SERVOTRONICS INC /DE/ [SVT] Filings

10-Q 1 svt-20230930x10q.htm 10-Q

Table of Contents

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 September 30, 2023

☐ 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 October 22, 2023
Common Stock, $.20 par value		2,496,211

Table of Contents

INDEX

		Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	a) Consolidated Balance Sheets, September 30, 2023 and December 31, 2022 (Reclassified)	3

	b) Condensed Consolidated Statements of Operations for the three-and nine-months ended September 30, 2023 and 2022	4

	c) Condensed Consolidated Statements of Comprehensive Loss for the three-and nine-months ended September 30, 2023 and 2022	5

	d) Condensed Consolidated Statements of Cash Flows for the nine-months ended September 30, 2023 and 2022	6

	e) Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	Mine Safety Disclosures	29

Item 5.	Other Information	29

Item 6.	Exhibits	30

Forward-Looking Statements		30

Signatures		31

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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


	September 30,		December 31,
	2023		2022
	(Unaudited)		(Reclassified)
Current assets:
Cash	$	158	$	3,812
Cash, restricted		150		—
Accounts receivable, net		12,297		8,453
Inventories, net		15,048		14,286
Prepaid income taxes		139		138
Other current assets		727		477
Assets related to discontinued operation		1,981		9,528
Total current assets		30,500		36,694

Property, plant and equipment, net		7,172		7,355
Deferred income taxes, net		—		1,072
Other non-current assets		42		173
Total Assets	$	37,714	$	45,294

Liabilities and Shareholders’ Equity
Current liabilities:
Line of credit	$	2,164	$	—
Current portion of eqiupment financing and capital leases		—		501
Current portion of post retirement obligation		87		87
Accounts payable		2,958		1,840
Accrued employee compensation and benefits costs		1,286		1,057
Accrued warranty		544		581
Other accrued liabilities		925		396
Liabilities related to discontinued operation		1,741		1,745
Total current liabilities		9,705		6,207
Post retirement obligation		3,996		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		525		523
Capital in excess of par value		14,603		14,556
Retained earnings		12,489		23,741
Accumulated other comprehensive loss		(2,295)		(2,337)
Employee stock ownership trust commitment		(157)		(157)
Treasury stock, at cost 91,570 (104,464 - 2022) shares		(1,152)		(1,214)
Total shareholders’ equity		24,013		35,112
Total Liabilities and Shareholders’ Equity	$	37,714	$	45,294

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($000’s omitted except per share data)

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022

Revenue	$	11,582	$	8,823	$	31,291	$	26,739

Costs of goods sold, inclusive of depreciation and amortization		9,083		7,596		26,252		21,814
Gross profit		2,499		1,227		5,039		4,925

Operating expenses:
Selling, general and administrative		2,219		1,918		7,663		5,919
Total operating costs and expenses		11,302		9,514		33,915		27,733
Operating income/(loss)		280		(691)		(2,624)		(994)

Other (expense)/income:
Interest expense		(98)		(50)		(239)		(194)
Gain on sale of equipment		—		—		—		26
Total other (expense)/income, net		(98)		(50)		(239)		(168)

Income/(loss) from continuing operations before income taxes		182		(741)		(2,863)		(1,162)

Income tax benefit/(expense)		—		154		(1,063)		234
Income/(loss) from continuing operations		182		(587)		(3,926)		(928)
(Loss)/income from discontinued operation, net of tax (Note 2)		(386)		271		(7,326)		127
Net loss	$	(204)	$	(316)	$	(11,252)	$	(801)

Basic and diluted income/(loss) per share
Continuing operations	$	0.07	$	(0.24)	$	(1.59)	$	(0.38)
Discontinued operation		(0.16)		0.11		(2.97)		0.05
Basic and diluted loss per share	$	(0.09)	$	(0.13)	$	(4.56)	$	(0.33)

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

($000’s omitted)

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022

Net loss	$	(204)	$	(316)	$	(11,252)	$	(801)

Other comprehensive income items:
Actuarial gains		17		28		42		84
Income tax provision on actuarial gains		—		(6)		—		(18)
Other comprehensive income:
Retirement benefits adjustments, net of income taxes		17		22		42		66

Total comprehensive loss	$	(187)	$	(294)	$	(11,210)	$	(735)

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($000’s omitted)

(Unaudited)


	Nine Months Ended
	September 30,
	2023		2022
Cash flows related to operating activities:
Loss from continuing operations	$	(3,926)	$	(928)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		790		751
Stock based compensation		110		126
Decrease in allowance for credit losses		8		5
Increase (decrease) in inventory reserve		34		(112)
(Decrease)increase in warranty reserve		(37)		32
Deferred income taxes		1,077		24
Gain on sale of equipment		—		(26)
Change in assets and liabilities:
Accounts receivable		(3,852)		(3,772)
Inventories		(796)		1,928
Prepaid income taxes		(1)		527
Other current assets		(250)		(233)
Accounts payable		1,118		1,467
Accrued employee compensation and benefit costs		229		(66)
Post retirement obligations		59		86
Other accrued liabilities		529		44
Net cash used in operating activities from continuing operations		(4,908)		(147)

Cash flows related to investing activities:
Capital expenditures - property, plant and equipment		(606)		(879)
Proceeds from sale of assets		—		38
Net cash used in investing activities from continuing operations		(606)		(841)

Cash flows related to financing activities:
Advances on line of credit, net of payments		2,164		—
Principal payments on long-term debt		—		(4,250)
Principal payments on equipment financing lease obligations		(501)		(210)

Net cash provided by (used in) financing activities from continuing operations		1,663		(4,460)
Discontinued Operation
Cash (used in) provided by operating activites		(1,753)		151
Cash provided by investing activities		2,100		—
Net cash provided by operating and investing activities from discontinued operation		347		151
Net decrease in cash and restricted cash		(3,504)		(5,297)
Cash and restricted cash at beginning of period		3,812		9,433
Cash and restricted cash at end of period	$	308	$	4,136

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Operations and Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

Servotronics, Inc. and its subsidiaries (the “Company”) currently design, manufacture and market servo-control components and other advanced technology products for aerospace, military and medical applications. 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.

Until 2023, the Company had operated historically under two business segments: Advanced Technology Group (“ATG”) and Consumer Products Group (“CPG”), which had been strategic business units that offered different products and services. Operations in ATG include the servo-control components (i.e., torque motors, control valves, etc.), and the CPG operations which were divested in 2023 included the design, manufacture and marketing of a variety of cutlery products for use by consumers and government agencies.

The consolidated financial statements include the accounts of Servotronics, Inc. (the active legal entity under the ATG segment), The Ontario Knife Company (“OKC”, the active legal entity under the CPG segment) and other, inactive, wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation. The Company derives its primary sales revenue from domestic customers, although a portion of finished products are for foreign end use.

As communicated in the June 30, 2023 10-Q filing, the Company executed an Asset Purchase Agreement (“APA”) with the third party to sell the assets of OKC, which closed on August 1, 2023. Management intends to wind down the OKC operations during the remainder of 2023. Accordingly, the results of operations of OKC are presented as a “Loss from Discontinued Operation, net of tax” on the Condensed Consolidated Statements of Operations, and assets and liabilities are reflected as “Assets and Liabilities related to Discontinued Operation” in the Condensed Consolidated Balance Sheets. The “Loss from Discontinued Operation, net of tax” is included in the net loss on the Condensed Consolidated Statements of Comprehensive Loss, and the cash used by operating activities from the discontinued operation is included in the “Discontinued Operation” section of the Condensed Consolidated Statements of Cash Flows.

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 consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three- and nine-months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The consolidated financial statements should be read in conjunction with the 2022 annual report and the notes thereto.

The 2022 financial information included in the aforementioned Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations were reclassified to conform with the discontinued operations presentation. Amounts for all periods discussed below reflect the results of operations, financial condition and cash flows from the Company’s continuing operations, unless otherwise noted. Refer to Note 2, Discontinued Operation and Assets and Liabilities Related to Discontinued Operation, for further discussion.

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.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cash and Restricted Cash

The following table provides a reconciliation of cash and restricted cash to the amounts in the statement of cash flows in thousands.


	September 30,		December 31,
	2023		2022

	($000’s omitted)
Cash	$	158	$	3,812
Restricted cash		150		—
Total cash and restricted cash	$	308	$	3,812

The Company considers cash to include all currency and coin owned by the Company as well as all deposits in the bank including checking and savings accounts. The restricted cash of $150,000 as of September 30, 2023 (no outstanding balance as of December 31, 2022) represents collateral with a financial institution.

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 credit losses. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for credit losses based on history of past write-offs, collections, and current credit conditions. The allowance for credit losses amounted to approximately $124,000 and $116,000 as of September 30, 2023 and December 31, 2022, respectively. The Company does not accrue interest on past due receivables.

The Company evaluated the accounting standards update related to the Current Expected Credit Losses (“CECL”) and determined that the pronouncement does not have a material effect on the financial position, results of operations or cash flows of the Company.

Revenue Recognition

Revenues are recognized at the time of shipment of goods, transfer of title and customer acceptance, as required. 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 performance of repairs or services provided. The costs incurred for nonrecurring engineering, development and repair activities of our products under agreements with commercial customers are expensed as incurred. Subsequently, the revenue is recognized as products are delivered to the customers with the approval by the customers.

Revenue is recognized at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods and services to a customer. The Company determines revenue recognition using the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when the company satisfies a performance obligation.

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

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

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

timing of the satisfaction of performance obligations or transaction price. Shipping and handling activities that occur after the customer obtains control of the promised goods are considered fulfillment activities.

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

Warranty and repair obligations are assessed on all returns. Revenue is not recorded on any warranty returns. The Company warrants its products against design, materials and workmanship based on an average of twenty-seven months. The Company determines warranty reserves needed based on actual average costs of warranty units shipped and current facts and circumstances. As of September 30, 2023, and December 31, 2022 under the guidance of ASC 460 the Company has recorded a warranty reserve of approximately $544,000 and $581,000, respectively. Revenue is recognized on repair returns, covered under a customer contract, at the contractual price upon shipment to the customer.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost includes all costs incurred to bring each product to its present location and condition. Market provisions in respect of lower of cost or market adjustments and inventory expected to be used in greater than two years are applied to the gross value of the inventory through a reserve of approximately $636,000 and $602,000 at September 30, 2023 and December 31, 2022, respectively. Pre-production and start-up costs are expensed as incurred.

The purchase of suppliers’ minimum economic quantities of material such as steel, etc. may result in a purchase of quantities exceeding two years of customer requirements. Also, in order to maintain a reasonable and/or agreed to lead time or minimum stocking requirements, certain larger quantities of other product support items may have to be purchased and may result in over one year’s supply. The amounts are not included in the inventory reserve discussed above.

Shipping and Handling Costs

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

Property, Plant and Equipment

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

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


Buildings and improvements		5-40 years
Machinery and equipment		5-20 years
Tooling		3‑5 years

Income Taxes

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.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Condensed Consolidated Balance Sheets as of September 30, 2023 or December 31, 2022, and did not recognize any interest and/or penalties in its Condensed Consolidated Statements of Operations during the periods ended September 30, 2023 and September 30, 2022. The Company did not have any material uncertain tax positions or unrecognized tax benefits or obligations as of September 30, 2023 and December 31, 2022. The 2019 through 2022 federal and state tax returns remain subject to examination.

Supplemental Cash Flow Information

There were income tax refunds received of approximately $0 and $811,000 for the nine-month periods ended September 30, 2023 and 2022, respectively. Income taxes paid amounted to approximately $2,000 and $50,000 for the nine-month periods ended September 30, 2023 and 2022, respectively. Interest paid during the nine-month periods ended September 30, 2023 and 2022 amounted to approximately $98,000 and $76,000, 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 over recent periods, the Company performed a test for recoverability of the long-lived assets by comparing the carrying value to the future undiscounted cash flows that are expected to 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’s strategic decision to sell certain assets of OKC resulted in the classification of a discontinued operation and triggered an impairment of OKC’s real property as of September 30, 2023 in accordance with Accounting Standards Codification (“ASC”) 360-10-45-9 Impairment or Disposal of Long-Lived Assets. Refer to Note 2, Discontinued Operation and Assets and Liabilities Related to Discontinued Operation, for further discussion.

The Company has determined that no other impairment of long-lived assets existed as of September 30, 2023 and December 31, 2022, which primarily includes the Company’s tangible real (land and building) and personal (machinery & equipment) properties.

Reclassifications

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

Effective January 1, 2023, the research and development and certain insurance expenditures of approximately $568,000 and $1,470,000 for the three- and nine-months ended September 30, 2023 are reflected in selling, general and administrative operating expenses. Accordingly, approximately $377,000 and $1,029,000 for the three- and nine-months ended September 30, 2022 was reclassified from cost of goods sold to selling, general and administrative for the same period in 2022. There was no impact to the Condensed Consolidated Statement of Operations due to the reclassification.

Research and Development Costs

Research and development costs are expensed as incurred and are included in selling, general and administrative on the Condensed Consolidated Statements of Operations.

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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 assesses the risk of nonperformance by the financial institutions to be low.

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 asset-based line of credit the fair value approximates its carrying amount.

Recent Accounting Pronouncements Adopted

Effective January 1, 2023, the Company adopted the Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, issued by the Financial Accounting Standards Board (“FASB”) which creates a new credit impairment standard for financial assets measured at amortized cost and available-for-sale debt securities. The ASU requires financial assets measured at amortized cost (including loans, trade receivables and held-to-maturity debt securities) to be presented at the net amount expected to be collected, through an allowance for credit losses that are expected to occur over the remaining life of the asset, rather than incurred losses. The measurement of credit losses for newly recognized financial assets (other than certain purchased assets) and subsequent changes in the allowance for credit losses are recorded in the statement of operations as the amounts expected to be collected change.

The adoption of ASU 2016-13 did not have a material effect on the financial position, results of operations or cash flows of the Company.

There have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, that are of significance, or potential significance, to the Company.

2.	Discontinued Operation and Assets and Liabilities Related to Discontinued Operation

As disclosed in the Company's Form 10-Q as of June 30, 2023, the Company’s decision to sell certain assets and wind down the operations of OKC met the “held for sale” criteria and represented a strategic shift that had a significant impact on the Company’s operations and financial results under ASC 205-20-45-9 Discontinued Operations. Therefore, the assets and liabilities of OKC are reflected as “Assets and Liabilities related to Discontinued Operation” in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (as reclassified). The operating results, the loss on sale of assets, wind down costs, and impairment of long-lived assets were reclassified to “Loss from Discontinued Operation, net of tax” in the Condensed Consolidated Statements of Operations for the three- and nine-months ended September 30, 2023 and September 30, 2022, respectively.

Under the terms of the APA, which divestiture closed on August 1, 2023, the Company sold inventory, machinery & equipment and intellectual property (patents & trademarks/tradenames) to the buyer for approximately $2,196,000 (original purchase price of $2,100,000 for the period ending June 30, 2023), which resulted in a change in purchase price and estimated loss on the sale of assets of $96,000 for the three-month period ending September 30, 2023 based on asset purchase reconciliations. In accordance with the sale, the Company evaluated whether the fair value of OKC assets sold ($2,196,000), less estimated costs to sell, exceeded the net carrying values. The Company concluded that the net carrying values exceeded the fair value, less estimated costs to sell, resulting in an estimated impairment charge of approximately $3,127,000 (original estimate of $3,223,000 for the period ending June 30, 2023). This impairment charge is included in the Loss from Discontinued Operation for the nine-month period ending September 30, 2023.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In addition, as a direct result of selling OKC’s assets, management’s focus on winding down the OKC operations, and actively marketing the real property for sale, the Company incurred an impairment charge of approximately $1,098,000 related to the real property based on independent, third party appraisals (less estimated costs to sell). Estimated wind down costs of approximately $1,208,000 ($1,129,000 for the period ending June 30, 2023 and included in the other accrued liabilities caption within the table presented below), were recorded for key employee retention agreements, employee severance agreements, and supplier purchase order obligations currently in negotiations. This resulted in additional costs of $79,000 for the three-month period ending September 30, 2023. This aggregate total of approximately $2,306,000 is included in the Loss from Discontinued Operation for the nine-month period ending September 30, 2023.

Finally, OKC’s operating losses of approximately $403,000 and $1,893,000 for the three- and nine-month periods ended September 30, 2023, respectively, are also included in the Loss from Discontinued Operation (compared to Income from Discontinued Operation of $271,000 and $127,000 for the three- and nine-month periods ended September 30, 2022, respectively, as reclassified).

Based on the above, the total Loss from Discontinued Operation, net of tax, is approximately $386,000 and $7,326,000 for the three- and nine-month periods ended September 30, 2023, respectively (compared to Income from Discontinued Operation of approximately $271,000 and $127,000 for the three- and nine-months ended September 30, 2022, respectively, as reclassified), and had a significant impact on the Company’s financial position in 2023.

As shown in the Statement of Cash Flows and disclosed in Note 1, the sale of OKC assets occurred on August 1, 2023 and the cash proceeds received of $2,100,000 were used to paydown the outstanding line of credit during the third quarter (current balance outstanding of approximately $2,164,000 as of September 30, 2023 compared to approximately $3,697,000 outstanding as of June 30, 2023) and fund the discontinued operations.

Discontinued Operation Financial Information

A summary of the results of operations classified as a discontinued operation, net of tax, in the Condensed Consolidated Statements of Operations, are as follows:


	Three Months Ended		Three Months Ended
	September 30, 2023		September 30, 2022

		($000’s omitted)
Net Sales	$	336	$	2,168
Operating costs		(739)		(1,897)
Loss/(income) from discontinued operation		(403)		271
Loss from discontinued operation - impairment and divestiture costs		(79)		—
Change in purchase price		96		—
(Loss)/income from discontinued operation before income taxes		(386)		271
Income tax benefit		—		—
(Loss)/income from discontinued operation, net of tax	$	(386)	$	271


	Nine Months Ended		Nine Months Ended
	September 30, 2023		September 30, 2022

	($000’s omitted)
Net Sales	$	3,423	$	6,650
Operating costs		(5,316)		(6,523)
(Loss)/income from discontinued operation		(1,893)		127
Loss from discontinued operation - impairment and divestiture costs		(2,306)		—
Estimated loss on sale of assets		(3,127)		—
(Loss)/income from discontinued operation before income taxes		(7,326)		127
Income tax benefit		—		—
(Loss)/income from discontinued operation, net of tax	$	(7,326)	$	127

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Table of Contents

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Assets & Liabilities Related to Discontinued Operation Financial Information

A summary of the carrying amounts of major classes of assets and liabilities, which are included in assets and liabilities related to discontinued operation in the Condensed Consolidated Balance Sheets, are as follows:


	September 30, 2023		Dec 31, 2022

	($000’s omitted)
Accounts receivable, net	$	335	$	1,016
Prepaid assets		96		313
Inventories, net		—		4,766
Machinery and equipment, net		—		567
Patents and trademark, net		—		140
Building and improvements, net		1,550		2,726
Assets related to discontinued operation	$	1,981	$	9,528

Accounts payable	$	777	$	1,272
Accrued employee compensation and other costs		964		473
Liabilities related to discontinued operation	$	1,741	$	1,745

The OKC assets not being sold under the terms of the APA include accounts receivable, prepaid assets, and the building totaling $1,981,000 as of September 30, 2023. The Company retains and will liquidate these assets in conjunction with the wind down of the OKC operations during the remainder of 2023. The accounts receivable of approximately $335,000 represents amounts due from customers and from the buyer of OKC’s assets in accordance with the terms of the APA, and is net of a reserve for credit losses of approximately $100,000. In addition, the OKC liabilities not assumed under the terms of the APA include the accounts payable and accrued expenses totaling approximately $1,741,000 as of September 30, 2023.

3.	Inventories


	September 30,		December 31,
	2023		2022

	($000’s omitted)
Raw material and common parts	$	7,926	$	7,199
Work-in-process		7,172		6,490
Finished goods		586		1,199
		15,684		14,888
Less inventory reserve		(636)		(602)
Total inventories	$	15,048	$	14,286

Subassembly inventory of approximately $3,554,000 was reclassified from raw material and common parts to work-in-process as of September 30, 2023 ($3,504,000 was reclassified as of December 31, 2022).

4.	Property, Plant and Equipment


	September 30,		December 31,
	2023		2022

	($000’s omitted)
Buildings	$	8,411	$	7,838
Machinery, equipment and tooling		15,305		14,526
Construction in progress		257		1,002
		23,973		23,366
Less accumulated depreciation and amortization		(16,801)		(16,011)
Total property, plant and equipment	$	7,172	$	7,355

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Depreciation and amortization expense amounted to approximately $272,000 and $230,000 for the three-months ended September 30, 2023 and 2022, respectively. Amortization expense primarily related to Right of Use (“ROU”) assets amounted to approximately $6,000 and $6,000 for the three months ended September 30, 2023 and 2022, respectively. Depreciation and amortization expense amounted to approximately $790,000 and $751,000 for the nine-months ended September 30, 2023 and 2022, respectively. Amortization expense, primarily related to ROU assets, amounted to approximately $18,000 and $18,000 for the nine-months ended September 30, 2023 and 2022, respectively.

The Company’s ROU assets included in machinery, equipment and tooling had a net book value of approximately $166,000 as of September 30, 2023 ($185,000 as of December 31, 2022).

As of September 30, 2023, there is approximately $257,000 ($1,002,000 as of December 31, 2022) of construction in progress (CIP) included in property, plant and equipment, all of which is related to capital projects. There is approximately $248,000 in CIP for machinery and equipment and approximately $9,000 for building improvements at the Advanced Technology Group.

5.	Indebtedness


	September 30,		December 31,
	2023		2022

	($000’s omitted)

Line of credit payable to a financial institution; Interest rate is the greater of prime or 7% plus 1% per annum. (Interest rate 9.5% as of September 30, 2023) (A)	$	2,164	$	—

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 factor 1.79553% - 1.869304% at time of funding) (B)		—		491

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) (C)		—		10
		2,164		501
Less current portion		(2,164)		(501)
Long term debt	$	—	$	—

On June 27, 2023, the Company entered into a three-year financing agreement with a financial lending institution for an asset-based line of credit (the “Credit Facility”) with a maximum revolving credit of $7,000,000. The borrowing base under the Credit Facility is determined using 85% of eligible domestic and foreign accounts receivable balances, less any other specific reserves. In general terms, ineligible receivables are defined as invoices unpaid over 90 days. The balance outstanding on the Credit Facility is approximately $2,164,000 as of September 30, 2023 (no balance outstanding as of December 31, 2022). The interest rate on the Credit Facility is equal to the greater of prime rate (as defined by JP Morgan Chase Bank) or 7% plus 1% per annum. The Company capitalized approximately $104,000 of loan origination costs related to the Credit Facility, which is collateralized by the Company’s assets.

In accordance with ASC 470-10-45-5 Classification of Revolving Credit Agreements Subject to Lock-Box Arrangements and Subjective Acceleration Clauses, borrowings outstanding under the Credit Facility that includes both a subjective acceleration clause and requirement to maintain a lock-box arrangement must be considered short-term obligations. As the Credit Facility includes both of the provisions, the outstanding balance of $2,164,000 is classified as a current liability on the Condensed Consolidated Balance Sheet as of September 30, 2023.

The Credit Facility contains two financial covenants required to be maintained by the Company at the end of each of its fiscal quarters. The Tangible Net Worth covenant requires the Company to maintain tangible net worth not less than $20,000,000. The Working Capital covenant requires the Company to maintain working capital not less than $10,000,000. The Company has met both covenant requirements as of September 30, 2023.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company had an equipment loan facility in the amount of $1,000,000 available until July 9, 2021. This line was non-revolving and non-renewable and the term was 60 months. Monthly payments were fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding. There was no balance outstanding as of September 30, 2023 ($491,000 outstanding as of December 31, 2022).

The Company had 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 and the term was 60 months. Monthly payments were fixed for the term of each funding based upon the Lender’s lease pricing in effect at the time of such funding. There was no balance outstanding as of September 30, 2023 ($10,000 outstanding as of December 31, 2022).

Concerns about the Company’s ability to meet obligations as they become due were raised during the first half of 2023 based on the 2023 year-to-date net loss, the working capital requirements, and the bank refinancing required based on the previous banking relationship. However, the net loss from continuing operations was negatively impacted by non-recurring SG&A expenses (see MD&A) and income tax expense (see Note 8), both of which had a significant impact on the results from continuing operations. Also, the net loss from discontinued operation was driven by Management’s deliberate focus on exiting the CPG business segment, which resulted in significant, non-recurring impairment charges based on the fair value of OKC assets sold (see Note 2). Therefore, Management believes that the disposal of the unprofitable CPG segment, the continued execution of sequential revenue growth in 2023, the forecasted revenue and customer backlog for the remainder of 2023 and 2024, the continued production improvements and efficiencies resulting in improved gross margins, and the availability of funds under the new Credit Facility to support working capital needs, have alleviated any doubt regarding the Company’s ability to continue as a going concern.

6.	Postretirement Benefit Plan

The Company provides certain postretirement benefits for two former executives of the Company (the Plan). Under the Plan, the Company pays the annual cost of health insurance coverage and provides life insurance at the same level of coverage provided to the former employees at the time of termination of employment. The Plan also provides a benefit to reimburse the participants for certain out-of-pocket medical or health related expenses. The participants’ benefits under the Plan cease upon the death of the former executives. The Plan is unfunded and the actuarially determined future accumulated postretirement benefit obligation at September 30, 2023 and December 31, 2022 was approximately $4,083,000 and $4,062,000, respectively and has been accrued and reflected in Post Retirement Obligation in the accompanying Condensed Consolidated Balance Sheets.

Benefit costs for the three-months ended September 30, 2023 and 2022 totaled $65,000 and $70,000, respectively. Benefit costs for the nine months ended September 30, 2023 and 2022 totaled $195,000 and $208,000, respectively.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.	Shareholders’ Equity


	Nine-month Period Ended September 30, 2023
			Accumulated
			Other				Capital in						Total
	Retained		Comprehensive				excess of				Treasury		shareholders’
	Earnings		Income/(Loss)		Common Stock		par value		ESOT		stock		equity
December 31, 2022	$	23,741	$	(2,337)	$	523	$	14,556	$	(157)	$	(1,214)	$	35,112

Retirement benefits adjustment		—		13		—		—		—		—		13
Stock based compensation		—		—		—		17		—		24		41
Net Loss		(1,547)		—		—		—		—		—		(1,547)

March 31, 2023	$	22,194	$	(2,324)	$	523	$	14,573	$	(157)	$	(1,190)	$	33,619

Retirement benefits adjustment		—		12		—		—		—		—		12
Stock based compensation		—		—		1		14		—		18		33
Net Loss		(9,500)		—		—		—		—		—		(9,500)

June 30, 2023	$	12,694	$	(2,312)	$	524	$	14,587	$	(157)	$	(1,172)	$	24,164
Retirement benefits adjustment		—		17		—		—		—		—		17
Stock based compensation		—		—		1		16		—		20		37
Net Loss		(205)		—		—		—		—		—		(205)

September 30, 2023	$	12,489	$	(2,295)	$	525	$	14,603	$	(157)	$	(1,152)	$	24,013


	Nine-month Period Ended September 30, 2022
			Accumulated
			Other				Capital in						Total
	Retained		Comprehensive				excess of				Treasury		shareholders’
	Earnings		Income/(Loss)		Common Stock		par value		ESOT		stock		equity
December 31, 2021	$	25,858	$	(3,908)	$	523	$	14,500	$	(258)	$	(1,349)	$	35,366

Retirement benefits adjustment		—		22		—		—		—		—		22
Stock based compensation		—		—		—		2		—		23		25
Net Income		325		—		—		—		—		—		325

March 31, 2022	$	26,183	$	(3,886)	$	523	$	14,502	$	(258)