Servotronics Q3 Earnings Decline Y/Y, Revenues Increase 7.3%

Servotronics SVT faced headwinds from operational and financial pressures within its aerospace and defense-focused business in third-quarter 2024. Despite achieving higher revenues through increased sales volume and price adjustments, the company's profitability struggled due to higher overhead costs, an unfavorable product mix and one-time expenses.

SVT also saw increased cost of goods sold and borrowing, putting additional strain on margins. As Servotronics continues its post-divestiture journey, the company is focused on aligning its operations with the aerospace and defense sector’s specialized demands while addressing cost containment and liquidity issues to drive profitability.

Q3 Results

Servotronics incurred a third-quarter 2024 loss per share from continuing operations of 18 cents against earnings of 7 cents in the prior-year quarter due to various operational challenges.

Total quarterly revenues of $12.4 million increased 7.3% from $11.6 million in the prior-year quarter due to increased sales volume and higher prices.

Quarterly earnings were affected by higher overhead costs and a less favorable product mix.

Servotronics, Inc. Price, Consensus and EPS Surprise

Servotronics, Inc. price-consensus-eps-surprise-chart | Servotronics, Inc. Quote

Gross Profit & Margins

Servotronics reported a gross profit of $2.27 million in third-quarter 2024, a 9.2% decrease from $2.50 million in third-quarter 2023. The gross margin for the third quarter of 2024 was 18.2%, down from 21.6% in the third quarter of 2023. The gross margin was affected by increased overhead costs and less contribution from research and development projects, slightly mitigated by higher prices and reduced prior-year product liability costs.

The operating margin for the reported quarter dropped significantly to -2.3% from a positive 2.4% in third-quarter 2023 due to one-time legal settlement expenses of $570,000.

Net loss was $0.5 million in the reported quarter, widening from a net loss of $0.2 million in third-quarter 2023. The wider net loss reflects legal settlement costs and higher interest expenses associated with the company’s line of credit, further impacting the bottom line.

Expenses

Servotronics’ cost of goods sold for third-quarter 2024 was $10.16 million, an 11.9% increase from $9.08 million in third-quarter 2023. This rise in COGS was driven by a less favorable product mix and increased overhead costs, which eroded the gross margin despite higher revenues.

Selling, general and administrative expenses declined 10.8% year over year to $1.98 million. The decrease stemmed from lower research and development, and legal expenses.

Cash, Debt & Capex

At the end of third-quarter 2024, cash and restricted cash were $196,000, down from $245,000 at the end of 2023. The line of credit usage rose year over year to $3.17 million, reflecting an increased reliance on credit amid operational challenges.

The company invested $933,000 in capital expenditure for the nine months ended Sept. 30 for machinery and building improvements, up from $606,000 in 2023.

Other Developments

In 2023, Servotronics divested its Consumer Products Group segment. The company is now focusing solely on advanced technology products in the aerospace and defense sectors. This strategic shift was aimed at aligning resources with its core competencies in servo-control components and similar technology products. This divestiture continues to impact operational results, and the company completed most wind-down activities related to the divested segment in third-quarter 2024.

In summary, while Servotronics achieved growth in top-line revenues, profitability was hindered by a lower gross margin, one-time legal settlement expenses and higher borrowing costs. Going forward, management must navigate ongoing aerospace sector challenges, cost containment and liquidity maintenance to achieve sustainable profitability.

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