SERVOTRONICS INC /DE/ - Quarter Report: 2022 June (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

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 June 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-07109

SERVOTRONICS, INC.

(Exact name of registrant as specified in its charter)


Delaware	16-0837866
(State or other jurisdiction of incorporation or organization)	(I. R. S. Employer Identification No.)

1110 Maple Street

Elma, New York 14059

(Address of principal executive offices) (zip code)

(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.

Yes ☒ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☒ 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 company ☒ 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 ☐ No ☒

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 July 22, 2022
Common Stock, $.20 par value		2,498,697

Table of Contents

INDEX

		Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	a) Condensed Consolidated Balance Sheets, June 30, 2022 and December 31, 2021 (Audited)	3

	b) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021	4

	c) Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2022 and 2021	5

	d) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021	6

	e) Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Mine Safety Disclosures	28

Item 5.	Other Information	28

Item 6.	Exhibits	29

Forward-Looking Statements		29

Signatures		30

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

($000’s omitted except share and per share data)


	June 30,		December 31,
	2022		2021
	(Unaudited)		(Audited)
Current assets:
Cash	$	5,108	$	9,546
Accounts receivable, net		10,139		7,198
Inventories, net		18,940		20,132
Prepaid income taxes		112		792
Other current assets		1,168		647
Total current assets		35,467		38,315

Property, plant and equipment, net		10,355		10,557

Deferred income taxes		884		900

Other non-current assets		316		321

Total Assets	$	47,022	$	50,093

Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt and finance leases		255		276
Accounts payable		2,717		663
Accrued employee compensation and benefits costs		1,586		1,759
Current portion of post retirement obligation		136		136
Other accrued liabilities		1,225		1,414
Total current liabilities		5,919		4,248
Long-term debt		381		4,750
Post retirement obligation		5,730		5,729

Shareholders’ equity:
Common stock, par value $0.20; authorized 4,000,000 shares; issued 2,614,506 shares; outstanding 2,498,697 (2,491,667 - 2021) shares		523		523
Capital in excess of par value		14,509		14,500
Retained earnings		25,373		25,858
Accumulated other comprehensive loss		(3,864)		(3,908)
Employee stock ownership trust commitment		(258)		(258)
Treasury stock, at cost 115,809 (122,839 - 2021) shares		(1,291)		(1,349)
Total shareholders’ equity		34,992		35,366

Total Liabilities and Shareholders’ Equity	$	47,022	$	50,093

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($000’s omitted except per share data)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021

Revenue	$	11,230	$	10,028	$	22,398	$	19,088

Costs of goods sold, inclusive of depreciation and amortization		10,062		8,156		18,592		16,223
Gross margin		1,168		1,872		3,806		2,865

Operating Expenses:
Selling, general and administrative		2,071		2,209		4,253		4,182
Total operating costs and expenses		12,133		10,365		22,845		20,405
Operating loss		(903)		(337)		(447)		(1,317)

Other (expense)/income:
Other income: employee retention credit (ERC)		—		1,914		—		3,644
Interest expense		(74)		(66)		(144)		(127)
Gain on sale of equipment		—		—		26		—
Total other (expense)/income, net		(74)		1,848		(118)		3,517

(Loss)/income before income taxes		(977)		1,511		(565)		2,200

Income tax (benefit)/provision		(167)		325		(80)		473

Net (loss)/income	$	(810)	$	1,186	$	(485)	$	1,727

Income per share:
Basic
Net (loss)/income per share	$	(0.33)	$	0.49	$	(0.20)	$	0.72

Diluted
Net (loss)/income per share	$	(0.33)	$	0.49	$	(0.20)	$	0.72

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

($000’s omitted)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021

Net (loss)/income	$	(810)	$	1,186	$	(485)	$	1,727

Other comprehensive income items:
Actuarial gains		29		20		56		39
Income tax expense on actuarial losses		(6)		(4)		(12)		(8)
Other comprehensive income:
Retirement benefits adjustments, net of income taxes		23		16		44		31

Total comprehensive (loss)/income	$	(787)	$	1,202	$	(441)	$	1,758

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($000’s omitted)

(Unaudited)


	Six Months Ended
	June 30,
	2022		2021
Cash flows related to operating activities:
Net (loss)/income	$	(485)	$	1,727
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
Depreciation and amortization		622		714
Stock based compensation		67		56
Increase in allowance doubtful accounts		—		9
Decrease in inventory reserve		(79)		(19)
(Decrease)/increase in warranty reserve		(15)		10
Gain on sale of equipment		(26)		—
Change in assets and liabilities:
Accounts receivable		(2,941)		(272)
Other receivables - ERC		—		(999)
Inventories		1,271		2,118
Prepaid income taxes		680		285
Other current assets		(521)		(361)
Accounts payable		2,054		(264)
Accrued employee compensation and benefit costs		(173)		559
Post retirement obligations		61		57
Other accrued liabilities		(173)		246

Net cash provided by operating activities		342		3,866

Cash flows related to investing activities:
Capital expenditures - property, plant and equipment		(428)		(13)
Proceeds from sale of assets		38		—

Net cash used by investing activities		(390)		(13)

Cash flows related to financing activities:
Principal payments on long-term debt		(4,250)		(774)
Principal payments on equipment financing lease obligations		(140)		(177)
Proceeds from equipment note and equipment financing lease obligations		—		384
Proceeds from line of credit		—		500
Purchase of treasury shares		—		(81)

Net cash used by financing activities		(4,390)		(148)

Net (decrease)/increase in cash		(4,438)		3,705

Cash at beginning of period		9,546		5,935

Cash at end of period	$	5,108	$	9,640

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (“consolidated financial statements”) have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

The accompanying condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and related Notes to such statements included in the Annual Report on Form 10-K for the year ended December 31, 2021 that was previously filed by the Company.

COVID-19 Impacts on Our Business

On March 11, 2020, the World Health Organization declared the outbreak of the coronavirus a global pandemic. COVID-19 resulted in the disruption of our operations due to the push-out of orders by our customers, elevated safety standards to keep our employees safe, and supply chain challenges. We continue to maintain the health and safety of our employees while meeting the needs of our customers and securing the financial well-being of the Company. All of our operations and production activities have remained operational. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation” for more information related to COVID-19.

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

The Company considers cash to include all currency and coins owned by the Company as well as all deposits in the bank including checking accounts and 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 $131,000 at June 30, 2022 and December 31, 2021. The Company does not accrue interest on past due receivables.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

Revenues are recognized at the time of shipment of goods, transfer of title and customer acceptance, as required. Our revenue transactions generally consist of a 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.

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. Shipping and handling activities that occur after the customer obtains control of the promised goods are considered fulfillment activities.

The timing of satisfaction of our performance obligations does not significantly vary from the typical timing of payment. The Company generally receives payment for these contracts within the payment terms negotiated and agreed upon by each customer contract.

Warranty and repair obligations are assessed on all returns. Revenue is not recorded on any warranty returns. The Company warrants its products against design, materials and workmanship based on an average of twenty-seven months. The Company determines warranty reserves needed based on actual average costs of warranty units shipped and current facts and circumstances. As of June 30, 2022 and December 31, 2021 under the guidance of ASC460 the Company has recorded a warranty reserve of approximately $496,000 and $511,000, respectively. This amount is reflected in other accrued expenses in the accompanying balance sheet. Revenue is recognized on repair returns, covered under a customer contract, at the contractual price upon shipment to the customer.

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 two years are applied to the gross value of the inventory through a reserve of approximately $1,663,000 and $1,742,000 at June 30, 2022 and December 31, 2021, respectively. Pre-production and start-up costs are expensed as incurred.

The purchase of suppliers’ minimum economic quantities of material such as steel, etc. may result in a purchase of quantities exceeding one year of customer requirements. Also, in order to maintain a reasonable and/or agreed to lead time, certain larger quantities of other product support items may have to be purchased and may result in over one year’s supply.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 right-of-use (“ROU”) assets accounted for as finance leases. The estimated useful lives of depreciable properties are generally as follows:


Buildings and improvements		5-40 years
Machinery and equipment		5-20 years
Tooling		3‑5 years

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities, as well as operating loss and credit carryforwards. The Company and its subsidiaries file a consolidated federal income tax return, combined New York, Texas, California and Connecticut state income tax returns and a separate Arkansas state income tax return.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company did not have any accrued interest or penalties included in its consolidated balance sheets at June 30, 2022 or December 31, 2021, and did not recognize any interest and/or penalties in its consolidated statements of operations during the three and six months ended June 30, 2022 and 2021. The Company did not have any material uncertain tax positions or unrecognized tax benefits or obligations as of June 30, 2022 and December 31, 2021. The 2018 through 2021 federal and state tax returns remain subject to examination.

Supplemental Cash Flow Information

There were income tax refunds received of approximately $811,000 and $0 for the six month periods ended June 30, 2022 and 2021, respectively. Income tax paid amounted to approximately $50,000 and $180,000 for the six month periods ended June 30, 2022 and 2021, respectively. Interest paid during the six month periods ended June 30, 2022 and 2021 amounted to approximately $66,000 and $73,000, 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 June 30, 2022 and December 31, 2021.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 to classifications adopted in the current period.

Research and Development Costs

Research and development costs are expensed as incurred.

Concentration of Credit Risks

Financial instruments that potentially subject the Company to concentration of credit risks principally consist of cash accounts in financial institutions. Although the accounts exceed the federally insured deposit amount, management assesses the risk of nonperformance by the financial institutions to be low.

Fair Value of Financial Instruments

The carrying amount of cash, 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 Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which creates a new credit impairment standard for financial assets measured at amortized cost and available-for-sale debt securities. The ASU requires financial assets measured at amortized cost (including loans, trade receivables and held-to-maturity debt securities) to be presented at the net amount expected to be collected, through an allowance for credit losses that are expected to occur over the remaining life of the asset, rather than incurred losses. The measurement of credit losses for newly recognized financial assets (other than certain purchased assets) and subsequent changes in the allowance for credit losses are recorded in the statement of income as the amounts expected to be collected change. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. ASU 2016-13 will be adopted by the Company as of January 1, 2023. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements and does not expect the impact to be significant.

3. Inventories


	June 30,		December 31,
	2022		2021

	($000’s omitted)
Raw material and common parts	$	14,256	$	15,952
Work-in-process		3,841		3,432
Finished goods		2,506		2,490
		20,603		21,874
Less inventory reserve		(1,663)		(1,742)
Total inventories	$	18,940	$	20,132

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. Property, Plant and Equipment


	June 30,		December 31,
	2022		2021

	($000’s omitted)
Land	$	7	$	7
Buildings		11,409		11,363
Machinery, equipment and tooling		20,620		20,689
Construction in progress		796		414
		32,832		32,473
Less accumulated depreciation and amortization		(22,477)		(21,916)
Total property, plant and equipment	$	10,355	$	10,557

Depreciation and amortization expense amounted to approximately $309,000 and $358,000 for the three months ended June 30, 2022 and 2021, respectively. Amortization expense primarily related to ROU assets amounted to approximately $8,000 and $17,000 for the three months ended June 30, 2022 and 2021, respectively. Depreciation and amortization expense amounted to approximately $622,000 and $714,000 for the six months ended June 30, 2022 and 2021, respectively. Amortization expense, primarily related to ROU assets, amounted to approximately $16,000 and $34,000 for the six months ended June 30, 2022 and 2021, respectively. The Company maintains property and casualty insurance in amounts adequate for the risk and nature of its assets and operations and which are generally customary in its industry.

As of June 30, 2022, there is approximately $796,000 ($414,000 – December 31, 2021) of construction in progress (CIP) included in property, plant and equipment all of which is related to capital projects. There is approximately $420,000 for building improvements ($110,000 - December 2021), $357,000 in CIP for machinery & equipment ($304,000 – December 2021 ) and $19,000 for computer software and equipment ($0 – December 2021) primarily related to the Advanced Technology Group.

5. Long-Term Debt


	June 30,		December 31,
	2022		2021

	($000’s omitted)

Line of credit payable to a financial institution; Interest rate is the BSBY Daily Floating Rate (Interest rate 2.58943% as of June 30, 2022) (A)	$	—	$	4,250

Equipment note obligations; Interest rate fixed for term of each funding based upon the Lender’s lease pricing at time of funding. (Interest rate/factor 1.795530% - 1.835015% as of June 30, 2022)(B)		602		712

Equipment financing lease obligations; Interest rate fixed for term of each funding based upon the Lender’s lease pricing at time of funding. (Interest rate/ factor 1.822758% - 1.869304% at time of funding)(C)		34		64
		636		5,026
Less current portion		(255)		(276)
Long term debt	$	381	$	4,750

A.)

The Company has a $6,000,000 line of credit. The interest rate is a rate per year equal to the sum (i) the greater of the Bloomberg’s Short-term Bank Yield (BSBY) Daily Floating Rate or the Index Floor, plus (ii) 1.65 percentage point(s). For purpose of this paragraph “Index Floor” means 0.5%. In addition, the Company is required to pay a commitment fee of 0.25% on the unused portion of the line of credit. The line of credit expires December 31, 2023.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On January 11, 2022, the Company executed an amendment to the loan agreement, which extended the line of credit availability period from December 31, 2022 to December 31, 2023. The amended agreement suspended the Debt Service Coverage Ratio loan covenant up through and including the third quarter of 2022. A Quarterly Minimum Cash Flow measurement loan covenant replaced the Debt Service Coverage Ratio loan covenant. Minimum Cash Flow means net income, plus depreciation, depletion, and amortization expense, plus interest expense, plus non-cash expense related to the Servotronics, Inc. Employee Stock Ownership Plan, plus non-cash stock and stock option transactions. Also, the amended agreement requires the Company to maintain a minimum liquidity, defined as cash on hand plus line of credit availability of at least $9,000,000. At June 30, 2022 and December 31, 2021 the Company was in compliance with our loan covenants.

Although the Company meets the current covenant requirements as of June 30, 2022, it is probable that the Company will fail to meet the Quarterly Minimum Cash Flow covenant requirement as of September 30, 2022. As the Company has no term loan or line of credit outstanding balances as of June 30, 2022 and the Minimum Liquidity Covenant is not expected to fail at September 30, 2022, the Company does not anticipate adverse consequences of its probable failure to satisfy future covenants.

The line of credit is secured by all personal property of the Company with the exception of certain equipment that was purchased from proceeds of government grants. There was approximately $0 and $4,250,000 outstanding at June 30, 2022 and December 31, 2021, respectively.

B.)

The Company had an equipment loan facility in the amount of $1,000,000 available until July 9, 2021. This line was non-revolving and non-renewable. The loan term for the equipment covered by the agreement is 60 months. Monthly payments are fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding. There was approximately $602,000 outstanding at June 30, 2022 and $712,000 balance outstanding at December 31, 2021.

C.)

The Company had a lease line of credit for equipment financing in the amount of $1,000,000 available until June 28, 2018. This line was non-revolving and non-renewable. The lease term for equipment covered by the lease line of credit is 60 months. Monthly payments are fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding. There was approximately $34,000 outstanding at June 30, 2022 and $64,000 at December 31, 2021.

Principal maturities of long-term debt are as follows: 2022 - $136,000; 2023 - $231,000; 2024 - $182,000; 2025 - $77,000; and 2026 - $10,000. Remaining principal payments and interest payments for the capital note and capital equipment financing lease obligations for each of the next five years:


	June 30,		December 31,
Year	2022		2021

	($000’s omitted)

2022	$	154	$	296
2023		246		246
2024		192		192
2025		83		83
2026		11		11
Total principal and interest payments		686		828
Less amount representing interest		(50)		(52)
Present value of net minimum lease payments		636		776
Less current portion		(255)		(276)
Long-term principle payments	$	381	$	500

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Postretirement Benefit Plan

The Company provides certain postretirement benefits for two former executives of the Company (the Plan). Under the Plan, the Company pays the annual cost of health insurance coverage and provides life insurance at the same level of coverage provided to the former employee at the time of termination of employment. The Plan also provides a benefit to reimburse the participants for certain out-of-pocket medical or health related expenses. The participant’s benefits under the Plan cease upon the death of the former executive. The Plan is unfunded and the actuarially determined future accumulated postretirement benefit obligation at June 30, 2022 and December 31, 2021 was approximately $5,866,000 and $5,865,000, respectively and has been accrued and reflected in Post Retirement Obligation in the accompanying consolidated balance sheets.

Benefit costs for the three months ended June 30, 2022 and 2021 totaled $69,000 and $46,000, respectively. Benefit costs for the six months ended June 30, 2022 and 2021 totaled $138,000 and $92,000, respectively.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Shareholders’ Equity


	Six-month Period Ended June 30, 2022
			Accumulated
			Other				Capital in						Total
	Retained		Comprehensive				excess of				Treasury		shareholders’
	Earnings		Income		Common Stock		par value		ESOT		stock		equity

December 31, 2021	$	25,858	$	(3,908)	$	523	$	14,500	$	(258)	$	(1,349)	$	35,366

Retirement benefits adjustment		—		22		—		—		—		—		22
Stock based compensation		—		—		—		2		—		23		25
Net Income		325		—		—		—		—		—		325

March 31, 2022	$	26,183	$	(3,886)	$	523	$	14,502	$	(258)	$	(1,326)	$	35,738

Retirement benefits adjustment		—		22		—		—		—		—		22
Stock based compensation		—		—		—		7		—		35		42
Net Loss		(810)		—		—		—		—		—		(810)

June 30, 2022	$	25,373	$	(3,864)	$	523	$	14,509	$	(258)	$	(1,291)	$	34,992


	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 benefits adjustment		—		15		—		—		—		—		15
Stock based compensation		—		—		—		11		—		20		31
Purchase of treasury shares		—		—		—		—		—		(81)		(81)
Net Income		541		—		—		—		—		—		541

March 31, 2021	$	22,344	$	(1,341)	$	523	$	14,492	$	(359)	$	(1,416)	$	34,243

Retirement benefits adjustment		—		16		—		—		—		—		16
Stock based compensation		—		—		—		5		—		20		25
Net Income		1,186		—		—		—		—		—		1,186

June 30, 2021	$	23,530	$	(1,325)	$	523	$	14,497	$	(359)	$	(1,396)	$	35,470

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, 2022, the Company has purchased 360,615 shares and there remains 89,385 shares available to purchase under this program. There were no shares purchased by the Company during the six month periods ended June 30, 2022 and 2021, respectively.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On January 1, 2021, 25,250 shares of restricted stock vested of which 9,920 shares were withheld by the Company for approximately $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. 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 Company, measured based on the grant date fair value, will be recognized over the requisite service period. An aggregate of 13,160 restricted shares were issued on May 14, 2021 with a grant date fair value of $100,000.

Included in six months ended June 30, 2022 and June 30, 2021 is approximately $67,000 and $50,000, respectively, of stock-based compensation expense related to the restrictive share awards.


		Weighted Average
		Grant Date Fair
	Shares	Value
Restricted Share Activity:
Unvested at December 31, 2021	6,576	$	7.60

Granted	7,030	$	11.04
Vested	6,812	$	7.83
Unvested at June 30, 2022	6,794	$	11.04

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,
	2022		2021		2022		2021

	($000’s omitted except per share data)
Net Income (loss)/income	$	(810)	$	1,186	$	(485)	$	1,727
Weighted average common shares outstanding (basic)		2,432		2,402		2,435		2,398
Unvested restricted stock		7		13		7		13
Weighted average common shares outstanding (diluted)		2,439		2,415		2,442		2,411
Basic
Net (loss)/income per share	$	(0.33)	$	0.49	$	(0.20)	$	0.72
Diluted
Net (loss)/income per share	$	(0.33)	$	0.49	$	(0.20)	$	0.72

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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. On January 13, 2022, the Defendants’ motion to dismiss was granted, in part, and denied, in part. 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, no loss has been recognized in the accompanying financials statements related to this litigation. The Company intends to vigorously defend against this litigation.

On December 21, 2021, the Company’s former Chief Executive Officer (“Former CEO”) delivered his Notice of Termination and alleged that the Company breached the terms of the Employment Agreement between the Company and the Former CEO by, among others, placing the Former CEO on paid administrative leave in June 2021 pending an internal investigation. On December 22, 2021, the Board of Directors accepted the Former CEO’s resignation from the Company but rejected his request to treat his resignation as resignation for good reason under Paragraph 10 of his Employment Agreement. The Board also determined, based on the findings of its investigation that the Former CEO committed willful malfeasance in violation of his Employment Agreement, and that such willful malfeasance would have justified termination of employment pursuant to Paragraph 9 of the Employment Agreement, but for his earlier resignation. The Former CEO claims that he is entitled to a severance payment equal to 2.99 times his average annual compensation as set forth in the Employment Agreement, plus the reimbursement of certain expenses and the value of any lost benefits. As noted above, the Board of Directors rejected the Former CEO’s claim that the Company breached the Employment Agreement. Accordingly, the Company is classifying the Former CEO’s termination as a voluntary resignation for which no severance is due. The Employment Agreement provides that disputes arising thereunder shall be settled by arbitration. To date, neither party has commenced an arbitration proceeding with respect to these matters. Based on the information known by the Company as of the date of this filing, if a claim is ultimately asserted, the Company does not consider the risk of loss to be probable and is unable to reasonably or accurately estimate the likelihood and amount of any liability that may be realized with respect to this matter.

There are no other legal proceedings currently pending by or against the Company other than litigation incidental to the business which is not expected to have a material adverse effect on the business or earnings of the Company.

9. Related Party Transactions

The Company paid legal fees and disbursements of approximately $33,000 and $25,000 in the three month periods ended June 30, 2022 and 2021, respectively, for services provided by a law firm that is owned by a member of the Company’s Board of Directors. Legal fees paid to that firm for the six month periods ended June 30, 2022 and 2021 amounted to approximately $54,000 and $44,000, respectively. Additionally, the Company had accrued unbilled legal fees at June 30, 2022 and 2021 of approximately $6,000 and $20,000, respectively, with this firm.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. Business Segments

The Company operates in two business segments, Advanced Technology Group (“ATG”) and Consumer Products Group (“CPG”). The Company’s reportable segments are strategic business units that offer different products and services. The segments are composed of separate corporations and are managed separately. Operations in ATG primarily involve the design, manufacture, and marketing of servo-control components (i.e., torque motors, control valves, actuators, etc.) for government, commercial and industrial applications. CPG’s operations involve the design, manufacture and marketing of a variety of cutlery products for use by consumers and government agencies. The Company derives its primary sales revenue from domestic customers, although a portion of finished products are for foreign end use.

As of June 30, 2022, the Company had identifiable assets of approximately $47,022,000 ($50,093,000 – December 31, 2021) of which approximately $37,168,000 ($40,871,000 – December 31, 2021) was for ATG and approximately $9,854,000 ($9,222,000 – December 31, 2021) was for CPG.

Information regarding the Company’s operations in these segments is summarized as follows:


	($000’s omitted except per share data)
	ATG						CPG						Consolidated
	Three Months Ended						Three Months Ended						Three Months Ended
	June						June						June
	2022			2021			2022			2021			2022			2021
Revenues from unaffiliated customers	$	8,748		$	7,823		$	2,482		$	2,205		$	11,230		$	10,028

Cost of goods sold, inclusive of depreciation and amortization		(8,055)			(6,242)			(2,007)			(1,914)			(10,062)			(8,156)
Gross margin		693			1,581			475			291			1,168			1,872
Gross margin %		7.9	%		20.2	%		19.1	%		13.2	%		10.4	%		18.7	%

Selling, general and administrative		(1,575)			(1,761)			(496)			(448)			(2,071)			(2,209)
Total operating costs and expenses		(9,630)			(8,003)			(2,503)			(2,362)			(12,133)			(10,365)
Operating loss		(882)			(180)			(21)			(157)			(903)			(337)

Other income: employee retention credit (ERC)		—			1,573			—			341			—			1,914
Interest expense		(74)			(65)			—			(1)			(74)			(66)
Total other (expense)/income, net		(74)			1,508			—			340			(74)			1,848

(Loss)/income before income taxes		(956)			1,328			(21)			183			(977)			1,511

Income tax (benefit)/provision		(173)			285			6			40			(167)			325
Net (loss)/income	$	(783)		$	1,043		$	(27)		$	143		$	(810)		$	1,186
Capital expenditures, net	$	313		$	—		$	—		$	(1)		$	313		$	(1)

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	($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,
	2022			2021			2022			2021			2022			2021
Revenues from unaffiliated customers	$	17,916		$	15,046		$	4,482		$	4,042		$	22,398		$	19,088

Cost of goods sold, inclusive of depreciation and amortization		(14,870)			(12,452)			(3,722)			(3,771)			(18,592)			(16,223)
Gross margin		3,046			2,594			760			271			3,806			2,865
Gross margin %		17.0	%		17.2	%		17.0	%		6.7	%		17.0	%		15.0	%

Selling, general and administrative		(3,349)			(3,346)			(904)			(836)			(4,253)			(4,182)
Total operating costs and expenses		(18,219)			(15,798)			(4,626)			(4,607)			(22,845)			(20,405)
Operating loss		(303)			(752)			(144)			(565)			(447)			(1,317)

Other income: employee retention credit (ERC)		—			2,986			—			658			—			3,644
Interest expense		(144)			(125)			—			(2)			(144)			(127)
Gain on sale of equipment		26			—			—			—			26			—
Total other (expense)/income, net		(118)			2,861			—			656			(118)			3,517

(Loss) income before income taxes		(421)			2,109			(144)			91			(565)			2,200

Income tax (benefit)/provision		(60)			453			(20)			20			(80)			473
Net (loss)/income	$	(361)		$	1,656		$	(124)		$	71		$	(485)		$	1,727
Capital expenditures, net	$	390		$	10		$	—		$	3		$	390		$	13

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview

During the six months ended June 30, 2022 and 2021, approximately 80% and 79%, respectively, of our consolidated revenues were derived from the ATG sale of product to a small base of customers. During the six months ended June 30, 2022 and 2021, approximately 20% and 21%, respectively, of our consolidated revenues were derived from the CPG sale of product to a large base of retail customers. There was an increase in consolidated revenue in the six months ended June 30, 2022 from 2021 of approximately $3,310,000, or 17.3%. This is primarily due to an increase in price at both the ATG of approximately $391,000 and the CPG of approximately $379,000, an increase in the number of units shipped at the ATG of approximately $2,479,000 and a favorable product mix shipped at the CPG of approximately $61,000.

Our commercial business is affected by such factors as uncertainties in today’s global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, the effects and threats of terrorism, and market demand.

The ATG engages its business development efforts in its primary markets and is broadening its activities to include new domestic and foreign markets that are consistent with its core competencies. We believe our business remains particularly well positioned in the strong commercial aircraft market driven by the recovery of business with increased demand post COVID, the replacement of older aircraft with more fuel 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 or changed as a function of our customers’ final delivery determinations.

See also Note 10, Business Segments, of the accompanying consolidated financial statements for information concerning business segment operating results.

Business Environment

There still remains uncertainty resulting from the COVID-19 pandemic. The ultimate impact depends on the severity and duration of the pandemic, including emergence and spread of new COVID-19 variants and resurgences and actions taken by government authorities and other third parties in response to the pandemic.

U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions. Disruptions in normal operating levels continue to create supply chain interruptions, volatility in commodity prices, credit and capital markets, and inflationary cost pressures within our end-markets.

We continue to actively monitor the impact of the supply chain constraints, and anticipate the inflationary environment will continue throughout the remainder of 2022. We are focused on ensuring ample liquidity to meet our business needs. For the six months ended June 30, 2022, the impacts of COVID-19 have not been material.

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Results of Operations

The following table compares our consolidated statements of operations data for the three months and six months ended June 30, 2022 and 2021 ($000’s omitted):


	($000’s omitted except per share data)
	Three Months Ended June 30
	2022					2021					2022 vs 2021
				% of					% of		Dollar		% Favorable/
	Dollars			Sales		Dollars			Sales		Change		(Unfavorable)
Revenues:
Advanced Technology Group	$	8,748		77.9	%	$	7,823		78.0	%	$	925	11.8	%
Consumer Products Group		2,482		22.1	%		2,205		22.0	%		277	12.6	%
		11,230		100.0	%		10,028		100.0	%		1,202	12.0	%

Cost of goods sold, inclusive of depreciation and amortization		(10,062)		89.6	%		(8,156)		81.3	%		(1,906)	(23.4)	%
Gross margin		1,168		10.4	%		1,872		18.7	%		(704)	(37.6)	%
Gross margin %		10.4	%				18.7	%

Selling, general and administrative		(2,071)		18.4	%		(2,209)		22.0	%		138	6.2	%
Total operating costs and expenses		(12,133)		108.0	%		(10,365)		103.4	%		(1,768)	(17.1)	%
Operating (loss)/income		(903)		8.0	%		(337)		3.4	%		(566)	(168.0)	%

Other income: employee retention credit (ERC)		—		0.0	%		1,914		(19.1)	%		(1,914)	(100.0)	%
Interest expense		(74)		(0.7)	%		(66)		(0.7)	%		(8)	(12.1)	%
Total other (expense)/income, net		(74)		(0.7)	%		1,848		(18.4)	%		(1,922)	(104.0)	%

(Loss) income before income taxes		(977)		(8.7)	%		1,511		15.1	%		(2,488)	(164.7)	%

Income tax (benefit) provision		(167)		(0.7)	%		325		(5.1)	%		(492)	(151.4)	%
Net (loss)/income	$	(810)		(7.2)	%	$	1,186		11.8	%	$	(1,996)	(168.3)	%

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Table of Contents


	($000’s omitted except per share data)
	Six Months Ended June 30,
	2022					2021					2022 vs 2021
				% of					% of		Dollar		% Favorable/
	Dollars			Sales		Dollars			Sales		Change		(Unfavorable)
Revenues:
Advanced Technology Group	$	17,916		80.0	%	$	15,046		78.8	%	$	2,870	19.1	%
Consumer Products Group		4,482		20.0	%		4,042		21.2	%		440	10.9	%
		22,398		100.0	%		19,088		100.0	%		3,310	17.3	%

Cost of goods sold, inclusive of depreciation and amortization		(18,592)		83.0	%		(16,223)		85.0	%		(2,369)	(14.6)	%
Gross margin		3,806		17.0	%		2,865		15.0	%		941	32.8	%
Gross margin %		17.0	%				15.0	%

Selling, general and administrative		(4,253)		19.0	%		(4,182)		21.9	%		(71)	(1.7)	%
Total operating costs and expenses		(22,845)		102.0	%		(20,405)		106.9	%		(2,440)	(11.9)	%
Operating (loss)/income		(447)		(2.0)	%		(1,317)		(6.9)	%		870	66.1	%

Other income: employee retention credit (ERC)		—		—			3,644		19.1	%		(3,644)	—
Interest expense		(144)		(0.6)	%		(127)		(0.7)	%		(17)	(13.4)	%
Gain on sale of equipment		26		0.1	%		—		—			26	—
Total other (expense)/income, net		(118)		(0.5)	%		3,517		18.4	%		(3,635)	(103.4)	%

(Loss) income before income taxes		(565)		(2.5)	%		2,200		11.5	%		(2,765)	(125.7)	%

Income tax (benefit) provision		(80)		(0.4)	%		473		2.5	%		(553)	(116.9)	%
Net (loss)/income	$	(485)		(2.2)	%	$	1,727		9.0	%	$	(2,212)	(128.1)	%

Revenue

Three months ended June 30,

Six months ended June 30,

ATG

CPG

Servotronics, Inc.

ATG

CPG

Servotronics, Inc.

($000’s omitted)

2022

2021

2022

2021

2022

2021

2022

2021

2022

2021

2022

2021

Revenues

8,748

7,823

2,482

2,205

11,230

10,028

17,916

15,046

4,482

4,042

22,398

19,088

Cost of goods sold

(8,055)

(6,242)

(2,007)

(1,914)

(10,062)

(8,156)

(14,870)

(12,452)

(3,722)

(3,771)

(18,592)

(16,223)

Gross margin

693

1,581

475

291

1,168

1,872

3,046

2,594

760

271

3,806

2,865

Gross margin %

7.9

20.2

19.1

13.2

10.4

18.7

17.0

17.2

17.0

6.7

17.0

15.0

Consolidated revenues from operations increased approximately $1,202,000 or 12.0% for the three month period ended June 30, 2022 when compared to the same period in 2021. This is due to the recovery of business within the commercial aircraft market of approximately $607,000 at the ATG and price increases of approximately $318,000 at the ATG and approximately $374,000 at the CPG. This is offset slightly by an unfavorable mix of the product shipped at the CPG of approximately $97,000 as compared to the same three month period ended June 30, 2021.

Consolidated revenues from operations increased approximately $3,310,000 or 17.3% for the six month period ended June 30, 2022 when compared to the same period in 2021. This is due to the recovery of business within the commercial aircraft market and an increase in price at the ATG of approximately $2,870,000 or 19.1% and a favorable product mix shipped and an increase in price at the CPG of approximately $440,000 or 10.9% for the six month period ended June 30, 2022 when compared to the same period in 2021.

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Both Segment’s revenue improved for the three and six month periods of June 30, 2022 as compared to the same periods ended June 30, 2021.

Gross Margin

Consolidated gross margins from operations decreased approximately $704,000 or (37.6)% for the three month period ended June 30, 2022 when compared to the same period in 2021. The gross margins decreased at the ATG by approximately $888,000 or (56.2)% partially offset by an increase at the CPG of approximately $184,000 or 63.2%.

Gross margin benefited in the three month period from the recovery of business within the commercial aircraft market and favorable product mix shipped at the ATG of approximately $169,000 as well as price increases of approximately $318,000. However, these were offset by increased production costs of approximately $537,000 for wages due to the discontinuation of the New York State Shared Work Program in the second half of 2021, approximately $402,000 for acceleration of inventory obsolescence due to market changes, approximately $304,000 for a customer driven process change resulting in a one-time cost increase, and a net increase of approximately $132,000 for all other operating expenses as compared to the same period in 2021. Additionally, gross margin increased in the three month period due to a favorable product mix shipped at the CPG of approximately $277,000 and price increases of approximately $374,000, partially offset by higher production costs of approximately $467,000 as compared to the same period in 2021.

Consolidated gross margins from operations increased approximately $941,000 or 32.8% for the six month period ended June 30, 2022 when compared to the same period in 2021. The gross margins increased at the ATG by approximately $452,000 or 17.4% and at the CPG by approximately $489,000 or 180.4%.

Gross margin benefited in the six month period as a result of the recovery of business within the commercial aircraft market and favorable product mix shipped at the ATG of approximately $614,000, price increases of approximately $391,000 and a net improvement of production efficiencies partially offset by the discontinued New York State Shared Work Program in the second half of 2021 of approximately $106,000. These increases were partially offset by the acceleration of inventory obsolescence of approximately $659,000 as compared to the same period in 2021. Additionally, gross margin increased in the six month period due to a favorable product mix shipped at the CPG of approximately $419,000 and price increases of approximately $379,000, partially offset by higher production costs of approximately $309,000 as compared to the same period in 2021.

Since late-2020, both Segments have experienced the challenge of fully utilizing their production resources, increasing the cost per unit produced. Additionally, we have incurred increased costs of raw materials and shipping costs associated with the production of our products. The Segments have been closely monitoring all other purchases. Despite these challenges, the consolidated gross margin and gross margin percent for the first six month period of 2022 is higher than the same period in 2021.

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Selling, General and Administrative Expenses and Operating Losses


	Three months ended June 30,																		Six months ended June 30,
	ATG						CPG						Servotronics, Inc.						ATG						CPG						Servotronics, Inc.
($000’s omitted)	2022			2021			2022			2021			2022			2021			2022			2021			2022			2021			2022			2021

SG&A:
Selling, general & admin		(1,575)			(1,761)			(496)			(448)			(2,071)			(2,209)			(3,349)			(3,346)			(904)			(836)			(4,253)			(4,182)
Total SG&A	$	(1,575)		$	(1,761)		$	(496)		$	(448)		$	(2,071)		$	(2,209)		$	(3,349)		$	(3,346)		$	(904)		$	(836)		$	(4,253)		$	(4,182)
% SG&A to Revenues		18.0	%		22.5	%		20.0	%		20.3	%		18.4	%		22.0	%		18.7	%		22.2	%		20.2	%		20.7	%		19.0	%		21.9	%

Operating Loss	$	(882)		$	(180)		$	(21)		$	(157)		$	(903)		$	(337)		$	(303)		$	(752)		$	(144)		$	(565)		$	(447)		$	(1,317)

Operating Loss %		(10.1)	%		(2.3)	%		(0.8)	%		(7.1)	%		(8.0)	%		(3.4)	%		(1.7)	%		(5.0)	%		(3.2)	%		(14.0)	%		(2.0)	%		(6.9)	%

Selling, general and administrative expenses (SG&A) decreased approximately $138,000 or 6.2% for the three month period ended June 30, 2022 when compared to the same period in 2021. The improvement is driven by the ATG due to lower legal and professional services fees of approximately $56,000 and a reversal of bad debt reserves of approximately $60,000, with all other SG&A expenses netting to a decrease of approximately $22,000 as compared to the three month period ended June 30, 2021.

Selling, general and administrative expenses (SG&A) increased approximately $71,000 or 1.7% for the six month period ended June 30, 2022 when compared to the same period in 2021. The increase is due to higher legal and professional services fees at the ATG of approximately $145,000 and trade shows, travel and meals expenditures at the CPG of approximately $94,000 partially offset by lower compensation at both segments of approximately $168,000 as compared to the same period in 2021.

Despite the increase in consolidated SG&A expenses in the six month period, the percentage to revenue is lower due to higher revenue at both Segments.

Operating Losses

Losses from operations increased approximately $566,000 or 168.0% when compared to the three month period ended June 30, 2022 to the same period in 2021. Losses from operations decreased approximately $870,000 or 66.1% when compared to the six month period ended June 30, 2022 to the same period in 2021. The consolidated improvement in the operating losses for the first six months is discussed above.

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Other (Expense)/Income:


	Three months ended June 30,																		Six months ended June 30,
	ATG						CPG						Servotronics, Inc.						ATG						CPG						Servotronics, Inc.
($000’s omitted)	2022			2021			2022			2021			2022			2021			2022			2021			2022			2021			2022			2021

Other (Expense)/Income:
ERC	$	—		$	1,573		$	—		$	341		$	—		$	1,914		$	—		$	2,986		$	—		$	658		$	—		$	3,644
Interest expense		(74)			(65)			—			(1)			(74)			(66)			(144)			(125)			—			(2)			(144)			(127)
Gain sale of equipment		—			—			—			—			—			—			26			—			—			—			26			—

Total other (expense)/income, net	$	(74)		$	1,508		$	—		$	340		$	(74)		$	1,848		$	(118)		$	2,861		$	—		$	656		$	(118)		$	3,517

(Loss)/income before income tax provision (benefits)	$	(956)		$	1,328		$	(21)		$	183		$	(977)		$	1,511		$	(421)		$	2,109		$	(144)		$	91		$	(565)		$	2,200
EBIT %		(10.9)	%		17.0	%		(0.8)	%		8.3	%		(8.7)	%		15.1	%		(2.3)	%		14.0	%		(3.2)	%		2.3	%		(2.5)	%		11.5	%

As discussed in our Annual Report on Form 10-K, the Company qualified for the Employee Retention Credit (ERC) for all quarters allowed under the Federal Government program. The Infrastructure Investment and Jobs Act of 2021, enacted November 15, 2021 terminated the employee retention credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses. As a result, for the three month and six month periods ended June 30, 2022 there was no recognition of an ERC as compared to approximately $1,914,000 recognized in the three month period and the approximately $3,644,000 recognized in the six month period ended June 30, 2021.

Interest Expense

Interest expense increased by 12.1% and 13.4% in the three and six month periods ended June 30, 2022, respectively, when compared to the same period in 2021. This is primarily due to the increase in interest recognized for postretirement benefits offset by the elimination of the interest for the paydown of our term loans as of December 2021. See also Note 5, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.

Income before Income Taxes

Consolidated income before income taxes for the three month period ended June 30, 2022 decreased approximately $2,488,000 when compared to the same period in 2021. The consolidated decrease is primarily the result of the elimination of the ERC credit and increases in the COGS at the ATG segment offset slightly by improved revenues at both Segments and improved operating performance at the CPG segment. The consolidated income before income taxes for the six month period ended June 30, 2022 decreased approximately $2,765,000 or (125.7)% when compared to the same period in 2021. The consolidated decrease is primarily the result of the elimination of the ERC credit and increases in the SG&A offset slightly by improved revenues and operating performance at the CPG segment.

Net (Loss) Income

Net income for the three month period ended June 30, 2022 decreased approximately $1,996,000 or (168.3)% when compared to the same period in 2021. The consolidated decrease is primarily the result of the elimination of the ERC credit and increases in the COGS at the ATG segment, offset slightly by improved revenues at both Segments and improved operating performance at the CPG segment. Net income for the six month period ended June 30, 2022 decreased approximately $2,212,000 or (128.1)% when compared to the same period in 2021. The consolidated decrease is primarily the result of the

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elimination of the ERC credit and increases in the SG&A offset slightly by improved revenues and operating performance at the CPG segment.

Liquidity and Capital Resources


	Six months ended June 30,
($000's omitted)	2022		2021

CASH FLOW DATA:
Net Cash Flows from:
Operating Activities	$	342	$	3,866
Investing Activities	$	(390)	$	(13)
Financing Activities	$	(4,390)	$	(148)

FINANCIAL POSITION:
Working Capital	$	29,548	$	31,166
Long-term Debt	$	381	$	4,925

CAPITAL EXPENDITURES (1):	$	(390)	$	(13)

(1) NET OF PROCEEDS FROM SALE OF EQUIPMENT

Operating Activities:

We generated approximately $342,000 in cash from operations during the six month period ended June 30, 2022 as compared to generating approximately $3,866,000 for the same period in 2021. At June 30, 2022, we had working capital of approximately $29,548,000 ($34,067,000 – December 2021) of which approximately $5,108,000 ($9,546,000 – December 2021) was comprised of cash.

The decrease in cash flow from operating activities is primarily attributable to a decrease in net income of approximately $2,212,000, and an increase in accounts receivable of approximately $1,670,000 due to the increases in revenues. This is partially offset by all other operating accounts which generated a net amount of approximately $16,000.

Our cash flow from operations and available capacity provide us with the financial resources needed to run our operations and reinvest in our business. Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing, and our operations in the future.

Investing Activities:

We used approximately $390,000 in cash from investing activities during the six month period ended June 30, 2022 as compared to a usage of cash of approximately $13,000 during the same period in 2021. The investing activities were primarily related to ATG projects and facilities improvement. Cash was generated through the sale of the Company car.

Financing Activities:

Our primary usage of cash in our financing activities in the six month period ended June 30, 2022 includes the repayment of the line of credit of approximately $4,250,000 and the principal payments on equipment financing obligations of approximately $140,000.

As of March 20, 2020, we increased our line of credit from $4,000,000 to $6,000,000. On January 11, 2022, we executed an amendment to the loan agreement, which extended our line of credit availability period from December 31, 2022 to December 31, 2023. The amended agreement suspended the Debt Service Coverage Ratio up through and including the third quarter of 2022. A Quarterly Minimum Cash Flow measurement replaced the Debt Service Coverage Ratio. Minimum Cash

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Flow means net income, plus depreciation, depletion, and amortization expense, plus interest expense, plus non-cash expense related to the Servotronics, Inc. Employee Stock Ownership Plan, plus non-cash stock and stock option transactions.

Through the third quarter of 2022, the amended agreement requires us to maintain a minimum liquidity, defined as cash on hand plus line of credit availability of at least $9,000,000.

The interest rate is a rate per year equal to the sum of (i) the greater of the Bloomberg’s Short-Term Bank Yield (BSBY) Daily Floating Rate or the Index Floor, plus (ii) 1.65 percentage point(s). For purposes of this paragraph, “Index Floor” means 0.5 percent.

The line of credit is secured by all personal property of the Company with the exception of certain equipment that was purchased from proceeds of government grants. There was no balance outstanding at June 30, 2022 and approximately $4,250,000 outstanding at December 31, 2021. The phase out of LIBOR and transition to the BSBY Daily Floating Rate is not expected to have a significant impact on our operating results, financial position, or cash flows as the only outstanding debt is the line of credit.

We had an equipment loan facility in the amount of $1,000,000 available until July 9, 2021. This line was non-revolving and non-renewable. The loan term for the equipment covered by the agreement is 60 months. Monthly payments are fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding. There is approximately $602,000 outstanding as of June 30, 2022 and $712,000 outstanding at December 31, 2021.

We had a lease line of credit for equipment financing in the amount of $1,000,000 available until June 28, 2018. This line was non-revolving and non-renewable. The lease term for equipment covered by the lease line of credit is 60 months. Monthly payments are fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding. There was approximately $34,000 outstanding at June 30, 2022 and $64,000 at December 31, 2021.

Management believes that it should retain the capital generated from operating activities for investment in research and development and programs to retain the Company’s human resources talent. Accordingly, there are no plans to institute a cash dividend within the next year.

We believe our cash generating capability and financial condition, together with available credit facilities will be adequate to meet our future operating and investing 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 Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) as of June 30, 2022. Based upon that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective due to the material weakness in the Company’s internal control over financial reporting reported in the Company’s Form 10-K for the year ended December 31, 2021.

Changes in Internal Controls

As reported in the Company’s Form 10-K for the year ended December 31, 2021, management identified certain control deficiencies that, individually and in the aggregate, constitute a material weakness in the Company’s internal control over financial reporting. The Company began its remediation efforts in 2021 and continues with its remediation plan which includes a comprehensive technology assessment by a third party, including the establishment and implementation of an information

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technology strategy and improvement of its risk assessment and documentation over the monitoring of internal controls. Except for the implementation of the remediation plan, there have been no changes during the period covered by this report to the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to affect, the Company’s internal controls over financial reporting.

Notwithstanding the existence of the above-mentioned material weakness, the Company believes that the consolidated financial statements in this filing fairly present, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. generally accepted accounting principles.

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PART II

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 materially 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


				Total Number of Shares	Maximum Number of Shares
				Purchased as Part of Publicly	that may yet be Purchased
	Total Number of Shares	Weighted Average Price $		Announced Plans or Programs	under the Plans or Programs
2022 Periods	Purchased	Paid Per Share		(1)	(1)
January - March	—	$	—	—	89,385
April	—		—	—	89,385
May	—		—	—	89,385
June	—		—	—	89,385
Total	—	$	—	—	89,385

(1)

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable

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Item 6. Exhibits


10.1		Servotronics, Inc. 2022 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Proxy Statement for the 2022 Annual Meeting)
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
101		The following materials from Servotronics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows and (v) the notes to the consolidated financial statements.

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words “project,” “believe,” “plan,” “anticipate,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements involve numerous risks and uncertainties which may cause the actual results of the Company to be materially different from future results expressed or implied by such forward-looking statements. There are a number of factors that will influence the Company’s future operations, including: uncertainties in today’s global economy, including political risks, adverse changes in legal and regulatory environments, and difficulty in predicting defense appropriations, the introduction of new technologies and the impact of competitive products, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company’s customers to fund long-term purchase programs, and market demand and acceptance both for the Company’s products and its customers’ products which incorporate Company-made components, the Company’s ability to accurately align capacity with demand, the availability of financing and changes in interest rates, the outcome of pending and potential litigation, the severity, magnitude and duration of the COVID-19 pandemic, including impacts of the pandemic and of businesses’ and governments’ responses to the pandemic on our operations and personnel, and on commercial activity and demand across our and our customers’ businesses, and on global supply chains, the ability of the Company to obtain and retain key executives and employees and the additional risks discussed elsewhere in this Form 10-Q and in the Company’s other filings with the Securities and Exchange Commission. 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, whether as a result of new information, future events or otherwise.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 15, 2022

	SERVOTRONICS, INC.

	By:	/s/ William F. Farrell, Jr., Chief Executive Officer
		William F. Farrell, Jr.
		Chief Executive Officer

	By:	/s/ Lisa F. Bencel, Chief Financial Officer
		Lisa F. Bencel
		Chief Financial Officer

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