Star Equity Fund, LP (“Star Equity Fund” or “we”), a shareholder of Servotronics, Inc. (NYSE American: SVT) (“Servotronics” or “the Company”), seeks to unlock shareholder value and improve corporate governance at its portfolio companies. To that end, on March 2, 2022, Star Equity Fund announced its nomination of a diverse, highly qualified slate of director candidates for election at Servotronics to act in the best interests of all shareholders who have long suffered value destruction during the tenure of the Company’s incumbent board of directors.
Servotronics recently issued its fourth quarter and full year 2021 earnings release in which it touted record operating cash flow and year-end cash, lower operating costs, and net income growth.
The earnings release included statements that, in our view, are highly misleading.
Specifically, the Company claimed:
- “Reduced total operating costs and expenses in 2021,” however, SG&A for the full year 2021 of $9.4 million was the highest in the Company’s history in absolute terms and also the highest in its history as a percentage of revenue at 23.2%.
- “Record operating cash flow and year-end cash” as well as “net income growth,” but each of these metrics was principally driven by the receipt of $9.6 million of government funds via PPP loans and employee retention credits.
In reality, the Company’s core business struggled in 2021.
- The Company’s ATG division full year 2021 revenue declined 35% versus 2019 (its pre-COVID level) while the division’s fourth quarter 2021 revenue declined 44% versus the fourth quarter of 2019.
- The Company’s CPG division, as consistent with prior years, incurred operating losses in each quarter of 2021. The Company has not provided any guidance or a plan on how this division will improve.
The Company also noted in its earnings release that it is conducting a search for new independent directors. We see no reason to trust the incumbent board to name truly independent new directors to the board. They have lost that trust due to their terrible record of enabling former CEO Kenneth Trbovich, who has been sued for various counts of sexual harassment, infliction of emotional distress, breach of fiduciary duties, fraud, and corporate waste.
We want Servotronics to thrive.
Our mission is to liberate the Company’s clients, employees, and shareholders from the malfeasance of the Trbovich family and its enablers, namely the incumbent board members. To that end, we urge Servotronics to hold its 2022 Annual Meeting as soon as possible to let the shareholders, not the incumbent board, decide who represents them. Last year’s annual meeting was held on May 14, 2021, and the Company should schedule the 2022 Annual Meeting on a similar timeframe.
We have attempted to engage with the Company privately and constructively on reaching a negotiated resolution to the election contest in the best interest of shareholders, including by making a settlement proposal enabling an orderly transition in the composition of the board. We regret to report, however, that the Company has declined to respond to that offer or make any counter-proposals, instead informing us that the Company is in the process of selecting new directors on its own. As a result, the incumbent board is leaving us with no alternative but to proceed with our election contest, which we are fully prepared to do for the benefit of all shareholders.