SERVOTRONICS, INC. There was an increase in consolidated revenue in the nine months endedSeptember 30, 2022 from 2021 of approximately$3,386,000 , 11.3%. This is primarily due to price increases at the ATG of approximately$1,130,000 and the CPG of approximately$174,000 and an increase in the number of units shipped at the ATG of approximately$2,975,000 . This is partially offset by an unfavorable product mix shipped at the ATG of approximately$861,000 and a decrease in the number of units shipped at the CPG of approximately$32,000 . During the nine months endedSeptember 30, 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 nine months endedSeptember 30, 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.
Business Environment
There still remains uncertainty resulting from the COVID-19 pandemic. The ultimate impact depends on the severity and duration of the pandemic, including emergence and spread of new COVID-19 variants and resurgences and actions taken by government authorities and other third parties in response to the pandemic.U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions. Disruptions in normal operating levels continue to create supply chain interruptions, volatility in commodity prices, credit and capital markets, and inflationary cost pressures within our end-markets. We continue to actively monitor the impact of the supply chain constraints, and anticipate the inflationary environment will continue throughout the remainder of 2022. We are focused on ensuring ample liquidity to meet our business needs. For the nine months endedSeptember 30, 2022 , the impacts of COVID-19 have
not
been material.
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Results of Operations
The following table compares the Company's consolidated statements of operations
data for the three months and nine months ended September 30, 2022 and 2021
($000 's omitted):
($000 's omitted except per share data)
Three months ending September 30,
2022 2021 2022 vs 2021
% of % of Dollar % Favorable/
Dollars Sales Dollars Sales Change (Unfavorable)
Revenues:
Advanced Technology Group $ 8,823 80.3 % $ 8,449 77.4 % $ 374 4.4 %
Consumer Products Group 2,168 19.7 % 2,466 22.6 % (298) (12.1) %
10,991 100.0 % 10,915 100.0 % 76 0.7 %
Costs of goods sold, inclusive of
depreciation and amortization (9,468) 86.1 % (9,143) 83.8 % (325) (3.6) %
Gross profit 1,523 13.9 % 1,772 16.2 % (249) (14.1) %
Gross margin % 13.9 % 16.2 %
Selling, general and administrative (1,943) 17.7 % (2,721) 24.9 % 778
28.6 %
Legal settlement award - 0.0 % (1,890) 17.3 % 1,890 100.0 %
Total operating costs and expenses (11,411) 103.8 % (13,754) 126.0 % 2,343
17.0 %
Operating (loss) (420) 3.8 % (2,839) 26.0 % 2,419 85.2 %
Other income: employee retention
credit (ERC) - 0.0 % 1,978 18.1 % (1,978) (100.0) %
Other income: PPP loan forgiveness - 0.0 % 4,000 36.6 % (4,000) (100.0) %
Interest expense (50) (0.5) % (5) 0.0 % (45) (900.0) %
Total other (expense)/income (50) (0.5) % 5,973 54.7 % (6,023) (100.8) %
(Loss) income before income taxes (470) (4.3) % 3,134 28.7 % (3,604) (115.0) %
Income tax benefit (154) (1.4) % (104) (1.0) % (50) (48.1) %
Net (loss)/income $ (316) (2.9) % $ 3,238 29.7 % $ (3,554) (109.8) %
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($000 's omitted except per share data)
Nine Months Ended September 30,
2022 2021 2022 vs 2021
% of % of Dollar % Favorable/
Dollars Sales Dollars Sales Change (Unfavorable)
Revenues:
Advanced Technology Group $ 26,739 80.1 % $ 23,495 78.3 % $ 3,244 13.8 %
Consumer Products Group 6,650 19.9 % 6,508 21.7 % 142 2.2 %
33,389 100.0 % 30,003 100.0 % 3,386 11.3 %
Cost of goods sold, inclusive of
depreciation and amortization (28,060) 84.0 % (25,366) 84.5 % (2,694) 10.6 %
Gross profit 5,329 16.0 % 4,637 15.5 % 692 14.9 %
Gross margin % 16.0 % 15.5 %
Selling, general and administrative (6,196) 18.6 % (6,903) 23.0 % 707
(10.2) %
Legal settlement award - 0.0 % (1,890) 6.3 % 1,890 (100.0) % Total operating costs and expenses (34,256) 102.6 % (34,159) 113.9 % (97)
0.3 %
Operating (loss) (867) (2.6) % (4,156) (13.9) % 3,289 79.1 %
Other income: Employee retention
credit (ERC) - 0.0 % 5,622 18.7 % (5,622) (100.0) %
Other income: Paycheck Protection
Program loan forgiveness - 0.0 % 4,000 13.3 % (4,000) (100.0) %
Interest expense (194) (0.6) % (132) (0.4) % (62) 47.0 %
Gain on sale of equipment 26 0.1 % - 0.0 % 26 100.0 %
Total other (expense)/income, net (168) (0.5) % 9,490 31.6 % (9,658) (101.8) %
(Loss) income before income taxes (1,035) (3.1) %
5,334 17.8 % (6,369) (119.4) %
Income tax (benefit) provision$ (234) (0.8) % 369 1.2 % (603) (163.4) % Net (loss)/income$ (801) (2.4) %$ 4,965 16.5 %$ (5,766) (116.1) % Revenue Three months ended September 30, Nine months ended September 30, ATG CPG Servotronics, Inc. ATG CPG Servotronics, Inc.
($000 's omitted) 2022 2021 2022 2021
2022 2021 2022 2021 2022 2021 2022 2021
Revenues $ 8,823 $ 8,449 $ 2,168 $ 2,466 (9,468) (9,143) (22,843) (19,214) (5,217) (6,152) (28,060) (25,366)
Gross profit 850 1,687 673 85 1,523 1,772 3,896 4,281 1,433 356 5,329 4,637 Gross margin % 9.6 % 20.0 % 31.0 % 3.4 % 13.9 % 16.2 % 14.6 % 18.2 % 21.5 % 5.5 % 16.0 % 15.5 % Consolidated revenues from operations increased approximately$76,000 or 0.7% for the three month period endedSeptember 30, 2022 when compared to the same period in 2021. This benefited from price increases at the ATG of approximately$739,000 . Although the ATG is experiencing an increase in volume due to the recovery of business within the commercial aircraft market it is offset by an unfavorable product mix of product shipped of approximately$365,000 . Additionally, the CPG had a decrease in prices of approximately$205,000 and a decrease in the number of units shipped amounting to approximately$93,000 as compared to the same three month period endedSeptember 30, 2021 . Consolidated revenues from operations increased approximately$3,386,000 or 11.3% for the nine month period endedSeptember 30, 2022 when compared to the same period in 2021. This is due to the recovery of business within the commercial aircraft market and an increase in price at the ATG of approximately$3,244,000 or 13.8% and price increases at the CPG approximately$174,000 , partially offset by a slightly lower number of units shipped of approximately$32,000 for the nine month period endedSeptember 30, 2022 when compared to
the
same period in 2021.
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The ATG's revenue improved for the three and nine month period ended September
30, 2022 as compared to the same periods ended September 30, 2021 . Although the
CPG's revenue for the three month period declined, the CPG revenue is slightly
higher for the nine month period ended September 30, 2022 as compared to the
same period ended September 30, 2021 .
Gross Profit
Consolidated gross profit from operations decreased approximately$249,000 or (14.1)% for the three month period endedSeptember 30, 2022 when compared to the same period in 2021. The gross profit decreased at the ATG by approximately$837,000 or (49.6)% offset by an increase at the CPG of approximately$588,000 or 691.8%. 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$180,000 and increased operating costs of approximately$657,000 . The increase in operating costs is primarily due to increased compensation and benefits of approximately$413,000 , recruiting costs for the ramp-up of production of approximately$169,000 , warranty expenses of approximately$41,000 , and a net increase of approximately$34,000 for all other operating expenses as compared to the same period in 2021. We have added staff during this period in anticipation of increasing production in future periods to satisfy demand. Additionally, gross profit increased in the three month period at the CPG due to an improvement in operating variances of approximately$341,000 , and a decrease in operating costs of approximately$339,000 . The decrease in operating costs is primarily due to a decrease in compensation and benefits of approximately$73,000 , an increase in the utilization of production resources of approximately$199,000 , a decrease in net freight costs of approximately$87,000 and a net increase of approximately$20,000 for all other operating expenses. This is partially offset by an unfavorable product mix shipped, and decreases in volume and prices at the CPG of approximately$92,000 as compared to the same period in 2021. Consolidated gross profit from operations increased approximately$692,000 or 14.9% for the nine month period endedSeptember 30, 2022 when compared to the same period in 2021. The gross profit decreased at the ATG by approximately$385,000 or (8.9)% and increased at the CPG by approximately$1,077,000 or 302.5%. Gross margin benefited in the nine months period from the recovery of business within the commercial aircraft market and favorable product mix shipped at the ATG of approximately$283,000 and price increases of approximately$709,000 . However, this was more than offset by an increase in operating costs of approximately$1,377,000 . This is primarily due to increased compensation and benefits of approximately$539,000 , recruiting costs for the ramp-up of production of approximately$216,000 , and the underutilization of production resources of approximately$650,000 and a net decrease of approximately$28,000 for all other operating expenses as compared to the same period in 2021. As previously noted, we have added staff during this period in anticipation of increasing production in future periods to satisfy customer demand. At the CPG, gross profit increased in the nine month period due to favorable product mix shipped at the CPG of approximately$526,000 , and price increases of approximately$180,000 , and a decrease in operating costs of approximately$371,000 . The decrease in operating costs is primarily due to a decrease in compensation and benefits of approximately$41,000 , an increase in the utilization of production resources of approximately$213,000 , a decrease in net freight costs of approximately$229,000 offset by an increase in repair and maintenance expenses of approximately$69,000 and a net increase of approximately$43,000 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. The CPG is starting to experience favorable production costs in the nine months endingSeptember 30, 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 future production. We will continue to monitor all purchases at both Segments. Despite these challenges, the consolidated gross margin and gross margin percent for the first nine month period of 2022 is higher than the same period in 2021. - 23 -
Table of Contents
Selling, General and Administrative Expenses
Three months ended September 30, Nine months ended September 30,
ATG CPG Servotronics, Inc. ATG CPG Servotronics, Inc.
($000 's
omitted) 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
SG&A:
Selling,
general &admin (1,541) (2,240) (402) (481) (1,943) (2,721) (4,890) (5,586) (1,306) (1,317) (6,196) (6,903) Legal settlement awards - (1,800) - (90) - (1,890) - (1,800) - (90) - (1,890) Total SG&A$ (1,541) $ (4,040) $ (402) $ (571) $ (1,943) $ (4,611) $ (4,890) $ (7,386) $ (1,306) $ (1,407) $ (6,196) $ (8,793) % SG&A to Revenues 17.5 % 47.8 % 18.5 % 23.2 % 17.7
% 42.2 % 18.3 % 31.4 % 19.6 % 21.6 % 18.6 % 29.3 %
Operating
(loss)/income
Operating
(loss)/income
% (7.8) % (27.8) % 12.5 % (19.7) % (3.8)
% (26.0) % (3.7) % (13.2) % 1.9 % (16.1) % (2.6) % (13.9) %
Selling, general and administrative expenses (SG&A) decreased approximately$778,000 or 28.6% for the three month period endedSeptember 30, 2022 when compared to the same period in 2021. The improvement is driven by the ATG due to lower legal fees of approximately$758,000 and a net decrease of all other SG&A expenses of approximately$20,000 as compared to the three month period endedSeptember 30, 2021 . SG&A expenses decreased approximately$707,000 or 10.2% for the nine month period endedSeptember 30, 2022 when compared to the same period in 2021. The decrease is due to lower legal fees at the ATG of approximately$678,000 and a net decrease of all other SG&A expenses of approximately$29,000 as compared to the same period in 2021.
With the decrease in consolidated SG&A expenses in the three and nine month periods and the increasing revenue, the percentage of SG&A to revenue declined at both Segments.
Operating Losses Losses from operations decreased approximately$2,419,000 or 85.2% when comparing to the three month period endedSeptember 30, 2022 to the same period in 2021. Losses from operations decreased approximately$3,289,000 or 79.1% when comparing the nine month period endedSeptember 30, 2022 to the same period in 2021. The consolidated improvement in the operating losses for the first three and nine month periods are discussed above. - 24 - Table of Contents Other (Expense)/Income Three months ended September 30, Nine months ended September 30, ATG CPG Servotronics, Inc. ATG CPG Servotronics, Inc. ($000 's omitted) 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Other (Expense)/Income: ERC $ -$ 1,598 $ -$ 380 $ -$ 1,978 $ -$ 4,584 $ -$ 1,038 $ -$ 5,622 PPP Loan foregiveness - 4,000 - 4,000 - 4,000 - - - 4,000 Interest expense (50) (5) - - (50) (5) (194) (130) - (2) (194) (132) Gain sale of equipment - - - - - - 26 - - - 26 - Total other (expense)/income, net$ (50) $ 5,593 $ -$ 380 $ (50) $ 5,973 $ (168) $ 8,454 $ -$ 1,036 $ (168) $ 9,490 (Loss)/income before income tax (benefits)/provision$ (741) $ 3,240 $ 271 $ (106) $ (470) $ 3,134 $ (1,162) $ 5,349 $ 127 $ (15) $ (1,035) $ 5,334 EBIT % (8.4) % 38.3 % (12.5) % 4.3 % (4.3) % 28.7 % (4.3) % 22.8 % (1.9) % 0.2 % (3.1) % 17.8 % As discussed in our Annual Report on Form 10-K, the Company qualified for the Employee Retention Credit (ERC) for all quarters allowed under the federal government program.The Infrastructure Investment and Jobs Act of 2021, enactedNovember 15, 2021 terminated the employee retention credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses. As a result, for the three month and nine month periods endedSeptember 30, 2022 there was no recognition of an ERC as compared to approximately$1,978,000 recognized in the three month period and the approximately$5,622,000 recognized in the nine month period endedSeptember 30, 2021 . Additionally, in our Annual Report on Form 10-K, the Company executed a promissory note under the Paycheck Protection Program (the "PPP" loan) in the amount of$4,000,000 . During the third quarter of 2021, the entire loan in the amount of$4,000,000 and the accrued interest of$57,000 was forgiven by the SBA and a gain of$4,057,000 was recorded in "Other (expense)/income" in the Company's consolidated statements of operations.
Interest Expense
Interest expense increased by 900.0% and 47.0% in the three and nine month periods endedSeptember 30, 2022 , respectively, when compared to the same period in 2021. This is primarily due to the increase in interest recognized for postretirement benefits offset by the elimination of the interest resulting from the pay down of our term loans as ofDecember 2021 . See also Note 5, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.
(Loss)/income before Income Taxes
Consolidated loss before income taxes for the three month period endedSeptember 30, 2022 decreased approximately$3,604,000 or (115.0)% when compared to the same period in 2021. The consolidated decrease is primarily the result of the elimination of the ERC credit and the one-time event of the Paycheck Protection Program (PPP) loan forgiveness within the three months endedSeptember 30, 2021 . This is partially offset by an increase in revenue at the ATG segment, an improvement in operating performance at the CPG, decreases in SG&A expenses at both segments and decreases for 2021 legal awards as discussed above. The consolidated loss before income taxes for the nine month period endedSeptember 30, 2022 decreased approximately$6,369,000 or (119.4)% when compared to the same period in 2021. The consolidated decrease is primarily the result of the elimination of the ERC credit and the one-time event of the PPP loan forgiveness within the three months endedSeptember 30, 2021 . This is partially offset by an increase in revenue at the ATG segment, an improvement in operating performance at the CPG, decreases in SG&A expenses at both segments and decreases for 2021 legal awards as discussed above. - 25 - Table of Contents Net (Loss) Income Net income for the three and nine month periods endedSeptember 30, 2022 decreased approximately$3,554,000 or (109.8)% and approximately$5,766,000 or (108.1)%, respectively, when compared to the same period in 2021. The consolidated decrease in net income is primarily the result of the elimination of the ERC credit and the one-time event of the Paycheck Protection Program (PPP) loan forgiveness within the three month period endedSeptember 30, 2021 . This is offset by an increase in revenue at the ATG segment, an improvement in operating performance at the CPG, decreases in SG&A expenses at both Segments and decreases for legal awards as discussed above.
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