NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The accompanying
unaudited condensed consolidated financial statements (“consolidated financial statements”) have been prepared in accordance
with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q
and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United
States generally accepted accounting principles for complete financial statements.
The accompanying
consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement
of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for
the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2020. The consolidated financial statements should be read in conjunction with the 2019 annual
report and the notes thereto.
2.
|
Business Description and Summary of Significant Accounting Policies
|
Business
Description
Servotronics, Inc.
and its subsidiaries design, manufacture and market advanced technology products consisting primarily of control components, and
consumer products consisting of knives and various types of cutlery and other edged products.
Principles
of Consolidation
The consolidated
financial statements include the accounts of Servotronics, Inc. and its wholly-owned subsidiaries (the “Company”).
All intercompany balances and transactions have been eliminated upon consolidation.
Cash
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 $188,000
at September 30, 2020 and $337,000 at December 31, 2019. The Company does not accrue interest on past due receivables.
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.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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.
The timing
of satisfaction of our performance obligations does not significantly vary from the typical timing of payment. The Company generally
receives payment for these contracts within the payment terms negotiated and agreed upon by each customer contract.
Warranty
and repair obligations are assessed on all returns. Revenue is not recorded on any warranty returns. The Company warrants its products
against design, materials and workmanship based on an average of twenty-seven months. The Company determines warranty reserves
needed based on actual average costs of warranty units shipped and current facts and circumstances. As of September 30, 2020
and December 31, 2019 under the guidance of ASC460 the Company has recorded a warranty reserve of approximately $287,000 and
$420,000, respectively. This amount is reflected in other accrued expenses in the accompanying consolidated balance sheets. 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 $1,677,000 and $1,437,000
at September 30, 2020 and December 31, 2019, respectively. Pre-production and start-up costs are expensed as incurred.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The purchase
of suppliers’ minimum economic quantities of material such as steel, etc. may result in a purchase of quantities exceeding
one year of customer requirements. Also, in order to maintain a reasonable and/or agreed to lead time, certain larger quantities
of other product support items may have to be purchased and may result in over one year’s supply. These amounts are not included
in the inventory reserve discussed above.
Shipping
and Handling Costs
Shipping and handling costs are classified
as a component of cost of goods sold.
Property,
Plant and Equipment
Property,
plant and equipment is carried at cost; 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
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
% Change
|
|
|
|
($000's omitted)
|
|
|
|
|
Income tax expense
|
|
$
|
240
|
|
|
$
|
409
|
|
|
|
(41.3
|
)%
|
Effective tax rate
|
|
|
18.2
|
%
|
|
|
17.4
|
%
|
|
|
0.8
|
%
|
The higher
effective tax rate during the nine months ended September 30, 2020 was primarily due to a decrease in permanent deductible
expenses.
In response
to COVID-19, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law on March 27, 2020.
The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and
future utilization of net operating losses, temporary suspension of certain payment requirements for the employer portion of Social
Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property,
and the creation of certain refundable employee retention credits. The Company is currently evaluating the impact of these measures
on its consolidated financial statements. If these measures are determined to be applicable to the Company, they may result in
cash refunds and an income tax benefit recorded in the consolidated statement of operations.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 and Texas state income tax returns and various separate state
income tax returns.
The Company’s
practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company did not have
any accrued interest or penalties included in its consolidated balance sheets at September 30, 2020 or December 31, 2019,
and did not recognize any interest and/or penalties in its consolidated statements of operations during the nine months ended September 30,
2020 and 2019. The Company did not have any material uncertain tax positions or unrecognized tax benefits or obligations as of
September 30, 2020 and December 31, 2019. On July 16, 2020, the Company was notified that the 2017 federal income
tax return was randomly selected for examination. The 2016 through 2019 federal and state tax returns remain subject to examination.
Supplemental Cash Flow Information
Income taxes paid during the nine months
ended September 30, 2020 and 2019 amounted to approximately $425,000 and $0, respectively. Interest paid during the nine months
ended September 30, 2020 and 2019 amounted to approximately $116,000 and $88,000, 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 September 30, 2020 and December 31, 2019.
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.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Concentration
of Credit Risks
Financial
instruments that potentially subject the Company to concentration of credit risks principally consist of cash accounts in financial
institutions. Although the accounts exceed the federally insured deposit amount, management does not anticipate nonperformance
by the financial institutions.
Fair
Value of Financial Instruments
The carrying
amount of cash, 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.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
($000's omitted)
|
|
Raw material and common parts
|
|
$
|
17,599
|
|
|
$
|
14,707
|
|
Work-in-process
|
|
|
4,700
|
|
|
|
4,158
|
|
Finished goods
|
|
|
4,531
|
|
|
|
2,723
|
|
|
|
|
26,830
|
|
|
|
21,588
|
|
Less inventory reserve
|
|
|
(1,677
|
)
|
|
|
(1,437
|
)
|
Total inventories
|
|
$
|
25,153
|
|
|
$
|
20,151
|
|
|
4.
|
Property, Plant and Equipment
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
($000's omitted)
|
|
Land
|
|
$
|
7
|
|
|
$
|
7
|
|
Buildings
|
|
|
11,641
|
|
|
|
11,017
|
|
Machinery, equipment and tooling
|
|
|
20,820
|
|
|
|
20,695
|
|
Construction in progress
|
|
|
222
|
|
|
|
331
|
|
|
|
|
32,690
|
|
|
|
32,050
|
|
Less accumulated depreciation and amortization
|
|
|
(20,330
|
)
|
|
|
(19,333
|
)
|
Total property, plant and equipment
|
|
$
|
12,360
|
|
|
$
|
12,717
|
|
Depreciation and amortization expense amounted
to approximately $356,000 and $339,000 for the three months ended September 30, 2020 and 2019, respectively. Amortization
expense primarily related to ROU assets amounted to approximately $15,000 and $18,000 for the three months ended September 30,
2020 and 2019, respectively. Depreciation and amortization expense amounted to approximately $1,072,000 and $902,000 for the nine
months ended September 30, 2020 and 2019, respectively. Amortization expense, primarily related to ROU assets, amounted to
approximately $50,000 and $59,000 for the nine months ended September 30, 2020 and 2019, 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.
SERVOTRONICS,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30,
2020, there is approximately $222,000 ($331,000 – December 31, 2019) of construction in progress (CIP) included in property,
plant and equipment all of which is related to capital projects. There is approximately $192,000 for machinery & equipment;
$22,000 for building improvements, and $8,000 for IT equipment and software, not yet put into service.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
($000's omitted)
|
|
Paycheck protection program payable to financial
institutions: Interest rate of 1% per annum. Unforgiven portion is payable monthly until April 20, 2022 (A)
|
|
$
|
4,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Line of credit payable to a financial institution;
Interest rate option of bank prime or Libor plus 1.65% (B)(C)
|
|
|
3,750
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Term
loan payable to a financial institution; Interest rate option of bank prime or Libor plus 1.4% (1.556% as of September 30,2020),
monthly principal payments of $21,833 through 2021 with a balloon payment of $786,000 due December 1, 2021(C).
|
|
|
1,114
|
|
|
|
1,310
|
|
|
|
|
|
|
|
|
|
|
Term
loan payable to a financial institution; Interest rate option of bank prime or Libor plus 1.4% (1.556% as of September
30,2020), monthly principal payments of $23,810 through December 1, 2021(C).
|
|
|
357
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
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 1.8259% - 1.835015% as of June
30, 2020)(D)
|
|
|
569
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
Equipment financing lease
obligations; Interest rate fixed for term of each funding based upon the Lender's lease pricing at time of funding.
(Interest rate/ factor 1.822758% - 1.869304% at time of funding)(E)
|
|
|
349
|
|
|
|
468
|
|
|
|
|
10,139
|
|
|
|
6,019
|
|
Less current portion
|
|
|
(849
|
)
|
|
|
(849
|
)
|
|
|
$
|
9,290
|
|
|
$
|
5,170
|
|
SERVOTRONICS,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
A.)
|
On April 21, 2020, the Company executed a promissory
note (the “Note”) in the amount of $4,000,000 as part of the Paycheck Protection Program (the “PPP Loan”)
administered by the Small Business Administration (the “SBA”) and authorized under the Coronavirus Aid, Relief, and
Economic Security Act (the CARES Act”). The PPP Loan is being made through the Bank of America, NA (the “Lender”).
The term of the PPP Loan is two years with an annual interest rate of 1.00%. Payments on the unforgiven amount of principal, if
any, and interest on the PPP Loan will be deferred until the date on which loan forgiveness is determined or 10 months after the
end of the borrower’s covered period if forgiveness is not requested.”
|
|
B.)
|
As of March 20, 2020, the Company increased its
line of credit from $4,000,000 to $6,000,000. As of July 31, 2020, the Company extended the line of credit to expire December 21,
2022. As of July 31, 2020, the interest rate is a rate per year equal to the bank’s prime rate or Libor plus 1.65%.
In addition, the Company is required to pay a commitment fee of 0.25% per year on the unused portion of the line of credit. There
was $3,750,000 balance outstanding at September 30, 2020 and $3,000,000 balance at December 31, 2019.
|
|
C.)
|
The term loans and line of credit are secured by all
personal property of the Company with the exception of certain equipment that was purchased from proceeds of government grants.
Certain lenders require the Company to comply with debt covenants as described in the specific loan documents, including a debt
service ratio. At September 30, 2020 and December 31, 2019 the Company was in compliance with these covenants.
|
|
D.)
|
The Company had an equipment loan facility in the amount
of $2,500,000 available until November 30, 2019. This line was non-revolving and non-renewable. The Company used approximately
$721,000 of the available funds for the purchase of machinery and equipment. 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 $569,000 outstanding at September 30, 2020 and $670,000 at December 31,
2019.
|
|
E.)
|
The Company established a lease line of credit for equipment
financing in the amount of $1,000,000 available until June 28, 2018. This line 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 $349,000 outstanding at September 30,
2020 and $468,000 at December 31, 2019.
|
The Company has 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 nothing outstanding as of September 30, 2020 and at December 31, 2019.
Remaining principal maturities of long-term debt are as follows: 2020 - $219,000, 2021 - $1,635,000, 2022 - $4,038,000, 2023 - $154,000 and 2024 - $93,000. Remaining principal payments and interest payments for the capital note and capital equipment financing lease obligations for each of the next five years: (Excluding PPP Loan)
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Year
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
($000's omitted)
|
|
|
|
|
|
|
|
2020
|
|
|
$
|
83
|
|
$
|
331
|
|
|
|
|
2021
|
|
|
|
331
|
|
|
331
|
|
|
|
|
2022
|
|
|
|
316
|
|
|
316
|
|
|
|
|
2023
|
|
|
|
169
|
|
|
169
|
|
|
|
|
2024
|
|
|
|
97
|
|
|
97
|
|
Total principal and interest payments
|
|
|
|
|
|
|
996
|
|
|
1,244
|
|
Less amount representing interest
|
|
|
|
|
|
|
(78
|
)
|
|
(106)
|
|
Present value of net minimum lease payments
|
|
|
|
|
|
|
918
|
|
|
1,138
|
|
Less current portion
|
|
|
|
|
|
|
(301
|
)
|
|
(301)
|
|
Long term principle payments
|
|
|
|
|
|
$
|
617
|
|
|
$837
|
|
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Shareholders’
Equity
|
|
Nine-month Period Ended September 30, 2020
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Common Stock
|
|
|
excess of
|
|
|
|
|
|
Treasury
|
|
|
shareholders'
|
|
|
|
Earnings
|
|
|
Income
|
|
|
|
|
|
par value
|
|
|
ESOT
|
|
|
stock
|
|
|
equity
|
|
January 1, 2020
|
|
$
|
20,484
|
|
|
$
|
98
|
|
|
$
|
523
|
|
|
$
|
14,358
|
|
|
$
|
(460
|
)
|
|
$
|
(1,471
|
)
|
|
$
|
33,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
(100
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
52
|
|
|
|
85
|
|
Net Income
|
|
|
1,898
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
$
|
22,382
|
|
|
$
|
98
|
|
|
$
|
523
|
|
|
$
|
14,391
|
|
|
$
|
(460
|
)
|
|
$
|
(1,519
|
)
|
|
$
|
35,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
|
|
-
|
|
|
|
48
|
|
|
|
87
|
|
Net Income
|
|
|
965
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
$
|
23,347
|
|
|
$
|
98
|
|
|
$
|
523
|
|
|
$
|
14,430
|
|
|
$
|
(460
|
)
|
|
$
|
(1,471
|
)
|
|
$
|
36,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
|
|
54
|
|
|
|
83
|
|
Net Loss
|
|
|
(1,782
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
$
|
21,565
|
|
|
$
|
98
|
|
|
$
|
523
|
|
|
$
|
14,459
|
|
|
$
|
(460
|
)
|
|
$
|
(1,417
|
)
|
|
$
|
34,768
|
|
|
|
Nine-month Period Ended September 30, 2019
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Common Stock
|
|
|
excess of
|
|
|
|
|
|
Treasury
|
|
|
shareholders'
|
|
|
|
Earnings
|
|
|
Income
|
|
|
|
|
|
par value
|
|
|
ESOT
|
|
|
stock
|
|
|
equity
|
|
January 1, 2019
|
|
$
|
18,788
|
|
|
$
|
35
|
|
|
$
|
523
|
|
|
$
|
14,250
|
|
|
$
|
(561
|
)
|
|
$
|
(1,522
|
)
|
|
$
|
31,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(128
|
)
|
|
|
(128
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
44
|
|
|
|
58
|
|
Net Income
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
$
|
18,886
|
|
|
$
|
35
|
|
|
$
|
523
|
|
|
$
|
14,264
|
|
|
$
|
(561
|
)
|
|
$
|
(1,606
|
)
|
|
$
|
31,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared ($0.16 per share)
|
|
|
(413
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(413
|
)
|
Purchase of treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
61
|
|
|
|
95
|
|
Net Income
|
|
|
714
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
$
|
19,187
|
|
|
$
|
35
|
|
|
$
|
523
|
|
|
$
|
14,298
|
|
|
$
|
(561
|
)
|
|
$
|
(1,566
|
)
|
|
$
|
31,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
58
|
|
|
|
86
|
|
Net Income
|
|
|
1,132
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
$
|
20,319
|
|
|
$
|
35
|
|
|
$
|
523
|
|
|
$
|
14,326
|
|
|
$
|
(561
|
)
|
|
$
|
(1,516
|
)
|
|
$
|
33,126
|
|
The Company’s Board of Directors authorized
the purchase of up to 450,000 shares of its common stock in the open market or in privately negotiated transactions. As of September 30,
2020, the Company has purchased 360,615 shares and there remains 89,385 shares available to purchase under this program. There
were 360 and 5,232 shares purchased by the Company during the nine month period ended September 30, 2020 and 2019, respectively.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s 2012 Long-Term
Incentive Plan provides for the granting of stock awards, including restricted stock, stock options and stock appreciation rights,
to employees and non-employees, including directors of the Company. Compensation expense is amortized over the related service
period, which is normally three years. Shares of unvested restricted stock are generally forfeited if a recipient leaves the Company
before the vesting date. Shares that are forfeited become available for future awards.
The following is a summary of
restricted stock activity for the nine months ended September 30, 2020. Of the shares that vested, the Company withheld 9,543
shares to satisfy the tax obligations for those participants who elected this option as permitted under the applicable equity plan.
|
|
Shares
|
|
Unvested at December 31, 2019
|
|
|
54,416
|
|
|
|
|
|
|
Granted
|
|
|
11,328
|
|
Forfeited
|
|
|
-
|
|
Vested
|
|
|
31,998
|
|
Unvested at September 30, 2020
|
|
|
33,746
|
|
Earnings Per Share
Basic earnings
per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period. The weighted
average number of common shares outstanding does not include any potentially dilutive securities or any unvested restricted shares
of common stock. These unvested restricted shares, although classified as issued and outstanding, are considered forfeitable until
the restrictions lapse and will not be included in the basic EPS calculation until the shares are vested. Diluted earnings per
share is computed by dividing net earnings by the weighted average number of shares outstanding during the period plus the number
of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on the earnings
per share that were outstanding for the period. 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.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
($000's omitted except per share data)
|
|
Net (Loss) Income
|
|
$
|
(1,782
|
)
|
|
$
|
1,132
|
|
|
$
|
1,081
|
|
|
$
|
1,944
|
|
Weighted average common shares outstanding (basic)
|
|
|
2,363
|
|
|
|
2,327
|
|
|
|
2,358
|
|
|
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
|
|
34
|
|
|
|
58
|
|
|
|
34
|
|
|
|
58
|
|
Weighted average common shares outstanding (diluted)
|
|
|
2,397
|
|
|
|
2,385
|
|
|
|
2,392
|
|
|
|
2,383
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share
|
|
$
|
(0.75
|
)
|
|
$
|
0.49
|
|
|
$
|
0.46
|
|
|
$
|
0.84
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share
|
|
$
|
(0.75
|
)
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
|
$
|
0.82
|
|
|
7.
|
Commitments and Contingencies
|
Post
retirement obligation. As previously disclosed in filings with the Securities and Exchange Commission (“SEC”),
the Company, under an employment agreement, is expected to pay post-employment health related benefits to a former Executive Officer
of the Company (the “Former Employee”), of which approximately $1,724,000 and $1,543,000 has been accrued as of September 30,
2020 and December 31, 2019, and is reflected as Post Retirement Obligation in the accompanying consolidated balance sheets.
Employment Agreements. The
Company provides certain post-employment health and life insurance benefits for its Chief Executive Officer and President Kenneth
Trbovich. Upon retirement and after attaining at least the age of 65, the Company will pay for the retired Executive’s and
dependent’s health benefits and will continue the Company-provided life insurance offered at the time of retirement. The
retiree’s health insurance benefits ceases upon the death of the retired executive. Approximately $699,000 and $583,000 has
been accrued as of September 30, 2020 and December 31, 2019, respectively, and is reflected as Post Retirement Obligation
in the accompanying consolidated balance sheets.
The Company has pending litigation relative
to leases of certain equipment and real property with a former related party. Aero, Inc. is suing Servotronics, Inc.
and its wholly owned subsidiary and has alleged damages in the amount of $3,000,000. The Company has filed a response to the Aero, Inc.
lawsuit and has also filed a counter-claim in the amount of $3,191,000. The Company considers the risk of loss remote, and is unable
to reasonably or accurately estimate the likelihood and amount of any liability or benefit that may be realized as a result of
this litigation. Accordingly, no gain or loss has been recognized in the accompanying financials statements related to this litigation.
|
9.
|
Related Party Transactions
|
The Company paid legal fees and disbursements
of approximately $150,000 and $81,000 in the nine month period ended September 30, 2020 and 2019, respectively, for services
provided by a law firm that is owned by a member of the Company’s Board of Directors. Legal fees paid for the three month
period ended September 30, 2020 and 2019 amounted to approximately $18,000 and $33,000, respectively. Additionally, the Company
had accrued unbilled legal fees at September 30, 2020 and 2019 of approximately $25,000 and $49,000, respectively, with this
firm.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company
operates in two business segments, ATG and CPG. The Company’s reportable segments are strategic business units that offer
different products and services. The segments are composed of separate corporations and are managed separately. Operations in ATG
primarily involve the design, manufacture, and marketing of servo-control components (i.e., torque motors, control valves, actuators, etc.)
for government, commercial and industrial applications. CPG’s operations involve the design, manufacture and marketing of
a variety of cutlery products for use by consumers and government agencies. The Company derives its primary sales revenue from
domestic customers, although a portion of finished products are for foreign end use.
As of September 30,
2020, the Company had identifiable assets of approximately $53,632,000 ($49,470,000 – December 31, 2019) of which approximately
$43,531,000 ($39,980,000 – December 31, 2019) was for ATG and approximately $10,101,000 ($9,490,000 – December 31,
2019) was for CPG.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the Company’s
operations in these segments is summarized as follows:
|
|
($000's omitted except per share data)
|
|
|
|
ATG
|
|
|
CPG
|
|
|
Consolidated
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues from unaffiliated customers
|
|
$
|
33,228
|
|
|
$
|
33,926
|
|
|
$
|
6,021
|
|
|
$
|
4,506
|
|
|
$
|
39,249
|
|
|
$
|
38,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, inclusive of depreciation
|
|
|
(26,495
|
)
|
|
|
(24,400
|
)
|
|
|
(5,187
|
)
|
|
|
(5,155
|
)
|
|
|
(31,682
|
)
|
|
|
(29,555
|
)
|
Gross margin
|
|
|
6,733
|
|
|
|
9,526
|
|
|
|
834
|
|
|
|
(649
|
)
|
|
|
7,567
|
|
|
|
8,877
|
|
Gross margin %
|
|
|
20.3
|
%
|
|
|
28.1
|
%
|
|
|
13.9
|
%
|
|
|
(14.4
|
)%
|
|
|
19.3
|
%
|
|
|
23.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
(4,857
|
)
|
|
|
(4,558
|
)
|
|
|
(1,255
|
)
|
|
|
(1,878
|
)
|
|
|
(6,112
|
)
|
|
|
(6,436
|
)
|
Interest
|
|
|
(125
|
)
|
|
|
(66
|
)
|
|
|
(9
|
)
|
|
|
(22
|
)
|
|
|
(134
|
)
|
|
|
(88
|
)
|
Total costs and expenses
|
|
|
(31,477
|
)
|
|
|
(29,024
|
)
|
|
|
(6,451
|
)
|
|
|
(7,055
|
)
|
|
|
(37,928
|
)
|
|
|
(36,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
1,751
|
|
|
|
4,902
|
|
|
|
(430
|
)
|
|
|
(2,549
|
)
|
|
|
1,321
|
|
|
|
2,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
318
|
|
|
|
852
|
|
|
|
(78
|
)
|
|
|
(443
|
)
|
|
|
240
|
|
|
|
409
|
|
Net income (loss)
|
|
$
|
1,433
|
|
|
$
|
4,050
|
|
|
$
|
(352
|
)
|
|
$
|
(2,106
|
)
|
|
$
|
1,081
|
|
|
$
|
1,944
|
|
Capital expenditures
|
|
$
|
640
|
|
|
$
|
1,449
|
|
|
$
|
68
|
|
|
$
|
211
|
|
|
$
|
708
|
|
|
$
|
1,660
|
|
|
|
($000's omitted except per share data)
|
|
|
|
ATG
|
|
|
CPG
|
|
|
Consolidated
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues from unaffiliated customers
|
|
$
|
8,184
|
|
|
$
|
11,180
|
|
|
$
|
2,113
|
|
|
$
|
1,182
|
|
|
$
|
10,297
|
|
|
$
|
12,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, inclusive of depreciation
|
|
|
(8,636
|
)
|
|
|
(7,378
|
)
|
|
|
(1,826
|
)
|
|
|
(1,449
|
)
|
|
|
(10,462
|
)
|
|
|
(8,827
|
)
|
Gross margin
|
|
|
(452
|
)
|
|
|
3,802
|
|
|
|
287
|
|
|
|
(267
|
)
|
|
|
(165
|
)
|
|
|
3,535
|
|
Gross margin %
|
|
|
(5.5
|
)%
|
|
|
34.0
|
%
|
|
|
13.6
|
%
|
|
|
(22.6
|
)%
|
|
|
(1.6
|
)%
|
|
|
28.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
(1,712
|
)
|
|
|
(1,539
|
)
|
|
|
(384
|
)
|
|
|
(595
|
)
|
|
|
(2,096
|
)
|
|
|
(2,134
|
)
|
Interest
|
|
|
(40
|
)
|
|
|
(25
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
(42
|
)
|
|
|
(31
|
)
|
Total costs and expenses
|
|
|
(10,388
|
)
|
|
|
(8,942
|
)
|
|
|
(2,212
|
)
|
|
|
(2,050
|
)
|
|
|
(12,600
|
)
|
|
|
(10,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
(2,204
|
)
|
|
|
2,238
|
|
|
|
(99
|
)
|
|
|
(868
|
)
|
|
|
(2,303
|
)
|
|
|
1,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
(512
|
)
|
|
|
389
|
|
|
|
(9
|
)
|
|
|
(151
|
)
|
|
|
(521
|
)
|
|
|
238
|
|
Net income (loss)
|
|
$
|
(1,692
|
)
|
|
$
|
1,849
|
|
|
$
|
(90
|
)
|
|
$
|
(717
|
)
|
|
$
|
(1,782
|
)
|
|
$
|
1,132
|
|
Capital expenditures
|
|
$
|
99
|
|
|
$
|
288
|
|
|
$
|
16
|
|
|
$
|
19
|
|
|
$
|
115
|
|
|
$
|
307
|
|