Servotronics, Inc. :SVT-US: Earnings Analysis: Q2, 2017 By the Numbers : October 10, 2017

Servotronics, Inc. reports financial results for the quarter ended June 30, 2017.

Highlights

  • Summary numbers: Revenues of USD 9.62 million, Net Earnings of USD 0.11 million.
  • Gross margins narrowed from 28.77% to 18.41% compared to the same period last year, operating (EBITDA) margins now 3.92% from 15.99%.
  • Change in operating cash flow of -113.19% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

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

2017-06-30 2017-03-31 2016-12-31 2016-09-30 2016-06-30
Relevant Numbers (Quarterly)
Revenues (mil) 9.62 9.1 9.88 9.47 10.3
Revenue Growth (%YOY) -6.6 1.74 2.83 -2.51 11.4
Earnings (mil) 0.11 0.03 0.13 0.37 1
Earnings Growth (%YOY) -89.54 -89.92 -72.89 -50.81 61.67
Net Margin (%) 1.09 0.29 1.27 3.87 9.75
EPS 0.05 0.01 0.05 0.16 0.43
Return on Equity (%) 0.39 0.1 0.46 1.37 3.89
Return on Assets (%) 1.21 0.29 1.38 4.04 11.2

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, SVT-US’s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if SVT-US’s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by 5.64% and earnings by 303.85% compared to the previous period.

Earnings Growth Analysis

The company’s year-on-year decline in earnings was influenced by a weakening in gross margins from 28.77% to 18.41%, as well as issues with cost controls. As a result, operating margins (EBITDA margins) went from 15.99% to 3.92% in this time frame. For comparison, gross margins were 20.33% and EBITDA margins were 2.52% in the previous period.

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 decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 183.08 days, compared to last year’s level of 176.77 days.

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 year-on-year change in operating cash flow of -113.19% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 14.00% to 1.65% and (2) one-time items that contributed to a decrease in pretax margins from 13.93% to 1.55%

EBIT Margin History
PreTax Margin History

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Company Profile

Servotronics, Inc. engages in the design, development, and manufacture of components, systems and sub-systems. It operates through the Advanced Technology Group and Consumer Products Group segments. The Advanced Technology Group segment is the design, manufacture and marketing of servo-control components such as torque motors, control valves, actuators, and others. The Consumer Products Group segment specializes the design, manufacture, and marketing of a variety of cutlery products for use by consumers and government agencies. The company was founded by Nicholas D. Trbovich in 1959 and is headquartered in Elma, NY.

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