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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-K

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

or

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

For the fiscal year ended December 31, 2021

Commission File No. 1-07109

SERVOTRONICS, INC.

(Exact name of registrant as specified in its charter)

Delaware

 

16-0837866

(State or other jurisdiction of

 

(I. R. S. Employer

incorporation or organization)

 

Identification No.)

1110 Maple Street

Elma, New York             14059

(Address of principal executive offices) (zip code)

(716) 655-5990

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Ticker symbol(s)

Name of each exchange on which registered

Common Stock

SVT

NYSE American

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes       No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes       No 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes       No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes       No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act.

Large accelerated filer  

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes       No 

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. 

Based on the closing price of the Common Stock on June 30, 2021 $8.65 (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 $14,176,355.

As of February 28, 2022, the number of $.20 par value common shares outstanding was 2,491,667.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2022 Annual Meeting of Shareholders are incorporated by reference in Part III.

TABLE OF CONTENTS

FOREWARD-LOOKING AND CAUTIONARY STATEMENTS

INTRODUCTORY NOTES

PART I

    

Page

Item 1.

Business

4

Item 1A.

Risk Factors

 

8

Item 1B.

Unresolved Staff Comments

 

8

Item 2.

Properties

 

8

Item 3.

Legal Proceedings

 

8

Item 4.

Mine Safety Disclosures

 

9

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

9

Item 6.

Selected Financial Data

 

10

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

10

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

18

Item 8.

Financial Statements and Supplementary Data

 

18

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

18

Item 9A.

Controls and Procedures

 

18

Item 9B.

Other Information

 

19

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

 

19

Item 11.

Executive Compensation

 

20

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

20

Item 13.

Certain Relationships and Related Transactions and Director Independence

 

20

Item 14.

Principal Accountant Fees and Services

 

20

PART IV

Item 15.

Exhibits and Financial Statement Schedules

 

21

FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS

All statements contained herein that are not statements of historical fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the word “believe,” “anticipate,” “expect,” “project,” “intend,” “will continue,” “will likely result,” “should” or words or phrases of similar meaning. Forward-looking statements involve numerous risks and uncertainties. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: uncertainties in today's global economy, including political risks, adverse changes in legal and regulatory environments, and difficulty in predicting defense appropriations, the introduction of new technologies and the impact of competitive products, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company's customers to fund long-term purchase programs, and market demand and acceptance both for the Company's products and its customers' products which incorporate Company-made components, the Company's ability to accurately align capacity with demand, the availability of financing and changes in interest rates, the outcome of pending and potential litigation, the severity, magnitude and duration of the COVID-19 pandemic, including impacts of the pandemic and of businesses’ and governments’ responses to the pandemic on our operations and personnel, and on commercial activity and demand across our and our customers’ businesses, and on global supply chains and the additional risks discussed in the Company's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as of the date hereof. The Company assumes no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise.

Business Environment; Impact of COVID-19

The COVID-19 pandemic has been, and continues to be, an unprecedented disruption in the economy and has negatively impacted, and may continue to negatively impact, the Company’s business and results. The COVID-19 pandemic and accompanying economic disruption have caused delays and declines in the placement of customer orders. Accordingly, the Company continued to experience declines in revenue for the most recently completed year compared to pre-pandemic levels. This trend may continue in the near-term and possibly longer, including, without limitation, if the pandemic increases in size and scope, its duration is prolonged or among other matters related thereto, governmental actions, including, without limitation, business restrictions are imposed. In response to the economic and business disruption, the Company has taken actions to reduce costs and spending across the organization. The Company continues to actively monitor the COVID-19 pandemic and may take further actions, including those that may alter business operations, if required by federal, state or local authorities or otherwise determined to be advisable by management.

The Company is focused on ensuring ample liquidity to meet its business needs. To that end, during April 2020, the Company received a loan under the Paycheck Protection Program (the “PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the aggregate principal amount of $4,000,000. See “Liquidity and Capital Resources” below for additional information regarding the Company’s credit facility and the PPP loan.

The Occupational Safety and Health Administration (OSHA) has withdrawn the vaccination and testing emergency temporary standard (ETS) after the United States Supreme Court blocked enforcement. The ETS required covered employers to create and mandate a COVID-19 vaccination policy, with an exemption for employers that mandated face coverings and regular testing for employees who were not vaccinated. OSHA indicated that the agency is not withdrawing the ETS as a proposed rule and is prioritizing its resources to focus on finalizing a permanent COVID-19 Healthcare Standard. The Company actively encourages employees to be vaccinated and has achieved some success in these efforts. However, management cannot currently predict the impact that the OSHA rule, if adopted, would have on our workforce, our ability to secure skilled labor in the future, or the cost of implementation and compliance with such rule.

As of the date of this annual report on Form 10-K, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. Factors arising from the COVID-19 pandemic that have impacted, or may negatively impact, the Company’s business and results, including sales and gross margin, include, but are not limited to: the Company’s ability to procure materials from suppliers or to meet delivery requirements and commitments to our customers; limitations on the ability of the Company’s employees to perform their work due to impacts caused by the pandemic or local, state, or federal orders that restrict the Company’s operations or the operations of its customers, or require that the employees be quarantined; limitations on the ability of carriers to deliver products to the Company’s facilities and customers; limitations on the ability or desire of the Company’s customers to conduct their

-3-

business, purchase products and services and pay for purchases on a timely basis or at all; and decreased demand for products and services.

The situation surrounding COVID-19 remains fluid. The Company is unable to determine or predict the nature, duration, or scope of the overall impact that the COVID-19 pandemic will have on the Company’s business, results of operations, liquidity, or financial condition, as such impact will depend on future developments, including the severity and duration of the pandemic and government and other actions taken in response thereto, all of which are highly uncertain. Further, even after the COVID-19 pandemic subsides, the Company may continue to experience adverse impacts to its business as a result of, among other things, any economic impact that has occurred or may occur in the future and changes in customer or supplier behavior.

The employee retention credit (“ERC”), a refundable tax credit against certain employment taxes, was established by the CARES Act and amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “Relief Act”) and the American Rescue Plan Act of 2021 (“ARPA”). A company needed a more than 50% decline in gross receipts in 2020, compared to the same quarter in 2019, in order to use the gross receipts test to be eligible for the credit. The Company determined it did not qualify for the ERC for 2020 as it did not satisfy the gross receipts test for any quarter in 2020.

The Relief Act provided for changes in the ERC for 2020 and provided an additional credit for all quarters of 2021. The Relief Act revised the gross receipts test, using two scenarios to qualify:1) a company that has had a more than 20% decline in gross receipts in 2021, compared to the same quarter in 2019, or 2) a company can elect to use the gross receipts from the immediately preceding quarter, and compare these prior quarter gross receipts to the same quarter in 2019, rather than the current quarter. The Infrastructure Investment and Jobs Act of 2021, enacted November 15, 2021 terminated the employee retention credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses. The Company determined it qualified for the ERC for the first, second and third quarters of 2021. As a result, the Company recognized approximately $5,622,000 on a consolidated basis, for the period ended December 31, 2021.

PART I

Item 1.Business

General

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 operates through two primary segments:  the Advanced Technology Group (ATG) and the Consumer Products Group (CPG).

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.

Products

Advanced Technology Products (ATG)

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.

-4-

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 (CPG)

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 medical 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 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 commercial aviation manufacturers, government prime contractors, government subcontractors, and end-users. Sales are made primarily by the Company’s professional staff.

The Company’s prime contracts and subcontracts with United States 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. The Company has a significant concentration of business with two major customers: Customer A and Customer B. Sales to Customer A accounted for 33.5% of consolidated sales in 2021 and 26.7% of consolidated sales in 2020. Sales to Customer B accounted for 19.1% of consolidated sales in 2021 and 22.3% of consolidated sales in 2020. In 2021 and 2020 we had a concentration of sales to Customer A and Customer B representing approximately 52.6% and 49.0% of our consolidated sales, respectively.

Two commercial aircraft accidents in 2018 and 2019 led to the grounding by the Federal Aviation Administration and other regulators of the Boeing 737 MAX aircraft. A significant portion of the units shipped to Customer B support Boeing 737 MAX aircraft production as shown in the table below:

    

737 MAX shipments as a % of:

 

Year

Customer B shipments

ATG Shipments

 

2019

 

27

%  

13

%

2020

 

17

%  

6

%

2021

 

16

%  

4

%

-5-

There was a significant decline of 30.0% in shipments to Customer B for the Boeing 737 MAX and a 38% decline in total shipments to Customer B in 2020 as compared to 2019. There was an additional decline of 42% in shipments to Customer B for the Boeing 737 MAX and a 38% decline in total shipments to Customer B in 2021 as compared to the same period in 2020.

The ATG revenue decreased approximately $9,105,000 in 2021 as compared to 2020. Customer A revenue increased approximately $258,000 or less than 2% in 2021 as compared to 2020. Customer B revenue decreased approximately $3,334,000 or (30)% in 2021 as compared to 2020. Customer B revenue drop was 37% of total ATG drop in revenue in 2021 as compared to 2020.

The loss of either of these customers would have a significant impact on our revenue and earnings.  The reduction in business with Customer B has significantly reduced 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 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 revenues in 2021 or 2020. 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 10, 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 2021 and 2020 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. The Company does not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on the Company’s business, nor on its results of operations, capital expenditures or financial position.

Manufacturing

The Company manufactures its ATG products in Elma, New York and Franklinville, New York and its CPG products in Franklinville, New York.

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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. We believe the loss of any one supplier, although potentially disruptive in the short-term, would not materially affect our operations in the long-term. As a result of the COVID-19 pandemic and resulting economic and supply chain disruptions, the Company continues to face upward pricing pressure on certain parts and raw materials.

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. Many of these competitors are substantially larger and have greater resources than the Company.

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

In order to continue supporting our customers, Servotronics remains committed to attracting and retaining top talent.  We strive to make Servotronics a diverse, inclusive and safe workplace for all.

The Company, at December 31, 2021, had 272 employees of which 268 are full time and 4 part time employees at two locations in New York. Approximately 82% of its employees and contractors are engaged in production, engineering, inspection, packaging or shipping activities. The balance is engaged in executive, administrative, clerical or sales capacities. None are subject to a collective bargaining agreement.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the SEC). The SEC maintains a website at www.sec.gov on which you may access our SEC filings.  In addition, we make available free of charge at www.servotronics.com/investor-relations copies of materials we file with, or furnish to, the SEC as soon as reasonably practical after we electronically file or furnish these reports, as well as other important information that we disclose from time to time. Information contained on our website, or that can be accessed through our website, does not constitute a part of this Annual Report on Form 10-K. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website.

Our corporate headquarters are located at 1110 Maple Street, Elma, New York 14059 and the telephone number of this location is (716) 655-5990.

-7-

Item 1A.Risk Factors

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.

Item 2.Properties

The Company owns real property as set forth in the following table with no related encumbrances:

Number of

Principal  

buildings and

Approx.

product

 type of

floor area

Location

    

Description

    

manufactured

    

construction

    

(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 to meet the Company’s current and foreseeable production needs. The properties are appropriately covered by insurance consistent with the advice of the Company’s insurance consultant.

Item 3.Legal Proceedings

See Note 8, Litigation, for information regarding legal actions. 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.

The following matters were settled during the fourth quarter of 2021:

On November 30, 2021, the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”) by and among the Company, Aero Metal Products, Inc. (“AMP”), a wholly owned subsidiary of the Company, and Aero, Inc. (“Aero”) to settle all claims and counterclaims related to a lawsuit filed by Aero against the Company and AMP, on July 19, 2013 in the Supreme Court of the State of New York, County of Erie (the “Lawsuit”). Pursuant to the Settlement Agreement, the Company agreed to pay Aero $1,800,000 in cash and the parties have agreed to dismiss the Lawsuit, with prejudice. In addition, the Company and Aero each agreed to release the other party from certain claims, including those arising out of the Lawsuit.

The sole shareholder of Aero, Inc. is the wife of a former executive officer, who is the brother of a member of the Company’s Board of Directors.  The Settlement Agreement was unanimously approved by the Company’s Board of Directors. The Settlement Agreement does not constitute an admission of liability, culpability, negligence, or wrongdoing on the part of the Company or AMP. The Company believes the settlement is in the best interests of the Company and its shareholders. The settlement reflects the Company’s desire to forgo further litigation uncertainty, risk, expense, and potential damages, and to eliminate further distraction from business focus associated with continuing lengthy and complex litigation and possible appeals.

On November 3, 2021, the Company entered into a Settlement Agreement and Release (the “November 3, 2021 Settlement Agreement”) to settle all claims relative to a dispute for work performed by an independent contractor for the Company’s wholly-owned subsidiary, The Ontario Knife Company. The Summons and Complaint had been filed on March 3, 2016 in New York State Supreme Court, Erie County. The Plaintiff alleged that the Company had used the trade secret of the Plaintiff. Alleged damages was in the amount

-8-

of $750,000. The Company denied all of the Plaintiff’s allegations. Substantive settlement negotiations were conducted by the parties under the Court’s guidance and supervision, which resulted in a settlement wherein the Company agreed to pay the sum of $90,000 in cash to the Plaintiff in return for the execution of a General Release to the Company, releasing the Company from any and all claims. The November 3, 2021 Settlement Agreement also acknowledged that the agreement reached thereunder was not an admission of liability on the part of the Company.

Item 4.Mine Safety Disclosures

Not applicable.

PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)

Market Information:

The Company’s common stock is listed on the NYSE American Stock exchange and trades under the symbol SVT.

(b)

Approximate Number of Holders of Common Stock

Title of class

    

Approximate number of record holders (as of February 15, 2022)

Common Stock, $.20 par value per share

276

(c)

Dividends on Common Stock

The Company has not paid any cash dividends in the two-year period ended December 31, 2021. The Company has no plans to pay cash dividends as it plans to retain all cash from operations as a source of capital to finance working capital and growth in the business.

(d)

Company Purchases of Company’s Equity Securities

Total Number of

Weighted

Shares

Average

Purchased as

Maximum Number of

Total Number

Price $Paid

Part of Publicly

Shares that may yet be

of Shares

Per

Announced Plans

Purchased under the Plans

2021 Periods

    

Withheld

    

Share

    

or Programs (1)

    

or Programs (1)

January - March

9,920

(2)

$

8.26

89,385

April - June

89,385

July - September

89,385

October - December

89,385

Total

 

9,920

 

$

8.26

 

 

89,385

(1) The Company’s Board of Directors authorized the purchase of up to 450,000 shares of its common stock in the open market or in privately negotiated transactions. As of December 31, 2021, the Company has purchased 360,615 shares and there remain 89,385 shares available to purchase under this program. There were no shares purchased by the Company in 2021.
(2) Includes 9,920 shares withheld by the Company in January 2021 to satisfy statutory minimum withholding tax requirements for those participants who elected this option as permitted under the Company’s 2012 Long-Term Incentive Plan.

-9-

Item 6.Selected Financial Data

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 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and the notes related thereto.  As noted under the heading “Forward-Looking and Cautionary Statements” of this Annual Report on Form 10-K, this discussion and analysis contains forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many known and unknown risks and uncertainties described elsewhere is this report.

All comparisons included within this Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, refer to results for the year ended December 31, 2021 compared to the year ended December 31, 2020, unless stated otherwise. Additionally, the information provided is expected to better allow investors to view the registrant from management’s perspective including using quarterly data supporting management’s discussion. In 2021, we were focused on execution, while managing the continued challenges caused by the COVID-19 pandemic.

Business Overview

The aviation and aerospace industries as well as markets for the Company’s consumer products continually face evolving challenges on a global basis. The operations of the Company can be affected by the trends of the economy, including interest rates, income tax laws, government regulation, legislation, and other factors. In addition, uncertainties in today’s global economy, competition from expanding manufacturing capabilities and technical sophistication of low-cost developing countries and emerging markets, currency policies in relation to the U.S. dollar of some major foreign exporting countries, the effect of terrorism, difficulty in predicting defense and other government appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company’s customers to fund long-term purchase programs, volatile market demand and the continued market acceptance of the Company’s advanced technology and cutlery products make it difficult to predict the impact on future financial results.

Both the ATG and CPG markets are sensitive to domestic and foreign economic conditions and policies, which may create volatility in operating results from period to period. For example, the airline industry is sensitive to fuel price increases and economic conditions. These factors directly impact the demand for aircraft production as well as the amount of repair and overhaul required on in-service aircraft.

The Company’s suppliers are also subject to all the pressures and volatility being generated by the current global economic conditions. Any interruption of the Company’s continuous flow of material and product parts that are required for the manufacture of the Company’s products could adversely impact the Company’s ability to meet the Company’s customers’ delivery requirements. Consistent with the evolving requirements of the aerospace industry, companies are increasingly being requested to operate under long-term agreements with their customers on the basis of fixed prices, targeted year to year price reductions and/or year to year price adjustments predicated on mutually agreed indices and/or a combination of some or all of the above described pricing arrangements and/or otherwise. Therefore, productivity improvements and cost containment strategies are continuously sought within the Company’s concept of continuous improvement. The Company’s products are labor intensive and as such productivity improvements are expected to have positive effects on the Company’s operating results. However, increased costs for raw material, purchased parts and/or labor will have the reverse effect.

If any adverse economic events reduce the number of Airliners and/or Aircraft being produced by the Company’s relevant prime contractors, the negative effects of that reduction will in turn flow down through the supply chain. Also, certain major manufacturers have successfully imposed extended payment terms to their suppliers. At times, these extended payment terms are not available to the Company when purchasing raw material such as aluminum, magnetic material, steel and/or other product support items and services. If the Company’s customers delay their payments until after the extended due date or fail to pay, it could adversely impact the Company’s operating results.

-10-

Maximizing the Company’s operations and resources requires continued dedicated performances from the Company’s key and other personnel. In the Company’s markets and business arenas there is substantial competition for the services of the highest performing individuals. Competitors, customers and other companies who may have interest in the Company’s most experienced and educated/highly trained personnel (i.e., managerial, engineering and accounting/administrative) are a continuing consequence of the Company’s history of successful operational performance. Any unplanned replacement of such personnel may require the hiring of new personnel on an expedited basis (provided they are available) and may temporarily interrupt the Company’s operations and efforts for continuous improvement.

Management Discussion

During the years ended December 31, 2021 and 2020, approximately 78% and 82%, respectively, of the Company’s consolidated revenues were derived from the ATG sale of product to a small base of customers. During the years ended December 31, 2021 and 2020, approximately 22% and 18% of the Company’s consolidated revenues were derived from the CPG sale of product to a large base of retail customers. There was a decrease in revenue in 2021 from 2020 of approximately $9,105,000 at the ATG and approximately $181,000 at the CPG.

The Company’s commercial business is affected by such factors as uncertainties in today’s global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, the effects and threats of terrorism, market demand and acceptance both for the Company’s products and its customers’ products which incorporate Company made components. The ATG engages its business development efforts in its primary markets and is broadening its activities to include new domestic and foreign markets that are consistent with its core competencies. We believe our business remains particularly well positioned in the strong commercial aircraft market driven by the replacement of older aircraft with more fuel efficient alternatives and the recovery of demand for air travel. Although the ATG backlog continues to be strong, actual scheduled shipments may be delayed/changed as a function of the Company’s customers’ final delivery determinations based on changes in the global economy and other factors.

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

-11-

Results of Operations

The following table compares the Company’s consolidated statements of income data for the years ended December 31, 2021 and 2020 ($000’s omitted).

Twelve Months Ended December 31,

    

    

    

 

2021 vs 2020

 

2021

2020

Dollar

% Favorable/

 

    

Dollars

    

% of Sales

    

Dollars

    

% of Sales

    

Change

    

(Unfavorable)

 

Revenue:

 

  

 

  

 

  

 

  

 

  

 

  

Advanced Technology

$

31,677

 

78.1

%  

$

40,782

 

81.8

%  

$

(9,105)

 

(22.3)

%

Consumer Products

 

8,881

 

21.9

%  

 

9,062

 

18.2

%  

 

(181)

 

(2.0)

%

 

40,558

 

100.0

%  

 

49,844

 

100.0

%  

 

(9,286)

 

(18.6)

%

Cost of goods sold, inclusive of depreciation and amortization

 

(34,570)

 

85.2

%  

 

(41,604)

 

83.5

%  

 

7,034

 

16.9

%

Gross margin

 

5,988

 

14.8

%  

 

8,240

 

16.5

%  

 

(2,252)

 

(27.3)

%

Gross margin %

 

14.8

%

 

16.5

%  

 

 

Operating expenses:

Selling, general and administrative

 

(9,423)

 

23.2

%  

 

(7,998)

 

16.0

%  

 

(1,425)

 

(17.8)

%

Legal settlement awards

(1,890)

4.7

%

(1,890)

Total operating expenses

(11,313)

27.9

%

(7,998)

16.00

(3,315)

(17.8)

%

Total costs and expenses

(45,883)

113.1

%

(49,602)

99.5

%

3,719

7.5

%

Operating (loss)/income

(5,325)

(13.1)

%

242

0.5

%

(5,567)

(2,300.4)

%

Other income/(expense):

Other income: employee retention credit (ERC)

5,622

13.9

%

5,622

Other income: PPP loan forgiveness

4,000

9.9

%

4,000

Interest expense

 

(187)

 

(0.5)

%  

 

(180)

 

(0.4)

%  

 

(7)

 

(3.9)

%

Loss on sale of equipment

(98)

(0.2)

%

(98)

Total other income/(expense)

9,337

23.0

%

(180)

(0.4)

%

9,517

5,287.2

%

Income before income tax provision

 

4,012

 

9.9

%  

 

62

 

0.1

%  

 

3,950

 

6,371.0

%

Income tax (benefit)/provision

 

(43)

 

(0.1)

%  

 

(38)

 

(0.1)

%  

 

(5)

 

13.2

%

Net income

$

4,055

 

10.0

%  

$

100

 

0.2

%  

$

3,955

 

3,955.0

%

-12-

Revenue and Gross Margin

    

Servotronics, Inc.

    

Servotronics, Inc.

 

2021 Three months ended

2020 Three months ended

 

($000's omitted)

March 31,

June 30,

September 30,

December 31,

Total Year

March 31,

June 30,

September 30,

December 31,

Total Year

 

 

Revenues

$

9,060

$

10,028

$

10,915

$

10,555

$

40,558

$

15,448

$

13,504

$

10,297

$

10,595

$

49,844

Cost of goods sold

 

(8,067)

 

(8,156)

 

(9,143)

 

(9,204)

 

(34,570)

 

(10,736)

 

(10,484)

 

(10,462)

 

(9,922)

 

(41,604)

Gross margin

 

993

 

1,872

 

1,772

 

1,351

 

5,988

 

4,712

 

3,020

 

(165)

 

673

 

8,240

Gross margin %

11.0

%  

 

18.7

%  

 

16.2

%  

 

12.8

%  

 

14.8

%  

 

30.5

%  

 

22.4

%  

 

(1.6)

%  

 

6.4

%  

 

16.5

%

    

    ATG

    

    ATG

 

2021 Three months ended

  2020 Three months ended

 

March 31,

June 30,

September 30,

December 31,

Total Year

March 31,

June 30,

September 30,

December 31,

Total Year

 

 

Revenues

$

7,223

$

7,823

$

8,449

$

8,182

$

31,677

$

13,814

$

11,230

$

8,184

$

7,554

$

40,782

Cost of goods sold

 

(6,210)

 

(6,242)

 

(6,762)

 

(6,715)

 

(25,929)

 

(9,366)

 

(8,494)

 

(8,635)

 

(6,945)

 

(33,440)

Gross margin

 

1,013

 

1,581

 

1,687

 

1,467

 

5,748

 

4,448

 

2,736

 

(451)

 

609

 

7,342

Gross margin %

 

14.0

%  

 

20.2

%  

 

20.0

%  

 

17.9

%  

 

18.1

%  

 

32.2

%  

 

24.4

%  

 

(5.5)

%  

 

8.1

%  

 

18.0

%

    

CPG

    

CPG

 

2021 Three months ended

2020 Three months ended

 

March 31,

June 30,

September 30,

December 31,

Total Year

March 31,

June 30,

September 30,

December 31,

  Total Year

 

 

Revenues

$

1,837

$

2,205

$

2,466

$

2,373

$

8,881

$

1,634

$

2,274

$

2,113

$

3,041

$

9,062

Cost of goods sold

 

(1,857)

 

(1,914)

 

(2,381)

 

(2,489)

 

(8,641)

 

(1,370)

 

(1,990)

 

(1,827)

 

(2,977)

 

(8,164)

Gross margin

 

(20)

 

291

 

85

 

(116)

 

240

 

264

 

284

 

286

 

64

 

898

Gross margin %

 

(1.1)

%  

 

13.2

%  

 

3.4

%  

 

(4.9)

%  

 

2.7

%  

 

16.2

%  

 

12.4

%  

 

13.5

%  

 

2.1

%  

 

9.9

%

Revenue

The Company’s consolidated revenues from operations decreased approximately $9,286,000 or (18.6)% for the twelve month period ended December 31, 2021 when compared to the same period in 2020. This is due to a decrease at both the ATG of approximately $9,105,000 or (22.3)% and at the CPG of approximately $181,000 or (2.0)%.

The consolidated decrease for the twelve month period ended December 31, 2021 when compared to the same twelve month period ended December 31, 2020 is attributable primarily to a decrease in units shipped at the ATG of approximately $10,189,000 offset by an increase in price/mix of units shipped of approximately $1,084,000. Throughout 2021 the ATG experienced a gradual increase in revenues, quarter over quarter sequentially, with a slight drop in the last three months ended December 31, 2021. Despite the slight drop in the last three months of 2021, the ATG revenues increased approximately 8.3% over the same three month period in 2020.

Additionally, there was a decrease in shipments at the CPG of approximately $410,000 offset by an increase in price/mix of units shipped of approximately $229,000. The CPG experienced an increase in revenues of approximately 8.1% for the first nine months of 2021 as compared to the same nine month period in 2020, with an approximate 22.0% decrease in revenues during the remaining three month period ending December 31, 2021, primarily attributable to the push-out of revenue due to contractual terms.

Gross Margin

The Company’s consolidated gross margins from operations decreased approximately $2,252,000 or (27.3)% for the twelve month period ended December 31, 2021 when compared to the same period in 2020.

The ATG gross margin decreased in the twelve month period due to an increase in the costs per units shipped of approximately $1,840,000 partially offset by the price increases of those units shipped of approximately $1,084,000, as mentioned above.  The gross margin also decreased approximately $2,534,000 due to the decrease in the number of units shipped at the ATG.  The gross margin improved by approximately $1,696,000 due to the mix of the units produced and sold in the twelve month period ended December 31, 2021 as compared to the same time period in 2020.

-13-

Additionally, the CPG gross margin decreased in the twelve month period due to an increase in the costs per units shipped of approximately $1,627,000 partially offset by the price increases of those units shipped of approximately $229,000, as mentioned above.  The gross margin also decreased approximately $67,000 due to the decrease in the number of units shipped at the CPG.  The gross margin improved by approximately $807,000 due to the mix of the units produced and sold in the twelve month period ended December 31, 2021 as compared to the same time period in 2020.

Since mid-2020, both Segments have experienced the challenge of fully utilizing their production resources, increasing the cost per unit produced. Additionally, the increased costs of raw materials and shipping costs associated with the production of our products have increased the costs per unit. The Segments have been closely monitoring all other purchases.

As the ATG revenue volume increases it is expected that the utilization of the production resources will improve and improve gross margin percentages similar to the first half of 2020. Since the ATG has production at both the Elma and Franklinville facilities, we also expect to see improvement in the CPG gross margin percentages.

Selling, General and Administrative Expenses and Operating Income

 

Servotronics, Inc.

Servotronics, Inc.

($000's omitted)

 

2021 Three months ended

2020 Three months ended

    

March 31,

    

June 30,

 

September 30,

    

December 31,

    

Total Year

    

March 31,

    

June 30,

    

September 30,

    

December 31,

    

Total Year

SG&A:

 

  

 

  

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Legal settlement awards

$

$

$

(1,890)

$

$

(1,890)

$

$

$

$

$

Selling, general & admin

 

(1,973)

 

(2,209)

 

(2,721)

 

(2,520)

 

(9,423)

 

(2,268)

 

(1,748)

 

(2,096)

 

(1,886)

 

(7,998)

Total SG&A

$

(1,973)

$

(2,209)

$

(4,611)

$

(2,520)

$

(11,313)

$

(2,268)

$

(1,748)

$

(2,096)

$

(1,886)

$

(7,998)

% SG&A to Revenues

 

21.8

%  

 

22.0

%  

 

42.2

%  

 

23.9

%  

 

27.9

%  

 

14.7

%  

 

12.9

%  

 

20.4

%  

 

17.8

%  

 

16.0

%

Operating (Loss)/Income

$

(980)

$

(337)

$

(2,839)

$

(1,169)

$

(5,325)

$

2,444

$

1,272

$

(2,261)

$

(1,213)

$

242

Operating (Loss)/Inc %

 

(10.8)

%  

 

(3.4)

%  

 

(26.0)

%  

 

(11.1)

%  

 

(13.1)

%  

 

15.8

%  

 

9.4

%  

 

(22.0)

%  

 

(11.4)

%  

 

0.5

%

ATG

ATG

 

($000's omitted)

2021 Three months ended

2020 Three months ended

 

March 31,

June 30,

September 30,

December 31,

Total Year

March 31,

June 30,

September 30,

December 31,

Total Year

 

SG&A:

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

Legal settlement awards

$

$

$

(1,800)

$

$

(1,800)

$

$

$

$

$

Selling, general & admin

 

(1,585)

 

(1,761)

 

(2,240)

 

(2,075)

 

(7,661)

 

(1,743)

 

(1,402)

 

(1,712)

 

(1,388)

 

(6,245)

Total SG&A

$

(1,585)

$

(1,761)

$

(4,040)

$

(2,075)

$

(9,461)

$

(1,743)

$

(1,402)

$

(1,712)

$

(1,388)

$

(6,245)

% SG&A to Revenues

 

21.9

%  

 

22.5

%  

 

47.8

%  

 

25.4

%  

 

29.9

%  

 

12.6

%  

 

12.5

%  

 

20.9

%  

 

18.4

%  

 

15.3

%

Operating (Loss)/Income

$

(572)

$

(180)

$

(2,353)

$

(608)

$

(3,713)

$

2,705

$

1,334

$

(2,163)

$

(779)

$

1,097

Operating (Loss)/Inc %

 

(7.9)

%  

 

(2.3)

%  

 

(27.8)

%  

 

(7.4)

%  

 

(11.7)

%  

 

19.6

%  

 

11.9

%  

 

(26.4)

%  

 

(10.3)

%  

 

2.7

%

CPG

CPG

 

($000's omitted)

2021 Three months ended

2020 Three months ended

 

    

March 31,

June 30,

September 30,

December 31,

Total Year

March 31,

June 30,

September 30,

December 31,

Total Year

 

SG&A:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Legal settlement awards

$

$

$

(90)

$

$

(90)

$

$

$

$

$

Selling, general & admin

 

(388)

 

(448)

 

(481)

 

(445)

 

(1,762)

 

(525)

 

(346)

 

(384)

 

(498)

 

(1,753)

Total SG&A

$

(388)

$

(448)

$

(571)

$

(445)

$

(1,852)

$

(525)

$

(346)

$

(384)

$

(498)

$

(1,753)

% SG&A to Revenues

 

21.1

%  

 

20.3

%  

 

23.2

%  

 

18.8

%  

 

20.9

%  

 

32.1

%  

 

15.2

%  

 

18.2

%  

 

16.4

%  

 

19.3

%

Operating (Loss)

$

(408)

$

(157)

$

(486)

$

(561)

$

(1,612)

$

(261)

$

(62)

$

(98)

$

(434)

$

(855)

Operating (Loss)/Inc %

 

(22.2)

%  

 

(7.1)

%  

 

(19.7)

%  

 

(23.6)

%  

 

(18.2)

%  

 

(16)

%  

 

(2.7)

%  

 

(4.6)

%  

 

(14.3)

%  

 

(9.4)

%

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) increased approximately $3,315,000 or 41.4% for the twelve month period ended December 31, 2021 when compared to the same period in 2020.  SG&A expenses at the ATG increased approximately $3,216,000 or 51.5%.  The increase is due to a legal settlement of approximately $1,800,000, as previously disclosed; legal fees of approximately $1,508,000 and professional fees of approximately $598,000 offset by a decrease of employee wages and benefits of approximately $833,000.  There was a net increase of all other ATG SG&A expenses of approximately $143,000 as compared to the same period in 2020.  In addition, SG&A expenses at the CPG increased approximately $99,000 or 5.6%.   The increase is due to a legal settlement of approximately $90,000, as previously disclosed and employee wages and benefits of approximately $138,000 offset by a decrease of assessed support from the ATG of approximately $103,000.  There was a net decrease of approximately $26,000 of all other CPG SG&A expenses as compared to the same period in 2020.  

-14-

In 2021, both Segments experienced an increase in SG&A as a percentage of revenues.  Management expects the ATG SG&A percentage to revenue to drop significantly, when adjusted for nonrecurring legal settlement costs, legal fees and professional fees, in conjunction with the anticipated increase of revenue volume.  The CPG SG&A percentage to revenue is not expected to improve significantly, except for adjusting for nonrecurring legal settlement costs.

Operating Losses

Losses from operations increased approximately $5,567,000 or (2300.4%) when comparing the twelve month period ended December 31, 2021 to the same period in 2020.  Operating losses increased at both the ATG and CPG approximately $4,810,000 and $757,000, respectively, as compared to the twelve month period ended December 31, 2020.  Operating losses for the three months ended December 31, 2021 at the ATG slightly improved by approximately $171,000 partially offset by additional operating losses at the CPG by approximately $127,000 as compared to the same time period in 2020.  

The consolidated increase in operating losses is primarily the result in the decreases in revenue and increases in SG&A expenditures, as discussed above.

Other Income:

Servotronics, Inc.

Servotronics, Inc.

($000's omitted)

2021 Three months ended

2020 Three months ended

March 31,

June 30,

September 30,

December 31,

Total Year

March 31,

June 30,

September 30,

December 31,

Total Year

Other Income:

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

ERC

$

1,730

$

1,914

$

1,978

$

$

5,622

$

$

$

$

$

PPP loan forgiveness

 

 

 

4,000

 

 

4,000

 

 

 

 

 

Interest expense

 

(61)

 

(66)

 

(5)

 

(55)

 

(187)

 

(42)

 

(50)

 

(42)

 

(46)

 

(180)

(Loss)/gain sale of equip

 

 

 

 

(98)

 

(98)

 

 

 

 

 

Total other income

$

1,669

$

1,848

$

5,973

$

(153)

$

9,337

$

(42)

$

(50)

$

(42)

$

(46)

$

(180)

Income (loss) before income tax provision (benefits)

$

689

$

1,511

$

3,134

$

(1,322)

$

4,012

$

2,402

$

1,222

$

(2,303)

$

(1,259)

$

62

ATG

ATG

($000's omitted)

2021 Three months ended

2020 Three months ended

March 31,

June 30,

September 30,

December 31,

Total Year

March 31,

June 30,

September 30,

December 31,

Total Year

Other Income:

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

ERC

$

1,413

$

1,573

$

1,598

$

$

4,584

$

$

$

$

$

PPP loan forgiveness

 

 

 

4,000

 

 

4,000

 

 

 

 

 

Interest expense

 

(60)

 

(65)

 

(5)

 

(55)

 

(185)

 

(38)

 

(46)

 

(41)

 

(45)

 

(170)

(Loss)/gain sale of equip

 

 

 

 

(98)

 

(98)

 

 

 

 

 

Total other income

$

1,353

$

1,508

$

5,593

$

(153)

$

8,301

$

(38)

$

(46)

$

(41)

$

(45)

$

(170)

Income (loss) before income tax provision (benefits)

$

781

$

1,328

$

3,240

$