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.
Based on the closing price of the Common Stock
on June 30, 2020 $7.56 (the last day of the registrant’s most recently completed second fiscal quarter), the aggregate market
value of the voting stock held by non-affiliates of the registrant was $12,053,718.
As of March 1, 2021, the number of $.20
par value common shares outstanding was 2,478,507.
Portions of the Registrant’s Proxy Statement
for the 2020 Annual Meeting of Shareholders are incorporated by reference in Part III.
PART I
Servotronics, Inc. and its subsidiaries (collectively
the “Registrant” or the “Company”) design, manufacture and market advanced technology products consisting primarily
of control components and consumer products consisting of knives and various types of cutlery and other edged products.
The Company was incorporated
in New York in 1959. In 1972, the Company was merged into a wholly-owned subsidiary organized under the laws of the State of Delaware,
thereby changing the Company’s state of incorporation from New York to Delaware.
The Company’s shares
currently trade on the New York Stock Exchange (NYSE American) under the symbol SVT.
Covid-19 Pandemic
The global COVID-19 coronavirus
pandemic and related impacts adversely affect and may continue to adversely affect business, financial condition, results of operations,
liquidity and cash flow. The extent to which the COVID-19 pandemic will continue to impact our business, operations and financial results
will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration, scope and severity of
the pandemic. These factors could, among other things, continue to disrupt (i) purchasing, contracting and payment behaviors of our
customers and their end-users; (ii) our operations, including our manufacturing activities, the shipment of our products, and the
performance of our suppliers and service providers; and (iii) liquidity and cash flow.
The commercial aerospace industry,
in particular, has been significantly disrupted, both domestically and internationally. The pandemic has had a significant adverse impact
on our business in 2020. The impact of COVID-19 is fluid and continues to evolve, and the shape and speed of recovery for the commercial
aerospace industry remains uncertain. There is significant uncertainty with respect to when the commercial transport market, will recover,
and whether and at what point capacity will return to and/or exceed pre-COVID-19 levels.
We took immediate action to
minimize the spread of COVID-19 in our workplaces and reduce costs. Since the early days of the pandemic, we have been following the guidance
from the U.S. Center for Disease Control (“CDC”) and the New York State Department of Health to protect our employees and
prevent the spread of the virus within our facilities. Some of the actions implemented include: social distancing, appropriate personal
protective equipment; facility deep cleaning; flexible work-from-home scheduling; pre-shift temperature screenings, and restrictions on
facility visitors and unnecessary travel. Actions to reduce costs included: (1) reducing our workforce to align operations with
customer demand; (2) delaying non-essential capital projects and minimizing discretionary spending and (3) suspension of certain
benefit programs.
Products
Advanced Technology Products
The Company designs, manufactures
and markets a variety of servo-control components which convert an electrical current into a mechanical force or movement and other related
products. The principal servo-control components produced include torque motors, electromagnetic actuators, hydraulic valves, pneumatic
valves and similar devices, all of which perform the same general function. These are sold principally to the commercial aerospace, aircraft
and government related industries, as well as medical and industrial markets.
To fill most of its orders
for components, the Company must either modify a standard model or design a new product in order to satisfy the customer’s particular
requirements. The Company also produces unique products based on specifications provided by its customers. The Company produces under
long-term contracts and other types of orders.
The Company may from time
to time produce metallic seals of various cross-sectional configurations. These seals fit between two surfaces, usually metal, to produce
a more secure and leak-proof joint. The Company manufactures these seals to close tolerances from standard and special alloy steels. Ductile
coatings are often applied to the seals in order to increase their effectiveness.
The Company has also produced
other products of its own and/or of a given design to meet customers’ requirements.
Consumer Products
The Company designs, manufactures
and sells a variety of edged products, tools and specialty consumer products for domestic and international distribution. These products
include a wide range of cutlery items such as steak, carving, bread, butcher and paring knives for household use and for use in restaurants,
institutions and private industry, as well as equipment and gear including fixed and folding knives for hunting, fishing and camping.
The Company also sells knives and tools to the U.S. Government, related agencies, and allied foreign governments. These products include
machetes, bayonets, axes, strap cutters, and other tools that are designed primarily for military and rescue/first-responder use, but
are viable in commercial markets as well. The Company also produces and markets other edged products such as various specialty tools,
putty knives, linoleum sheet cutters, field knives and SciMed items including scalpels and micro-spatulas. The Company manufactures its
products from stainless and high carbon steels, titanium, or synthetic materials in numerous styles, designs, models and sizes. Substantially
all of the Company’s commercial related products are intended for the moderate to premium priced markets. The Company also provides
plastic fabrication, metal fabrication and other engineering, design, and OEM/white-label manufacturing services to regional customers.
This includes the production of a wide range of machined, engineered, and/or molded consumer and industrial products and components.
Sales, Marketing and Distribution
Advanced Technology Products
The Company’s Advanced
Technology Group (ATG) products are marketed throughout the United States and in select foreign markets. Products are primarily non-seasonal
in nature. These products are sold to the United States Government, government prime contractors, government subcontractors, commercial
manufacturers and end-users. Sales are made primarily by the Company’s professional staff.
The Company’s prime
contracts and subcontracts with the United States Government, government subcontractors, and commercial manufacturers are subject to termination
at the convenience of the customer. In the event of such termination, the Company is ordinarily entitled to receive payment for its costs
and profits on work done prior to termination. Since the inception of the Company’s business, less than 1% of its contracts have
been terminated for convenience. The Company’s sales of advanced technology products are composed primarily of a small group of
customers. We have a significant concentration of business with two major customers; Customer A and Customer B. Sales to Customer A accounted
for 22.3% of consolidated sales in 2020 and 35.0% of consolidated sales in 2019. Sales to Customer B accounted for 26.6% of consolidated
sales in 2020 and 19.8% of consolidated sales in 2019. In both 2020 and 2019 we had a concentration of sales to Customer A and Customer
B representing approximately 48.9% of our consolidated sales. Two commercial aircraft accidents led to the grounding by the Federal Aviation
Administration and other regulators of the Boeing 737 MAX aircraft. Approximately 27% of the 2019 units shipped to Customer B and approximately
13% of ATG total units shipped in 2019 support the Boeing 737 MAX aircraft production. Approximately 17% of the 2020 units shipped to
Customer B and approximately 6% of ATG total units shipped in 2020 support the Boeing 737 MAX aircraft production. There was a significant
decline of 61% in shipments to Customer B for the Boeing 737 MAX and a 38% decline in shipments to Customer B as compared to the same
period in 2019. Customer A is 4% and Customer B is 81% of our drop in revenues in 2020 as compared to 2019.
As a result of the slowdown
in demand for our products, we implemented several cost reduction programs. We delayed our 2021 merit increases and initiated reduced
work schedules across the company and implemented permanent census reductions.
The loss of either of these
customers or a significant reduction in business with them would significantly reduce our sales and earnings. See Note 1, Business Description
and Summary of Significant Accounting Policies – Concentration of Credit Risks, of the accompanying consolidated financial statements
for information related to sales concentrations.
Consumer Products
The Company’s
consumer products are marketed throughout the United States and in select foreign markets. Consumer sales are moderately seasonal.
Sales are direct to consumer, through national and international distributors, and through retailers such as big box, hardware,
supermarket, variety, department, discount, gift, drug, outdoors and sporting stores. The Company’s Consumer Products Group
(CPG) also sells its knives and tools (principally machetes, bayonets, survival knives and kitchen knives) to various branches of
the United States Government. Additionally, the Company provides OEM and white label product design and manufacturing services to a
regional customer base across a wide range of consumer and commercial industries. No single customer of the CPG represented more
than 10% of the Company’s consolidated sales in 2020 or 2019. The Company sells its products and manufacturing services
through its own sales resources, independent manufacturers’ representatives and electronic commerce.
Business Segments
Business segment information
is presented in Note 11, Business Segments, of the accompanying consolidated financial statements.
Intellectual Properties
The Company has rights under
certain copyrights, trademarks, patents, and registered domain names. In the view of management, the Company’s competitive position
is not dependent on patent protection.
Research Activities
The amount spent by the Company
in research and development activities during its 2020 and 2019 fiscal years was not significant, but the Company does take advantage
of tax credits for research and development activities when available. Such activities are expensed as incurred.
Environmental Compliance
The cost of compliance with
current environmental laws has not been material and the Company does not anticipate that it will be in the future.
Manufacturing
The Company manufactures its
advanced technology products in Elma, New York and Franklinville, New York and its consumer products in Franklinville, New York.
Raw Materials and Other Supplies
The Company purchases raw
materials and certain components for its products from outside vendors. The Company is generally not dependent upon a single source of
supply for any raw material or component used in its operations.
Competition
Although no reliable industry
statistics are available to enable the Company to determine accurately its relative competitive position with respect to any of its products,
the Company believes that it is a significant factor with respect to certain of its servo-control components within its competitive market.
The Company’s share of the overall cutlery market is not significant.
The Company has many different
competitors with respect to servo-control components because of the nature of that business and the fact that these products also face
competition from other types of control components which, at times, can accomplish the desired result.
The
Company encounters active competition with respect to its consumer products from numerous companies, many of which are larger in terms
of manufacturing capacity, financial resources and marketing organization. Its principal competitors vary depending upon the customer
and/or the products involved. The Company believes that it competes primarily with more than 20 companies with respect to its consumer
products, in addition to foreign imports. To the Company’s knowledge, its principal competitors with regard to cutlery include Corelle
Brands Holdings, Inc., Benchmade Knife Company, Inc., Tramontina, Inc., Dexter-Russell Inc., W. R. Case & Sons
Cutlery Company, Lifetime Brands, Inc., Cutco Corporation and Gerber. The Company also competes with other regional manufacturing
companies for its molded plastic and metal and plastic fabrication services. To the Company’s knowledge, its principal competitors
with regard to manufacturing services include PM Plastics, Monarch Plastics and Ontario Plastics.
The Company markets most of
its products throughout the United States and to a lesser extent in select foreign markets. The Company believes that it competes in marketing
its servo-control products primarily on the basis of operating performance, adherence to rigid specifications, quality, price and delivery
and its consumer products primarily on the basis of price, quality and delivery.
Employees
The
Company, at December 31, 2020, had 318 employees of which 316 are full time and 2 part time employees at two locations in
New York. Approximately 87% of its employees and contractors are engaged in production, inspection, packaging or shipping activities.
The balance is engaged in executive, engineering, administrative, clerical or sales capacities. None are subject to a collective bargaining
agreement.
The Company is a smaller reporting
company by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 1B.
|
Unresolved Staff Comments
|
Not applicable.
The Company owns real property
as set forth in the following table with no related encumbrances:
Location
|
|
Description
|
|
Principal
product
manufactured
|
|
Number of
buildings and
type of
construction
|
|
Approx.
floor area
(sq. feet)
|
Elma, New York
|
|
Corporate Headquarters and Manufacturing Facility
|
|
Advanced technology products
|
|
1-concrete block/
steel
|
|
83,000
|
|
|
|
|
|
|
|
|
|
Franklinville, New York
|
|
Office and Manufacturing Facility
|
|
Advanced technology products
Cutlery products
|
|
1-tile/wood
1-concrete/metal
|
|
137,000
|
The
Company believes that the properties are suitable and adequate for the current production capacity. The properties are appropriately covered
by insurance consistent with the advice of the Company’s insurance consultant.
Item 3.
|
Legal Proceedings
|
See Note 9, Litigation, for information regarding legal actions. 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 4.
|
Mine Safety Disclosures
|
Not applicable.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
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 December 31, 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 service is performed.
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.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2020 and December 31, 2019 under the guidance
of ASC460 the Company has recorded a warranty reserve of approximately $382,000 and $420,000, 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 net realizable value adjustments and inventory determined to be slow moving
are applied to the gross value of the inventory through a reserve of approximately $1,720,000 and $1,437,000 at December 31, 2020
and December 31, 2019, 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 two
years of customer requirements. Also, in order to maintain a reasonable and/or agreed to lead time or minimum stocking requirements, certain
larger quantities of other product support items may have to be purchased and may result in over one year’s supply.
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.
SERVOTRONICS, INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 tax purposes. Depreciation expense includes the amortization of capital lease assets. 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
|
|
Years ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000's omitted)
|
|
|
|
|
Income tax expense
|
|
$
|
(38
|
)
|
|
$
|
671
|
|
|
|
(105.7
|
)%
|
Effective tax rate
|
|
|
(61.3
|
)%
|
|
|
21.5
|
%
|
|
|
(385.1
|
)%
|
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 December 31, 2020 or
December 31, 2019, and did not recognize any interest and/or penalties in its consolidated statements of income during the
years ended December 31, 2020 and 2019. The Company did not have any material uncertain tax positions or unrecognized tax
benefits or obligations as of December 31, 2020 and December 31, 2019. During 2020, the 2017 federal tax return was
selected for examination by the Internal Revenue Service. The Company does not anticipate any material adjustments as a result of
this examination. The 2017 through 2020 federal and state tax returns remain subject to examination.
Supplemental
Cash Flow Information
Income
taxes paid, 2020 net of a refund, for the years ended December 31, 2020 and 2019 amounted to approximately $40,000 and $524,000, respectively.
Interest paid, for the years ended December 31, 2020 and 2019 amounted to approximately $180,000 and $125,000,
respectively.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 CPG segment, 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 December 31, 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.
Research and
Development Costs
Research and development costs are expensed as
incurred.
Concentration
of Credit Risks
Financial instruments
that potentially subject the Company to concentration of credit risks principally consist of cash accounts in financial institutions.
Although the accounts exceed the federally insured deposit amount, management does not anticipate nonperformance by the financial institutions.
The Company had
sales of advanced technology products to two customers, including various divisions and subsidiaries of a common parent company, which
represented more than 10% of consolidated revenues in 2020. In both 2020 and 2019 we had a concentration of sales to Customer A and Customer
B representing approximately 48.9% of our consolidated revenues. No other customers of the ATG or CPG represented more than 10% of the Company’s
consolidated revenues in either of these years. Refer to Note 12, Business Segments, for disclosures related to business segments of the
Company.
Fair Value of
Financial Instruments
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.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting
Pronouncements Adopted
We consider the
applicability and impact of all ASUs. Recent ASUs were assessed and determined to be either not applicable, or had and are expected to
have minimal impact on our financial statements and related disclosures.
2.
|
Immaterial Correction of an
Error in Prior Periods
|
Under ASC 715-60 Defined Benefit Plans-Other
Postretirement the Company’s policy was to record actuarial gains and losses as a component of comprehensive income as they
arise and to record the minimum amortization of net actuarial gain or loss as a component of net periodic benefit cost. Beginning in 2014,
without making an accounting policy election, the Company incorrectly expensed substantially all of the actuarial loss related to its
postretirement health and life insurance benefit plan as opposed to following its prior established policy. In accordance with Financial
Accounting Standards Board Accounting Standards Codification 250, Accounting Changes and Error Corrections, we evaluated the
materiality of the errors from quantitative and qualitative perspectives, and concluded that the errors were immaterial to the Company's
prior period interim and annual consolidated financial statements. Since these revisions were not material to any prior period interim
or annual financial statements, no amendments to previously filed interim or annual periodic reports are required. Consequently, the Company
has adjusted for these errors by revising its historical financial statements presented herein. The Company has recorded a cumulative
effect of the error to the opening equity as of December 31, 2018 to increase retained earnings and accumulated other comprehensive
loss by $881,000.
The following table presents the effects
of the error correction for the year ended December 31, 2019:
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
($000's omitted)
|
|
|
|
|
|
|
As Reported
|
|
|
Restatement
|
|
|
As Adjusted
|
|
Retained earnings
|
|
$
|
20,484
|
|
|
$
|
1,219
|
|
|
$
|
21,703
|
|
Accumulated other comprehensive gain (loss)
|
|
|
98
|
|
|
|
(1,219
|
)
|
|
|
(1,121
|
)
|
Selling, general and administrative
|
|
|
9,313
|
|
|
|
(430
|
)
|
|
|
8,883
|
|
Income tax provision
|
|
|
579
|
|
|
|
92
|
|
|
|
671
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefits adjustment, net of income taxes
|
|
|
63
|
|
|
|
(338
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.91
|
|
|
$
|
0.14
|
|
|
$
|
1.05
|
|
Diluted net income per share
|
|
$
|
0.88
|
|
|
$
|
0.15
|
|
|
$
|
1.03
|
|
Net cash provided by operating activities, comprehensive income, or total equity were not affected by this correction.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
($000's omitted)
|
|
Raw material and common parts
|
|
$
|
16,989
|
|
|
$
|
14,707
|
|
Work-in-process
|
|
|
4,273
|
|
|
|
4,158
|
|
Finished goods
|
|
|
3,864
|
|
|
|
2,723
|
|
|
|
|
25,126
|
|
|
|
21,588
|
|
Less inventory reserve
|
|
|
(1,720
|
)
|
|
|
(1,437
|
)
|
Total inventories
|
|
$
|
23,406
|
|
|
$
|
20,151
|
|
SERVOTRONICS, INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
|
Property, Plant and Equipment
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
($000's omitted)
|
|
Land
|
|
$
|
7
|
|
|
$
|
7
|
|
Buildings
|
|
|
11,359
|
|
|
|
11,017
|
|
Machinery, equipment and tooling
|
|
|
21,146
|
|
|
|
20,695
|
|
Construction in progress
|
|
|
198
|
|
|
|
331
|
|
|
|
|
32,710
|
|
|
|
32,050
|
|
Less accumulated depreciation and amortization
|
|
|
(20,693
|
)
|
|
|
(19,333
|
)
|
Property, plant and equipment, net
|
|
$
|
12,017
|
|
|
$
|
12,717
|
|
Depreciation
and amortization expense amounted to approximately $1,442,000 and $1,268,000 for
the years ended December 31, 2020 and 2019, respectively. Depreciation expense amounted to approximately $1,368,000 and
$1,178,000 for the years ended December 31, 2020 and 2019, respectively. Amortization expense
primarily related to capital leases amounted to approximately $74,000 and $90,000 for years ended December 31, 2020 and 2019, respectively.
The Company’s Right of Use (‘ROU’)
assets included in machinery, equipment and tooling had a net book value of approximately $610,000 ($728,000 – 2019).
As of December 31,
2020, there is approximately $198,000 ($331,000 – 2019) of construction in progress (CIP) included in property, plant and equipment
all of which is related to capital projects. There is approximately $191,000 in CIP for the machinery and equipment and self-constructed
assets, and $7,000 of computer equipment primarily at the Advance Technology Group.
SERVOTRONICS, INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
December 31,
|
|
|
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 2.15000% (B) (C)
|
|
|
3,750
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Term loan payable to a financial institution; Interest rate option of bank prime or Libor plus 1.554750%, monthly
principal payments of $21,833 through 2021 with a balloon payment of $786,000 due December 1, 2021(C).
|
|
|
1,048
|
|
|
|
1,310
|
|
|
|
|
|
|
|
|
|
|
Term loan payable to a financial institution; Interest rate option of bank prime or Libor plus 1.554750%, monthly
principal payments of $23,810 through 2021(C).
|
|
|
286
|
|
|
|
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 December 31, 2020)(D)
|
|
|
310
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
534
|
|
|
|
670
|
|
|
|
|
9,928
|
|
|
|
6,019
|
|
Less current portion
|
|
|
(2,635
|
)
|
|
|
(849
|
)
|
|
|
$
|
7,293
|
|
|
$
|
5,170
|
|
|
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 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 the loan forgiveness is determined or 10 months after the end of the borrower’s
covered period if forgiveness is not requested.
|
|
B.)
|
At
December 31, 2019, the Company had a $4,000,000 line of credit. As of March 20, 2020,
the Company increased its line of credit to $6,000,000. The interest rate is a rate
per year equal to the bank’s prime rate or Libor plus 2.15%. In addition, effective
June 17, 2020, the Company is required to pay a commitment fee of 0.15% on the unused portion
of the line of credit. The line of credit expires December 21, 2022. There was
$3,750,000 balance outstanding at December 31, 2020 and $3,000,000 balance at December 31,
2019.
|
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
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 December 31, 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, 2020. 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 $310,000 outstanding
at December 31, 2020 and $468,000 balance outstanding 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, 2019. 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
$534,000 outstanding at December 31, 2020 and $670,000 at December 31, 2019.
|
Principal maturities of long-term debt
are as follows: 2021 - $2,635,000, 2022 - $6,037,000, 2023 - $1,154,000, and 2024 - $102,000.
Remaining principal payments for the capital note and capital lease obligations for each of the next five years:
|
|
|
|
|
December 31,
|
|
|
|
Year
|
|
|
2020
|
|
|
|
|
|
|
($000's omitted)
|
|
|
|
2021
|
|
|
|
331
|
|
|
|
2022
|
|
|
|
316
|
|
|
|
2023
|
|
|
|
169
|
|
|
|
2024
|
|
|
|
112
|
|
Total principal and interest payments
|
|
|
|
|
|
928
|
|
Less amount representing interest
|
|
|
|
|
|
(83
|
)
|
Present value of net minimum lease payments
|
|
|
|
|
|
845
|
|
Less current portion
|
|
|
|
|
|
(301
|
)
|
Long term principle payments
|
|
|
|
|
$
|
544
|
|
|
6.
|
Employee
Benefit Plans
|
Employee Stock Ownership Plan (ESOP)
In 1985, the Company established an employee stock
ownership plan (ESOP) for the benefit of employees who meet certain minimum age and service requirements. Upon inception of the ESOP,
the Company borrowed $2,000,000 from a bank and lent the proceeds to the trust established under the ESOP to purchase shares of the Company’s
common stock. The Company’s loan to the trust is at an interest rate approximating the prime rate and is repayable to the Company
over a 40-year term ending in December 2024. During 1987 and 1988, the Company loaned an additional $1,942,000 to the trust under
terms similar to those under the Company’s original loan.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ESOP shares are
held by the plan trustees in a suspense account until allocated to participant accounts. Contributions to the employee stock ownership
plan are determined annually by the Company according to plan formula. Each year the Company makes contributions to the trust sufficient
to enable the trust to repay the principal and interest due to the Company under the trust loans. As the loans are repaid, shares are
released from the suspense account pro rata based on the portion of the aggregate loan payments that are paid during the year. The ESOP
plan allows dividends on unallocated shares to be distributed to participants in cash, unless otherwise directed. ESOP shares released
from the suspense account are allocated to participants on the basis of their relative taxable compensation in the year of allocation
and/or on the participant’s account balance.
If Servotronics
shares are not readily tradeable on an established securities market at the times of an ESOP participant’s termination of employment
or retirement and if such ESOP participant requests that his/her ESOP distributed shares be repurchased by the Company, the Company is
obligated to do so. The Company’s shares currently trade on NYSE American. There were no outstanding shares subject to the repurchase
obligation at December 31, 2020.
Since inception of the ESOP, 398,283 shares have
been allocated, exclusive of shares distributed to ESOP participants. At December 31, 2020 and 2019, 71,744 and 87,426 shares, respectively,
remain unallocated.
Related compensation expense associated with the
Company’s ESOP, which is equal to the principal reduction on the loans receivable from the trust, amounted to approximately $101,000
in both 2020 and 2019. Included as a reduction to shareholders’ equity is the ESOP trust commitment which represents the remaining
indebtedness of the trust to the Company. Employees are entitled to vote allocated shares and the ESOP trustees are entitled to vote
unallocated shares and those allocated shares not voted by the employees.
Other Postretirement Benefit Plans
The Company provides certain postretirement health
and life insurance benefits for the Company’s Chief Executive Officer and President, and a former executive of the Company (the
Plan). Upon retirement and after attaining at least the age of 65, the Company will pay the annual cost of health insurance coverage
and provide life insurance offered at the time of retirement. The Plan also provides a benefit to reimburse the participants of certain
out-of-pocket medical or health related expenses. The retirees’ insurance benefits cease upon the death of the retired executive.
The Plan is unfunded and the actuarially determined future accumulated postretirement benefit obligation at December 31, 2020 and
2019 was approximately $2,529,000 and $2,126,000, respectively.
SERVOTRONICS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in the balances sheets at December 31,
2020 and 2019 consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Long-term liabilities - retirement benefits and other
|
|
$
|
2,529,000
|
|
|
$
|
2,126,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, before income
taxes:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
1,716,000
|
|
|
$
|
1,419,000
|
|
The estimated net loss to be amortized from AOCI
to benefit cost during 2021 is approximately $77,000.
A reconciliation of the beginning and ending balances
of accumulated postretirement benefit obligations is as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accumulated postretirement benefit obligations at
the beginning of the year
|
|
$
|
2,126,000
|
|
|
$
|
1,730,000
|
|
Service Cost
|
|
|
38,000
|
|
|
|
30,000
|
|
Interest Cost
|
|
|
70,000
|
|
|
|
71,000
|
|
Actuarial loss
|
|
|
357,000
|
|
|
|
390,000
|
|
Benefits paid
|
|
|
(62,000
|
)
|
|
|
(95,000
|
)
|
Accumulated postretirement benefit obligations at the end of the year
|
|
$
|
2,529,000
|
|
|
$
|
2,126,000
|
|
Financial information for this Plan
for the year ended December 31, 2020 and 2019 is as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Pension cost
|
|
$
|
168,000
|
|
|
$
|
144,000
|
|
Company contribution and benefits paid
|
|
$
|
62,000
|
|
|
$
|
95,000
|
|
Assumptions used as of and for the
years ended December 31, 2020 and 2019 are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Discount rate used in determining
|
|
|
|
|
|
|
|
|
Benefit obligation
|
|
|
2.625
|
%
|
|
|
3.375
|
%
|
Pension cost
|
|
|
3.375
|
%
|
|
|
4.250
|
%
|
Medical inflation rate is estimated at 10% for
the first year and then grading down by 0.5% for each year subsequent until a floor of 5% is reached. The assumption for mortality uses
the PriH – 2012 with an improvement scale of MP 2020 (for 2019 the MP 2019 improvement scale was used).
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effect of a one-percentage-point
increase and a one-percentage-point decrease in the assumed health care cost trend rates on the aggregate of the service and interest
cost components of net periodic postretirement health care benefit costs and the accumulated postretirement benefit obligation for health
care benefits are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Effect of 1% increase in health care trend rates:
|
|
|
|
|
|
|
|
|
Benefit obligation
|
|
$
|
465,000
|
|
|
$
|
399,000
|
|
Aggregate of service and interest cost
|
|
$
|
28,000
|
|
|
$
|
26,000
|
|
|
|
|
|
|
|
|
|
|
Effect of 1% decrease of health care trend rates:
|
|
|
|
|
|
|
|
|
Benefit obligation
|
|
$
|
(356,000
|
)
|
|
$
|
(305,000
|
)
|
Aggregate of service and interest cost
|
|
$
|
(20,000
|
)
|
|
$
|
(19,000
|
)
|
The Company is expected to make benefit
payments as of December 31, 2020:
Years ending December 31,
|
|
|
|
|
2022
|
|
|
$
|
69,000
|
|
2023
|
|
|
|
71,000
|
|
2024
|
|
|
|
73,000
|
|
2025
|
|
|
|
75,000
|
|
2026 - 2030
|
|
|
$
|
403,000
|
|
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision
from operations included in the consolidated statements of income consists of the following:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
($000’s omitted)
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(47
|
)
|
|
$
|
455
|
|
State
|
|
|
(24
|
)
|
|
|
45
|
|
|
|
|
(71
|
)
|
|
|
500
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
|
33
|
|
|
|
171
|
|
|
|
|
33
|
|
|
|
171
|
|
|
|
$
|
(38
|
)
|
|
$
|
671
|
|
The reconciliation
of the federal statutory income tax rate to the Company’s effective tax rate based upon the total income tax provision from operations
is as follows:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Permanent non-deductible expenses
|
|
|
105.8
|
%
|
|
|
2.6
|
%
|
Business credits
|
|
|
-61.7
|
%
|
|
|
-3.0
|
%
|
ESOP dividend
|
|
|
0.0
|
%
|
|
|
-0.6
|
%
|
Stock compensation
|
|
|
-7.6
|
%
|
|
|
-0.1
|
%
|
Foreign-derived intangible income deduction
|
|
|
-55.7
|
%
|
|
|
-1.2
|
%
|
State taxes, net of federal benefit
|
|
|
-28.7
|
%
|
|
|
1.3
|
%
|
Other
|
|
|
-34.4
|
%
|
|
|
1.5
|
%
|
|
|
|
-61.3
|
%
|
|
|
21.5
|
%
|
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2020 and 2019, the deferred
tax assets (liabilities) were comprised of the following:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
($000’s omitted)
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
455
|
|
|
$
|
473
|
|
Accrued employees compensation and benefits costs
|
|
|
397
|
|
|
|
148
|
|
Postretirement obligation (accumulated other comprehensive income)
|
|
|
360
|
|
|
|
298
|
|
Accrued arbitration award and related liability
|
|
|
-
|
|
|
|
324
|
|
State net operating loss and credit carryforwards
|
|
|
147
|
|
|
|
236
|
|
Bad debt reserve
|
|
|
40
|
|
|
|
71
|
|
Warranty reserve
|
|
|
80
|
|
|
|
88
|
|
Other
|
|
|
67
|
|
|
|
-
|
|
Total deferred tax assets
|
|
|
1,546
|
|
|
|
1,638
|
|
Valuation allowance
|
|
|
(147
|
)
|
|
|
(236
|
)
|
Net deferred tax assets
|
|
|
1,399
|
|
|
|
1,402
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(62
|
)
|
|
|
(32
|
)
|
Property, plant and equipment
|
|
|
(1,200
|
)
|
|
|
(1,238
|
)
|
Total deferred tax liabilities
|
|
|
(1,262
|
)
|
|
|
(1,270
|
)
|
Net deferred tax assets
|
|
$
|
137
|
|
|
$
|
132
|
|
In assessing
the ability of the Company to realize the benefit of the deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. Based upon the level of historical taxable income, the
opportunity for net operating loss carrybacks, and projections for future taxable income over the periods which deferred tax assets
are deductible, management believes it is more likely than not the Company will generate sufficient taxable income to realize the
benefits of these deductible differences at December 31, 2020, except for a valuation allowance of $147,000 ($236,000 –
2019) related to certain state net operating loss carryforwards, state tax credit carryforwards and other state net deferred tax
assets. At December 31, 2020, the Company has net operating loss carryforwards with full valuation allowances from Pennsylvania
of approximately $1,620,000, which is no longer a benefit to the Company at December 31, 2020 because they ceased to filing a tax
return in Pennsylvania. The Company also has a New York state tax credit carryforward at December 31, 2020 of approximately
$147,000 ($139,000 – 2019), which begins to expire in 2023.
There are no
uncertain tax positions or unrecognized tax benefits for 2020 and 2019. The Company is subject to routine audits of its tax returns
by the Internal Revenue Service and various state taxing authorities. During 2020, the 2017 federal tax retain was selected for
examination by the Internal Revenue Service. The Company does not anticipate any material adjustments as a result of this
examination. The 2017 through 2020 federal and state tax returns remain subject to examination.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Years Ended December 31, 2019 and 2020
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Common
|
|
|
excess of
|
|
|
|
|
|
Treasury
|
|
|
shareholders'
|
|
|
|
Earnings
|
|
|
Income
|
|
|
Stock
|
|
|
par value
|
|
|
ESOT
|
|
|
stock
|
|
|
equity
|
|
December 31, 2018
|
|
$
|
19,669
|
|
|
$
|
(846
|
)
|
|
$
|
523
|
|
|
$
|
14,250
|
|
|
$
|
(561
|
)
|
|
$
|
(1,522
|
)
|
|
$
|
31,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared ($0.16 per share)
|
|
|
(413
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(413
|
)
|
Retirement benefits adjustment
|
|
|
-
|
|
|
|
(275
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
101
|
|
|
|
-
|
|
|
|
(174
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
|
|
-
|
|
|
|
208
|
|
|
|
316
|
|
Purchase of treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(157
|
)
|
|
|
(157
|
)
|
Net Income
|
|
|
2,447
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
21,703
|
|
|
$
|
(1,121
|
)
|
|
$
|
523
|
|
|
$
|
14,358
|
|
|
$
|
(460
|
)
|
|
$
|
(1,471
|
)
|
|
$
|
33,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefits adjustment
|
|
|
-
|
|
|
|
(235
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
101
|
|
|
|
-
|
|
|
|
(134
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123
|
|
|
|
-
|
|
|
|
216
|
|
|
|
339
|
|
Purchase of treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
(100
|
)
|
Net Income
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
$
|
21,803
|
|
|
$
|
(1,356
|
)
|
|
$
|
523
|
|
|
$
|
14,481
|
|
|
$
|
(359
|
)
|
|
$
|
(1,355
|
)
|
|
$
|
33,737
|
|
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2019, the Company has purchased
360,255 shares and there remain 89,745 shares available to purchase under this program. There were 5,232 shares purchased by the
Company in 2019. As of December 31, 2020, the Company has purchased 360,615 shares and there remains 89,385 shares available to
purchase under this program. There were 360 shares purchased by the Company in 2020.
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 11,328 restricted shares were
issued on August 14, 2020 with a grant date fair value of $100,000.
The Company’s 2012 Long-Term
Incentive Plan was approved by the shareholders at the 2012 Annual Meeting of Shareholders. This plan authorizes the issuance of up
to 300,000 shares
On
January 1, 2020, 26,250 shares of restricted stock vested of which 9,543 shares were withheld
by the Company for approximately $99,000 to satisfy statutory minimum withholding tax requirements for those participants who elected
this option as permitted under the Company’s 2012 Long-Term Incentive Plan.
On May 25,
2018, the Company issued 78,750 shares of restricted stock to Executive Officers and certain key management of the Company under the
Company’s 2012 Long-Term Incentive Plan. The restricted share awards have varying vesting periods between January 2020 and
January 2021; however, these shares have voting rights and accrue dividends prior to vesting. The accrued dividends are paid upon
vesting of the restricted shares. The aggregate amount of expense to the Company, measured based on grant date fair value is approximately
$735,000 and has been recognized over the requisite service period.
SERVOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included
in the years ended December 31, 2020 and 2019 is approximately $339,000 and $316,000, respectively, of stock-based compensation
expense related to the restrictive share awards. We have approximately $286,000 in compensation to be recorded related to unvested
shares to be recognized in 2021.
A summary
of the status of restricted share awards granted under all employee plans is presented below:
|
|
|
|
|
Weighted Average Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
Restricted Share Activity:
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2018
|
|
|
80,894
|
|
|
$
|
9.33
|
|
|
|
|
|
|
|
|
|
|
Granted in 2019
|
|
|
7,836
|
|
|
$
|
12.77
|
|
Forfeited in 2019
|
|
|
2,000
|
|
|
$
|
9.33
|
|
Vested in 2019
|
|
|
32,314
|
|
|
$
|
9.75
|
|
Unvested at December 31, 2019
|
|
|
54,416
|
|
|
$
|
9.58
|
|
|
|
|
|
|
|
|
|
|
Granted in 2020
|
|
|
11,328
|
|
|
$
|
8.83
|
|
Vested in 2020
|
|
|
34,830
|
|
|
$
|
9.11
|
|
Unvested at December 31, 2020
|
|
|
30,914
|
|
|
$
|
9.24
|
|
Earnings
Per Share
Basic
earnings per share is computed by dividing net income 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 income by the weighted average number of shares outstanding during the period plus the number of shares of common stock that would
be issued assuming all contingently issuable shares having a dilutive effect on the earnings per share that were outstanding for the
period. The dilutive effect of unvested restrictive stock is determined using the treasury stock method.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
($000's omitted except for per share data)
|
|
Net Income
|
|
$
|
100
|
|
|
$
|
2,447
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
(basic)
|
|
|
2,366
|
|
|
|
2,330
|
|
Unvested restricted stock
|
|
|
31
|
|
|
|
56
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
(diluted)
|
|
|
2,397
|
|
|
|
2,386
|
|
Basic
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.04
|
|
|
$
|
1.05
|
|
Diluted
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.04
|
|
|
$
|
1.03
|
|
SERVOTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Shareholders’
Rights Plan
During 2012, the
Company’s Board of Directors adopted a shareholders’ rights plan (the “Rights Plan”) and simultaneously declared
a dividend distribution of one right for each outstanding share of the Company’s common stock outstanding at October 15, 2012.
The Rights Plan replaced a previous shareholders rights plan that was adopted in 2002 and expired on August 28, 2012. The rights
do not become exercisable until the earlier of (i) the date of the Company’s public announcement that a person or affiliated
group other than Dr. Nicholas D. Trbovich, Kenneth D. Trbovich or the ESOP trust (an “Acquiring Person”) has acquired,
or obtained the right to acquire, beneficial ownership of 25% or more of the Company’s common stock (excluding shares held by the
ESOP trust) or (ii) ten business days following the commencement of a tender offer that would result in a person or affiliated group
becoming an Acquiring Person.
The
exercise price of a right has been established at $32.00. Once exercisable, each right would entitle the holder to purchase one one-hundredth
of a share of Series A Junior Participating Preferred Stock. In the event that any person becomes an Acquiring Person, each right
would entitle any holder other than the Acquiring Person to purchase common stock or other securities of the Company having a value equal
to three times the exercise price. The Board of Directors has the discretion in such event to exchange two shares of common stock or
two one-hundredths of a share of preferred stock for each right held by any holder other than the Acquiring Person.
SERVOTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Litigation.
The Company has pending litigation relative to leases of certain equipment and real property
with a former subsidiary, Aero, Inc. 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 has not considered the risk of loss to be probable, and is unable to reasonably or accurately
estimate the likelihood and amount of any liability or benefit that may be realized as a result of this litigation. Accordingly, no gain
or loss has been recognized in the accompanying financial statements related to this litigation.
There are no other
legal proceedings currently pending by or against the Company other than ordinary routine litigation incidental to the business which
is not expected to have a material adverse effect on the business or earnings of the Company.
|
10.
|
Related
Party Transactions
|
The Company paid
legal fees and disbursements of approximately $183,000 and $197,000 in the year ended December 31, 2020 and 2019, respectively,
for services provided by a law firm that is owned by a member of the Company’s Board of Directors. Additionally, the Company had
accrued unbilled legal fees at December 31, 2020 and 2019 of approximately $19,000 and $52,000, respectively, with this firm.
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.
SERVOTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Information regarding
the Company’s operations in these segments is summarized as follows ($000’s omitted):
|
|
($000's omitted except per share data)
|
|
|
|
ATG
|
|
|
CPG
|
|
|
Consolidated
|
|
|
|
Years Ended
|
|
|
Years Ended
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues from unaffiliated customers
|
|
$
|
40,782
|
|
|
$
|
48,519
|
|
|
$
|
9,062
|
|
|
$
|
6,753
|
|
|
$
|
49,844
|
|
|
$
|
55,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, inclusive of depreciation
|
|
|
(33,440
|
)
|
|
|
(35,632
|
)
|
|
|
(8,164
|
)
|
|
|
(7,514
|
)
|
|
|
(41,604
|
)
|
|
|
(43,146
|
)
|
Gross margin (loss)
|
|
|
7,342
|
|
|
|
12,887
|
|
|
|
898
|
|
|
|
(761
|
)
|
|
|
8,240
|
|
|
|
12,126
|
|
Gross margin %
|
|
|
18.0
|
%
|
|
|
26.6
|
%
|
|
|
9.9
|
%
|
|
|
(11.3
|
)%
|
|
|
16.5
|
%
|
|
|
21.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
(6,245
|
)
|
|
|
(6,158
|
)
|
|
|
(1,753
|
)
|
|
|
(2,725
|
)
|
|
|
(7,998
|
)
|
|
|
(8,883
|
)
|
Interest
|
|
|
(170
|
)
|
|
|
(97
|
)
|
|
|
(10
|
)
|
|
|
(28
|
)
|
|
|
(180
|
)
|
|
|
(125
|
)
|
Total costs and expenses
|
|
|
(39,855
|
)
|
|
|
(41,887
|
)
|
|
|
(9,927
|
)
|
|
|
(10,268
|
)
|
|
|
(49,782
|
)
|
|
|
(52,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
927
|
|
|
|
6,633
|
|
|
|
(865
|
)
|
|
|
(3,515
|
)
|
|
|
62
|
|
|
|
3,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
492
|
|
|
|
1,428
|
|
|
|
(530
|
)
|
|
|
(757
|
)
|
|
|
(38
|
)
|
|
|
671
|
|
Net income/(loss)
|
|
$
|
435
|
|
|
$
|
5,205
|
|
|
$
|
(335
|
)
|
|
$
|
(2,758
|
)
|
|
$
|
100
|
|
|
$
|
2,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
40,826
|
|
|
$
|
39,989
|
|
|
$
|
9,502
|
|
|
$
|
9,481
|
|
|
$
|
50,328
|
|
|
$
|
49,470
|
|
Capital expenditures
|
|
$
|
661
|
|
|
$
|
1,990
|
|
|
$
|
68
|
|
|
$
|
281
|
|
|
$
|
729
|
|
|
$
|
2,271
|
|