● | acquisitions could create demands on our management, operational resources and financial and internal control systems that we are unable to effectively address; | |
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Future claims, litigation and regulatory actions could adversely affect our financial condition and our ability to conduct our business.
While we strive to ensure that our products comply with applicable government regulatory standards and internal requirements and that our products perform effectively and safely, customers from time to time could claim that our products do not meet contractual requirements, and users could be harmed by use or misuse of our products. This could give rise to breach of contract, warranty or recall claims, or claims for negligence, product liability, strict liability, personal injury or property damage. Product liability insurance coverage may not be available or adequate in all circumstances. In addition, claims may arise related to patent infringement, environmental liabilities, distributor terminations, commercial contracts, antitrust or competition law, employment law and employee benefits issues and other regulatory matters. While we have in place processes and policies to mitigate these risks and to investigate and address such claims as they arise, we cannot predict the underlying costs to defend or resolve such claims.
Our business operations could be significantly disrupted by the loss of any members of our senior management team and segment leaders.
Our success depends to a significant degree upon the continued contributions of our senior management team and segment leaders. Our senior management team has extensive marketing, sales, manufacturing, finance and engineering experience, and we believe that the depth of our management team is instrumental to our continued success. The loss of any of our key managers in the future could significantly impede our ability to successfully implement our business strategy, financial plans, expansion of services, marketing and other objectives.
A significant disruption in, or breach in security of, our information technology systems or data could adversely affect our business, reputation and results of operations.
We rely on information technology systems to process, transmit and store electronic information (including sensitive data such as confidential business information and personally identifiable data relating to employees and customers), and to manage or support a variety of critical business processes and activities (such as receiving and fulfilling orders, billing, collecting and making payments, shipping products and fulfilling contractual obligations). These systems may be damaged, disrupted or shut down due to attacks by computer hackers, computer viruses, ransomware, human error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. Security breaches could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, customers or suppliers. Our information technology systems may be exposed to computer viruses, malicious codes, unauthorized access and other cyber-attacks and we expect the sophistication and frequency of such attacks to continue to increase. Any of the attacks, breaches or other disruptions or damage described above could interrupt our operations or the operations of our customers, delay production and shipments, result in theft of our and our customers’ intellectual property and trade secrets, damage customer and employee relationships and our reputation or result in defective products, legal claims and proceedings, liability and penalties under privacy laws and increased costs for security and remediation, each of which could adversely affect our business, reputation and results of operations.
General Risk Factors
We are engaged in highly competitive industries and if we are unable to compete effectively, we may experience decreased demand and decreased market share.
Our businesses operate in industries that are highly competitive. In order to compete effectively, we must retain longstanding relationships with major customers and continue to grow our business by establishing relationships with new customers, continually developing new products to maintain and expand our brand recognition and position in various product categories and penetrating new markets, including high-growth markets. Our failure to compete effectively and/or pricing pressures resulting from competition may adversely impact our financial results.
Adverse credit market conditions may significantly affect our access to capital, cost of capital and ability to meet liquidity needs.
Disruptions, uncertainty or volatility in the credit markets may adversely impact our ability to access credit already arranged and the availability and cost of credit to us in the future. These market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to grow and maintain our business. Accordingly, we may be forced to delay raising capital or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility. Longer-term disruptions in the capital and credit markets as a result of the uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures include deferring capital expenditures or other discretionary uses of cash. Overall, our results of operations, financial condition and cash flows could be materially adversely affected by disruptions in the credit markets.
Our business is subject to a variety of domestic and international laws, rules, policies and other obligations regarding data protection.
The processing and storage of certain information is increasingly subject to privacy and data security regulations and many such regulations are country-specific. The interpretation and application of data protection laws in the U.S., Europe and elsewhere, including but not limited to the California Consumer Privacy Act and the General Data Protection Regulation (the “GDPR”), are uncertain, evolving and may be inconsistent among jurisdictions. Complying with these various laws may be difficult and could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. We may be required to expend additional resources to continue to enhance our information privacy and security measures, investigate and remediate any information security vulnerabilities and/or comply with regulatory requirements.
Changes in foreign, cultural, political and financial market conditions could impair the Company’s operations and financial performance.
The economies of foreign countries important to the Company’s operations could suffer slower economic growth or economic, social and/or political instability or hyperinflation in the future. The Company’s international operations, including sourcing operations (and the international operations of the Company’s customers), are subject to inherent risks which could adversely affect the Company, including, among other things:
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The foregoing could create uncertainty surrounding the Company’s business and the business of existing and future customers and suppliers, which could increase the cost of some of the Company’s products, thereby reducing its margins. Further, the foregoing risks could have a significant adverse impact on the Company’s ability to commercialize its products on a competitive basis in the international markets and may have a material adverse effect on its business, financial condition, and results of operations. The Company’s small sales volume in some countries, relative to some multinational and local competitors, could exacerbate such risks.
Should any of these risks occur, the Company’s ability to sell or export its products could be impaired; the Company could experience a loss of sales and profitability from its international operations; and/or the Company could experience a substantial impairment or loss of assets, any of which could have a material adverse impact on the Company’s business.
The elimination of or changemilitary conflict in Ukraine has resulted in substantial economic sanctions by the London Interbank Offered Rate (LIBOR) may adversely affect the interest rates on and value of certain floating rate securitiesU.S. and other instruments that we hold.
LIBOR is a common benchmark interest rate (or reference rate) used to setcountries against Russia including restrictions on selling or importing goods, services or technology in or from affected regions and make adjustments to interest rates for certain floating rate securitiestravel bans and asset freezes impacting connected individuals and political, military, business and financial organizations in Russia. The U.S. and other financial instruments. Published reports have indicated that regulatory authorities and/countries could impose wider sanctions and take other actions if the conflict continues or financial institutions may change how LIBORfurther escalates. It is calculated or discontinue its calculationnot possible to predict the broader consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and publication after 2021. Alternative reference rates have been developed, including The Federal Reserve Bank of New York’s Secured Overnight Financing Rate (SOFR), but the acceptance of such alternativeadverse effects on macroeconomic conditions, currency exchange rates and their applicability to existing instruments is uncertain. If LIBOR ceases to exist or if the methodsfinancial markets, all of calculating LIBOR change from current methods for any reason, outstanding securities with interest rates tied to LIBOR may be adversely affected if those securities either do not provide for the automatic substitution of another reference rate or convert to another reference rate or a fixed rate thatwhich could be less favorable to us. Outstanding securities and contracts that could be affected include certain preferred stocks and other floating rate securities, fixed rate securities that may convert to LIBOR-based floating rate instruments in the future, certain derivatives, and any other assets or liabilities whose value is tied to LIBOR. Any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could also adversely affect the value of those instruments. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost ofimpact our variable rate indebtedness causing a negative impact on ourbusiness, financial position, liquiditycondition and results of operations. Specifically, the use of an alternative reference rate could result in increased costs, including increased interest expense on our borrowings, and increased borrowing costs in the future. Management continues to evaluate the LIBOR exposure risks.
Unforeseen future events may negatively impact our economic condition.
Future events may occur that would adversely affect the reported value of our assets. Such events may include, but are not limited to, strategic decisions made in response to changes in economic and competitive conditions, the impact of the economic environment on our customer base, or a material adverse change in our relationship with significant customers.
Such events may also include terrorist acts, conflicts, severe weather conditions and other natural or manmade disasters, including power outages, fires, explosions, cyber based attacks, epidemics or pandemics, and acts of God wherever located around the world. The potential for future such events, the national and international responses to such events or perceived threats to national security, and other actual or potential conflicts or wars, such as the Russia-Ukraine conflict, the Israel-Hamas conflict and ongoing instability in the Middle East, have created many economic and political uncertainties. Any of the foregoing events, or our inability to accurately forecast these events or mitigate the impact of these conditions on our business, could materially adversely affect us.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.None.
In the past year and with the guidance of a qualified third-party, we have made improvements in our cybersecurity program across the Company, and we have developed processes for deterring, detecting, evaluating, and responding to potential cybersecurity incidents. In doing so, we focus on our employees, networks, applications and data with a cybersecurity plan, informed by nationally recognized frameworks.
Our third-party advisor has performed cybersecurity risk assessments of our information technology security processes and implemented technologies to lessen risk. Using third party services, we monitor, scan, assess, audit, and remediate identified vulnerabilities across our networks, as appropriate. Furthermore, recognizing that our employees are an essential line of defense in cybersecurity, we require employees to participate in training and testing programs through which we provide education on the risk of potential cybersecurity incidents, methods for identification of such incidents and appropriate responses. Our policies and processes are informed by industry standard practices regarding application security, access management, device protection, network management, and data loss prevention and recovery.
Our cybersecurity incident response plan includes retention of external experts for prompt assistance following discovery of any material incident. This cybersecurity incident response plan is part of our ongoing cybersecurity vulnerability management, and we endeavor to maintain appropriate controls to identify, monitor, analyze and address potential cybersecurity incidents, including potential unauthorized access to our networks and applications, along with detection of potential unusual activity within our networks or applications. Any potential cybersecurity incident is immediately reported the Chief Executive Officer and Chief Financial Officer, and the Audit Committee or the full Board, as appropriate.
Our Board of Directors provides oversight of risks from cybersecurity threats, in coordination with our management team and the Audit Committee of the Board. Our Board relies on management to bring significant matters impacting the Company to its attention, including with respect to material risks from cybersecurity threats. Our Audit Committee provides an additional layer of cybersecurity oversight and is responsible for discussing cybersecurity concerns (including data privacy risk management) and the steps management has taken to monitor and control such exposures with management.
The Company operates facilities in the United States of America and Puerto RicoRico. The following table provides information relative to our principal facilities as shown below:of December 31, 2023:
LOCATION | SIZE | DESCRIPTION | OWNED OR LEASED | |||
Akron, OH | 100,000 Sq. Ft. | Used for design and manufacturing air handling units and administration | Leased through | |||
Ceiba, Puerto Rico | 11,467 Sq. Ft. | Used for manufacturing and precision machining of industrial components. | Leased through 2026. | |||
Cleveland, Ohio | 37,000 Sq. Ft. | Used for corporate administrative | Owned | |||
Eastlake, Ohio | 51,520 Sq. Ft. | Used for the storage and distribution of marine hose and administration | Leased through | |||
Longmont, Colorado | 2,400 Sq. Ft. | Used for manufacturing and precision machining of industrial components. | Leased, through | |||
Ocala, Florida |
| Used for the storage of hydraulic hose. | Leased, through | |||
Davie, Florida | 7,010 Sq. Ft. | Used for the manufacturing, storage and distribution of fuel pump products and administration. | Leased, through 2025. | |||
Painesville, Ohio | 50,000 Sq. Ft. | Used for manufacturing flexible metal hose and administration. | Leased, through 2026. | |||
Phoenix, Arizona |
| Used for manufacturing and precision machining of aerospace components. | Leased through | |||
Worcester, Massachusetts | 56,706 Sq. Ft. | Used for manufacturing of highly engineered forgings. | Leased through 2033. | |||
| Greenville, OH | 53,135 Sq. Ft. | Used for manufacturing and precision machining of | Leased through |
The Company's headquarters and executive offices are located in Cleveland, Ohio. The Company's Industrial Hoseand Transportation Products segment utilizes the Phoenix, Arizona; Worcester, Massachusetts; Longmont, Colorado; Ceiba, Puerto Rico; Painesville, Ohio; Eastlake, Ohio; Greenville, Ohio: Ocala, Florida; and Eastlake, Ohio, as well as Ocala,Davie, Florida properties. The Company’s Commercial Air Handling Equipment segment utilizes the Akron, Ohio property. The Company’s Aerospace segment utilizes the Phoenix, Arizona, Worcester, Massachusetts, Longmont, Colorado and Ceiba, Puerto Rico properties.
We consider our facilities to be well-maintained and in good operating condition. We believe the quality and production capacity of our facilities is sufficient to maintain our competitive position for the foreseeable future and accommodate our anticipated growth in production.
At the time of filing this Annual Report on Form 10-K, there were no material legal proceedings pending or threatened against the Company.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT.*
The following is a list of the executive officers of the Company. The executive officers are elected each year and serve at the pleasure of the Board of Directors.
Mr. Brian E. Powers was elected to the Company’s Board of Directors in February 2014 and became Chairman in July 2015.2014. He was appointed Chief Executive Officer on September 1, 2016.
Mr. John P. DalyJeffrey J. Salay became Chief Financial Officer on September 8, 2020.May 1, 2023. Prior to joining the Company, Mr. DalySalay served as the Director of Financial PlanningChief Accounting Officer for Diebold Nixdorf, Incorporated (NYSE: DBD), from July 2022 to May 2023 and Analysis for Park Place Technologiesserved as Corporate Controller from 2017November 2020 to 2020July 2022. Prior to that, he was Senior Assurance Manager with Ernst & Young LLP from December 2014 to November 2020. Mr. Salay began his career with KPMG LLP and as Senior Finance Manager for Beam Suntory from 2012 to 2017.is a licensed Certified Public Accountant in Ohio.
OFFICE | OFFICER | AGE |
| Brian E. Powers |
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Chief Financial Officer |
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●* | The description of Executive Officers called for in this Item is included pursuant to the instructions to Item 401 of Regulation S-K. |
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
a) MARKET INFORMATION
The Company’s Class A Common Shares are traded on the Over-The-CounterOTC Pink SheetsOpen Market under the symbol “CRAWA”. There is no market for the Company’s Class B Common Shares.
The following table sets forth the per share range of high and low bids (Over-The-Counter Pink Sheets) for the Company’s Class A Common Shares for the periods indicated. The Over-The-Counterindicated, as reported by the OTC Pink SheetOpen Market. These prices reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not represent actual transactions.transactions. Trading on the Over-The-CounterOTC Pink SheetsOpen Market is limited and the prices quoted by brokers are not a reliable indication of the value of our common stock.Class A Common Shares.
Fiscal year ended | Fiscal year ended | Fiscal year ended | Fiscal year ended | |||||||||||||||||||||||||||||
December 31, 2020 | December 31, 2019 | December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||
HIGH | LOW | HIGH | LOW | HIGH | LOW | HIGH | LOW | |||||||||||||||||||||||||
First Quarter | $ | 22.25 | $ | 10.65 | $ | 14.00 | $ | 10.00 | $ | 19.50 | $ | 13.56 | $ | 32.00 | $ | 26.35 | ||||||||||||||||
Second Quarter | 15.88 | 12.22 | 19.96 | 12.06 | 25.82 | 16.50 | 30.00 | 21.01 | ||||||||||||||||||||||||
Third Quarter | 15.76 | 14.75 | 20.21 | 14.00 | 34.97 | 23.13 | 22.50 | 17.73 | ||||||||||||||||||||||||
Fourth Quarter | 23.00 | 14.50 | 23.00 | 18.00 | 34.24 | 26.00 | 19.88 | 12.25 | ||||||||||||||||||||||||
b) HOLDERS
As of February 19, 2021,March 4, 2024, there were approximately 157140 shareholders of record of the Company's outstanding Class A Common Shares and 67 holders of record of the Company's outstanding Class B Common Shares.
c) ISSUER PURCHASES OF EQUITY SECURITIES
The following table discloses shares repurchased by the Company during the quarter ended December 31, 2023.
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Maximum number of shares that may yet be purchased under the program (1) | ||||||||||||
October 1 to October 31, 2023 | - | - | - | - | ||||||||||||
November 1 to November 30, 2023 | - | - | - | - | ||||||||||||
December 1 to December 31, 2023 | - | - | - | 300,000 | ||||||||||||
Total | - | - | - | 300,000 | ||||||||||||
1. | On December 15, 2023, the Company announced a share repurchase program of up to 300,000 of the Company’s Class A and/or Class B common shares. Shares may be repurchased from time to time by the Company through open-market transactions, in privately negotiated transactions or by other means, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, in accordance with applicable securities laws and other restrictions. The timing and total amount of share repurchases will depend upon business, economic and market conditions, corporate and regulatory requirements, prevailing share prices, and other considerations. The authorization may be suspended or discontinued at any time and does not obligate the Company to acquire any amount of shares. The authorization has no expiration date. |
ITEM 6. SELECTED FINANCIAL DATA.[RESERVED]
This item is not applicable to the Company as a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Items Affecting the Comparability of our Financial Results
Effective April 19, 2019, theThe Company completed the acquisition ofpurchased substantially all of the operating assets of Data Genomix, Inc.Reverso Pumps, Inc, (“Reverso Pumps”) and Separ of the Americas, LLC, (“Separ America”), an Ohio corporation. DG isboth located in the business of developing and commercializing marketing and data analytic technology applications.Davie, Florida on January 10, 2022.
Effective January 2, 2020, theThe Company completed the acquisition ofpurchased substantially all of the operating assets of MPI Products, Inc. (dba Marine Products International)KMC Corp. dba Knitting Machinery Corp. (“MPI”Knitting Machinery”), pursuant to the Asset Purchase Agreement entered into by located in Cleveland, Ohio and between Crawford United Acquisition Company LLC, anGreenville, Ohio limited liability company and wholly-owned subsidiary of the Company, and MPI. Upon closing of the agreement, the assets were transferred to the Company in consideration of a purchase price of $9.4 million in cash, which was subject to post-closing adjustments based on working capital.May 1, 2022.
Accordingly, in light of the timing of these transactions, the Company’s results for the year ended on December 31, 20202023 include the added results of operations on MPIof Reverso Pumps, Separ America and Knitting Machinery in the Industrial Hose segment and Transportation Products segment. Conversely, our results for the year ended December 31, 2022 do not include the full twelve months results of operations of DGReverso Pumps, Separ America and Knitting Machinery in the CorporateIndustrial and OtherTransportation Products segment.
Reportable Segment Information
Refer to Part 1, Item 1. Business for descriptions of our business segments.
Results of Operations
Year Ended December 31, 2023 Compared with Year ended December 31, 2022
Sales for the year ended December 31, 2023 increased to $143.9 million, an increase of $16.1 million or 12.6% from sales of $127.8 million during the prior year. The Companyincrease in sales for the year ended December 31, 2023 was predominantly attributable to organic growth mechanisms, including a strategic implementation of price adjustments, predominantly within the low single-digit percentage range, and an escalation in sales volume across both of the Company's reportable segments. Further insights into the performance of each segment are provided in the detailed discussions that follow.
Cost of sales for the year ended December 31, 2023 were $106.2 million compared to $100.7 million for the prior year, an increase of $5.5 million or 5.5%, which is required to report segment information disclosures based on how management evaluates operating performance and resource allocations. The Company operates three reportable business segments: (1) Aerospace Components, (2) Commercial Air Handling, (3) and Industrial Hose. The Company's management evaluates segment performance based primarily on operating income. Certain corporate costs are allocateddirectly attributable to the segmentsincrease in sales. Gross margin was 26.2% in the current year compared to 21.2% for the prior year. The 500 basis point increase can be primarily attributed to the expanded sales base, which facilitated more efficient absorption of fixed costs, alongside the normalization of escalated raw material and interest expense directly relatedlogistics expenses driven by inflationary pressures. Additionally, a series of company efficiency initiatives contributed to financingthis improvement. Throughout the acquisitionfiscal year 2023, the company effectively navigated the inflationary challenges that peaked in the prior year. The strategy of passing on a business is allocatedportion of the increased costs to that segment, respectively. Intangible assets are allocated to each segment andcustomers, coupled with rigorous direct cost management programs, played a crucial role in bolstering our financial performance. These measures not only helped in mitigating the related amortizationimpact of these assets are recordedinflation but also resulted in selling,notable cost savings.
Selling, general and administrative expenses.
Aerospace Components:The Aerospace Components segment was added July 1, 2018, whenexpenses (SG&A) for the Company purchased allyear ended December 31, 2023 were $19.7 million, compared to $18.5 million for the prior year. This marginal increase in SG&A expenses, which remained stable as a percentage of the issued and outstanding sharesour total sales, is primarily reflective of capital stock of CAD Enterprises, Inc. in Phoenix, Arizona. This segment manufactures precision components primarily for customers in the aerospace industry. This segment provides complete end-to-end engineering, machining, grinding, welding, brazing, heat treat and assembly solutions. Utilizing state-of-the-art machining and welding technologies, this segment is an industry leader in providing complex components produced from nickel-based superalloys and stainless steels. Our quality certifications include ISO 9001:2015/AS9100D,inflationary labor costs as well as Nadcap accreditation for Fluorescent Penetrant Inspection (FPI), Heat Treating/Braze, Non-Conventional Machining EDM, TIG/E-Beam welding. The Company purchased all ofstrategic investments aimed at managing and supporting the issued and outstanding shares of capital stock of KT Acquisition LLC (name later changed to Komtek Forge LLC), in Worcester, Massachusetts on January 15, 2021. Komtek Forge LLC is a supplier of highly engineered forgings for the aerospace, industrial gas turbine, medical prosthetics, alternative energy, petrochemical and defense industries. The Company purchased all of the membership interests of Global-Tek-Manufacturing LLC (“Global-Tek”), in Ceiba, Puerto Rico and substantially all of the assets of Machining Technology L.L.C. (Machining Technologies), in Longmont, Colorado on March 2, 2021. Global-Tek and Machining Technologies specialize in providing customers with highly engineered manufacturing solutions, including CNC machining, anodizing, electro polishing and laser marking for customers in the defense, aerospace and medical device markets. Komtek Forge LLC, Global-Tek and Machining Technologies were all acquired in 2021 and therefore are not included in the 2020 and 2019 results reported herein.
Commercial Air Handling:The Commercial Air Handling segment was added June 1, 2017, when the Company purchased certain assets and assumed certain liabilities of Air Enterprises Acquisition LLC in Akron, Ohio. The acquired business, which operates under the name Air Enterprises, is an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions. Its customers are typically in the health care, education, pharmaceutical and industrial manufacturing markets in the United States. This segment also sells to select international markets. The custom air handling units are constructed of non-corrosive aluminum, resulting in sustainable, long-lasting, and energy efficient solutions with life expectancies of 50 years or more. These products are distributed through a network of sales representatives, based on relationships with health care networks, building contractors and engineering firms. The custom air handling equipment is designed, manufactured and installed under the brand names FactoryBilt® and SiteBilt®. FactoryBilt® air handling solutions are designed, fabricated and assembled in a vertically integrated process entirely within the Akron, Ohio facility. SiteBilt® air handling solutions are designed and fabricated in Akron, but are then crated and shipped to the field and assembled on-site.
Industrial Hose:
The Industrial Hose segment was added July 1, 2016, when the Company purchased the assets of the Federal Hose Manufacturing, LLC of Painesville, Ohio. This business segment includes the manufacture of flexible interlocking metal hoses and the distribution of silicone and hydraulic hoses. Metal hoses are sold primarily to major heavy-duty truck manufacturers and major aftermarket suppliers in North America. Metal hoses are also sold into the agricultural, industrial and petrochemical markets. Silicone hoses are distributed to a number of industries in North America, including agriculture and general industrial markets. The Company added the distribution of marine hose for recreational boating to this segment through the acquisition of the assets of MPI on January 2, 2020.
Corporate and Other:
Corporate costs not allocated to the three primary business segments are aggregated with the results of DG, acquired on April 19, 2019.company's growth.
Results of Operations
Year Ended December 31, 2020 Compared with Year ended December 31, 2019
SalesInterest charges for the year ended December 31, 2020 (“current year”) decreased to $85.1 million, a decrease of approximately $4.6 million or 5% from sales of $89.7 million during the year ended December 31, 2019 (“prior year”). This decrease in sales was primarily attributable to lower demand resulting from the impact of the COVID-19 pandemic, including temporary closures by certain customers.
Cost of sales for the current year was $66.1 million compared to $70.1 million in the prior year, a decrease of $4.0 million or 6%. Gross profit was $18.9 million in the current year compared to $19.6 million in the prior year, a decrease of $0.7 million. The decrease in cost of sales and gross profit was attributable to lower sales resulting from decreased demand due to the COVID-19 pandemic. The Company took a number of steps following the onset of the pandemic to reduce costs in response to lower sales levels, including staff reductions, shortened work weeks, and compensation decreases for certain salaried employees.
Selling, general and administrative expenses (SG&A) in the current year were $11.5 million, or 13% of sales, compared to $9.1 million, or 10% of sales, in the prior year. SG&A expenses increased $2.4 million due to the acquisition of MPI, which includes approximately $0.3 million of intangible amortization expense. These expenses were partially offset by the cost reduction actions since the onset of the pandemic, as described above.
Interest charges in the current year2023 were approximately $1.0$1.3 million compared to $1.1 million in the prior year. TheTotal debt outstanding decreased, thus the comparability in interest expense decreased duewas directly attributable to lower average interest rates onrate increases, which align with the Company’s floating rate bank debt.macroeconomic environment. Average total debt (including notes) and average interest rates for the current year ended December 31, 2023 were $26.4$17.4 million and 3.2%6.8%, respectively, compared to $21.2$27.3 million and 3.9% in3.8%, respectively, for the same period of lastprior year.
Other expense, netGain on investment for the year ended December 31, 2023 was negative $1.1 million in the current yearimmaterial, compared to $34 thousanda loss of other expense, net$0.9 million in the prior year. Other (income) expense, net was comprisedThe change is the result of rental income, gains and losses onmarket price changes in the disposal of assets, legal settlements, acquisition expenditures, unrealized gains and losses on equity securities, and dividends fromCompany's investments in marketable securities. There have been no significant changes in the Ohio Bureau of Workers’ Compensation intendedCompany's investment strategy or portfolio as compared to ease COVID-19’s impact on local businesses. The decrease is primarily related to income from unrealized gains on equity securities of $0.6 million and $0.4 million of dividends from the Ohio Bureau of Workers’ compensation.prior year.
Income tax expense in the current year ended December 31, 2023was $1.6$3.9 million compared to $2.4$1.2 million in the prior year. Income tax expense decreased due to lower income in the current year. Tax expense is recorded at the Company’s expected effective tax rate of 22%was higher in the current year as2023 compared to 26% in the prior year.year driven primarily by higher pre-tax income.
Net income for the current year ended December 31, 2023was $5.8$13.3 million or $1.76$3.77 per diluted share as compared to a net income of $7.0$6.6 million or $2.13$1.89 per diluted share infor the prior year.
Commercial Air Handling Segment
Sales in the Commercial Air Handling Equipment segment for the year ended December 31, 2023 increased to $58.4 million, an increase of approximately $10.7 million, or 22.5%, from sales of $47.6 million during the prior year. The primary driver behind this increase was a heightened demand for clean air solutions, a trend accelerated by the post-COVID-19 pandemic landscape. As pandemic-related restrictions were progressively lifted, it enabled our teams to gain on-site access essential for completing installations, particularly for key clients in the hospital and university sectors. Additionally, our company capitalized on the economic upturn and is effectively managing a strong backlog of orders, which signifies not only the current demand but also positions us well for sustained growth in the foreseeable future.
Segment operating profit in the Commercial Air Handling Equipment segment for the year ended December 31, 2023 was $15.4 million, or 26.3%, compared to $6.7 million, or 14.0% for the prior year, an increase of $8.7 million or 1,230 basis points. This improvement in both operating profit and margin can be primarily attributed to the increased revenue base, which facilitated more efficient absorption of fixed costs. Additionally, the segment benefited from reduced input costs, reflecting the broader economic stabilization and recovery trends in 2023. A notable factor contributing to this success has been the implementation of various efficiency, cost management, and continuous improvement initiatives within our manufacturing processes. These strategic measures have effectively streamlined operations and enhanced profitability. Moreover, the segment's Selling, General, and Administrative (SG&A) costs have remained consistent compared to the previous year. This consistency in SG&A expenses, alongside the improved revenue and operational efficiencies, underscores our focused approach towards sustainable growth and profitability in this segment.
Industrial and Transportation Products Segment
Sales in the Industrial and Transportation Products segment for the year ended December 31, 2023 increased to $85.5 million, an increase of approximately $5.4 million or 6.7%, from sales of $80.1 million during the prior year. The increase in sales for the year ended December 31, 2023 was largely attributed to a broad-based upswing across our diversified portfolio, aligning with the economic recovery and resurgence in various industries post-pandemic. A key highlight of this performance was the growth in our aerospace-related product lines. Sales in machined aerospace parts surged by $5.3 million, while our forged aerospace products saw an increase of approximately $1.2 million. These gains are indicative of the revitalization of the travel and aerospace industries, as global travel restrictions eased and demand for air travel rebounded strongly. Additionally, our machined defense parts product line witnessed a significant increase in sales, amounting to about $2.1 million. This reflects a return to pre-pandemic sales volumes, underscoring our capacity to meet the robust and evolving demands of the defense sector. However, these positive developments were partially offset by declines in other areas. Our digital marketing entity experienced a decrease of approximately $1.5 million, reflecting the dynamic and competitive nature of the digital marketing landscape. Similarly, sales of boating products dipped by $1.5 million, following a period of heightened demand during the pandemic. The sale of industrial hose also saw a slight decrease of around $0.2 million. Overall, the segment's performance in 2023 is a testament to our strategic agility and ability to capitalize on market opportunities, particularly in the aerospace and defense sectors, while navigating challenges in other areas. This balanced approach has positioned us well for continued growth and resilience in a rapidly evolving global market.
Segment operating profit in the Industrial and Transportation Products segment for the year ended December 31, 2023 was $7.6 million, or 8.9%, compared to $6.0 million, or 7.4%, for the prior year, an increase of $1.6 million or 140 basis points. This enhancement in both operating profit and margin was largely driven by the increased revenue stemming from our aerospace and defense sales, which rose notably due to the recovery in the aerospace sector, as detailed in our sales analysis. The gross margin within this segment improved largely due to the efficient absorption of fixed costs. This was made possible by the growth in sales volume, especially in areas where we experienced a resurgence post-pandemic. Additionally, we successfully managed to pass through certain increased costs attributable to inflation, while simultaneously implementing various efficiency initiatives. These strategic measures contributed to bolstering our financial performance in this challenging economic environment. The segment's Selling, General, and Administrative (SG&A) costs have risen in line with the sales increase. This indicates that while we have strategically increased our investment in SG&A to support growth, it has been proportional and in sync with our expanding revenue streams. This balanced approach underscores our commitment to maintaining a sustainable growth trajectory while effectively managing operational costs.
Liquidity and Capital Resources
As described further in Note 15 to the Company’s consolidated financial statements, effective January 2, 2020, the Company completed the MPI acquisition for a purchase price of $9.4 million cash, which is subject to certain post-closing adjustments based on working capital.
The Company’s credit agreement, dated as of June 1, 2017, by and between the Company and JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”), provides for a revolving credit facility. The amendmentfacility of up to the Credit agreement entered into on March 2, 2021 increased availability under the revolving credit facility to $30 million, which matures June 1, 2024, of which approximately $13.6 million was outstanding at$30.0 million. At December 31, 2020. Management believes2023 there was approximately $24.9 million of borrowing availability, which has increased in recent quarters as the amountCompany generated cash, and used that cash to pay down debt.
Operating Activities. The dynamics of cash flows from operating activities are subject to variability, influenced by the revolving credit facility and the termsoscillating demands of the loan agreement provide the flexibility to fund acquisitions, working capital and other strategic initiatives.
Total current assets at the scheduling of payment cycles. Net cash provided by operating activities was $18.8 million for the year ended December 31, 2020 increased2023, compared to $35.2$8.0 million from $27.0 million at December 31, 2019, an increase of $8.2 million. The increase in current assets is comprised of the following: an increase innet cash of $4.0 million; an increase in inventory of $3.4 million; an increase in investments of $1.5 million; and an increase in contract assets of $1.3 million, offset by a decrease in accounts receivable of $2.0 million. Fluctuations in contract assets related to the Commercial Air Handling division are dependent upon progress billing milestones for contracts. The decline in accounts receivable is attributable to lower billings at the Corporate and Other segment. The increase in inventory is related to the expansion of our Industrial Hose division through the acquisition of MPI. The increase in investments is related to the purchase of equity securities as described further in Note 7 to the Company’s consolidated financial statements. The Company is carrying higher cash balances due to the uncertainty of future economic conditions directly related to the COVID-19 pandemic.
Total current liabilities at December 31, 2020 increased to $17.5 million from $16.3 million at December 31, 2019, an increase of $1.2 million. The increase in current liabilities is comprised of the following: the increase in accounts payable of $3.2 million and the increase in leases payable of $0.3 million partially offset by the decrease in accrued expenses of $0.9 million and the decrease in unearned revenue of $1.1 million. The increase in accounts payable is primarily attributable to the Company’s extension of payment timeframes for certain payables and expenses.
Cash provided by operating activities for the twelve monthsprior year. The improvement in cash flow from operations is most directly attributable to the increase in net income. Despite its growing sales base, the Company had an inventory balance $2.4 million lower for the year ended December 31, 2020 was approximately $9.9 million,2023 compared to cash provided by operating activitiesthe prior year. Partially offsetting these improvements was a use of $0.9$2.8 million on accounts payable for the year ended December 31, 2023 compared to proceeds of $2.0 million in the same periodprior year. The Company maintains strict oversight of disbursements, and this change is largely the result of invoice timing. Concurrently, the Company's focus on enhancing the efficiency of its receivables process yielded a year ago. Cash provided by operating activities for the current year is comprised of the following: net income of $5.8 million; adjustments for non-cash items of $2.5 million; and cash provided by working capital adjustments of $1.6 million. The primary drivers of increased working capital during the current year were thenotable decrease in the accounts receivable of $2.8balance by $2.2 million andfor the year ended December 31, 2023, despite the increasegrowth in accounts payable of $2.8 million.sales. This decrease is testament to our strategic emphasis on expediting collections, thereby strengthening our liquidity position.
Investing Activities.Cash used in investing activities for the twelve monthsthe year ended December 31, 2020 of $10.92023 was $2.0 million, compared to cash used in investing activities of $0.8$5.1 million in the same period a year ago. The increase in cashprior year. Cash used in investing activities for the year ended December 31, 2023 was largely due to the acquisition of MPI in the Industrial Hose segment andfor capital expenditures in the normal course of business. The Company also invested $0.9 million to purchase 280,000 sharesCash used in investing activities for the prior year was for the acquisitions of Ampco-PittsburghKnitting Machinery Corporation, (“AP”), as further describedReverso Pumps and Separ America in the schedule 13D/A relating to AP filed withIndustrial and Transportation Products segment as well as capital expenditures in the SEC on October 1, 2020.normal course of business.
Financing Activities.Cash provided byused in financing activities was approximately $5.0$16.4 million for the twelve monthsthe year ended December 31, 2020,2023, compared to cash used byin financing activities of $2.9$3.2 million in the sameprior year. Beginning in the second half of 2022, the Company has utilized cash flow from operations to pay down its total debt. In the first half of the prior year period, a year ago. Cash provided by financing activities for the current year was primarily related to: $12.2 million borrowingsCompany borrowed on theits revolving credit facility primarily related to fund the acquisition of MPI and $5.1 million of borrowings under the PPP Loans described below; offset by cash used for $6.4 million in payments on bank debt; $3.7 million in repayment of a PPP loan and $2.2 million in payments on notes.acquisitions noted above.
The Company is actively managing its business to maintaingenerate cash flow and liquidity. As discussed elsewhere in this MD&A section, the Company has taken a number of defensive measures to enhance liquidity in response to the COVID-19 pandemic, including various expense reduction steps and PPP loans by Federal Hose and CAD.flow. We believe that our cash flow from operations, cash balances and availability on our revolving credit facility to be sufficient to fund working capital needs and service principal and interest payments due related to the bank debt and notes payable for at least the next 12 months. TheBased on a combination of increased profitability and decreased debt levels, the Company had $6.3 million availablebelieves it is well positioned to borrow on the revolving credit facility at December 31, 2020 and borrowing availability under the revolving credit facility was increased by $10 million in the amendment entered into on March 2, 2021.support ongoing operations as well as growth initiatives. Notwithstanding the Company's expectations, if the Company's operating results decrease as the result of pressures on the business due to, for example, the impact of the COVID-19 pandemic,supply chain interruptions or delays, increases in material, freight or labor costs, inflationary pressures, currency or interest rate fluctuations, regulatory issues, a downturn in general economic conditions, or the Company's failure to execute its business plans, the Company may require additional financing, or may be unable to comply with its obligations under the credit facility, and its lenders could demand repayment of any amounts outstanding under the Company’s credit facility. As the company cannot predict the duration or scope of the COVID-19 pandemic and its impact on the Company’s customers and suppliers, the negative financial impact to the Company’s results cannot be reasonably estimated, but could be material.
The Company applied for and was approved for a loan in the amount of $3,679,383 on April 10, 2020 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”); however, on May 5, 2020, the Company opted to return all of the proceeds and repay the loan in full. On June 4, 2020, both Federal Hose and CAD entered into unsecured loans with First Federal Savings and Loan Association of Lakewood, pursuant to the Paycheck Protection Program under the CARES Act, in the amounts of $253,071 and $1,200,766, respectively (the “PPP Loans”).
The PPP Loans each have a two-year term and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement, and will begin in January 4, 2021, in monthly installments based on the principal balance of the PPP Loan outstanding following the deferral period and taking into consideration any portion of the PPP Loan that may be forgiven prior to that time. The PPP Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. Federal Hose and CAD each used their respective PPP Loan amounts for qualifying expenses and to applied for, and were granted forgiveness of the loans in full by the U.S. Small Business Administration in accordance with the terms of the CARES Act. See Note 98 and Note 19 of the notes9 to the consolidated financial statements for a further description of the PPP Loans and forgiveness of the loans.
Due to the uncertainty of future economic conditions directly related to the COVID-19 pandemic, management has decided to carry higher cash balances and levels of liquidity, rather than focus on debt reduction goals. Management believes the Company has adequate liquidity for debt service, working capital, capital expenditures and other strategic initiatives. However, because the Company cannot predict the duration or scope of the COVID-19 pandemic and its impactinformation on the Company, the pandemic may adversely impact the Company’s available liquidity for debt service, working capital, or cause delay or curtailment of the Company’s planned capital expenditures or other strategic initiatives.Company's total debt.
Off-Balance Sheet Arrangements
From time to time, the Company enters into performance and payment bonds in the ordinary course of business.business in connection with commercial air handling contracts. These bonds are secured by certain assets of the Company by the surety until the Company'sCompany’s completion of the requirements of the commercial air handling contract. At December 31, 2020,2023, the Company did not have any active surety bonds for whichhas secured performance and payment not been satisfied.payment bonds in the amount of $8.1 million, which is consistent with the prior year, and represents surety on completion of the requirements of certain commercial air handling contracts. The Company has no other off-balance sheet arrangements (as defined in Regulation S-K Item 303 paragraph (a)(4)(ii)) that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expendituresexpenditure or capital resources.
ImpactCritical Accounting Policies and Estimates
Preparation of Inflationfinancial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Over
Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the past five years, inflation has had a minimal effect onAudit Committee of the Company becauseBoard of low rates of inflation.Directors.
Revenue Recognition:
We recognize revenue with respect to customer orders when our obligations under the contract terms are satisfied and control of the product transfers to the customer, typically upon shipment. Revenue from certain contracts in the Commercial Air Handling Equipment segment is accounted for over time, when products are manufactured or services are performed, as control transfers under these arrangements. We follow a cost-based input method, since there is no objective output measure that would fairly depict the transfer of control over the life of the performance obligation. Progress on the performance obligation is measured by the proportion of actual costs incurred to the total costs expected to complete the contract. Costs included in the measure of progress include direct labor and third-party. This cost-based method of revenue recognition requires the Company to make estimates of costs to complete its projects on an ongoing basis. Significant judgment is required to evaluate assumptions related to these estimates. The effect of revisions to estimates related to the transaction price or costs to complete a project are recorded on a cumulative catch-up basis. Certain contracts may be terminated by the customer; however, in the event of termination, most contracts require payment for services rendered through the date of termination.
Allowance for Obsolete and Slow-Moving Inventory:
Inventories are valued using the first-in, first-out (“FIFO”) method; stated at the lower of cost or net realizable value; and are reduced by an allowance for obsolete and slow-moving inventories. The allowance is estimated based on management’s review of inventories on hand with minimal sales activity, which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for based on estimated selling prices less disposal costs. Though we consider these allowances adequate and proper, changes in economic conditions in specific markets in which we operate could have a material effect on allowances required.
Business Combinations:
Business combinations are accounted for using the purchase method of accounting under ASC 805, “Business Combinations.” This method requires the Company to record assets and liabilities of the businesses acquired at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as Goodwill. Determining the fair value requires management to make estimates and assumptions including discount rates, rates of return on assets, and long-term sales growth rates.
Goodwill and Indefinite Lived Intangible Assets:
As referenced by ASC 350 “Intangibles - Goodwill and other” (“ASC 350”), management performs its annual test for Goodwill and intangible assets at least annually or more frequently, if impairment indicators arise at the reporting unit level. Our reporting units have been identified at the individual company component level, with each individual subsidiary operating company constituting its own reporting unit. During 2022, management performed quantitative testing for the CAD Enterprises and Global-Tek reporting units. In 2023, and because of the Company’s strong performance, a thorough qualitative analysis was performed, which did not indicate that quantitative testing was necessary in any reporting units other than CAD Enterprises.
Our Goodwill impairment analysis utilizes a qualitative approach that compares the carrying amount of the reporting unit to its estimated fair value. To the extent that the qualitative approach indicates that it is more likely than not that the carrying amount is less than the reporting unit's fair value, we apply a quantitative approach as a secondary step. In applying the quantitative approach, we use an income approach to estimate the fair value of the reporting unit. The income approach uses a number of factors, including future business plans and actual and forecasted operating results. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; and operating margins used to project future cash flows for the operating company. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual company. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate reasonable assumptions into our analysis of Goodwill impairment testing for a reporting unit, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.
In conducting our annual Goodwill impairment analyses at December 31, 2023 and 2022, Goodwill for CAD Enterprises was $7.3 million.
In our 2022 qualitative assessment of CAD Enterprises, we noted a decline in revenue from $30.1 million in 2019 to $18.9 million in 2020, $18.3 million in 2021 and $15.5 million in 2022 and a decline in after-tax income margin from 5.8% in 2019 to -4.6% in 2020, -0.5% in 2021, and -3.4% in 2022 and thus determined to conduct a quantitative assessment of CAD Enterprises. The quantitative assessment of CAD Enterprises confirmed that the estimated fair value exceeded carrying value by 12 percent, and thus no impairment existed at December 31, 2022. The key assumptions used to estimate fair value included discount rates; revenue growth rates, including assumed terminal growth rates; and after-tax income margins used to project future cash flows for CAD Enterprises. The discount rate used to estimate fair value was 10% and was based on estimates of capital costs and management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows for CAD Enterprises. Our revenue growth rate for the 9-year period in the discounted cash flow model was 10.2% per year, which reflects management’s assessment of estimated future orders for CAD Enterprises based in part on a Long-Term-Agreement (“LTA”) with the company’s largest customer, a new $7.5 million incremental purchase order with this customer, our previous revenue history including actual revenues of $30.1 million in 2019 before the onset of the COVID-19 pandemic, and a continued business rebound in the aerospace industry. The assumed terminal growth rate for CAD Enterprises was 3% based on management’s assessment of long-term growth rates for the Aerospace industry. The after-tax income margins used to project future margins for the company were based on the historical margins for CAD Enterprises prior to the COVID-19 pandemic.
During 2023, revenue at CAD Enterprises increased from $15.5 million in 2022 to $20.9 million. The revenue growth was 35% and was consistent with the quantitative modeling done in 2022. However despite the strong revenue growth, CAD did not meet the profitability projections used in the prior year's goodwill analysis. Accordingly, we noted a triggering event and completed a Step 1 quantitative analysis as of December 31, 2023. The quantitative assessment of CAD Enterprises confirmed that the estimated fair value exceeded carrying value by 35 percent, and thus no impairment existed at December 31, 2023. The key assumptions used to estimate fair value included discount rates; revenue growth rates, including assumed terminal growth rates; and after-tax income margins used to project future cash flows for CAD Enterprises. The discount rate used to estimate fair value was 15% and was based on estimates of capital costs and management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows for CAD Enterprises. The increase from the prior year reflects the incremental company specific risks related to the missed profitability projections in 2023. Our revenue growth rate for the 7-year period in the discounted cash flow model was 7.7% per year, which reflects management’s assessment of estimated future orders for CAD Enterprises based in part on a Long-Term-Agreement (“LTA”) with the company’s largest customer, inclusive of an expected increase in volume, our previous revenue history including actual revenues exceeding $30 million prior to the recent inflationary environment, and growth in the aerospace industry stemming from post-pandemic travel rebound, geopolitical conflicts and private space exploration. The assumed terminal growth rate for CAD Enterprises was 3% based on management’s assessment of long-term growth rates for the Aerospace industry. The after-tax income margins used to project future margins for the company reflect that most of CAD's non-material costs are fixed, and as revenue grows, much of the growth will fall-through to the bottom line.
Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. Potential events and circumstances including global conflicts, materials shortages, inability to increase prices to keep pace with expenses, onset of a global pandemic, departure of key employees and loss of a key customer could negatively affect the key assumptions used for the recent fair value test and are similar to the risk factors noted in Item 1A, Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
In conducting our 2022 annual Goodwill impairment analysis, Goodwill for Global-Tek Manufacturing and Global-Tek Colorado at December 31, 2022 was $1.9 million. In our qualitative assessment of Global-Tek Manufacturing and Global-Tek Colorado, we noted a decline in revenue from $9.2 million in 2021 to $6.5 million in 2022 and a decline in after-tax income margin from 17.3% in 2021 to -3.3% in 2022 and thus determined to conduct a quantitative assessment of Global-Tek Manufacturing and Global-Tek Colorado. The quantitative assessment of Global-Tek Manufacturing and Global-Tek Colorado confirmed that the estimated fair value exceeded carrying value by 23.3%, and thus no impairment existed at December 31, 2022. The key assumptions used to estimate fair value included discount rates; revenue growth rates, including assumed terminal growth rates; and after-tax income margins used to project future cash flows for Global-Tek Manufacturing and Global-Tek Colorado. The discount rate used to estimate fair value was 10% and was based on estimates of capital costs and management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows for Global-Tek Manufacturing and Global-Tek Colorado. Our revenue growth rate for the 9-year period in the discounted cash flow model was 6.5% per year, which reflects management’s assessment of estimated future orders for Global-Tek Manufacturing and Global-Tek Colorado based on our previous revenue history including actual revenues of $9.2 million in 10 months of operations after the acquisition in 2021 before the untimely passing of the General Manager. The assumed terminal growth rate for Global-Tek Manufacturing and Global-Tek Colorado was 3% based on management’s assessment of long-term growth rates for the Aerospace and Defense industries. The after-tax income margins used to project future margins for the company were based on the historical margins for Global-Tek Manufacturing and Global-Tek Colorado prior to the untimely passing of the General Manager. In 2021, Global-Tek Manufacturing and Global-Tek Colorado earned an debt-free after-tax income margin of 16.4%. The discounted cash flow model used to estimate fair value assumes an after-tax income margin of 6.2% in 2027, or year 5 of the forecast period and expanding margins to 7.8% in the terminal year. This is based on management’s assessment of our ability to grow SG&A expenses at a slower rate than revenues as the company achieves more scale. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable.
During 2023, revenue at Global-Tek increased from $6.5 million in 2022 to $8.6 million. The revenue growth was 32% and exceeded the quantitative modeling done in 2022. Aspects of the Global-Tek business underlying revenue also remain favorable, which were key factors in the qualitative analysis which deemed quantitative testing not necessary. Potential events and circumstances including global conflicts, materials shortages, inability to increase prices to keep pace with expenses, onset of a global pandemic, departure of key employees and loss of a key customer could negatively affect the key assumptions used for the recent fair value test and are similar to the risk factors noted in Item 1A, Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Income Taxes:
In accordance with ASC 740, “Income Taxes” (“ASC 740”), we account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. Specifically, we measure gross deferred tax assets for deductible temporary differences and carryforwards, such as operating losses and tax credits, using the applicable enacted tax rates and apply the more likely than not measurement criterion. Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual annual effective income tax rates and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.
Impact of Inflation:
Inflationary economic conditions during the past few years have increased the Company’s costs of producing its products. While these inflationary conditions stabilized during 2023, the Company's costs have remained elevated, and may increase further if inflationary economic conditions persist. The Company’s products are manufactured using various metals and other commodity-based materials including steel, aluminum, rubber and silicone. Freight and labor costs also are significant elements of the Company’s production costs. Inflationary economic conditions have elevated these various costs. If the Company is unable to continue mitigating cost increases through customer pricing actions, alternative supply arrangements or other cost reduction initiatives, the Company's profitability may be adversely affected.
Forward-Looking Statements
The foregoing discussion includes forward-looking statements relating towithin the businessmeaning of the Company.“Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, including statements made regarding the Company’s future results. Generally, these statements can be identified by the use of words such as “guidance,” “outlook,” “believes,” “estimates,” “anticipates,” “expects,” “forecasts,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could,” “would” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements, or other statements made by the Company, are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) the duration and scopeshortages in supply or increased costs of the COVID-19 pandemic, the resumption of operations by the Company’s customers, loosening of public health restrictions, or any reimposed restrictions or tightening of public health restrictions which could impact the demand for the Company’s products; (b) the Company’s inability to obtain needednecessary products, components or raw materials from the Company’s suppliers; (b) availability shortages or increased costs of freight and labor for the Company and/or its suppliers; (c) actions that governments, businesses and individuals take in response to public health crises, such as the COVID-19 pandemic, including mandatory business closures and restrictions on onsite commercial interactions; (d) the impact of the pandemic and actions takenconditions in response to the pandemic on global and regional economies and economic activity; €activity, including slow economic growth or recession, inflation, currency and credit market volatility, reduced capital expenditures and changes in government trade, fiscal, tax and monetary policies; (e) adverse effects from evolving geopolitical conditions, such as the pace of recovery when the COVID-19 pandemic subsides;military conflicts in Ukraine and Israel; (f) the Company's ability to effectively integrate acquisitions, and manage the larger operations of the combined businesses, (g) the Company's dependence upon a limited number of customers and the aerospace industry, (h) the highly competitive industryindustries in which the Company operates, which includes several competitors with greater financial resources and larger sales organizations, (i) the Company's ability to capitalize on market opportunities in certain sectors, (j) the Company's ability to obtain cost effective financing and (k) the Company's ability to satisfy obligations under its financing arrangements, and the other risks described in “Item 1A. Risk Factors” in thisour Annual Report on Form 10-K and the Company’s subsequent filings with the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This item is not applicable to the Company as a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following pages contain the Financial Statements and Supplementary Data as specified for Item 8 of Part II of Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Crawford United Corporation
Cleveland, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Crawford United Corporation (the "Company") as of December 31, 20202023 and 2019,2022, and the related consolidated statements of income, stockholders' equity, and cash flows, for the years then ended, and the related notes and schedules (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202023 and 2019,2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment
As described in Note 5 to the consolidated financial statements, the Company’s consolidated goodwill balance was approximately $11.5$16.5 million and $9.8$16.3 million at December 31, 20202023 and 2019,2022, respectively, which is allocated to the Company’s reporting units. Goodwill is tested for impairment at least annually at the reporting unit level. The determination of the fair value requires management to make significant estimates and assumptions related to forecasts of future revenues and operating margins and discount rates. As disclosed by management, changes in these assumptions could have a significant impact on either the fair value of the reporting units, the amount of any goodwill impairment charge, or both.
We identified the goodwill impairment assessment as a critical audit matter. The primary procedures we performed to address this critical audit matter included: a) Testing the effectiveness of controls related to management’s goodwill impairment tests, including controls over the determination of fair value; b) Testing management’s process for determining the fair value; c) Evaluating whether the assumptions used were reasonable by considering past performance and whether such assumptions were consistent with evidence obtained in other areas of the audit.
/s/ Meaden & Moore, Ltd.
Meaden & Moore, Ltd.
We are uncertain as to the year we began servicing consecutively as the auditor of the Company’s financial statements; however, we are aware that we have been the Company’s auditor consecutively since at least 1979.
Cleveland, Ohio
March 16, 20214, 2024
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, | December 31, | |||||||||||||||
2020 | 2019 | 2023 | 2022 | |||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 6,194,276 | $ | 2,232,499 | $ | 1,647,175 | $ | 1,247,627 | ||||||||
Accounts receivable less allowance for doubtful accounts | 12,021,692 | 14,001,795 | 19,671,833 | 21,884,807 | ||||||||||||
Contract assets | 3,735,557 | 2,422,379 | 4,822,347 | 3,284,301 | ||||||||||||
Inventory less allowance for obsolete inventory | 11,030,960 | 7,678,690 | ||||||||||||||
Inventories less allowance for obsolete inventory | 17,672,622 | 20,176,142 | ||||||||||||||
Investments | 1,534,400 | - | 665,301 | 657,971 | ||||||||||||
Prepaid expenses and other current assets | 657,496 | 703,002 | 1,303,780 | 1,522,516 | ||||||||||||
Total Current Assets | 35,174,381 | 27,038,365 | 45,783,058 | 48,773,364 | ||||||||||||
Property, plant and equipment, net | 11,290,783 | 12,394,172 | 14,686,190 | 15,213,443 | ||||||||||||
Operating right of use assets, net | 8,856,820 | 9,224,840 | ||||||||||||||
Operating right of use asset, net | 8,356,903 | 9,524,280 | ||||||||||||||
OTHER ASSETS: | ||||||||||||||||
Goodwill | 11,505,852 | 9,791,745 | 16,453,049 | 16,231,938 | ||||||||||||
Intangibles, net of accumulated amortization | 7,558,309 | 3,950,838 | 8,252,600 | 9,492,560 | ||||||||||||
Other non-current assets | 106,638 | 88,046 | 107,798 | 362,489 | ||||||||||||
Total Non-Current Other Assets | 19,170,799 | 13,830,629 | ||||||||||||||
Total Non-Current Assets | 24,813,447 | 26,086,987 | ||||||||||||||
Total Assets | $ | 74,492,783 | $ | 62,488,006 | $ | 93,639,598 | $ | 99,598,074 | ||||||||
See accompanying notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, | December 31, | |||||||||||||||
2020 | 2019 | 2023 | 2022 | |||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Notes payable - current | $ | 2,782,479 | $ | 2,749,459 | ||||||||||||
Bank debt - current | 1,333,333 | 1,333,333 | ||||||||||||||
Leases payable | 1,136,300 | 850,664 | ||||||||||||||
Notes payable – current | $ | 824,226 | $ | 1,303,972 | ||||||||||||
Bank debt – current | - | 222,222 | ||||||||||||||
Operating lease liabilities - current | 1,714,174 | 1,705,224 | ||||||||||||||
Accounts payable | 9,230,032 | 6,071,522 | 11,168,308 | 14,017,973 | ||||||||||||
Unearned revenue | 820,002 | 1,998,578 | 5,596,706 | 4,354,868 | ||||||||||||
Accrued income taxes | 539,876 | 1,239,289 | ||||||||||||||
Accrued expenses | 2,242,924 | 3,281,445 | 3,292,787 | 3,224,188 | ||||||||||||
Total Current Liabilities | 17,545,070 | 16,285,001 | 23,136,077 | 26,067,736 | ||||||||||||
LONG-TERM LIABILITIES: | ||||||||||||||||
Notes payable | 5,455,717 | 7,676,697 | 470,209 | 1,846,405 | ||||||||||||
Bank debt | 12,174,428 | 6,376,594 | 5,096,672 | 19,224,318 | ||||||||||||
PPP loans | 1,453,837 | - | ||||||||||||||
Leases payable | 7,901,357 | 8,513,448 | ||||||||||||||
Operating lease liabilities - noncurrent | 6,901,043 | 8,060,152 | ||||||||||||||
Deferred income taxes | 2,429,828 | 2,207,734 | 310,250 | 1,384,558 | ||||||||||||
Total Long-Term Liabilities | 29,415,167 | 24,774,473 | 12,778,174 | 30,515,433 | ||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||
Class A 10,000,000 shares authorized, 2,595,087 issued at December 31, 2020 and 2,576,837 issued at December 31, 2019 | 3,896,705 | 3,599,806 | ||||||||||||||
Class B 2,500,000 shares authorized, 954,283 shares issued at December 31, 2020 and December 31, 2019 | 1,465,522 | 1,465,522 | ||||||||||||||
Class A common shares - 10,000,000 shares authorized, 2,832,966 issued at December 31, 2023 and 2,791,449 issued at December 31, 2022 | 8,878,986 | 7,351,563 | ||||||||||||||
Class B common shares - 2,500,000 shares authorized, 914,283 shares issued at December 31, 2023 and December 31, 2022 | 1,465,522 | 1,465,522 | ||||||||||||||
Contributed capital | 1,741,901 | 1,741,901 | 1,741,901 | 1,741,901 | ||||||||||||
Treasury shares | (1,938,052 | ) | (1,905,780 | ) | (2,237,026 | ) | (2,125,252 | ) | ||||||||
Class A – 39,467 shares issued at December 31, 2020 and 37,208 shares issues at December 31, 2019 | ||||||||||||||||
Class B -182,435 shares issued at December 31, 2020 and December 31, 2019 | ||||||||||||||||
Class A common shares – 54,074 shares held at December 31, 2023 and 47,412 shares held at December 31, 2022 | ||||||||||||||||
Class B common shares – 182,435 shares held at December 31, 2023 and December 31, 2022 | ||||||||||||||||
Retained earnings | 22,366,470 | 16,527,083 | 47,875,964 | 34,581,171 | ||||||||||||
Total Stockholders' Equity | 27,532,546 | 21,428,532 | 57,725,347 | 43,014,905 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 74,492,783 | $ | 62,488,006 | $ | 93,639,598 | $ | 99,598,074 | ||||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended | Years Ended | |||||||||||||||
December 31, 2020 | December 31, 2019 | December 31, 2023 | December 31, 2022 | |||||||||||||
Total Sales | $ | 85,069,900 | $ | 89,698,527 | $ | 143,885,934 | $ | 127,754,927 | ||||||||
Cost of Sales | 66,138,610 | 70,123,892 | 106,239,852 | 100,722,146 | ||||||||||||
Gross Profit | 18,931,290 | 19,574,635 | 37,646,082 | 27,032,781 | ||||||||||||
Operating Expenses: | ||||||||||||||||
Selling, general and administrative expenses | 11,478,837 | 9,063,969 | 19,713,611 | 18,499,309 | ||||||||||||
Operating Income | 7,452,453 | 10,510,666 | 17,932,471 | 8,533,472 | ||||||||||||
Other (Income) and Expenses: | ||||||||||||||||
Interest charges | 952,192 | 1,056,843 | 1,255,984 | 1,138,224 | ||||||||||||
Unrealized gain on investments | (585,107 | ) | - | |||||||||||||
(Gain) loss on investments | (7,330 | ) | 860,273 | |||||||||||||
Other (income) expense, net | (389,873 | ) | 34,333 | (480,331 | ) | (1,197,218 | ) | |||||||||
Total Other (Income) and Expenses | (22,788 | ) | 1,091,176 | 768,323 | 801,279 | |||||||||||
Income before Provision for Income Taxes | 7,475,241 | 9,419,490 | 17,164,148 | 7,732,194 | ||||||||||||
Provision for Income Taxes: | ||||||||||||||||
Current | 1,443,761 | 1,890,912 | ||||||||||||||
Deferred | 192,093 | 548,715 | ||||||||||||||
Total Provision for Income Taxes | 1,635,854 | 2,439,627 | ||||||||||||||
Income tax expense | 3,869,355 | 1,170,791 | ||||||||||||||
Net Income | $ | 5,839,387 | $ | 6,979,863 | $ | 13,294,793 | $ | 6,561,403 | ||||||||
Net Income per Common Share - Basic | $ | 1.76 | $ | 2.45 | ||||||||||||
Net Income Per Common Share - Basic | $ | 3.79 | $ | 1.89 | ||||||||||||
Net Income per Common Share - Diluted | $ | 1.76 | $ | 2.13 | ||||||||||||
Net Income Per Common Share - Diluted | $ | 3.77 | $ | 1.89 | ||||||||||||
Weighted Average Shares of Common Stock Outstanding – Basic | 3,319,731 | 2,849,239 | ||||||||||||||
Weighted Average Shares of Common Stock Outstanding - Diluted | 3,320,553 | 3,277,857 | ||||||||||||||
Weighted Average Shares of Common Stock Outstanding | ||||||||||||||||
Basic | 3,507,883 | 3,462,868 | ||||||||||||||
Diluted | 3,526,836 | 3,462,868 | ||||||||||||||
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON SHARES - | ||||||||||||||||||||||||
NO PAR VALUE | ||||||||||||||||||||||||
CONTRIBUTED | TREASURY | RETAINED | ||||||||||||||||||||||
CLASS A | CLASS B | CAPITAL | SHARES | EARNINGS | TOTAL | |||||||||||||||||||
Balance at December 31, 2021 | $ | 5,393,823 | $ | 1,465,522 | $ | 1,741,901 | $ | (1,981,113 | ) | $ | 28,019,768 | $ | 34,639,901 | |||||||||||
Stock Awards to Directors and Officers | 957,728 | - | - | - | - | 957,728 | ||||||||||||||||||
Acquisition | 1,000,012 | - | - | - | - | 1,000,012 | ||||||||||||||||||
Share repurchase | - | - | - | (144,139 | ) | - | (144,139 | ) | ||||||||||||||||
Net income | - | - | - | - | 6,561,403 | 6,561,403 | ||||||||||||||||||
Balance at December 31, 2022 | $ | 7,351,563 | $ | 1,465,522 | $ | 1,741,901 | $ | (2,125,252 | ) | $ | 34,581,171 | $ | 43,014,905 | |||||||||||
Stock Awards to Directors and Officers | 1,377,423 | - | - | - | - | 1,377,423 | ||||||||||||||||||
Stock issuance (see note 6) | 150,000 | - | - | - | - | 150,000 | ||||||||||||||||||
Share repurchase | - | - | - | (111,774 | ) | - | (111,774 | ) | ||||||||||||||||
Net income | - | - | - | - | 13,294,793 | 13,294,793 | ||||||||||||||||||
Balance at December 31, 2023 | $ | 8,878,986 | $ | 1,465,522 | $ | 1,741,901 | $ | (2,237,026 | ) | $ | 47,875,964 | $ | 57,725,347 | |||||||||||
COMMON SHARES | COMMON SHARES | |||||||||||||||||||||||
ISSUED | TREASURY SHARES | OUTSTANDING | ||||||||||||||||||||||
CLASS A | CLASS B | CLASS A | CLASS B | CLASS A | CLASS B | |||||||||||||||||||
Balance at December 31, 2021 | 2,720,787 | 914,283 | 41,844 | 182,435 | 2,678,943 | 731,848 | ||||||||||||||||||
Stock Awards to Directors and Officers | 32,200 | - | - | - | 32,200 | - | ||||||||||||||||||
Acquisition | 38,462 | - | - | - | 38,462 | - | ||||||||||||||||||
Share repurchase | - | - | 5,568 | - | (5,568 | ) | - | |||||||||||||||||
Balance at December 31, 2022 | 2,791,449 | 914,283 | 47,412 | 182,435 | 2,744,037 | 731,848 | ||||||||||||||||||
Stock Awards to Directors and Officers | 34,700 | - | - | - | 34,700 | - | ||||||||||||||||||
Stock issuance (see note 6) | 7,317 | - | - | - | 7,317 | - | ||||||||||||||||||
Stock forfeit | (500 | ) | - | - | - | (500 | ) | - | ||||||||||||||||
Share repurchase | - | - | 6,662 | - | (6,662 | ) | - | |||||||||||||||||
Balance at December 31, 2023 | 2,832,966 | 914,283 | 54,074 | 182,435 | 2,778,892 | 731,848 | ||||||||||||||||||
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at December 31, 2018 | $ | 2,641,300 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 9,577,792 | $ | 12,765,485 | |||||||||||
Share-based compensation expense | 348,877 | - | - | - | - | 348,877 | ||||||||||||||||||
Warrant exercise | 250,000 | - | - | - | - | 250,000 | ||||||||||||||||||
Note conversion | 359,629 | 755,250 | - | - | - | 1,114,879 | ||||||||||||||||||
Cumulative effect of accounting change related to lease standard | - | - | - | - | (30,572 | ) | (30,572 | ) | ||||||||||||||||
Net Income | - | - | - | - | 6,979,863 | 6,979,863 | ||||||||||||||||||
Balance at December 31, 2019 | $ | 3,599,806 | $ | 1,465,522 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 16,527,083 | $ | 21,428,532 | |||||||||||
Share-based compensation expense | 70,849 | - | - | - | - | 70,849 | ||||||||||||||||||
Stock awards | 226,050 | - | - | - | - | 226,050 | ||||||||||||||||||
Repurchase of shares | - | - | - | (32,272 | ) | - | (32,272 | ) | ||||||||||||||||
Net income | - | - | - | - | 5,839,387 | 5,839,387 | ||||||||||||||||||
Balance at December 31, 2020 | $ | 3,896,705 | $ | 1,465,522 | $ | 1,741,901 | $ | (1,938,052 | ) | $ | 22,366,470 | $ | 27,532,546 | |||||||||||
COMMON SHARES ISSUED | TREASURY SHARES | COMMON SHARES OUTSTANDING | ||||||||||||||||||||||
CLASS A | CLASS B | CLASS A | CLASS B | CLASS A | CLASS B | |||||||||||||||||||
Balance at December 31, 2018 | 2,161,014 | 779,283 | 37,208 | 182,435 | 2,123,806 | 596,848 | ||||||||||||||||||
Stock awards | 64,334 | - | - | - | 64,334 | - | ||||||||||||||||||
Warrant exercise | 100,000 | - | - | - | 100,000 | - | ||||||||||||||||||
Note conversion | 251,489 | 175,000 | - | - | 251,489 | 175,000 | ||||||||||||||||||
Balance at December 31, 2019 | 2,576,837 | 954,283 | 37,208 | 182,435 | 2,539,629 | 771,848 | ||||||||||||||||||
Stock Awards | 17,250 | - | - | - | 17,250 | - | ||||||||||||||||||
Stock option exercise | 1,000 | - | - | - | 1,000 | - | ||||||||||||||||||
Share repurchase | - | - | 2,259 | - | (2,259 | ) | - | |||||||||||||||||
Balance at December 31, 2020 | 2,595,087 | 954,283 | 39,467 | 182,435 | 2,555,620 | 771,848 | ||||||||||||||||||
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended | ||||||||
December 31, 2020 | December 31, 2019 | |||||||
Cash Flows from Operating Activities | ||||||||
Net Income | $ | 5,839,387 | $ | 6,979,863 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,458,593 | 2,054,721 | ||||||
Loss on disposal of assets | - | 10,544 | ||||||
Non-cash share-based compensation expense | 296,899 | 348,877 | ||||||
| Unrealized gain on investments | (585,107 | ) | ||||||
Deferred income taxes | 222,094 | 548,715 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease (Increase) in accounts receivable | 2,751,191 | (4,164,533 | ) | |||||
Decrease (Increase) in inventories | (434,014 | ) | (2,180,708 | ) | ||||
Decrease (Increase) in contract assets | (1,313,178 | ) | (339,030 | ) | ||||
Decrease (Increase) in prepaid expenses & other assets | 80,311 | 125,324 |
| |||||
Increase (Decrease) in accounts payable | 2,752,081 | 747,632 | ||||||
Increase (Decrease) in accrued expenses | (996,956 | ) | 32,328 | |||||
Increase (Decrease) in unearned revenue | (1,178,576 | ) | (3,269,190 | ) | ||||
Total adjustments | 4,053,338 | (6,085,320 | ) | |||||
Net Cash Provided by Operating Cash Activities | $ | 9,892,725 | $ | 894,543 | ||||
Cash Flows from Investing Activities | ||||||||
Cash paid for acquisition | $ | (9,400,000 | ) | $ | (50,001 | ) | ||
Capital expenditures | (574,315 | ) | (746,430 | ) | ||||
Purchase of equity securities | (949,293 | ) | - | |||||
Net Cash Used in Investing Activities | (10,923,608 | ) | (796,431 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Borrowings on PPP loans | 5,133,220 | - | ||||||
Payments on related party notes | (2,187,960 | ) | (1,592,298 | ) | ||||
Repayment of PPP loans | (3,679,383 | ) | - | |||||
Borrowings on convertible notes | - | 266,880 | ||||||
Payments on bank debt | (6,393,747 | ) | (4,385,211 | ) | ||||
Borrowings on bank debt | 12,152,802 | 2,539,598 | ||||||
Share repurchase | (32,272 | ) | - | |||||
Payments on capital lease | - | (11,158 | ) | |||||
Proceeds from options and warrants | - | 258,950 | ||||||
Net Cash Provided by (Used in) Financing Activities | 4,992,660 | (2,923,239 | ) | |||||
Net Increase (decrease) in cash and cash equivalents | 3,961,777 | (2,825,127 | ) | |||||
Cash and cash equivalents at beginning of year | 2,232,499 | 5,057,626 | ||||||
Cash and cash equivalents at end of year | $ | 6,194,276 | $ | 2,232,499 | ||||
Supplemental disclosures of cash flow information | ||||||||
Interest paid | $ | 831,654 | $ | 949,280 | ||||
Income taxes paid | $ | 956,246 | $ | 1,815,482 | ||||
Conversion of debt to equity | $ | - | $ | 848,000 | ||||
Years Ended December 31, | ||||||||
2023 | 2022 | |||||||
Cash Flows from Operating Activities | ||||||||
Net Income | $ | 13,294,793 | $ | 6,561,403 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,921,740 | 3,750,805 | ||||||
Loss (Gain) on investments in equity securities | (7,330 | ) | 860,273 | |||||
Reduction in carrying amount of RoU assets | 1,720,844 | 1,706,810 | ||||||
Loss (Gain) on disposal of assets | (3,988 | ) | 16,930 | |||||
Write off of contingent liability | - | (750,000 | ) | |||||
Share-based compensation expense | 1,377,423 | 957,728 | ||||||
Deferred income taxes | (1,074,308 | ) | (1,872,770 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 2,212,974 | (2,745,949 | ) | |||||
Inventories | 2,355,929 | (2,772,375 | ) | |||||
Contract assets | (1,538,046 | ) | (1,173,244 | ) | ||||
Prepaid expenses & other current assets | 218,736 | (373,139 | ) | |||||
Right of use assets | (457,317 | ) | (2,232,314 | ) | ||||
Other noncurrent assets | 254,691 | (265,166 | ) | |||||
Accounts payable | (2,849,665 | ) | 1,981,556 | |||||
Lease liabilities | (1,150,159 | ) | 538,067 | |||||
Accrued income taxes | (699,413 | ) | 2,555,884 | |||||
Other current liabilities | (27,551 | ) | 204,050 | |||||
Unearned revenue | 1,241,838 | 1,097,850 | ||||||
Total adjustments | 5,496,398 | 1,484,996 | ||||||
Net Cash Provided by Operating Activities | 18,791,191 | 8,046,399 | ||||||
Cash Flows from Investing Activities | ||||||||
Cash paid for business acquisitions | - | (4,331,739 | ) | |||||
Capital expenditures | (2,032,773 | ) | (742,828 | ) | ||||
Net Cash Used in Investing Activities | (2,032,773 | ) | (5,074,567 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Payments on related party notes | (1,855,942 | ) | (4,071,885 | ) | ||||
Payments on bank debt | (21,667,362 | ) | (7,120,834 | ) | ||||
Borrowings on bank debt | 7,276,208 | 8,868,238 | ||||||
Payments on contingent liability | - | (750,000 | ) | |||||
Share repurchase | (111,774 | ) | (144,139 | ) | ||||
Net Cash Used in Financing Activities | (16,358,870 | ) | (3,218,620 | ) | ||||
Net Increase (Decrease) in cash and cash equivalents | 399,548 | (246,788 | ) | |||||
Cash and cash equivalents at beginning of period | 1,247,627 | 1,494,415 | ||||||
Cash and cash equivalents at end of period | $ | 1,647,175 | $ | 1,247,627 | ||||
Supplemental disclosures of cash flow information | ||||||||
Interest paid | $ | 1,220,439 | $ | 1,060,483 | ||||
Income taxes paid | $ | 5,599,745 | $ | 582,883 | ||||
Supplemental disclosures of noncash financing and investing activity | ||||||||
Additions to ROU assets obtained from new operating lease liabilities | $ | 457,317 | $ | 2,232,314 | ||||
Purchase accounting adjustment to Goodwill for a change in inventory | $ | 147,591 | $ | - | ||||
Purchase accounting adjustment to Goodwill for a change in fixed assets | $ | 73,520 | $ | - | ||||
Issuance of Class A common shares in business acquisition | $ | - | $ | 1,000,012 | ||||
Issuance of Class A common shares for capital expenditures | $ | 150,000 | $ | - | ||||
See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CRAWFORD UNITED CORPORATIONDECEMBERDecember 31, 2020 AND2023 and 20222019
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for financial information(GAAP) and with the instructions to Form 10-K10-K and Article 8 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Principles of Consolidation
S-X.The consolidated financial statements include the accounts of Crawford United Corporation and its wholly-owned domestic subsidiaries.subsidiaries (the “Company”). Significant intercompany transactions and balances have been eliminated in the financial statements.
During the year ended December 31, 2023, there have been no changes to the Company's significant accounting policies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NewRecent Accounting Standards AdoptedPronouncements
In FebruaryJune 2016, the FASB issued ASU 2016-02 “Leases (Topic 842),” a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. The new standard was effective for fiscal years and interim periods within those years, beginning on or after December 15, 2018. The adoption of this new standard on January 1, 2019 resulted in assets of $9.7 million recorded as Operating Right of Use Assets, net, and additional lease liabilities of $9.8 million. The Company also recorded an adjustment to retained earnings resulting from the cumulative effect of the change in accounting of ($0.1) million. See Note 9 for further information.
In January 2017, FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard, which should be applied prospectively, is effective for fiscal years beginning after December 15, 2019. The Company adopted this standard on January 1, 2020, and did not result in any impairment.
New Accounting Standards Not Yet Adopted
In June 2016 the FASB issued ASU 2016-13,-13, Financial Instruments-Credit Losses. The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard will bewas effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company has fully adopted the standard with no material impact to the financial statements.
ConcentrationIn November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU enhances reportable segment disclosures on both an annual and interim basis primarily in regards to the disclosure of Credit Risk
significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within the reported measure(s) of segment profit or loss. In addition, the ASU requires disclosure, by segment, of other items included in the reported measure(s) of segment profit or loss, including qualitative information describing the composition, nature and type of each item. The ASU also expands disclosure requirements related to the CODM, including how the reported measure(s) of segment profit or loss are used to assess segment performance and allocate resources, the method used to allocate overhead for significant segment expenses and others. Lastly, all current required annual segment reporting disclosures under Topic 280 are now effective for interim periods. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company sells its products and services primarily to customers inis evaluating the United Statesimpact of America and to a lesser extent overseas. All sales are made in U.S. dollars. The Company extends normal credit terms to its customers. For the year ended December 31, 2020, sales to three customers in the Commercial Air Handling segment were 15% of consolidated sales of the Company, while one customer in the Aerospace Components segment accounted for 33% of consolidated sales. For the year ended December 31, 2019, sales to three customers in the Commercial Air Handling segment were 12% of consolidated sales of the Company, while one customer in the Aerospace Components segment accounted for 29% of consolidated sales.adopting this ASU.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU enhances income tax disclosures by providing information to better assess how an entity’s operations, related tax risks, tax planning and operational opportunities affect its tax rate and prospects for future cash flows. This ASU requires additional disclosures to the annual effective tax rate reconciliation including specific categories and further disaggregated reconciling items that meet the quantitative threshold. Additionally, the ASU requires disclosures relating to income tax expense and payments made to federal, state, local and foreign jurisdictions. This ASU is effective for fiscal years and interim periods beginning after December 15, 2024. The Company is evaluating the impact of adopting this ASU.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of certain assets and liabilities and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Accounting for "Financial Instruments" requires the Company to disclose estimated fair values of financial instruments. Financial instruments held by the Company include, among others, accounts receivable, accounts payable, and notes payable. The carrying amounts reported in the consolidated balance sheet for assets and liabilities qualifying as financial instruments is a reasonable estimate of fair value.
Fair Value Measurements
As defined in FASB ASC 820, "Fair Value Measurements", fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
* Level 1: Quoted market prices in active markets for identical assets or liabilities.
* Level 2: Inputs to the valuation methodology include: *
- Quoted prices for similar assets or liabilities in active markets;
*
- Quoted prices for identical assets or similar assets or liabilities in inactive markets;
*
- Inputs other than quoted prices that are observable for the asset or liability;
*
- Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
* Level 3: Unobservable inputs that are not corroborated by market data.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
FollowingThe following is a description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Stock:Investments in stock: The stock market value is based on valuation of market quotes from independent active market sources, and is considered a level 1 investment.
Concentration of Credit Risk
The Company sells its products and services primarily to customers in the United States of America and to a lesser extent overseas. All sales are made in U.S. dollars. The Company extends normal credit terms to its customers. For the year ended December 31, 2023, sales to nine customers in the Commercial Air Handling Equipment segment were 18.9% of consolidated sales of the Company, while sales to nine customers in the Industrial and Transportation Products segment accounted for 23.2% of consolidated sales. For the year ended December 31, 2022, sales to nine customers in the Commercial Air Handling Equipment segment were 17.0% of consolidated sales of the Company, while nine customers in the Industrial and Transportation Products segment accounted for 22.5% of consolidated sales.
Revenue Recognition
The Company recognizes revenue under ASC 606, “Revenue from Contracts with Customers”. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company appliesby analyzing the following standardsfive steps: (1) Identify the contract with the customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and recognizes5) Recognize revenue when (1) it has a firm contract and the parties are committed to perform their respective obligations, (2) the product has been shipped to and accepted by the customer or the service has been provided, (3) the sales price(or as) each performance obligation is fixed or determinable and (4) amounts are reasonably assured of collection, including the consideration of the customer’s ability and intention to pay when the amount is due.satisfied. The Company primarily receives fixed consideration for sales of product. The Company does not have any significant financing components as payment is received at or shortly after the point of sale. Costs incurred to obtain a contract will be expensed as incurred when the amortization period is less than a year. Shipping and handling amounts paid by customers are included in revenue. Sales tax and other similar taxes are excluded from revenue.
Contract Performance Obligations:
To determine proper revenue recognition, the Company evaluates whether two or more contracts should be combined and accounted for as a single contract and whether a combined or single contract should be accounted for as more than one performance obligation. This evaluation sometimes requires judgment, and the decision to combine contracts or separate a combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Contracts are considered to contain a single performance obligation if the promise to transfer individual goods or services is not separately identifiable from other promises in the contracts primarily because the Company provides a significant service of integrating a complex set of tasks and components into a single project or capability. Contracts that cover multiple performance phases of the product lifecycle (development, construction, maintenance and support) are typically considered to have multiple performance obligations even when they are part of a single contract. The Company provides warranties, as well as limited workmanship warranties, to customers. These warranties are included in the sale, and do not provide customers with a service in addition to assurance of compliance with agreed upon specifications. The Company does not consider these assurance-type warranties to be separate performance obligations.
Construction Contracts
The Company recognizes revenue on construction contracts over time;time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. The customer typically controls the work in process, as evidenced by the contract.
The Company’s construction contracts are generally accounted for as a single performance obligation, since the Company is providing a significant service of integrating components into a single project. The Company recognizes revenue using a cost-based input method, by which actual costs incurred relative to total estimated contract costs determine, as a percentage, progress toward contract completion. This percentage is applied to the transaction price to determine the amount of revenue to recognize. The Company believes the cost-based input method is the best depiction of performance, because it directly measures the value of the services transferred to the customer. Revenues on uninstalled materials are recognized when control is transferred to the customer, which does not necessarily equate to when the cost is incurred.
If based on a lack of reliable information, progress cannot be reasonably measured, recognition of revenues (but not costs) is deferred until progress can be reliably measured. If, however, the Company expects that total costs will be recovered, revenues are recognized equal to costs incurred until the Company can reliably measure progress. There were no contracts that were unable to be reasonably measured at December 31, 2023 and 2022.
Revenues on uninstalled materials are recognized when control is transferred to the customer, which does not necessarily equate to when the cost is incurred. Under limited circumstances (e.g., transfer of control occurs significantly after services are provided, the cost of the materials is significant), revenue is recognized, but no profit is recognized, on certain uninstalled third-party materials when the cost is incurred.
Because the Company almost always acts as a principal in contracts, revenues are recognized gross. The Company is considered the principal because the Company controls the contractually specified goods and services before they are transferred to the customer. The payment terms of the Company’s construction contracts from time to time require the customer to make advance payments as well as interim payments as work progresses. The advance payment generally is not considered a significant financing component as the Company expects to recognize those amounts in revenue within a year of receipt as work progresses on the related performance obligation.
The payment terms of the Company’s construction contracts from time to time require the customer to make advance payments as well as interim payments as work progresses. The advance payment generally is not considered a significant financing component as the Company expect to recognize those amounts in revenue within a year of receipt as work progresses on the related performance obligation.
Contract Assets
Contract assets are related to the Commercial Air Handling segment. A contract asset is recorded when revenue is recognized in advance of the right to receive consideration (i.e., the Company must perform additional services in order to receive consideration). Amounts are recorded as receivables when the right to consideration is unconditional. When consideration is received, or the Company has an unconditional right to consideration in advance of delivery of goods or services, a contract liability would be recorded.
Contract Estimates
Due to the nature of the Company’s performance obligations, the estimation of total revenue and cost at completion is subject to many variables and requires significant judgment. Since a significant change in one or more of these variables could affect the profitability of contracts, the Company reviews and updates contract-related estimates regularly through a review process in which the Company reviews the progress and execution of performance obligations and the estimated cost at completion.
The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, a provision for the entire loss is recognized in the period it is identified.
Contract Modifications
Contract modifications are routine in the performance of the Company’s contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract.
Variable Consideration
The nature of the Company’s contracts can, but typically do not, give rise to several types of variable consideration, including claims, unpriced change orders, and liquidated damages and penalties. The Company recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company estimates the amount of revenue to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the amount.
Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on assessment of legal enforceability, past performance, and all information (historical, current, and forecasted) that is reasonably available to the Company.
Cost and Expense Recognition
Contract costs include all direct labor, materials, subcontractor, and equipment costs, and those indirect costs related to contract performance, such as indirect labor, tools and supplies. For construction contracts, costs are generally recognized as incurred. Under certain circumstances, costs incurred in the period related to future activity on contracts may be capitalized.
Costs incurred that do not contribute to satisfying performance obligations are excluded from the cost input calculation for revenue recognition. Excluded costs include both uninstalled materials and abnormal costs. Abnormal costs comprise wasted materials, wasted or rework labor and other resources to fulfill a contract that were not reflected in the price of the contract. A limited allowance for material overages and labor inefficiencies is typically included in our contract costs estimates (and by extension in the contract price).
For construction contracts, when it is probable that the total contract costs will exceed total contract revenues, a provision for the estimated expected loss is recorded. As long-term contracts extend over one or more years, revisions in costs and profits estimated during the course of the work are reflected in the accounting period in which the facts requiring the changes become known. Contracts which are substantially complete are considered closed for financial statement purposes.
Unearned Revenue
Unearned revenue consists of customer deposits and contract liabilities related to the Commercial Air Handling Equipment segment. Unearned revenue for the year ended December 31, 2022 was $4,354,868, substantially all of this unearned revenue was recognized in 2023
Disaggregation of Revenue
Revenue earned over time was $43.4 million and $51.6 million for the years ended December 31, 2020 and 2019. Revenue earnedcompared to at a point in time was $41.7 million and $38.1 millionis as follows for the years ended December 31, 2020 2023 and 2019.2022.
December 31, | ||||||||
2023 | 2022 | |||||||
Earned over time | $ | 59,572,611 | $ | 50,236,873 | ||||
Point in time | 84,313,323 | 77,518,054 | ||||||
Total revenue | $ | 143,885,934 | $ | 127,754,927 | ||||
Deferred Commissions
Commissions are earned based on the status of the contract. Commissions are paid upon receipt of payment for units shipped.
Product Warranties
The Company provides a warranty for its custom air handling business covering parts for 12 months from startup or 18 months from shipment, whichever comes first. The warranty reserve is maintained at a level which, in management’s judgment, is adequate to absorb potential warranties incurred. The amount of the reserve is based on management’s knowledge of the contracts and historical trends. Because of the uncertainties involved in the contracts, it is reasonably possible that management’s estimates may change in the near term. However, the amount of change that is reasonably possible cannot be precisely estimated at this time. There are no material warranty obligations outside of the air handling business.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. From time to time the Company maintains cash balances in excess of the FDIC limits.
Accounts Receivable
The Company establishesrecognizes an allowance for doubtfullosses on accounts receivable in an amount equal to the current expected credit losses. The estimation of the allowance is based upon factors surrounding the credit riskon an analysis of historical loss experience, current receivables aging, and management’s assessment of current conditions and reasonable and supportable expectation of future conditions, as well as an assessment of specific customers, historical trendsidentifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for expected credit losses is recognized in selling, general and other information.administrative expenses
InventoryInventory is
Inventories are valued using the first-in, first-out (“FIFO”) method; stated at the lower of cost (first-in, first-out) or net realizable value.value; and are reduced by an allowance for obsolete and slow-moving inventories. The Company establishes reservesallowance is estimated based on management’s review of inventories on hand with minimal sales activity, which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for excess and obsolete inventory based upon historical inventory usage trends and other information.on estimated selling prices less disposal costs.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Maintenance and repair costs are expensed as incurred. Additions and betterments are capitalized. The depreciation policy of the Company is generally as follows:
Class | Method | Estimated Useful Lives (years) | |||||
Buildings & Improvements | Straight-line | 10 | to | 40 | |||
Machinery and equipment | Straight-line | 3 | to | 20 | |||
Tools and dies | Straight-line | 3 | |||||
Estimated Useful | |||||
Class | Method | Lives (years) | |||
Buildings and Improvements | Straight-line | 10 to 40 | |||
Machinery and Equipment | Straight-line | 3 to 20 |
Valuation of Long-Lived Assets
Long-lived assets such as property, plant and equipment, and softwareas well as intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset.
Shipping and Handling Costs
Shipping and handling costs are classified as cost of product sold.
Income Taxes
The provision for income taxes is computed on domestic financial statement income. Where transactions are included in the determination of taxable income in a different year, deferred income tax accounting is used.
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus any change in deferred taxes during the year. Deferred taxes result from differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The company is currently undergoing an IRS concluded the audit of the 2018 tax return. Tax Return on February 3, 2023 and there were no material findings and this matter is considered closed.
Income per Common Share
Income per common share information is computed on the weighted average number of shares outstanding during each period.
Goodwill
Indefinite-lived intangible assets and Goodwill are tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not (i.e., a likelihood greater than 50%) that the intangible asset or the reporting unit is impaired.
Reclassifications: Certain 2022 financial information has been reclassified to conform to the 2023 presentation.
The balance of accounts receivable, net was $19.7 million, $21.9 million, and $18.4 million at December 31, 2023, 2022 and 2021, respectively.
The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.information relevant to estimating expected credit losses. The reserve for doubtful accounts was $19,973$105,223, $143,631 and $18,325$75,930 at December 31, 20202023, 2022 and 2019,2021, respectively.
Inventory is valued at the lower of cost (first-in, first-out)(first-in, first-out) or net realizable value and consistconsists of the following:
December 31, 2020 | December 31, 2019 | |||||||
Raw materials and component parts | $ | 3,897,133 | $ | 2,945,427 | ||||
Work-in-process | 3,449,252 | 2,800,699 | ||||||
Finished products | 3,999,920 | 2,183,170 | ||||||
Total Inventory | 11,346,305 | 7,929,296 | ||||||
Less: Inventory reserves | 315,345 | 250,606 | ||||||
Net Inventory | $ | 11,030,960 | $ | 7,678,690 | ||||
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
Raw materials and component parts | $ | 3,989,444 | $ | 2,892,820 | ||||
Work-in-process | 4,514,263 | 5,158,252 | ||||||
Finished products | 9,846,694 | 13,483,017 | ||||||
Total inventory | $ | 18,350,401 | $ | 21,534,089 | ||||
Less: inventory reserves | 677,779 | 1,357,947 | ||||||
Net inventory | $ | 17,672,622 | $ | 20,176,142 | ||||
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Impairment testing
U.S. GAAP requires that both indefinite-lived intangible assets and goodwillGoodwill are tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not (i.e., a likelihood greater than 50%) that the intangible asset or the reporting unit is impaired. During interim periods, ASC 350 requires companies to focus on those events and circumstances that affect the significant inputs used to determine the fair value of the asset group or reporting unit to determine whether an interim quantitative impairment test is requires.required.
The Company performed its annual impairment test for goodwillGoodwill and intangible assets as of the last day of the fourth quarter. The Company first assessed certain qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible assets is less than its carrying amount, adand whether it is therefore necessary to perform the quantitative impairment test. ForIn 2023, for all reporting units other than CAD Enterprises the aerospace reporting unit, the Company performedqualitative analysis indicated that a quantitative analysis was not necessary. During 2022 a quantitative analysis was performed for Global-Tek as well as CAD. Noimpairment test, including a discounted cash flow model and peer comparison. As a result ofwas identified in the impairment testing, it was determined that no indefinite-lived intangible assets or goodwill was impaired.periods presented.
The Goodwill values are presented below:
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
Commercial Air Handling Equipment Segment: | ||||||||
Beginning Balance | $ | 478,256 | $ | 478,256 | ||||
Acquisitions | - | - | ||||||
Adjustments | - | - | ||||||
Ending Balance | $ | 478,256 | $ | 478,256 | ||||
Industrial and Transportation Products Segment: | ||||||||
Beginning Balance | $ | 15,753,682 | $ | 13,926,362 | ||||
Acquisitions | - | 1,997,174 | ||||||
Adjustments | 221,111 | (169,854 | ) | |||||
Ending Balance | $ | 15,974,793 | $ | 15,753,682 | ||||
Total Company: | ||||||||
Beginning Balance | $ | 16,231,938 | $ | 14,404,618 | ||||
Acquisitions | - | 1,997,174 | ||||||
Adjustments | 221,111 | (169,854 | ) | |||||
Ending Balance | $ | 16,453,049 | $ | 16,231,938 | ||||
Goodwill increased by $0.2 million from $16.2 million at December 31, 2022 to $16.5 million at December 31,2023. The increase in Goodwill was driven by a purchase accounting adjustment to Goodwill, recorded in the second quarter of 2023, for Knitting Machinery Company of America (KMC). Goodwill increased by $1.8 million from $14.4 million at December 31, 2021 to $16.2 million at December 31, 2022. The increase in Goodwill was driven by the addition of $2.0 million in the Industrial and Transportation Products segment related to the acquisitions of Reverso Pumps & Separ America and KMC and in the first and second quarters of 2022, respectively. These increases were partially offset by a decrease of $0.2 million related to a purchase accounting adjustment for Global-Tek, also in the Industrial and Transportation Products segment.
Intangible assets relate to the purchase of businesses. Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is not amortized, but is reviewed on an annual basis for impairment. Amortization of other intangible assets is calculated on a straight-line basis over periods ranging from one year to 15 years. Intangible assets consist of the following:
December 31, 2020 | December 31, 2019 | |||||||
Customer Intangibles | $ | 7,700,000 | $ | 4,970,000 | ||||
Non-Compete Agreements | 200,000 | 200,000 | ||||||
Trademarks | 1,930,000 | 340,000 | ||||||
Total Other Intangibles | 9,830,000 | 5,510,000 | ||||||
Less: Accumulated Amortization | 2,271,691 | 1,559,162 | ||||||
Other Intangibles, Net | $ | 7,558,309 | $ | 3,950,838 | ||||
December 31, 2023 | December 31, 2022 | |||||||
Customer list intangibles | $ | 9,316,000 | $ | 9,316,000 | ||||
Non-compete agreements | 200,000 | 200,000 | ||||||
Trademarks | 4,466,899 | 4,445,649 | ||||||
Total intangible assets | 13,982,899 | 13,961,649 | ||||||
Less: accumulated amortization | 5,730,299 | 4,469,089 | ||||||
Intangible assets, net | $ | 8,252,600 | $ | 9,492,560 | ||||
Intangible amortization expense was as follows:
December 31, 2020 | December 31, 2019 | December 31, 2023 | December 31, 2022 | |||||||||||||
Accumulated amortization at the beginning of the period | $ | 1,559,162 | $ | 1,177,798 | $ | 4,469,089 | $ | 3,203,585 | ||||||||
Amortization expense | 712,529 | 381,364 | 1,261,210 | 1,265,504 | ||||||||||||
Accumulated amortization at end of period | $ | 2,271,691 | $ | 1,559,162 | $ | 5,730,299 | $ | 4,469,089 | ||||||||
Intangible amortization for the next five years is as follows:
Amortization in future periods | ||||
2021 | 712,530 | |||
2022 | 689,197 | |||
2023 | 672,530 | |||
2024 | 672,530 | |||
2025 | 672,530 | |||
Amortization in future periods | ||||
2024 | 1,261,210 | |||
2025 | 1,261,210 | |||
2026 | 933,345 | |||
2027 | 817,298 | |||
2028 | 759,117 | |||
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are recorded at cost and depreciated over their useful lives. Maintenance and repair costs are expenses as incurred. Property, plant and equipment are as follows:
December 31, 2020 | December 31, 2019 | |||||||
Land | $ | 228,872 | $ | 228,872 | ||||
Buildings and Improvements | 2,061,887 | 1,837,009 | ||||||
Machinery & Equipment | 14,329,462 | 13,950,444 | ||||||
Total Property, Plant & Equipment | 16,620,221 | 16,016,325 | ||||||
Less: Accumulated Depreciation | 5,329,438 | 3,622,153 | ||||||
Property Plant & Equipment, Net | $ | 11,290,783 | $ | 12,394,172 | ||||
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
Land | $ | 231,034 | $ | 231,034 | ||||
Buildings and improvements | 3,760,203 | 3,222,243 | ||||||
Machinery & equipment | 24,851,703 | 23,301,660 | ||||||
Total property, plant & equipment | 28,842,940 | 26,754,937 | ||||||
Less: accumulated depreciation | 14,156,750 | 11,541,494 | ||||||
Property plant & equipment, net | $ | 14,686,190 | $ | 15,213,443 | ||||
During the second quarter of 2023, the Company issued 7,317 Class A Common Shares, valued at $150,000, to Air Power Dynamics, LLC in an arms-length exchange for an aerospace tooling machine. Air Power Dynamics, LLC is controlled by Ambassador Edward Crawford, who is the chairman of the Company's board.
Depreciation expense for the years ended December 31, 2020 2023 and 20192022 was $1,707,285$2,619,244 and $1,645,829,$2,398,445, respectively.
7. INVESTMENTS IN EQUITY SECURITIES
Investments in equity securities as of December 31, 20202023 and 2022 are summarized in the table below:
2020 | ||||||||
Cost | Market | |||||||
Stock | $ | 949,293 | $ | 1,534,400 | ||||
Less cost | 949,293 | |||||||
Gross unrealized gains on equity securities | 585,107 | |||||||
Deferred income taxes | 146,736 | |||||||
Net unrealized gains on equity securities | $ | 438,371 | ||||||
There were no investments held by the Company as of December 31, 2019.
UNREALIZED | REALIZED | |||||||||||||||||||
BALANCE | ACQUISITIONS, | GAINS | GAINS | BALANCE | ||||||||||||||||
AT | DISPOSITIONS | (LOSSES) | (LOSSES) | AT END | ||||||||||||||||
BEGINNING | AND | INCLUDED | INCLUDED | OF | ||||||||||||||||
OF YEAR | SETTLEMENTS | IN EARNINGS | IN EARNINGS | PERIOD | ||||||||||||||||
December 31, 2022 | $ | 1,518,244 | $ | - | $ | (860,273 | ) | $ | - | $ | 657,971 | |||||||||
Year-to-date December 31, 2023 | 657,971 | - | 53,614 | (46,284 | ) | 665,301 | ||||||||||||||
Investments by fair value level in the hierarchy as of December 31, 20202023 and December 31, 2022 are as follows:
Quoted Market Prices in Attractive Markets (Level 1) | Models with Significant Observable Market Parameters (Level 2) | Unobservable Inputs that are not Corroborated by Market Data (Level 3) | Total Carrying Value in the Balance Sheet | |||||||||||||
Common stock | $ | 1,534,400 | $ | - | $ | - | $ | 1,534,400 | ||||||||
Unobservable | ||||||||||||||||
Quoted | Models with | Inputs that | ||||||||||||||
Market | Significant | are not | Total | |||||||||||||
Prices in | Observable | Corroborated | Carrying | |||||||||||||
Attractive | Market | by Market | Value in the | |||||||||||||
Markets | Parameters | Data | Balance | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Sheet | |||||||||||||
Common stock as of December 31, 2023 | $ | 665,301 | $ | - | $ | - | $ | 665,301 | ||||||||
Common stock as of December 31, 2022 | $ | 657,971 | $ | - | $ | - | $ | 657,971 | ||||||||
8. BANK DEBT and NOTES PAYABLE
The Company is party to a Credit Agreement with JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”).
The Company entered into a sixth amendment to the Credit Agreement on June 1, 201712, 2023. The most significant change in the amended Credit Agreement was the discontinued use of LIBOR as a reference rate, with JPMorgan Chasethe adoption of the Federal Reserve Bank N.A.of New York's Secured Overnight Financing Rate (SOFR) as lender, whichthe primary reference rate. This change was subsequently amended in connectionanticipated and aligns with funding the acquisition of CAD Enterprises, Inc. (“CAD”)US Dollar LIBOR panel ceasing on July 5, 2018 (as amended, the “Credit Agreement”). As amended,June 30, 2023.
The Company entered into a seventh amendment to the Credit Agreement is comprisedon November 27, 2023. The Seventh Amendment to the Credit Agreement, among other things, (a) extends the maturity date of a revolvingthe underlying credit facility from June 1, 2024 to June 1, 2027, (b) increases the maximum annual amount that the Company and its subsidiaries may pay in dividends or other restricted payments to $2,000,000 from $1,250,000, and (c) permits the amountrepurchase by the Company and its subsidiaries of $12,000,000, up to $7,000,000 of Company equity prior to June 30, 2024, subject to a borrowing base (determined based on 80% of Eligible Accounts, plus 50% of Eligible Progress Billing Accounts, plus 50% of Eligible Inventory, minus Reserves, each as defined incompliance with certain financial covenants under the Credit Agreement) Agreement.
A Term Loan A matured December 1, 2022, and a term A loanwas paid in the amount of $6,000,000. Outstanding borrowingsfull on the term A loan are payable in consecutive monthly installments, which currently amount to $111,111 per month. The Credit Agreement was amended on September 30, 2019 to expand the revolving loan amount from $12,000,000 to $20,000,000, subject to a borrowing base, and to extend the maturity of revolving facility from June 1, 2021 to June 1, 2024. The Credit Agreement was amended on December 30, 2019 to eliminate the borrowing base. The Credit Agreement was amended on March 2, 2021 to expand the revolving loan amount from $20,000,000 to $30,000,000January 4, 2023.
The revolving facility under the Credit Agreement includes a $3 million sublimit for the issuance of letters of credit thereunder. Interest for borrowings under the revolving facility accrues at a per annum rate equal to Prime Rate or LIBORSOFR (previously LIBOR) plus applicable margins of (i) (0.25%) for Prime Rate loans and (ii) 1.75% for LIBORSOFR (previously LIBOR) loans. The maturity date of the revolving facility is June 1, 2024. Interest for borrowings under the term A loan accrues at a per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) 0.25% for Prime Rate loans and (ii) 2.25% for LIBOR loans. The maturity date of the term A loan is December 1, 2022. The Credit Agreement includes a commitment fee on the unused portion of the revolving facility of 0.25% per annum payable quarterly.
The obligations of the Company and other borrowers under the Credit Agreement are secured by a blanket lien on all the assets of the Company and its subsidiaries. The Credit Agreement also includes customary representations and warranties and applicable reporting requirements and covenants. The financial covenants under the Credit Agreement include a minimum fixed charge coverage ratio, a maximum senior funded debt to EBITDA ratio and a maximum total funded debt to EBITDA ratio.
Bank debt balances consist of the following:
December 31, 2020 | December 31, 2019 | |||||||
Term Debt | $ | 2,777,778 | $ | 4,111,111 | ||||
Revolving Debt | 10,825,797 | 3,722,995 | ||||||
Total Bank Debt | 13,603,575 | 7,834,106 | ||||||
Less: Current Portion | 1,333,333 | 1,333,333 | ||||||
Non-Current Bank Debt | 12,270,242 | 6,500,773 | ||||||
Less: Unamortized Debt Costs | 95,814 | 124,179 | ||||||
Net Non-Current Bank Debt | $ | 12,174,428 | $ | 6,376,594 | ||||
Minimum principal payments due on the term loan until maturity are:
Term Loan | ||||
2021 | 1,333,333 | |||
2022 | 1,444,445 | |||
Total principal payments | $ | 2,777,778 | ||
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
Term debt | $ | - | $ | 222,222 | ||||
Revolving debt | 5,112,187 | 19,281,119 | ||||||
Total Bank debt | 5,112,187 | 19,503,341 | ||||||
Less: current portion | - | 222,222 | ||||||
Non-current bank debt | 5,112,187 | 19,281,119 | ||||||
Less: unamortized debt costs | 15,515 | 56,801 | ||||||
Net non-current bank debt | $ | 5,096,672 | $ | 19,224,318 | ||||
The Company had $9.2$24.9 million and $16.3$10.7 million available to borrow on the revolving credit facility at December 31, 2020 2023 and 2019,2022, respectively.
Convertible Notes Payable
On December 30, 2011, management entered into a Convertible Loan Agreement (“Convertible Loan”) with Roundball, LLC (“Roundball”). The Convertible Loan provides approximately $467,000 of liquidity to meet on- going working capital requirements of the Company and allows $250,000 of borrowing on the agreement at the Company's discretion at an interest rate of 0.25%. Roundball, a major shareholder of the Company, is an affiliate of Steven Rosen and Matthew Crawford, Directors of the Company.
As part of the Convertible Loan, the parties entered into a Warrant Agreement, dated December 30, 2012 (as amended to date, the “Warrant Agreement”), whereby the Company issued a warrant to Roundball to purchase, at its option, up to 100,000 shares of Class A Common Stock of the Company at an exercise price of $2.50 per share, subject to certain anti-dilution and other adjustments. The Warrant Agreement, as amended, expired December 30, 2019.
On December 11, 2019, Roundball provided notice to the Company of its exercise of the Conversion Option and exercised the Warrants. On December 18, 2019, the Company issued 75,000 Class B Shares and 251,489 shares of the Company’s Class A common stock (the “Class A Shares”) to Roundball following the Company’s receipt on December 11, 2019, of a notice from Roundball of its exercise of the Conversion Option in respect of $466,880 of the principal and interest amount outstanding under the Promissory Note between the Company and Roundball, thereupon retiring all outstanding debt incurred and accrued interest under the Promissory Note.
On December 11, 2019, Roundball exercised the Warrants for 100,000 of the Company’s Class A Shares at an exercise price of $2.50 per share, resulting in an aggregate exercise price of $250,000.
The outstanding balance on the Convertible Loan as of December 31, 2020 and 2019, respectively was $0 and $200,000.
Notes Payable – Related Party
The Company has two separate outstanding promissory notes with First Francis Company Inc. (“First Francis”), which were originally issued in July 2016 inIn connection with the Komtek Forge acquisition, on January 15, 2021, the Company refinanced its previously outstanding First Francis promissory notes in the aggregate amount of Federal Hose Manufacturing (“Federal Hose”)$2,077,384, including accrued interest payable through the refinance date and which were amended in July 2018 in connectioncombined this amount with acquisition of CAD. The firstan existing First Francis promissory note was issued with original principalcarried by Komtek Forge in the amount of $2,000,000, and the second was issued with original principal$1,702,400 into one note for a combined $3,779,784 loan due to First Francis Company, payable in the amount of $2,768,662. quarterly installments beginning April 15, 2021. The promissory notes each have an interest rate ofon the refinanced loan remained at 6.25% per annum, which was increased from 4.0% per annum as part of the July 2018 amendments to the Credit Agreement. In addition, the promissory note with original principal amount of $2,768,662 was amended in July 2018 to provide for a conversion option commencing July 5, 2019 which allows First Francis to convert the promissory note, in whole in part with respect to a maximum amount of $648,000, into shares of the Company’s Class B common stock at the price of $6.48 per share (subject to adjustment), subject to shareholder approval which was obtained on May 10, 2019. On July 9, 2019, First Francis exercised its option to convert $648,000 of existing indebtedness into 100,000 Class B Common Shares of the Company.annum. First Francis is owned by Ambassador Edward Crawford and Matthew Crawford, who servesboth of whom serve on the Board of Directors of the Company, and Edward Crawford, who served on the Board of Directors of the Company until June 17, 2019. Company.
Notes Payable – Seller Note
Effective July 1, 2018, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of CAD. Upon the closing of the transaction, the CAD shares were transferred and assigned to the Company in consideration of the payment by the Company of an aggregate purchase price of $21 million, $12 million of which was payable in cash at closing, with the remainder paid in the form of a subordinated promissory note issued by the Company in favor of a Seller (the “Seller Note), which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Share Purchase Agreement entered into in connection with the acquisition (the “Share Purchase Agreement”Note”). The Seller Note bearshad an interest at a rate of four percent (4%(4.00%) per annum and is payablethe loan was paid in full no later than June 30, 2023 (the “Maturity Date”). The Maturity Date, with respect to any then-outstanding portionon March 31, 2023.
Notes Payable
Notes payable consists of the original principal amount which is subject to an indemnification claim by the Company (asserted in accordance with the terms of the Share Purchase Agreement) pending as of the date thereof, will be automatically extended until such time as any claim relating to such disputed amount is no longer pending, pursuant to the terms of the Seller Note and subject to additional conditions set forth therein and in the Share Purchase Agreement. The Company is not permitted to prepay any amounts due and owing under the Seller Note. Payment of the Seller Note is secured by a second-priority security interest in the assets of CAD. Interest accrued on the original principal amount becomes due and payable in arrears beginning September 30, 2018, and subsequent interest is due on the first day of each calendar quarter thereafter up to and including June 30, 2023. The Company is required to make quarterly principal payments, the amount of which will be calculated based on a four (4) year amortization schedule, beginning on September 30, 2019 and continuing on the last day of each calendar quarter thereafter up to and including the Maturity Date. The holders of the Seller Note and the Company agreed to defer the quarterly principal payment due June 30, 2020 until June 30, 2023; quarterly interest was paid on the Seller Note.following:
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
In connection with the Komtek Forge acquisition, the Company refinanced its previously outstanding First Francis promissory notes, accrued interest payable through the refinance date and the assumed First Francis promissory note into one note on January 15, 2021 for a $3,779,784 loan due to First Francis Company, payable in quarterly installments beginning April 15, 2021 and maturing on October 15, 2025 | $ | 1,294,435 | $ | 2,587,877 | ||||
In connection with the CAD acquisition, the Company entered into a promissory note on July 1, 2018 for a $9,000,000 loan due to the seller, payable in quarterly installments beginning September 30, 2018. The note was paid in full on March 31, 2023 | - | 562,500 | ||||||
Total notes payable | 1,294,435 | 3,150,377 | ||||||
Less current portion | 824,226 | 1,303,972 | ||||||
Notes payable – non-current portion | $ | 470,209 | $ | 1,846,405 | ||||
Paycheck Protection Program Notes
The Company applied for and was approved for a loan in the amount of $3,679,383 (the “PPP Loan”) on April 10, 2020 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On May 5, 2020, the Company instructed JPMorgan to repay in full the Promissory Note pursuant to the Paycheck Protection Program under the CARES Act. On June 4, 2020, Federal Hose and CAD each entered into unsecured loans with First Federal Savings and Loan Association of Lakewood, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), in the amounts of $253,071 and $1,200,766, respectively (the “PPP Loans”).
The PPP Loans each have a two-year term and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments are deferred until seven months after the date of the loan, and will begin January 4, 2021, in monthly installments based on the principal balance of the PPP Loan outstanding following the deferral period and taking into consideration any remaining unforgiven portion of the PPP Loan. The PPP Loans may be prepaid at any time prior to maturity with no prepayment penalties. The loans contain events of default and other provisions customary for a loan of this type. The PPP Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. Federal Hose and CAD each intend to use their entire respective PPP Loan amounts for qualifying expenses and to apply for forgiveness of the loans in accordance with the terms of the CARES Act. The PPP Loans may be forgivable, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and on maintaining certain average levels of employment and payroll as required by the CARES Act. Federal Hose and CAD intend to use the loan proceeds only for permissible purposes, and as of December 31, 2020 have used all proceeds from the PPP Loans to retain employees and maintain payroll. The PPP Loans are unsecured and guaranteed by the U.S. Small Business Administration. The Company received notice of forgiveness from First Federal Savings and Loan Association of Lakewood of 100% of the CAD and Federal Hose PPP loans on January 22,2021 and January 29, 2021, respectively.
Notes Payable
Notes payable consist of the following:
December 31, 2020 | December 31, 2019 | |||||||
In connection with the Federal Hose acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,000,000 loan due to First Francis Company, payable in quarterly installments beginning October 31, 2016 | $ | 1,108,829 | $ | 1,302,776 | ||||
In connection with the Federal Hose acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,768,662 loan due to First Francis Company, payable in quarterly installments beginning October 31, 2016. | 941,867 | 1,248,380 | ||||||
In connection with the CARES Act, Federal Hose entered into a promissory note on June 4, 2020 for a $253,071 loan due to First Federal Savings and Loan Association of Lakewood, with monthly principal and interest installments to begin January 4, 2021. Any unforgiven portion of the note is payable on or before June 4, 2022. | 253,071 | - | ||||||
In connection with the CARES Act, CAD entered into a promissory note on June 4, 2020 for a $1,200,766 loan due to First Federal Savings and Loan Association of Lakewood, with monthly principal and interest installment to begin January 4, 2021. Any unforgiven portion of the note is payable on or before June 4, 2022. | 1,200,766 | - | ||||||
In connection with the CAD acquisition, the Company entered into a promissory note on July 1, 2018 for a $9,000,000 loan due to the Loudermilks, payable in quarterly installments beginning September 30, 2018. | 6,187,500 | 7,875,000 | ||||||
Total notes payable | 9,692,033 | 10,426,156 | ||||||
Less current portion | 2,782,479 | 2,749,459 | ||||||
Notes payable – non-current portion | $ | 6,909,554 | $ | 7,676,697 | ||||
Principal payments on the notes payable are as follows for the years ended December 31:
Related Party Notes | Seller Note | PPP Loans | Total Principal Payments | |||||||||||||
2021 | 532,479 | 2,250,000 | - | 2,782,479 | ||||||||||||
2022 | 1,518,217 | 2,250,000 | 1,453,837 | 5,222,054 | ||||||||||||
2023 | - | 1,687,500 | - | 1,687,500 | ||||||||||||
2024 | - | - | - | - | ||||||||||||
Total principal payments | $ | 2,050,696 | $ | 6,187,500 | $ | 1,453,837 | 9,692,033 | |||||||||
Related Party | Total Principal | |||||||
Notes | Payments | |||||||
2024 | 824,226 | 824,226 | ||||||
2025 | 470,209 | 470,209 | ||||||
2026 | - | - | ||||||
2027 | - | - | ||||||
Total principal payments | $ | 1,294,435 | $ | 1,294,435 | ||||
On January 1, 2019, the Company adopted ASU 2016-02 “Leases (Topic 842),” a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP.
The Company has operating leases for facilities, vehicles and equipment. These leases have remaining terms of 2 years to 1510 years, some of which include options to extend the leases for up to 10 years. Lease expense for the years ended December 31, 2020 2023 and 20192022 was approximately $1.5$2.2 million and $1.6$2.0 million, respectively.
Supplemental balance sheet information related to leases:
December 31, 2020 | December 31, 2019 | |||||||
Operating leases: | ||||||||
Operating lease right-of-use assets, net | $ | 8,856,820 | $ | 9,224,840 | ||||
Other current liabilities | 1,136,300 | 850,664 | ||||||
Operating lease liabilities | 7,901,357 | 8,513,448 | ||||||
Total operating lease liabilities | $ | 9,037,657 | $ | 9,364,112 | ||||
Weighted Average Remaining Lease Term | ||||||||
Operating Leases (in years) | 9.0 | 11.0 | ||||||
Weighted Average Discount Rate | ||||||||
Operating Leases | 5.0 | % | 5.0 | % | ||||
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
Operating leases: | ||||||||
Operating lease right-of-use assets, net | $ | 8,356,903 | $ | 9,524,280 | ||||
Other current liabilities | 1,714,174 | 1,705,224 | ||||||
Operating lease liabilities | 6,901,043 | 8,060,152 | ||||||
Total operating lease liabilities | $ | 8,615,217 | $ | 9,765,376 | ||||
Weighted Average Remaining Lease Term | ||||||||
Operating Leases (in years) | 7.1 | 7.7 | ||||||
Weighted Average Discount Rate | ||||||||
Operating Leases | 5.0 | % | 5.0 | % | ||||
Future minimum lease payments at December 31, 20202023 were as follows:
Operating | ||||||||
Operating Leases | Leases | |||||||
Year Ending December 31, | ||||||||
2021 | $ | 1,502,178 | ||||||
2022 | 1,452,087 | |||||||
2023 | 1,268,341 | |||||||
2024 | 1,285,820 | $ | 2,105,239 | |||||
2025 | 1,303,601 | 2,061,125 | ||||||
2026 | 1,521,090 | |||||||
2027 | 845,957 | |||||||
2028 | 636,577 | |||||||
Thereafter | 4,668,151 | 3,059,965 | ||||||
Total future minimum lease payments | $ | 11,480,178 | $ | 10,229,953 | ||||
Less: imputed interest | (2,442,521 | ) | (1,614,736 | ) | ||||
Total | $ | 9,037,657 | $ | 8,615,217 | ||||
Commitments and Contingencies
From time to time, the Company is involved in legal matters arising in the ordinary course of business. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is, or could be, involved in litigation, will not have an adverse effect on its business, financial condition or results of operations.
There are 10,000,000 Class A Shares and 2,500,000 Class B Shares authorized, as well as 1,000,000 Serial Preferred Shares.
Unissued shares of Class A common stock (1,042,848(1,002,848 and 1,045,8481,002,848 shares at December 31, 2020 2023 and 2019,2022, respectively) are reserved for the share-for-share conversion rights of the Class B common stock, stock options under the Directors Plans, conversion rights of the Convertible Promissory Note and available warrants.stock. The Class A shares have one vote per share and the Class B shares have three votes per share, except under certain circumstances such as voting on voluntary liquidation, sale of substantially all the assets, etc. Dividends up to $0.10 per year, noncumulative, must be paid on Class A shares before any dividends are paid on Class B shares.
The Company's 2013On November 20, 2023, the Board of Directors of the Company approved and adopted the Company’s 2023 Omnibus Equity Plan (the “Plan”“2023 Equity Plan”) was approved. The 2023 Equity Plan replaces the Company’s 2013 Omnibus Equity Plan, which had expired. The 2023 Equity Plan became effective upon the Board’s approval, however the Company intends to submit the plan to the Company’s shareholders for ratification and adoptedapproval at the Company’s 2024 annual meeting of shareholders.
The 2023 Equity Plan is administered by an affirmative vote of a majoritythe Company’s Compensation Committee, in coordination with the Board. The 2023 Equity Plan permits awards to be made to officers, employees, consultants and directors of the Company's Class A and Class B Shareholders andCompany, as selected by the Compensation Committee in coordination with the Board. The 2023 Equity Plan generally provides for the grant of the following types of incentive awards: stock options, stock appreciation rights,common shares, performance shares, restricted shares, restricted share units, performancestock appreciation rights and stock options. Stock options may be issued as either incentive stock options or nonqualified stock options, however incentive stock options may be issued only if the 2023 Equity Plan is ratified and approved by the Company’s shareholders.
The aggregate number of Class A common shares and of the Company (“Class A Common Shares. Those who will be eligibleShares”) reserved for issuance pursuant to the 2023 Equity Plan is 350,000, and shares may again become available for awards under the 2023 Equity Plan include employees who provide servicesin the event that any portion of an award is forfeited or terminated prior to its complete vesting or exercise.
Awards may be made under the 2023 Equity Plan for a period of ten years from the plan’s effective date, subject to the Company and its affiliates, executive officers, non-employee Directors and consultants designated byBoard’s ability to amend, alter, suspend, discontinue, or terminate the Compensation Committee. Under the2023 Equity Plan 150,000 Class A Common Shares were initially reserved for issuance. The Plan was materially revised in 2019 to increase the maximum number of the Company’s Class A Common Shares, without par value, available for issuance to 400,000, providing an additional 250,000 Class A Common Shares under the Plan. This change to the Plan was approved in connection with the Company’s 2019 Annual Meeting of Shareholders. The Class A Common Shares may be either authorized, but unissued, common shares or treasury shares. The Company granted 15,000 and 12,000 restricted stock awards under the Plan during the fiscal years ended December 31, 2020 and December 31, 2019, respectively. Approximately 271,000 Class A Common Shares remain available for issuance under the Plan.any portion thereof at any time.
The Company's expired Outside Directors Stock Option Plans (collectively the "Directors Plans"), provided for the automatic grant of options to purchase up to 5,000 shares of Class A Common Stock over a three-year period to members of the Board of Directors who were not employees of the Company, at the fair market value on the date of grant. TheNo stock options are exercisable for up to 10 years. All options granted under the Directors Plans became fully exercisable on March 8, 2015.
outstanding. Non-cash compensation expense, all related to stock option plansrestricted share awards, was $296,899$1,377,423 and $348,877$957,728 for the years ended December 31, 2020 2023 and December 31, 2019,2022, respectively. All but an immaterial number of shares issued had no vesting requirements.
December 31, | ||||||||
2023 | 2022 | |||||||
Class A shares issued to Directors and employees related to stock compensation plans | 34,700 | 32,200 | ||||||
Non-cash stock compensation expense | $ | 1,377,423 | $ | 957,728 | ||||
A summary of the Company’s Treasury stock acquired for the years ended December 31, 2022 and December 31, 2023 is as follows:
TREASURY SHARES | ||||||||
CLASS A | CLASS B | |||||||
Balance at December 31, 2021 | 41,844 | 182,435 | ||||||
Share repurchase | 5,568 | - | ||||||
Balance at December 31, 2022 | 47,412 | 182,435 | ||||||
Share repurchase | 6,662 | - | ||||||
Balance at December 31, 2023 | 54,074 | 182,435 | ||||||
Income tax expense for 2023 was $3,869,355 which was comprised of $4,817,023 of current income tax expense and $947,668 of deferred income tax benefit, resulting in an effective tax rate of 22.5%. Income tax expense for 2022 was $1,170,791 which was comprised of $2,629,560 of current income tax expense and $1,458,769 of deferred income tax benefit, resulting in an effective tax rate of 15.1%.
A reconciliation of the provision of income taxes to the statutory federal income tax rate is as follows:
Year | Year | |||||||||||||||
Year | Year | December 31, | December 31, | |||||||||||||
December 31, 2020 | December 31, 2019 | 2023 | 2022 | |||||||||||||
Income Before Provision for Income Taxes | $ | 7,475,241 | $ | 9,419,490 | $ | 17,164,148 | $ | 7,732,194 | ||||||||
Statutory rate | 21 | % | 21 | % | 21 | % | 21 | % | ||||||||
Tax at statutory rate | 1,569,801 | 1,978,092 | 3,604,471 | 1,623,761 | ||||||||||||
State taxes, net of federal benefit | 336,654 | 551,179 | 302,484 | 20,438 | ||||||||||||
Release of FIN 48 reserve | (121,000 | ) | (414,000 | ) | ||||||||||||
Deferred Adjustments | 125,935 | - | ||||||||||||||
Permanent differences | 18,715 | 23,889 | (299,103 | ) | (17,334 | ) | ||||||||||
Return to Provision Adjustments | (289,316 | ) | (113,533 | ) | ||||||||||||
Return to provision adjustments | 262,552 | (22,681 | ) | |||||||||||||
Other | (5,984 | ) | (19,393 | ) | ||||||||||||
Provision for income taxes | $ | 1,635,854 | $ | 2,439,627 | $ | 3,869,355 | $ | 1,170,791 | ||||||||
Deferred tax assets (liabilities) consist of the following:
December 31, | December 31, | |||||||||||||||
December 31, 2020 | December 31, 2019 | 2023 | 2022 | |||||||||||||
Inventories | $ | 179,171 | $ | 164,768 | $ | 176,022 | $ | 221,441 | ||||||||
Bad debts | 5,009 | 4,659 | 23,197 | 5,757 | ||||||||||||
Accrued liabilities | 48,812 | 279,508 | 527,320 | 677,728 | ||||||||||||
Prepaid expense | (92,571 | ) | (116,524 | ) | (103,037 | ) | (136,419 | ) | ||||||||
Depreciation and amortization | (2,757,740 | ) | (2,798,040 | ) | (2,464,503 | ) | (3,111,224 | ) | ||||||||
Capitalized Costs | 496,897 | 629,085 | ||||||||||||||
Research and development and other credit carryforwards | 451,247 | 556,387 | 1,067,816 | 443,689 | ||||||||||||
Right of use lease accounting | 47,351 | (19,600 | ) | (149,876 | ) | (80,376 | ) | |||||||||
Directors stock option plan | 161,212 | 163,427 | 203,914 | 180,761 | ||||||||||||
Total deferred tax liability | (1,957,509 | ) | (1,765,415 | ) | (222,250 | ) | (1,169,558 | ) | ||||||||
Valuation allowance | (47,319 | ) | (47,319 | ) | (33,000 | ) | (39,000 | ) | ||||||||
Reserve for uncertain tax positions | (425,000 | ) | (395,000 | ) | (55,000 | ) | (176,000 | ) | ||||||||
Total reserves & allowances | (472,319 | ) | (442,319 | ) | (88,000 | ) | (215,000 | ) | ||||||||
Net deferred tax liability, net of reserves | $ | (2,429,828 | ) | $ | (2,207,734 | ) | $ | (310,250 | ) | $ | (1,384,558 | ) | ||||
Valuation Allowance
The Company has a valuation allowance for deferred tax assets based upon certain credits that may not be fully utilized in the future. The Company believes the valuation allowance of $47 thousand$33,000 at December 31, 20202023 and 2019, respectively,$39,000 at December 31, 2022, is adequate.
Reserve for Uncertain Tax Positions
The Company has a reserve of unrecognized tax benefits related to exposures in accordance with ASC 740. The Company believes the valuation allowancereserve of $0.4 million$55,000 at December 31, 20202023 and 2019, respectively,$176,000 at December 31, 2022, is adequate. Due to the uncertainties involved with this significant estimate, it is reasonably possible that the Company’s estimate may change in the near term.
Tax Credits and Net Operating losses:
At December 31, 2020,2023, the Company has state net operating losses (NOLs) and research and development (R&D) and other credit carryforwards for tax purposes which expire as follows:
Tax Year Expires | State NOLs | R& D & Other Credits | ||||||||||||||
2021 | - | 3,000 | ||||||||||||||
2022 | - | 3,000 | ||||||||||||||
2023 | - | 3,000 | ||||||||||||||
Tax Year | R& D & Other | |||||||||||||||
Expires | State NOLs | Credits | ||||||||||||||
2024 | - | 3,000 | $ | - | $ | 3,000 | ||||||||||
2025 | - | 3,000 | - | 3,000 | ||||||||||||
2026 | - | 3,000 | - | 3,000 | ||||||||||||
2027 | - | 3,000 | - | 3,000 | ||||||||||||
2028 | - | 3,000 | - | 3,000 | ||||||||||||
2029 | 191,519 | 3,000 | - | 3,000 | ||||||||||||
2030 | 414,231 | 3,000 | - | 3,000 | ||||||||||||
2031 | 641,229 | 3,000 | - | 3,000 | ||||||||||||
2032 | - | 3,000 | - | 3,000 | ||||||||||||
2033 | 532,837 | 3,000 | - | 3,000 | ||||||||||||
2034 | 285,607 | 3,000 | - | 3,000 | ||||||||||||
2035 | - | - | - | - | ||||||||||||
2036 | - | - | - | |||||||||||||
2037 and beyond | - | - | ||||||||||||||
2037 | - | - | ||||||||||||||
2038 and beyond | - | - | ||||||||||||||
| $ | 2,065,423 | $ | 42,000 | $ | - | $ | 33,000 | |||||||||
14.13. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per share.share and is inclusive of A and B Common Shares.
Years Ended | Years Ended | |||||||||||||||
2020 | 2019 | 2023 | 2022 | |||||||||||||
Net Income Per Common Share - Basic | ||||||||||||||||
Income available to common stockholders | $ | 5,839,387 | $ | 6,979,863 | $ | 13,294,793 | $ | 6,561,403 | ||||||||
Weighted Average Shares of Common Stock Outstanding | 3,319,731 | 2,849,239 | 3,507,883 | 3,462,868 | ||||||||||||
Net Income Per Common Share - Basic | $ | 1.76 | $ | 2.45 | $ | 3.79 | $ | 1.89 | ||||||||
Effect of Dilutive Securities | ||||||||||||||||
Weighted Average Shares of Common Stock Outstanding - Basic | 3,319,731 | 2,849,239 | 3,507,883 | 3,462,868 | ||||||||||||
Options and warrants under convertible note | 822 | 428,618 | ||||||||||||||
Unvested Restricted Stock Awards | 18,953 | - | ||||||||||||||
Weighted Average Shares of Common Stock Outstanding - Diluted | 3,320,553 | 3,277,857 | 3,526,836 | 3,462,868 | ||||||||||||
Net Income Per Common Share – Diluted | ||||||||||||||||
Income available to common stockholders | $ | 5,839,387 | $ | 6,979,863 | $ | 13,294,793 | $ | 6,561,403 | ||||||||
Weighted Average Shares of Common Stock Outstanding - Diluted | 3,320,553 | 3,277,857 | 3,526,836 | 3,462,868 | ||||||||||||
Net Income Per Common Share - Diluted | $ | 1.76 | $ | 2.13 | $ | 3.77 | $ | 1.89 | ||||||||
IncludedThere were no options included in the computation of diluted earnings for the year ended December 31, 2020 and 2023 or for the year ended December 31, 2019 were options of 1,000 shares Class A common stock. 2022.
The Company has a 401(k)401(k) Savings and Retirement Plans covering all full-time employees. Company contributions for each of these plans, including matching of employee contributions, are at the Company's discretion.
For thethe years ended December 31, 2020 2023 and December 31, 2019,2022, the Company made matching contributions to the plans in the amount of $97,322$389,179 and $315,090$359,965 respectively. Komtek Forge makes pension contributions to the United Steelworkers pension fund on behalf of its employees. For the years ended December 31, 2023 and December 31, 2022, these contributions amounted to $66,362 and $55,914 respectively. The Company does not provide any other postretirement benefits to its employees.
Effective January 2, 2020,10, 2022, Crawford REV Acquisition Company LLC (name later changed to Reverso Pumps LLC or “Reverso Pumps”), a Delaware limited liability company and indirect wholly-owned subsidiary of Crawford United Corporation (the “Company”), completed the acquisition (the “Reverso Transaction”) of substantially all the assets of Reverso Pumps, Inc., a Florida corporation and developer, designer, manufacturer, seller and distributor of oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems (“Reverso”), pursuant to an Asset Purchase Agreement (the “Reverso Asset Purchase Agreement”) entered into and effective January 10, 2022 by and among Reverso Pumps, the Seller, the seller parties named therein and the Seller Parties’ representatives named therein. Upon the closing of the Transaction, the assets were transferred and assigned to Reverso Pumps in exchange for approximately $2.6 million in cash after post-closing adjustments.
Additionally, effective on January 10, 2022, Crawford SEP Acquisition Company LLC (name later changed to Separ America LLC or “Separ America”), a Delaware limited liability company and indirect wholly-owned subsidiary of the Company, completed the acquisition (the “Separ Transaction,” and with the Reverso Transaction, the “Transactions”) of substantially all of the assets of MPI Products, Inc. (dba Marine Products International) (“MPI”), pursuant toSepar of the Asset Purchase Agreement entered into by and between Crawford United Acquisition CompanyAmericas, LLC, an Ohioa Florida limited liability company and wholly-owned subsidiarydeveloper, designer, manufacturer, seller and distributor of oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems (“Separ”) pursuant to an Asset Purchase Agreement (the “Separ Asset Purchase Agreement,” and together with the Company,Reverso Asset Purchase Agreement, the “Purchase Agreements”) by and MPI.among Separ America, the Seller, the seller parties named therein and the Seller Parties’ representative named therein. Upon the closing of the agreement,Transaction, the assets were transferred and assigned to the CompanySepar America in consideration of a purchase price of $9.4exchange for approximately $1.6 million in cash which was subject toafter post-closing adjustments based on working capital.adjustments.
Cash Consideration Transferred | $ | 3,951,392 | ||
Seller Transaction Costs | 230,359 | |||
Total Consideration | $ | 4,181,751 | ||
Accounts Receivable | 466,887 | |||
Inventory | 1,308,822 | |||
Fixed Assets | 64,710 | |||
Prepaid and Other Assets | 64,080 | |||
Intangible Assets: Customer List & Trademarks | 1,300,000 | |||
Goodwill | 1,572,913 | |||
Total Assets Acquired | $ | 4,777,412 | ||
Accounts Payable | $ | 542,359 | ||
Accrued Expense | 53,302 | |||
Total Liabilities Assumed | $ | 595,661 | ||
Total Fair Value | $ | 4,181,751 | ||
Acquisition transaction costs incurred were: | $ | 124,825 |
MPI manufactures
Goodwill
Goodwill has an assigned value of $1.6 million and distributes industrialrepresents the expected synergies generated by combining the operations of Reverso, Separ, and the Company. The Company sells marine hoses used byand related products and the recreational boating industryacquisition of Reverso Pumps and Separ America will allow the Company to expand its offerings to customers in the strategically important marine and defense markets. Intangible assets, customer list has one operating location in Cleveland, Ohio. Purchase price wasan assigned tovalue of $0.5 million which represents the bookexpected value of the netlist of the customers of Reverso Pumps and Separ America. Intangible assets, acquired withtrademarks has an assigned value of $0.8 million which represents the excess overexpected value of the book value assigned to intangible assetstrademarks of Reverso Pumps and goodwill and has been allocated to the following accounts:Separ America.
Accounts Receivable | $ | 771,088 | ||
Inventory | 2,918,255 | |||
Fixed Assets | 29,581 | |||
Prepaid and Other Assets | 53,397 | |||
Intangibles Assets | 4,320,000 | |||
Goodwill | 1,714,108 | |||
Total Assets Acquired | $ | 9,806,429 | ||
Accrued Expense | 406,429 | |||
Total Liabilities Assumed | $ | 406,429 | ||
Net Assets Acquired | $ | 9,400,000 |
On April 19, 2019, theEffective May 1, 2022, Knitting Machinery Company of America, LLC, a Delaware limited liability company (“Knitting Machinery”) and indirect wholly-owned subsidiary of Crawford United Corporation, completed the acquisition of substantially all of the operating assets of Data Genomix, Inc.KMC Corp. dba Knitting Machinery Corp., an Ohioa Delaware corporation (“DG”),and specialist in the manufacture of hose reinforcement machinery for the plastic, rubber and silicone industries pursuant to the terms of an Asset Purchase Agreement entered into as of May 1, 2022. The acquired business is strategically important to the Company’s growing industrial hose platform and will expand its offerings and diversify its customer base in this important market segment. The assets were transferred and assigned to Knitting Machinery in exchange for approximately $250,000 in cash and 38,462 Class A Common Shares valued at $1.0 million.
Cash Consideration Transferred | $ | 250,000 | ||
Fair Value of Stock Consideration | 1,000,012 | |||
Total Consideration | $ | 1,250,012 | ||
Cash | $ | 100,000 | ||
Accounts Receivable | 155,932 | |||
Inventory | 517,270 | |||
Fixed Assets | 90,603 | |||
Intangible Assets | 150,000 | |||
Goodwill | 645,372 | |||
Total Assets Acquired | $ | 1,659,177 | ||
Accounts Payable | $ | 33,694 | ||
Deferred Revenue | 375,471 | |||
Total Liabilities Assumed | $ | 409,165 | ||
Total Fair Value | 1,250,012 | |||
Acquisition transaction costs incurred were: | $ | 30,479 |
Goodwill and Intangible Assets
Goodwill has an assigned value of $0.6 million and represents the expected synergies generated by combining the operations of KMC and between Hickok Operating LLC,the Company. Goodwill increased by $0.2 million from $0.4 million at December 31, 2022 to $0.6 million at December 31, 2023. The increase in Goodwill was driven by a purchase accounting adjustment to Goodwill in the second quarter of 2023 for a change in inventory and fixed assets. The Company utilizes industrial hoses for customers in the Industrial and Transportation Products segment and the acquisition of KMC has allowed the Company to strengthen its supply chain. Intangible asset, trademark has an Ohio limited liability company and wholly-owned subsidiaryassigned value of $0.075 million which represents the expected value of the Company, and DG on the date thereof. DG isKMC trade name in the businessmarket. Intangible asset, customer list has an assigned value of developing$0.075 million which represents the expected value of the list of the customers of KMC to the Company.
Sales and commercializing marketing and data analytic technology applications. The company paid $50,001 for DG.
Acquisition related costs are included in Other expense, net in the consolidated statements of income. Acquisition related costs were $110,548 and $74,117Net Income for the Acquired Companies
Sales and net income information for the acquired companies, Reverso Pumps LLC (“Reverso Pumps”), Separ America LLC (“Separ America”) and Knitting Machinery Company of America LLC (“Knitting Machinery”) since the respective acquisition dates for years ended December 31, 2020 2023 and 2019, respectively. Also, see note 7, Bank debt regarding further information on the acquisitions and the loan agreements and notes issued in connection with such acquisitions.2022 are provided below.
Year ended | Year ended | |||||||||||||||
December 31, 2023 | December 31, 2022 | |||||||||||||||
Sales | Net Income | Sales | Net Income | |||||||||||||
Acquired Companies: | ||||||||||||||||
Reverso Pumps (acquired January 10, 2022) | $ | 6,527,485 | $ | 1,141,472 | $ | 5,467,426 | $ | 876,558 | ||||||||
Separ America (acquired January 10, 2022) | 2,339,485 | 744,663 | 1,746,551 | 353,239 | ||||||||||||
Knitting Machinery (acquired May 1, 2022) | 633,573 | 33,579 | 1,022,603 | 82,830 | ||||||||||||
Subtotal Acquired Companies | $ | 9,500,543 | $ | 1,919,714 | 8,236,580 | 1,312,627 | ||||||||||
All Other Companies | 134,385,391 | 11,375,079 | 119,518,347 | 5,248,776 | ||||||||||||
Total | $ | 143,885,934 | $ | 13,294,793 | $ | 127,754,927 | $ | 6,561,403 | ||||||||
17.16. SEGMENT AND RELATED INFORMATION
The Company operates three reportablereports operations for two business segments: (1) Aerospace Components, (2)(1) Commercial Air Handling (3)Equipment and (2) Industrial Hose.and Transportation Products. The identification of our operating segments is based on guidance in ASC 280-10-50-1. The Company's management evaluates segment performance based primarily on segment operating income. Certain corporate costs are allocated to the segments and interest expense directly related to financing the acquisition of a business is allocated to that segment, respectively.profit. Intangible assets are allocated to each segment and the related amortization of these assets are recorded in selling, general and administrative expenses. The Company does not allocate corporate costs to the respective segments.
Aerospace Components:
The Aerospace ComponentsBoth the Commercial Air Handling Equipment segment was added July 1, 2018, whenand the Company purchased allIndustrial and Transportation Products segment engage in business activities from which they may recognize revenues and incur expenses, including revenue and expenses relating to transactions with other components of the issuedCompany. The operating results for both the Commercial Air Handling Equipment segment and outstanding shares of capital stock of CAD Enterprises, Inc.the Industrial and Transportation Products segment are reviewed regularly by our chief operating decision maker, the chief executive officer, and is considered in Phoenix, Arizona. Thismaking decisions about resources to be allocated to the segment manufactures precision components primarilyin assessing its performance. Financial information for customersboth segments is available in the aerospace industry. This segment provides complete end-to-end engineering, machining, grinding, welding, brazing, heat treat and assembly solutions. Utilizing state-of-the-art machining and welding technologies, this segment is an industry leader in providing complex components produced from nickel-based superalloys and stainless steels. Our quality certifications include ISO 9001:2015/AS9100D, as well as Nadcap accreditation for Fluorescent Penetrant Inspection (FPI), Heat Treating/Braze, Non-Conventional Machining EDM, TIG/E-Beam welding. The Company purchased all of the issued and outstanding shares of capital stock of KT Acquisition LLC (name later changed to Komtek Forge LLC), in Worcester, Massachusettsinternal financial statements that are prepared on January 15, 2021. Komtek Forge LLC is a supplier of highly engineered forgings for the aerospace, industrial gas turbine, medical prosthetics, alternative energy, petrochemical and defense industries. The Company purchased all of the membership interests of Global-Tek-Manufacturing LLC (“Global-Tek”), in Ceiba, Puerto Rico and substantially all of the assets of Machining Technology L.L.C. (Machining Technologies), in Longmont, Colorado on March 2, 2021. Global-Tek and Machining Technologies specialize in providing customers with highly engineered manufacturing solutions, including CNC machining, anodizing, electro polishing and laser marking for customers in the defense, aerospace and medical device markets. Komtek Forge LLC, Global-Tek and Machining Technologies were all acquired in 2021 and therefore are not included in the 2020 and 2019 results reported herein.monthly basis.
Commercial Air Handling:Handling Equipment:
The Commercial Air Handling Equipment segment was added June 1, 2017, when the Company purchased certain assets and assumed certain liabilities of Air Enterprises Acquisition LLC in Akron, Ohio. The acquired business, which operates under the name Air Enterprises, is an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions. Its customers are typically in the health care, education, pharmaceutical and industrial manufacturing markets in the United States. This segment also sells to select international markets. The custom air handling units are constructed of non-corrosive aluminum, resulting in sustainable, long-lasting, and energy efficient solutions with life expectancies of 50 years or more. These products are distributed through a network of sales representatives, based on relationships with health care networks, building contractors and engineering firms. The custom air handling equipment is designed, manufactured and installed under the brand names FactoryBilt® and SiteBilt®. FactoryBilt® air handling solutions are designed, fabricated and assembled in a vertically integrated process entirely within the Akron, Ohio facility. SiteBilt® air handling solutions are designed and fabricated in Akron, but are then crated and shipped to the field and assembled on-site.
Industrial Hose:and Transportation Products:
The Industrial Hoseand Transportation Products segment was added July 1, 2016, when the Company purchased the assets of the Federal Hose Manufacturing, LLC of Painesville, Ohio. This business segment includes the manufacture of flexible interlocking metal hoses and the distribution of silicone and hydraulic hoses. Metal hoses are sold primarily to major heavy-duty truck manufacturers and major aftermarket suppliers in North America. Metal hoses are also sold into the agricultural, industrial and petrochemical markets. Silicone hoses are distributed to a number of industries in North America, including agriculture and general industrial markets. The Company purchased all of the issued and outstanding shares of capital stock of CAD Enterprises, Inc.(“CAD”) in Phoenix, Arizona on July 1, 2018. CAD provides complete end-to-end engineering, machining, grinding, welding, brazing, heat treat and assembly solutions. Utilizing state-of-the-art machining and welding technologies, this segment is an industry leader in providing complex components produced from nickel-based superalloys and stainless steels. CAD’s quality certifications include ISO 9001:2015/AS9100D, as well as Nadcap accreditation for Fluorescent Penetrant Inspection (FPI), Heat Treating/Braze, Non-Conventional Machining EDM, and TIG/E-Beam welding. The Company added the distribution of marine hose for recreational boating to this segment through the acquisition of the assets of MPI Products, Inc. (“MPI”) on January 2, 2020.
CorporateMPI specializes in rubber and Other:
Corporate costs not allocatedplastic marine hose for the recreational boating industry. MPI offers certified products that meet marine industry standards and regulations. Effective April 19, 2019, the Company, completed the acquisition of substantially all of the assets of Data Genomix, Inc., an Ohio corporation (“DG”). DG is in the business of developing and commercializing marketing and data analytic technology applications. The Company purchased all of the issued and outstanding membership interests of KT Acquisition LLC (name later changed to Komtek Forge LLC), in Worcester, Massachusetts on January 15, 2021. Komtek Forge LLC is a supplier of highly engineered forgings for the three primary business segments are aggregatedaerospace, industrial gas turbine, medical prosthetics, alternative energy, petrochemical and defense industries. The Company purchased all of the membership interests of Global-Tek-Manufacturing LLC (“Global-Tek”), in Ceiba, Puerto Rico and substantially all of the assets of Machining Technology LLC (name later changed to Global-Tek Colorado LLC or “Global-Tek Colorado”) in Longmont, Colorado on March 2, 2021. Global-Tek and Global-Tek Colorado specialize in providing customers with highly engineered manufacturing solutions, including CNC machining, anodizing, electro polishing and laser marking for customers in the resultsdefense, aerospace and medical device markets. The Company purchased substantially all of DG, acquiredthe assets of Emergency Hydraulics LLC (“Emergency Hydraulics”), in April 2019.Ocala, Florida on July 1, 2021. Emergency Hydraulics provides hydraulic hoses, air tank assemblies and related products to manufacturers of firefighting trucks and other emergency vehicles. The company purchased substantially all of the assets of Crawford REV Acquisition Company LLC (name later changed to Reverso Pumps LLC or “Reverso Pumps”), in Davie, Florida on January 10, 2022. Reverso Pumps develops, designs, manufactures, sells and distributes oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems.
Year Ended December 31, 2020 | ||||||||||||||||||||
Commercial Air Handling | Aerospace Components | Industrial Hose | Corporate and Other | Consolidated | ||||||||||||||||
Sales | $ | 41,243,413 | $ | 18,916,525 | $ | 22,762,199 | $ | 2,147,763 | $ | 85,069,900 | ||||||||||
Gross Profit | 10,216,587 | 1,415,591 | 6,518,682 | 780,430 | 18,931,290 | |||||||||||||||
Operating Income | 5,313,487 | (649,230 | ) | 3,746,257 | (958,061 | ) | 7,452,453 | |||||||||||||
Pretax Income | 5,750,226 | (1,164,179 | ) | 2,114,580 | 774,614 | 7,475,241 | ||||||||||||||
Net Income | 4,312,669 | (873,134 | ) | 1,585,935 | 813,917 | 5,839,387 | ||||||||||||||
Year Ended December 31, 2019 | ||||||||||||||||||||
Commercial Air Handling | Aerospace Components | Industrial Hose | Corporate and Other | Consolidated | ||||||||||||||||
Sales | 51,564,344 | 30,126,438 | 7,171,164 | 836,581 | 89,698,527 | |||||||||||||||
Gross Profit | 12,350,412 | 5,015,003 | 1,970,149 | 239,071 | 19,574,635 | |||||||||||||||
Operating Income | 7,141,097 | 2,876,304 | 859,114 | (365,849 | ) | 10,510,666 | ||||||||||||||
Pretax Income | 7,140,398 | 2,073,239 | 635,995 | (430,142 | ) | 9,419,490 | ||||||||||||||
Net Income | 5,291,035 | 1,536,270 | 471,272 | (318,714 | ) | 6,979,863 | ||||||||||||||
The company purchased substantially all of the assets of Crawford SEP Acquisition Company LLC (name later changed to Separ America LLC or “Separ America”), in Davie, Florida on January 10, 2022. Separ America develops, designs, manufactures, sells and distributes oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems. The company purchased substantially all of the assets of KMC Corp. dba Knitting Machinery Corp. (“Knitting Machinery”), in Cleveland, Ohio and Greenville, Ohio on May 1, 2022. Knitting Machinery specializes in manufacturing hose reinforcement machinery for the plastic, rubber and silicone industries.
The factors used to determine the Company’s reportable segments follow the guidance of ASC 280-10-50-21 and 50-10-22 and include consideration of the type of products or services delivered, the customers and end markets served, the appliable revenue recognition methodology and the length of time it takes to deliver products or services to customers. The Commercial Air Handling Equipment segment was identified as a reportable segment consisting of Air Enterprises, because Air Enterprises is strategically and operationally different from our other companies in several ways. First, Air Enterprises sells equipment to end customers and our other businesses that fall into the Industrial and Transportation Products segment sell products and components to end customers, not equipment. Second, the Commercial Air Handling Equipment segment delivers custom air handling solutions to customers which is different than the Industrial and Transportation Products segment which delivers manufactured metal, silicone, hydraulic and marine hoses, complex engineered components, highly engineered forgings, highly engineered and machined parts and data analytic technology applications. Third, the Commercial Air Handling Equipment segment serves customers primarily in the health care and education end markets while the Industrial and Transportation Products segment delivers products to customers in the heavy-duty truck manufacturing, agricultural, industrial, petrochemical, aerospace, defense, industrial gas turbine, medical prosthetics, alternative energy and emergency vehicle end markets. Fourth, the Commercial Air Handling Equipment segment recognizes revenue primarily over time while the Industrial and Transportation Products segment recognizes revenue primarily at a point in time. Fifth, the Commercial Air Handling Equipment segment manufactures custom air handling solutions for customers over a period of three to eighteen months from the time the order is received to the time the air handling solution is delivered to the end customer as compared to the Industrial and Transportation Products segment which sells and delivers products to customers much more quickly, often within 30 days or less. For the reasons previously mentioned, Air Enterprises is strategically and operationally different than the other businesses owned by the Company and management finds it useful to include this business in the Commercial Air Handling Segment which is separate and distinct from all of our other businesses that reside in the Industrial and Transportation Products segment.
Corporate:
Corporate costs not directly attributable to a segment are aggregated here.
Information by industry segment is set forth below:
Twelve Months ended 2023 | ||||||||||||||||
Industrial | ||||||||||||||||
Commercial | And | |||||||||||||||
Air | Transportation | |||||||||||||||
Handling | Products | Corporate | Consolidated | |||||||||||||
Sales | $ | 58,378,593 | $ | 85,507,341 | $ | - | $ | 143,885,934 | ||||||||
Gross Profit | 19,123,207 | 18,522,875 | - | 37,646,082 | ||||||||||||
Operating Income | 15,367,247 | 7,594,668 | (5,029,444 | ) | 17,932,471 | |||||||||||
Pretax Income | 15,367,247 | 8,173,742 | (6,376,841 | ) | 17,164,148 | |||||||||||
Net Income | 10,987,581 | 6,090,530 | (3,783,318 | ) | 13,294,793 | |||||||||||
Twelve Months ended 2022 | ||||||||||||||||
Industrial | ||||||||||||||||
Commercial | And | |||||||||||||||
Air | Transportation | |||||||||||||||
Handling | Products | Corporate | Consolidated | |||||||||||||
Sales | $ | 47,649,695 | $ | 80,105,232 | $ | - | $ | 127,754,927 | ||||||||
Gross Profit | 10,751,822 | 16,280,959 | - | 27,032,781 | ||||||||||||
Operating Income | 6,670,069 | 5,955,820 | (4,092,417 | ) | 8,533,472 | |||||||||||
Pretax Income | 6,670,069 | 5,951,335 | (4,889,210 | ) | 7,732,194 | |||||||||||
Net Income | 4,769,099 | 4,253,978 | (2,461,674 | ) | 6,561,403 | |||||||||||
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
Capital Expenditures: | ||||||||
Commercial Air Handling Equipment Segment | $ | 250,685 | $ | 53,591 | ||||
Industrial and Transportation Products Segment | 1,290,742 | 534,563 | ||||||
Corporate | 491,346 | 154,674 | ||||||
Total Capital Expenditures | $ | 2,032,773 | $ | 742,828 | ||||
Depreciation and Amortization: | ||||||||
Commercial Air Handling Equipment Segment | $ | 432,038 | $ | 431,752 | ||||
Industrial and Transportation Products Segment | 3,344,898 | 3,151,898 | ||||||
Corporate | 144,804 | 167,155 | ||||||
Total Depreciation and Amortization | $ | 3,921,740 | $ | 3,750,805 | ||||
Identifiable Assets: | ||||||||
Commercial Air Handling Equipment Segment | $ | 20,252,946 | $ | 20,681,082 | ||||
Industrial and Transportation Products Segment | 70,808,054 | 76,701,530 | ||||||
Corporate | 2,578,598 | 2,215,461 | ||||||
Total Identifiable Assets | $ | 93,639,598 | $ | 99,598,074 | ||||
Geographical Information
Included in the consolidated financial statements are the following amounts related to geographic locations:
Year Ended | Year Ended | |||||||||||||||
Year Ended December 31, 2020 | Year Ended December 31, 2019 | December 31, | December 31, | |||||||||||||
2023 | 2022 | |||||||||||||||
United States of America | $ | 83,992,635 | $ | 89,370,005 | $ | 140,583,071 | $ | 125,097,522 | ||||||||
Puerto Rico | 601,232 | - | 1,665,770 | 413,684 | ||||||||||||
Canada | 388,531 | 283,011 | 975,866 | 1,175,246 | ||||||||||||
Other | 87,502 | 45,511 | 661,227 | 1,068,475 | ||||||||||||
| $ | 85,069,900 | $ | 89,698,527 | $ | 143,885,934 | $ | 127,754,927 | |||||||||
All export sales to foreign countries are made in US Dollars.
18.17. QUARTERLY DATA (UNAUDITED)
The following table presents the Company’s unaudited quarterly consolidated income statement data for the years ended December 31, 2020 2023 and 2019.2022. These quarterly results include all adjustments consisting of normal recurring adjustments that the Company considers necessary for the fair presentation for the quarters presented and are not necessarily indicative of the operating results for any future period.
Year Ended December 31, 2020 | Year Ended December 31, 2023 | |||||||||||||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | March 31, | June 30, | September 30, | December 31, | |||||||||||||||||||||||||
2020 | 2020 | 2020 | 2020 | 2023 | 2023 | 2023 | 2023 | |||||||||||||||||||||||||
Sales | $ | 25,281,574 | $ | 18,576,588 | $ | 21,277,797 | $ | 19,933,941 | $ | 39,484,356 | $ | 36,933,015 | $ | 33,641,513 | $ | 33,827,050 | ||||||||||||||||
Gross Profit | 6,208,143 | 3,499,039 | 4,852,417 | 4,371,691 | 10,516,552 | 10,474,878 | 8,909,332 | 7,745,321 | ||||||||||||||||||||||||
Operating Income | 3,138,149 | 530,520 | 2,126,417 | 1,657,368 | 5,119,267 | 5,152,364 | 4,296,968 | 3,363,871 | ||||||||||||||||||||||||
Net Income | 2,075,570 | 228,837 | 1,426,090 | 2,108,890 | 3,391,473 | 3,851,342 | 2,814,736 | 3,237,242 | ||||||||||||||||||||||||
Net Income per Common Share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.63 | $ | 0.07 | $ | 0.43 | $ | 0.63 | $ | 0.97 | $ | 1.10 | $ | 0.80 | $ | 0.92 | ||||||||||||||||
Diluted | $ | 0.63 | $ | 0.07 | $ | 0.43 | $ | 0.63 | $ | 0.97 | $ | 1.09 | $ | 0.80 | $ | 0.91 | ||||||||||||||||
Year Ended December 31, 2022 | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
2022 | 2022 | 2022 | 2022 | |||||||||||||
Sales | $ | 31,002,746 | $ | 31,902,027 | $ | 32,189,623 | $ | 32,660,531 | ||||||||
Gross Profit | 6,366,405 | 6,768,491 | 6,309,803 | 7,588,082 | ||||||||||||
Operating Income | 1,397,321 | 2,375,527 | 1,999,678 | 2,760,946 | ||||||||||||
Net Income | 1,065,875 | 1,171,264 | 1,254,545 | 3,069,719 | ||||||||||||
Net Income per Common Share: | ||||||||||||||||
Basic | $ | 0.31 | $ | 0.34 | $ | 0.36 | $ | 0.88 | ||||||||
Diluted | $ | 0.31 | $ | 0.34 | $ | 0.36 | $ | 0.88 | ||||||||
Year Ended December 31, 2019 | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
2019 | 2019 | 2019 | 2019 | |||||||||||||
Sales | $ | 21,836,087 | $ | 24,514,636 | $ | 22,244,681 | $ | 21,103,124 | ||||||||
Gross Profit | 4,829,888 | 5,226,933 | 4,987,563 | 4,530,251 | ||||||||||||
Operating Income | 2,571,071 | 2,791,553 | 2,558,779 | 2,589,263 | ||||||||||||
Net Income | 1,745,458 | 1,831,479 | 1,694,868 | 1,708,058 | ||||||||||||
Net Income per Common Share: | ||||||||||||||||
Basic | $ | 0.63 | $ | 0.66 | $ | 0.59 | $ | 0.58 | ||||||||
Diluted | $ | 0.55 | $ | 0.57 | $ | 0.52 | $ | 0.51 | ||||||||
18. SUBSEQUENT EVENTS
Effective January 2, 2024, the Company acquired substantially all of the assets of Heany Industries Inc. (“Heany”) under an asset purchase agreement in exchange for $7 million in cash, subject to customary post-closing adjustments. Heany offers materials engineering solutions for a variety of aerospace, industrial and bio-medical applications. Heany’s engineered coatings provide a protective shield for aircraft engine components, locomotive parts, dental implants, and other applications where increasing longevity and reducing downtime is critical. The asset purchase agreement contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties and covenants, and certain other specified matters, which are subject to certain exceptions, terms and limitations. The asset purchase agreement contains certain customary post-closing covenants of the parties.
Effective January 15, 2021, the Company, completed the acquisition of all of the issued and outstanding shares of capital stock of KT Acquisition LLC (dba Komtek Forge), a Massachusetts limited liability company and supplier of highly engineered forgings for the aerospace, industrial gas turbine, medical prosthetics. alternative energy, petrochemical, and defense industries, pursuant to a Membership Interest Purchase Agreement entered into as of January 15, 2021 by and among the Company, the Seller, the seller parties named therein and the Seller Parties’ representative named therein. Upon the closing of the Transaction, the Stock was transferred and assigned to the Company in consideration of the payment by the Company of an aggregate purchase price of $9.4 million, payable at closing, which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Asset Purchase Agreement, plus the assumption of specified liabilities of the Seller.
Effective March 1, 2021, MTA Acquisition Company, LLC, a Delaware limited liability company (“MTA”) and indirect wholly-owned subsidiary of Crawford United Corporation, completed the acquisition of all of the membership interests of Global-Tek-Manufacturing LLC, a Puerto Rico limited liability company and specialist in machining parts from wrought, rounds, castings or extrusions and providing in house anodizing and other finishing and assembly operations and substantially all of the assets of Machining Technology L.L.C., a Colorado limited liability company with CNC machining capability, pursuant to a Membership Interest and Asset Purchase Agreement entered into March 2, 2021 and effective as of March 1, 2021 by and among MTA, the Seller, the seller parties named therein and the Seller Parties’ representative named therein. Upon the closing of the Transaction, the Stock and assets were transferred and assigned to MTA in exchange for approximately $4.9 million in cash and the repayment of remaining outstanding indebtedness and transaction costs totaling approximately $1.58 million, subject to customary post-closing adjustments. The Purchase Agreement also includes a post-closing “earnout” that provides for up to an aggregate of $1.5 million in additional consideration to the Interest Sellers (up to $750,000 per year) if specified performance targets are met in the two years following closing. If earned, the additional consideration is payable in cash or, at the election of each Interest Seller, in Company common shares up to a maximum aggregate amount of 61,475 shares.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company has established disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and, as such, is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, to allow timely decisions regarding required disclosure.
The Company does not expect that its disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of December 31, 2020,2023, an evaluation was performed, under the supervision and with the participation of the Company'sCompany’s management, including the Company'sCompany’s Chief Executive Officer along with the Company's Vice President, Finance andCompany’s Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's management, including the Chief Executive Officer along with the Company's Chief Financial Officer, concluded that the Company'sCompany’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")Act. Based upon that evaluation, the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020 to ensure that information required to be disclosed by the Company in reports that it files2023.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company's internal controls over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.The Company'smaintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. The Company's
Because of its inherent limitations, internal control over financial reporting includes policies and procedures that (1) pertain to maintaining records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company's receipts and expenditures are being made only in accordance with authorization of the Company's management and directors, and (3) provide reasonable assurance regarding prevention or the timely detection of unauthorized acquisition, use or disposal of the company's assets that could have a material effect on the financial statements.
Management, including the Company's Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, doesmay not expect that the Company's internal controls will prevent or detect all errors and all fraud. An internal control system no matter how well designed and operated can provide only reasonable, not absolute, assurance that the objectivesmisstatements. Also, projections of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, collusion of two or more people, or by management override of the control. Also, any evaluation of the effectiveness of controls into future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of its financial statements would not be prevented or detected on a timely basis.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Crawford United is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of management, including the Company'sCompany’s Chief Executive Officer along withand the Company'sCompany’s Chief Financial Officer, we conducted an evaluation of the effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 2020,2023, as required by Rule 13a-15(c) of the Securities Exchange Act of 1934, as amended.Act. In making this assessment,evaluation, we used the criteria set forth in the framework in Internal Control-Integrated Framework (1992) for Small Public Companies(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on ourthis evaluation, under the framework in Internal Control-Integrated Framework for Small Public Companies, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.2023.
This annual report does not include an attestation report of the Company'sCompany’s independent registered public accounting firm regarding internal control over financial reporting. Management'sManagement’s report was not subject to attestation by the Company'sCompany’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management'smanagement’s report in this annual report.
/s/ B. E. Powers
B. E. Powers
President and Chief Executive Officer
/s/ J. P. Daly
J. Salay
J. P. Daly
J. Salay
Chief Financial Officer
March 17, 20215, 2024
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting during the quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.During the quarter ended December 31, 2023, no director or officer of the Company adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, each as defined in Item 408 of Regulation S-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information required by this Item as to the Audit Committee, the Audit Committee financial expert, the procedures for recommending nominees to the Board of Directors and compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the information set forth under the captions "Information Regarding Meetings and Committees of the Board of Directors" and "Delinquent Section 16(a) Reports" in the Company's definitive Proxy Statement on Schedule 14A for the 20212024 Annual Meeting of Shareholders.Shareholders, to be filed by the Company with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A.
The Company has historically operated under informal ethical guidelines, under which the Company's principal executive, financial, and accounting officers, are held accountable. In accordance with these guidelines, the Company has always promoted honest, ethical and lawful conduct throughout the organization and has adopted a written Code of Ethics for the Chief Executive Officer and Chief Financial Officer. In addition, the Company adopted and the Board of Directors approved a written Code of Ethics and Business Conduct for all officers and employees. The Company also implemented a system to addressemployees, which is available on the "Whistle Blower" provision of the Sarbanes-Oxley Act of 2002.Company’s website at www.crawfordunited.com under “Investor Relations”.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 is incorporated by reference to the information set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement on Schedule 14A for the 20202024 Annual Meeting of Shareholders, since such Proxy Statement willto be filed by the Company with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item 12 is incorporated by reference to the information set forth under the captions "Principal Shareholders,"Shareholders" and "Share Ownership of Directors and Officers" and “Equity Compensation Plan Information” in the Company's definitive Proxy Statement on Schedule 14A for the 20202024 Annual Meeting of Shareholders, since such Proxy Statement willto be filed by the Company with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A.
Equity Compensation Plan Information
The following table provides information as of December 31, 2023 about the Company’s common shares that may be issued upon exercise of options, warrants and rights granted, and shares remaining available for issuance, under the Company’s existing equity compensation plans, including the Company’s 2023 Omnibus Equity Plan.
| (a) | (b) | (c) | ||||||||||
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(1) | |||||||||
| Equity compensation plans approved by security holders | 2,700 | - | 350,000 | |||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 2,700 | - | 350,000 | |||||||||
1. | This amount reflects that the total amount of Class A Common Shares available for issuance under the 2023 Omnibus Equity Plan at December 31, 2023. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item 13 is incorporated by reference to the information set forth under the caption "Transactions with Management" in the Company's definitive Proxy Statement on Schedule 14A for the 20192024 Annual Meeting of Shareholders, since such Proxy Statement willto be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item 14, which includes the fees of the Company’s principal accountants, Meaden & Moore, Ltd. (PCAOB ID 314), is incorporated by reference to the information set forth under the caption "Independent Public Accountants" in the Company's definitive Proxy Statement on Schedule 14A for the 20202024 Annual Meeting of Shareholders, since such Proxy Statement willto be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) (1) FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Registrant and its subsidiaries are included in Part II, Item 8:
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Consolidated Balance Sheet - As of December 31, |
|
| |
| |
| |
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(a) (2) FINANCIAL STATEMENT SCHEDULES
The following Consolidated Financial Statement Schedules of the Registrant and its subsidiaries are included in Item 15 hereof.
NoneNone.
SEQUENTIAL PAGE
Schedule II - Valuation and Qualifying Accounts |
All other Schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. |
(a) (3) EXHIBITS
Reference is made to the Exhibit Index set forth herein.
*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. | |
* | |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CRAWFORD UNITED CORPORATION | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the 17th5th day of March, 2021:2024:
SIGNATURE: | TITLE | |
/s/ Brian E. Powers |
| |
Brian E. Powers | Executive Officer and Director | |
(Principal Executive Officer) | ||
/s/ | Vice President and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | |
/s/ Edward F. Crawford | Chairman | |
Edward F. Crawford | ||
/s/ Matthew V. Crawford | Director | |
Matthew V. Crawford | ||
/s/ Steven H. Rosen | Director | |
Steven H. Rosen | ||
/s/ Kirin M. Smith | Director | |
Kirin M. Smith | ||
/s/ | Director | |
| ||
/s/ Luis E. Jimenez | Director | |
Luis E. Jimenez |
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions | ||||||||||||||||||||||||||||||||
Balance at | Charged to | |||||||||||||||||||||||||||||||
Additions | Beginning | Costs and | Balance at | |||||||||||||||||||||||||||||
Description | Balance at Beginning of Period | Charged to Costs and Expenses | Deductions | Balance at End of Period | of Period | Expenses | Deductions | End of Period | ||||||||||||||||||||||||
Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||
Year Ended December 31, 2022 | Year Ended December 31, 2022 | |||||||||||||||||||||||||||||||
Reserve for doubtful accounts | $ | 35,000 | $ | - | $ | (16,675 | ) | $ | 18,325 | $ | 75,390 | $ | 68,241 | $ | - | $ | 143,631 | |||||||||||||||
Reserve for inventory obsolescence | 226,492 | 24,114 | - | 250,606 | 452,607 | 905,340 | - | 1,357,947 | ||||||||||||||||||||||||
Reserve for product warranty | 474,304 | 417,505 | (589,323 | ) | 302,486 | 30,383 | 432,906 | (398,289 | ) | 65,000 | ||||||||||||||||||||||
Valuation allowance for deferred taxes | 47,319 | - | - | 47,319 | 47,319 | - | (8,319 | ) | 39,000 | |||||||||||||||||||||||
Reserve for uncertain tax positions | $ | 395,000 | $ | - | $ | - | $ | 395,000 | $ | 590,000 | $ | - | $ | (414,000 | ) | $ | 176,000 | |||||||||||||||
Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||
Year Ended December 31, 2023 | Year Ended December 31, 2023 | |||||||||||||||||||||||||||||||
Reserve for doubtful accounts | $ | 18,325 | $ | 1,648 | - | $ | 19,973 | $ | 143,631 | $ | - | $ | (38,408 | ) | $ | 105,223 | ||||||||||||||||
Reserve for inventory obsolescence | 250,606 | 64,739 | - | 315,345 | 1,357,947 | 58,000 | (738,167 | ) | 677,780 | |||||||||||||||||||||||
Reserve for product warranty | 302,486 | 253,461 | (350,947 | ) | 205,000 | 65,000 | 709,409 | (571,796 | ) | 202,613 | ||||||||||||||||||||||
Valuation allowance for deferred taxes | 47,319 | - | - | 47,319 | 39,000 | - | (6,000 | ) | 33,000 | |||||||||||||||||||||||
Reserve for uncertain tax positions | $ | 395,000 | $ | 30,000 | $ | - | $ | 425,000 | $ | 176,000 | $ | - | $ | (121,000 | ) | $ | 55,000 | |||||||||||||||