SERVOTRONICS INC /DE/ [SVT] Filings

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-K

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For the fiscal year ended December 31, 2022

Commission File No. 1-07109

SERVOTRONICS, INC.

(Exact name of registrant as specified in its charter)

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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:

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

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

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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 ☐

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

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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.

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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. ☐

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

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

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Based on the closing price of the Common Stock on June 30, 2022 $11.23 (the last day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the voting stock held by non-affiliates of the registrant was $18,797,515.

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As of February 28, 2023, the number of $.20 par value common shares outstanding was 2,525,313.

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DOCUMENTS INCORPORATED BY REFERENCE

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Portions of the Registrant’s Proxy Statement for the 2023 Annual Meeting of Shareholders are incorporated by reference in Part III.

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Table of Contents

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FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS

All statements contained herein that are not statements of historical fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the word “believe,” “anticipate,” “expect,” “project,” “intend,” “will continue,” “will likely result,” “should” or words or phrases of similar meaning. Forward-looking statements involve numerous risks and uncertainties. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: uncertainties in today's global economy, including political risks, adverse changes in legal and regulatory environments, 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, 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, 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.

PART I

Item 1.Business

General

Servotronics, Inc. and its subsidiaries (collectively the “Registrant” or the “Company”) design, manufacture and market advanced technology products consisting primarily of control components and consumer products consisting of knives and various types of cutlery and other edged products. The Company operates through two primary segments:  the Advanced Technology Group (ATG) and the Consumer Products Group (CPG).

The Company was incorporated in New York in 1959. In 1972, the Company was merged into a wholly-owned subsidiary organized under the laws of the State of Delaware, thereby changing the Company’s state of incorporation from New York to Delaware.

The Company’s shares currently trade on the New York Stock Exchange (NYSE American) under the symbol SVT.

Products

Advanced Technology Products (ATG)

The Company designs, manufactures and markets a variety of servo-control components which convert an electrical current into a mechanical force or movement and other related products. The principal servo-control components produced include torque motors, electromagnetic actuators, hydraulic valves, pneumatic valves and similar devices, all of which perform the same general function. These are sold principally to the commercial aerospace, aircraft and government related industries, as well as medical and industrial markets.

To fill most of its orders for components, the Company must either modify a standard model or design a new product in order to satisfy the customer’s particular requirements. The Company also produces unique products based on specifications provided by its customers. The Company produces under long-term contracts and other types of orders.

The Company may from time to time produce metallic seals of various cross-sectional configurations. These seals fit between two surfaces, usually metal, to produce a more secure and leak-proof joint. The Company manufactures these seals to close tolerances from standard and special alloy steels. Ductile coatings are often applied to the seals in order to increase their effectiveness.

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The Company has also produced other products of its own and/or of a given design to meet customers’ requirements.

Consumer Products (CPG)

The Company designs, manufactures and sells a variety of cutlery products.  These products include a wide range of kitchen knives such as steak, carving, bread, butcher and paring knives for household use and for use in restaurants, institutions and private industry, as well as other types of knives for hunting, fishing and camping. The Company sells cutlery products to the U.S. Government, related agencies and allied foreign governments. These products include machetes, bayonets and other types of knives that are primarily for military use. The Company also produces and markets other cutlery items such as carving forks and various specialty tools such as putty knives, linoleum sheet cutters and field knives.  The Company manufactures its cutlery products from stainless or high carbon steel in numerous styles, designs, models and sizes.  Substantially all of the Company’s commercial cutlery related products are intended for the medium to premium priced markets.

Sales, Marketing and Distribution

Advanced Technology Products

The Company’s ATG products are marketed throughout the United States and in select foreign markets. Products are primarily non-seasonal in nature. These products are sold to commercial aviation manufacturers, government prime contractors, government subcontractors, and end-users. Sales are made primarily by the Company’s professional staff.

The Company’s prime contracts and subcontracts with United States Government subcontractors and commercial manufacturers are subject to termination at the convenience of the customer.  In the event of such termination, the Company is ordinarily entitled to receive payment for its costs and profits on work done prior to termination. Since the inception of the Company’s business, less than 1% of its contracts have been terminated for convenience.  The Company’s sales of advanced technology products are composed primarily of a small group of customers.  The Company has a significant concentration of business with two major customers: Customer A and Customer B.  Sales to Customer A accounted for 30.1% of consolidated sales in 2022 and 33.5% of consolidated sales in 2021.  Sales to Customer B accounted for 18.9% of consolidated sales in 2022 and 19.1% of consolidated sales in 2021.  In 2022 and 2021 we had a concentration of sales to Customer A and Customer B representing approximately 49.0% and 52.6% of our consolidated sales, respectively.

The ATG revenue increased approximately $3,500,000 or 11.0% in 2022 as compared to 2021.  Customer A revenue decreased approximately $393,000 or (2.9)% in 2022 as compared to 2021.  Customer B revenue increased approximately $503,000 or 6.5% in 2022 as compared to 2021.

The loss of either of these customers would have a significant impact on our revenue and earnings.   See Note 1, Business Description and Summary of Significant Accounting Policies – Concentration of Credit Risks, of the accompanying consolidated financial statements for information related to sales concentrations.

Consumer Products

The Company’s consumer products are marketed throughout the United States and in select foreign markets. Consumer sales are seasonal. Sales are direct to consumer, through national and international distributors, and through retailers such as big box, hardware, supermarket, variety, department, discount, gift, drug, outdoors and sporting stores. The Company’s Consumer Products Group (CPG) also sells its knives and tools (principally machetes, bayonets, survival knives and kitchen knives) to various branches of the United States Government. Additionally, the Company provides OEM and white label product design and manufacturing services to a regional customer base across a wide range of consumer and commercial industries. No single customer of the CPG represented more than 10% of the Company’s consolidated revenues in 2022 or 2021. The Company sells its products and manufacturing services through its own sales resources, independent manufacturers’ representatives and electronic commerce.

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Business Segments

Business segment information is presented in Note 10, Business Segments, of the accompanying consolidated financial statements.

Intellectual Properties

The Company has rights under certain copyrights, trademarks, patents, and registered domain names. In the view of management, the Company’s competitive position is not dependent on patent protection.

Research Activities

Research and development costs are expensed as incurred.

Environmental Compliance

The cost of compliance with current environmental laws has not been material and the Company does not anticipate that it will be in the future. The Company does not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on the Company’s business, nor on its results of operations, capital expenditures or financial position.

Manufacturing

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

Raw Materials and Other Supplies

The Company purchases raw materials and certain components for its products from outside vendors. The Company is generally not dependent upon a single source of supply for any raw material or component used in its operations. We believe the loss of any one supplier, although potentially disruptive in the short-term, would not materially affect our operations in the long-term. As a result of the COVID-19 pandemic and resulting economic and supply chain disruptions, the Company continues to face upward pricing pressure on certain parts and raw materials.

Competition

Although no reliable industry statistics are available to enable the Company to determine accurately its relative competitive position with respect to any of its products, the Company believes that it is a significant factor with respect to certain of its servo-control components within its competitive market. The Company’s share of the overall cutlery market is not significant.

The Company has many different competitors with respect to servo-control components because of the nature of that business and the fact that these products also face competition from other types of control components which, at times, can accomplish the desired result. Many of these competitors are substantially larger and have greater resources than the Company.

The Company encounters active competition with respect to its consumer products from numerous companies, many of which are larger in terms of manufacturing capacity, financial resources and marketing organization. Its principal competitors vary depending upon the customer and/or the products involved. The Company believes that it competes primarily with more than 20 companies with respect to its consumer products, in addition to foreign imports. To the Company’s knowledge, its principal competitors with regard to cutlery include Corelle Brands Holdings, Inc., Benchmade Knife Company, Inc., Tramontina, Inc., Dexter-Russell Inc., W. R. Case & Sons Cutlery Company, Lifetime Brands, Inc., Cutco Corporation and Gerber. The Company also competes with other regional manufacturing companies for its molded plastic and metal and plastic fabrication services. To the Company’s knowledge, its principal competitors with regard to manufacturing services include PM Plastics, Monarch Plastics and Ontario Plastics.

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The Company markets most of its products throughout the United States and to a lesser extent in select foreign markets. The Company believes that it competes in marketing its servo-control products primarily on the basis of operating performance, adherence to rigid specifications, quality, price and delivery and its consumer products primarily on the basis of price, quality and delivery.

Employees

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

The Company, at December 31, 2022, had 309 employees of which 303 are full time and 6 part time employees at two locations in New York. Approximately 88% of its employees and contractors are engaged in production, engineering, inspection, packaging or shipping activities. The balance is engaged in executive, administrative, clerical or sales capacities. None are subject to a collective bargaining agreement.

Available Information

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

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

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Item 1A.Risk Factors

The Company is a smaller reporting company by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

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Item 1B.Unresolved Staff Comments

Not applicable.

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Item 2.Properties

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

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

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Item 3.Legal Proceedings

See Note 8, Litigation, for information regarding legal actions. There are no other legal proceedings currently pending by or against the Company other than ordinary routine litigation incidental to the business which is not expected to have a material adverse effect on the business or earnings of the Company.

Item 4.Mine Safety Disclosures

Not applicable.

PART II

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

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

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The Company has not paid any cash dividends in the two-year period ended December 31, 2022. The Company has no plans to pay cash dividends as it plans to retain all cash from operations as a source of capital to finance working capital and growth in the business.

The Company’s Board of Directors authorized the purchase of up to 450,000 shares of its common stock in the open market or in privately negotiated transactions. As of December 31, 2022, the Company has purchased 360,615 shares and there remain 89,385 shares available to purchase under this program. There were no shares purchased by the Company in 2022.

Item 6.[Reserved]

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

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

All comparisons included within this Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, refer to results for the year ended December 31, 2022 compared to the year ended December 31, 2021, unless stated otherwise.  Additionally, the information provided is expected to better allow investors to view the registrant from management’s perspective including using quarterly data supporting management’s discussion.

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Business Overview

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

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

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

If any adverse economic events reduce the number of airliners and/or aircraft being produced by the Company’s relevant prime contractors, the negative effects of that reduction will in turn flow down through the supply chain. Also, certain major manufacturers have successfully imposed extended payment terms to their suppliers. At times, these extended payment terms are not available to the Company when purchasing raw material such as aluminum, magnetic material, steel and/or other product support items and services. If the Company’s customers delay their payments until after the extended due date or fail to pay, it could adversely impact the Company’s operating results and cash flow. During 2022, inflation negatively impacted our input costs, primarily for labor and materials.  Supply chain disruptions, labor shortages, and global inflation remain persistant.

Maximizing the Company’s operations and resources requires continued dedicated performances from the Company’s key and other personnel. In the Company’s markets and business arenas there is substantial competition for the services of the highest performing individuals. Any unplanned replacement of such personnel may require the hiring of new personnel on an expedited basis (provided they are available) and may temporarily interrupt the Company’s operations and efforts for continuous improvement.

On March 30, 2023, the Company announced that the Company’s Board of Directors has authorized the review of the strategic alternatives for the CPG with a goal of enhancing shareholder value. This review was authorized by the Board on February 28, 2023 and the company has engaged a financial advisor to evaluate potential alternatives. There is no set timetable for the strategic review process and there can be no assurance that such review will result in any transaction or other alternative.

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Management Discussion

There was an increase in consolidated revenue in the twelve months ended December 31, 2022 from 2021 of approximately $3,263,000 or 8.0%. This is primarily due to an increase in the number of units shipped at the ATG of approximately $3,007,000 and to price increases at the ATG of approximately $1,699,000 and the CPG of approximately $300,000. This is partially offset by an unfavorable product mix shipped at the ATG of approximately $1,198,000 and at the CPG of approximately $427,000 and a decrease in the number of units shipped at the CPG of approximately $118,000. During the twelve months ended December 31, 2022 and 2021, approximately 80% and 78%, respectively, of the Company's consolidated revenues were derived from the ATG sale of product to a small base of customers. During the twelve months ended December 31, 2022 and 2021, approximately 20% and 22%, respectively, of the Company's consolidated revenues were derived from the CPG sale of product to a large base of retail customers.

Our commercial business is affected by such factors as uncertainties in today’s global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, the effects and threats of terrorism, and increasing market demand could impact our ability to produce and deliver product on time.

The ATG engages its business development efforts in its primary markets and is broadening its activities to include new domestic and foreign markets that are consistent with its core competencies. We believe our business remains particularly well positioned in the strong commercial aircraft market driven by the recovery of business with increased demand post COVID, the replacement of older aircraft with more fuel-efficient alternatives and the increasing demand for air travel in emerging markets. Although the ATG backlog continues to be strong, actual scheduled shipments may be delayed or changed as a function of our customers’ final delivery determinations.

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

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Results of Operations

The following table compares the Company’s consolidated statements of income data for the years ended December 31, 2022 and 2021 ($000’s omitted).

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Revenue and Gross Profit

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Revenue

Consolidated revenues from operations decreased approximately $123,000 or (1.2)% for the three month period ended December 31, 2022 when compared to the same period in 2021. This benefited from price increases at the ATG of approximately $569,000. Although the ATG is experiencing an increase in volume due to the recovery of business within the commercial aircraft market it is partially offset by an unfavorable product mix of product shipped of approximately $305,000.  Additionally, the CPG had an increase in prices of approximately $126,000 offset by by an unfavorable product mix of product shipped and a decrease in the number of units shipped amounting to approximately $513,000 as compared to the same three month period ended December 31, 2021.

Consolidated revenues from operations increased approximately $3,263,000 or 8.0% for the twelve month period ended December 31, 2022 when compared to the same period in 2021. Although the ATG is experiencing an increase in volume due to the recovery of business within the commercial aircraft market of approximately $3,007,000 it is partially offset by an unfavorable product mix of product shipped of approximately $1,198,000.  The twelve month period benefited from price increases at the ATG of approximately $1,699,000. Additionally, the CPG had an increase in prices of approximately $300,000 offset by an unfavorable product mix of product shipped and a decrease in the number of units shipped amounting to approximately $545,000 as compared to the same twelve month period ended December 31, 2021.

Gross Profit

Consolidated gross profit from operations decreased approximately $736,000 for the three month period ended December 31, 2022 when compared to the same period in 2021. The gross profit decreased at the ATG by approximately $1,233,000 offset by an increase at the CPG of approximately $497,000.

Gross profit benefited in the three months period from the recovery of business within the commercial aircraft market with increased volume and price increases offset by an unfavorable product mix shipped at the ATG of a net decrease of approximately $270,000 and increased operating costs of approximately $963,000. The increase in operating costs is primarily due to increased compensation and benefits of approximately $906,000 and expendable tools and equipment of approximately $124,000, and a net increase of approximately $9,000 for all other operating expenses, offset by lower warranty expenses of approximately $76,000 as compared to the same period in 2021. The ATG has added staff during this period in anticipation of increasing production in 2023 to satisfy the increasing customer demand.

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Additionally, gross profit increased in the three month period at the CPG due to an improvement in operating variances of approximately $255,000, and a decrease in operating costs of approximately $242,000. The decrease in operating costs is primarily due to an improvement in the utilization of production resources of approximately $235,000, a decrease in freight of approximately $54,000, offset by an increase in utilities of approximately $24,000 and a net increase of approximately $23,000 for all other expenses as compared to the same period in 2021.

Consolidated gross profit from operations decreased slightly by approximately $44,000 or (0.7)% for the twelve month period ended December 31, 2022 when compared to the same period in 2021. The gross profit decreased at the ATG by approximately $1,618,000 and increased at the CPG by approximately $1,574,000.

Gross profit benefited in the twelve months period from the recovery of business within the commercial aircraft market and price increases at the ATG of approximately $1,229,000. However, this was more than offset by an unfavorable product mix shipped and an increase in operating costs of approximately $2,847,000. This is primarily due to increased compensation and benefits of approximately $2,234,000, recruiting costs for the ramp-up of production of approximately $188,000, expendable tools and equipment of approximately $178,000, building and production equipment maintenance of approximately $125,000, travel and lodging of approximately $106,000 and a net increase of approximately $16,000 for all other operating expenses as compared to the same period in 2021. As previously noted, we have added staff during this period in the preparation for increased production in 2023 to satisfy customer demand.  At the CPG, gross profit increased in the twelve month period due to price increases of approximately $300,000, a decrease in operating variances of approximately $348,000 and a decrease in operating costs of approximately $926,000. The decrease in operating costs is primarily due to an improvement in the utilization of production resources of approximately $417,000, a decrease in net freight costs of approximately $400,000, a decrease in compensation and benefits of approximately $58,000, a decrease in repair and maintenance expenses of approximately $48,000 and a net decrease of approximately $3,000 for all other operating expenses as compared to the same period in 2021.

Since mid-2020, both Segments have experienced the challenge of fully utilizing their production resources, increasing the cost per unit produced. In 2022, CPG experienced favorable production costs in the twelve months ended December 31, 2022.  Additionally, both Segments have incurred increased costs for raw materials associated with the production of our products. The ATG has incurred the costs of ramping up staffing to support increased production planned for 2023.  Despite the challenges, the consolidated gross profit has decreased only slightly from the same period in 2021.

Selling, General and Administrative Expenses and Operating Income (Loss)

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