Servotronics, Inc. :SVT-US: Earnings Analysis: 2016 By the Numbers : March 20, 2017

Servotronics, Inc. reports financial results for the year ended December 31, 2016.

We analyze the earnings along side the following peers of Servotronics, Inc. – Lifetime Brands, Inc., Allied Motion Technologies Inc., Sevcon, Inc., Nidec Corporation Sponsored ADR, Regal Beloit Corp, Generac Holdings Inc. and Acme United Corporation (LCUT-US, AMOT-US, SEV-US, NJDCY-US, RBC-US, GNRC-US and ACU-US) that have also reported for this period.

Highlights

  • Gross margins widened from 22.79% to 23.84% compared to the same period last year, operating (EBITDA) margins now 8.69% from 7.97%.
  • Year-on-year change in operating cash flow of 98.29% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings declined although operating margins improved from 6.01% to 6.56%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016 2015 2014 2013 2012
Relevant Numbers (Annual)
Revenues 38.59 36.73 31.65 30.31 30.51
Revenue Growth (YOY) N/A N/A N/A N/A N/A
Earnings 1.75 4.6 -3.13 0.98 1.65
Earnings Growth (YOY) -61.87 247.06 -420.62 -40.8 -37.28
Net Margin 4.54 12.52 -9.88 3.22 5.4
EPS 0.76 2.03 -1.38 0.43 0.47
Return on Equity 6.67 19.85 -14.01 4.15 7.08
Return on Assets 4.96 13.21 -9.58 3.29 5.52

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Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from 22.79% to 23.84%, while operating margins improved from 7.97% to 8.69% over this period. For comparison, gross margins were 22.79% and EBITDA margins 7.97% in the immediate last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

SVT-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 193.57, compared to last year’s level of 177.44 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

SVT-US‘s change in operating cash flow of 98.29% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

Despite an overall improvement in operating (EBIT) margins, the company’s earnings fell. EBIT margins went from 6.01% to 6.56%. The decline in earnings appears to be largely because of one-time items. Pretax margins declined from 18.32% to 6.40%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Servotronics, Inc. engages in the design, manufacture and marketing of control components, knives, cutlery and other edged products. It operates through the Advanced Technology Group (ATG) and Consumer Products Group (CPG). The Advanced Technology Group segment designs, manufactures and markets a variety of servo-control components. The Consumer Products Group segment designs, manufactures and sells cutlery products used by the consumers and government agencies. The company was founded by Nicholas D. Trbovich in 1959 and is headquartered in Elma, NY.

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