0001104659-21-105173.txt : 20210813 0001104659-21-105173.hdr.sgml : 20210813 20210813164952 ACCESSION NUMBER: 0001104659-21-105173 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 62 CONFORMED PERIOD OF REPORT: 20210630 FILED AS OF DATE: 20210813 DATE AS OF CHANGE: 20210813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVOTRONICS INC /DE/ CENTRAL INDEX KEY: 0000089140 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 160837866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07109 FILM NUMBER: 211173035 BUSINESS ADDRESS: STREET 1: 1110 MAPLE ST CITY: ELMA STATE: NY ZIP: 14059 BUSINESS PHONE: 7166335990 MAIL ADDRESS: STREET 1: P O BOX 300 CITY: ELMA STATE: NY ZIP: 14059-0300 10-Q 1 svt-20210630x10q.htm FORM 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2021

or

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

Commission File No. 1-07109

SERVOTRONICS, INC.

(Exact name of registrant as specified in its charter)

Delaware

16-0837866

(State or other jurisdiction of incorporation or organization)

(I. R. S. Employer Identification No.)

1110 Maple Street

Elma, New York 14059

(Address of principal executive offices) (zip code)

(716) 655-5990

(Registrant’s telephone number, including area code)

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

Title of each class

Ticker symbol(s)

Name of each exchange on which registered

Common Stock

SVT

NYSE American

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes       No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes      No

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

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

    

Outstanding at July 20, 2021

Common Stock, $.20 par value

 

2,491,667

INDEX

Page No.

 

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements (Unaudited):

 

a)     Condensed Consolidated Balance Sheets, June 30, 2021 and December 31, 2020 (Audited)

3

b)     Condensed Consolidated Statements of Operating Income for the three and six months ended June 30, 2021 and 2020

4

 

c)     Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020

5

 

d)     Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020

6

 

e)     Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

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

17

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

 

Item 4.

Controls and Procedures

22

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

24

 

Item 1A.

Risk Factors

24

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

Item 3.

Defaults Upon Senior Securities

24

 

Item 4.

Mine Safety Disclosures

24

 

Item 5.

Other Information

24

 

Item 6.

Exhibits

25

 

Forward-Looking Statements

25

Signatures

26

- 2 -

SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

June 30, 

December 31, 

    

2021

    

2020

(Unaudited)

(Audited)

Assets

Current assets:

 

  

 

  

Cash

$

9,640

$

5,935

Accounts receivable, net

 

7,899

 

7,636

Other receivables-employee retention credit (ERC)

999

Inventories, net

 

21,307

 

23,406

Prepaid income taxes

 

198

 

483

Other current assets

 

744

 

383

Total current assets

 

40,787

 

37,843

 

 

  

Property, plant and equipment, net

 

11,320

 

12,017

 

 

  

Deferred income taxes

 

129

 

137

 

 

  

Other non-current assets

 

327

 

331

 

  

 

  

Total Assets

$

52,563

$

50,328

 

  

 

  

Liabilities and Shareholders’ Equity

 

  

 

  

Current liabilities:

 

 

  

Current portion of long-term debt

$

4,560

$

2,334

Current portion of capitalized loan/lease obligations

 

376

 

301

Dividend payable

 

 

12

Accounts payable

 

1,347

 

1,599

Accrued employee compensation and benefits costs

 

2,208

 

1,649

Other accrued liabilities

 

1,130

 

874

Total current liabilities

 

9,621

 

6,769

Long-term debt

 

4,925

 

7,293

Post retirement obligation

 

2,547

 

2,529

 

  

 

  

Shareholders’ equity:

 

  

 

  

Common stock, par value $0.20; authorized 4,000,000 shares; issued 2,614,506 shares; outstanding 2,419,923 (2,416,683 - 2020) shares

 

523

 

523

Capital in excess of par value

 

14,497

 

14,481

Retained earnings

 

23,530

 

21,803

Accumulated other comprehensive loss

 

(1,325)

 

(1,356)

Employee stock ownership trust commitment

 

(359)

 

(359)

Treasury stock, at cost 122,839 (126,079 - 2020) shares

 

(1,396)

 

(1,355)

Total shareholders’ equity

 

35,470

 

33,737

 

 

  

Total Liabilities and Shareholders’ Equity

$

52,563

$

50,328

See notes to condensed consolidated financial statements

- 3 -

SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATING INCOME

($000’s omitted except per share data)

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

Revenue

$

10,028

$

13,504

$

19,088

$

28,952

 

 

  

 

 

  

Costs of goods sold, inclusive of depreciation and amortization

 

8,156

 

10,484

 

16,223

 

21,220

Gross margin

 

1,872

 

3,020

 

2,865

 

7,732

 

 

 

 

Operating Expenses:

 

 

 

 

Selling, general and administrative

 

2,209

 

1,748

 

4,182

 

4,016

Operating (loss)/income

(337)

1,272

(1,317)

3,716

Other income/(expense):

Other income: employee retention credit (ERC)

1,914

3,644

Interest expense

 

(66)

 

(50)

 

(127)

 

(92)

Total other income/(expenses)

 

1,848

 

(50)

 

3,517

 

(92)

 

 

 

 

Income before income tax provision

 

1,511

 

1,222

 

2,200

 

3,624

 

 

 

 

Income tax provision

 

325

 

257

 

473

 

761

 

  

 

  

 

  

 

  

Net income

$

1,186

$

965

$

1,727

$

2,863

 

  

 

  

 

  

 

  

Income per share:

 

  

 

  

 

  

 

  

Basic

 

  

 

  

 

  

 

Net Income per share

$

0.49

$

0.41

$

0.72

$

1.21

 

 

  

 

  

 

  

Diluted

 

  

 

  

 

  

 

  

Net income per share

$

0.49

$

0.40

$

0.72

$

1.20

See notes to condensed consolidated financial statements

- 4 -

SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($000’s omitted)

(Unaudited)

Three Months Ended

 

Six Months Ended

June 30,

 

June 30,

    

2021

    

2020

    

2021

    

2020

Net Income

$

1,186

    

$

965

$

1,727

$

2,863

Other comprehensive income items:

 

  

 

  

 

 

Actuarial gain

 

20

 

 

39

 

Income tax expense on actuarial gain

(4)

(8)

Other comprehensive income:

 

  

 

  

 

 

Retirement obligation, net of taxes

16

31

Total comprehensive income

$

1,202

$

965

$

1,758

$

2,863

See notes to condensed consolidated financial statements

- 5 -

SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($000’s omitted)

(Unaudited)

Six Months Ended

June 30, 

    

2021

    

2020

Cash flows related to operating activities:

 

  

 

  

Net Income

$

1,727

$

2,863

Adjustments to reconcile net income to net cash generated by operating activities:

 

  

 

  

Depreciation and amortization

 

714

 

718

Stock based compensation

 

56

 

172

Increase/(Decrease) in allowance doubtful accounts

 

9

 

(181)

(Decrease)/Increase in inventory reserve

 

(19)

 

132

Increase/(Decrease) in warranty reserve

 

10

 

(133)

Decrease in deferred income taxes

8

Change in assets and liabilities:

 

  

 

  

Accounts receivable

 

(272)

 

3,106

Other receivables - ERC

(999)

Inventories

 

2,118

 

(5,076)

Prepaid income taxes

 

285

 

583

Other current assets

 

(361)

 

(120)

Accounts payable

 

(264)

 

(715)

Accrued employee compensation and benefit costs

 

559

 

3

Post retirement obligations

49

198

Other accrued liabilities

 

246

 

(74)

 

  

 

  

Net cash generated by operating activities

 

3,866

 

1,476

 

  

 

  

Cash flows related to investing activities:

 

  

 

  

Capital expenditures - property, plant and equipment

 

(13)

 

(593)

Net cash used by investing activities

(13)

(593)

Cash flows related to financing activities:

 

  

 

  

Principal payments on long-term debt

 

(774)

 

(274)

Principal payments on equipment financing lease obligations

 

(177)

 

(148)

Proceeds from equipment note and equipment financing lease obligations

384

Proceeds from line of credit

 

500

 

750

Proceeds from paycheck protection program

4,000

Purchase of treasury shares

(81)

(100)

 

  

 

  

Net cash (used)/generated by financing activities

 

(148)

 

4,228

 

 

Net increase in cash

 

3,705

 

5,111

 

 

Cash at beginning of period

 

5,935

 

2,029

 

 

  

Cash at end of period

$

9,640

$

7,140

See notes to condensed consolidated financial statements

- 6 -

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.           Basis of Presentation

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

The accompanying consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The consolidated financial statements should be read in conjunction with the 2020 annual report and the notes thereto.

2.           Business Description and Summary of Significant Accounting Policies

Business Description

Servotronics, Inc. and its subsidiaries design, manufacture and market advanced technology products consisting primarily of control components, and consumer products consisting of knives and various types of cutlery and other edged products.

Principles of Consolidation

The consolidated financial statements include the accounts of Servotronics, Inc. and its wholly-owned subsidiaries (the “Company”). All intercompany balances and transactions have been eliminated upon consolidation.

Cash

The Company considers cash to include all currency and coins owned by the Company as well as all deposits in the bank including checking accounts and savings accounts.

Accounts Receivable

The Company grants credit to substantially all of its customers and carries its accounts receivable at original invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on history of past write-offs, collections, and current credit conditions. The allowance for doubtful accounts amounted to approximately $197,000 at June 30, 2021 and $188,000 at December 31, 2020. The Company does not accrue interest on past due receivables.

Revenue Recognition

Revenues are recognized at the time of shipment of goods, transfer of title and customer acceptance, as required.  Our revenue transactions generally consist of a single performance obligation to transfer contracted goods and are not accounted for under industry-specific guidance.  Purchase orders generally include specific terms relative to quantity, item description, specifications, price, customer responsibility for in-process costs, delivery schedule, shipping point, payment and other standard terms and conditions of purchase.  Service sales, principally representing repair, are recognized at the time of shipment of goods.

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.

- 7 -

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revenue excludes taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (e.g., sales and use taxes).  Revenue includes payments for shipping activities that are reimbursed by the customer to the Company.

Performance obligations are satisfied as of a point in time.  Performance obligations are supported by contracts with customers, providing a framework for the nature of the distinct goods, services or bundle of goods and services.  The timing of satisfying the performance obligation is typically indicated by the terms of the contract.  As a significant portion of the Company’s revenue are recognized at the time of shipment, transfer of title and customer acceptance, there is no significant judgment applied to determine the timing of the satisfaction of performance obligations or transaction price.

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

Warranty and repair obligations are assessed on all returns.  Revenue is not recorded on any warranty returns.  The Company warrants its products against design, materials and workmanship based on an average of twenty-seven months. The Company determines warranty reserves needed based on actual average costs of warranty units shipped and current facts and circumstances.  As of June 30, 2021 and December 31, 2020 under the guidance of ASC460 the Company has recorded a warranty reserve of approximately $392,000 and $382,000, 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 and terms.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost includes all costs incurred to bring each product to its present location and condition. Market provisions in respect of lower of cost or market adjustments and inventory expected to be used in greater than two years are applied to the gross value of the inventory through a reserve of approximately $1,701,000 and $1,720,000 at June 30, 2021 and December 31, 2020, respectively. Pre-production and start-up costs are expensed as incurred.

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

Shipping and Handling Costs

Shipping and handling costs are classified as a component of cost of goods sold.

Property, Plant and Equipment

Property, plant and equipment is carried at cost; expenditures for new facilities and equipment and expenditures which substantially increase the useful lives of existing plant and equipment are capitalized; expenditures for maintenance and repairs are expensed as incurred. Upon disposal of properties, the related cost and accumulated depreciation are removed from the respective accounts and any profit or loss on disposition is included in income.

Depreciation is provided on the basis of estimated useful lives of depreciable properties, primarily by the straight-line method for financial statement purposes and by accelerated methods for income tax purposes. Depreciation expense includes the amortization of right-of-use (“ROU“) assets accounted for as finance leases. The estimated useful lives of depreciable properties are generally as follows:

Buildings and improvements

    

5-40 years

Machinery and equipment

5-20  years

Tooling

35 years

- 8 -

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

For the Six Months Ended

June 30, 

    

2021

    

2020

    

% Change

 

($000's omitted)

Income tax expense

 

$

473

 

$

761

 

(37.8)

%

Effective tax rate

 

21.5

%

21.0

%

2.4

%

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

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company did not have any accrued interest or penalties included in its consolidated balance sheets at June 30, 2021 or December 31, 2020, and did not recognize any interest and/or penalties in its consolidated statements of income during the three and six months ended June 30, 2021 and 2020. The Company did not have any material uncertain tax positions or unrecognized tax benefits or obligations as of June 30, 2021 and December 31, 2020. The 2017 through 2020 federal and state tax returns remain subject to examination.

Supplemental Cash Flow Information

Income taxes paid during the six months ended June 30, 2021 and 2020 amounted to approximately $180,000 and $42,000, respectively. Interest paid during the six months ended June 30, 2021 and 2020 amounted to approximately $73,000 and $84,000, respectively.

Employee Stock Ownership Plan

Contributions to the employee stock ownership plan are determined annually by the Company according to plan formula.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable based on undiscounted future operating cash flow analyses. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Due to the losses incurred by our Consumer Products Group (“CPG”), we performed a test for recoverability of the long-lived assets by comparing its carrying value to the future undiscounted cash flows that we expect will be generated by the asset group.   Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. The Company has determined that no impairment of long-lived assets existed at June 30, 2021 and December 31, 2020.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain balances, as previously reported, were reclassified to conform to classifications adopted in the current period.

Research and Development Costs

Research and development costs are expensed as incurred.

- 9 -

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Concentration of Credit Risks

Financial instruments that potentially subject the Company to concentration of credit risks principally consist of cash accounts in financial institutions. Although the accounts exceed the federally insured deposit amount, management does not anticipate nonperformance by the financial institutions.

Fair Value of Financial Instruments

The carrying amount of cash, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value due to their short maturity. Based on variable interest rates and the borrowing rates currently available to the Company for loans similar to its long-term debt, the fair value approximates its carrying amount.

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.

3.           Inventories

    

June 30, 

    

December 31, 

2021

2020

($000's omitted)

Raw material and common parts

$

16,161

$

16,989

Work-in-process

 

3,166

 

4,273

Finished goods

 

3,681

 

3,864

 

23,008

 

25,126

Less inventory reserve

 

(1,701)

 

(1,720)

Total inventories

$

21,307

$

23,406

4.           Property, Plant and Equipment

    

June 30, 

    

December 31, 

2021

2020

($000's omitted)

Land

$

7

$

7

Buildings

 

11,363

 

11,359

Machinery, equipment and tooling

 

21,187

 

21,146

Construction in progress

 

167

 

198

 

32,724

 

32,710

Less accumulated depreciation and amortization

 

(21,404)

 

(20,693)

Total property, plant and equipment

$

11,320

$

12,017

Depreciation and amortization expense amounted to approximately $358,000 and $363,000 for the three months ended June 30, 2021 and 2020, respectively. Amortization expense primarily related to ROU assets amounted to approximately $17,000 and $17,000 for the three months ended June 30, 2021 and 2020, respectively. Depreciation and amortization expense amounted to approximately $714,000 and $718,000 for the six months ended June 30, 2021 and 2020, respectively. Amortization expense, primarily related to ROU assets, amounted to approximately $34,000 and $35,000 for the six months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, there is approximately $167,000 ($198,000 – December 31, 2020) of construction in progress (CIP) included in property, plant and equipment all of which is related to capital projects.  There is approximately $160,000 in CIP for machinery & equipment and self-constructed assets ($191,000 – December 2020), $6,000 for computer equipment ($7,000 – December 2020) and $1,000 for building improvements ($0 – December 2020) primarily related to the Advanced Technology Group.

- 10 -

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.           Long-Term Debt

    

June 30, 

    

December 31, 

2021

2020

($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

$

4,000

Line of credit payable to a financial institution; Interest rate option of bank prime or Libor plus 2.15000% (B)(C)

4,250

3,750

Term loan payable to a financial institution; Interest rate option of bank prime or Libor plus 1.492130%, monthly principal payments of $21,833 through 2021 with a balloon payment of $286,000 due December 1, 2021(C).

417

1,048

 

 

  

Term loan payable to a financial institution; Interest rate option of bank prime or Libor plus 1.492130%, monthly principal payments of $23,810, maturity date December 1, 2021(C).

 

143

 

286

Equipment note obligations; Interest rate fixed for term of each funding based upon the Lender's lease pricing at time of funding. (Interest rate/factor 1.795530% - 1.835015% as of June 30, 2021)(D)

 

819

 

534

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)

232

310

 

9,861

 

9,928

Less current portion

 

(4,936)

 

(2,635)

$

4,925

$

7,293

A.)On April 21, 2020, the Company executed a promissory note (the "Note") in the amount of $4,000,000 as part of the Paycheck Protection Program (the “PPP Loan”) administered by the Small Business Administration (the "SBA") and authorized under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act"). The PPP Loan is being made through the Bank of America, NA (the "Lender"). The term of the PPP Loan is two years with an annual interest rate of 1.00%. Payments of principal and interest on the PPP Loan will be deferred on the unforgiven amount, if any, until the date on which loan forgiveness is determined. On August 4, 2021, the Company submitted a PPP Loan forgiveness application to the Lender. The Lender has 60 days to review and process the forgiveness application. When the Lender has completed its review, they are required to notify the SBA regarding their determination of whether all or a portion of the PPP loan may be forgiven. The SBA has 90 days from receipt to approve or reject the forgiveness application. As of the date of this filing, the Company has not received any determination of approval of its application from the Lender or the SBA. The Company has elected to account for the PPP Loan under ASC 470 “Debt” and will record the forgiveness, as applicable, when notified by the SBA.
B.)The Company has a $6,000,000 line of credit. The interest rate is a rate per year equal to the bank’s prime rate or Libor plus 2.15%. In addition, the Company is required to pay a commitment fee of 0.25% on the unused portion of the line of credit.  The line of credit expires December 21, 2022.  There was $4,250,000 balance outstanding at June 30, 2021 and $3,750,000 balance at December 31, 2020.
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 June 30, 2021 and December 31, 2020 the Company was in compliance with these covenants.
D.)The Company has an equipment loan facility in the amount of $1,000,000 available until July 9, 2021. This line is 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.  During the six months ended June 30, 2021, approximately $384,500 was drawn on this facility.  There was approximately $819,000 outstanding at June 30, 2021 and $534,000 balance outstanding at December 31, 2020.

- 11 -

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

E.)The Company established a lease line of credit for equipment financing in the amount of $1,000,000 available until June 28, 2018. This line was non-revolving and non-renewable. The lease term for equipment covered by the lease line of credit is 60 months.  Monthly payments are fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding.  There was approximately $232,000 outstanding at June 30, 2021 and $310,000 at December 31, 2020.

Principal maturities of long-term debt are as follows:  2021 - $2,754,000; 2022 - $6,614,000; 2023 - $231,000; 2024 - $178,000; and 2025 and beyond - $84,000.  Remaining principal payments and interest payments for the capital note and capital equipment financing lease obligations for each of the next five years:

    

    

June 30, 

    

December 31, 

Year

2021

2020

($000’s omitted)

 

2021

$

230

 

$

331

 

2022

393

 

316

 

2023

246

 

169

 

2024

188

 

112

 

2025+

90

 

Total principal and interest payments

 

1,147

 

928

Less amount representing interest

 

(96)

 

(83)

Present value of net minimum lease payments

 

1,051

 

845

Less current portion

 

(376)

 

(301)

Long-term principle payments

$

675

$

544

6.            Postretirement Benefit Plan

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 June 30, 2021 and December 31, 2020 was approximately $2,547,000 and $2,529,000, respectively and has been accrued and reflected in Post Retirement Obligation in the accompanying condensed consolidated balance sheets.

Benefit cost for the three months ended June 30, 2021 and 2020 totaled $46,000 and $99,000, respectively. Benefit costs for the six months ended June 30, 2021 and 2020 totaled $92,000 and $198,000, respectively.

- 12 -

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.           Shareholders’ Equity

Six-month Period Ended June 30, 2021

Accumulated

  

  

  

  

  

Other

  

Capital in

  

Total

Retained

Comprehensive

excess of

Treasury

shareholders’

    

Earnings

    

Income

    

Common Stock

    

par value

    

ESOT

    

stock

    

equity

 

  

 

  

 

  

 

  

 

  

 

  

 

  

December 31, 2020

 

$

21,803

$

(1,356)

$

523

$

14,481

$

(359)

$

(1,355)

$

33,737

 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Retirement obligation, net of taxes

15

15

Stock based compensation

 

 

 

 

 

11

 

 

20

 

31

Purchase of treasury shares

 

 

 

 

 

 

 

(81)

 

(81)

Net Income

 

 

541

 

 

 

 

 

 

541

March 31, 2021

$

22,344

$

(1,341)

$

523

$

14,492

$

(359)

$

(1,416)

$

34,243

Retirement obligation, net of taxes

16

16

Stock based compensation

5

20

25

Net Income

1,186

1,186

June 30, 2021

$

23,530

$

(1,325)

$

523

$

14,497

$

(359)

$

(1,396)

$

35,470

Six-month Period Ended June 30, 2020

Accumulated

  

  

  

  

  

Other

  

Capital in

  

Total

Retained

Comprehensive

excess of

Treasury

shareholders’

    

Earnings

    

Income

    

Common Stock

    

par value

    

ESOT

    

stock

    

equity

December 31, 2019

 

$

20,484

$

98

$

523

$

14,358

$

(460)

$

(1,471)

$

33,532

 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Stock based compensation

33

52

85

Purchase of treasury shares

 

 

 

 

 

 

 

(100)

 

(100)

Net Income

 

 

1,898

 

 

 

 

 

 

1,898

March 31, 2020

$

22,382

$

98

$

523

$

14,391

$

(460)

$

(1,519)

$

35,415

Stock based compensation

39

48

87

Net Income

 

965

 

 

 

 

 

 

965

June 30, 2020

 

$

23,347

$

98

$

523

$

14,430

$

(460)

$

(1,471)

$

36,467

The Company’s Board of Directors authorized the purchase of up to 450,000 shares of its common stock in the open market or in privately negotiated transactions. As of June 30, 2021, the Company has purchased 360,615 shares and there remains 89,385 shares available to purchase under this program. There were no shares and 360 shares purchased by the Company during the six month period ended June 30, 2021 and 2020, respectively.

On January 1, 2021, 25,250 shares of restricted stock vested of which 9,920 shares were withheld by the Company for approximately $81,000 to satisfy statutory minimum withholding tax requirements for those participants who elected this option as permitted under the applicable equity plan.

The Company’s director compensation policy provides that non-employee directors receive a portion of their annual retainer in the form of restricted stock under the Company’s 2012 Long-Term Incentive Plan.  These shares vest quarterly over a twelve month service period, have voting rights and accrue dividends that are paid upon vesting.  The aggregate amount of expense to the Company, measured based on the grant date fair value, will be recognized over the requisite service period.  An aggregate of 11,328 restricted shares were issued on August 14, 2020 with a grant date fair value of $100,000.

The Company issued to the non-employee directors 13,160 shares of restricted stock to vest quarterly over a twelve month service period, have voting rights and accrue dividends that are paid upon vesting. The aggregate amount of the expense to the Company, measured based on the grant date fair value, will be recognized over the requisite service period. The aggregate of 13,160 restricted shares were issued on May 14, 2021 with a grant date fair value of $100,000.

- 13 -

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Included in six months ended June 30, 2021 and December 31, 2020 is approximately $50,000 and $336,000, respectively, of stock-based compensation expense related to the restrictive share awards.

Weighted Average

Grant Date Fair

    

Shares

    

Value 

Restricted Share Activity:

Unvested at the year ended December 31, 2020

 

30,914

$

9.24

Granted

 

13,160

$

7.60

Vested

 

30,914

$

9.24

Unvested at June 30, 2021

 

13,160

$

7.60

Earnings Per Share

Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding does not include any potentially dilutive securities or any unvested restricted shares of common stock. These unvested restricted shares, although classified as issued and outstanding, are considered forfeitable until the restrictions lapse and will not be included in the basic EPS calculation until the shares are vested. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on the earnings per share that were outstanding for the period. Incremental shares from assumed conversions are calculated as the number of shares that would be issued, net of the number of shares that could be purchased in the marketplace with the cash received upon stock option exercise. The dilutive effect of unvested restrictive stock is determined using the treasury stock method.

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

($000’s omitted except per share data)

Net Income

$

1,186

$

965

$

1,727

$

2,863

Weighted average common shares outstanding (basic)

 

2,402

 

2,364

 

2,398

 

2,364

Unvested restricted stock

 

13

 

25

 

13

 

25

Weighted average common shares outstanding (diluted)

 

2,415

 

2,389

 

2,411

 

2,389

Basic

 

  

 

  

 

 

  

Net income per share

$

0.49

$

0.41

$

0.72

$

1.21

Diluted

 

 

  

 

  

 

  

Net income per share

$

0.49

$

0.40

$

0.72

$

1.20

8.           Litigation

In the course of its business, the Company is subject to a variety of claims and lawsuits that are inherently subject to many uncertainties regarding the possibility of a loss to the Company. Because litigation outcomes are inherently unpredictable, the Company's evaluation of legal proceedings often involves a series of complex assessments by management, after consulting with legal counsel, about future events and can rely heavily on estimates and assumptions. The Company carries liability insurance, subject to certain deductibles and policy limits, for such claims as they arise and may from time to time establish reserves for litigation that is considered probable of a loss. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.

- 14 -

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has pending litigation relative to leases of certain equipment and real property with a former related party. Aero, Inc. is suing Servotronics, Inc. and its wholly owned subsidiary and has alleged damages in the amount of $3,000,000. The Company has filed a response to the Aero, Inc. lawsuit and has also filed a counter-claim in the amount of $3,191,000. The discovery of the action is complete, and a trial is scheduled to commence in the third quarter of 2021 in the Supreme Court of the State of New York, County of Erie. The Company does not consider the risk of loss to be probable and is unable to reasonably or accurately estimate the likelihood and amount of any liability or benefit that may be realized as a result of this litigation. Accordingly, no gain or loss has been recognized in the accompanying financials statements related to this litigation.

On June 7, 2021, a Summons and Complaint was filed by an employee in the Supreme Court of the State of New York, County of Erie, against Servotronics, Inc., the Servotronics Board of Directors, The Ontario Knife Company and Kenneth D. Trbovich (collectively, the "Defendants"). The Complaint alleges certain violations under the New York Human Rights Law by the Defendants relating to the employee's employment by the Company as well as intentional and negligent infliction of emotional distress. The complaint also alleges certain purported derivative causes of action against all Defendants, including breach of fiduciary duties, fraud and corporate waste. The complaint seeks monetary damages in an amount not less than $5,000,000 with respect to the direct causes of action and equitable relief with respect to the purported derivative causes of action. The Defendants filed a motion to dismiss the Complaint on August 6, 2021. This litigation is still in its earliest stages. Based on the information known by the Company as of the date of this filing, the Company does not consider the risk of loss to be probable and is unable to reasonably or accurately estimate the likelihood and amount of any liability that may be realized as a result of this litigation. Accordingly, no loss has been recognized in the accompanying financials statements related to this litigation. The Company intends to vigorously defend against this litigation.

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.

9.           Related Party Transactions

The Company paid legal fees and disbursements of approximately $44,000 and $132,000 in the six month period ended June 30, 2021 and 2020, respectively, for services provided by a law firm that is owned by a member of the Company’s Board of Directors. Legal fees paid for the three month period ended June 30, 2021 and 2020 amounted to approximately $25,000 and $37,000, respectively. Additionally, the Company had accrued unbilled legal fees at June 30, 2021 and 2020 of approximately $20,000 and $25,000, respectively, with this firm.

10.           Employee Retention Credit

The employee retention credit (ERC) for 2020 was established under the CARES Act and amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “Relief Act”) provided for changes in the employee retention credit for 2020 and provided an additional credit for the first and second calendar quarters of 2021.

The Company evaluated its eligibility for the employee retention credit for the three and six months ending June 30, 2021. In order to qualify for the ERC in the second quarter of 2021, the Company needed to experience a 20% reduction in gross receipts from either (1) the same quarter in 2019 or (2) the immediate preceding quarter to the corresponding calendar quarter in 2019. It was determined that the Company qualified for the employee retention credit under both scenarios for June 30, 2021. As a result, for the three and six month periods ending June 30, 2021 approximately $1,914,000 and $3,644,000, respectively was as recognized in other income for the employee retention credit.

11.           Business Segments

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

- 15 -

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2021, the Company had identifiable assets of approximately $52,563,000 ($50,328,000 – December 31, 2020) of which approximately $