Servotronics Announces Second Quarter 2023 Financial Results

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Aug 10, 2023, 16:45 ET

-- Revenue and gross margin reflect solid improvement over prior year --

-- Results impacted by CPG divestiture, including asset impairment charges --

ELMA, N.Y., Aug. 10, 2023 /PRNewswire/ -- Servotronics, Inc. (NYSE American – SVT) a designer and manufacturer of servo-control components and other advanced technology products today reported financial results for the second quarter ended June 30, 2023.

As previously announced, during the second quarter, the Company decided to divest its Ontario Knife Company (OKC) assets, which comprise the primary assets of the Consumer Products Group (CPG). Accordingly, the financial results of the segment have been classified as discontinued operations for all periods presented. Unless otherwise noted, all financial results presented are based on continuing operations. In addition, the Company has presented certain non-GAAP financial information, including non-GAAP adjusted operating income and adjusted operating margin, which management believes better reflects Servotronics' ongoing operations.

Highlights for the second quarter financial results include the following:

Consolidated revenues were $10.6 million, up 21.7% from $8.7 million in the second quarter of 2022.
Gross profit increased to $1.6 million or 14.6% of revenue in the second quarter, up from $1.0 million, or 11.7% of revenue in the second quarter of 2022.
Selling, general and administrative (SG&A) costs increased $1.4 million to $3.3 million in the second quarter of 2023 compared to $2.0 million in the second quarter of 2022. The increase in SG&A was primarily the result of non-recurring costs.
Operating loss for the quarter was $1.7 million compared with an operating loss of $0.9 million in the second quarter of 2022, with the increase due primarily to the non-recurring SG&A costs noted above.
The Company recorded a $2.6 million valuation allowance on its net deferred tax assets, resulting in income tax expense of $1.5 million in the 2023 second quarter, compared to an income tax benefit of $0.2 million in the 2022 second quarter.
Non-GAAP adjusted operating loss improved to $0.7 million, or 6.9% of sales compared to adjusted operating loss of $0.9 million, or 10.1% of sales in the second quarter of 2022.
Net loss from continuing operations was $3.3 million, or ($1.33) per diluted share in the second quarter of 2023 compared to a net loss from continuing operations of $0.8 million, or ($0.32) per diluted share in the second quarter of 2022. The change was primarily due to the impact of the non-recurring SG&A charges and deferred tax valuation allowance noted above.

"The second quarter marked several significant milestones in Servotronics' strategic transformation. We began the process to divest the assets of the CPG segment, allowing us to focus on our core Advanced Technology Group business. On the financial front, we welcomed a new Chief Financial Officer and refinanced our line of credit. While progressing our strategic plan, we also successfully defended the Company through a proxy contest at our annual meeting," said Chief Executive Officer William F. Farrell, Jr. "I am very pleased with the team and everything we accomplished in the second quarter. We are now well positioned to capitalize on positive market trends in the commercial aerospace market that will support our efforts to deliver sustainable growth and improved operating results."

CPG Divestiture

As part of the Company's strategic review, the Board and management team decided to pursue the sale of the assets of OKC. The strategic review highlighted the key factors that drove the decision to sell the assets which included the history of slower growth in revenues, operating losses and a lack of strategic fit with the core Advanced Technology Group (ATG) business, and misalignment with the Company's key end markets.

The sale of the CPG business involved a specific process of soliciting potential buyers for the assets, evaluation of offers for the assets and determining the best alternative for Servotronics. Ultimately, the Company accepted the cash offer of $2.1 million from Blue Ridge Knives as it maximized the value of the assets of the business. The sale proceeds were less than the carrying value of the assets on Servotronics' balance sheet, resulting in a non-cash loss on the sale of $3.2 million. In addition, the estimated loss on the wind down of the CPG operations as well as results of operating the business during the quarter resulted in the loss from discontinued operations of $6.2 million in the second quarter of 2023.

Business Results

000's	Three Months Ended
	June 30, 2023	Mar 31, 2023	Dec 31, 2022	June 30, 2022
Revenue	$ 10,649	$ 9,060	$ 8,446	$ 8,749

Cost of goods sold	9,092	8,072	8,212	7,723
Gross Profit	1,557	988	234	1,026
Gross Margin	14.6 %	10.9 %	2.8 %	11.7 %

SG&A Expenses	3,269	2,179	1,702	1,908
Less: Nonrecurring Expenses	(973)	(201)	-	-
Adjusted SG&A Expenses	2,296	1,978	1,702	1,908
as a % of Revenue	21.6 %	21.8 %	20.2 %	21.8 %

Operating Loss	(1,712)	(1,192)	(1,468)	(882)
Less: Nonrecurring Expenses	(973)	(201)	-	-
Adjusted Operating Loss	$ (739)	$ (991)	$ (1,468)	$ (882)
Adjusted Operating Margin	-6.9 %	-10.9 %	-17.4 %	-10.1 %

Revenues increased to $10.6 million in the 2023 second quarter, up 21.7% from the second quarter of 2022, due primarily to favorable pricing and increased sales volume driven by the continued recovery of the commercial aircraft market.

For the second quarter, gross profit increased 51.8% to $1.6 million, or 14.6% of sales, up from $1.0 million, or 11.7% of sales in the prior-year period. Gross profit benefited from increased sales volumes. In addition, the Company is implementing continuous improvement, value stream and lean initiatives to create more efficient production processes to improve product flow, reduce the amount of work-in-process and scrap inventory, leading to increased production output.

Second-quarter SG&A expenses increased approximately $1.4 million compared to the prior-year period. SG&A expenses were primarily driven by approximately $1.0 million of non-recurring expenses during the quarter including severance, costs related to refinancing credit lines, and costs related to the successful defense of the contested proxy at the Company's annual meeting of shareholders.

Non-GAAP adjusted operating loss for the second quarter of 2023, which excludes those non-recurring SG&A costs, improved to $0.7 million loss compared with $0.9 million loss in the 2022 second quarter. Net loss from continuing operations for the second quarter was $3.3 million, or ($1.33) per diluted share compared to net loss from continuing operations of $0.8 million, or ($0.32) per diluted share in the second quarter of 2022.

Mr. Farrell concluded, "We took several decisive actions during the second quarter that will bring us closer to achieving our strategic plan for Servotronics. While these actions had an unfavorable effect on our second-quarter GAAP results with a number of non-recuring charges, we are seeing progress in improving our operating results and expect continued improvements in the second half of 2023. We generated a 52% increase in gross profit on a 22% increase in sales, highlighting our efforts to improve operating efficiencies within the business which we believe will drive operating leverage. I am confident that Servotronics will continue to gain share in our key markets and provide superior returns to our shareholders as we execute on our strategic priorities and maintain integrity, accountability, and transparency throughout all aspects of our business."

ABOUT SERVOTRONICS

Servotronics designs, develops and manufactures servo controls and other components for various commercial and government applications including aircraft, jet engines, missiles, manufacturing equipment and other aerospace applications at its operating facilities in Elma and Franklinville, New York.

FORWARD-LOOKING STATEMENTS

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

SERVOTRONICS, INC. (SVT) IS LISTED ON NYSE America

SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($000's omitted except share and per share data)

			June 30,	December 31,
			2023	2022
			(Unaudited)	(Reclassified)
Current assets:
	Cash		$ 716	$ 3,812
	Cash, restricted		180	-
	Accounts receivable, net		11,141	8,453
	Inventories, net		15,098	14,286
	Prepaid income taxes		139	138
	Other current assets		996	477
	Assets related to discontinued operation		4,174	9,528
		Total current assets	32,444	36,694

Property, plant and equipment, net			7,242	7,355

Deferred income taxes, net			-	1,072

Other non-current assets			172	172

Total Assets			$ 39,858	$ 45,293

Liabilities and Shareholders' Equity
Current liabilities:
	Line of credit		$ 3,697	$ -
	Current portion of eqiupment financing and capital leases		-	501
	Current portion of post retirement obligation		87	87
	Accounts payable		2,904	1,840
	Accrued employee compensation and benefits costs		1,358	1,057
	Accrued warranty		579	581
	Other accrued liabilities		290	394
	Liabilities related to discontinued operation		2,763	1,745
		Total current liabilities	11,678	6,205


Post retirement obligation			4,016	3,975

Shareholders' equity:
	Common stock, par value $0.20; authorized 4,000,000
	shares; issued 2,629,052 shares; outstanding
	2,496,211 (2,483,318 - 2022) shares		524	523
	Capital in excess of par value		14,587	14,556
	Retained earnings		12,694	23,741
	Accumulated other comprehensive loss		(2,312)	(2,336)
	Employee stock ownership trust commitment		(157)	(157)
	Treasury stock, at cost 91,570 (104,464 - 2022) shares		(1,172)	(1,214)
		Total shareholders' equity	24,164	35,113

Total Liabilities and Shareholders' Equity			$ 39,858	$ 45,293

SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ($000's omitted except per share data)

		Three Months Ended		Six Months Ended
		June 30,		June 30,
		2023	2022	2023	2022

Revenue		$ 10,649	$ 8,749	$ 19,709	$ 17,916

Costs of goods sold, inclusive of depreciation
	and amortization	9,092	7,723	17,168	14,218
Gross profit		1,557	1,026	2,541	3,698

Operating expenses:
Selling, general and administrative		3,269	1,908	5,444	4,001
Total operating costs and expenses		12,361	9,631	22,612	18,219
Operating loss		(1,712)	(882)	(2,903)	(303)

Other (expense)/income:
Interest expense		(89)	(74)	(142)	(144)
Gain on sale of equipment		-	-	-	26
Total other expense, net		(89)	(74)	(142)	(118)

Loss from continuing operations before income taxes		(1,801)	(956)	(3,045)	(421)
Income tax (provision)/benefit		(1,479)	167	(1,063)	80
Loss from continuing operations		(3,280)	(789)	(4,108)	(341)
Loss from discontinued operation, net of tax (Note 2)		(6,220)	(21)	(6,940)	(144)
Net loss		$ (9,500)	$ (810)	$ (11,048)	$ (485)

Basic and diluted loss per share
Continuing operations		$ (1.33)	$ (0.32)	$ (1.67)	$ (0.14)
Discontinued operation		(2.53)	(0.01)	(2.82)	(0.06)
Basic and diluted loss per share		$ (3.86)	$ (0.33)	$ (4.49)	$ (0.20)

	SERVOTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($000's omitted)

		Six Months Ended
		June 30,
		2023	2022
Cash flows related to operating activities:
	Loss from continuing operations	$ (4,108)	$ (341)
	Adjustments to reconcile net loss to net cash used
	by operating activities:
	Depreciation and amortization	517	485
	Stock based compensation	74	67
	Decrease in allowance for credit losses	(25)	(3)
	Increase (decrease) in inventory reserve	14	(46)
	Decrease in warranty reserve	(2)	(15)
	Deferred income taxes	1,072	-
	Gain on sale of equipment	-	(26)
Change in assets and liabilities:
	Accounts receivable	(2,663)	(2,785)
	Inventories	(826)	1,506
	Prepaid income taxes	(1)	680
	Other current assets	(519)	(488)
	Accounts payable	1,064	995
	Accrued employee compensation and benefit costs	301	(159)
	Post retirement obligations	66	61
	Other accrued liabilities	(105)	(5)

Net cash used in operating activities from continuing operations		(5,141)	(74)

Cash flows related to investing activities:
	Capital expenditures - property, plant and equipment	(403)	(428)
	Proceeds from sale of assets	-	38

Net cash used in investing activities from continuing operations		(403)	(390)

Cash flows related to financing activities:
	Advances on line of credit, net of payments	3,697	-
	Principal payments on long-term debt	-	(4,250)
	Principal payments on equipment financing lease obligations	(501)	(140)

Net cash provided by (used in) financing activities from continuing operations		3,196	(4,390)

Discontinued Operation
	Cash (used in) provided by operating activities	(568)	241
Net cash (used in) provided by operating activities from discontinued operation		(568)	241

Net decrease in cash and restricted cash		(2,916)	(4,613)

Cash and restricted cash at beginning of period		3,812	9,433

Cash and restricted cash at end of period		$ 896	$ 4,820