EDGAR 10-K Filing

Company CIK: 89140
Filing Year: 2024
Filename: 89140_10-K_2024_0001410578-24-000274.json

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ITEM 1. BUSINESS
Item 1.Business
Description of the Business
Servotronics designs and manufactures high-performance servo valves, including torque motor, hydraulic, and pneumatic valves. Our products are sold to commercial aerospace, government, medical, and industrial markets.
Additional information describing the business is provided in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report.
Until 2023, we operated historically under two business segments: Advanced Technology Group (“ATG”) and Consumer Products Group (“CPG”), which were separate operating units that offered different products and services. The CPG business segment, which included the design, manufacturing, and marketing of a variety of cutlery products for use by consumers and government agencies, was divested as disclosed in the Company’s quarterly reports on Form 10-Q for the quarterly periods ended September 30, 2023 and June 30, 2023. As a divested business segment, CPG is reflected as a discontinued operation in this annual report on Form 10-K.
The sale of the Company’s products to primarily large commercial aerospace customers does result in a dependence on a small number of major customers. See Note 11, Customer and Supplier Concentration, for further information.
Sales, Marketing, and Distribution
We have embarked on a rebranding initiative, launching a new website and refining our branding strategy to better communicate our product and service capabilities to new and existing customers. These developments are pivotal in aligning our organizational structure and market presence with our long-term vision and the dynamic demands of the aerospace and government sectors, as well as our targeted expansion into the energy and industrial markets.
Our products are marketed and sold throughout the United States and in select foreign markets. These products are sold to commercial aviation manufacturers, government prime contractors, government subcontractors, and end-users.
Servotronics holds long-term contracts with prime contractors of the United States Government for military programs and original equipment manufacturers for commercial programs. These contracts are subject to termination at the convenience of the customer. If such termination occurs, we would generally be entitled to receive payment for our costs and profits on work done before termination. Throughout the history of our business, less than 1% of our contracts have been terminated for convenience.
Competition
We believe the critical items of competition in our markets are product quality, reliability, design, engineering capabilities, product development, conformity to customer specifications, timely delivery, and sales support. We compete effectively in the servo valve market as we provide significant value to our customers by developing customized solutions for their specific needs.
Materials & Supplies
Materials, supplies, and components are purchased from many suppliers, however, the loss of a significant supplier could have a material effect on our operations in the short term. This report provides additional information describing supplier risk in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 11 in the Consolidated Financial Statements.
Intellectual Properties
We recognize the critical importance of intellectual property (IP) to our business operations and overall value proposition. Our IP portfolio comprises trademarks, copyrights, and trade secrets encompassing innovative technologies, designs, processes, and branding assets integral to our products and services. These IP assets serve as key differentiators in the marketplace, providing us with competitive advantages, barriers to entry, and opportunities for monetization and strategic partnerships. By effectively safeguarding and leveraging our intellectual property assets, we aim to sustain our competitive position, drive innovation, and create long-term value for our shareholders.
Research and Development Activities
We continue to make considerable investments in research and development activities, demonstrating our commitment to promoting innovation and continuous improvement throughout our operations and with our customers. By prioritizing research and development initiatives, we aim to drive sustainable long-term growth, strengthen our market position, and provide greater value to our stakeholders over the long term.
People and Values
Our company's culture is built on strong values. We prioritize respect for all and foster an inclusive workplace where every staff member can thrive and showcase their full potential. Innovation and personal growth are encouraged among employees.
The dedication and hard work of our employees form the backbone of our operations. As a quality, technology and research driven company, attracting and retaining the right team of talented individuals is essential to achieving our long-term strategic goals. As of December 31, 2023, our team comprised 262 individuals, with 254 as full-time employees, 1 part-time, 3 temporary, and 4 subcontractors across our two New York locations. About 88% actively contribute to production, engineering, inspection, packaging, or shipping tasks. Each member's commitment and expertise are deeply appreciated, and none are bound by a collective bargaining agreement, reflecting our collaborative and supportive work environment.
We are dedicated to attracting top talent from diverse backgrounds and industries to meet our current and future business needs. This is achieved through partnerships with trade schools, universities, and professional associations.
Employee engagement and retention are key priorities. We actively seek feedback through focus groups and strategy sessions, fostering a culture of collaboration and innovation. Personal and professional growth is encouraged at all levels, and our recently implemented leadership program focuses on developing current and future leaders, ensuring they create an inspiring and motivating workplace for all.
Corporate Responsibility
Our values lay the foundation for our growth as a corporation. Emphasizing ethics and integrity, we conduct our business in compliance with all laws and regulations, emphasizing ethics and integrity. We file annual, quarterly, and current reports, proxy statements, and other information with the U.S. Securities and Exchange Commission. Additionally, we maintain an anonymous ethics hotline for employees to report any concerns they have about business behavior.
Disclosure Regarding Forward-Looking Statements
The information included or incorporated by reference in this report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “project,” “believe,” “plan,” “anticipate,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements involve numerous risks and uncertainties which may cause the actual results of the Company to be materially different from future results expressed or implied by such forward-looking statements. There are a number of factors that will influence our future operations, including: uncertainties in today’s global economy, including political risks and adverse changes in legal and regulatory environments; the ability to implement our corporate strategies; the state of the aerospace and defense industries; the introduction of new technologies and the impact of competitive products; the ability to sustain, manage or forecast our growth and product acceptance to accurately align capacity with demand; risks related to constraints and disruptions in the global supply chain and labor markets; the demand for and market acceptance of new or existing aircraft which contain our products; risks related to our concentration of revenue among a relatively small number of customers; the availability of financing and changes in interest rates; the outcome of pending and potential litigation; our ability to attract and retain key executives and employees; and the additional risks discussed elsewhere in this report and 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.

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ITEM 1A. RISK FACTORS
Item 1A.Risk Factors
Servotronics is a smaller reporting company as defined in 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
Item 1B.Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2.Properties
Our corporate headquarters are located in Elma, New York in a facility we own encompassing approximately 83,000 square feet used for manufacturing activities as well as office space for our sales, marketing, engineering, and administrative personnel. We also own a building in Franklinville, New York of approximately 92,000 square feet that was primarily used by the CPG prior to the divestment of that business segment in August 2023. A portion of the Franklinville facility continues to be used to support manufacturing of our servo-control business.
We believe that our properties are generally in good condition, are well maintained, and are suitable and adequate to carry on our business.

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ITEM 3. LEGAL PROCEEDINGS
Item 3.Legal Proceedings
See Note 9, Commitments and Contingencies, for information regarding legal actions. There are no other legal proceedings currently pending by or against us 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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4.Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a)
Market Information:
Our common stock is listed on the NYSE American stock exchange and trades under the ticker symbol SVT.
(b)
Approximate Number of Holders of Common Stock, as of February 23, 2024
Title of Class
Appropriate number of record holders
Common Stock, $.20 par value per share
(c)
Dividends on Common Stock
We believe in creating long-term value for our shareholders by continually investing in our business, utilizing capital expenditures and exploring new market opportunities. Additionally, we remain committed to identifying strategic acquisitions and returning capital to our shareholders. No cash dividends were paid in the two-year period ended December 31, 2023 and we have no immediate plans to do so, as we intend to retain all cash from operations to fuel working capital and further business growth.
(d)
Company Purchases of Company’s Equity Securities
Maximum Number of
Total Number of Shares
Shares that May Yet Be
Number of
Purchased as Part of
Purchased Under the
Shares Purchased
Average Price
Publicly Announced
Plans of Programs
Period
(1)
Paid per Share
Plans or Programs
(2)
10/01/23 to 10/31/23
-
-
-
-
11/01/23 to 11/30/23
-
-
-
-
12/01/23 to 12/31/23
1,748
12.40
-
-
Total
1,748
12.40
-
n/a
(1) As permitted under the Company’s equity compensation plan, these shares were withheld by the Company to satisfy tax withholding obligations for employees in connection with the vesting of stock. Shares withheld for tax withholding obligations do not affect the total number of shares available for repurchase under any approved common stock repurchase plan.
(2) The Board of Directors (Board) 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, 2023, 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 2023 or 2022. In March 2024, the Board formally approved the termination of the share repurchase authorization under this program.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.[Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes appearing elsewhere in this report.
The discussion and analysis contain forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements due to many known and unknown risks and uncertainties described elsewhere in this report.
Business Overview
We are a strategic partner in the aerospace industry, playing a key role in supporting the growth of commercial airplanes, including Narrowbody and Widebody aircraft and business jets. We have long-term customer contracts resulting from being a trusted partner in safety-critical, high-temperature, and high-vibration environments. Our products are sold to commercial aerospace, government, medical, and industrial markets.
As stated in Item 1 and disclosed in the accompanying Consolidated Financial Statements, we executed an Asset Purchase Agreement (APA) with a third party on August 1, 2023 to sell certain assets of The Ontario Knife Company (“OKC”), wind-down the OKC operations, and divest the CPG business segment. This divestiture represented a strategic shift, and the Company has realigned its corporate and management reporting structure to focus soley on aerospace and now organizes its business in a single reportable segment. This segment structure reflects the financial information and reports used by our management, specifically the Chief Executive Officer and Chief Operating Officer. Therefore, the management discussion and analysis below pertains only to the results of operations of our continuing operations (the servo control business formerly known as the ATG business segment), unless otherwise noted.
Commercial Aerospace Market:
The aviation and aerospace industries face ongoing challenges on a global scale. The operations of our Company can be affected by various factors such as increases in fuel prices, interest rates, income tax laws, government regulations, and legislation. The reputation and operations of aircraft manufacturers may have a direct or indirect affect on the demand for our products. The global economy's uncertainties, competition from 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 our customers to fund long-term purchase programs, volatile market demand, and the continued market acceptance of our advanced technology products, make it difficult to predict the impact on future financial results. These factors also have a direct impact on the demand for aircraft production and the amount of repair and overhaul services required on in-service aircraft.
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 reviewed for continuous improvement. Since our products are labor-intensive, any productivity improvements are expected to positively impact our financial performance. However, if the costs of raw materials, purchased parts, or labor increase, it will have the opposite effect.
Our suppliers are also subject to all the pressures and volatility generated by global economic conditions. Any interruption in the continuous flow of material and product parts required to manufacture our products could adversely impact the ability to meet customer demand. If airline manufacturers reduce the number of airliners and/or aircraft produced due to adverse economic events, it will negatively impact the supply chain. Moreover, some major manufacturers have imposed extended payment terms to their suppliers, which may not be available to us when purchasing raw materials, such as aluminum, magnetic material, steel, and other product support items and services. Any delay in payment or failure to pay by our customers could adversely affect our operating results and cash flow.
The commercial aerospace market, characterized by its dynamic nature, is witnessing unprecedented growth driven by increased global travel demands. However, the industry's ability to meet this soaring demand is hindered by ongoing challenges with supply of parts and people constraints. We are challenged by these same factors.
Our Company is deeply involved in providing cutting-edge solutions and components to meet the evolving needs of aerospace manufacturers and operators worldwide. The commercial aerospace market continues to witness robust growth driven by increasing demand for air travel, fleet modernization efforts, and technological advancements in aircraft design and production. Our strategic focus within this market encompasses developing and supplying advanced materials, components, and systems that enhance aircraft performance, efficiency, and safety. Through strong industry partnerships, innovative product offerings, and a commitment to excellence, we aim to maintain our leadership position and capitalize on emerging opportunities in the dynamic commercial aerospace landscape.
Marketing Strategy
Our company focuses on expanding business in primary markets, such as commercial aviation, while exploring new opportunities in markets like energy and industrials as part of our growth strategy. This approach capitalizes on our technology and expertise in applications for our servo valves, meeting the expanding demands of these sectors.
Furthermore, our strategy includes expanding our services in the defense sector, strategically aligning with the increasing demand for modernizing and renewing military fleets. We actively collaborate with Tier 2 Defense Contractors by providing essential components for various defense applications. In doing so, we contribute critical components to military platforms that require the highest levels of precision and reliability.
By expanding our services in the defense sector, we are diversifying our portfolio and reinforcing our commitment to excellence across a wide range of aerospace applications. This balance between our commercial and defense activities positions us to strategically leverage growth opportunities in both areas due to our reputation for delivering unparalleled quality in the most challenging environments.
Management’s Discussion and Analysis
Our business remains exceptionally well - positioned within the commercial aircraft market, bolstered by robust demand from aircraft manufacturers seeking new aircraft and the replacement of older models with more fuel - efficient alternatives, coupled with the burgeoning demand for air travel in emerging markets. Recent strategic enhancements to our leadership team, including the appointment of a new Chief Operating Officer (COO), Chief Financial Officer (CFO), and Director of Marketing & Sales, underscore our steadfast commitment to achieving our operational, financial, and marketing strategies.
Notably, our customer base, primarily Tier 1 suppliers to aircraft manufacturers, continues to exhibit robust demand, driving our revenue growth over the preceding year by 24%. Furthermore, the strength of our customer demand and backlog position us favorably for 2024, with expectations for another year of significant revenue expansion.
Our strategic initiatives are focused on system enhancements and production improvements designed to directly improve our production flow and output, while achieving higher gross margins. By aligning our operating expenses with industry standards and leveraging increased revenue and gross margins, we expect to return to profitability in 2024.
Results of Operations
The following table compares the Company's Consolidated Statements of Operations data for the years ended December 31, 2023 and 2022:
Year Ended December 31,
(dollars in thousands)
2023 vs 2022
Dollars
% Sales
Dollars
% Sales
$ Change
% Change
Revenues
$
43,629
100.0
%
$
35,185
100.0
%
$
8,444
24.0
%
Cost of goods sold
(35,824)
82.1
%
(29,616)
84.2
%
(6,208)
21.0
%
Gross Profit
7,805
17.9
%
5,569
15.8
%
2,236
40.2
%
Gross Margin %
17.9
%
-
15.8
%
-
2.1
%
-
Selling, general and administrative
(9,918)
22.7
%
(8,067)
22.9
%
(1,851)
22.9
%
Operating loss
(2,113)
(4.8)
%
(2,498)
(7.1)
%
15.4
%
Other expenses
(336)
0.8
%
(167)
0.5
%
(169)
101.2
%
Loss before income taxes
(2,449)
(5.6)
%
(2,665)
(7.6)
%
8.1
%
Income tax (provision) benefit
(1,098)
2.5
%
1.6
%
(1,668)
(292.6)
%
Loss from continuing operations
$
(3,547)
(8.1)
%
$
(2,095)
(6.0)
%
$
(1,452)
(69.3)
%
Revenue and Gross Profit/Margin
Three months ended
(dollars in thousands)
Mar.31
Jun. 30
Sep. 30
Dec. 31
Year
Mar.31
Jun. 30
Sep. 30
Dec. 31
Year
Revenues
$
9,060
$
10,649
$
11,582
$
12,338
$
43,629
$
9,168
$
8,748
$
8,823
$
8,446
$
35,185
Cost of goods sold
(8,072)
(9,088)
(9,070)
(9,594)
(35,824)
(6,496)
(7,722)
(7,596)
(7,802)
(29,616)
Gross profit
1,561
2,512
2,744
7,805
2,672
1,026
1,227
5,569
Gross margin %
10.9
%
14.7
%
21.7
%
22.2
%
17.9
%
29.1
%
11.7
%
13.9
%
7.6
%
15.8
%
See reclassification note
Revenue
Throughout the year, we demonstrated a robust sales performance, marked by consecutive quarters of growth. This sustained momentum is a testament to the effectiveness of our sales strategies and significant customer demand for our products and services. We expect these efforts to gain further momentum with the efforts of our new Director of Marketing & Sales, and our continued investments in R&D.
Revenues for the three-month period ended December 31, 2023, increased by approximately $3,892,000, or 46.1%, compared to the same period in 2022. This was driven by an increase in volume by approximately $3,200,000, price increases of approximately $500,000, and favorable product mix of approximately $200,000.
Similarly, for the twelve-month period ended December 31, 2023, revenues increased by approximately $8,444,000, or 24.0%, compared to the same period in 2022. This was driven by an increase in volume by approximately $7,300,000, price increases of approximately $900,000, and favorable product mix of approximately $200,000. As the year progressed, our year-over-year growth in sales accelerated from 21.7% in the second quarter to 46.1% in the fourth quarter, as we increased production to meet elevated customer demand.
Our company's foreign sales increased from $10,541,000 in 2022 to $12,129,000 in 2023, showing a growth of approximately $1,588,000, or 15.1%. These sales constitute a substantial part of our overall revenue stream, and can be attributed to several factors, including an enhanced market penetration, amplified demand for our products/services, and successful execution of our international sales and marketing strategies.
Gross Profit/Margin
Over the past year, we have consistently achieved gross profit growth driven by our significantly higher production output. Our gross margin has also demonstrated steady improvement, showcasing our ability to optimize pricing strategies, enhance operational efficiencies, and manage input costs effectively. These consecutive quarters of gross profit and margin growth underscore our commitment to delivering value to our customers and shareholders, while positioning us for continued success.
During the three-month period ended December 31, 2023, gross profit increased by approximately $2,100,000, or 326.1% compared to the same period in 2022. This growth was primarily driven by increased volume and improved absorption of manufacturing costs. The direct labor utilization improved due to production efficiencies in the current year based on hiring and training of personnel that occurred in the prior year, resulting in a gross margin of 22.2%, compared to 7.6% for the same period in 2022.
For the twelve-month period ended December 31, 2023, gross profit increased by approximately $2,236,000, or 40.2% compared to the same period in 2022. This growth was primarily driven by increased sales volume and improved absorption of manufacturing costs, partially offset by unfavorable product mix. The gross margin for the twelve-month period was 17.9% compared to 15.8% for the same period in 2022. Improvements in gross margin throughout the year demonstrate the potential operating leverage that we may achieve based on continued revenue growth relative to our fixed costs.
Effective January 1, 2023, research and development, certain insurance expenditures, and other items of approximately $1,835,000 for the year ended December 31, 2023, are reflected in selling, general, and administrative operating expenses. Accordingly,
approximately $1,439,000 for the year ended December 31, 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 Consolidated Statement of Operations due to the reclassification.
Selling, General and Administrative Expenses and Operating Income (Loss)
Three months ended(reclassified)
(dollars in thousands)
Mar. 31
Jun. 30
Sep. 30
Dec. 31
Year
Mar. 31
Jun. 30
Sep. 30
Dec. 31
Year
Selling, General & Admin
(2,185)
(3,284)
(2,240)
(2,209)
(9,918)
(2,097)
(1,915)
(1,926)
(2,129)
(8,067)
Total SG&A
$
(2,185)
$
(3,284)
$
(2,240)
$
(2,209)
$
(9,918)
$
(2,097)
$
(1,915)
$
(1,926)
$
(2,129)
$
(8,067)
% SG&A to Revenues
24.1
%
30.8
%
19.3
%
17.9
%
22.7
%
22.9
%
21.9
%
21.8
%
25.2
%
22.9
%
Operating (Loss)/Income
$
(1,197)
$
(1,723)
$
$
$
(2,113)
$
$
(889)
$
(699)
$
(1,485)
$
(2,498)
Operating (Loss)%
(13.2)
%
(16.2)
%
2.3
%
4.3
%
(4.8)
%
6.3
%
(10.2)
%
(7.9)
%
(17.6)
%
(7.1)
%
Selling, General and Administrative Expenses
Our strategy continues to emphasize growth, maximizing our operations and resources requiring continued dedicated performances from our key and other personnel. In our key 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 and may temporarily interrupt our operations and efforts for continuous improvement. We intend to continue strengthening and expanding our core competencies, while improving our margins and earnings by controlling costs in all aspects of our business.
During the three-month period ended December 31, 2023, our selling, general and administrative (SG&A) expenses increased by approximately $80,000 or 3.8% compared to the same period in 2022. This increase was mainly driven by higher compensation and research and development expenses related to customer projects. However, SG&A decreased as a percentage of revenue by 7.3% compared to the same period in 2022.
During the first half of 2023, we encountered challenges resulting in significant one-time SG&A costs related to reviewing strategic alternatives for the CPG business segment, bank refinancing, and a proxy contest, all of which consumed our time and resources and negatively impacted our operational performance. By the end of second quarter, we had successfully obtained a new credit facility and concluded the annual meeting with all Company proposals being approved by the shareholders. These significant one-time costs, along with other restructuring costs, were approximately $1,211,000 and are not expected to recur in 2024. Consequently, for the twelve-month period ended December 31, 2023, our SG&A expenses increased by approximately $1,851,000, or 22.9% when compared to the same period in 2022, due primarily to these significant one-time costs, in addition to increased research and development expenses of approximately $594,000. However, SG&A expenses as a percentage of revenue of 22.7% is consistent with 22.9% for the same period in 2022, and significantly lower at 18.6% compared to 23.5% for the second half of 2023 when compared to the same period in 2022, respectively.
Operating Income (Loss)
We experienced a notable increase in income from operations compared to the prior year. This was driven by our significant revenue growth, increased production output and operational efficiencies, and disciplined management of controllable operating costs, primarily during the second half of 2023.
For the three month period ended December 31, 2023, our operating income increased by approximately $2,020,000, or 136.0%, compared to the same period in 2022. This improvement was driven by sales and gross profit growth.
Our losses from operations decreased (improved) by approximately $385,000, or 15.4%, for the twelve month period ended December 31, 2023, compared to the same period in 2022. This improvement was driven by sales and gross profit growth, but mostly offset by higher SG&A expenses resulting from the significant one-time costs as noted.
Other (Expense)/Income:
Three months ended
(dollars in thousands)
Mar. 31
Jun. 30
Sep. 30
Dec. 31
Year
Mar. 31
Jun. 30
Sep. 30
Dec. 31
Year
Other (Expense)/Income
Interest Expense
(47)
(83)
(93)
(122)
(345)
(66)
(70)
(46)
(32)
(214)
Other income
-
-
Gain on sale of equipment
-
-
-
-
-
-
-
Total Other Expense
$
(47)
$
(78)
$
(91)
$
(120)
$
(336)
$
(40)
$
(67)
$
(42)
$
(18)
$
(167)
(Loss)/Income before income tax provision (benefits)
$
(1,244)
$
(1,801)
$
$
$
(2,449)
$
$
(956)
$
(741)
$
(1,503)
$
(2,665)
EBIT%
(13.7)
%
(16.9)
%
1.6
%
3.4
%
(5.6)
%
5.8
%
(10.9)
%
(8.4)
%
(17.8)
%
(7.6)
%
We experienced increased interest expense when compared to the prior year. During the year, we experienced an increase in interest rates in our credit facility that did not occur in the prior year. In addition, our usage of the credit facility increased driven by the significant, one-time SG&A expenses as previously noted.
For the three-month period ended December 31, 2023, other expenses (net) increased by approximately $102,000, or 566.7%, compared to the same period in 2022. As noted, the increase was driven by increased usage of our asset-based line of credit and higher interest rates.
Other expenses (net) increased by approximately $169,000, or 101.2%, for the twelve-month period ended December 31, 2023, compared to the same period in 2022. As previously noted, the increase was driven by increased usage of our asset-based line of credit and higher interest rates.
Despite the increase in interest rates, we maintain a prudent approach to managing our financial obligations and remain committed to optimizing our capital structure to effectively navigate changing market dynamics. For additional details regarding our borrowing facility, see Note 5, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.
Income (Loss) before Income Taxes
Prudent financial management, including effective risk mitigation strategies and disciplined expense control, played a crucial role in improving profitability and maximizing shareholder value. Overall, the increase/(decrease) in income/(loss) before income taxes underscores the Company's ability to execute its strategic objectives, adapt to changing market dynamics, and deliver sustained value to its stakeholders.
For the three-month period ended December 31, 2023, income before income taxes improved to $415,000, an increase of approximately $1,918,000, or 127.6%, compared a loss before income taxes of $1,503,000 during the same period in 2022. This improvement was driven by increased sales and gross profit growth, as previously noted.
For the twelve-month period ended December 31, 2023, the loss before income taxes decreased (improved) by approximately $216,000, or 8.1%, compared to the same period in 2022. This improvement was driven by sales and gross profit growth, but mostly offset by higher SG&A expenses, as noted.
Income Taxes
The Company’s effective tax rate for continuing operations was (44.8%) and 21.2% for the twelve-month period ended December 31, 2023 and 2022, respectively. The effective tax rate reflects federal and state income taxes, permanent non-deductible expenditures, impact of recording a valuation allowance against the net deferred tax assets, and the federal tax credit for research and development expenditures. The decrease in the effective tax rate between 2022 and 2023 is due to the recording of a valuation allowance against the net deferred tax assets with a net loss before income taxes in 2023. See also Note 8, Income Taxes, of the accompanying consolidated financial statements for information concerning income taxes.
Liquidity and Capital Resources
Years Ended December 31,
(in thousands)
CASH FLOW DATA:
Net Cash Flows from:
Operating Activities
$
(3,815)
$
(346)
Investing Activities
$
(689)
$
(1,196)
Financing Activities
$
1,602
$
(4,525)
YEAR-END FINANCIAL POSITION:
Working Capital
$
21,639
$
27,071
Indebtedness
$
2,103
$
CAPITAL EXPENDITURES, NET :
$
(689)
$
(1,234)
Operating Activities:
For the twelve-month period ended December 31, 2023, we used approximately $3,815,000 in cash from continuing operations, compared to cash used of approximately $346,000 for the same period in 2022. The increase in cash used in continuing operations of approximately $3,469,000 is primarily attributable to the net loss of approximately $1,452,000, and increased accounts receivable of approximately $1,378,000 driven by the significant revenue growth during the second half of 2023.
Our working capital as of December 31, 2023 was $21,639,000, which is a decrease from $27,071,000 in the prior year, driven primarily by the sale of assets related to the discontinued operation.
Investing Activities:
In 2023, we utilized approximately $689,000 in cash as compared to $1,196,000 used in the same period in 2022. These investments reflect our commitment to prudent capital allocation and our focus on driving sustainable growth and long-term value for our shareholders.
Financing Activities:
Our financing activities have been essential in supporting our strategic initiatives and optimizing our capital structure. These activities have primarily involved securing a new credit facility of $7,000,000 to support our working capital needs.
During the twelve-month period ended December 31, 2023, we received a total of $2,103,000 from our credit facility (net of payments) and we made principal payments of approximately $501,000 on our equipment financing obligations, compared to principal payments of approximately $4,250,000 and $275,000 on our long-term debt and financing obligations, respectively, for the same period in 2022.
Our primary sources of liquidity are the cash generated from our operations and the cash available from our credit facility. All covenant requirements were met as of December 31, 2023.
Discontinued Operation Activities:
During the twelve-month period ended December 31, 2023, our use of cash from discontinued operating activities of approximately $2,823,000 resulted from the operating losses and divestiture costs associated with winding down the OKC operations, and our source of cash from discontinued operating activities of approximately $2,158,000 resulted from cash proceeds due to the sale of OKC assets on August 1, 2023.
Management expects to sell the assets related to discontinued operation (primarily the building) in 2024 and the cash proceeds will be used to fund continuing operations.
Ongoing Liquidity Considerations:
We incurred net losses from continuing operations for the years ended December 31, 2023 and 2022. The loss in 2023 was impacted by significant, one-time (non-recurring) operating costs related to reviewing strategic alternatives for the CPG business segment, bank refinancing and proxy contest initiatives, and incremental income tax expense recorded in support our conservative tax position (see Note 8) based on our losses incurred. The loss in 2022 was predominately driven by our decision to maintain our experienced and knowledgeable workforce during the pandemic years and hire ahead of the expected increased customer demand in 2023.
The net loss from discontinued operation (see Note 2) in 2023 was driven by operating losses, the loss on sale of assets, divestiture costs, and non-cash asset impairment charges for the CPG business segment.
We believe that our asset base, combined with the current customer demand and backlog will lead to significant growth and provide us with sufficient liquidity in 2024.
Management Summary
Fiscal 2023 was a year of stabilization. It was a year marked by significant transformation of our business and long-term strategy, as well as a few challenges that affected our results. We navigated the continuing recovery of the commercial aerospace market juxtaposed with a supply chain that had not fully recovered from the impact of the pandemic. The financial progress we made toward achieving a sustainable operating model is evident in the steady improvement in our financial results throughout the year. We generated sequential improvements in gross profit and margins in every quarter in 2023 all while generating 24% revenue growth for the full year. On the cost side, our SG&A expenses were much lower as a percentage of revenues following the unusual costs in the first half of the year. The ultimate result of our efforts was a return to operating profitability in the second half of the year, and net profitability in the fourth quarter. Our strategic initiatives will continue to focus on our operating model to achieve profitability and enhance shareholder value in 2024.
Off Balance Sheet Arrangements
Not applicable.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ significantly from those estimates under different assumptions and conditions.
We have identified our critical accounting estimates. An accounting estimate is considered critical where (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material.
Inventories
Inventories are measured at lower of cost or net realizable value. Inventory costing requires complex calculations that include standard labor and material costs, assumptions for overhead absorption, scrap, and the determination of which costs may be capitalized. Analysis of actual labor cost to standard cost is performed and adjusted, if required, quarterly. Material costs are assessed and adjusted on an on-going basis. Daily cycle counts of raw material and finished goods are performed to ensure accuracy and legitimacy of our inventory balances. Quarterly, full physical counts are performed for WIP balances. The valuation of inventory requires us to review inventory each quarter for excess and slow-moving items and establish a reserve. As of December 31, 2023, we have $14,198,000 of inventory recorded on our consolidated balance sheet, representing approximately 39% of total assets.
Impairment of Long-Lived Assets
The impairment of long-lived assets is a critical aspect of our financial reporting process, where we assess the carrying value of these assets to ensure their recoverability and to reflect any potential declines in their value. Our evaluation involves both qualitative and quantitative assessments, considering factors such as changes in market conditions, technological advancements, legal and regulatory developments, and other relevant indicators of impairment. We conduct impairment tests whenever events or changes in circumstances suggest that the carrying amount of a long-lived asset may not be recoverable. These tests typically involve comparing the asset's carrying value to its estimated future undiscounted cash flows, with impairment recognized if the carrying amount exceeds the asset’s fair value. We utilize various valuation techniques, including discounted cash flow analysis, market-based approaches, and independent appraisals, to determine fair values when necessary. Additionally, we review long-lived assets for impairment at least annually, or more frequently if events or circumstances indicate potential impairment. Through this rigorous impairment assessment process, we aim to ensure the accuracy of our financial statements and provide transparent disclosure to our stakeholders regarding any impairments that may materially affect our financial position and results of operations.
Deferred Tax Valuation Allowance
We make estimates and judgments in determining the provision for taxes for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We must assess the likelihood that we will be able to recover our deferred tax assets. Recovery of a deferred tax asset is based on the ability of the business to generate income. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate may not ultimately be recoverable. These calcualtions require the use of estimates, in particular in relation to the expected growth of sales, the expected hourly rate for labor, the expected productivity of the production labor and achievable gross margin rates.
Commitments and Contingencies
In assessing commitments and contingencies, we employ a diligent and comprehensive approach aimed at ensuring transparency and accuracy for financial statement purposes. Our evaluation process encompasses a thorough review of contractual obligations, legal proceedings, and other potential liabilities that may impact our financial position and operations. We utilize a combination of internal expertise and legal counsel to assess the probability of occurrence and potential financial impact associated with these commitments and contingencies. This evaluation involves analyzing the nature of the obligation, the likelihood of settlement, and the availability of reliable information to estimate the potential loss or exposure. Additionally, we continuously monitor and reassess these commitments and contingencies to reflect any material changes in circumstances or new information that may arise. Through this diligent evaluation process, we strive to provide our stakeholders with transparent and accurate disclosures regarding our commitments and contingencies in our financial statements, thereby enhancing confidence in our financial reporting and risk management practices.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Servotonics is a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.Financial Statements and Supplementary Data
The consolidated financial statements of the Company which are included in this Annual Report on Form 10-K are described in the accompanying Index to Consolidated Financial Statements on Page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.Controls and Procedures
(i) Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of its management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) as of December 31, 2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective as of the end of the period covered by this report, and designed to ensure that material information relating to us and our consolidated subsidiaries is made known to them on a timely basis, and that these disclosure controls and procedures are effective to ensure such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(ii) Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Under the supervision and with the participation of management, including the CEO and CFO, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (COSO). Our management concluded that our internal controls over financial reporting were effective as of December 31, 2023.
This annual report does not include an attestation report of the Corporation’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s independent registered public accounting firm pursuant to rules of the SEC that permit the Corporation to provide only management’s report in this Annual Report on Form 10-K.
(iii)
Changes in Internal Control Over Financial Reporting
Management previously identified material weaknesses in its internal control over financial reporting in connection with the 2020 Form 10-K/A, 2021 Form 10-K, and 2022 Form 10-K filings. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected in a timely basis by the Company’s internal controls. Remediation efforts for the identified material weaknesses began in 2021 and concluded successfully in 2023. Remediation efforts undertaken by the Company:
● engaged a third party to perform a comprehensive information technology (IT) general controls assessment, which included:
o performing a formal IT risk assessment
o performing file restores from backup at least annually
o annual security awareness training and frequent phishing campaigns to test the knowledge of employees
o monitoring logical access and change management
● engaged a third party to assist with enhanced internal control testing procedures and documentation standards aligned with the COSO components and principles, including entity-level controls, which included:
o improving the documentation of controls over significant estimates
o improving the documentation of controls over the completeness and accuracy of system-generated reports used in the performance of process-level controls
o improving the procedures performed to substantiate relevant data points from the system-generated reports used in the performance of process-level controls
Except as set forth above, there were no changes in the Company’s internal controls over financial reporting during the fourth quarter of 2023 that have materially affected, or are reasonably likely to affect, the Company’s internal controls over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B.Other Information
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.Directors, Executive Officers and Corporate Governance
Information required under this Item 10 is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2023 fiscal year or such information will be included by amendment to this Form 10-K.
Code of Ethics
The Company has adopted a Code of Ethics and Business Conduct (the Code) that applies to all directors, officers and employees of the Company as required by the listing standards of the NYSE American. The Code is available on the Company’s website at www.servotronics.com and the Company intends to disclose on this website any amendment to the Code. Waivers under the Code, if any, will be disclosed under the rules of the SEC and the NYSE American.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11.Executive Compensation
Information required under this Item 11 is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2023 fiscal year or such information will be included by amendment to this Form 10-K.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2023:
Number of
Number of
securities
securities to be
remaining
issued upon
Weighted-average
available for
exercise of
exercise price of
future issuance
outstanding
outstanding
under
options,
options
equity
warrants and
warrants and
compensation
Plan category
rights
rights
plans
Equity compensation plans approved by security holders
-
-
155,422
Equity compensation plans not approved by security holders
-
-
-
Total
-
-
155,422
Information required under this Item 12 is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2023 fiscal year or such information will be included by amendment to this Form 10-K.
Also incorporated by reference is the information in the table under the heading “Company Purchases of Company’s Equity Securities” included in Item 5 of this Form 10-K. See also Note 7, Shareholders’ Equity, of the accompanying consolidated financial statements for more information.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.Certain Relationships and Related Transactions and Director Independence
Information required under this Item 13 is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2023 fiscal year or such information will be included by amendment to this Form 10-K.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.Principal Accountant Fees and Services
Information required under this Item 14 is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2023 fiscal year or such information will be included by amendment to this Form 10-K.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.Exhibits and Financial Statement Schedules
2.1
Asset Purchase Agreement, dated July 10, 2023, by and between The Ontario Knife Company and Blue Ridge Knives, Inc. (Incorporated by reference to Exhibit 2.1 to the Company's Form 8 - K filed with the SEC on August 3, 2023).
3.1
Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3(A)(1) to the Company’s Form 10-KSB for the year ended December 31, 1996)
3.2
Amendments to Certificate of Incorporation dated August 27, 1984 (Incorporated by reference to Exhibit 3(A)(2) to the Company’s Form 10-KSB for the year ended December 31, 1996)
3.3
Amendments to Certificate of Incorporation dated June 30, 1998 (Incorporated by reference to Exhibit 3(A)(4) to the Company’s Form 10-KSB for the year ended December 31, 1998)
3.4
Certificate of designation creating Series I preferred stock (Incorporated by reference to Exhibit 4(A) to the Company’s Form 10-KSB for the year ended December 31, 1987)
3.5
By-laws of the Company (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on April 27, 2022)
4.1
Description of Capital Stock (Incorporated by reference to Exhibit 4.4 to the Company's Form 10 - K for the year ended December 31, 2022)
Material Contracts (*Indicates management contract or compensatory plan or arrangement)
10.1
Form of Indemnification Agreement between the Registrant and each of its Directors and Officers (Incorporated by reference to Exhibit 10.7 for the year ended December 31, 2016)
10.2
Loan agreement between the Company and its employee stock ownership trust, as amended (Incorporated by reference to Exhibit 10(C)(1) to the Company’s Form 10-KSB for the year ended December 31, 1991)
10.3
Stock purchase agreement between the Company and its employee stock ownership trust (Incorporated by reference to Exhibit 10(D)(2) to the Company’s Form 10-KSB for the year ended December 31, 1988)
10.4*
Servotronics, Inc. Executive Change in Control Severance Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the SEC on May 16, 2022)
10.5*
Participation Agreement for Executive Change in Control Severance Plan (Incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed with the SEC on May 16, 2022)
10.6*
Servotronics, Inc. 2022 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s Proxy Statement for the 2022 Annual Meeting of Shareholders)
10.7
Financing Agreement effective June 28, 2023, between Servotronics, Inc. and Rosenthal & Rosenthal, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on June 30, 2023)
10.8*
Non-Employee Director Compensation Policy (Incorporated by reference to Exhibit 10.8 to the Company's Form 10 - K filed with the SEC on March 31, 2023)
10.9
Cooperation Agreement, dated as of February 15, 2023, by and between Servotronics, Inc. and Brent D. Baird (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on February 15, 2023)
Servotronics, Inc. Insider Trading Policy (Filed herewith)
Subsidiaries of the Registrant (Filed herewith)
23.1
Consent of Freed Maxick CPAs, P.C. (Filed herewith)
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith)
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith)
Servotronics, Inc. Clawback Policy (Filed Herewith)
The following materials from Servotronics, Inc.’s Annual Report on Form 10-K for the period ended December 31, 2023, formatted in XBRL (eXtensible Business Reporting Language): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows and (v) the notes to the consolidated financial statements.