svt20250331_10q.htm

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2025

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-07109

SERVOTRONICS, INC.

(Exact name of registrant as specified in its charter)

Delaware	16-0837866
(State or other jurisdiction of incorporation or organization)	(I. R. S. Employer Identification No.)

1110 Maple Street

Elma, New York 14059

(Address of principal executive offices) (zip code)

(716) 655-5990

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Ticker symbol(s)	Name of each exchange on which registered
Common Stock	SVT	NYSE American

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒

No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒

No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐

No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 17, 2025
Common Stock, $.20 par value		2,556,502

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INDEX

			Page No.

	PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements (Unaudited):

		a) Condensed Consolidated Balance Sheets, March 31, 2025 and December 31, 2024 (Audited)	3

		b) Condensed Consolidated Statements of Operations for the three-months ended March 31, 2025 and 2024	4

		c) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three-months ended March 31, 2025 and 2024	5

		d) Condensed Consolidated Statements of Cash Flows for the three-months ended March 31, 2025 and 2024	6

		e) Notes to Condensed Consolidated Financial Statements	7

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.		Controls and Procedures	27

	PART II. OTHER INFORMATION

Item 1.		Legal Proceedings	28

Item 1A.		Risk Factors	28

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.		Defaults Upon Senior Securities	28

Item 4.		Mine Safety Disclosures	28

Item 5.		Other Information	28

Item 6.		Exhibits	28

Forward-Looking Statements			29

Signatures			30

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share data)

	*March 31,*			*December 31,*
	*2025*			*2024*
	(Unaudited)			(Audited)
Current Assets:
Cash	$	37		$	111
Cash, restricted		150			150
Accounts receivable, net		11,362			9,288
Inventories, net		15,488			15,826
Prepaid and other current assets		1,142			968
Assets related to discontinued operation		1,450			1,436
Total current assets		29,629			27,779

Property, plant and equipment, net		7,031			7,005
Other non-current assets		48			48
Total Assets	$	36,708		$	34,832

Liabilities and Shareholders' Equity

Current Liabilities:
Line of credit	$	3,725		$	2,127
Current portion of post-retirement obligation		84			84
Accounts payable		2,737			2,413
Accrued employee compensation and benefits costs		794			705
Accrued warranty		337			333
Other accrued liabilities		851			1,170
Liabilities related to discontinued operation		23			23
Total Current Liabilities		8,551			6,855

Long-Term Liabilities:
Post-retirement obligation		4,121			4,097
Post-retirement obligation, current		(84	)		(84	)
Post-retirement obligation, net		4,037			4,013
Other long-term liabilities		425			460
Total long-term liabilities		4,462			4,473

Shareholders' Equity:
Common stock, par value $0.20; 4,000,000 shares authorized; 2,629,052 shares issued; 2,544,246 shares outstanding (2,537,753 shares outstanding as of December 31, 2024)		526			526
Capital in excess of par value		14,862			14,828
Retained earnings		11,459			11,331
Accumulated other comprehensive loss		(2,042	)		(2,059	)
Treasury stock, at cost 69,020 shares (75,513 shares as of December 31,2024)		(1,110	)		(1,122	)
Total shareholders' equity		23,695			23,504
Total Liabilities and Shareholders' Equity	$	36,708		$	34,832

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share data)

(Unaudited)

	*Three Months Ended*
	*March 31,*
	*2025*			*2024*

Revenue	$	11,703		$	10,446
Costs of goods sold		9,343			8,711
Gross profit		2,360			1,735

Selling, general and administrative		2,118			2,018

Operating income (loss)		242			(283	)

Interest & other expense, net		97			83

Income (loss) from continuing operations before income taxes		145			(366	)

Income tax expense		-			-
Income (loss) from continuing operations, net of tax		145			(366	)

Loss from discontinued operation before income taxes		(17	)		(17	)
Loss from discontinued operation, net of tax (see Note 2)		(17	)		(17	)

Net income (loss)	$	128		$	(383	)

Basic and diluted income (loss) per share:
Continuing operations	$	0.06		$	(0.15	)
Discontinued operation		(0.01	)		(0.01	)
Basic and diluted income (loss) per share	$	0.05		$	(0.16	)

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

	*Three Months Ended*
	*March 31,*
	*2025*		*2024*

Net income (loss)	$	128	$	(383	)

Other comprehensive income items:
Actuarial gains		17		19
Total		17		19

Total comprehensive income (loss)	$	145	$	(364	)

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	*Three Months Ended*
	*March 31,*
	*2025*			*2024*
Cash flows related to operating activities:
Income (loss) from continuing operations	$	145		$	(366	)
Adjustments to reconcile income (loss) from continuing operations to net cash (used) provided by operating activities:
Depreciation and amortization		218			271
Stock based compensation		46			63
(Decrease) increase allowance for credit losses		(3	)		3
(Decrease) increase inventory reserve		(6	)		38
Increase (decrease) warranty reserve		4			(59	)
Changes in assets and liabilities (using) providing cash:
Accounts receivable		(2,071	)		1,589
Inventories		344			(769	)
Prepaid and other current assets		(174	)		(412	)
Accounts payable		324			77
Accrued employee compensation and benefit costs		89			(164	)
Other accrued liabilities		(378	)		118
Post-retirement obligations		41			24
Other long-term liabilities		(168	)		-
Net cash (used) provided by operating activities from continuing operations		(1,589	)		413

Cash flows related to investing activities:
Purchase of property, plant and equipment		(69	)		(152	)
Disposal of property, plant and equipment		17			-
Net cash used by investing activities from continuing operations		(52	)		(152	)

Cash flows related to financing activities:
Proceeds from (payments on) line of credit, net		1,598			(94	)
Net cash provided (used) by financing activities from continuing operations		1,598			(94	)

Discontinued Operation
Cash used by operating activities		(31	)		(126	)
Net cash used by discontinued operation		(31	)		(126	)

Net (decrease) increase in cash and restricted cash		(74	)		41
Cash and restricted cash at beginning of period		261			245
Cash and restricted cash at end of period	$	187		$	286

See notes to condensed consolidated financial statements

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Operations and Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

Servotronics, Inc. (“Servotronics”) and its subsidiaries (“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.

The condensed consolidated financial statements currently include the accounts of Servotronics, The Ontario Knife Company ("OKC"), 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.

The Company executed an Asset Purchase Agreement (“APA”) with a third party to sell certain assets of OKC, which transaction 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 Condensed Consolidated Statements of Operations, and assets and liabilities are reflected as “Assets and Liabilities related to Discontinued Operation” in the Condensed Consolidated Balance Sheets. The “Loss from Discontinued Operation, net of tax” is included in the net income or net loss on the Condensed Consolidated Statements of Comprehensive Income (Loss), and the cash used by operating activities from the discontinued operation is included in the “Discontinued Operation” section of the Condensed Consolidated Statements of Cash Flows.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited Condensed Consolidated Financial Statements (“consolidated financial statements”) have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Operating results for the three-months ended March 31, 2025, are not necessarily indicative of the results that may be expected for the year ending December 31, 2025. The consolidated financial statements should be read in conjunction with the 2024 annual report and the notes thereto.

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. Refer to Note 2 “Discontinued Operation and Assets and Liabilities Related to Discontinued Operation”, for further discussion on the discontinued operation.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cash and Restricted Cash

The following table provides a reconciliation of cash and restricted cash to the amounts in the balance sheet:

	*March 31,*		*December 31,*
(in thousands)	*2025*		*2024*
Cash	$	37	$	111
Restricted cash		150		150
Total cash and restricted cash	$	187	$	261

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 March 31, 2025 and December 31, 2024 represents collateral with a financial institution.

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 allowance for credit losses was approximately $12,000 as of March 31, 2025 and $15,000 as of December 31, 2024, 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. 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.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 are 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 our 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 March 31, 2025, and December 31, 2024 under the guidance of ASC 460, the Company has recorded a warranty reserve of approximately $337,000 and $333,000, 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 are provided below:

	*Three Months Ended*
(in thousands)	*March 31, 2025*		*March 31, 2024*
Domestic	$	8,243	$	7,786
International		3,460		2,660
Total Revenue	$	11,703	$	10,446

Inventories

Inventories are stated at the lower of cost or net realizable value, with any adjustments reflected as a reduction to finished goods inventory. Cost includes all costs incurred to bring each product to its present location and condition. Inventory reserves consist of obsolete and/or slow-moving items based on inventory levels in excess of forecasted sales activity and have increased due to the reserve methodologies. These reserves are applied to the gross value of the inventory and are approximately $752,000 and $758,000 as of March 31, 2025 and December 31, 2024, respectively. Pre-production and start-up costs are expensed as incurred.

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.

Shipping and Handling Costs

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

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Condensed Consolidated Balance Sheets as of March 31, 2025 or December 31, 2024, and did not recognize any interest and/or penalties in its Condensed Consolidated Statements of Operations during the three-month periods ended March 31, 2025, and 2024. The Company did not have any material uncertain tax positions or unrecognized tax benefits or obligations as of March 31, 2025 and December 31, 2024. 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

There was no income taxes paid or received for the three-month periods ended March 31, 2025 and 2024. Interest paid during the three-month periods ended March 31, 2025, and 2024 was approximately $57,000 and $45,000 respectively. The Company secured a $192,000 loan to purchase IT equipment, which is included in other accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets.

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.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 March 31, 2025, which primarily includes the Company’s tangible real (land and building) and personal (machinery & equipment) properties associated with its continuing operations.

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 expense on the Condensed 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.

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 does not believe the adoption of ASU 2023-09 will have a material impact on its Condensed Consolidated financial statements or 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 ASU 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 11 for further information on the Company's reportable segment.

There have been no additional new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, that are of significance, or potential significance, to the Company.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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” definition 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 Condensed Consolidated Balance Sheets as of March 31, 2025 and December 31, 2024. In addition, OKC’s operating loss, divestiture costs, and impairment charges on long-lived assets were reclassified to “Loss from Discontinued Operation, net of tax” in the Condensed Consolidated Statements of Operations for the three-months period ended March 31, 2025 and 2024.

Under the terms of the Asset Purchase Agreement, the Company sold inventory, machinery & equipment and intellectual property (patents & trademarks/tradenames) to a third party on August 1, 2023. As a direct result of Management’s decision to sell OKC’s assets, divest the operations, and exit the CPG business segment, the Company incurred impairment charges on its long-lived asset (building) in 2023 based on independent, third-party appraisals (less estimated costs to sell). No impairment charges were incurred for the three-month period ended March 31, 2025

Operating loss from the discontinued operation was approximately $17,000 and $25,000 for the three-month periods ended March 31, 2025 and 2024, respectively. Divestiture and impairment costs were $0 and approximately ($8,000) the three-month periods ended March 31, 2025 and 2024, respectively.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Discontinued Operation Financial Information

Consolidated Statements of Operations are as follows:

	*Three Months Ended*
(in thousands)	*March 31, 2025*			*March 31, 2024*

Operating costs	$	(17	)	$	(25	)
Loss from discontinued operation		(17	)		(25	)
Gain from discontinued operation - impairment and divestiture recovery costs		-			8
Loss from discontinued operation before income taxes		(17	)		(17	)
Loss from discontinued operation, net of tax	$	(17	)	$	(17	)

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 Condensed Consolidated Balance Sheets, are as follows:

	*March 31,*		*December 31,*
(in thousands)	*2025*		*2024*

Prepaid and other assets	$	22	$	8
Building, net of estimated costs to sell		1,428		1,428
Assets related to discontinued operation	$	1,450	$	1,436

Accounts payable	$	23	$	23
Liabilities related to discontinued operation	$	23	$	23

The Company is actively marketing the building for sale using a commercial real estate broker with a selling price equals its appraised value. To date, no events have occurred that would trigger further impairment, and Management expects to sell the real property within the next twelve months. Most of the remaining assets and liabilities are expected to be expensed or settled in 2025, as divestiture and wind-down activities are substantially complete.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.	Inventories

	*March 31,*			*December 31,*
(in thousands)	*2025*			*2024*

Raw material and common parts	$	8,192		$	8,044
Work-in-process		7,164			7,072
Finished goods		884			1,468
		16,240			16,584
Less inventory reserve		(752	)		(758	)
Inventories, net	$	15,488		$	15,826

4.	Property, Plant and Equipment

	*March 31,*			*December 31,*
(in thousands)	*2025*			*2024*

Buildings and building improvements	$	9,045		$	9,020
Machinery, equipment and tooling		15,803			15,768
Construction in progress		400			216
		25,248			25,004
Less accumulated depreciation and amortization		(18,217	)		(17,999	)
Property, plant and equipment, net	$	7,031		$	7,005

Depreciation and amortization expense amounted to approximately $218,000 and $271,000 for the three-month periods ended March 31, 2025 and 2024, respectively. Amortization expense related to Right of Use (“ROU”) assets amounted to approximately $6,000 for the three-month periods ended March 31, 2025 and 2024, respectively.

The Company’s ROU assets included in machinery, equipment and tooling had a net book value of approximately $130,000 and $136,000 as of March 31, 2025 and December 31, 2024, respectively.

As of March 31, 2025, there is approximately $400,000 ($216,000 as of December 31, 2024) of construction in progress included in property, plant and equipment; all of which is related to capital projects for machinery and equipment of $104,000, building improvements of $71,000, and IT equipment of $225,000.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.	Indebtedness

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 $3,725,000 and $2,127,000 as of March 31, 2025 and December 31, 2024, respectively. The interest rate on the Credit Facility is equal to the greater of 8.0% or the prime rate (as defined by JP Morgan Chase) plus 1.0% (8.5% as of March 31, 2025 and December 31, 2024). 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 Acceleration 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 has met both covenant requirements as of March 31, 2025 and December 31, 2024, respectively.

On January 17, 2025, the Company entered into a three-year equipment loan financing agreement with a lending institution in the amount of $192,000. Monthly payments are fixed at an interest rate of 8.09%. The outstanding balance is approximately $182,000 as of March 31, 2025. Principal maturities of long-term debt related to the financing agreement are approximately: 2025 $44,000; 2026 $63,000; 2027 $69,000; and 2028 $6,000. The current portion of $64,000 is included in other accrued liabilities and the remainder of $118,000 is included in other long-term liabilities as of March 31, 2025.

6.	Postretirement Benefit Plan

The Company provides certain postretirement health and life insurance benefits ("the Plan") for two former executives (“retirees”) of the Company. Upon ceasing employment, the Plan 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 $4,121,000 and $4,097,000 as of March 31, 2025 and December 31, 2024, respectively. Benefit costs for the three-month periods ended March 31, 2025, and 2024 were $66,000 and $73,000, respectively.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.	Shareholders’ Equity

	*Three Months Ended March 31, 2025*
			Accumulated
			Other					Capital in							Total
	Retained		Comprehensive			Common		Excess of				Treasury			Shareholders'
(in thousands)	Earnings		Loss			Stock		Par Value		ESOT		Stock			Equity

December 31, 2024	$	11,331	$	(2,059	)	$	526	$	14,828	$	-	$	(1,122	)	$	23,504

Retirement benefits adjustment		-		17			-		-		-		-			17
Stock based compensation		-		-			-		34		-		12			46
Net Income		128		-			-		-		-		-			128

March 31, 2025	$	11,459	$	(2,042	)	$	526	$	14,862	$	-	$	(1,110	)	$	23,695

	*Three Months Ended March 31, 2024*
				Accumulated
				Other					Capital in								Total
	Retained			Comprehensive			Common		Excess of					Treasury			Shareholders'
(in thousands)	Earnings			Loss			Stock		Par Value		ESOT			Stock			Equity

December 31, 2023	$	12,954		$	(2,389	)	$	525	$	14,617	$	(56	)	$	(1,157	)	$	24,494

Retirement benefits adjustment		-			19			-		-		-			-			19
Stock based compensation		-			-			-		44		-			19			63
Net Loss		(383	)		-			-		-		-			-			(383	)

March 31, 2024	$	12,571		$	(2,370	)	$	525	$	14,661	$	(56	)	$	(1,138	)	$	24,193

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Share

Basic earnings per share is computed by dividing net earnings by the weighted average number of common 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 earnings by the weighted average number of common 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 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.

	*Three Months Ended*
	*March 31,*
(in thousands)	*2025*			*2024*

Income (loss) from continuing operations	$	145		$	(366	)
Loss from discontinued operation		(17	)		(17	)
Net income (loss)	$	128		$	(383	)

Weighted average common shares outstanding (basic)		2,520			2,490
Unvested restricted stock		22			29
Weighted average common shares outstanding (diluted)		2,542			2,519

Basic and diluted income (loss) earnings per share:
Continuing operations	$	0.06		$	(0.15	)
Discontinued operation		(0.01	)		(0.01	)
Basic and diluted income (loss) per share	$	0.05		$	(0.16	)

Stock-Based Compensation

The Company’s 2022 Equity Incentive Plan (“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 common shares.

The Company’s executive compensation program established by the Board of Directors (Board) determines the type of awards available to the Company’s executives. The program consists of a cash incentive plan and a long-term incentive plan (“LTIP”) that are awarded annually. The LTIP includes service-based (restricted) share awards that vest annually over three years, and performance-based (restricted) share awards that cliff-vest based on the achievement of a financial metric over a specified three-year period.

On February 19, 2025, 6,493 service-based shares were granted to Company executives under the 2025-2027 LTIP Stock Award. On March 26, 2024, 7,180 service-based shares were granted to Company executives under the 2024-2026 LTIP Stock Award.

The Company’s director compensation policy provides that non-employee directors receive a portion of their annual retainer in the form of restricted 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.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of restricted (service-based) share awards granted is presented below:

				Weighted Average
				Grant Date Fair
	Shares			Value
Service-Based Share Activity:
Unvested at December 31, 2024		17,976		$	11.96
Granted in 2025		6,493		$	10.26
Vested in 2025		(1,996	)	$	12.53
Unvested at March 31, 2025		22,473		$	11.42

Included in the three-month periods ended March 31, 2025, and 2024 is approximately $46,000 and $63,000, respectively, of stock-based compensation expense related to the service-based and director share awards. The Company has approximately $169,000 of stock-based compensation expense related 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 share awards with shares of common stock.

On February 19, 2025, 19,482, performance-based share awards (at target) were granted to Company executives under the 2025-2027 LTIP Stock Award at a grant date fair value of $10.26 per share. On March 26, 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. 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 status of performance-based share awards granted is presented below:

			Weighted Average
			Grant Date Fair
	Shares		Value
Performance-Based Share Activity:
Unvested at December 31, 2024		33,205	$	12.04
Granted in 2025		19,482	$	10.26
Vested in 2025		-	$	-
Unvested at March 31, 2025		52,687	$	11.38

No stock-based compensation expense related to performance-based share awards is included in the three-month periods ended March 31, 2025, and 2024, as the probability of achieving the financial metric required for vesting and issuance of the share awards is deemed not probable for the 2023-2025, 2024-2026, and 2025-2027 LTIP Stock Awards granted to executives. The maximum potential stock-based compensation expense for the performance-based share awards under the 2023-2025, 2024-2026, and 2025-2027 LTIP Stock Awards is approximately $1,200,000.

8.	Income Taxes

The income tax expense in the Condensed Consolidated Statements of Operations is $0 for both the three-month periods ended March 31, 2025 and 2024, due to the valuation allowance recorded against the net deferred tax assets. The valuation allowance was initially recorded in 2023 based on management's determination that is more likely than not that the Company will not realize the net deferred tax assets in the future.

The effective tax rate is 0% for both the three-month periods ended March 31, 2025 and 2024. The difference between the statutory rate of 21% and the effective tax rate expense of 0% for both the three-month periods ended March 31, 2025 and 2024, is due to the valuation allowance recorded against the deferred tax assets, as noted.

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SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

In November 2024, the Company settled a dispute related to the terms of the Former CEO's Employment Agreement for approximately $570,000, payable annually over four years beginning in January 2025. The remaining liability of approximately $459,000 is included in other current and long-term liabilities as of March 31, 2025. The settlement does not impact the post-retirement benefit obligations under the Former CEO's Employment Agreement.

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.

Customer and Supplier Concentration

The Company’s revenues include significant concentration from a limited number of customers. Customer concentration for the three-month periods ended March 31, 2025 and 2024 included customers A, B, C, and D, which collectively accounted for approximately 84% and 86% 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 three-month periods ended March 31, 2025 and 2024 were approximately $3,460,000 and $2,660,000, 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. For the period ended March 31, 2025, no single supplier accounted for 10% of purchases. For the period ended March 31, 2024, 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.

11.

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. During the three-month periods ended March 31, 2025, and March 31, 2024, domestic revenue accounted for approximately 70% and 75%, 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 profit (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 are 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.

	*Three Months Ended*
(in thousands)	*March 31, 2025*		*March 31, 2024*

Revenue	$	11,703	$	10,446

Compensation & benefits		4,998		4,818
Other costs of goods sold		4,345		3,893
Total costs of goods sold		9,343		8,711

Gross profit		2,360		1,735

Compensation & benefits		1,151		1,155
Professional & legal		429		255
Other operating expenses		538		608
Total operating expenses		2,118		2,018

Operating income (loss)	$	242	$	(283	)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed 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 design and manufacture high performance servo-valves ("servo-control business") and are a strategic partner in the aerospace industry. 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 to the commercial aerospace, government, medical, and industrial markets.

The Company established its corporate and management reporting structure to focus solely on the servo-control business 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 our servo-control business, the continuing operations, unless otherwise noted.

Commercial Aerospace Market

The commercial aerospace market, while still recovering from supply chain disruptions, has shown signs of progress and increased certainty of airframe manufacturers' plane deliveries. In addition, the industry continues to benefit from strong demand for air travel, ongoing fleet modernization, and advances in aircraft design and production. Although industry challenges remain, their impact has begun to ease. Commercial airplane deliveries from original equipment manufacturers are stabilizing, and previously elevated inventory levels, customer rescheduling, and delivery deferrals are showing signs of improvement and positivity impacted our results for the first quarter of 2025.

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Business Development Strategy

Our business development strategy 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

The first quarter of 2025 marked a solid start to 2025 for the Company, reflecting improved industry conditions and the successful execution of our strategic initiatives designed to develop long-term sustainable growth and profitability. We experienced a notable increase in revenue, driven by robust demand in both commercial and defense sectors. Gross profit margins continued to improve, benefiting from enhanced operational efficiencies and a more favorable product mix. While Selling, General & Administrative (SG&A) expenses rose slightly due to expenses associated with the engagement of an investment bank to review strategic alternatives for the Company, as well as proxy solicitation costs, our disciplined operating cost management ensured that operating income expanded at a healthy rate. Net income also saw a substantial uptick, supported by improved operating performance and a stable interest rate environment.

Results of Operations

The following table compares the Company’s Consolidated Statements of Operations data for the three-month periods ended March 31, 2025, and 2024:

	Three Months Ended March 31,
(dollars in thousands)	2025					2024					2025 vs 2024
					%					%	$				%
	Dollars		Sales			Dollars		Sales			Change		Change
Revenues	$	11,703		100.0	%	$	10,446		100.0	%	$	1,257		12.0	%
Costs of goods sold		9,343		79.8	%		8,711

SEC Form 10-Q filed by Servotronics Inc.