SEC Form 10-K filed by Servotronics Inc.

PART I

 

The Registrant, Servotronics, Inc., is referred to in this report as “Servotronics” or the "Company” or in the nominative “we” or in the possessive “our.”

 

Item 1.   Business

 

Description of the Business

 

We design and manufacture high-performance servo-control valves, including torque motors, hydraulic, and pneumatic valves ("servo-control business").  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 during 2023 and disclosed as a discontinued operation in the Company’s annual report on Form 10-K for the years ended December 31, 2024, and 2023.  CPG is also reflected as a discontinued operation in this annual report.  With only one business segment, reference to ATG is no longer used to describe the ongoing, servo-control business.

 

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 defense sectors, as well as our targeted expansion into the aftermarket (Repair & Overhaul), 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, defense contractors, and government subcontractors.

 

Servotronics holds long-term contracts with prime defense 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 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, 2024, 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.

 

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 leadership program focuses on developing current and future leaders, ensuring they create an inspiring and motivating workplace for all. We are pleased that our people strategies have resulted in employee retention improving from 60% in 2022 to nearly 90% in 2024.

 

Corporate Responsibility

 

Our values lay the foundation for our growth as a corporation. 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.

 ​

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.

 ​

Item 1B.  Unresolved Staff Comments

 

None.

 ​

Item 1C.  Cybersecurity

 

Cybersecurity Risk Management and Strategy

 

We have developed and implemented a cybersecurity risk management program intended to protect the confidentiality, integrity, and availability of our critical systems and information.

 

Our cybersecurity risk management program is aligned to the Company's business strategy. It shares common methodologies, reporting channels and governance processes that apply to the other areas of enterprise risk, including legal, compliance, strategic, operational, and financial risk. Key elements of our cybersecurity risk management program include:

 

●

risk assessments designed to help identify material cybersecurity risks to our critical systems, information, products, services, and our broader enterprise information technology environment;

 

●

a security team principally responsible for managing our cybersecurity risk assessment processes and our response to cybersecurity incidents;

 

●

the use of external service providers, where appropriate, to assess, test or otherwise assist with aspects of our security procedures;

 

●

training and awareness programs for team members that include periodic and ongoing assessments to drive adoption and awareness of cybersecurity processes and procedures;

 

●

a cybersecurity incident response plan that includes procedures for responding to cybersecurity incidents; and

 

●

a third-party risk management process for service providers, suppliers, and vendors.

 

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Table of Contents

  In the last three fiscal years, the Company has not experienced any material cybersecurity incidents.

 

Cybersecurity Governance

 

The Board of Directors ("the Board") regularly receives reports from our executive officers and third parties on cybersecurity matters. In addition, the Board receives reports addressing cybersecurity as part of our overall enterprise risk management program and to the extent cybersecurity matters are addressed in regular business updates.

 

Management is responsible for developing cybersecurity programs, including as may be required by applicable law or regulation. These individuals’ expertise in IT and cybersecurity generally has been gained from a combination of education, including relevant degrees and/or certifications, and prior work experience. They are informed by their respective cybersecurity teams and monitor the prevention, detection, mitigation and remediation of cybersecurity incidents as part of the cybersecurity programs described above.

 ​

Item 2.   Properties

 

Our corporate headquarters is 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.  The Company also owns a building in Franklinville, New York, of approximately 92,000 square feet, and used primarily by the CPG business segment prior to its divestiture in 2023.  This building was listed for sale with a commercial broker in 2024.  See also Note 2, Discontinued Operation and Assets and Liabilities Related to Discontinued Operation, for further information.  Approximately 10% of the Franklinville facility's square footage continues to be used for manufacturing of our servo-control business.

 

We believe that our properties are in good condition, are well maintained, and are suitable and adequate to carry on our ongoing, servo-control business.

 

Item 3.   Legal Proceedings

 

See Note 9, Commitments and Contingencies, for information on legal proceedings.  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 that are not disclosed.

 

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

 

(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 19, 2025

 

Title of Class		Appropriate number of record holders
Common Stock, $.20 par value per share			215

 

(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 year ended December 31, 2024, and we have no plans to do so in the immediate future.

 

(d)

Company Purchases of Company’s Equity Securities

 

​		​		​		Total Number of Shares		Maximum Number of
​		Number of		​		Purchased as Part of		Shares that May Yet Be
​		Shares Purchased		Average Price		Publicly Announced		Purchased Under the
Period		(1)		Paid per Share		Plans or Programs		Plans or Programs
10/01/24 to 10/31/24		1,820		13.02		—		—
11/01/24 to 11/30/24		726		12.90		—		—
12/01/24 to 12/31/24		697		10.72		—		—
Total		3,243		12.50		—		—

 

 

(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. As of December 31, 2024, the Company did not have an authorized stock repurchase plan in place.

 

 

Item 6.   [Reserved]

 ​

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, with our servo-control valves playing a key role in supporting manufacturing 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 into the 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 in 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 realigned its corporate and management reporting structure to focus solely on aerospace and organized its business into a single reportable segment.  This segment structure reflects the financial information and reports used by our management, specifically the Chief Executive Officer.  Therefore, the management discussion and analysis below pertain only to the results of operations of our continuing operations (the servo control business formerly known as the Advanced Technology Group ("ATG") business segment), unless otherwise noted.

 

Commercial Aerospace Market

 

The Company's operations 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 effect 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, tariffs, 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 products, make it difficult to predict 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 constantly 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.

 

We are deeply involved in providing cutting-edge solutions and components to meet the evolving needs of aerospace manufacturers and operators worldwide. 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.

 

The commercial aerospace market, characterized by its complex nature, continues to witness unprecedented growth driven by increasing demand for air travel, fleet modernization efforts, and technological advancements in aircraft design and production.  However, the industry's ability to meet this soaring demand has been hindered by ongoing challenges with supply chain, quality and people constraints (i.e. strikes) that have trickled down to all suppliers, including us.  Commercial airplane deliveries from the original equipment manufacturers declined from 2023 to 2024, marking the first year of a decline since 2020. Although the impact of the volatile industry conditions was present in early 2024, the excessive inventory levels, customer rescheduling, and delivery deferrals became more acute during the second half of the year.

 

 

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

 

We navigated a challenging industry environment in 2024 initially marked by strong indicated demand, followed by customer-driven delivery delays, which impacted our financial performance. This discussion provides an overview of our financial and operational results, highlighting key factors that influenced our performance, including revenue trends, gross profit fluctuations, changes in SG&A expenses, increased borrowing costs, and the resulting impact on operating and net income. While many factors caused 2024 to be a challenging year for the aerospace industry and us, we believe the market and our Company are well-positioned for growth in 2025. We remain focused on executing our strategic initiatives, optimizing operational efficiencies, and maintaining financial discipline to drive sustainable growth.

 

 

Results of Operations

 

The following table compares the Company's Consolidated Statements of Operations data for the years ended December 31, 2024 and 2023:

 

		Year Ended December 31,
(in thousands)		2024								2023								2024 vs 2023
		Dollars				% Sales				Dollars				% Sales				$ Change				% Change
Revenue		$	44,917				100.0	%		$	43,629				100.0	%		$	1,288				3.0	%
Cost of goods sold			36,651				81.6	%			35,824				82.1	%			827				2.3	%
Gross profit			8,266				18.4	%			7,805				17.9	%			461				5.9	%
Gross margin			18.4	%			—				17.9	%			—				0.5	%		—
​		​				​				​				​				​				​
Selling, general and administrative			9,275				20.6	%			9,918				22.7	%			(643	)			(6.5	)%
Operating loss			(1,009	)			(2.2	)%			(2,113	)			(4.8	)%			1,104				52.2	%
​		​				​				​				​				​				​
Other expenses			(496	)			1.1	%			(336	)			0.8	%			(160	)			(47.6	)%
​		​				​				​				​				​				​
Loss from continuing operations before income taxes			(1,505	)			(3.4	)%			(2,449	)			(5.6	)%			944				38.5	%
​		​				​				​				​				​				​
Income tax provision			(7	)			0.0	%			(1,098	)			2.5	%			1,091				99.4	%
Loss from continuing operations, net of tax		$	(1,512	)			(3.4	)%		$	(3,547	)			(8.1	)%		$	2,035				57.4	%

 

 

Revenue and Gross Profit/Margin

 

			Three months ended (reclassified)
(in thousands)		2024																				2023
		Mar. 31				Jun. 30				Sep. 30				Dec. 31				Year				Mar. 31				Jun. 30				Sep. 30				Dec. 31				Year
Revenue		$	10,446			$	12,273			$	12,430			$	9,768			$	44,917			$	9,060			$	10,649			$	11,582			$	12,338			$	43,629
Cost of goods sold			(8,711	)			(9,210	)			(10,162	)			(8,568	)			(36,651	)			(8,072	)			(9,092	)			(9,083	)			(9,577	)			(35,824	)
Gross profit			1,735				3,063				2,268				1,200				8,266				988				1,557				2,499				2,761				7,805
Gross margin			16.6	%			25.0	%			18.2	%			12.3	%			18.4	%			10.9	%			14.6	%			21.6	%			22.4	%			17.9	%

 ​

Revenue

 

During the first three quarters of 2024, we had consistent revenue growth, reflecting strong demand for our products. However, beginning in the third quarter and extending into the fourth quarter, certain customers began shifting and pushing out their demand to 2025, which led to higher finished goods inventory levels and significantly impacted our ability to deliver fourth quarter shipments and revenue. These customer shifts do not indicate a loss of business but rather a recalibration of delivery schedules, as the underlying demand and backlog for our products and services remain strong.  We continue to work closely with our customers to align our production output and delivery schedules with their current demand and forecasts. As such, we remain confident in our long-term growth strategies that are supported by strong industry fundamentals.

 

Revenues for the three-month period ended December 31, 2024, decreased by approximately $2,570,000, or 20.8%, compared to the same period in 2023. This was driven by a decrease in volume of approximately $2,722,000 and unfavorable product mix of approximately $276,000, partially offset by price increases of approximately $428,000,

 

For the year ended December 31, 2024, revenues increased by approximately $1,288,000, or 3.0%, compared to the same period in 2023. This was driven by price increases of approximately $1,432,000 and a volume increase of approximately $339,000, partially offset by unfavorable product mix of approximately $483,000. 

 

Our foreign sales decreased from $12,129,000 for the year ended December 31, 2023 to $11,385,000 for the same period in 2024, a decline of approximately $744,000, or 6.1%, driven by lower deliveries in the fourth quarter.  As these sales constitute a substantial part of our overall revenue stream, we remain committed to improving deliveries in 2025, while expanding our global presence, strengthening our relationships with international customers, and leveraging our strategic initiatives to drive long-term growth in key foreign markets.

 

Gross Profit/Margin

 

During the first half of 2024 we had sequential growth in both gross profit and gross margin, driven by higher volumes, price increases, and improved operational efficiencies, partially offset by unfavorable product mix. Gross profit and gross margin both declined for the second half of the year due to unfavorable product mix compounded by significantly lower volume and less absorption of fixed overhead costs.  Going forward, our focus is on optimizing our production footprint and improving cost efficiency to drive long-term gross profit and margin improvement.  

 

During the three-month period ended December 31, 2024, gross profit decreased by approximately $1,561,000, or 56.5% compared to the same period in 2023. This decrease was driven primarily by lower volumes, unfavorable product mix, and less absorption of fixed overhead costs, slightly offset by price increases.  This resulted in a gross margin of 12.3%, compared to 22.4% for the same period in 2023.

 

For the year ended December 31, 2024, gross profit increased by approximately $461,000, or 5.9% compared to the same period in 2023. The increase was driven primarily by price increases and higher absorption of overhead costs, partially offset by unfavorable product mix. This resulted in a gross margin of 18.4% compared to 17.9% for the same period in 2023.

 

 

 

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

 

		Three months ended (reclassified)
(in thousands)		2024																				2023
		Mar. 31				Jun. 30				Sep. 30				Dec. 31				Year				Mar. 31				Jun. 30				Sep. 30				Dec. 31				Year
Selling, general and administrative		$	(2,018	)		$	(2,397	)		$	(2,549	)		$	(2,311	)		$	(9,275	)		$	(2,185	)		$	(3,269	)		$	(2,219	)		$	(2,245	)		$	(9,918	)
% SG&A to revenues			19.3	%			19.5	%			20.5	%			23.7	%			20.6	%			24.1	%			30.7	%			19.2	%			18.2	%			22.7	%
Operating (loss) income		$	(283	)		$	666			$	(281	)		$	(1,111	)		$	(1,009	)		$	(1,197	)		$	(1,712	)		$	280			$	516			$	(2,113	)
Operating (loss) income %			(2.7	)%			5.4	%			(2.3	)%			(11.4	)%			(2.2	)%			(13.2	)%			(16.1	)%			2.4	%			4.2	%			(4.8	)%

 

Selling, General and Administrative Expenses

 

During the first three quarters of 2024, we experienced a sequential increase in Selling, General, and Administrative (SG&A) expenses, largely driven by legal settlement costs associated with a former officer, which significantly impacted our SG&A expenses.  Excluding the legal settlement costs, our SG&A expenses would have reflected a more normalized, consistent trend throughout the year.  We remain committed to maintaining a disciplined approach to expense management and driving operational excellence.

 

During the three-month period ended December 31, 2024, SG&A expenses increased by approximately $66,000 or 2.9%, when compared to the same period in 2023. This increase in SG&A expenses was driven by the legal settlement costs, and increased as a percentage of revenue by 550 basis points due to the lower revenue when compared to the same period in 2023

 

For the year ended December 31, 2024, SG&A expenses decreased by approximately $643,000, or 6.5%, when compared to the same period in 2023, due primarily to lower one-time costs of approximately $704,000 in the current year for legal settlement costs, compared to approximately $1,211,000 in the prior year related primarily to proxy contest and bank refinancing costs. SG&A expenses as a percentage of revenue for the year ended December 31, 2024 decreased by 210 basis points when compared to the same period in 2023.

 

Operating (Loss) Income

 

Despite our customers deferred deliveries that significantly impacted our 2024 results, we experienced an improvement in operating results when compared to 2023.  We are committed to improving our operational performance as customer demand normalizes, legal-related expenses subside, and we continue to execute on our strategic transformation initiatives. 

 

For the three-month period ended December 31, 2024, operating loss increased by approximately $1,627,000, or 315.3%, when compared to the same period in 2023.  The increase in operating loss was driven by lower gross profit due primarily to volume and unfavorable product mix.

 

For the year ended December 31, 2024, operating loss decreased (improved) by approximately $1,104,000, or 52.2%, when compared to the same period in 2023. The improvement was driven by slightly higher gross profit and lower SG&A expenses.

 

 

Other Expense, net

 

​		Three months ended (reclassified)
(in thousands)		2024																				2023
​		Mar. 31				Jun. 30				Sep. 30				Dec. 31				Year				Mar. 31				Jun. 30				Sep. 30				Dec. 31				Year
Other expense, net
Interest expense		$	(86	)		$	(100	)		$	(173	)		$	(129	)		$	(488	)		$	(47	)		$	(89	)		$	(98	)		$	(111	)		$	(345	)
Other income			3				2				1				4				10				—				—				—				9				9
Loss on sale of equipment			—				—				—				(18	)			(18	)			—				—				—				—				—
Total other expense, net		$	(83	)		$	(98	)		$	(172	)		$	(143	)		$	(496	)		$	(47	)		$	(89	)		$	(98	)		$	(102	)		$	(336	)
​		​				​				​				​				​				​				​				​				​				​
(Loss) income from continuing operations before income taxes		$	(366	)		$	568			$	(453	)		$	(1,254	)		$	(1,505	)		$	(1,244	)		$	(1,801	)		$	182			$	414			$	(2,449	)

 

Other Expense, net

 

For the three-month period ended December 31, 2024, other expense (net) increased by approximately $41,000, or 40.2%, when compared to the same period in 2023.  The increase was driven by higher interest expense due to increased usage of our asset-based line of credit to support working capital requirements, including higher inventory levels resulting from customer delivery pushouts into 2025.

 

For the year ended December 31, 2024 other expense (net) increased by approximately $160,000, or 47.6%, when compared to the same period in 2023.  The increase was driven by higher interest expense due to increased usage of our asset-based line of credit to support working capital requirements, as noted.

 

(Loss) Income before Income Taxes

 

For the three-month period ended December 31, 2024, loss before income taxes of approximately $1,254,000 increased by approximately $1,668,000, or 402.9%, when compared to the income before income taxes of approximately $415,000 for the same period in 2023. The increase in loss was driven by the significantly lower revenue and gross profit, as previously noted.

 

For the year ended December 31, 2024, loss before income taxes of approximately $1,505,000 decreased (improved) by approximately $944,000, or 38.5%, when compared to the loss before income taxes of approximately $2,448,000 for same period in 2023. The decrease in loss resulted from higher revenue, increased gross profit and lower SG&A expenses, partially offset by higher interest expense.

 

Income Taxes

 

For both the three-month period and year ended December 31, 2024, tax expense of $7,000 was recorded based on current taxable income, compared to tax expense of $35,000 and $1,098,000, respectively, recorded for the same periods in 2023.  The significant expense recorded in 2023 pertained to the recording of a full valuation allowance against our net deferred tax assets, as described in Note 8, "Income Taxes".

 

Our effective tax rate for continuing operations was (0.5%) and (44.8%) for the twelve-month periods ended December 31, 2024 and 2023, respectively.  The effective tax rate reflects federal and state income taxes, permanent non-deductible expenditures, impact of recording a full valuation allowance against the net deferred tax assets, and the federal tax credit for research and development expenditures.  The change in the effective tax rates between 2024 and 2023 is due primarily to the increase in business tax credits in 2024 and recording of the full valuation allowance in 2023.  See also Note 8, "Income Taxes", for further discussion.

 

 

 

Liquidity and Capital Resources

 

​		Years Ended December 31,
(in thousands)		2024				2023
​		​				​
CASH FLOW DATA:
Net Cash Flows from:
Operating Activities		$	1,253			$	(3,815	)
Investing Activities		$	(1,035	)		$	(689	)
Financing Activities		$	(17	)		$	1,602
​		​				​
YEAR-END FINANCIAL POSITION:
Working Capital		$	20,924			$	21,639
Indebtedness		$	2,127			$	2,103
​		​				​
CAPITAL EXPENDITURES, NET:		$	(1,035	)		$	(689	)
CASH FLOW DATA (DISCONTINUED):
Net Cash Flows from:
Discontinued Operating Activities		$	(185	)		$	(2,823	)
Discontinued Investing Activities		$	—			$	2,158

 

Operating Activities:

 

For the year ended December 31, 2024, we generated approximately $1,253,000 in cash from continuing operations, compared to cash used of approximately $3,815,000 for the same period in 2023. The increase in cash provided by continuing operations of approximately $5,068,000 when compared to the same period in 2023, is primarily attributable to a lower net loss by approximately $2,035,000 and lower accounts receivable by approximately $2,883,000 driven by market conditions primarily in the fourth quarter of 2024.

 

Our working capital as of December 31, 2024 was $20,924,000, a decrease of approximately $715,000 from $21,639,000 as of the end of 2023, driven primarily by a reduction in accounts receivable, as noted above.

 

Investing Activities:

 

In 2024, we used approximately $1,035,000 for capital purchases compared to $689,000 for the same period in 2023.

 

Financing Activities:

 

For the year ended December 31, 2024, we used $41,000 for the purchase of treasury shares, partially offset by funding received (net of payments) of approximately $24,000 from our credit facility.  For the same period in 2023, funding received (net of payments) from our credit facility was approximately $2,103,000, partially offset by use of cash for payments on financing lease obligations of approximately $501,000.

 

Our primary sources of liquidity are the cash generated from our operations and the cash available from our $7,000,000 credit facility.  As of December 31, 2024, our collateral base and eligible accounts receivable supported the ability to fund an additional $4,300,000 from the credit facility.  In addition, all covenant requirements were met as of December 31, 2024.  Refer to Note 5, "Indebtedness", for further discussions.

 

Discontinued Operation Activities:

 

For the year ended December 31, 2024, cash used for discontinued operating activities was approximately $185,000, compared to cash used of $2,823,000 for the same period in 2023.  The source of cash from discontinued investing activities of approximately $2,158,000 for the same period in 2023 resulted from cash proceeds due to the sale of OKC assets.  See Note 2, "Discontinued Operations and Assets and Liabilities Related to Discontinued Operation", for further information.

 

 

Ongoing Liquidity Considerations:

 

We incurred a net loss from continuing operations for the years ended December 31, 2024 and 2023. The losses in both 2024 and 2023 were both impacted by significant events.  Specifically for 2024, market conditions and customer demand changes affected volume, and combined with unfavorable product mix, did not generate enough gross profit to cover SG&A expenses, which were impacted by legal settlement costs related to a former officer of the Company.

 

The net loss from discontinued operation in 2024 is primarily related to repair and maintenance costs for the mostly (approximately 90%) vacant building.  For 2023, the net loss 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 the availability on our $7,000,000 million line of credit (available through June 2026 with extensions), combined with the current customer demand and backlog, will continue to support our operations and growth, and provide us with sufficient liquidity in 2025.  The availability on the line of credit was approximately $4,300,000 as of December 31, 2024 based on our collateral base and eligible accounts receivable.  In addition, it is management's intention to sell the building related to the discontinued operation in 2025, which would generate cash flow for continuing operations.      

 

Management Summary 

 

To recap recent history, 2022 was a year of transition, highlighted by the hiring of our new CEO, who began evaluating the overall business and setting the course for long-term success. The initial focus was improving culture and employee retention. Morale was low and limited resources had been devoted to talent development, leadership training, and employee satisfaction. By late 2022 and early 2023, upskilling efforts began with new leadership in human resources and operations that set the course of action for change. Along with these efforts, the overall business evaluation process led to the decision in early 2023 to exit the unprofitable consumer products business segment.  This included the OKC operations which lacked synergies with our core aerospace markets.  The divestiture allowed the new leadership team to focus on transforming the servo-control business. Our strategic initiatives for the continuing operations centered on creating a people-centric culture, overhauling our processes for improved production output, business development and quality, while also enhancing our ERP system capabilities. Implementing change while still meeting customer demand meant each initiative required a multi-year plan, with many actions carrying over into 2024. Overall, our efforts in 2023 yielded higher employee retention and production output resulting in 24% revenue growth, which were significant milestone achievements.

 

Based on customer forecasts, we started 2024 with expectations of another year of double-digit revenue growth and improved profitability.  However, it became a year of turbulence within the aerospace industry, marked by well-documented airframe manufacturers' quality issues, labor strikes, and engine delivery concerns.  This created massive ripple effects throughout the commercial aerospace market, and we were not immune to these headwinds. Although we reacted quickly to adjust our production plans and flex our operations, our revenue and profitability were directly impacted during the second half of the year when customers began to pushout demand into 2025. Despite these market conditions, revenue still grew by approximately 3%, gross margins improved, and operating costs were down.  In addition, we are pleased that our people strategy resulted in employee retention improving from 60% in 2022 to nearly 90% in 2024.  We invested in a training program for all in-line managers and leaders to equip them with best practices and the tools necessary to better manage team performance, engagement and satisfaction.  Our system enhancements included upgrading our ERP system resulting in improved visibility and operational execution. Also, continuous improvement and lean initiatives began to create additional value within the production processes for safely delivering quality product on time.  Looking forward, as airline manufacturers increase build rates in 2025 and beyond, we are well-positioned to meet demand due to these investments.

 

Over the last three years, we achieved sequential growth in revenue, gross profit and margins, resulting in improvements in operating and net loss despite market and industry challenges (as shown below). Our transformation is not done and there is more to do in 2025 to continue this positive momentum. We remain focused on step-change improvements in manufacturing flow and output, material planning, and processes required for delivering high-quality, servo-control valves to our customers. Given current forecasts, we expect to achieve profitable growth in 2025.  

 

 

Non-GAAP Measures:

 

We believe the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information to investors and other users of our financial statements in evaluating our operating results distinct from results that include certain non-recurring items that are not indicative of our ongoing operating performance. These non-GAAP disclosures have limitations as analytical tools, should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to net operating income (loss) determined in accordance with GAAP.

 

We have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures. Adjusted operating and net loss are provided for information purposes only and are not measures of financial performance under GAAP. We encourage readers to rely upon the GAAP numbers but include the non-GAAP financial measures as supplemental metrics to assist readers to illustrate the improvements made between 2022-2024 reflected in our growth in revenue, gross profit and margins, and improvements in adjusted operating and net losses when excluding the one-time expenses in 2024 and 2023.  These measures include legal settlement costs of approximately $704,000 in 2024, and bank refinancing and proxy contest costs of approximately $1,211,000 in 2023.  The net loss in 2023 was also impacted by incremental tax expense of approximately $1,098,000 resulting from a tax position due primarily to discontinuing the OKC operation and divesting the CPG business segment (combined adjustment to net loss of $2,309,000).

 

Finally, we believe adjusted EBITDA is a useful measure for evaluating our operating performance in accordance with the Requirements of Item 10(e)(i)(C) of Regulation S-K. Adjusted EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our debt financings, as well as income tax expense. It also excludes the one-time expenses incurred in 2024 and 2023, as noted above, as these costs were significant and not in the ordinary course of business.  Adjusted EBITDA is frequently used as one of the bases for comparing businesses in our industry, however, this measure is provided as a supplemental measure of our operating results and may not be comparable to similarly titled measures of other companies.  

 

​		Years Ended December 31,
(in thousands)		2024				2023				2022
​		​				​
Revenue		$	44,917			$	43,629			$	35,185
Costs of goods sold			36,651				35,824				29,616
Gross profit			8,266				7,805				5,569
Gross margin			18.4	%			17.9	%			15.8	%
Selling, general and administrative			9,275				9,918				8,067
Operating loss			(1,009	)			(2,113	)			(2,498	)
Total other expense, net			(496	)			(336	)			(167	)
Loss from continuing operations before income taxes			(1,505	)			(2,449	)			(2,665	)
Income tax expense			(7	)			(1,098	)			565
Loss from continuing operations, net of tax		$	(1,512	)		$	(3,547	)		$	(2,100	)
Non-GAAP measures for comparison:
Operating loss		$	(1,009	)		$	(2,113	)		$	(2,498	)
Addback: one-time expenses			704				1,211				-
Adjusted operating loss		$	(305	)		$	(902	)		$	(2,498	)
Loss from continuing operations, net of tax		$	(1,512	)		$	(3,547	)		$	(2,100	)
Addback: one-time expenses			704				2,309				-
Adjusted loss from continuing operations, net of tax		$	(808	)		$	(1,238	)		$	(2,100	)
Adjusted EBITDA		$	716			$	49			$	(1,551	)

 

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, 2024, we have $15,826,000 of inventory recorded on our consolidated balance sheet, representing approximately 45% 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.

 

A commercial real estate broker ("broker") has been actively marketing the building associated with the discontinued operation at an asking price of $1,800,000, which is above the current net book value of $1,428,000.  Based on discussions with the broker, commercial property sales can range from 12-18 months once actively marketed, a timeframe that is within Management's expectations for the sale of this property.  Although there has been interest by third parties, no offers have been received, nor has there been any information received from our brokers that would indicate that our asking price is not aligned with the commercial real estate market conditions.  Based on the information known, Management does not believe that an impairment exists and the $1,428,000 represents a fair value of the building as of December 31, 2024.

 

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 calculations 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.

 ​

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

 

The Company 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.

 ​

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 F1.

 ​

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Not applicable.

 ​

 

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, 2024.  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, 2024.

 

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

 

There were no changes in the Company’s internal controls over financial reporting during 2024 that have materially affected, or are reasonably likely to affect, the Company’s internal controls over financial reporting.

 

 

Item 9B.  Other Information

 

Not applicable.

 ​

Item 9C.  Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 

Not applicable.

 ​

 

PART I

 

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 2024 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.

 ​

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 2024 fiscal year or such information will be included by amendment to this Form 10-K.

 ​

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, 2024:

 

​

Number of

Weighted-average

Number of

​

securities to be

exercise price of

securities remaining

​

issued upon

outstanding

available for

​

exercise of

options

future issuance

​

outstanding options,

warrants and

under equity

Plan category

warrants and rights

rights

compensation plans

Equity compensation plans approved by security holders

—

—

140,167

Equity compensation plans not approved by security holders

—

—

—

Total

—

—

140,167

 

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 2024 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.

 ​

 

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 2024 fiscal year or such information will be included by amendment to this Form 10-K.

 ​

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 2024 fiscal year or such information will be included by amendment to this Form 10-K.

 ​

 

PART IV

 

Item 15.  Exhibits and Financial Statement Schedules

 

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)
10	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)

 

 

19	Servotronics, Inc. Insider Trading Policy (Incorporated by reference to Exhibit 19 to the Company's Form 10-K filed with the SEC on March 22, 2024)
21	Subsidiaries of the Registrant (Filed herewith)
23.1	Consent of Freed Maxick P.C. (f/k/a 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)
​	​
97	Servotronics, Inc. Clawback Policy (Incorporated by reference to Exhibit 97 to the Company's Form 10-K filed with the SEC on March 22, 2024)
101.1 SCH	Inline XBRL Taxonomy Extension Schema Document (filed herewith).
101.2 CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.3 DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.4 LAB	Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.5 PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
104	Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in exhibits 101.*) (filed herewith).

 

 

Item 16. Form 10 - K Summary

 

None.

 ​

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SERVOTRONICS, INC.
March 17, 2025	By	/s/ William F. Farrell, Jr., Chief Executive Officer
		William F. Farrell, Jr.
		Chief Executive Officer

 ​

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

/s/ William F. Farrell, Jr.		Chief Executive Officer	March 17, 2025
William F. Farrell, Jr.
/s/ Robert A. Fraass		Chief Financial Officer	March 17, 2025
Robert A. Fraass
/s/ Brent D. Baird		Director	March 17, 2025
Brent D. Baird		​	​
		​	​
/s/ Karen L. Howard		Director	March 17, 2025
Karen L. Howard
/s/ Christopher M. Marks		Director	March 17, 2025
Christopher M. Marks
/s/ Evan H. Wax		Director	March 17, 2025
Evan H. Wax

 

SERVOTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 ​

 

See notes to consolidated financial statements

 ​

 

SERVOTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 ​

 

See notes to consolidated financial statements

 ​

 

SERVOTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

See notes to consolidated financial statements

 ​

 

SERVOTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 ​

 

See notes to consolidated financial statements

 ​

 

1.    Business Description and Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

Servotronics, Inc. and its subsidiaries (the “Company”) design, manufacture and market servo-control components and other advanced technology products for aerospace, military and medical applications.  The Company was incorporated in New York in 1959.  In 1972, the Company was merged into a wholly owned subsidiary organized under the laws of the State of Delaware, thereby changing the Company’s state of incorporation from New York to Delaware. The Company’s shares currently trade on the New York Stock Exchange (NYSE) American under the symbol SVT.

 

Until 2023, the Company had operated historically under two business segments: Advanced Technology Group (“ATG”) and Consumer Products Group (“CPG”), which had been strategic business segments that offered different products and services.  Operations in ATG include the servo-control components (i.e., torque motors, control valves, etc.), and the CPG operations included the design, manufacture and marketing of a variety of cutlery products for use by consumers and government agencies.  During 2023, the Company’s Management made the strategic decision to sell certain assets of The Ontario Knife Company (“OKC”) and divest the CPG business segment. This divestiture represented a strategic shift, as the Company has realigned its corporate and management reporting structure to focus solely on aerospace and now organizes its business in a single reportable segment without reference to ATG.  This segment structure reflects the financial information and reports used by our management, specifically the Chief Executive Officer, identified as the Chief Operating Decision Maker ("CODM").  See Note 12 "Segment Information" for further discussion.

 

The consolidated financial statements include the accounts of Servotronics, Inc. (the active legal entity under the ATG segment), OKC, (the legal entity under the CPG business segment) and other, inactive, wholly-owned subsidiaries.  All intercompany balances and transactions have been eliminated upon consolidation.  The Company derives its primary sales revenue from domestic customers, although a portion of finished products are for foreign end use.  As communicated in the June 30, 2023, 10-Q filing, the Company executed an Asset Purchase Agreement (“APA”) with a third party to sell certain assets of OKC, which closed on August 1, 2023.  Accordingly, the sale of assets and results of operations for OKC are presented as a “Loss from Discontinued Operation, net of tax” on the Consolidated Statements of Operations, and assets and liabilities are reflected as “Assets and Liabilities related to Discontinued Operation” in the Consolidated Balance Sheets. The “Loss from Discontinued Operation, net of tax” is included in the “net loss” on the Consolidated Statements of Comprehensive Loss, and the cash used in operating activities and provided by investing activities from the discontinued operation are included in the “Discontinued Operation” section of the Consolidated Statements of Cash Flows.  See Note 2 “Discontinued Operation and Assets and Liabilities Related to Discontinued Operation” for further discussion.  

 

Amounts for all periods discussed below reflect the results of operations, financial condition and cash flows from the Company’s continuing operations, unless otherwise noted.

 

Cash and Restricted Cash

 

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

 

​		Years Ended December 31,
(in thousands)		2024				2023
Cash		$	111			$	95
Restricted cash			150				150
Total cash and restricted cash		$	261			$	245

 

The Company considers cash to include all currency and coin owned by the Company as well as all deposits in the bank including checking and savings accounts. The restricted cash of $150,000 as of December 31, 2024 and 2023, respectively, represents collateral with a financial institution.

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Accounts Receivable

 

The Company grants credit to substantially all of its customers and carries its accounts receivable at original invoice amount less an allowance for credit losses. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for credit losses based on history of past write-offs, collections, and current credit conditions. The opening accounts receivable balance was $8,453,000 as of  January 1, 2023. The allowance for credit losses amounted to approximately $15,000 and $121,000 as of December 31, 2024 and December 31, 2023, respectively. The Company does not accrue interest on past due receivables.

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

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

 

Warranty and repair obligations are assessed on all returns. Revenue is not recorded on any warranty returns. The Company warrants its products against design, materials and workmanship based on an average of twenty-seven months. The Company determines warranty reserves needed based on actual average costs of warranty units shipped and current facts and circumstances. As of December 31, 2024, and 2023, under the guidance of Accounting Standards Codification (“ASC”) 460-1-50 Product Warranties, the Company has recorded a warranty reserve of approximately $333,000 and $542,000, respectively. Revenue is recognized on repair returns, covered under a customer contract, at the contractual price upon shipment to the customer.

 

The Company disaggregates revenue from contracts with customers into geographic regions. The Company determined that disaggregating revenue into this category achieves the objective to portray how the nature, timing, and uncertainty of revenue from cash flows are affected by different regions. Disaggregation of revenue by geographic region is provided below:

 

		Three Months Ended								Year Ended
(in thousands)		December 31, 2024				December 31, 2023				December 31, 2024				December 31, 2023
Domestic		$	7,351			$	8,972			$	33,532			$	31,500
International			2,417				3,366				11,385				12,129
Total Revenue		$	9,768			$	12,338			$	44,917			$	43,629

 

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value. Cost includes all costs incurred to bring each product to its present location and condition. Market provisions in respect of lower of cost or net realizable value adjustments and inventory determined to be slow moving are applied to the gross value of the inventory through a reserve of approximately $758,000 and $627,000 at December 31, 2024, and 2023, respectively. Pre-production and start-up costs are expensed as incurred.

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Shipping and Handling Costs

 

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

 

Property, Plant, and Equipment

 

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

 

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

 ​

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

 

Income Taxes

 

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

 

The Company’s practice is to recognize interest and/or penalties related to uncertain tax positions and income tax matters in income tax expense.  The Company did not have any accrued interest or penalties included in its Consolidated Balance Sheets at December 31, 2024 or December 31, 2023, and did not recognize any interest and/or penalties in its Consolidated Statements of Operations during the years ended December 31, 2024 and 2023. The Company did not have any material uncertain tax positions or unrecognized tax benefits or obligations as of December 31, 2024 and December 31, 2023.  The 2021 through 2024 federal and 2020 through 2024 state tax returns remain subject to examination by the respective taxing authorities.

 

Supplemental Cash Flow Information

 

Income tax refunded for the years ended December 31, 2024 and 2023 amounted to approximately $0 and $146,000, respectively. Income taxes paid were approximately $0 and $2,000 for the years ended December 31, 2024 and 2023, respectively. Interest paid was approximately $278,000 and $366,000 for the years ended December 31, 2024 and 2023, respectively.

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Employee Stock Ownership Plan

 

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

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets for impairment annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable based on undiscounted future operating cash flow analyses. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

 

The Company’s strategic decision to sell certain assets of OKC in 2023 resulted in the classification of a discontinued operation and triggered an impairment of OKC’s real property in accordance with ASC 360 - 10 - 45 - 9 Impairment or Disposal of Long - Lived Assets. Refer to Note 2, “Discontinued Operation and Assets and Liabilities Related to Discontinued Operation”, for further discussion. No additional impairment of long - lived assets exists as of December 31, 2024, and 2023, which primarily includes the Company’s tangible real (land and building) and personal (machinery & equipment) properties.

 

Use of Estimates

 

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

 

Reclassifications

 

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

 

Research and Development Costs

 

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

 

Concentration of Credit Risks

 

Financial instruments that potentially subject the Company to concentration of credit risks principally consist of cash accounts in financial institutions. Although the accounts exceed the federally insured deposit amount, management assesses the risk of nonperformance by the financial institutions to be low.

 

Fair Value of Financial Instruments

 

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

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Recent Accounting Pronouncements

 

In December 2023, the FASB issued ASU 2023 - 09 “Income Taxes (Topics 740): Improvements to Income Tax Disclosures” to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023 - 09 is effective for the Company's annual periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on its financial statement disclosures.

 

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires all public entities, including public entities with a single reportable segment, to provide in interim and annual periods one or more measures of segment profit or loss used by the chief operating decision maker to allocate resources and assess performance. Additionally, the standard requires disclosures of significant segment expenses and other segment items as well as incremental qualitative disclosures. The Company adopted ASU 2023-07 effective December 31, 2024, on a retrospective basis. The adoption of 2023-07 did not change the way that the Company identifies its reportable segments and, as a result, did not have a material impact on the Company’s segment-related disclosures. Refer to Note 12 for further information on the Company's reportable segment.

 

 

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

 

The Company’s decision to sell certain assets and wind down the operations of OKC met the “held for sale” under ASC 205-20-45-9 Discontinued Operations and represented a strategic shift that had a significant impact on the Company’s overall operations and financial results. Accordingly, the assets and liabilities of OKC are reflected as “Assets and Liabilities related to Discontinued Operation” in the Consolidated Balance Sheets as of  December 31, 2024, and 2023.  In addition, OKC’s operating loss, the loss on sale of assets, divestiture costs, and impairment charges on long-lived assets were reclassified to “Loss from Discontinued Operation, net of tax” in the Consolidated Statements of Operations for the years ended December 31, 2024, and 2023. 

 

The discontinued operation incurred an operating loss of approximately $111,000 for the year ended  December 31, 2024 resulting from taxes, insurance costs, and repairs and maintenance costs associated with the vacant portion of the building.  A commercial real estate broker ("broker") has been actively marketing the building for sale in March 2024 at an asking price above the current net book value of $1,428,000.  No third party offers, or other market indicators have occurred, that would indicate further impairment of the building as of December 31, 2024, and the timing for sale is within the expected window for closing.  Therefore, the Company believes the classification as an asset related to discontinued operation in current assets is appropriate as of December 31, 2024, and will continue to monitor the asking price relative to commercial real estate market conditions in 2025.

 

In August 2023, the Company sold inventory, machinery & equipment and intellectual property (patents & trademarks/tradenames) to a third-party buyer for approximately $2,158,000.  In accordance with the sale, the net carrying values of the assets sold exceeded its fair values, less estimated costs to sell, resulting in a loss on the sale of assets of approximately $3,162,000 for the twelve-month year ended December 31, 2023.  As a direct result of Management’s decision to sell OKC’s assets, divest the operations, and exit the CPG segment, the Company incurred an impairment charge on its long-lived asset (building) of approximately $1,219,000 and divestiture costs of approximately $807,000 related to key employee retention agreements, employee severance agreements, and supplier open purchase order obligations totaling $2,026,000 for the year ended  December 31, 2023.  In addition, OKC incurred an operating loss of approximately $2,052,000 for the year ended  December 31, 2023 that was also included in the Loss from Discontinued Operation.

 

In summary, the Discontinued Operation, net of tax, resulted in a loss of approximately $111,000 and $7,240,000 for the years ended December 31, 2024, and 2023, respectively, as follows:

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Discontinued Operation Financial Information

 

Consolidated Statements of Operations are as follows:

 

​		Years Ended December 31,
(in thousands)		2024				2023
​		​				​
Net Sales		$	—			$	3,410
Operating costs			(111	)			(5,462	)
Loss from discontinued operation			(111	)			(2,052	)
Loss from discontinued operation - impairment and divestiture costs			—				(2,026	)
Loss on sale of assets			—				(3,162	)
Loss from discontinued operation before income taxes			(111	)			(7,240	)
Income tax			—				—
Loss from discontinued operation, net of tax		$	(111	)		$	(7,240	)

 

Assets & Liabilities Related to Discontinued Operation Financial Information

 

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

 

​		Years Ended December 31,
(in thousands)		2024				2023
​		​				​
Accounts receivable, net		$	—			$	38
Prepaid and other assets			8				31
Inventories, net			—				55
Building and improvements, net			1,428				1,428
Assets related to discontinued operation		$	1,436			$	1,552
​		​				​
Accounts payable		$	24			$	197
Accrued employee compensation and other costs			—				16
Liabilities related to discontinued operation		$	24			$	213

 

 

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3.    Inventories

 

​		Years Ended December 31,
(in thousands)		2024				2023
Raw material and common parts		$	8,044			$	7,828
Work-in-process			7,072				6,466
Finished goods			1,468				531
​			16,584				14,825
Less inventory reserve			(758	)			(627	)
Total inventories		$	15,826			$	14,198

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.    Property, Plant and Equipment

 

​		Years Ended December 31,
(in thousands)		2024				2023
Buildings and building improvements		$	9,020			$	8,447
Machinery, equipment and tooling			15,768				15,503
Construction in progress			216				106
​			25,004				24,056
Less accumulated depreciation and amortization			(17,999	)			(17,078	)
Property, plant and equipment, net		$	7,005			$	6,978

 

Depreciation and amortization expense amounted to approximately $990,000 and $1,083,000 for the years ended December 31, 2024 and 2023, respectively. Depreciation expense amounted to approximately $966,000 and $1,059,000 for the years ended December 31, 2024 and 2023, respectively. Amortization expense primarily related to equipment financing amounted to approximately $24,000 for each of the years ended December 31, 2024 and 2023, respectively.

 

The Company’s Right of Use (‘ROU’) assets included in machinery, equipment and tooling had a net book value of approximately $136,000 as of December 31, 2024 ($160,000 as of December 31, 2023).

 

As of December 31, 2024, there is approximately $216,000 ($106,000 as of December 31, 2023) of construction in progress (CIP) included in property, plant and equipment all of which is related to capital projects. There is approximately $180,000 in CIP for machinery and approximately $36,000 for building improvements.

 ​

5.    Long-Term Debt

 

In 2023, the Company entered into a three-year financing agreement with a financial lending institution for an asset-based line of credit ("Credit Facility") with a maximum revolving credit of $7,000,000. The borrowing base under the Credit Facility is determined using 85% of eligible domestic and foreign accounts receivable balances, less any other specific reserves. In general terms, ineligible receivables are defined as invoices unpaid over 90 days. The balance outstanding on the Credit Facility is approximately $2,127,000 and $2,103,000 as of December 31, 2024, and 2023, respectively. The interest rate on the Credit Facility is equal to the greater of 8.0% or prime rate (as defined by JP Morgan Chase) plus 1.0% (8.5% and 9.5% as of December 31, 2024 and 2023, respectively). The Credit Facility is collateralized by the Company's non-realty assets.

 

In accordance with ASC 470-10-45-5 Classification of Revolving Credit Agreements Subject to Lock-Box Arrangements and Subjective Clauses, borrowings outstanding under the Credit Facility that includes both a subjective acceleration clause and requirement to maintain a lock-box arrangement must be considered short-term obligations. As the Credit Facility includes both provisions, the outstanding balances are classified as current liabilities on the Condensed Consolidated Balance Sheets.

 

The Credit Facility contains two financial covenants required to be maintained by the Company at the end of each of its fiscal quarters. The Tangible Net Worth covenant requires the Company to maintain tangible net worth not less than $20,000,000. The Working Capital covenant requires the Company to maintain working capital not less than $10,000,000. The Company met both covenant requirements as of December 31, 2024, and 2023.

 

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   ​

6.    Employee Benefit Plans

 

Employee Stock Ownership Plan (ESOP)

 

In 1985, the Company established an employee stock ownership plan (ESOP or the Plan) for the benefit of employees who meet certain minimum age and service requirements. Upon inception of the ESOP, the Company borrowed $2,000,000 from a bank and lent the proceeds to the Plan in accordance with the Trust Agreement (the Trust) established under the ESOP to purchase shares of the Company’s common stock. The Company’s original loan to the Trust is at interest rates approximating the prime rate and is repayable to the Company over a 40-year term ending in December 2024. During 1987 and 1988, the Company loaned an additional amount of $1,942,000 to the Trust under terms similar to those under the original loan, with term ending in December 2028.

 

Company shares are held by the Plan’s trustees (per Trust Agreement) in a suspense account until allocated to participant accounts in the Plan.  Contributions are determined annually by the Company according to the ESOP plan formula.  Each year the Company makes contributions to the Trust sufficient to enable the Trust to repay the principal and interest due to the Company under the terms of the Trust. As the loans are repaid, shares are released from the suspense account pro rata based on the portion of the aggregate loan payments that are paid during the year. The Plan allows dividends (if applicable) on unallocated shares to be distributed to participants in cash, unless otherwise directed.  Shares released from the suspense account are allocated to participants in the ESOP based on their relative taxable compensation in the year of allocation and/or on the participants’ account balances.

 

If the Company’s shares are not readily tradeable on an established securities market when an ESOP participant’s termination of employment or retirement occurs, and if such ESOP participant requests that his/her ESOP distributed shares be repurchased by the Company, the Company is obligated to do so. The Company’s shares currently trade on NYSE American. There were no outstanding ESOP shares subject to the repurchase obligation at December 31, 2024.

 

Company shares allocated to the Plan are 291,980 and 321,141 as of December 31, 2024, and 2023, respectively. As of December 31, 2024 and 2023, 15,786 and 26,752 shares, respectively, remain unallocated in the suspense account.

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Related compensation expense associated with the Plan, which is equal to the principal reduction on the loans receivable from the trust, amounted to approximately $56,000 and $101,000 for the years ended December 31, 2024, and 2023, respectively. Included as a reduction to Company’s shareholders’ equity is the ESOP trust commitment which represents the remaining indebtedness of the Trust to the Company.  ESOP participants are entitled to vote allocated shares and the Trust is entitled to vote unallocated shares and any allocated shares not voted by the participants.

 

Other Postretirement Benefit Plans

 

The Company provides certain postretirement health and life insurance benefits for two former executives (retirees) of the Company (the Plan). Upon ceasing employment with the Company, the Company pays the annual cost of health insurance coverage and provides continuing life insurance at the same level of coverage at the time of terminating employment with the Company. The Plan also provides a benefit to reimburse the retirees for certain out-of-pocket medical and/or health-related costs. The retirees’ benefits cease upon their death. The Plan is unfunded and the actuarially-determined projected postretirement benefit obligation was approximately $4,097,000 and $4,262,000 as of December 31, 2024 and 2023, respectively.

 

Amounts recognized in the Consolidated Balance Sheets as of December 31, 2024 and 2023 consist of the following:

 

​		Years Ended December 31,
(in thousands)		2024				2023
​		​				​
Current portion - retirement benefits and other		$	84			$	97
Long-term liabilities - retirement benefits and other			4,013				4,165
Post-retirement benefit obligation		$	4,097			$	4,262
​		​				​
Accumulated other comprehensive loss, before income taxes:
Net actuarial loss		$	2,694			$	3,024

 

The estimated net loss to be amortized from accumulated other comprehensive income ("AOCI") to benefit cost during 2025 is approximately $84,000. The decrease in the projected postretirement benefit obligation was due to changes in actuarial assumptions.  The actuarial loss is being amortized based on the expected lifetimes of the two former executives.

 

A reconciliation of the beginning and ending balances of accumulated postretirement benefit obligations as of December 31, 2024 and 2023 is as follows:

 

​		Years Ended December 31,
(in thousands)		2024				2023
​		​				​
Accumulated post-retirement benefit obligations at the beginning of the year		$	4,262			$	4,062
Interest cost			216				192
Actuarial (gain)/loss			(231	)			152
Benefits paid			(150	)			(144	)
Accumulated post-retirement benefit obligations at the end of the year		$	4,097			$	4,262

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Financial information for this Plan for the years ended December 31, 2024 and 2023 are as follows:

 

​		Years Ended December 31,
(in thousands)		2024				2023
​		​				​
Interest cost		$	216			$	192
Recognized actuarial loss			97				87
Benefit cost		$	313			$	279
Benefits paid		$	150			$	144

 

Actuarial assumptions used as of and for the years ended December 31, 2024 and 2023 are as follows:

 

​		Years Ended December 31,
​		2024				2023
Discount rate used in determining:
Benefit obligation			5.000	%			5.250	%
Benefit cost			5.250	%			4.875	%

 

Assumed healthcare cost trend rate is estimated at 10% for the first year and then grading down by 0.5% for each year subsequent until a floor of 5% is reached. The actuarial assumptions for mortality include the use of PriH – 2012 mortality tables with generational mortality improvement scale 2024 and adjusted scale MP 2021.

 

The effect of a one-percentage-point increase, and a one-percentage-point decrease in the assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic postretirement health care benefit costs and the accumulated postretirement benefit obligation for health care benefits are as follows:

 

​		Years Ended December 31,
(in thousands)		2024				2023
Effect of 1% increase in health care trend rates:
Change in benefit obligation		$	603			$	543
Change in combined service and interest cost		$	32			$	31
​						​
Effect of 1% decrease of health care trend rates:
Change in benefit obligation		$	(497	)		$	(450	)
Change in combined service and interest cost		$	(26	)		$	(25	)

 

Based on actuarial assumptions, the Company is expected to make benefit payments for the next ten years ending December 31, as follows (in thousands):

 

Years Ending December 31,			Amount
2025			$	145
2026				156
2027				167
2028				178
2029				188
2030-2034			$	1,084

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7.    Shareholders’ Equity

 

​		Years Ended December 31, 2023 and 2024
(in thousands)						Accumulated
​		​				Other				​				Capital in				​				​				Total
​		​​Retained				Comprehensive				​​Common				excess of				​				​​Treasury				shareholders'
​		Earnings				Loss				Stock				​par value				​ESOT				Stock				​equity
December 31, 2022		$	23,741			$	(2,337	)		$	523			$	14,556			$	(157	)		$	(1,214	)		$	35,112
​		​				​				​				​				​				​				​
Retirement benefits adjustment			—				(52	)			—				—				101				—				49
Stock based compensation, net			—				—				2				61				—				57				120
Net Loss			(10,787	)			—				—				—				—				—				(10,787	)
​		​				​				​				​				​				​				​
December 31, 2023		$	12,954			$	(2,389	)		$	525			$	14,617			$	(56	)		$	(1,157	)		$	24,494
Retirement benefits adjustment			—				330				—				—				56				—				386
Stock based compensation, net			—				—				1				211				—				35				247
Net Loss			(1,623	)			—				—				—				—				—				(1,623	)
​		​				​				​				​				​				​				​
December 31, 2024		$	11,331			$	(2,059	)		$	526			$	14,828			$	—			$	(1,122	)		$	23,504

 

Earnings Per Share

 

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. The weighted average number of common shares outstanding does not include any potentially dilutive securities or any unvested restricted shares of common stock. These unvested restricted shares, although classified as issued and outstanding, are considered forfeitable until the restrictions lapse and will not be included in the basic EPS calculation until the shares are vested. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period plus the number of shares of common stock that would be issued assuming all contingently issuable shares having a dilutive effect on the earnings per share that were outstanding for the period. The dilutive effect of unvested restrictive stock is determined using the treasury stock method.  However, if the assumed common shares are anti-dilutive, basic and diluted earnings per share are the same. As a result of the net losses generated in 2024, all outstanding common shares would be antidilutive.  As of the year ended December 31, 2024 and 2023, there were 17,976 and 24,110 common shares, respectively, that could potentially dilute basic earnings per share in the future. Incremental shares from assumed conversions are calculated as the number of shares that would be issued, net of the number of shares that could be purchased in the marketplace with the cash received upon stock option exercise.

 

​		Years Ended December 31,
(in thousands except per share data)		2024				2023
​		​				​
Loss from continuing operations		$	(1,512	)		$	(3,547	)
Loss from discontinued operation, net of tax			(111	)			(7,240	)
Net loss		$	(1,623	)		$	(10,787	)
Weighted average common shares outstanding (basic)			2,509				2,470
Unvested restricted stock			18				24
Weighted average common shares outstanding (diluted)			2,527				2,494
Basic and diluted loss per share:
Continuing operations		$	(0.60	)		$	(1.44	)
Discontinued operation			(0.04	)			(2.93	)
Basic and diluted loss per share		$	(0.64	)		$	(4.37	)

 

Common Stock Buyback

 

In January 2006, the Company’s 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.  Over the years, the Company purchased 360,615 shares and 89,385 shares were available for purchase. In March 2024, the Board formally approved the termination of the share repurchase authorization under this program.  There were no shares purchased by the Company in 2024 or 2023.

 

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Table of Contents

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Stock-Based Compensation

 

The Company’s 2022 Equity Incentive Plan (“the Equity Plan”) was approved by the shareholders at the 2022 Annual Meeting of Shareholders. The Equity Plan allows for various types of awards (rights) to be granted, including incentive stock options, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards, cash awards, or any other equity-based awards. The total number of awards under the Equity Plan are limited to a maximum of 200,000 authorized shares.

 

The Company’s executive compensation program established by the Board of Directors determines the type of awards available to the Company’s executives. The program consists of an annual (cash) incentive plan (“AIP”) and a long-term (equity) incentive plan (“LTIP”). The LTIP includes service-based awards that vest annually over three years, and performance-based awards that cliff-vest based on the achievement of a financial metric over a specific three-year time period. On March 25, 2024, 7,180 service-based (restricted) shares were granted to Company executives under the 2024-2026 LTIP Stock Award (“the 2024-2026 Award”). Additionally, on January 29, 2024, the Board of Directors granted 1,786 service-based restricted shares in connection with the hiring (sign-on) of an executive officer which vest after a one-year service period. On September 18, 2024, 3,691 service-based and sign-on restricted shares were forfeited due to the voluntary resignation of an executive officer.  On December 13, 2023, 5,793 service-based (restricted) shares were granted to Company executives under the 2023-2025 LTIP Stock Award (“the 2023-2025 Award”). Additionally, on May 1, 2023, the Board of Directors granted 1,759 service-based restricted shares in connection with the hiring (sign-on) of an executive officer which vested after a one-year service period.

 

The Company’s director compensation policy provides that non-employee directors receive a portion of their annual retainer in the form of shares under the Equity Plan. These shares vest quarterly over a twelve-month service period, have voting rights, and any dividends declared and paid during the restricted period accrue and are paid upon vesting. The aggregate amount of expense to the Company, measured based on the grant date fair value, is recognized over the requisite service period. On May 10, 2024, an aggregate of 9,980 shares were issued with a grant date fair value of $125,000 (10,410 shares were issued on June 9, 2023 with a grant date fair value of $125,000).

 

A summary of the service-based share awards granted is presented below:

 

​		​				Weighted Average Grant
Service-Based Share Activity:		Shares				Date Fair Value
Unvested at December 31, 2022			27,010			$	11.09
Granted in 2023			18,687			$	11.74
Vested in 2023			(23,249	)		$	11.26
Unvested at December 31, 2023			22,448			$	11.45
Granted in 2024			18,946			$	12.70
Forfeited in 2024			(3,691	)		$	13.29
Vested in 2024			(19,727	)		$	11.84
Unvested at December 31, 2024			17,976			$	11.96

 

Of the 19,727 shares vested in 2024, 3,243 shares were withheld (purchased as treasury shares) by the Company for approximately $41,000 to satisfy statutory minimum withholding tax requirements as permitted under the Equity Plan.  Of the 23,249 shares vested in 2023, 1,748 shares were withheld by the Company for approximately $22,000 to satisfy statutory minimum withholding tax requirements as permitted under the Equity Plan.

 

Included in the years ended December 31, 2024 and 2023 is approximately $288,000 and $120,000, respectively, of stock-based compensation expense related to the service-based shares. The Company has approximately $148,000 of stock-based compensation expense related to service-based shares to be recognized over the requisite service periods.

 

Restricted, performance-based share awards represent a right to receive a certain number of shares of common stock based on the achievement of corporate performance goals and continued employment during the performance period. Performance-based share awards granted to executives' vest at the end of a three-year period and are not issued until the performance period is complete and the metrics are achieved. Vested and issued shares may range from 0% to a maximum of 200% of targeted amounts depending on the achievement of performance measures at the end of a three-year period. The expected cost of the shares is based on the date of grant fair value and the Company's assessment of the probability that the performance condition will be achieved at target (100%). Any related compensation expense is recognized when the probability is likely that the performance criteria will be achieved. Forfeitures are recognized as they occur. These awards may be settled in cash or shares of common stock at the election of the Company on the date of grant. It is the Company's intent to settle performance-based awards with shares of common stock.

 

On March 25, 2024, 21,541 performance-based share awards (at target) were granted to Company executives under the 2024-2026 LTIP Stock Award at a grant date fair value of $12.63 per share, of which 5,716 share awards were forfeited on September 18, 2024, upon the resignation of an executive officer. On December 13, 2023, 17,380 performance-based share awards (at target) were granted to Company executives under the 2023-2025 LTIP Stock Award at a grant date fair value of $11.50 per share. 

 

A summary of the performance-based share awards granted is presented below:

 

 

​		​				Weighted Average Grant
Performance-Based Share Activity:		Shares				Date Fair Value
Unvested at December 31, 2023			17,380			$	11.50
Granted in 2024			21,541			$	12.63
Forfeited in 2024			(5,716	)		$	12.63
Vested in 2024			—			$	—
Unvested at December 31, 2024			33,205			$	12.04

 

No stock-based compensation expense related to performance-based awards is included in the years ended December 31, 2024 and 2023, as the probability of achieving the financial metric required for vesting and issuance of the share awards is deemed not probable for the 2024-2026 and 2023-2025 LTIP Awards granted to executives. The maximum potential stock-based compensation expense for the performance-based share awards under the 2024-2026 and 2023-2025 LTIP Stock Awards is approximately $800,000.

 

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Table of Contents

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.    Income Taxes

 

The income tax expense included in the Consolidated Statements of Operations consists of the following:

 

​		Years Ended December 31,
(in thousands)		2024				2023
Continuing Operations:		​				​
Current:		​				​
Federal		$	(7	)		$	(24	)
State			—				(2	)
Total Current			(7	)			(26	)
Deferred:
Federal			—				(1,072	)
State			—				—
Total Deferred			—				(1,072	)
Total Continuing Operations		$	(7	)		$	(1,098	)
​		​				​
Discontinued Operation:		​				​
Current:		​				​
Federal		$	—			$	—
State			—				—
Total Current			—				—
Deferred:		​				​
Federal			—				—
State			—				—
Total Deferred			—				—
​		​				​
Total Discontinued Operation		$	—			$	—
​		​				​
Total Income Tax Expense		$	(7	)		$	(1,098	)

 

The reconciliation of the federal statutory income tax rate to the Company’s effective tax rate based upon the total income tax provision from continuing operations is as follows:

 ​

​		Years Ended December 31,
​		2024				2023
​		​				​
Federal statutory rate			21.0	%			21.0	%
Permanent non-taxable income			(3.5	)%			0.2	%
Business credits			21.3	%			2.8	%
State taxes, net of federal benefit			0.0	%			(0.1	)%
Valuation allowance			(38.7	)%			(68.6	)%
Other			(0.6	)%			(0.1	)%
​			(0.5	)%			(44.8	)%

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

At December 31, 2024 and 2023, the deferred tax assets (liabilities) from continuing operations were comprised of the following:

 ​

​			Years Ended December 31,
(in thousands)			2024				2023
​			​				​
Deferred Tax Assets:			​				​
Inventories			$	202			$	254
Accrued employees' compensation and benefits costs				316				362
Postretirement adjustment (accumulated other comprehensive loss)				566				635
Accrued litigation settlement				128				39
State credit carryforwards				157				177
Federal credit carryforwards				302				—
Federal net operating loss carryforward				482				1,493
Bad debt reserve				3				26
Warranty reserve				70				114
Research and experimentation expenses				2,217				751
Customer accruals				156				344
Sec 163(j) disallowed interest				46				83
Other				1				1
Total deferred tax assets				4,646				4,279
Valuation allowance				(3,727	)			(3,145	)
Net deferred tax assets				919				1,134
​	​						​
Deferred tax liabilities:
Prepaid expenses				(78	)			(71	)
Property, plant and equipment				(841	)			(853	)
Other receivable - insurance proceeds				—				(210	)
Total deferred tax liabilities				(919	)			(1,134	)
Net deferred tax assets			$	—			$	—

 

In assessing the ability of the Company to realize the benefit of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the level of historical pre-tax income, as well as projections of future taxable income over the periods which deferred tax assets are deductible, management determined that it is more likely than not that the Company may not realize the net deferred tax assts recorded as of December 31, 2024. Accordingly, a valuation allowance of $3,727,000, an increase of approximately $582,000 from the valuation allowance of $3,145,000 as of  December 31, 2023, was recorded against net deferred tax assets as of  December 31, 2024.  The federal net operating loss carryforward amount is approximately $2,291,000 as of December 31, 2024 ($7,100,000 as of December 31, 2023) and has no expiration date. The Company has a New York state tax credit carryforward of approximately $198,000 as of  December 31, 2024 ($219,000 as of  December 31, 2023), which begins to expire in 2025.

 

There are no uncertain tax positions or unrecognized tax benefits for 2024 and 2023. The Company is subject to routine audits of its tax returns by the Internal Revenue Service and various state taxing authorities. The 2021 through 2024 federal and 2020 through 2024 state tax returns remain subject to examination.

 ​

9.    Commitments and Contingencies

 

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

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

On December 21, 2021, the Company’s former Chief Executive Officer (“Former CEO”) delivered his Notice of Termination and alleged that the Company breached the terms of the Employment Agreement between the Company and the Former CEO by, among others, placing the Former CEO on paid administrative leave in June 2021 pending an internal investigation. On December 22, 2021, the Board of Directors accepted the Former CEO’s resignation from the Company but rejected his request to treat his resignation as resignation for good reason under Paragraph 10 of his Employment Agreement. The Board also determined, based on the findings of its investigation that the Former CEO committed willful malfeasance in violation of his Employment Agreement, and that such willful malfeasance would have justified termination of employment pursuant to Paragraph 9 of the Employment Agreement, but for his earlier resignation. The Former CEO claims that he is entitled to a severance payment equal to 2.99 times his average annual compensation as set forth in the Employment Agreement, plus the reimbursement of certain expenses and the value of any lost benefits. During 2024, mediation efforts to resolve these disputes resulted in a good-faith settlement agreement between the Company and the Former CEO for approximately $570,000 in November 2024, payable over four years beginning in January 2025.  The settlement agreement does not impact the post-retirement benefits under the Former CEO's Employment Agreement.  The settlement amount of $570,000 combined with legal and payroll costs related to this matter, amounted to approximately $704,000 for the year ended  December 31, 2024, which is included in selling, general & administrative expenses.  There was no settlement amount recorded for the year ended  December 31, 2023.

 

During 2024, the Company entered into a settlement agreement with a particular customer regarding product liability costs and customer damages (the claim) resulting from non-conforming product shipped to the customer in prior years. The insurance carrier determined the claim was covered by the Company's aviation insurance for approximately $1,009,000 (insurance proceeds). The claim settlement (liability) of approximately $1,018,000 was remitted to the customer.  The claim has been settled as of December 31, 2024 (insurance proceeds receivable and a claims liability of $1,000,000 were recorded as of December 31, 2023).

 

On June 7, 2021, a Summons and Complaint was filed by an employee in the Supreme Court of the State of New York, County of Erie, against Servotronics, Inc., the Servotronics Board of Directors, The Ontario Knife Company and Kenneth D. Trbovich (collectively, the “Defendants”). The Complaint alleges certain violations under the New York Human Rights Law by the Defendants relating to the employee’s employment by the Company as well as intentional and negligent infliction of emotional distress. The Complaint also alleges certain purported derivative causes of action against all Defendants, including breach of fiduciary duties, fraud and corporate waste. The Complaint seeks monetary damages in an amount not less than $5,000,000 with respect to the direct causes of action and equitable relief with respect to the purported derivative causes of action. The Defendants filed a motion to dismiss the Complaint on August 6, 2021. On January 13, 2022, the Defendants’ motion to dismiss was granted, in part, and denied, in part. This litigation is still in its earliest stages. The Company is insured for such matters in the amount of $3 million with a retention of $250,000 for defense costs. During 2023, the Company met the retention amount, so defense costs are covered by insurance. Additionally, there is an excess coverage policy for $3 million that considers the retention payment from the primary insurance policy as the excess $3 million retention. Based on the information known by the Company as of the date of this filing, the Company does not consider the risk of loss to be probable and is unable to reasonably or accurately estimate the likelihood and amount of any liability that may be realized as a result of this litigation. Accordingly, no loss has been recognized in the accompanying financials statements related to this litigation. The Company is vigorously defending against this litigation.

 

There are no other legal proceedings currently pending by or against the Company that would have a material adverse effect on the business, cash flow, or earnings of the Company.

 ​

10.   Related Party Transactions

 

The Company paid legal fees and disbursements of approximately $0 and $8,000 in the years ended December 31, 2024 and 2023, respectively, for services provided by a law firm owned by a former member of the Company’s Board of Directors.  Additionally, as the Company no longer utilizes this firm, no accrued unbilled legal fees exist as of December 31, 2024.

 

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11.   Customer and Supplier Concentration

 

The Company’s revenues include significant concentration from a limited number of customers. Customer concentration for the years ended December 31, 2024 and 2023 included customers A, B, C, and D, which collectively accounted for approximately 86% and 90% of revenues, respectively. While the Company continues to pursue diversification of its customer base, the loss of, or significant reduction in business from, any of these major customers could have a material adverse effect on the Company’s financial condition, results of operations, and cash flows. The Company routinely assesses its relationships with major customers, including creditworthiness, market conditions, and competitive pressures, to mitigate risks associated with customer concentration. Despite these efforts, there can be no assurance that the Company will successfully reduce its dependence on any single customer in the future. The Company's foreign sales for the years ended December 31, 2024 and 2023 were approximately $11,385,000 and $12,129,000, respectively, and constitute a substantial part of the Company’s revenue.

 

The Company relies on a variety of suppliers for the procurement of raw materials, components, and services necessary for its operations. In the current year, no single supplier accounted for 10% of purchases. For the year ended December 31, 2023, supplier concentration included purchases from one supplier, accounting for approximately 10% of total purchases. While the Company actively manages its relationships with suppliers and seeks to diversify its supplier base, a disruption in the supply of goods or services from this major supplier could have a material adverse effect on the Company's operations and financial results. To mitigate the risks associated with supplier concentration, the Company engages in ongoing efforts to identify alternative sources of supply, assess supplier reliability and performance, and negotiate favorable contractual terms where feasible. However, there can be no assurance that the Company will be successful in reducing its dependence on any single supplier or mitigating the impact of supplier-related risks in the future.

 

12.   Segment Information

 

The Company designs and manufactures high-performance servo valves, including torque motors, hydraulic, and pneumatic valves. Its products are sold to commercial aerospace, government, medical, and industrial markets. The Company holds long-term contracts with prime defense contractors of the United States Government for military programs and original equipment manufacturers for commercial programs. For the years ended December 31, 2024 and 2023, domestic revenue accounted for approximately 75% and 72%, respectively, of total revenue, while revenue from international markets contributed the remaining portion. The Company manages its business activities on a consolidated basis and operates as one reportable segment.

 

The Company's Chief Executive Officer is the Chief Operating Decision Maker (“CODM”). The CODM evaluates the Company’s performance and allocates resources based on long-term strategic objectives, operational results, and financial forecasts. Key performance metrics utilized by the CODM include revenue, gross profit, and operating loss as stated on the face of the financials and serve as a primary measure for assessing the overall business performance and tracking budget versus actual results. Employee compensation and benefits includes wages, retirement benefits, medical costs, and other employee-related expenses that are part of cost of goods sold and operating expenses as shown below.  Other costs of goods sold include, but are not limited to, material costs, temporary labor costs, insurance, and manufacturing overhead costs consisting of utilities, supplies and facility expenditures. Professional & legal expenses include, but not limited to, outside counsel and legal settlement costs, consulting, and accounting and tax-related service fees.  Other operating expenses include, but are not limited to, insurance, Board fees, IT, marketing, and R&D costs.

 

		Year Ended
(in thousands)		December 31, 2024				December 31, 2023
Revenue		$	44,917			$	43,629
Compensation & benefits			19,355				18,586
Other costs of goods sold			17,296				17,238
Total costs of goods sold		$	36,651			$	35,824
Gross profit		$	8,266			$	7,805
Compensation & benefits		$	4,756			$	4,322
Professional & legal			1,844				1,984
Other operating expenses			2,675				3,612
Total operating expenses		$	9,275			$	9,918
Operating loss		$	(1,009	)		$	(2,113	)