on legal proceedings, equity security sales, defaults, mine safety, and exhibits Item 1. Legal Proceedings This section refers to the detailed litigation disclosures in Note 8 of the financial statements and states that other legal matters are adequately covered by insurance or are not expected to materially impact the Company's business or earnings - The Company is subject to various claims and litigation, with management's opinion that pending legal matters are either adequately insured or not expected to materially adversely affect the business or earnings[125] Item 1A. Risk Factors This item is not applicable for the Company's filing Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's authorized share repurchase program, noting that no shares were purchased during the nine-month period ended September 30, 2022 - The Board of Directors authorized the purchase of up to 450,000 shares of common stock. As of September 30, 2022, 360,615 shares have been purchased, with 89,385 shares remaining available under the program. No shares were purchased during the nine months ended September 30, 2022[127] Item 3. Defaults Upon Senior Securities This item is not applicable for the Company's filing Item 4. Mine Safety Disclosures This item is not applicable for the Company's filing Item 5. Other Information This item is not applicable for the Company's filing Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including certifications from the CEO and CFO and XBRL formatted financial statements - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002, and XBRL formatted financial statements[134] Forward-Looking Statements This section provides a cautionary statement regarding forward-looking statements within the report, highlighting various risks and uncertainties that could cause actual results to differ materially from projections, including global economic conditions, government contracts, commercial aviation industry vitality, and market demand - Forward-looking statements are subject to numerous risks and uncertainties, including those related to the global economy, government contracts, the commercial aviation industry, customer funding, market demand, and general economic trends[133] - The Company derives a material portion of its revenues from contracts with U.S. Government agencies or their prime contractors, and its business is performed under fixed-price contracts, introducing specific risks[133] Signatures This section contains the official signatures of the Company's Chief Executive Officer and Chief Financial Officer, certifying the filing of the report pursuant to the Securities Exchange Act of 1934 - The report is duly signed on behalf of Servotronics, Inc. by William F. Farrell, Jr., Chief Executive Officer, and Lisa F. Bencel, Chief Financial Officer, as of November 14, 2022[136][137]