SERVOTRONICS, INC. During the six months endedJune 30, 2022 and 2021, approximately 80% and 79%, respectively, of our consolidated revenues were derived from the ATG sale of product to a small base of customers. During the six months endedJune 30, 2022 and 2021, approximately 20% and 21%, respectively, of our consolidated revenues were derived from the CPG sale of product to a large base of retail customers. There was an increase in consolidated revenue in the six months endedJune 30, 2022 from 2021 of approximately$3,310,000 , or 17.3%. This is primarily due to an increase in price at both the ATG of approximately$391,000 and the CPG of approximately$379,000 , an increase in the number of units shipped at the ATG of approximately$2,479,000 and a favorable product mix shipped at the CPG of approximately$61,000 . Our commercial business is affected by such factors as uncertainties in today's global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, the effects and threats of terrorism, and market demand. The ATG engages its business development efforts in its primary markets and is broadening its activities to include new domestic and foreign markets that are consistent with its core competencies. We believe our business remains particularly well positioned in the strong commercial aircraft market driven by the recovery of business with increased demand post COVID, the replacement of older aircraft with more fuel efficient alternatives and the increasing demand for air travel in emerging markets. Although the ATG backlog continues to be strong, actual scheduled shipments may be delayed or changed as a function of our customers' final delivery determinations.
See also Note 10, Business Segments, of the accompanying consolidated financial statements for information concerning business segment operating results.
Business Environment
There still remains uncertainty resulting from the COVID-19 pandemic. The ultimate impact depends on the severity and duration of the pandemic, including emergence and spread of new COVID-19 variants and resurgences and actions taken by government authorities and other third parties in response to the pandemic.U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions. Disruptions in normal operating levels continue to create supply chain interruptions, volatility in commodity prices, credit and capital markets, and inflationary cost pressures within our end-markets. We continue to actively monitor the impact of the supply chain constraints, and anticipate the inflationary environment will continue throughout the remainder of 2022. We are focused on ensuring ample liquidity to meet our business needs. For the six months endedJune 30, 2022 , the impacts of COVID-19 have not been material. - 19 - Table of Contents Results of Operations The following table compares our consolidated statements of operations data for the three months and six months endedJune 30, 2022 and 2021 ($000 's omitted): ($000 's omitted except per share data) Three Months Ended June 30 2022 2021 2022 vs 2021 % of % of Dollar % Favorable/ Dollars Sales Dollars Sales Change (Unfavorable)
Revenues: Advanced Technology Group$ 8,748 77.9 %$ 7,823 78.0 %$ 925 11.8 % Consumer Products Group 2,482 22.1 % 2,205 22.0 % 277 12.6 % 11,230 100.0 % 10,028 100.0 % 1,202 12.0 % Cost of goods sold, inclusive of depreciation and amortization (10,062) 89.6 % (8,156) 81.3 % (1,906) (23.4) % Gross margin 1,168 10.4 % 1,872 18.7 % (704) (37.6) % Gross margin % 10.4 % 18.7 % Selling, general and administrative (2,071) 18.4 % (2,209) 22.0 % 138 6.2 % Total operating costs and expenses (12,133) 108.0 % (10,365) 103.4 % (1,768) (17.1) % Operating (loss)/income (903) 8.0 % (337) 3.4 % (566) (168.0) % Other income: employee retention credit (ERC) - 0.0 % 1,914 (19.1) % (1,914) (100.0) % Interest expense (74) (0.7) % (66) (0.7) % (8) (12.1) % Total other (expense)/income, net (74) (0.7) % 1,848 (18.4) % (1,922) (104.0) % (Loss) income before income taxes (977) (8.7) % 1,511 15.1 % (2,488) (164.7) % Income tax (benefit) provision (167) (0.7) % 325 (5.1) % (492) (151.4) % Net (loss)/income$ (810) (7.2) %$ 1,186 11.8 %$ (1,996) (168.3) % - 20 - Table of Contents ($000 's omitted except per share data) Six Months Ended June 30, 2022 2021 2022 vs 2021 % of % of Dollar % Favorable/ Dollars Sales Dollars Sales Change (Unfavorable) Revenues: Advanced Technology Group$ 17,916 80.0 %$ 15,046 78.8 %$ 2,870 19.1 % Consumer Products Group 4,482 20.0 % 4,042 21.2 % 440 10.9 % 22,398 100.0 % 19,088 100.0 % 3,310 17.3 % Cost of goods sold, inclusive of depreciation and amortization (18,592) 83.0 % (16,223) 85.0 % (2,369) (14.6) % Gross margin 3,806 17.0 % 2,865 15.0 % 941 32.8 % Gross margin % 17.0 % 15.0 % Selling, general and administrative (4,253) 19.0 % (4,182) 21.9 % (71) (1.7) % Total operating costs and expenses (22,845) 102.0 % (20,405) 106.9 % (2,440) (11.9) % Operating (loss)/income (447) (2.0) % (1,317) (6.9) % 870 66.1 % Other income: employee retention credit (ERC) - - 3,644 19.1 % (3,644) - Interest expense (144) (0.6) % (127) (0.7) % (17) (13.4) % Gain on sale of equipment 26 0.1 % - - 26 - Total other (expense)/income, net (118) (0.5) % 3,517
18.4 % (3,635) (103.4) %
(Loss) income before income taxes (565) (2.5) % 2,200 11.5 % (2,765) (125.7) % Income tax (benefit) provision (80) (0.4) % 473 2.5 % (553) (116.9) % Net (loss)/income$ (485) (2.2) %$ 1,727 9.0 %$ (2,212) (128.1) % Revenue Three months ended June 30, Six months ended June 30, ATG CPG Servotronics, Inc. ATG CPG Servotronics, Inc. ($000 's omitted) 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Revenues$ 8,748 $ 7,823 $ 2,482 $ 2,205 $ 11,230 $ 10,028 $ 17,916 $ 15,046 $ 4,482 $ 4,042 $ 22,398 $ 19,088 Cost of goods
sold (8,055) (6,242) (2,007) (1,914) (10,062)
(8,156) (14,870) (12,452) (3,722) (3,771) (18,592) (16,223)
Gross
margin 693 1,581 475 291 1,168 1,872 3,046 2,594 760 271 3,806 2,865 Gross margin % 7.9 % 20.2 % 19.1 % 13.2 % 10.4 % 18.7 % 17.0 % 17.2 % 17.0 % 6.7 % 17.0 % 15.0 % Consolidated revenues from operations increased approximately$1,202,000 or 12.0% for the three month period endedJune 30, 2022 when compared to the same period in 2021. This is due to the recovery of business within the commercial aircraft market of approximately$607,000 at the ATG and price increases of approximately$318,000 at the ATG and approximately$374,000 at the CPG. This is offset slightly by an unfavorable mix of the product shipped at the CPG of approximately$97,000 as compared to the same three month period endedJune 30, 2021 . Consolidated revenues from operations increased approximately$3,310,000 or 17.3% for the six month period endedJune 30, 2022 when compared to the same period in 2021. This is due to the recovery of business within the commercial aircraft market and an increase in price at the ATG of approximately$2,870,000 or 19.1% and a favorable product mix shipped and an increase in price at the CPG of approximately$440,000 or 10.9% for the six month period endedJune 30, 2022 when compared to the same period in 2021. - 21 -
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Both Segment's revenue improved for the three and six month periods of
Gross Margin
Consolidated gross margins from operations decreased approximately$704,000 or (37.6)% for the three month period endedJune 30, 2022 when compared to the same period in 2021. The gross margins decreased at the ATG by approximately$888,000 or (56.2)% partially offset by an increase at the CPG of approximately$184,000 or 63.2%. Gross margin benefited in the three month period from the recovery of business within the commercial aircraft market and favorable product mix shipped at the ATG of approximately$169,000 as well as price increases of approximately$318,000 . However, these were offset by increased production costs of approximately$537,000 for wages due to the discontinuation of theNew York State Shared Work Program in the second half of 2021, approximately$402,000 for acceleration of inventory obsolescence due to market changes, approximately$304,000 for a customer driven process change resulting in a one-time cost increase, and a net increase of approximately$132,000 for all other operating expenses as compared to the same period in 2021. Additionally, gross margin increased in the three month period due to a favorable product mix shipped at the CPG of approximately$277,000 and price increases of approximately$374,000 , partially offset by higher production costs of approximately$467,000 as compared to the same period in 2021. Consolidated gross margins from operations increased approximately$941,000 or 32.8% for the six month period endedJune 30, 2022 when compared to the same period in 2021. The gross margins increased at the ATG by approximately$452,000 or 17.4% and at the CPG by approximately$489,000 or 180.4%. Gross margin benefited in the six month period as a result of the recovery of business within the commercial aircraft market and favorable product mix shipped at the ATG of approximately$614,000 , price increases of approximately$391,000 and a net improvement of production efficiencies partially offset by the discontinuedNew York State Shared Work Program in the second half of 2021 of approximately$106,000 . These increases were partially offset by the acceleration of inventory obsolescence of approximately$659,000 as compared to the same period in 2021. Additionally, gross margin increased in the six month period due to a favorable product mix shipped at the CPG of approximately$419,000 and price increases of approximately$379,000 , partially offset by higher production costs of approximately$309,000 as compared to the same period in 2021. Since late-2020, both Segments have experienced the challenge of fully utilizing their production resources, increasing the cost per unit produced. Additionally, we have incurred increased costs of raw materials and shipping costs associated with the production of our products. The Segments have been closely monitoring all other purchases. Despite these challenges, the consolidated gross margin and gross margin percent for the first six month period of 2022 is higher than
the
same period in 2021.
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Selling, General and Administrative Expenses and Operating Losses
Three months ended June 30, Six months ended June 30,
ATG CPG Servotronics, Inc. ATG CPG Servotronics, Inc.
($000 's
omitted) 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
SG&A:
Selling,
general &
admin (1,575) (1,761) (496) (448) (2,071) (2,209) (3,349) (3,346) (904) (836) (4,253) (4,182)
Total
SG&A $ (1,575) $ (1,761) $ (496) $ (448) $ (2,071) $ (2,209) $ (3,349) $ (3,346) $ (904) $ (836) $ (4,253) $ (4,182)
% SG&A to
Revenues 18.0 % 22.5 % 20.0 % 20.3 % 18.4 % 22.0 % 18.7 % 22.2 % 20.2 % 20.7 % 19.0 % 21.9 %
Operating
Loss $ (882) $ (180) $ (21) $ (157) $ (903) $ (337) $ (303) $ (752) $ (144) $ (565) $ (447) $ (1,317)
Operating
Loss % (10.1) % (2.3) % (0.8) % (7.1) % (8.0) % (3.4) % (1.7) % (5.0) % (3.2) % (14.0) % (2.0) % (6.9) %
Selling, general and administrative expenses (SG&A) decreased approximately$138,000 or 6.2% for the three month period endedJune 30, 2022 when compared to the same period in 2021. The improvement is driven by the ATG due to lower legal and professional services fees of approximately$56,000 and a reversal of bad debt reserves of approximately$60,000 , with all other SG&A expenses netting to a decrease of approximately$22,000 as compared to the three month period endedJune 30, 2021 . Selling, general and administrative expenses (SG&A) increased approximately$71,000 or 1.7% for the six month period endedJune 30, 2022 when compared to the same period in 2021. The increase is due to higher legal and professional services fees at the ATG of approximately$145,000 and trade shows, travel and meals expenditures at the CPG of approximately$94,000 partially offset by lower compensation at both segments of approximately$168,000 as compared to the same period in 2021.
Despite the increase in consolidated SG&A expenses in the six month period, the percentage to revenue is lower due to higher revenue at both Segments.
Operating Losses
Losses from operations increased approximately$566,000 or 168.0% when compared to the three month period endedJune 30, 2022 to the same period in 2021. Losses from operations decreased approximately$870,000 or 66.1% when compared to the six month period endedJune 30, 2022 to the same period in 2021. The consolidated improvement in the operating losses for the first six months is discussed above. - 23 - Table of Contents Other (Expense)/Income: Three months ended June 30, Six months ended June 30, ATG CPG Servotronics, Inc. ATG CPG Servotronics, Inc. ($000 's omitted) 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Other (Expense)/Income: ERC $ -$ 1,573 $ -$ 341 $ -$ 1,914 $ -$ 2,986 $ -$ 658 $ -$ 3,644 Interest expense (74) (65) - (1) (74) (66) (144) (125) - (2) (144) (127) Gain sale of equipment - - - - - - 26 - - - 26 - Total other (expense)/income, net$ (74) $ 1,508 $ -$ 340 $ (74) $ 1,848 $ (118) $ 2,861 $ -$ 656 $ (118) $ 3,517 (Loss)/income before income tax provision (benefits)$ (956) $ 1,328 $ (21) $ 183 $ (977)
(10.9) % 17.0 % (0.8) % 8.3 % (8.7) % 15.1 % (2.3) % 14.0 % (3.2) % 2.3 % (2.5) %
11.5 %
As discussed in our Annual Report on Form 10-K, the Company qualified for the Employee Retention Credit (ERC) for all quarters allowed under the Federal Government program.The Infrastructure Investment and Jobs Act of 2021, enactedNovember 15, 2021 terminated the employee retention credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses.
As a result, for the three month and six month periods ended
Interest Expense
Interest expense increased by 12.1% and 13.4% in the three and six month periods
ended
This is primarily due to the increase in interest recognized for postretirement benefits offset by the elimination of the interest for the paydown of our term loans as ofDecember 2021 . See also Note 5, Long-Term Debt, of the accompanying consolidated financial statements for information on long-term debt.
Income before Income Taxes
Consolidated income before income taxes for the three month period endedJune 30, 2022 decreased approximately$2,488,000 when compared to the same period in 2021. The consolidated decrease is primarily the result of the elimination of the ERC credit and increases in the COGS at the ATG segment offset slightly by improved revenues at both Segments and improved operating performance at the CPG segment. The consolidated income before income taxes for the six month period endedJune 30, 2022 decreased approximately$2,765,000 or (125.7)% when compared to the same period in 2021. The consolidated decrease is primarily the result of the elimination of the ERC credit and increases in the SG&A offset slightly by improved revenues and operating performance at the CPG segment.
Net (Loss) Income
Net income for the three month period ended
The consolidated decrease is primarily the result of the elimination of the ERC credit and increases in the COGS at the ATG segment, offset slightly by improved revenues at both Segments and improved operating performance at the CPG segment.
Net income for the six month period ended
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elimination of the ERC credit and increases in the SG&A offset slightly by improved revenues and operating performance at the CPG segment.
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