UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 20172021
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1 - 53321-5332
P&F INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 22-1657413 | |
(State or other jurisdiction of | (I.R.S. Employer Identification Number) | |
incorporation or organization) | ||
445 Broadhollow Road, Suite 100, Melville, New York | 11747 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(631) (631) 694-9800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A common stock, $1.00 par value | PFIN | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx⌧ No¨◻
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx⌧ No¨
◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for the complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨☐ Nox
⌧
As of November 7, 20174, 2021, there were 3,603,8723,181,286 shares of the registrant’s Class A Common Stockcommon stock outstanding.
P&F INDUSTRIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 20172021
TABLE OF CONTENTS
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| Consolidated Balance Sheets as of September 30, | 3 | |
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| 5 | ||
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| 10 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | ||
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2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | (See Note 1) | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 1,205,000 | $ | 3,699,000 | ||||
Accounts receivable — net | 10,994,000 | 7,906,000 | ||||||
Inventories | 20,090,000 | 19,901,000 | ||||||
Prepaid expenses and other current assets | 925,000 | 3,030,000 | ||||||
TOTAL CURRENT ASSETS | 33,214,000 | 34,536,000 | ||||||
PROPERTY AND EQUIPMENT | ||||||||
Land | 1,281,000 | 1,150,000 | ||||||
Buildings and improvements | 6,136,000 | 5,209,000 | ||||||
Machinery and equipment | 20,160,000 | 19,401,000 | ||||||
27,577,000 | 25,760,000 | |||||||
Less accumulated depreciation and amortization | 18,770,000 | 18,671,000 | ||||||
NET PROPERTY AND EQUIPMENT | 8,807,000 | 7,089,000 | ||||||
GOODWILL | 4,445,000 | 3,897,000 | ||||||
OTHER INTANGIBLE ASSETS — net | 8,709,000 | 6,606,000 | ||||||
DEFERRED INCOME TAXES — net | 1,643,000 | 1,793,000 | ||||||
OTHER ASSETS — net | 120,000 | 130,000 | ||||||
TOTAL ASSETS | $ | 56,938,000 | $ | 54,051,000 |
| | | | | | |
| | September 30, 2021 | | December 31, 2020 | ||
|
| (unaudited) |
| (See Note 1) | ||
ASSETS | | | | | | |
CURRENT ASSETS | | | | | | |
| | | | | | |
Cash | | $ | 789,000 | | $ | 904,000 |
Accounts receivable — net | |
| 8,448,000 | |
| 7,468,000 |
Inventories | |
| 21,623,000 | |
| 18,362,000 |
Prepaid expenses and other current assets | |
| 2,608,000 | |
| 2,806,000 |
TOTAL CURRENT ASSETS | |
| 33,468,000 | |
| 29,540,000 |
| | | | | | |
PROPERTY AND EQUIPMENT | | | | | | |
Land | |
| 507,000 | |
| 507,000 |
Buildings and improvements | |
| 3,594,000 | |
| 3,544,000 |
Machinery and equipment | |
| 25,601,000 | |
| 25,673,000 |
| |
| 29,702,000 | |
| 29,724,000 |
Less accumulated depreciation and amortization | |
| 21,423,000 | |
| 20,329,000 |
NET PROPERTY AND EQUIPMENT | |
| 8,279,000 | |
| 9,395,000 |
| | | | | | |
GOODWILL | |
| 4,446,000 | |
| 4,449,000 |
| | | | | | |
OTHER INTANGIBLE ASSETS — net | |
| 5,749,000 | |
| 6,226,000 |
| | | | | | |
DEFERRED INCOME TAXES — net | |
| 496,000 | |
| 226,000 |
| | | | | | |
RIGHT-OF-USE ASSETS – OPERATING LEASES | | | 3,031,000 | | | 3,281,000 |
| | | | | | |
OTHER ASSETS — net | |
| 80,000 | |
| 250,000 |
| | | | | | |
TOTAL ASSETS | | $ | 55,549,000 | | $ | 53,367,000 |
See accompanying notes to consolidated financial statements (unaudited).
3
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | (See Note 1) | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Short-term borrowings | $ | 2,334,000 | $ | — | ||||
Accounts payable | 3,247,000 | 2,398,000 | ||||||
Accrued compensation and benefits | 1,694,000 | 1,733,000 | ||||||
Accrued other liabilities | 1,449,000 | 2,019,000 | ||||||
Current maturities of long-term debt | — | 13,000 | ||||||
TOTAL CURRENT LIABILITIES | 8,724,000 | 6,163,000 | ||||||
Long - term debt, less current maturities | 92,000 | 88,000 | ||||||
Other liabilities | 901,000 | 210,000 | ||||||
TOTAL LIABILITIES | 9,717,000 | 6,461,000 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Preferred stock - $10 par; authorized - 2,000,000 shares; no shares issued | — | — | ||||||
Common stock | ||||||||
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,203,000 at September 30, 2017 and 4,181,000 at December 31, 2016 | 4,203,000 | 4,181,000 | ||||||
Class B - $1 par; authorized - 2,000,000 shares; no shares issued | — | — | ||||||
Additional paid-in capital | 12,996,000 | 12,906,000 | ||||||
Retained earnings | 35,481,000 | 36,061,000 | ||||||
Treasury stock, at cost – 596,000 shares at September 30, 2017 and 584,000 at December 31, 2016 | (4,910,000 | ) | (4,821,000 | ) | ||||
Accumulated other comprehensive loss | (549,000 | ) | (737,000 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | 47,221,000 | 47,590,000 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 56,938,000 | $ | 54,051,000 |
| | | | | | |
| | September 30, 2021 | | December 31, 2020 | ||
|
| (unaudited) |
| (See Note 1) | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
| | | | | | |
CURRENT LIABILITIES | | | | | | |
| | | | | | |
Short-term borrowings | | $ | 3,295,000 | | $ | 1,374,000 |
Accounts payable | |
| 3,598,000 | |
| 2,199,000 |
Accrued compensation and benefits | |
| 1,231,000 | |
| 525,000 |
Accrued other liabilities | |
| 1,328,000 | |
| 1,354,000 |
Current leased liabilities – operating leases | | | 816,000 | | | 847,000 |
Current maturities of long-term debt (PPP loan) | |
| — | |
| 1,983,000 |
TOTAL CURRENT LIABILITIES | |
| 10,268,000 | |
| 8,282,000 |
| | | | | | |
Noncurrent leased liabilities – operating leases | | | 2,261,000 | | | 2,474,000 |
Long–term debt, less current maturities (PPP loan) | |
| — | |
| 946,000 |
Other liabilities | |
| 102,000 | |
| 127,000 |
| | | | | | |
TOTAL LIABILITIES | |
| 12,631,000 | |
| 11,829,000 |
| | | | | | |
SHAREHOLDERS’ EQUITY | |
| | |
|
|
Preferred stock - $10 par; authorized - 2,000,000 shares; 0 shares issued | |
| — | |
| — |
Common stock | |
| | |
|
|
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,453,000 at September 30, 2021, and 4,428,000 at December 31, 2020 | |
| 4,453,000 | |
| 4,428,000 |
Class B - $1 par; authorized - 2,000,000 shares; 0 shares issued | |
| 0 | |
| 0 |
Additional paid-in capital | |
| 14,158,000 | |
| 14,144,000 |
Retained earnings | |
| 35,139,000 | |
| 33,756,000 |
Treasury stock, at cost – 1,273,000 shares at September 30, 2021 and at December 31, 2020 | |
| (10,213,000) | |
| (10,213,000) |
Accumulated other comprehensive loss | |
| (619,000) | |
| (577,000) |
| | | | | | |
TOTAL SHAREHOLDERS’ EQUITY | |
| 42,918,000 | |
| 41,538,000 |
| | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 55,549,000 | | $ | 53,367,000 |
See accompanying notes to consolidated financial statements (unaudited).
4
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (LOSS)
(Unaudited)(unaudited)
Three months | Nine months | |||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net revenue | $ | 15,782,000 | $ | 14,633,000 | $ | 44,357,000 | $ | 44,769,000 | ||||||||
Cost of sales | 10,198,000 | 10,128,000 | 28,377,000 | 29,743,000 | ||||||||||||
Gross profit | 5,584,000 | 4,505,000 | 15,980,000 | 15,026,000 | ||||||||||||
Selling, general and administrative expenses | 5,352,000 | 4,915,000 | 15,765,000 | 15,088,000 | ||||||||||||
Impairment of goodwill and other intangible assets | — | — | — | 8,311,000 | ||||||||||||
Operating income (loss) | 232,000 | (410,000 | ) | 215,000 | (8,373,000 | ) | ||||||||||
Other expense (income), net | 11,000 | (43,000 | ) | (13,000 | ) | (75,000 | ) | |||||||||
Interest expense | 50,000 | 26,000 | 124,000 | 164,000 | ||||||||||||
Income (loss) from continuing operations before income taxes | 171,000 | (393,000 | ) | 104,000 | (8,462,000 | ) | ||||||||||
Income tax expense (benefit) | 166,000 | (107,000 | ) | 142,000 | (2,872,000 | ) | ||||||||||
Income (loss) from continuing operations | 5,000 | (286,000 | ) | (38,000 | ) | (5,590,000 | ) | |||||||||
Discontinued operations (Note 2) | ||||||||||||||||
Income from discontinued operations, net of tax of $-0- and $38,000 for the three and nine-month periods ended September 30, 2016, respectively. | — | — | — | 72,000 | ||||||||||||
Gain on sale of discontinued operations, net of tax benefit of $187,000 and $328,000 for the three and nine-month periods ended September 30, 2016, respectively. | — | 187,000 | — | 12,358,000 | ||||||||||||
Income from discontinued operations, net of tax | — | 187,000 | — | 12,430,000 | ||||||||||||
Net income (loss) | $ | 5,000 | $ | (99,000 | ) | $ | (38,000 | ) | $ | 6,840,000 | ||||||
Basic (loss) earnings per share | ||||||||||||||||
Continuing operations | $ | — | $ | (0.08 | ) | $ | (0.01 | ) | $ | (1.55 | ) | |||||
Discontinued operations | — | 0.05 | — | 3.45 | ||||||||||||
Net (loss) income | $ | — | $ | (0.03 | ) | $ | (0.01 | ) | $ | 1.90 | ||||||
Diluted (loss) earnings per share | ||||||||||||||||
Continuing operations | $ | — | $ | (0.08 | ) | $ | (0.01 | ) | $ | (1.55 | ) | |||||
Discontinued operations | — | 0.05 | — | 3.45 | ||||||||||||
Net (loss) income | $ | — | $ | (0.03 | ) | $ | (0.01 | ) | $ | 1.90 | ||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 3,617,000 | 3,598,000 | 3,609,000 | 3,598,000 | ||||||||||||
Diluted | 3,777,000 | 3,598,000 | 3,609,000 | 3,598,000 | ||||||||||||
Net income (loss) | $ | 5,000 | $ | (99,000 | ) | $ | (38,000 | ) | $ | 6,840,000 | ||||||
Other comprehensive income (loss) - foreign currency translation adjustment | 71,000 | (63,000 | ) | 188,000 | (299,000 | ) | ||||||||||
Total comprehensive income (loss) | $ | 76,000 | $ | (162,000 | ) | $ | 150,000 | $ | 6,541,000 |
| | | | | | | | | | | | |
| | Three months | | Nine months | ||||||||
| | ended September 30, | | ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net revenue | | $ | 12,985,000 | | $ | 12,406,000 | | $ | 40,520,000 | | $ | 37,276,000 |
Cost of sales | |
| 9,011,000 | | | 8,883,000 | | | 27,062,000 | | | 26,223,000 |
Gross profit | |
| 3,974,000 | | | 3,523,000 | | | 13,458,000 | | | 11,053,000 |
Selling, general and administrative expenses | |
| 4,734,000 | | | 4,673,000 | | | 15,183,000 | | | 14,983,000 |
Impairment of goodwill and other intangible assets | | | 0 | | | 0 | | | — | | | 1,612,000 |
Operating loss | |
| (760,000) | | | (1,150,000) | | | (1,725,000) | | | (5,542,000) |
Loss on sale of property and equipment | |
| (67,000) | | | (22,000) | | | (67,000) | | | (22,000) |
Other income | | | 0 | | | 0 | | | 2,929,000 | | | 31,000 |
Interest expense | |
| (14,000) | | | (21,000) | | | (21,000) | | | (118,000) |
(Loss) income before income taxes | |
| (841,000) | |
| (1,193,000) | |
| 1,116,000 | |
| (5,651,000) |
Income tax benefit | |
| (108,000) | | | (336,000) | | | (267,000) | | | (1,655,000) |
Net (loss) income | | $ | (733,000) | | $ | (857,000) | | $ | 1,383,000 | | $ | (3,996,000) |
| | | | | | | | | | | | |
Basic (loss) earnings per share | | $ | (0.23) | | $ | (0.27) | | $ | 0.44 | | $ | (1.27) |
Diluted (loss) earnings per share | | $ | (0.23) | | $ | (0.27) | | $ | 0.43 | | $ | (1.27) |
| | | | | | | | | | | | |
Weighted average common shares outstanding: | |
| | | | | | | | | | |
| | | | | | | | | | | | |
Basic | |
| 3,181,000 | | | 3,151,000 | | | 3,177,000 | | | 3,148,000 |
Diluted | |
| 3,181,000 | | | 3,151,000 | | | 3,191,000 | | | 3,148,000 |
| | | | | | | | | | | | |
Net (loss) income | | $ | (733,000) | | $ | (857,000) | | $ | 1,383,000 | | $ | (3,996,000) |
Other comprehensive (loss) income - foreign currency translation adjustment | |
| (61,000) | | | 77,000 | | | (42,000) | | | (60,000) |
Total comprehensive (loss) income | | $ | (794,000) | | $ | (780,000) | | $ | 1,341,000 | | $ | (4,056,000) |
See accompanying notes to consolidated financial statements (unaudited).
5
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
Three months ended September 30, 2021
Class A common stock, $1 par | Additional paid-in | Retained | Treasury stock | Accumulated other comprehensive | ||||||||||||||||||||||||||||
Total | Shares | Amount | capital | earnings | Shares | Amount | loss | |||||||||||||||||||||||||
Balance, January 1, 2017 | $ | 47,590,000 | 4,181,000 | $ | 4,181,000 | $ | 12,906,000 | $ | 36,061,000 | (584,000 | ) | $ | (4,821,000 | ) | $ | (737,000 | ) | |||||||||||||||
Net loss | (38,000 | ) | — | — | — | (38,000 | ) | — | — | — | ||||||||||||||||||||||
Restricted common stock compensation | 30,000 | 5,000 | 5,000 | 25,000 | — | — | — | — | ||||||||||||||||||||||||
Stock - based compensation | 20,000 | — | — | 20,000 | — | — | — | — | ||||||||||||||||||||||||
Exercise of stock options | 62,000 | 17,000 | 17,000 | 45,000 | — | — | — | — | ||||||||||||||||||||||||
Dividends | (542,000 | ) | — | — | — | (542,000 | ) | — | — | — | ||||||||||||||||||||||
Purchase of Treasury stock | (89,000 | ) | — | — | — | — | (12,000 | ) | (89,000 | ) | — | |||||||||||||||||||||
Foreign currency translation adjustment | 188,000 | — | — | — | — | — | — | 188,000 | ||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||
Balance, September 30, 2017 | $ | 47,221,000 | 4,203,000 | $ | 4,203,000 | $ | 12,996,000 | $ | 35,481,000 | (596,000 | ) | $ | (4,910,000 | ) | $ | (549,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated | |
| | | | | Class A common | | Additional | | | | | | | | | | other | |||||
| | | | | stock, $1 par | | paid-in | | Retained | | Treasury stock | | comprehensive | |||||||||
|
| Total |
| Shares |
| Amount |
| capital |
| earnings |
| Shares |
| Amount |
| loss | ||||||
Balance, July 1, 2021 | | $ | 43,703,000 |
| 4,453,000 | | $ | 4,453,000 | | $ | 14,149,000 | | $ | 35,872,000 |
| (1,273,000) | | $ | (10,213,000) | | $ | (558,000) |
| |
| | | | | | | | | | | | | | | | | | | | |
Net loss | |
| (733,000) |
| 0 | |
| 0 | |
| 0 | |
| (733,000) |
| 0 | |
| 0 | |
| 0 |
| |
| | | | | | | | | | | | | | | | | | | | |
Restricted common stock compensation | |
| 8,000 |
| 0 | |
| 0 | |
| 8,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| |
| | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | |
| 1,000 |
| 0 | |
| 0 | |
| 1,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| |
| | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | |
| (61,000) |
| 0 | |
| 0 | |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| (61,000) |
| |
| | | | �� | | | | | | | | | | | | | | | | |
Balance, September 30, 2021 | | $ | 42,918,000 |
| 4,453,000 | | $ | 4,453,000 | | $ | 14,158,000 | | $ | 35,139,000 |
| (1,273,000) | | $ | (10,213,000) | | $ | (619,000) |
Three months ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Accumulated | |
| | | |
| Class A common |
| Additional | | | | | | | | |
| other | |||||
| | | |
| stock, $1 par |
| paid-in |
| Retained |
| Treasury stock |
| comprehensive | |||||||||
|
| Total |
| Shares |
| Amount |
| capital |
| earnings |
| Shares |
| Amount |
| loss | ||||||
Balance, July 1, 2020 | | $ | 43,130,000 |
| 4,423,000 | | $ | 4,423,000 | | $ | 14,106,000 | | $ | 35,571,000 |
| (1,273,000) | | $ | (10,213,000) | | $ | (757,000) |
| | | | | | | | | | | | | | | | | | | | | | |
Net loss | |
| (857,000) |
| 0 | |
| 0 | |
| 0 | |
| (857,000) |
| 0 | |
| 0 | |
| 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Restricted common stock compensation | |
| 8,000 |
| 0 | |
| 0 | |
| 8,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | |
| 10,000 |
| 0 | |
| 0 | |
| 10,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | |
| 77,000 |
| 0 | |
| 0 | |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 77,000 |
| | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2020 | | $ | 42,368,000 |
| 4,423,000 | | $ | 4,423,000 | | $ | 14,124,000 | | $ | 34,714,000 |
| (1,273,000) | | $ | (10,213,000) | | $ | (680,000) |
See accompanying notes to consolidated financial statements (unaudited).
6
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY (unaudited)
Nine months ended September 30, 2021
Nine months | ||||||||
ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss from continuing operations | $ | (38,000 | ) | $ | (5,590,000 | ) | ||
Net income from discontinued operations | — | 12,430,000 | ||||||
Adjustments to reconcile net loss from operations to net cash provided by (used in) operating activities: | ||||||||
Non-cash charges: | ||||||||
Depreciation and amortization | 975,000 | 1,227,000 | ||||||
Amortization of other intangible assets | 620,000 | 803,000 | ||||||
Amortization of debt issue costs | 42,000 | 118,000 | ||||||
Recovery for losses on accounts receivable - net | (12,000 | ) | — | |||||
Stock-based compensation | 20,000 | 13,000 | ||||||
Restricted stock-based compensation | 30,000 | 39,000 | ||||||
(Gain) loss on sale of fixed assets | (8,000 | ) | 3,000 | |||||
Deferred income taxes | 142,000 | (3,163,000 | ) | |||||
Fair value change in contingent consideration | 14,000 | — | ||||||
Impairment of goodwill and other intangible assets | — | 8,311,000 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (2,252,000 | ) | (2,166,000 | ) | ||||
Inventories | 1,468,000 | (681,000 | ) | |||||
Prepaid expenses and other current assets | 2,154,000 | (1,947,000 | ) | |||||
Other assets | 45,000 | 60,000 | ||||||
Accounts payable | 842,000 | 1,304,000 | ||||||
Accrued compensation and benefits | (129,000 | ) | (209,000 | ) | ||||
Accrued other liabilities | (623,000 | ) | 287,000 | |||||
Other liabilities | (14,000 | ) | (14,000 | ) | ||||
Total adjustments | 3,314,000 | 3,985,000 | ||||||
Net cash provided by (used in) operating activities – continuing operations | 3,276,000 | (1,605,000 | ) | |||||
Net cash used in operating activities – discontinued operations | — | (653,000 | ) | |||||
Net cash provided by (used in) operating activities | $ | 3,276,000 | $ | (2,258,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated | |
| | | | | Class A common | | Additional | | | | | | | | | | other | |||||
| | | | | stock, $1 par | | paid-in | | Retained | | Treasury stock | | comprehensive | |||||||||
|
| Total |
| Shares |
| Amount |
| capital |
| earnings |
| Shares |
| Amount |
| loss | ||||||
Balance, January 1, 2021 | | $ | 41,538,000 |
| 4,428,000 | | $ | 4,428,000 | | $ | 14,144,000 | | $ | 33,756,000 |
| (1,273,000) | | $ | (10,213,000) | | $ | (577,000) |
| | | | | | | | | | | | | | | | | | | | | | |
Net income | |
| 1,383,000 |
| 0 | |
| 0 | |
| 0 | |
| 1,383,000 |
| 0 | |
| 0 | |
| 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Restricted common stock compensation | |
| 35,000 |
| 25,000 | |
| 25,000 | |
| 10,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | |
| 4,000 |
| 0 | |
| 0 | |
| 4,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | |
| (42,000) |
| 0 | |
| 0 | |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| (42,000) |
| | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2021 | | $ | 42,918,000 |
| 4,453,000 | | $ | 4,453,000 | | $ | 14,158,000 | | $ | 35,139,000 |
| (1,273,000) | | $ | (10,213,000) | | $ | (619,000) |
Nine months ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated | |
| | | | | Class A common | | Additional | | | | | | | | | | other | |||||
| | | | | stock, $1 par | | paid-in | | Retained | | Treasury stock | | comprehensive | |||||||||
|
| Total |
| Shares |
| Amount |
| capital |
| earnings |
| Shares |
| Amount |
| loss | ||||||
Balance, January 1, 2020 | | $ | 46,506,000 |
| 4,416,000 | | $ | 4,416,000 | | $ | 14,056,000 | | $ | 38,867,000 |
| (1,273,000) | | $ | (10,213,000) | | $ | (620,000) |
| | | | | | | | | | | | | | | | | | | | | | |
Net loss | |
| (3,996,000) |
| 0 | |
| 0 | |
| 0 | |
| (3,996,000) |
| 0 | |
| 0 | |
| 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | |
| 3,000 |
| 1,000 | |
| 1,000 | |
| 2,000 | |
| |
| | |
| | |
| |
| | | | | | | | | | | | | | | | | | | | | | |
Restricted common stock compensation | |
| 33,000 |
| 6,000 | |
| 6,000 | |
| 27,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | |
| 39,000 |
| 0 | |
| 0 | |
| 39,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Dividends | |
| (157,000) |
| 0 | |
| 0 | |
| 0 | |
| (157,000) |
| 0 | |
| 0 | |
| 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | |
| (60,000) |
| 0 | |
| 0 | |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| (60,000) |
| | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2020 | | $ | 42,368,000 |
| 4,423,000 | | $ | 4,423,000 | | $ | 14,124,000 | | $ | 34,714,000 |
| (1,273,000) | | $ | (10,213,000) | | $ | (680,000) |
See accompanying notes to consolidated financial statements (unaudited).
7
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months | ||||||||
ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | $ | (444,000 | ) | $ | (894,000 | ) | ||
Purchase of net assets of Jiffy Air Tool, Inc. | (6,845,000 | ) | — | |||||
Purchase of patents | (200,000 | ) | — | |||||
Proceeds from disposal of assets | 8,000 | 30,000 | ||||||
Net cash used in investing activities – continuing operations | (7,481,000 | ) | (864,000 | ) | ||||
Net cash provided by investing activities – discontinued operations | — | 20,149,000 | ||||||
Net cash (used in) provided by investing activities | (7,481,000 | ) | 19,285,000 | |||||
Cash Flows from Financing Activities: | ||||||||
Dividend payments | (542,000 | ) | (2,156,000 | ) | ||||
Proceeds from exercise of stock options | 62,000 | 23,000 | ||||||
Purchase of Class A Common Stock | (89,000 | ) | (255,000 | ) | ||||
Net proceeds from short-term borrowings | 2,334,000 | 10,536,000 | ||||||
Repayments of term loans | — | (6,343,000 | ) | |||||
Repayments of notes payable | (14,000 | ) | (27,000 | ) | ||||
Payments of debt issue costs | (74,000 | ) | (30,000 | ) | ||||
Net cash provided by financing activities – continuing operations | 1,677,000 | 1,748,000 | ||||||
Net cash used in financing activities – discontinued operations | — | (18,716,000 | ) | |||||
Net cash provided by (used in) financing activities | 1,677,000 | (16,968,000 | ) | |||||
Effect of exchange rate changes on cash | 34,000 | (45,000 | ) | |||||
Net (decrease) increase in cash | (2,494,000 | ) | 14,000 | |||||
Cash at beginning of period | 3,699,000 | 927,000 | ||||||
Cash at end of period | $ | 1,205,000 | $ | 941,000 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 74,000 | $ | 123,000 | ||||
Income taxes | $ | 342,000 | $ | 88,000 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Contingent consideration on acquisition | $ | 692,000 | $ | — |
| | | | | | |
| | Nine months | ||||
| | ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Cash Flows from Operating Activities: | | | | | | |
Net income (loss) | | $ | 1,383,000 | | $ | (3,996,000) |
| | | | | | |
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | | | | |
| | | | | | |
Non-cash and other charges: | | | | | | |
Depreciation and amortization | |
| 1,345,000 | | | 1,339,000 |
Amortization of other intangible assets | |
| 474,000 | | | 544,000 |
Amortization of operating lease assets | | | 670,000 | | | 675,000 |
Amortization of debt issue costs | |
| 12,000 | | | 12,000 |
Amortization of consideration payable to a customer | |
| 202,000 | | | 202,000 |
Provision for losses on accounts receivable | |
| 19,000 | | | 47,000 |
Stock-based compensation | |
| 4,000 | | | 39,000 |
Restricted stock-based compensation | |
| 35,000 | | | 33,000 |
Forgiveness of PPP loan | | | (2,929,000) | | | 0 |
Deferred income taxes | |
| (267,000) | | | (771,000) |
Loss on sale or disposal of fixed assets | | | 33,000 | | | 22,000 |
Fair value adjustment of assets held for sale | | | 40,000 | | | 0 |
Gain on lease obligation settlement | | | 0 | | | (31,000) |
Impairment of goodwill and other intangible assets | |
| 0 | |
| 1,612,000 |
Changes in operating assets and liabilities: | |
| | | | |
Accounts receivable | |
| (1,007,000) | | | 712,000 |
Inventories | |
| (3,274,000) | | | 3,384,000 |
Prepaid expenses and other current assets | |
| 248,000 | | | (341,000) |
Other assets | |
| 0 | | | (32,000) |
Accounts payable | |
| 1,406,000 | | | 708,000 |
Accrued compensation and benefits | |
| 711,000 | | | (1,190,000) |
Accrued other liabilities and other current liabilities | | | (14,000) | | | (239,000) |
Operating lease liabilities | |
| (665,000) | | | (702,000) |
Other liabilities | |
| (36,000) | | | (2,000) |
Total adjustments | |
| (2,993,000) | | | 6,021,000 |
Net cash (used in) provided by operating activities | | | (1,610,000) | | | 2,025,000 |
See accompanying notes to consolidated financial statements (unaudited).
8
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| | | | | | |
| | Nine months | ||||
| | ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Cash Flows from Investing Activities: |
| |
|
| |
|
Capital expenditures | | $ | (428,000) | | $ | (956,000) |
Proceeds from sale of fixed asset | |
| 28,000 | | | 1,000 |
Net cash used in investing activities | |
| (400,000) | | | (955,000) |
| | | | | | |
Cash Flows from Financing Activities: | |
| | | | |
Dividend payments | |
| 0 | | | (157,000) |
Proceeds from exercise of stock options | |
| 0 | | | 3,000 |
Net proceeds (repayments) from short-term borrowings | |
| 1,921,000 | | | (3,314,000) |
Proceeds from PPP loan | |
| 0 | | | 2,929,000 |
Net cash provided by (used in) financing activities | |
| 1,921,000 | | | (539,000) |
| | | | | | |
Effect of exchange rate changes on cash | |
| (26,000) | | | (3,000) |
Net (decrease) increase in cash | |
| (115,000) | | | 528,000 |
Cash at beginning of period | |
| 904,000 | | | 380,000 |
Cash at end of period | | $ | 789,000 | | $ | 908,000 |
| | | | | | |
Supplemental disclosures of cash flow information: | |
| | | | |
| | | | | | |
Cash paid for: | |
| | | | |
Interest | | $ | 25,000 | | $ | 109,000 |
Taxes | | $ | 12,000 | | $ | 26,000 |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 6,000 | | $ | 5,000 |
| | | | | | |
Non-cash information: | |
| | | | |
Right of Use (“ROU”) assets recognized for new operating lease liabilities | | $ | 320,000 | | $ | 140,000 |
See accompanying notes to consolidated financial statements (unaudited).
9
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the management of the Company, as defined below, these unaudited consolidated financial statements include all normal, recurring adjustments necessary to present fairly the information set forth therein. All such adjustments, except for those adjustments relating to discontinued operations, are of a normal recurring nature. Results for interim periods are not necessarily indicative of results to be expected for a full year.
The consolidated balance sheet information as of December 31, 20162020, was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162020 (“20162020 Form 10-K”). The interim consolidated financial statements contained herein should be read in conjunction with the 20162020 Form 10-K.
The consolidated financial statements have been reported in U.S. dollars by translating asset and liability amounts of a foreign wholly-owned subsidiary at the closing exchange rate, equity amounts at historical rates and the results of operations and cash flow at the average of the prevailing exchange rates during the periods reported. As a result, the Company is exposed to foreign currency translation gains or losses. These gains or losses are presented in the Company’s consolidated financial statements as “Other comprehensive income (loss) - foreign currency translation adjustment”.
adjustment.”
Principles of Consolidation
The unaudited consolidated financial statements contained herein include the accounts of P&F Industries, Inc., and its subsidiaries (“P&F” or the “Company”). All significant intercompany balances and transactions have been eliminated.
Reclassification
Certain amounts in the consolidated financial statements of the Company have been reclassified to conform to classifications used in the current year. The reclassifications had no effect on previously reported results of operations or retained earnings.
Customer Concentration
The Company has one retail customer that during the three and nine-month periods ended September 30, 2017 accounted for 23.6% and 27.6%, respectively, of the Company’s revenue. Whereas for the same three and nine-month periods in 2016, the Company had two retail customers that accounted for 45.3% and 43.4%, respectively, of the Company’s revenue. Additionally, the Company has two retail customers that, in the aggregate, at September 30, 2017 and December 31, 2016, accounted for 39.6% and 53.5%, respectively, of the Company’s accounts receivable.
Out - of - period Adjustment
During the preparation of the Company’s tax provision for the three and nine-month periods ended September 30, 2017, it determined that the effect of forfeitures, expiration and exercise of certain of its common stock options should have been reflected in its second quarter and six-month period ended June 30, 2017’s income tax provision. The Company has concluded that this error was immaterial based upon a qualitative and quantitative analysis. As such, the Company reflected such effect in its three and nine-month period ended September 30, 2017.
The Company
P&F, is a Delaware corporation incorporated on April 19, 1963. Prior to February 11, 2016 (the “Nationwide Closing Date”), the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide, which had been reported in the Hardware segment, the Company currently only operates in the Tools business. See Note 2 to consolidated financial statements for further discussion.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)
Tools
The Company1963, conducts its Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”).
Florida Pneumatic
Florida Pneumatic directly, and through its wholly-owned subsidiaries Exhaust Technologies Inc. (“ETI”) and, Universal Air Tool Company Limited (“UAT”) are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, Florida Pneumatic, through a wholly-owned subsidiary, purchased substantially all of the operating assets, less certain payables of, and Jiffy Air Tool, Inc. See Note 3 for further discussion. The business(“Jiffy”) imports, manufactures, and markets pneumatic hand tools of its own design, primarily to the retail, industrial, automotive and aerospace markets. Its products include sanders, grinders, drills, saws, and impact wrenches. These tools are similar in appearance and function to electric hand tools, but are powered by compressed air, rather than by electricity or a battery. Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.
tools, as they are more commonly referred to, generally offer better performance, and weigh less than their electrical counterparts. Florida Pneumatic is engaged in the importation and saleimports and/or manufactures approximately 75 types of pneumatic hand tools, primarily formost of which are sold at prices ranging from $50 to $1,000, under the retail, industrialnames “Florida Pneumatic,” “Universal Tool”, “Jiffy Air Tool”, AIRCAT, NITROCAT, as well as under the trade names or trademarks of several private label customers. These products are sold to retailers, distributors, manufacturers and automotive markets. Florida Pneumatic also markets,private label customers through its Berkley Tool division (“Berkley”), a product line which includes pipein-house sales personnel and bolt dies, pipe taps, wrenches, visesmanufacturers’ representatives. The AIRCAT and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brandNITROCAT brands of pipe cutting and threading machines. Lastly as the result of the Jiffy acquisition, Florida Pneumatic now manufactures pneumatic tools marketedare sold primarily to the automotive service and repair market (“automotive market”). Users of Florida Pneumatic’s hand tools include industrial maintenance and production staffs, do-it-yourself mechanics, professional automobile mechanics and auto body personnel. Jiffy manufactures and distributes pneumatic tools and components primarily to aerospace sector.manufacturers.
10
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - (Continued)
The Company - Continued
Hy-Tech
Hy-Tech designs, manufactures, and sellsmarkets industrial tools, systems, gearing, accessories, and a wide rangevariety of industrial productsreplacement parts under thevarious brands including ATP, ATSCO, Ozat, Numatx, ThaxtonNUMATX, and Quality Gear. These products, including heavy dutyThaxton. Hy-Tech produces and sells heavy-duty pneumatic impact tools, grinders, air tools, industrial grinders, impact sockets,motors, hydro-pneumatic riveters, hydrostatic test plugs, air motorsimpact sockets and custom gears, with prices ranging from $300 to $42,000.
Hy-Tech’s “Engineered Solutions” products are all sold directdirectly to major end users as well asOriginal Equipment Manufacturers (“OEM’s”), and industrial branded products are sold through a broad network of Industrial and Fluid Power Distributors. Industries served includespecialized industrial distributors serving the power generation, petrochemical, aerospace, construction, railroad, mining, ship building and fabricated metals.metals industries. Hy-Tech also manufacturesworks directly with its industrial customers, designing and manufacturing products from finished components assemblies and finished product for various Original Equipment Manufacturersto complete turnkey systems to be sold under their own brand names.
Hy-Tech’s Power Transmission Group, or PTG, is a custom gear, gearbox and power transmission system manufacturer. In addition to manufacturing a broad range of standard and custom gears for manufacturers in a wide variety of industries, PTG reverse engineers existing gears as well as designs new gears, utilizing state-of-the-art technologies, including 3D imaging and Gleason Gear modeling software.
COVID-19
Hardware
PriorOn March 11, 2020, the World Health Organization designated the novel coronavirus (“COVID-19”) as a global pandemic. The Company continues to actively monitor COVID-19 and its continued impact on its operations and financial results. Further, the negative impact of the world-wide supply-chain crisis due primarily to the Nationwide Closing Date,global pandemic has adversely affected many of the Company’s product lines, particularly its retail and automotive lines. However, the Company conductedcontinues to incur delays in container shipments from Asia as well as significant increases in inbound ocean freight costs, which the Company believes is due primarily to the global pandemic. We expect this to continue for the foreseeable future. The Company’s corporate office and business units are continuing to work alongside their external business partners and customers to minimize the continued business constraints caused by COVID-19 on its Hardwarebusiness.
Due in large part to shelter-in-place restrictions that were implemented in late first quarter of 2020, which for many has been lifted during the latter portion of 2020 and early 2021, as well as significant decreases in travel and customer consumption behavior, the Company experienced a reduction in its revenue and earnings per share during 2020 and has continued to a lesser degree during the first nine months of 2021. It is unclear what the financial impacts from COVID-19 will be on the Company’s businesses in the future.
Going Concern Assessment
Management assesses going concern uncertainty to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the “look-forward period,” as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, it considers various scenarios, forecasts, projections, estimates and makes certain key assumptions, including the timing and nature of projected cash expenditures, its ability to reduce, delay or curtail cash outflows and its ability to raise additional capital, if necessary, among other factors. Management has prepared estimates of operations covering the look-forward period and believes that sufficient funds will be generated from operations, working capital, and its existing credit facility to fund its operations. The Company has contingency plans in which it would further reduce or defer additional expenses and cash outlays, should operations weaken beyond current forecasts.
11
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - (Continued)
Going Concern Assessment - Continued
The impact of COVID-19 on the Company’s business through its wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its businesshas been considered in these assumptions; however, it is unclear what the full impact of COVID-19 will be or when the Company believes a return to more normal operations through its wholly-owned subsidiary, Nationwide. Nationwide was an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. Effectivemay occur. Further, as part of the Nationwide Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22,200,000.business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company, on April 20, 2020, received a $2.9 million Paycheck Protection Program (“PPP”) loan. See Note 29 - CARES Act to the Company’s consolidated financial statements for further discussion.
The accompanying consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.
Customer Concentration
At September 30, 2021, and December 31, 2020, accounts receivable from The Home Depot (“THD”) was 33.8% and 38.0%, respectively, of total accounts receivable. Accounts receivable attributable to Amazon.Com, Inc., (“Amazon”) at September 30, 2021, and December 31, 2020, was 0.1% and 15.8%, respectively, of total net accounts receivable. Revenue from THD, stated as a percentage of the Company’s total revenue during the three and nine-month periods ended September 30, 2021, was 24.8% and 26.6%, respectively, and 30.0% and 25.7%, respectively, for the same periods in 2020. There were no other customers that accounted for more than 10% of consolidated revenue or accounts receivable during the three and nine-month periods ended September 30, 2021, or 2020.
Management Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses in those financial statements. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, inventory, goodwill, intangible assets and other long-lived assets, contingent consideration, income taxes and deferred taxes. Descriptions of these policies are discussed in the Company’s 20162020 Form 10-K. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustmentsadjusts when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
Significant Accounting Policies
The Company’s significant accounting policies are described in “Note 1: Summary of Significant Accounting Policies” of our 2020 Form 10-K.
Lease Accounting
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)
New Accounting Pronouncements
Recently Adopted
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09,Improvements to Employee Share-Based Payment Accounting. The standard reduces complexity in several aspects of the accounting for employee share-based compensation, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for fiscal 2017. The impact of the adoption was not materialCompany adheres to the Company’s consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value for entities using the first-in, first-out method of valuing inventory. ASU 2015-11 eliminates other measures required by current guidance to determine net realizable value. ASU 2015-11 is effective for fiscal 2017. The impact of the adoption was not material to the Company’s consolidated financial statements.
Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02,Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.standards set forth in Accounting Standards Codification (“ASC”) 842, “Leases”. ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leasesleases’ guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
12
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES –- (Continued)
Lease Accounting - Continued
New Accounting PronouncementsIf the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgement when determining the incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term to the lease payments in a similar currency.
The Company’s operating leases include vehicles, office space and the use of real property. The Company has not identified any new material finance leases for the three months ended September 30, 2021.
The Company considers any options to extend the term of a lease when measuring the Right-of-Use lease asset.
For the three and nine-month periods ended September 30, 2021, and 2020, the Company had $222,000 and $670,000, and $223,000 and $675,000, respectively, in operating lease expense.
The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of September 30, 2021:
| | | | |
|
| As of September 30, 2021 |
| |
2021 (excluding the nine months ended September 30, 2021) | | $ | 217,000 | |
2022 | |
| 843,000 | |
2023 | |
| 841,000 | |
2024 | |
| 566,000 | |
2025 | | | 296,000 | |
Thereafter | | | 867,000 | |
Total operating lease payments | |
| 3,630,000 | |
Less imputed interest | |
| (553,000) | |
Total operating lease liabilities | | $ | 3,077,000 | |
| | | | |
Weighted average remaining lease term | | | 5.7 | years |
Weighted average discount rate | | | 6.87 | % |
Revenue Recognition
Not Yet Adopted
In May 2014,The Company’s revenue recognition policies are detailed in its 2020 Form 10-K. The following tables present the FASB issued ASU No. 2014-09,Company’s revenues recognized under ASC Topic 606, “Revenue from Contracts with CustomersCustomers”,, as a new Topic, ASC Topic 606, which supersedes existing accounting standards for revenue recognitionthe three and creates a single framework. Additional updates to Topic 606 issued by the FASB in 2015nine-month periods ended September 30, 2021, and 2016 include the following:2020.
The underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard permits the use of either a retrospective or modified retrospective application. The Company is in the final assessment phaseof what impact, if any, the new revenue standard and related updates will have on its consolidated financial statements and related disclosures, and based on its preliminary assessment, other than additional disclosures in its Notes to its consolidated financial statements, there will be no material impact to its consolidated financial statements.The standard update, as amended, will be effective for annual periods beginning after December 15, 2017.
In January 2017, the FASB issued ASU No. 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”),which simplified the testing of goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for public companies for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the effects that the adoption of ASU 2017-04 will have on its consolidated financial statements.
Other than the aforementioned, the Company does not believe that any other recently issued, but not yet effective accounting standard, if adopted, will have a material effect on its consolidated financial statements.
13
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 21 – DISCONTINUED OPERATIONSBUSINESS AND SUMMARY OF ACCOUNTING POLICIES - (Continued)
Florida Pneumatic
Sale of Nationwide Industries, Inc.
The Company,Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Retail, Automotive, Industrial and Aerospace. It also generates revenue from its Berkley products line, as part of its strategic plan to focus on expanding its position in the power-tool and accessories market, sold Nationwide in February 2016. On the Nationwide Closing Date, P&F, Countrywide, Nationwide and Argosy NWI Holdings, LLC, a Delaware limited liability company (“Buyer”), entered into a Stock Purchase and Redemption Agreement (the “Stock Purchase Agreement”), pursuant to which, among other things, after giving effect to certain contributions and redemptions of Nationwide’s common shares (“Nationwide Shares”), the Buyer acquired all of the outstanding Nationwide Shares from Countrywide (the “Acquisition”). The purchase price for the Nationwide Shares acquired in the Acquisition was approximately $22,200,000, before giving effect to an estimated working capital adjustment, as defined in the Stock Purchase Agreement, of approximately $802,000 in favor of the Buyer. Further, in accordance with the Stock Purchase Agreement, the Company placed into escrow $1,955,000 (“escrow funds”), of which $250,000 related to the final working capital adjustment. Pursuant to the terms of the Stock Purchase Agreement, the final working capital adjustment amount was determined to be approximately $75,000 in the Company’s favor. As a result, during the three-month period ended June 30, 2016, the $250,000 portion of the escrow funds was released to the Company, and the final working capital adjustment amount of $75,000 was paid to the Company by the Buyer. In connection with the Acquisition, Countrywide agreed that, should it sell the real property it owned in Tampa, Florida (the “Premises”), it will contribute an additional $400,000 into the escrow funds. In November 2016, the Premises were sold, andwell as a result Countrywide contributed the additional $400,000 into the aforementioned escrow funds which, at that time, aggregated to approximately $2,105,000. In accordance with the Stock Purchase Agreement, in August 2017,line of air filters and other OEM parts are reported as no claims were made against the Escrow funds, the Company received the full amountOther.
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| |||||||||||||
| | 2021 | | 2020 | | Increase (decrease) |
| |||||||||
|
| | |
| Percent of |
| | |
| Percent of |
| | |
| |
|
| | Revenue | | revenue | | Revenue | | revenue | | $ | | % |
| |||
Automotive | | $ | 3,168,000 | | 33.0 | % | $ | 3,530,000 |
| 36.5 | % | $ | (362,000) |
| (10.3) | % |
Retail | | | 3,222,000 |
| 33.5 | | | 3,718,000 |
| 38.4 | | | (496,000) |
| (13.3) | |
Industrial | |
| 1,257,000 |
| 13.1 | |
| 1,044,000 |
| 10.8 | |
| 213,000 |
| 20.4 | |
Aerospace | |
| 1,832,000 |
| 19.1 | |
| 1,268,000 |
| 13.1 | |
| 564,000 |
| 44.5 | |
Other | |
| 128,000 |
| 1.3 | |
| 121,000 |
| 1.2 | |
| 7,000 |
| 5.8 | |
Total | | $ | 9,607,000 |
| 100.0 | % | $ | 9,681,000 |
| 100.0 | % | $ | (74,000) |
| (0.8) | % |
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| |||||||||||||
| | 2021 | | 2020 | | Increase (decrease) |
| |||||||||
| | | | | Percent of | | | | | Percent of | | | | | | |
|
| Revenue |
| revenue |
| Revenue |
| revenue |
| $ |
| % |
| |||
Automotive | | $ | 11,053,000 |
| 35.4 | % | $ | 9,690,000 |
| 34.2 | % | $ | 1,363,000 | | 14.1 | % |
Retail | | | 10,775,000 |
| 34.5 | | | 9,569,000 |
| 33.8 | | | 1,206,000 | | 12.6 | |
Industrial | | | 3,919,000 | | 12.6 | | | 2,383,000 | | 8.4 | | | 1,536,000 | | 64.5 | |
Aerospace | |
| 5,094,000 |
| 16.3 | |
| 6,341,000 |
| 22.4 | | | (1,247,000) | | (19.7) | |
Other | |
| 380,000 |
| 1.2 | |
| 368,000 |
| 1.2 | | | 12,000 | | 3.3 | |
Total | | $ | 31,221,000 |
| 100.0 | % | $ | 28,351,000 |
| 100.0 | % | $ | 2,870,000 | | 10.1 | % |
14
Table of the escrow plus interest.
At the closing of the Acquisition, after paying closing costs, the net cash received from the Buyer was approximately $18,700,000.
As Nationwide was a substantial and unique business unit of the Company, its sale was a strategic shift. Accordingly, in accordance with ASC Topic 360, the Company, in 2016, classified Nationwide as a discontinued operation.
The net income from discontinued operations, net of taxes in 2016 presented in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss), is comprised of the following:
January 1, 2016 through February 11, 2016 | ||||
Revenue | $ | 1,830,000 | ||
Cost of goods sold | 1,177,000 | |||
Gross margin | 653,000 | |||
Selling and general and administrative expenses | 483,000 | |||
Interest expense - net | 60,000 | |||
Income before income taxes | 110,000 | |||
Income taxes | 38,000 | |||
Net income | $ | 72,000 |
The Company recognized a gain of $12,185,000, on the sale of Nationwide during the three-month period ended March 31, 2016, which represents the difference between the adjusted net purchase price and the carrying book value of Nationwide. During the three-month period ended June 30, 2016, the Company incurred an additional $14,000 in expenses related to the sale. For income tax purposes, the Company’s tax basis in Nationwide was greater than the net proceeds, thus resulting in a tax loss. This tax loss may only be applied against future capital gain transactions. During the three-month period ended March 31, 2016; the Company recorded a tax benefit of $141,000, net of a valuation allowance against the gain on sale. In November 2016, Countrywide completed the sale of the real property located in Tampa Florida, which was treated as a capital gain transaction for tax purposes. As a result, during the three-month period ended September 30, 2016, the Company removed the valuation allowance initially recorded against the tax loss, resulting in an additional $187,000 tax benefit recorded against the gain on sale.
Contents
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - (Continued)
Hy-Tech
Hy-Tech designs, manufactures, and sells a wide range of industrial products which are categorized as ATP for reporting purposes. In addition to Engineered Solutions, products and components manufactured for other companies under their brands are included in the OEM category in the table below. PTG revenue is comprised of products manufactured and sold by Hy-Tech’s gear business. NUMATX, Thaxton and other peripheral product lines, such as general machining, are reported as Other.
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| |||||||||||||
|
| 2021 |
| 2020 | | Increase (decrease) |
| |||||||||
| | |
| Percent of | | | |
| Percent of |
| | |
| |
| |
| | Revenue | | revenue | | Revenue | | revenue | | $ | | % |
| |||
OEM | | $ | 1,668,000 |
| 49.4 | % | $ | 872,000 |
| 32.0 | % | $ | 796,000 |
| 91.3 | % |
ATP | | | 751,000 |
| 22.2 | | | 624,000 |
| 22.9 | | | 127,000 |
| 20.4 | |
PTG | | | 882,000 | | 26.1 | | | 1,027,000 | | 37.7 | | | (145,000) | | (14.1) | |
Other | |
| 77,000 |
| 2.3 | |
| 202,000 |
| 7.4 | |
| (125,000) |
| (61.9) | |
Total | | $ | 3,378,000 |
| 100.0 | % | $ | 2,725,000 |
| 100.0 | % | $ | 653,000 |
| 24.0 | % |
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| |||||||||||||
| | 2021 | | 2020 | | Increase (decrease) |
| |||||||||
| | | | | Percent of | | | | | Percent of | | | | |
| |
|
| Revenue |
| revenue |
| Revenue |
| revenue |
| $ |
| % |
| |||
OEM | | $ | 4,688,000 |
| 50.4 | % | $ | 3,513,000 |
| 39.4 | % | | 1,175,000 | | 33.4 | % |
ATP | |
| 2,242,000 |
| 24.1 | |
| 2,254,000 |
| 25.2 | | | (12,000) | | (0.5) | |
PTG | | | 2,132,000 | | 22.9 | | | 2,783,000 | | 31.2 | | | (651,000) | | (23.4) | |
Other | |
| 237,000 |
| 2.6 | |
| 375,000 |
| 4.2 | | | (138,000) | | (36.8) | |
Total | | $ | 9,299,000 |
| 100.0 | % | $ | 8,925,000 |
| 100.0 | % | | 374,000 | | 4.2 | % |
Recently Adopted Accounting Pronouncements
During the nine-month period ended September 30, 2021, there were no accounting pronouncements or other authoritative guidance issued that the Company adopted. No other new accounting pronouncement issued or effective during the three and nine-month period ended September 30, 2021, has or is expected to have a material impact on our consolidated financial statements or disclosures.
NOTE 32 – ACQUISITION
On April 5, 2017 (the “Jiffy Closing Date”), Bonanza Holdings Corp. (now known as Jiffy Air Tool, Inc.), a Delaware corporation and newly formed wholly-owned subsidiary (“Jiffy”) of Florida Pneumatic, Jiffy Air Tool, Inc. a Nevada corporation (“Jiffy Seller”), The Jack E. Pettit—1996 Trust, the sole shareholder of Jiffy Seller and Jack E. Pettit, entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which, among other things, Jiffy acquired (the “Jiffy Acquisition”) substantially all of the operating assets of Jiffy Seller for $5,950,000, in addition to the assumption of certain payables and contractual obligations as set forth in the Asset Purchase Agreement. Jiffy manufactures and distributes pneumatic tools and components, primarily sold to aerospace manufacturers. The purchase price was $5,950,000, less a post-closing working capital adjustment of $155,000, which was paid by Jiffy Seller to the Company in June 2017.
Additionally, the Jiffy Seller may be entitled to up to $1,000,000 in additional consideration, which is contingent upon Jiffy achieving certain revenue thresholds and other criteria as set forth in the Asset Purchase Agreement within two defined measurement periods occurring within approximately the first two years following the Jiffy Closing Date.
In connection with the Asset Purchase Agreement, a separate Purchase and Sale Agreement and Joint Escrow Instructions (the “Purchase and Sale Agreement” and together with the Asset Purchase Agreement, the “Agreements”) was entered into between Jiffy Seller and Bonanza Properties Corp. (“Bonanza Properties”), a Delaware corporation and newly formed wholly-owned subsidiary of Florida Pneumatic, pursuant to which Bonanza Properties purchased certain real property of the Jiffy Seller. Pursuant to the Purchase and Sale Agreement, the purchase price for the real property was $1,050,000.
The initial total consideration ($5,950,000 plus $1,050,000) was paid by Jiffy to the Jiffy Seller from funds available under the Revolver, as defined in Note 10, pursuant to the Second Amended and Restated Loan Agreement (defined below), less certain amounts escrowed pursuant to, among others, the terms of the Agreements.
Total | ||||
Cash paid at closing | $ | 7,000,000 | ||
Less working capital adjustment | (155,000 | ) | ||
Fair value of contingent consideration | 692,000 | |||
Total estimated purchase price | $ | 7,537,000 |
The following table presents preliminary purchase price allocation:
Accounts receivable | $ | 789,000 | ||
Inventories | 1,571,000 | |||
Other current assets | 45,000 | |||
Land | 131,000 | |||
Building | 919,000 | |||
Machinery and equipment | 1,196,000 | |||
Identifiable intangible assets: | ||||
Customer relationships | 1,670,000 | |||
Trademarks and trade names | 790,000 | |||
Non-compete agreements | 17,000 | |||
Liabilities assumed | (125,000 | ) | ||
Goodwill | 534,000 | |||
Total estimated purchase price | $ | 7,537,000 |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 3 – ACQUISITION – (Continued)
The excess of the total purchase price over the fair value of the net assets acquired, including the value of the identifiable intangible assets, has been allocated to goodwill. Goodwill will be amortized over 15 years for tax purposes, but not deductible for financial reporting purposes. The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes, useful lives have been assigned as follows:
The following unaudited pro-forma combined financial information gives effect to the Jiffy Acquisition as if the Jiffy Acquisition was consummated January 1, 2016. This unaudited pro-forma financial information is presented for information purposes only, and is not intended to present actual results that would have been attained had the Jiffy Acquisition been completed as of January 1, 2016 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.
Three months ended | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
2016 | 2017 | 2016 | ||||||||||
Revenue | $ | 16,400,000 | $ | 45,835,000 | $ | 50,092,000 | ||||||
Net (loss) income from continuing operations | $ | (23,000 | ) | $ | 68,000 | $ | (5,002,000 | ) | ||||
(Loss) earnings per share – basic | $ | (0.01 | ) | $ | 0.02 | $ | (1.39 | ) | ||||
(Loss) earnings per share – diluted | $ | (0.01 | ) | $ | 0.02 | $ | (1.39 | ) |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 4 – EARNINGS (LOSS) INCOME PER SHARE
Basic earnings (loss) income per common share is based only on the weighted average number of shares of Common Stock outstanding for the periods. Diluted earnings (loss) income per common share reflects the effect of shares of Common Stock issuable upon the exercise of options unless the effect on earnings is antidilutive.
anti-dilutive.
Diluted earnings (loss) income per common share is computed using the treasury stock method. Under this method, the aggregate number of shares of Common Stock outstanding reflects the assumed use of proceeds from the hypothetical exercise of any outstanding options to purchase shares of Common Stock. The average market value for the period is used as the assumed purchase price.
15
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 2 – (LOSS) INCOME PER SHARE – (Continued)
The following table sets forth the elements of basic and diluted earnings (loss) income per common share:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator for basic and diluted earnings (loss) per common share: | ||||||||||||||||
Net income (loss) from continuing operations | $ | 5,000 | $ | (286,000 | ) | $ | (38,000 | ) | $ | (5,590,000 | ) | |||||
Net income from discontinued operations | — | 187,000 | — | 12,430,000 | ||||||||||||
Net income (loss) | $ | 5,000 | $ | (99,000 | ) | $ | (38,000 | ) | $ | 6,840,000 | ||||||
Denominator: | ||||||||||||||||
For basic earnings (loss) per share - weighted average common shares outstanding | 3,617,000 | 3,598,000 | 3,609,000 | 3,598,000 | ||||||||||||
Dilutive securities(1) | 160,000 | — | — | — | ||||||||||||
For diluted earnings (loss) per share - weighted average common shares outstanding | 3,777,000 | 3,598,000 | 3,609,000 | 3,598,000 |
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Numerator for basic and diluted (loss) income per common share: | | | | | | | | | | | | |
Net (loss) income | | $ | (733,000) | | $ | (857,000) | | $ | 1,383,000 | | $ | (3,996,000) |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Denominator for basic (loss) earnings per share - weighted average common shares outstanding | |
| 3,181,000 | |
| 3,151,000 | |
| 3,177,000 | |
| 3,148,000 |
Dilutive securities (1) | |
| — | |
| — | |
| 14,000 | |
| — |
Denominator for diluted (loss) income per share - weighted average common shares outstanding | |
| 3,181,000 | |
| 3,151,000 | |
| 3,191,000 | |
| 3,148,000 |
At September 30, 20172021, and 2016,2020, there were outstanding stock options whose exercise prices were higher than the average market values of the underlying Common Stock for the period. For all periods presented, other than the three months ended September 30, 2017, these options are considered anti-dilutive and are excluded from the computation of diluted earnings (loss) per share. The weighted average of anti-dilutive stock options outstanding was as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Weighted average antidilutive stock options outstanding | 138,000 | 73,000 | 86,000 | 78,000 | ||||||||||||
| | | | | | | | |
| | Three months ended | | Nine months ended | ||||
| | September 30, | | September 30, | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
Weighted average anti-dilutive stock options outstanding |
| 135,000 |
| 183,000 |
| 138,000 |
| 172,000 |
NOTE 53 – EQUITY – COMMON STOCK REPURCHASE PLANSTOCK-BASED COMPENSATION
On August 9, 2017, the Company’s Board of Directors authorized the Company to repurchase up to 100,000 shares of its common stock over a period of up to twelve months (the “Repurchase Program”).
On August 24, 2017, the Company announced that, pursuant to the Repurchase Program, it had adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. A plan under Rule 10b5-1 allows the Company to repurchase shares at times when it might otherwise be prevented from doing so by securities laws or because of self-imposed trading blackout periods. Repurchases made under the plan are subject to the Securities and Exchange Commission's regulations, as well as certain price, market, volume, and timing constraints specified in the plan. Since repurchases under the plan are subject to certain constraints, there is no guarantee as to the exact number of shares that will be repurchased under the plan.
As of September 30, 2017, the Company repurchased 12,365 shares of its Common Stock pursuant to the Repurchase Program.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 5 – EQUITY – COMMON STOCK REPURCHASE PLAN – (Continued)
Stock option compensation
The Company accounts for stock-based compensation, including options and non-vested shares, according to the provisions of FASB ASC 718,Share Based Payment.
On September 5, 2017 (“Grant Date”), the compensation committee of Company’s Board of Directors authorized the issuance of 89,000 options to purchase shares of the Company’s Class A Common Stock under the Company’s 2012 Stock Incentive Plan. The options expire ten years from the Grant Date. The Company granted an aggregate of 55,000 of these options to its Chief Executive Officer and its Chief Financial Officer, with the balance to non-executive employees of the Company. AllThere were 0 options granted on the Grant Date vest one-third on each of the first three anniversaries of the Grant Date. Further, all options granted on the Grant Date have an exercise price of $7.09, which was the closing price of the Company’s common stock on the Grant Date.
Stock option compensation expense is attributable to the granting of, and the remaining requisite service periods of, stock options. Compensation expense attributable to stock-options was approximately $20,000 and $0or issued during the three-month periodsnine-month period ended September 30, 2017 and 2016, respectively. Compensation expense attributable to stock-options was approximately $20,000 and $13,000 during the nine-month periods ended September 30, 2017 and 2016, respectively. The compensation expense is recognized in selling, general and administrative expenses on the Company’s Statements of Operations and Comprehensive Income (Loss) on a straight-line basis over the vesting periods. The exercisability of the respective non-vested options, which are at pre-determined dates on a calendar year, does not necessarily correspond to the period(s) in which straight-line amortization of compensation cost is recorded. As of September 30, 2017, the Company had approximately $373,000 of total unrecognized compensation cost related to non-vested awards granted under its stock-based plans, which it expects to recognize over a weighted average period of 1.9 years. The expected term of stock options is based on historical exercises and terminations. The volatility is determined using historical volatilities based on historical stock prices.
The Company estimated the fair value of these options using the following assumption:
Risk-free interest rate | 2.07 | % | |
Expected term (in years) | 10 | years | |
Volatility | 87.16 | % | |
Dividend yield | 2.82 | % | |
Weighted average fair value of options granted | $ | 4.41 |
2021.
The following is a summary of the changes in outstanding options during the nine-month period ended September 30, 2017:2021:
Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||||||||||||
Outstanding and vested, January 1, 2017 | 423,817 | $ | 5.68 | 2.9 | $ | 1,271,704 | ||||||||||||||||||||
| | | | | | | | | | | ||||||||||||||||
| | | | Weighted | | Weighted average | | | | |||||||||||||||||
| | | | average | | remaining | | Aggregate | ||||||||||||||||||
| | | | exercise | | contractual life | | Intrinsic | ||||||||||||||||||
|
| Option shares |
| price |
| (years) |
| Value | ||||||||||||||||||
Outstanding, January 1, 2021 |
| 200,878 | | $ | 6.59 |
| 4.1 | | $ | 85,663 | ||||||||||||||||
Granted | 89,000 | 7.09 |
| 0 | |
| — | | — | | | — | ||||||||||||||
Exercised | (16,722 | ) | 3.65 |
| 0 | |
| — |
| — | |
| — | |||||||||||||
Forfeited | (6,793 | ) | 7.86 |
| 6,180 | |
| 7.61 |
| — | |
| — | |||||||||||||
Expired | (71,069 | ) | 10.72 |
| 16,199 | |
| 4.37 |
| — | |
| — | |||||||||||||
Outstanding, September 30, 2017 | 418,233 | $ | 5.17 | 4.1 | $ | 907,347 | ||||||||||||||||||||
Vested, September 30, 2017 | 329,233 | $ | 4.65 | 2.5 | $ | 891,327 | ||||||||||||||||||||
Outstanding, September 30, 2021 |
| 178,499 | | $ | 6.76 |
| 3.7 | | $ | 83,910 | ||||||||||||||||
Vested, September 30, 2021 |
| 175,831 | | $ | 6.73 |
| 3.6 | | $ | 83,910 |
16
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 53 – EQUITY – COMMON STOCK REPURCHASE PLAN –STOCK-BASED COMPENSATION - (Continued)
Option Shares | Weighted Average Grant- Date Fair Value | ||||||||||||
Non-vested options, January 1, 2017 | — | $ | — | ||||||||||
| | | | | | ||||||||
| | | | Weighted | |||||||||
| | | | average grant- | |||||||||
|
| Option shares |
| date fair value | |||||||||
Non-vested options, January 1, 2021 |
| 5,334 | | $ | 4.60 | ||||||||
Granted | 89,000 | 4.41 |
| 0 | |
| — | ||||||
Vested | — | — |
| (2,666) | |
| 4.60 | ||||||
Forfeited | — | — |
| 0 | |
| 0 | ||||||
Non-vested options, September 30, 2017 | 89,000 | $ | 4.41 | ||||||||||
Non-vested options, September 30, 2021 |
| 2,668 | | $ | 4.60 |
The numberOn April 22, 2021, the Company’s Board of sharesDirectors (the “Board”) approved the amendment and restatement of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan, (the “2012 Plan”) asto be renamed the P&F Industries, Inc. 2021 Stock Incentive Plan (the “2021 Plan”) following the approval and recommendation of September 30, 2017 was 88,812. At September 30, 2017, there were 192,233 options outstanding issued underthe Compensation Committee of the Board (the “Compensation Committee”). The 2021 Plan amends and restates the 2012 Plan in its entirety and, 226,000 options outstanding issuedamong other things, incorporates the following key changes: (i) it increases the aggregate share reserve by an additional 175,000 shares for a total share reserve of 500,000 shares; (ii) it limits the aggregate amount of stock-based and cash-based awards to any non-employee director with respect to any fiscal year for service to the Board at $300,000 (or $450,000 for a non-employee director serving in a lead role); and (iii) extends the term from April 20, 2022 to April 22, 2031. The amendment and restatement was approved by the Board and was approved by the Company’s shareholders during its 2021 Annual Meeting of Stockholders held on May 26, 2021. As a result of the foregoing, the remaining number of shares of Common Stock available for issuance under the 2002 Stock Incentive Plan.
2021 Plan at September 30, 2021, was 203,037.
Restricted Stock
TheOn February 16, 2021, the Company in May 2017, granted 1,00025,000 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 5,000 restricted shares.Chief Financial Officer. The Company determined that the fair value of these shares was $6.17$6.36 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary of the grant date. As such, theThe Company iswill ratably amortizingamortize over a five-year vesting period the total non-cash compensation expense of approximately $30,000 in its$159,000, or $32,000 per annum, to selling, general and administrative expenses through May 2018.expenses.
The Company, in May 2016, granted 1,000 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 5,000 restricted shares. The Company determined that the fair value of these shares was $8.72 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares could not have been traded earlier than the first anniversary of the grant date. As such, the Company ratably amortized the total non-cash compensation expense of approximately $44,000 in its selling, general and administrative expenses through May 2017.
NOTE 64 – FAIR VALUE MEASUREMENTS
Accounting guidance defines fair value as 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. Under this guidance, the Company is required to classify certain assets and liabilities based on the following hierarchy:
Level 1: Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date.
Level 2: Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Inputs reflect management'smanagement’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrumentsinstrument’s valuation.
The guidance requires the use of observable market data if such data is available without undue cost and effort.
17
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 4 – FAIR VALUE MEASUREMENTS - (Continued)
As of September 30, 20172021, and December 31, 2016,2020, the carrying amounts reflected in the accompanying Consolidated Balance Sheetsconsolidated balance sheets for current assets and current liabilities approximated fair value due to the short-term nature of these accounts.
The fair value of the prepaid expenses and other current assets at December 31, 2016 consisted primarily of escrowed funds from the sale of Nationwide, which was estimated to be the same as its carrying value, based on Level 3 inputs. In August 2017, the Company received the entire $2,105,000, in accordance with the terms and conditions set forth in the Stock Purchase Agreement.
The fair value of the contingent consideration payable to the Jiffy Seller, of $706,000, included in other liabilities was determined applying Level 3 inputs. The fair value of this contingent consideration is being adjusted quarterly.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 6 – FAIR VALUE MEASUREMENTS – (Continued)
Assets and liabilities measured at fair value on a non-recurring basis include goodwill and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).
NOTE 75 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable - net consists of:
September 30, 2017 | December 31, 2016 | |||||||||||||
| | | | | | | ||||||||
|
| September 30, 2021 |
| December 31, 2020 | ||||||||||
Accounts receivable | $ | 11,067,000 | $ | 7,991,000 | | $ | 8,724,000 | | $ | 7,726,000 | ||||
Allowance for doubtful accounts | (73,000 | ) | (85,000 | ) | ||||||||||
$ | 10,994,000 | $ | 7,906,000 | |||||||||||
Allowance for doubtful accounts, sales discounts and chargebacks | |
| (276,000) | |
| (258,000) | ||||||||
| | $ | 8,448,000 | | $ | 7,468,000 |
NOTE 86 – INVENTORIES
Inventories consist of:
September 30, 2017 | December 31, 2016 | |||||||||||||
| | | | | | | ||||||||
|
| September 30, 2021 |
| December 31, 2020 | ||||||||||
Raw material | $ | 1,681,000 | $ | 1,918,000 | | $ | 1,979,000 | | $ | 2,077,000 | ||||
Work in process | 1,642,000 | 658,000 | |
| 1,489,000 | |
| 1,127,000 | ||||||
Finished goods | 16,767,000 | 17,325,000 | |
| 18,155,000 | |
| 15,158,000 | ||||||
$ | 20,090,000 | $ | 19,901,000 | |||||||||||
| | $ | 21,623,000 | | $ | 18,362,000 |
NOTE 97 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill are as follows:
Balance, January 1, 2017 | $ | 3,897,000 | ||
Acquisition of Jiffy Air Tool, Inc. | 534,000 | |||
Currency translation adjustment | 14,000 | |||
Balance, September 30, 2017 | $ | 4,445,000 |
| | | |
Balance, January 1, 2021 |
| $ | 4,449,000 |
Currency translation adjustment | |
| (3,000) |
Balance, September 30, 2021 | | $ | 4,446,000 |
18
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS - (Continued)
Other intangible assets were as follows:
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Cost | Accumulated amortization | Net book value | Cost | Accumulated amortization | Net book value | |||||||||||||||||||
Other intangible assets: | ||||||||||||||||||||||||
Customer relationships (1) | $ | 6,834,000 | $ | 1,427,000 | $ | 5,407,000 | $ | 5,143,000 | $ | 1,022,000 | $ | 4,121,000 | ||||||||||||
Trademarks and trade names (1) | 2,326,000 | — | 2,326,000 | 1,507,000 | — | 1,507,000 | ||||||||||||||||||
Trademarks and trade names (2) | 200,000 | 15,000 | 185,000 | 200,000 | 5,000 | 195,000 | ||||||||||||||||||
Engineering drawings | 330,000 | 168,000 | 162,000 | 330,000 | 148,000 | 182,000 | ||||||||||||||||||
Non-compete agreements (1) | 238,000 | 201,000 | 37,000 | 212,000 | 150,000 | 62,000 | ||||||||||||||||||
Patents (3) | 1,405,000 | 813,000 | 592,000 | 1,205,000 | 666,000 | 539,000 | ||||||||||||||||||
Totals | $ | 11,333,000 | $ | 2,624,000 | $ | 8,709,000 | $ | 8,597,000 | $ | 1,991,000 | $ | 6,606,000 |
| | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | ||||||||||||||
|
| | |
| Accumulated |
| Net book |
| | |
| Accumulated |
| Net book | ||||
| | Cost | | amortization | | value | | Cost | | amortization | | value | ||||||
Other intangible assets: | | | | | | | | | | | | | | | | | | |
Customer relationships (1) | | $ | 6,498,000 | | $ | 3,416,000 | | $ | 3,082,000 | | $ | 6,502,000 | | $ | 3,034,000 | | $ | 3,468,000 |
Trademarks and trade names (1) | |
| 2,184,000 | |
| 0 | |
| 2,184,000 | |
| 2,187,000 | |
| 0 | |
| 2,187,000 |
Trademarks and trade names | |
| 200,000 | |
| 69,000 | |
| 131,000 | |
| 200,000 | |
| 59,000 | |
| 141,000 |
Engineering drawings | |
| 330,000 | |
| 250,000 | |
| 80,000 | |
| 330,000 | |
| 239,000 | |
| 91,000 |
Non-compete agreements (1) | |
| 333,000 | |
| 284,000 | |
| 49,000 | |
| 335,000 | |
| 266,000 | |
| 69,000 |
Patents | |
| 1,286,000 | |
| 1,063,000 | |
| 223,000 | |
| 1,286,000 | |
| 1,016,000 | |
| 270,000 |
Totals | | $ | 10,831,000 | | $ | 5,082,000 | | $ | 5,749,000 | | $ | 10,840,000 | | $ | 4,614,000 | | $ | 6,226,000 |
(1) | A portion of these intangibles are maintained in a foreign currency and are therefore subject to foreign exchange rate fluctuations. | |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS – (Continued)
Amortization expense of intangible assets from continuing operations subject to amortization was as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
$ | 181,000 | $ | 217,000 | $ | 620,000 | $ | 803,000 |
The weighted average amortization period for intangible assets was as follows:
September 30, 2017 | December 31, 2016 | |||||||||||
| | | | | ||||||||
|
| September 30, 2021 |
| December 31, 2020 | ||||||||
Customer relationships | 10.4 | 9.3 |
| 6.9 |
| 7.6 | ||||||
Trademarks and trade names (see note 2 to the table above) | 13.8 | 14.5 | ||||||||||
Trademarks and trade names |
| 9.8 |
| 10.5 | ||||||||
Engineering drawings | 8.3 | 8.8 |
| 5.4 |
| 6.1 | ||||||
Non-compete agreements | 1.9 | 1.2 |
| 2.3 |
| 3.0 | ||||||
Patents | 9.0 | 6.1 |
| 4.7 |
| 5.2 |
Amortization expense of intangible assets subject to amortization was as follows:
| | | | | | | | | | |
Three months ended September 30, | | Nine months ended September 30, | ||||||||
2021 |
| 2020 |
| 2021 |
| 2020 | ||||
$ | 158,000 | | $ | 158,000 | | $ | 474,000 | | $ | 544,000 |
Amortization expense for the balance of 2021, and for each of the next five years and thereafter is estimated to be as follows:
2018 | $ | 709,000 | ||
2019 | 686,000 | |||
2020 | 653,000 | |||
2021 | 638,000 | |||
2022 | 635,000 | |||
Thereafter | 3,062,000 | |||
$ | 6,383,000 |
| | | |
October 1 through December 31, 2021 |
| $ | 157,000 |
2022 | |
| 629,000 |
2023 | |
| 625,000 |
2024 | |
| 577,000 |
2025 | |
| 548,000 |
Thereafter | |
| 1,029,000 |
| | $ | 3,565,000 |
19
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 108 – DEBT
In October 2010, the Company entered into a Loan and Security Agreement (as amended from time to time, “Credit(“Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One”, or the “Bank”). The Credit Agreement, as amended and restated in April 2017 and further amended from time-to-time, among other things, provides forthe ability to borrow funds under a Revolver Loan$16,000,000 revolver line (“Revolver”), subject to certain borrowing base criteria. Additionally, there is a $2,000,000 line for capital expenditures (“Capex Loan”), with $1,600,000 available for future borrowings. Revolver and Capex Loan borrowings under which are secured by the Company’s accounts receivable, mortgages on itsinventory, equipment, and real property, (“Real Property”), inventory and equipment.among other things. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteedcross guaranteed by certain other subsidiaries. The Credit Agreement expires on February 8, 2024.
At the Company’s option, Revolver borrowings will bear interest at either London InterBankInterbank Offered Rate (“LIBOR”) or the Base Rate, as the term is defined in the Credit Agreement, plus thean Applicable Margin, as defined in the Credit Agreement. Further, the interest rate, either LIBOR or Base Rate, which is added to the Applicable Margin, is at the option of the Company. The Company is limited assubject to limitations on the number of LIBOR borrowings.
Contemporaneously with the Jiffy Acquisition, the Company entered into a Second Amended and Restated Loan and Security Agreement, effective as of the Jiffy Closing Date (the “Second Amended and Restated Loan Agreement”), with Capital One. The Second Amended and Restated Loan Agreement amended and restated the Credit Agreement.
The Second Amended and Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount the Company can borrow under the Revolver Commitment (as defined in the Second Amended and Restated Loan Agreement) to $16,000,000, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteria as well as financial and other covenants.
The Company provides Capital One with among other things,monthly borrowing base certificates, and in certain circumstances, it is required to deliver monthly financial statements and monthly borrowing base certificates. The Company is required to complycertificates of compliance with certainvarious financial covenants. Should an event of default occur the interest rate would increase by 2 percent per annum during the period of default, in addition to other remedies provided to Capital One.
At September 30, 2021, short-term or Revolver borrowing was $3,295,000, compared to $1,374,000, at December 31, 2020. Applicable Margin Rates at September 30, 2021, and December 31, 2020, for LIBOR and Base Rates were 1.50% and 0.50%, respectively. Additionally, at September 30, 2021, and December 31, 2020, there was approximately $12,700,000 and $11,971,000, respectively, available to the Company under its Revolver arrangement.
The average balances of short-term borrowings from our Bank during the three and nine-month periods ended September 30, 2021, were $2,050,000, and $2,046,000, compared to $2,261,000, and $4,615,000, for the same periods in 2020.
NOTE 9 – CARES Act
On April 20, 2020, the Company believes it isreceived a PPP loan in compliancethe amount of $2,929,000, as provided pursuant to the CARES Act and administered by the United States Small Business Administration (“SBA”). The PPP loan, which was unsecured and guaranteed by the SBA, was designed to create economic stimulus by providing additional operating capital to small businesses in the U.S., such as P&F. To facilitate the PPP loan, the Company entered into a Promissory Note dated April 17, 2020, with BNB Bank as the lender (the “Lender”) (the “PPP Promissory Note”).
Under the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), the Company was eligible to apply for and receive forgiveness for all covenantsor a portion of the PPP loan. Such forgiveness was determined, subject to limitations, based on the use of the loan proceeds for certain permissible purposes as set forth in the PPP loan, including, but not limited to, payroll costs (as defined under the Credit Agreement.PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”) incurred during the 24 weeks subsequent to funding, and on the maintenance of employee compensation levels, as defined, following the funding of the PPP loan. In February 2021, in accordance with the Flexibility Act, the Company filed an application for forgiveness with the Lender, who approved this submission and subsequently submitted the Company’s application to the SBA. On June 9, 2021, the Company was advised that the SBA had approved the Company’s PPP loan forgiveness application and as such, the PPP loan and interest were forgiven in their entirety and recorded as other income during the second quarter of 2021.
At December 31, 2020, the current portion of the PPP loan debt was $1,983,000, with $946,000 accounted for as long-term debt.
20
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 10 – DEBT – (Continued)
In connection with the Company’s common stock repurchase plan discussed in Note 5, the Company and the Bank amended the Second Amended and Restated Loan Agreement to permit the Company to implement the plan. Among other things, the amendment also reduced the Fixed Charge Coverage Ratio, as defined in the Credit Agreement.
Short-term Borrowings
The Company had no revolver borrowings at December 31, 2016, whereas at September 30, 2017, its Revolver borrowings were $2,334,000. During the nine-month period ended September 30, 2017, the primary item impacting the Company’s Revolver borrowings was the acquisition discussed in Note 3. The Applicable Margin added to LIBOR borrowings at September 30, 2017 was 1.75%, compared to 1.50% at December 31, 2016. The Applicable Margin added to the Base Rate (Prime rate) borrowings at September 30, 2017 was 0.75% and 0.50% at December 31, 2016.
The Company owns vehicles for use by its UAT salesforce. The current portion of the balance due relating to these vehicles is $0 at September 30, 2017 and $13,000 at December 31, 2016.
Long-term Borrowings
The Credit Agreement, as amended, provides for a Term Loan A, which is secured by mortgages on the Company’s Real Property, accounts receivable, inventory and equipment. Term Loan A borrowings can be at either LIBOR, or at the Base Rate, or a combination of the two plus the Applicable Margins. The Applicable Margin added to LIBOR borrowings at September 30, 2017 was 1.75% and 1.50% at December 31, 2016. Applicable Margin for borrowings at the Base Rate (Prime rate) for the same timeframes was 0.75% and 0.50%, respectively. A portion of the net proceeds from the sale of Nationwide repaid all but $100,000 of Term Loan A. This balance is being borrowed at the LIBOR Rate, and is included in long-term debt, less debt issue costs on the Company’s Consolidated Balance Sheets at September 30, 2017 and December 31, 2016.
In accordance with ASU No. 2015-03, the Company reduced its long-term debt by $8,000 and $12,000, respectively, relating to debt issue costs as of September 30, 2017 and December 31, 2016.
NOTE 1110 – DIVIDEND PAYMENTS
The Company’s Board of Directors has not declared dividends in 2021.
On August 10, 2017,February 11, 2020, the Company’s Board of Directors, in accordance with theirits dividend policy, declared a quarterly cash dividend of $0.05 per common share, which was paid on August 25, 2017,February 28, 2020, to shareholders of record at the close of business on August 21, 2017.February 24, 2020. The total amount of this dividend payment was approximately $180,000. During the nine-month period ended September 30, 2017, the Company has paid approximately $542,000 in dividends. The Company currently intends to continue its quarterly dividend payment; however, it will review its policy on a quarterly basis. $157,000.
21
P&F INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward Looking Statement
The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of P&F Industries, Inc. and subsidiaries (“P&F”, or the “Company”). P&F and its representatives may, from time to time,time-to-time, make written or verbal forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to shareholders. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “would,” “could,” “should”“should,” and their opposites and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. Any forward-looking statements contained herein, including those related to the Company’s future performance, are based upon the Company’s historical performance and on current plans, estimates and expectations. All forward-looking statements involve risks and uncertainties. These risks and uncertainties could cause the Company’s actual results for all or part the 20172021 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company for a number of reasons including, but not limited to:
Disruption in the global capital and credit markets; |
Importation delays; |
● | Customer concentration; |
● | Unforeseen inventory adjustments or changes in purchasing patterns; |
● | Market acceptance of products; |
● | Competition; |
● | Price reductions; |
● | Exposure to fluctuations in energy prices; |
● | The strength of the retail economy in the United States and abroad; |
Adverse changes in currency exchange rates; |
Interest rates; |
● | Debt and debt service requirements; |
● | Borrowing and compliance with covenants under our credit facility; |
● | Impairment of long-lived assets and goodwill; |
Retention of key personnel; |
Acquisition of businesses; |
Regulatory environment; |
Litigation and insurance; |
● | The threat of terrorism and related political instability and economic uncertainty; and | |
● | Business disruptions or other costs associated with information technology, cyber-attacks, system implementations, data privacy or catastrophic losses, |
and those other risks and uncertainties described in its Annual Report on Form 10-K for the year ended December 31, 20162020 (“20162020 Form 10-K”), its Quarterly Reports on Form 10-Q, and its other reports and statements filed by the Company with the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. The Company cautions you against relying on any of these forward-looking statements.
22
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
OVERVIEW
P&F INDUSTRIES, INC. AND SUBSIDIARIES
During the third quarter of 2021, significant factors that impacted our results of operations were the:
Negative impact of the COVID-19 pandemic on revenue and |
● | Supply-chain disruption; |
● | Significant increases in ocean freight costs; and |
● | While our Aerospace revenue improved, compared to the same three-month period in 2020, there exists an ongoing production slow-down at Boeing, as well as significant reductions in activity at other commercial and military aerospace manufacturing facilities. |
OUR BUSINESS
BusinessFlorida Pneumatic
P&FFlorida Pneumatic directly, and each of its subsidiaries are herein referred to collectively as the “Company.” In addition, the words “we”, “our” and “us” refer to the Company. Prior to February 11, 2016, (the “Nationwide Closing Date”) the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide, the Company currently only operates in the Tools segment. See Note 2 to the consolidated financial statements for further discussion.
Tools
The Company conducts its Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates through its wholly-owned subsidiaries Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). Exhaust Technologies Inc. (“ETI”) and, Universal Air Tool Company Limited (“UAT”) are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, we purchased substantially all of the operating assets, less certain payables of, and Jiffy Air Tool, Inc. through(“Jiffy”) imports, manufactures, and markets pneumatic hand tools of its own design, primarily to the retail, industrial, automotive, and aerospace markets. Its products include sanders, grinders, drills, saws, and impact wrenches. These tools are similar in appearance and function to electric hand tools, but are powered by compressed air, rather than by electricity or a wholly-owned subsidiary (“Jiffy”). See Note 3battery. Air tools, as they are more commonly referred to, our consolidated financial statements for further discussion. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.
generally offer better performance, and weigh less than their electrical counterparts. Florida Pneumatic is engaged in the importation and saleimports and/or manufactures approximately 75 types of pneumatic hand tools, primarily formost of which are sold at prices ranging from $50 to $1,000, under the retail, industrialnames “Florida Pneumatic,” “Universal Tool”, “Jiffy Air Tool”, AIRCAT, NITROCAT, as well as under the trade names or trademarks of several private label customers. These products are sold to retailers, distributors, manufacturers and automotive markets. Florida Pneumatic also markets,private label customers through its Berkley Tool division (“Berkley”), a product line which includes pipein-house sales personnel and bolt dies, pipe taps, wrenches, visesmanufacturers’ representatives. The AIRCAT and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brandNITROCAT brands of pipe cutting and threading machines. Lastly, as the result of the acquisition of Jiffy, Florida Pneumatic now manufactures pneumatic tools marketedare sold primarily to the aerospace sector.
Hy-Techautomotive service and repair market (“automotive market”). Users of Florida Pneumatic’s hand tools include industrial maintenance and production staffs, do-it-yourself mechanics, professional automobile mechanics and auto body personnel. Jiffy manufactures and distributes its own linepneumatic tools and components primarily to aerospace manufacturers.
Hy-Tech
Hy-Tech designs, manufactures, and markets industrial tools, systems, gearing, accessories and a wide variety of industrial pneumatic tools.replacement parts under various brands including ATP, NUMATX, and Thaxton. Hy-Tech also produces and marketssells heavy-duty pneumatic impact wrenches,tools, grinders, drills,air motors, hydro-pneumatic riveters, hydrostatic test plugs, impact sockets and motors. Further, it also manufactures toolscustom gears, with prices ranging from $300 to customer specifications. Its customers include refineries, chemical plants,$42,000.
Hy-Tech’s “Engineered Solutions” products are sold directly to Original Equipment Manufacturers (“OEM’s”), and industrial branded products are sold through a broad network of specialized industrial distributors serving the power generation, facilities, heavypetrochemical, aerospace, construction, enterprises, oilrailroad, mining, ship building and gasfabricated metals industries. Hy-Tech works directly with its industrial customers, designing and mining companies.manufacturing products from finished components to complete turnkey systems to be sold under their own brand names.
Hy-Tech’s Power Transmission Group, or PTG, is a custom gear, gearbox and power transmission system manufacturer located in Punxsutawney, PA. In addition Hy-Tech manufactures an extensive lineto manufacturing a broad range of pneumatic tool replacement partsstandard and custom gears for its own toolsmanufacturers in a wide variety of industries, PTG reverse engineers existing gears as well as several other widely-used brandsdesigns new gears, utilizing state-of-the-art technologies, including 3D imaging and Gleason Gear modeling software.
23
Management’s Discussion and distributes high pressure stoppers for hydrostatic testing fabricated pipe, gears, sprockets, splinesAnalysis of Financial Condition and racks. Additionally, the Company develops highly engineered product solutions to specific customer requirements in the pneumatic tool market.Results of Operations - Continued
Hardware
Prior to the Nationwide Closing Date, we conducted our Hardware business through our wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business operations through its wholly-owned subsidiary, Nationwide. Nationwide was an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. On the Nationwide Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22,200,000. See Note 2 to consolidated financial statements for further discussion.
KEY INDICATORS
Economic Measures
ECONOMIC MEASURES
Much of our business is driven by the ebbs and flows of the general economic conditions in both the United States and, to a lesser extent, abroad. We focus on a wide array of customer types including but not limited to large retailers, aerospace manufacturers, large and small resellers of pneumatic tools and parts, and automotive related customers. We tend to track the general economic conditions of the United States, industrial production, and general retail sales.
A key economic measure relevant to us is the cost of the raw materials in our products. Key materials include metals, especially various types of steel and aluminum. Also important is the value of the United States Dollar (“USD”) in relation to the Taiwanese dollar (“TWD”), as we purchase a significant portion of our products from Taiwan. Purchases from Chinese sources are made in USD; however, if the Chinese currency, the Renminbi (“RMB”), were to be revalued against the USD, there could be a negative impact on the cost of our products. Additionally, we closely monitor the fluctuation in the Great British Pound (“GBP”) to the USD, and the GBP to TWD, both of which has hadcan have an impact on ourthe consolidated results in 2017.results. In addition, we monitor both the price of crude oil as well as the number of operating rotary drilling rigs in the United States, as a means of gauging actual and potential oil production, which is a key factor in our sales into the oil and gas exploration and extraction sector.
We now consider tariffs a key economic measure, as a significant portion of products imported by Florida Pneumatic and to a lesser degree, Hy-Tech, are subject to these tariffs.
TheLastly, the cost and availability of a quality labor pool in the countries where products and components are manufactured, both overseas as well as in the United States, could materially affect our overall results.
Operating Measures
OPERATING MEASURES
Key operating measures we use to manage our operations are:are orders; shipments; development of new products; customer retention; inventory levels and productivity. These measures are recorded and monitored at various intervals, including daily, weekly and monthly. To the extent these measures are relevant;relevant, they are discussed in the detailed sections below.
Financial Measures
FINANCIAL MEASURES
Key financial measures we use to evaluate the results of our business include:include various revenue metrics; gross margin; selling, general and administrative expenses; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; operating cash flows and capital expenditures; return on sales; return on assets; daysdays’ sales outstanding and inventory turns. These measures are reviewed at monthly, quarterly and annual intervals and compared to historical periods as well as to established objectives. To the extent that these measures are relevant, they are discussed in the detail below.
24
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Descriptions of these policies are discussed in the 20162020 Form 10-K.10-K, and in the notes to these consolidated financial statements. Certain of these accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities, revenues and expenses. On an ongoing basis, we evaluate estimates, including, but not limited to those related to bad debts, inventory reserves, goodwill and intangible assets, warranty reserves, and taxes and deferred taxes. We base our estimates on historical data and experience, when available, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
TRENDS AND UNCERTAINTIES
OVERVIEWCOVID-19 PANDEMIC
On March 11, 2020, the World Health Organization designated the recent novel coronavirus, or COVID-19, as a global pandemic. COVID-19 was first detected in Wuhan City, Hubei Province, China and continued to spread, significantly impacting various markets around the world, including the United States. Various policies and initiatives have been implemented to reduce the global transmission of COVID-19.
Key factors or events impactingThe COVID-19 virus and the resultant global economic down-turn continues to have a negative impact on our three and nine-month 2021 results. Additionally, we believe the supply-chain crisis, is related to the pandemic. Beginning in early 2021, but magnifying during the third quarter 2017 results of operations were:2021, we encountered severe shipping / receiving delays of inventory / containers from our Asian suppliers, which has caused intermittent shortages of inventory. Further, the costs of international freight has greatly increased. In addition, the COVID-19 pandemic has caused many of our customers and potential customers to refuse on-site visits, which is critical to generating revenue. We believe that until the above issues subside, our business will likely continue to be adversely affected.
BOEING/AEROSPACE
The Federal Aviation Administration (“FAA”) and the European Union Aviation Safety Agency (“EASA”) have lifted the grounding of the 737 MAX. Production is still very limited due to the inventory at Boeing and the reluctance of airlines to accept deliveries due to weak air travel demand, as well as the lack of certification by China. This will likely continue to have an adverse effect on our revenue. In addition, production of military and other commercial aircraft throughout the industry has slowed as well, we believe due to the ongoing global COVID-19 pandemic. However, we believe when all other commercial and military production lines throughout the United States come back online, an increase in our revenue should follow.
RESULTS OF OPERATIONSOIL AND GAS
The profitability of crude oil production generally declines when prices fall. As a result, as prices dropped in 2020, production slowed worldwide. However, the price of crude oil has begun to improve. As such, orders and activity during this quarter have begun to strengthen. In addition to the price of crude oil we monitor the number of active rotary rigs, which is discussed elsewhere. In spite of the return of crude oil prices to pre-pandemic levels, we believe many oil drilling companies have forgone the typical maintenance that would utilize our tools in order to continue cash-flow generating production activities in lieu of shutting down for required maintenance. We cannot say for certain when the typical maintenance activity will resume.
Continuing operations
25
Unless otherwise discussed elsewhere in the Management’s Discussion and Analysis we believe that our relationships with our key customersof Financial Condition and suppliers remain satisfactory. Global oil and gas exploration and extraction have been the primary marketResults of Hy-Tech, which until recently has begun to show signs of improving. Further, there remains a persistent weakness in the other markets that Hy-Tech serves most notably power generation and construction.Operations - Continued
TRENDS AND UNCERTAINTIES - (Continued)
We elected not to renew our supply agreement with Sears, which expired on September 30, 2017. This decision was based on a number of factors including Sears’ continuing financial difficulties, the sale of the Craftsman brand to Stanley Black & Decker and our level of working capital exposure in relation to our return on that investment pertaining to Sears. There is no Sear’s inventory exposure at September 30, 2017. Further, we believe that all accounts receivable attributable to Sears, which approximates $1,100,000 at September 30, 2017, should be collected by December 31, 2017. However, at the present time, there can be no assurance that we will fully recover this.
TECHNOLOGIES
We believe that over time, several newer technologies, and features will begin to have ana greater impact on the market for the Company’sour traditional pneumatic tool offerings. ThisThe impact of this evolution has been felt initially by the advent of someadvanced cordless operated hand tools in the automotive aftermarket. For certain non-automotive applications, we have begun to develop cordless models of tools and expect to introduce these products in the near future.
OTHER MATTER
In May 2021, Florida Pneumatic detected a ransomware attack on its information technology systems that caused data to be encrypted. At the present time, all critical Florida Pneumatic information technology systems have been remediated and are operational. We are currently evaluating the developmentbelieve that our corporate office and our other subsidiaries, all of more advanced technologies in our tool platforms.
RESULTS OF OPERATIONS
Continuing operations - (Continued)
which operate on separate, independent networks, were not affected by this incident.
Other than the aforementioned, or matters that may be discussed below, there are no major trends or uncertainties that had, or we could have reasonably expect couldexpected to have a material impact on our revenue, nor was there any unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations.
Unless otherwise discussed elsewhere in the Management’s Discussion and Analysis, we believe that our relationships with our key customers and suppliers remain satisfactory.
RESULTS OF OPERATIONS
REVENUE
During the first quarter of 2016, we sold Nationwidethree and nine-month period ended September 30, 2021, various product lines were affected to an unrelated third partysome degree by the global COVID-19 pandemic, which caused orders and revenue for approximately $22,200,000. As a result of this transaction, Nationwide’s 2016 results are reported under discontinued operations. Please see Note 2 - Discontinued Operations,those product lines for the same periods, to our consolidated financial statements for additional information.
REVENUE
be less than pre-pandemic levels.
The tables below provide an analysis of our net revenue from continuing operations for the three and nine-month periods ended September 30, 20172021, and 2016:2020:
Consolidated
Three months ended September 30, | ||||||||||||||||||||||||||||
Increase | ||||||||||||||||||||||||||||
2017 | 2016 | $ | % | |||||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||
| | Three months ended September 30, | | |||||||||||||||||||||||||
| | | | | | Increase (decrease) |
| |||||||||||||||||||||
|
| 2021 |
| 2020 |
| $ |
| % |
| |||||||||||||||||||
Florida Pneumatic | $ | 12,295,000 | $ | 11,702,000 | $ | 593,000 | 5.1 | % | | $ | 9,607,000 | | $ | 9,681,000 | | $ | (74,000) | | (0.8) | % | ||||||||
Hy-Tech | 3,487,000 | 2,931,000 | 556,000 | 19.0 | |
| 3,378,000 | |
| 2,725,000 | |
| 653,000 | | 24.0 | | ||||||||||||
Consolidated | $ | 15,782,000 | $ | 14,633,000 | $ | 1,149,000 | 7.9 | % | | $ | 12,985,000 | | $ | 12,406,000 | | $ | 579,000 | | 4.7 | % |
Nine months ended September 30, | ||||||||||||||||||||||||||||
Decrease | ||||||||||||||||||||||||||||
2017 | 2016 | $ | % | |||||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||
| | Nine months ended September 30, | | |||||||||||||||||||||||||
| | | | | | Increase (decrease) |
| |||||||||||||||||||||
|
| 2021 |
| 2020 |
| $ |
| % |
| |||||||||||||||||||
Florida Pneumatic | $ | 34,936,000 | $ | 35,270,000 | $ | (334,000 | ) | (0.9 | )% | | $ | 31,221,000 | | $ | 28,351,000 | | $ | 2,870,000 | | 10.1 | % | |||||||
Hy-Tech | 9,421,000 | 9,499,000 | (78,000 | ) | (0.8 | ) | |
| 9,299,000 | |
| 8,925,000 | |
| 374,000 | | 4.2 | | ||||||||||
Consolidated | $ | 44,357,000 | $ | 44,769,000 | $ | (412,000 | ) | (0.9 | )% | | $ | 40,520,000 | | $ | 37,276,000 | | $ | 3,244,000 | | 8.7 | % |
26
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
REVENUE – Continued
Florida Pneumatic
Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; retail, automotive, industrial/catalog,Automotive, Retail, Aerospace and aerospace.Industrial. It also generates revenue from its Berkley products line, as well as a line of air filters and other OEM parts (“Other”).
Three months ended September 30, | ||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Increase (decrease) | ||||||||||||||||||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||||||||||||||||||
Retail customers | $ | 5,212,000 | 42.4 | % | $ | 6,631,000 | 56.7 | % | $ | (1,419,000 | ) | (21.4 | )% | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | Three months ended September 30, |
| |||||||||||||||||||||||||||||||||||||
| | 2021 | | 2020 | | Increase (decrease) |
| |||||||||||||||||||||||||||||||||
|
| | |
| Percent of |
| |
| Percent of |
| |
| | | ||||||||||||||||||||||||||
| | Revenue | | revenue | | Revenue | | revenue | | $ | | % |
| |||||||||||||||||||||||||||
Automotive | 3,021,000 | 24.6 | 3,723,000 | 31.8 | (702,000 | ) | (18.9 | ) | | $ | 3,168,000 |
| 33.0 | % | $ | 3,530,000 |
| 36.5 | % | $ | (362,000) | | (10.3) | % | ||||||||||||||||
Industrial/catalog | 1,228,000 | 10.0 | 1,026,000 | 8.7 | 202,000 | 19.7 | ||||||||||||||||||||||||||||||||||
Retail | |
| 3,222,000 |
| 33.5 | |
| 3,718,000 |
| 38.4 | |
| (496,000) | | (13.3) | | ||||||||||||||||||||||||
Industrial | |
| 1,257,000 |
| 13.1 | |
| 1,044,000 |
| 10.8 | |
| 213,000 | | 20.4 | | ||||||||||||||||||||||||
Aerospace | 2,564,000 | 20.8 | 89,000 | 0.8 | 2,475,000 | 2,780.9 | |
| 1,832,000 |
| 19.1 | |
| 1,268,000 |
| 13.1 | |
| 564,000 | | 44.5 | | ||||||||||||||||||
Other | 270,000 | 2.2 | 233,000 | 2.0 | 37,000 | 15.9 | |
| 128,000 |
| 1.3 | |
| 121,000 |
| 1.2 | |
| 7,000 | | 5.8 | | ||||||||||||||||||
Total | $ | 12,295,000 | 100.0 | % | $ | 11,702,000 | 100.0 | % | $ | 593,000 | 5.1 | % | | $ | 9,607,000 |
| 100.0 | % | $ | 9,681,000 |
| 100.0 | % | $ | (74,000) | | (0.8) | % |
RESULTS OF OPERATIONS
Continuing operations - (Continued)
Nine months ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | Increase (decrease) | ||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Revenue | revenue | Revenue | revenue | $ | % | |||||||||||||||||||
Retail customers | $ | 15,976,000 | 45.7 | % | $ | 19,411,000 | 55.1 | % | $ | (3,435,000 | ) | (17.7 | )% | |||||||||||
Automotive | 10,024,000 | 28.7 | 11,336,000 | 32.1 | (1,312,000 | ) | (11.6 | ) | ||||||||||||||||
Industrial/catalog | 3,812,000 | 10.9 | 3,523,000 | 10.0 | 289,000 | 8.2 | ||||||||||||||||||
Aerospace | 4,426,000 | 12.7 | 320,000 | 0.9 | 4,106,000 | 1,283.1 | ||||||||||||||||||
Other | 698,000 | 2.0 | 680,000 | 1.9 | 18,000 | 2.6 | ||||||||||||||||||
Total | $ | 34,936,000 | 100.0 | % | $ | 35,270,000 | 100.0 | % | $ | (334,000 | ) | (0.9 | )% |
The majorityFor most of the declinethird quarter of 2021, much of U.S. and global economies were still feeling the ill effects of the global COVID-19 pandemic. Further, the negative impact of the world-wide supply-chain crisis adversely affected nearly all of Florida Pneumatic’s product lines. Most seriously affected were its Retail and Automotive inventory levels, which in turn hampered its ability to fulfill orders in a timely manner. In an effort to combat future potential shipping issues, Florida Pneumatic has increased its purchases, which has caused a temporary up-tick in its inventory levels through at least the first half of 2022. During the third quarter of 2021, Aircat sales relative to the same period in 2020 decreased by $362,000. This was primarily caused by two factors. First, pent up demand for our products that were not generally available through our largest on-line channel during the second quarter of 2020 caused a surge in orders during the third quarter of 2020, which did not repeat in 2021. Second, during the third quarter of 2021, Aircat made a change to its channel distribution strategy which caused a temporary pause in shipments to the channel as customer inventory levels were adjusted. We expect shipments to resume to prior levels in the fourth quarter of 2021. Florida Pneumatic’s third quarter 20172021 Industrial revenue improved 20.4 percent over the same period a year ago. This increase, we believe is due in part to a continuation of the recovery than began during the second quarter occurring in certain sectors from the ill effects of the pandemic. Most of the Aerospace revenue is attributable to Jiffy Air Tool. The Boeing Corporation is a major customer of Jiffy. The Boeing 737 MAX aircraft had been grounded by the FAA and the EASA in March 2019. Earlier this year both agencies lifted the “No Fly” ruling it imposed on all Boeing 737 MAX aircraft, allowing it to begin flights in the United States, and Europe. As a result, order activity began to improve, which was a primary factor for the improvement in Aerospace revenue when comparing the third quarters of 2021 and 2020. However, it is uncertain how long, if ever, it will take for the Boeing Corporation to increase its manufacturing of its 737 MAX aircraft to a volume that would be comparable to pre-COVID-19 levels. Lastly, orders from other aerospace companies and military aircraft manufacturers improved slightly this quarter.
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| |||||||||||||
| | 2021 | | 2020 | | Increase (decrease) |
| |||||||||
|
| | |
| Percent of |
| |
| Percent of |
| |
| | | ||
| | Revenue | | revenue | | Revenue | | revenue | | $ | | % |
| |||
Automotive | | $ | 11,053,000 |
| 35.4 | % | $ | 9,690,000 |
| 34.2 | % | $ | 1,363,000 | | 14.1 | % |
Retail | |
| 10,775,000 |
| 34.5 | |
| 9,569,000 |
| 33.8 | |
| 1,206,000 | | 12.6 | |
Industrial | |
| 3,919,000 |
| 12.6 | |
| 2,383,000 |
| 8.4 | |
| 1,536,000 | | 64.5 | |
Aerospace | |
| 5,094,000 |
| 16.3 | |
| 6,341,000 |
| 22.4 | |
| (1,247,000) | | (19.7) | |
Other | |
| 380,000 |
| 1.2 | |
| 368,000 |
| 1.2 | |
| 12,000 | | 3.3 | |
Total | | $ | 31,221,000 |
| 100.0 | % | $ | 28,351,000 |
| 100.0 | % | $ | 2,870,000 | | 10.1 | % |
27
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
REVENUE – Continued
Despite the impact during the third quarter 2021, relating to the ongoing COVID-19 pandemic and supply chain delays, Florida Pneumatic’s Automotive revenue during the nine-month period ended September 30, 2021, is more than 14 percent greater than the amount reported during the same period in 2020. This improvement is driven by growing demand for its AIRCAT line of pneumatic hand tools, plus stronger sales generated by its UK operations. Additionally, Florida Pneumatic’s Retail revenue was due toimproved 12.6 percent during the reduction in shipments to Sears this quarter,nine-month period ended September 30, 2021, compared to the same period in 2016. As discussed above, we elected not to renew an agreement with Sears, which expired on September 30, 2017. Also impacting our Retail revenue this quarter was a decline in shipments2020, driven primarily by demand for spray gun-type tools and accessories being sold to The Home Depot, which was due primarily to their decision to reduce the number of items offered for sale at certain locations. Additionally, we believe thatare being used to apply disinfectant to combat the recent hurricanes,COVID-19 virus. Further, its Industrial revenue during the nine-month period ended September 30, 2021, also encountered growth, which impactedwe believe is driven primarily by certain sectors beginning to recover from the southern portioneffects of the United States, was a contributing factor topandemic. Partially offsetting the above increases, is the year-to-date decline in our RetailFlorida Pneumatic’s Aerospace revenue. Most of the Aerospace revenue this quarter, comparedis attributable to Jiffy Air Tool, whose major customer is the Boeing Corporation. We believe however, that as both domestic and international travel restrictions ease, and Boeing and other major aircraft manufacturers begin to produce and deliver new aircraft, we could see a continuation of the improvement we witnessed in the third quarter of 2016. A major factor contributing to the net decline in our Automotive revenue this quarter compared to the same three-month period in 2016, were two major automotive parts distributors continuing to adjust their inventory levels of pneumatic hand tools. Partially offsetting this decline was an increase in revenue from our UAT division headquartered in the United Kingdom. OurIndustrial/catalog revenue increased slightly compared to the same period a year ago. We believe that activity in this sector has begun to improve; however,year. However, no assurance can be givenmade, and it is possible that this trendsector will continue. Lastly,remain depressed for the Jiffy acquisition in April of this yearhas enabled us to approach the aerospace sector with a much stronger brand. As a result, aerospace sales contributed nearly $2.5 million to Florida Pneumatic’s total third quarter 2017 revenue.foreseeable future.
Hy-Tech
With respect to our year to date results, seventy-five percent of the decline in our Retail revenue was due primarily to the reduction in shipments to Sears, compared to the same nine-month period in 2016. During 2016, The Home Depot rolled-out several new tools, which did not occur in 2017, accounting for much of the decline in The Home Depot’s year-to-date revenue. Additionally, year to date revenue was negatively affected by The Home Depot’s decision to reduce the number of items being offered at certain locations. We believe two major automotive distributors have been adjusting their inventory levels. As such, their decision is a primary cause of the year to date decline in our Automotive revenue. It should be noted that we have encountered increased sales to other major Automotive customers and distributors. Additionally, UAT’s 2017 year to date revenue has declined approximately 11%, when compared to the same period a year ago. Our Industrial/catalog revenue, while sluggish during the first three months of 2017, has begun to see slight improvement during the second and third quarters of 2017. Lastly, aerospace revenue, driven by the Jiffy acquisition, added more than $4.1 million to Florida Pneumatic’s year to date 2017 revenue, compared to the same period a year ago.
Hy-Tech
Hy-Tech designs, manufactures, and sells a wide range of industrial products under the brands ATP, ATSCO and Ozat which are categorized as “ATP”ATP for reporting purposespurposes. In addition to Engineered Solutions, products and include heavy duty air tools, industrial grinderscomponents manufactured for other companies under their brands are included in the OEM category in the table below. PTG revenue is comprised of products manufactured and impact sockets.sold by Hy-Tech’s gear business. NUMATX, Thaxton and other peripheral product lines, Numatx, Thaxton and Quality Gear,such as general machining, are reported as “Other”Other.
| | | | | | | | | | | | | | | | |
|
| Three months ended September 30, |
| |||||||||||||
| | 2021 | | 2020 | | Increase (decrease) |
| |||||||||
| | | |
| Percent of |
| | |
| Percent of |
| | |
| |
|
| | Revenue | | revenue | | Revenue | | revenue | | $ | | % |
| |||
OEM | | $ | 1,668,000 |
| 49.4 | % | $ | 872,000 |
| 32.0 | % | $ | 796,000 | | 91.3 | % |
ATP | |
| 751,000 |
| 22.2 | |
| 624,000 |
| 22.9 | |
| 127,000 | | 20.4 | |
PTG | |
| 882,000 |
| 26.1 | |
| 1,027,000 |
| 37.7 | |
| (145,000) | | (14.1) | |
Other | |
| 77,000 |
| 2.3 | |
| 202,000 |
| 7.4 | |
| (125,000) | | (61.9) | |
Total | | $ | 3,378,000 |
| 100.0 | % | $ | 2,725,000 |
| 100.0 | % | $ | 653,000 | | 24.0 | % |
28
Management’s Discussion and include the hydro-pneumatic riveters, hydrostatic test plugs, air motorsAnalysis of Financial Condition and custom gears.
Three months ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | Increase (decrease) | ||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||
ATP | $ | 3,092,000 | 88.7 | % | $ | 2,515,000 | 85.8 | % | $ | 577,000 | 22.9 | % | ||||||||||||
Other | 395,000 | 11.3 | 416,000 | 14.2 | (21,000 | ) | (5.0 | ) | ||||||||||||||||
Total | $ | 3,487,000 | 100.0 | % | $ | 2,931,000 | 100.0 | % | $ | 556,000 | 19.0 | % |
Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
Continuing operations - (Continued)REVENUE – Continued
Nine months ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | Decrease | ||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Revenue | revenue | Revenue | revenue | $ | % | |||||||||||||||||||
ATP | $ | 8,386,000 | 89.0 | % | $ | 8,411,000 | 88.5 | % | $ | (25,000 | ) | (0.3 | )% | |||||||||||
Other | 1,035,000 | 11.0 | 1,088,000 | 11.5 | (53,000 | ) | (4.9 | ) | ||||||||||||||||
Total | $ | 9,421,000 | 100.0 | % | $ | 9,499,000 | 100.0 | % | $ | (78,000 | ) | (0.8 | )% |
Significant components contributing to the increase in Hy-Tech’s third quarter 2017 ATP revenue, compared to the same period in 2016, include the resurgence in activity from a large customer acquired in the ATSCO acquisition that had reduced its orders until the second quarter of 2017, and continues to place orders duringDuring the third quarter of 2017. Additionally, in 2016 we began2021, Hy-Tech continued to pursue alternate markets where we believed we could exploit our engineering and manufacturing expertise, and develop different applications for our tools, motors and accessories. We believe the development of this new marketing strategy provides an opportunity to generate new sources of revenue from new markets in 2017 and beyond. While third quarter 2017 revenue from this new initiative was $156,000, at September 30, 2017 Hy-Tech had future orders just shy of $750,000. Although Hy-Tech’s third quarter 2017 revenue has increased compared to both the first and second quarters of 2017, we believe that there continues to be an excess inventory of tools and spare parts in the distribution channels. Additionally, we believeencounter modest signs that the turn-around activities inill effects of the oil and gas sector continuepandemic were beginning to lag, compared to historic levels, further negatively impacting Hy-Tech’s revenue. Recent hurricanes and other major storms have also impacted Hy-Tech’s revenue. Further, we believe lower-priced imported tools and spare parts are adversely impacting Hy-Tech’s position in the marketplace.
The fluctuation in Hy-Tech’s year to dateease. As a result, its total revenue for the nine-monththree-month period ended September 30, 2017, compared to the same period in 2016 was primarily due to a number of factors. A decline in ATP revenue from a large customer that was acquired in the ATSCO acquisition that had greatly reduced its purchases in the first quarter of 2017, compared to its purchases during the first quarter of 2016. By mid-2016 this customer ceased placing orders. However, as discussed above, this customer began placing orders during the second quarter of 2017 and continued into the third quarter of this year. A major component of Hy-Tech’s revenue is derived from the oil and gas sector. Currently, we estimate that the oil and gas sector revenue accounts for approximately 30% to 35% of Hy-Tech’s total revenue. This revenue stream is driven by a number of factors, such as, the number of off-shore rigs located in the Gulf of Mexico, “turn-arounds” or plant maintenance activities and, to a lesser extent, land rigs. We believe the lag in turn-around activities, the hurricanes that severely damaged the Gulf of Mexico and many of the oil refineries in the Gulf States, along with the growing presence of lower-priced imported tools and spare parts are impacting the markets in which Hy-Tech operates. However, as discussed earlier, Hy-Tech continues to pursue alternate markets where it believes it can exploit its engineering and manufacturing expertise, and develop different applications for its tools, motors and accessories. Revenue from these new sources during the first nine months of 2017 was approximately $657,000, and is included in the ATP grouping. Lastly, Hy-Tech has recently begun a new marketing strategy that is intended to re-energize its gear and hydraulic stopper business.
RESULTS OF OPERATIONS
Continuing operations - (Continued)
Gross profit / margin
Three months ended September 30, | Increase | |||||||||||||||||||||||
2017 | 2016 | Amount | % | |||||||||||||||||||||
Florida Pneumatic | $ | 4,579,000 | $ | 4,219,000 | $ | 360,000 | 8.5 | % | ||||||||||||||||
As percent of respective revenue | 37.2 | % | 36.1 | % | 1.1 | % pts | ||||||||||||||||||
Hy-Tech | $ | 1,005,000 | $ | 286,000 | $ | 719,000 | 251.4 | |||||||||||||||||
As percent of respective revenue | 28.8 | % | 9.8 | % | 19.0 | % pts | ||||||||||||||||||
Total | $ | 5,584,000 | $ | 4,505,000 | $ | 1,079,000 | 24.0 | % | ||||||||||||||||
As percent of respective revenue | 35.4 | % | 30.8 | % | 4.6 | % pts |
Nine months ended September 30, | Increase | |||||||||||||||||||||||
2017 | 2016 | Amount | % | |||||||||||||||||||||
Florida Pneumatic | $ | 13,116,000 | $ | 13,070,000 | $ | 46,000 | 0.4 | % | ||||||||||||||||
As percent of respective revenue | 37.5 | % | 37.1 | % | 0.4 | % pts | ||||||||||||||||||
Hy-Tech | $ | 2,864,000 | $ | 1,956,000 | $ | 908,000 | 46.4 | |||||||||||||||||
As percent of respective revenue | 30.4 | % | 20.6 | % | 9.8 | % pts | ||||||||||||||||||
Total | $ | 15,980,000 | $ | 15,026,000 | $ | 954,000 | 6.3 | % | ||||||||||||||||
As percent of respective revenue | 36.0 | % | 33.6 | % | 2.4 | % pts |
Customer and product mix were the primary factors that contributed to the increase in Florida Pneumatic’s third quarter 2017 gross margin, compared to the same period a year ago. Of note, Jiffy’s gross margin approximates that of Florida Pneumatic’s non-retail product lines. As such, the gross profit associated with the Aerospace revenue this quarter exceeded the gross profits lost as the result of the decline in Retail revenue. There were no significant changes to our cost structure or selling price during this quarter.
Florida Pneumatic’s overall gross margin for the nine-month period ended September 30, 2017 is essentially the same as the gross margin for the same period in 2016.
Hy-Tech’s 2017 third quarter gross margin2021, increased 19.0 percentage points, a more than 250% improvement24 percent, over the same period a year ago. Factors contributingCustomer orders for its OEM and ATP product lines improved when compared to the positive change include, amongsame three-month period a year ago, driving revenue growth of 91.3 percent and 20.4 percent, respectively. Significant orders from two of its major OEM customers, along with its Engineered Solutions approach, which continues to gain market momentum, provided the impetus for the current quarter growth in OEM. Its ATP revenue improvement was due in large part to a general rebound in the pneumatic tool sector, and an increase in the number of oil and gas rigs. According to Baker Hughes Inc., the average number of oil and gas rotary rigs in operation during the fiscal third quarter 2021 were 496, compared to 254 during the same three-month period in 2020. Additionally, in an effort to increase market penetration, Hy-Tech has “refreshed” and/or improved a number of its ATP tools, as well as the marketing of its Magnum Force line of large impact wrenches. Hy-Tech believes that the Magnum Force line, a series of super duty industrial impact tools, that are designed specifically for use in demanding environments, such as refinery turnarounds, power generation outages, structural steel erection, mining and other things: (a)similar bolting applications, is beginning to gain acceptance. The above increases were offset by a quarter over quarter decline in its PTG revenue. PTG continues to encounter delays and disruptions in its outside third-party processors, creating delays in its delivery time to its customers. Additionally, PTG continues to encounter reluctance to permit face to face visitation, which we believe is critical to completing the sale of PTG products and services, by its current and prospective customers. The decline in Hy-Tech’s Other revenue was due to a large order for its Thaxton products shipping during the third quarter in 2020, with no similar order this quarter.
| | | | | | | | | | | | | | | | |
|
| Nine months ended September 30, |
| |||||||||||||
| | 2021 | | 2020 | | Increase (decrease) |
| |||||||||
| | | |
| Percent of |
| | |
| Percent of |
| | |
| |
|
| | Revenue | | revenue | | Revenue | | revenue | | $ | | % |
| |||
OEM | | $ | 4,688,000 |
| 50.4 | % | $ | 3,513,000 |
| 39.4 | % | | 1,175,000 | | 33.4 | % |
ATP | |
| 2,242,000 |
| 24.1 | |
| 2,254,000 |
| 25.2 | |
| (12,000) | | (0.5) | |
PTG | |
| 2,132,000 |
| 22.9 | |
| 2,783,000 |
| 31.2 | |
| (651,000) | | (23.4) | |
Other | |
| 237,000 |
| 2.6 | |
| 375,000 |
| 4.2 | |
| (138,000) | | (36.8) | |
Total | | $ | 9,299,000 |
| 100.0 | % | $ | 8,925,000 |
| 100.0 | % | | 374,000 | | 4.2 | % |
Hy-Tech’s year-to-date revenue improvement over the same nine-month period in 2020 was driven by continued growth in its OEM line, which saw a 33.4 percent increase, the majority of which occurring during the third quarter of 2016,2021. This improvement was partially offset by i) the ongoing negative effects on the U.S. economy caused by the global COVID-19 pandemic, particularly adversely affecting PTG revenue and operations; and ii) delays and disruptions from outside third-party processors. As discussed above, we increased Hy-Tech’s allowance for obsolete / sloware beginning to see improvement in the number and size of ATP orders and are optimistic about market acceptance of our Magnum Force line. PTG’s nine-month 2021 revenue declined due primarily to the factors discussed earlier. However, as travel restrictions ease and customers begin to accept visitors, we believe order levels should improve. In addition, we are working with vendors and improving internal systems toward the goal of greatly reducing supply chain issues moving inventory (“OSMI”). This adjustmentforward.
29
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS -(Continued)
GROSS MARGIN/PROFIT
| | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Increase |
| ||||||||
| | 2021 |
| 2020 | | Amount |
|
| % |
| |||
Florida Pneumatic | | $ | 3,381,000 | | $ | 3,291,000 | | $ | 90,000 |
| | 2.7 | % |
As percent of respective revenue | |
| 35.2 | % |
| 34.0 | % |
| 1.2 | % | pts | | |
Hy-Tech | | $ | 593,000 | | $ | 232,000 | | $ | 361,000 |
| | 155.6 | |
As percent of respective revenue | |
| 17.6 | % |
| 8.5 | % |
| 9.1 | % | pts | | |
Total | | $ | 3,974,000 | | $ | 3,523,000 | | $ | 451,000 |
| | 12.8 | % |
As percent of respective revenue | |
| 30.6 | % |
| 28.4 | % |
| 2.2 | % | pts | | |
The improvement in 2016Florida Pneumatic’s gross margin was compounded by lowerdue primarily to product mix. Specifically, the increase in Industrial and Aerospace revenue, both of which generally have stronger gross margin than Florida Pneumatic’s other product lines, contributed to the increase in gross margin. Additionally, stronger overhead absorption due to reduced manufacturing, in turn due to weakness in the oil and gas and power generation sectors and (b) during 2016, we were shipping a line of very low gross margin tools to a major customer. However, during the second and third quarters of 2017, shipments of these low gross margin tools declinedat Jiffy this quarter, compared to the prior year. Additional factors contributingsame three-month period a year ago contributed to the improved gross margin. However, increased freight costs partially offset the improvement. Florida Pneumatic’s ocean freight costs have increased approximately four-fold when compared to a year ago. We are attempting to pass through a portion of these increases; however, we may not be able to fully neutralize the negative effects. The improvement in Hy-Tech’s gross margin include: (a) improvedis due primarily to its overall product/customer mix. Additionally, there was a slight improvement in its manufacturing overhead absorption as manufacturing activity has increased; (b) improved inventory turns, which directly impacts fluctuations in Hy-Tech’s OSMI, and (c) the sale of the low margin tools has been lower this yearquarter, when compared to the prior year.same three-month period in 2020, further contributing to its improved gross margin.
| | | | | | | | | | | | | |
|
| Nine months ended September 30, |
| Increase |
| ||||||||
| | 2021 |
| 2020 | | Amount |
|
| % |
| |||
Florida Pneumatic | | $ | 11,746,000 | | $ | 10,274,000 | | $ | 1,472,000 |
| | 14.3 | % |
As percent of respective revenue | |
| 37.6 | % |
| 36.2 | % |
| 1.4 | % | pts | | |
Hy-Tech | | $ | 1,712,000 | | $ | 779,000 | | $ | 933,000 |
| | 119.8 | |
As percent of respective revenue | |
| 18.4 | % |
| 8.7 | % |
| 9.7 | % | pts | | |
Total | | $ | 13,458,000 | | $ | 11,053,000 | | $ | 2,405,000 |
| | 21.8 | % |
As percent of respective revenue | |
| 33.2 | % |
| 29.7 | % |
| 3.5 | % | pts | | |
Generally, customer and product mix greatly affect Florida Pneumatic’s gross margin. As discussed earlier, the increase in Florida Pneumatic’s higher margin Industrial revenue contributed to the higher gross margin this quarter, compared to the same nine-month period in 2020. This improvement was partially offset by the significant increases in its ocean freight costs that have been incurred for most of 2021. Additionally, in early 2021, Jiffy was under absorbing its manufacturing overhead, due to the reduction of product being produced. However, with increased production during the third quarter of 2021 this under absorption issue has been reduced. Hy-Tech manufactures most of its products. Its gross margin is impacted by customer/product mix. Factors such as absorption of manufacturing overhead, raw material pricing and third-party costs also affect its gross margin. Hy-Tech’s gross margin for the nine months ended September 30, 2021, improved 9.7 percentage points, when comparing the three-month periods ended September 30, 2021, and 2020. During the nine-month period ended September 30, 2017, improved 9.8 percentage points, when compared2020, Hy-Tech recorded additional charges to the same period a year ago. Offsetting the primary factorsits OSMI allowance and an adjustment to this improvement discussed above,its physical inventory, both adversely affecting its 2020 gross margin, onwhereas there were no additional charges incurred during the products being sold under its new marketing initiative are below Hy-Tech’s historical range. In addition to margins on these products increasing as the resultnine months ended September 30, 2021.
30
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Selling and general and administrative expensesRESULTS OF OPERATIONS -(Continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (“SG&A” or “operating expenses”) include salaries and related costs, commissions, travel, administrative facilities costs, communications costs and promotional expenses for our direct sales and marketing staff, administrative and executive salaries and related benefits, legal, accounting, and other professional fees as well as general corporate overhead and certain engineering expenses.
RESULTS OF OPERATIONS
Continuing operations - (Continued)
During the third quarter of 2017,2021, our SG&A was $5,352,000,were $4,734,000, compared to $4,915,000 for$4,673,000 incurred during the same three-month period in 2016.2020. The most significant factors contributing to the net increase was due in large part to the acquisition of the Jiffy business in April 2017, with SG&A of approximately $575,000 for the third quarter of 2017. Other significant components of the change include: (i) a $17,000 reduction in non-Jiffy compensationwere: i) Compensation expenses whichincreased $74,000. Compensation expense is comprised of base salaries and wages, accrued performance-based bonus incentives and associated payroll taxes and employee benefits; (ii)ii) information systems-related expenses increased $35,000, driven by increased cyber security costs, and iii) a decrease in variable expensesdecline of $78,000, due primarily to lower Retail revenue; (iii) a decrease$31,000 in professional fees of $56,000 and (iv) a reduction in amortization and depreciation expenses of $60,000. These reductions were partially offset by an increase in corporate related expenses of $24,000.
expenses.
Our SG&A expenses for the nine-month period ended September 30, 2017 was $15,765,000,2021, were $15,183,000, compared to $15,088,000 for$14,983,000, during the same nine-month period in 2016. As noted above, the most2020. There were significant componentfactors which contributed to the net increase was the addition of Jiffy, with year to date 2017 SG&A of approximately $1,025,000. Other significant components include reductions in: (i) non-Jiffy compensation expenses of $74,000; (ii) variable expenses of $300,000, due primarily to lower Retail revenue; (iii) depreciation and amortization of $236,000, due mostly to the reduction in Hy-Tech’s intangible assets, which were written down in 2016; and (iv) corporate related expenses of $80,000. The reductions were partially offsetchange. First, driven by an increase of more than $3,200,000 in professional fees of $381,000, whichrevenue, our variable expenses increased $487,000. Variable expenses include feesamong other items, commissions, freight out, travel, advertising, shipping supplies and expenses related to the Jiffy Acquisition and recruitment fees for executive positions at Hy-Tech.
Impairment of goodwill and other intangible assets - 2016
During the second quarter of 2016,warranty costs. Additionally, we determined that an interim impairment analysis of the goodwill recordedincurred approximately $318,000 in connection with Hy-Tech and ATSCO was necessary. As a result of the aforementioned, it was determined that Hy-Tech's short and long-term projections at that time had indicated an inability to generate sufficient discounted future cash flows to support the recorded amounts of goodwill, other intangible assets and other long-lived assets necessitating the impairment charge. Accordingly, adhering to current accounting literature, we recorded an impairment charge of $8,311,000 relating to goodwill and other intangible assetsadditional information systems costs during the second quarter of 2016.
Other expense (income), net
The three-month period ended September 30, 2017 included $11,000 consisting primarily of an adjustment to the fair value of the contingent consideration obligation to the Jiffy Seller. During the same period in 2016, the most significant factor contributing to the net Other income was rental income of real property that was sold in November of 2016. There is no income of a similar nature for 2017.
For the nine-month period ended September 30, 2017, our Other expense (income), net, is primarily the fair value adjustment discussed above partially offsetting the receipt of the balance of an escrow2021, which related to the saleMay 2021 ransomware attack at our Florida Pneumatic subsidiary. Further, compensation expenses increased $72,000. Partially offsetting the above increases was a decline in professional fees of $576,000, most of which was driven by expenses in 2020 related to the relocation and set up of the real propertytwo gear businesses that was locatedwere acquired in Tampa, Florida and used by Nationwide Industries Inc. See Note 2 to our consolidated financial statements for further discussion. The amount for the same period in 2016 was the net rental income on the real property that was sold in November of 2016.
RESULTS OF OPERATIONS
Continuing operations - (Continued)
Interest
Three months ended September 30, | Increase | |||||||||||||||
2017 | 2016 | Amount | % | |||||||||||||
Interest expense attributable to: | ||||||||||||||||
Short-term borrowings | $ | 32,000 | $ | 15,000 | $ | 17,000 | 113.3 | % | ||||||||
Term loans, including Capital Expenditure Term Loans | 1,000 | 1,000 | - | - | ||||||||||||
Amortization expense of debt issue costs | 17,000 | 10,000 | 7,000 | 70.0 | ||||||||||||
Total | $ | 50,000 | $ | 26,000 | $ | 24,000 | 92.3 | % |
Nine months ended September 30, | Increase (decrease) | |||||||||||||||
2017 | 2016 | Amount | % | |||||||||||||
Interest expense attributable to: | ||||||||||||||||
Short-term borrowings | $ | 80,000 | $ | 41,000 | $ | 39,000 | 95.1 | % | ||||||||
Term loans, including Capital Expenditure Term Loans | 2,000 | 5,000 | (3,000 | ) | (60.0 | ) | ||||||||||
Amortization expense of debt issue costs | 42,000 | 118,000 | (76,000 | ) | (64.4 | ) | ||||||||||
Total | $ | 124,000 | $ | 164,000 | $ | (40,000 | ) | (24.4 | )% |
Primarily due to the resultlate 2019, none of the sale of Nationwiderelocation expenses repeated in 2021. Lastly, when comparing the nine-month periods ended September 30, 2021, and the real property located in Tampa, Florida, occurring in February2020, depreciation and November 2016, respectively, our total bank borrowings have been minimal. However, asamortization expenses declined $75,000, and corporate expenses and stock-based compensation declined $30,000 and $19,000, respectively.
OTHER INCOME
As discussed in Note 3 - Acquisition, to our consolidated financial statements,9 – CARES Act, on April 5, 2017,20, 2020, we purchasedreceived a Paycheck Protection Program (“PPP”) loan, in the net assetsamount of $2,929,000. Under the terms of the Jiffy businessCARES Act, as amended, we were eligible to apply for forgiveness for all or a portion of the PPP loan. In February 2021, we filed an application for forgiveness with the lender, who approved this submission and real property locatedsubmitted the application for forgiveness to the SBA. On June 9, 2021, we were advised that the SBA had approved our PPP loan forgiveness application and as such, the PPP loan and interest were forgiven in Carson City, Nevada. The funding for this transaction was from our Revolver Loan, which is our short-term borrowing.
its entirety. Accordingly, the lender applied the funds and paid off PPP loan principal in its entirety and interest in full. In accordance with current accounting guidance we have reported our short-term and term loan interest expense incurred during the period January 1, 2016 through February 11, 2016, which was the effective date of sale of Nationwide, in Discontinued operations. Further, as the result of the Company and Capital One, National Association (“Capital One”, or the “Bank”) agreeing to significantly modify the Credit Agreement, as defined below in our Liquidity and Capital Resources, we were required to write down and recognize as interest expense the debt issue costs associated with the then existing Credit Agreement. These costs are identified in the table above as “Amortization expensethis forgiveness of debt issue costs”. See Note 2and related accrued interest is to our consolidated financial statementsbe accounted for further discussion on the saleas Other Income and shall not be considerable as taxable income.
INTEREST
| | | | | | | | | | | | |
|
| Three months ended September 30, |
| Decrease |
| |||||||
| | 2021 |
| 2020 | | Amount |
| % |
| |||
Interest expense attributable to: | | |
| | |
| | |
| |
| |
Short-term borrowings | | $ | 10,000 | | $ | 12,000 | | $ | (2,000) |
| (16.7) | % |
PPP loan | |
| — | |
| 5,000 | |
| (5,000) |
| (100.0) | |
Amortization expense of debt issue costs | |
| 4,000 | |
| 4,000 | |
| — |
| — | |
| | | | | | | | | | | | |
Total | | $ | 14,000 | | $ | 21,000 | | $ | (7,000) |
| (33.3) | % |
31
Management’s Discussion and Analysis section for further information regardingof Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS -(Continued)
| | | | | | | | | | | | |
|
| Nine months ended September 30, |
| Decrease |
| |||||||
| | 2021 |
| 2020 |
| Amount |
| % |
| |||
Interest expense attributable to: | | |
| | |
| | |
| |
| |
Short-term borrowings | | $ | 28,000 | | $ | 95,000 | | $ | (67,000) |
| (70.5) | % |
PPP loan | |
| (19,000) | |
| 11,000 | |
| (30,000) |
| (272.7) | |
Amortization expense of debt issue costs | |
| 12,000 | |
| 12,000 | |
| — |
| — | |
| | | | | | | | | | | | |
Total | | $ | 21,000 | | $ | 118,000 | | $ | (97,000) |
| (82.2) | % |
The Applicable Margin, as defined in our bank loans.
OurCredit Agreement was the same during the three-month periods ended September 30, 2021, and 2020. The average balance of short-term borrowings during the three and nine-monththree-month periods ended September 30, 2017 was $3,635,0002021, and $3,263,000, respectively, compared2020, were $2,050,000 and $2,260,000, respectively.
As discussed in Note 9 – CARES Act, to $2,585,000the Company’s consolidated financial statements, in late April 2020, we borrowed approximately $2.9 million from BNB Bank as provided under the Coronavirus Aid, Relief and $3,593,000, respectively,Economic Security (“CARES”) Act. The PPP Loan, as defined in Note 9, accrued interest at a rate of 1.0% per annum. Pursuant to the Flexibility Act, as defined in Note 9, interest on any unforgiven amount is deferred until the forgiveness determination is made by the SBA. On June 9, 2021, we received notice that the SBA had forgiven our obligation to repay the PPP loan and related accrued interest. As such, during the same periodsthree-month period ended June 30, 2021, we recorded a reversal of the accrued interest related to the PPP loan.
Lastly, we and our bank amended the Credit Agreement in 2016.
February 2019. The debt issue costs are associated with such amendment.
Income taxesINCOME TAXES
At the end of each interim reporting period, we estimatecompute an effective tax rate expected to be applied for thebased upon our estimated full year.year results. This estimate is used to determine the income tax provision or benefit applicable to continuing operations, on a year-to-date basis and may change in subsequent interim periods. Additionally, in the year to date computation we included the impact of options that expired, were exercised, or were forfeited. The aggregate net effect of these options reduced our deferred tax asset and increased the tax provision by approximately $116,000. As a result of the aforementioned,Accordingly, our effective tax rate applicable to continuing operationsrates for the threethree-month and nine-month periods ended September 30, 2017 was 97.1%2021, were a tax benefit of 12.8% and 136.5%23.9%, respectively. Forcompared to a tax benefit of 28.2% and 29.3% for the same periods in 2016 our effective tax rate applicable to continuing operations was 27.2% and 33.9%, respectively.the prior year. The Company’s effective tax rates for all periods presented were also affectedimpacted primarily by state taxes, and non-deductible expenses and foreign tax rate differentials.
RESULTS OF OPERATIONS
Discontinued operations - 2016
Nationwide’s results of operations in our consolidated financial statements and Note 2, presents their revenue and cost of goods soldexpenses. Additionally, for the period January 1, 2016 through February 11, 2016. The SG&A incurred during the same period includes that of Nationwide plus $19,000 of expenses incurred at the corporate level that is specifically attributable to Nationwide. In accordance with current accounting guidance, we included, as part of discontinued operations, all interest expense incurred attributable to our Bank borrowings during the period January 1, 2016 through February 11, 2016. Additionally, we initially recognized an after tax gain of $12,171,000, on the sale of Nationwide. For income tax purposes, the Company’s tax basis in Nationwide was greater than the net proceeds, thus resulting in a tax loss. This gain represents the difference between the adjusted net purchase price and the carrying value of Nationwide. Further, in 2016, Countrywide completed the sale of the Tampa, Florida real property, which was treated as a capital gain transaction for tax purposes. During the three-monthnine-month period ended September 30, 2016,2021, the gain resulting from the forgiveness of debt of the PPP loan was not included in the computation of the effective tax rate.
32
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
On March 27, 2020, the CARES Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARP”) was signed into law to provide relief as a result of the COVID-19 pandemic. The ARP, among other things, extended and modified the employee retention credit. As of September 30, 2021, the Company removed a valuation allowance initially recorded againstis evaluating the impact of the ARP on the Company’s effective tax loss, resulting in an additional gain on sale $187,000.
rate.
LIQUIDITY AND CAPITAL RESOURCES
We monitor such metrics as days’ sales outstanding, inventory requirements, inventory turns, estimated future purchasing requirements and capital expenditures to project liquidity needs, as well as evaluate return on assets. Our primary sources of funds are operating cash flows, existing working capital and our Revolver Loan (“Revolver”) with our Bank.
We gauge our liquidity and financial stability by various measurements, some of which are shown in the following table:
September 30, 2017 | December 31, 2016 | |||||||
Working Capital | $ | 24,490,000 | $ | 28,373,000 | ||||
Current Ratio | 3.81 to 1 | 5.60 to 1 | ||||||
Shareholders’ Equity | $ | 47,221,000 | $ | 47,590,000 |
| | | | | | |
|
| September 30, 2021 |
| December 31, 2020 | ||
Working capital | | $ | 23,200,000 | | $ | 21,258,000 |
Current ratio | |
| 3.26 to 1 | |
| 3.57 to 1 |
Shareholders’ equity | | $ | 42,918,000 | | $ | 41,538,000 |
Credit facility
In October 2010, we entered into a Loan and Security Agreement (as amended from time to time, “Credit Agreement”) with an affiliate of Capital One. TheOur Credit Agreement provides for Revolver borrowings, which are secured by the Company’s accounts receivable, mortgages on its real property (“Real Property”), inventory and equipment. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries.
At our option, Revolver borrowings will bear interest at either LIBOR (“London InterBank Offered Rate”) or the Base Rate, as the termFacility is defined in the Credit Agreement, plus the Applicable Margin, as defined in the Credit Agreement. The interest rate, either LIBOR or Base Rate, which is added to the Applicable Margin, is at our option. We are limited in the number of LIBOR borrowings.
Contemporaneously with the acquisition of the Jiffy business discussed in Note 38 to the consolidated financial statements, we entered into a Second Amended and Restated Loan and Security Agreement, effective as of the April 5, 2017 closing date of the Jiffy Acquisition (the “Second Amended and Restated Loan Agreement”), with Capital One which amended and restated the previous amendment to the Credit Agreement.statements.
The Second Amended and Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount we can borrow under the Revolver Commitment (as defined) from $10,000,000 to $16,000,000, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteria as well as financial and other covenants.
LIQUIDITY AND CAPITAL RESOURCES – (Continued)
The net funds of approximately $18,700,000 provided by the sale of Nationwide in 2016 were used to pay down the Revolver, Capex loans and the Term Loan A; however, we and the Bank agreed to have $100,000 remain outstanding under the Term Loan A, rather than pay it off in full, thus providing the Company and Capital One the ability to potentially increase future term loan borrowings more efficiently and at lower costs.
We funded the $7,000,000 Jiffy acquisition from Revolver borrowings. Cash flows from operations thereafter and receipt in August of the $2,100,000 escrow from the sale of Nationwide have reduced our Revolver balance to $2,334,000 at September 30, 2017. Revolver borrowings can be at either LIBOR or at the Base Rate, as defined in the Credit Agreement with Capital One. Applicable LIBOR Margins in effect at September 30, 2017 was 1.75%, compared to 1.50% at December 31, 2016. The Applicable Base Rate Margins in effect as of September 30, 2017 and December 31, 2016 were 0.75% and 0.50%, respectively.
Cash flows
During the nine-month period ended September 30, 2017,2021, our net cash decreased to $1,205,000$789,000 from $3,699,000 at$904,000 on December 31, 2016.2020. Our total bank debt at September 30, 2017, primarily driven by the Jiffy acquisition, which2021, was discussed in Note 3 to the accompanying consolidated financial statements, was $2,434,000,$3,295,000 compared to $100,000$4,303,000 at December 31, 2016.2020, included borrowings under the CARES Act. The total debt to total book capitalization (total debt divided by total debt plus equity) at September 30, 20172021, was 4.9%,7.1% compared to 0.2%9.4% at December 31, 2016.2020.
In March 2016, our Board of Directors approved the initiation of a dividend policy under which the Company intends to declare quarterly cash dividends to its stockholders in the amount of $0.05 per quarter. During the nine-month period endedAt September 30, 2017,2021, our Board of Directors votedshort-term or Revolver borrowing was $3,295,000 compared to approve the payment of three quarterly dividends. As such, in February 2017, May 2017,$1,374,000, at December 31, 2020. Additionally, at September 30, 2021, and August 2017, we paid a $0.05 per share dividend to the shareholders of record. The aggregate of such dividend paymentsDecember 31, 2020, there was approximately $542,000. Our Board of Directors expects$12,700,000 and $11,971,000, respectively, available to maintain this dividend policy; however,us under the future declaration of dividends under this policy is dependent upon several factors, which includes such things as our overall financial condition, results of operations, capital requirements and other factors our board may deemed relevant.
We believe we will be able to fund the repurchase of the remaining shares in accordance with our Repurchase Program, as discussed in Note 5 – Equity – Common Stock Repurchase Plan.
Revolver arrangement.
During the nine-month period ended September 30, 2017,2021, we used $444,000$428,000 for capital expenditures, compared to $894,000$956,000 during the same period in the prior year. Capital expenditures for the balance of 2017 are2021 is expected to be approximately $500,000,$381,000, some of which may be financed through our credit facilities with Capital One Bank or financed through independent third partythird-party financial institutions. The remaining 20172021 capital expenditures will likely be for machineryfacility upgrades.
Customer concentration
Refer to NOTE 1 – Business and equipment, toolingsummary of accounting policies – Customer Concentration for a detailed discussion.
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Management’s Discussion and computer hardwareAnalysis of Financial Condition and software.
We believe that net cash flows from operations and available borrowings under our Credit Facility should provide sufficient cash to fund our consolidated cost structure for at least the next 12 months from the dateResults of this filing.
Operations - Continued
LIQUIDITY AND CAPITAL RESOURCES – RESULTS OF OPERATIONS -(Continued)
Customer concentration
Florida Pneumatic has two customers, Sears and The Home Depot that, in the aggregate, at September 30, 2017, and December 31, 2016, accounted for 39.6% and 53.5%, respectively of our accounts receivable. To date, these customers remain at or close to complying with their payment terms. Additionally, these two customers in the aggregate, accounted for 31.3% and 35.4%, respectively, of our revenue for the three and nine-month periods ended September 30, 2017, compared to 45.3% and 43.4% for the same periods in 2016.
As previously mentioned, we elected not to renew an agreement with Sears, which terminated on September 30, 2017. We believe the loss of Sears’s revenue will have a negative impact on our financial condition, but will not affect our ability to remain a going concern.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 to our consolidated financial statements for a discussion of recent accounting standards and pronouncements.
We are currently evaluating the impact of the adoption of ASU No. 2016-02,Leases, on our consolidated financial condition, results of operations and cash flows. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity.
The Company is in the final assessment phaseof what impact, if any, the new revenue standard, ASU No. 2014-09,Revenue from Contracts with Customers, and related updates will have on its consolidated financial statements and related disclosures, and based on its preliminary assessment, other than additional disclosures in its Notes to its consolidated financial statements, there will be no material impact to its consolidated financial statements.
Other than the aforementioned, we do not believe that any other recently issued, but not yet effective accounting standard, if adopted, will have a material effect on our consolidated financial statements.statements
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
Not required.
Item 4. Controls and Procedures |
Disclosure Controls and Procedures
The Company'sCompany’s management, with the participation of the Company'sCompany’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated, as of September 30, 2017,2021, the effectiveness of the Company'sCompany’s disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure“disclosure controls and procedures,"” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC'sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company'sCompany’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company'sCompany’s disclosure controls and procedures as of September 30, 2017,2021, the Company’s management, including its CEO and CFO, concluded that the Company'sCompany’s disclosure controls and procedures were effective at the reasonable assurance level at that date.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, identified in connection with the evaluation required by Exchange Act Rule 13a-15(d), that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings |
There have been no material changes to the legal proceedingsproceedings’ disclosure described in our 20162020 Form 10-K.
Item 1A. Risk Factors |
There have been no material changes to the risk factors previously disclosed under Part I, Item 1A “Risk Factors” in our 2016the 2020 Form 10-K, and subsequentother than as set forth in Item 1A “Risk Factors” in the Company’s Quarterly reportsReport on Form 10-Q.10-Q for the quarter ended March 31, 2021.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None |
The following table presents our repurchase activity of our Class A Common stock during the three-month period ended September 30, 2017.
Maximum | ||||||||||||||||
Number | ||||||||||||||||
Total Number of | of shares | |||||||||||||||
Shares Purchased as | that May Yet | |||||||||||||||
Part of Publicly | Be Purchased | |||||||||||||||
Total Number of | Average Price | Announced Plan | Under the Plan | |||||||||||||
Period | Shares Purchased | Paid per Share | or Program | or Program (1) | ||||||||||||
July 1, 2017 - July 31, 2017 | - | - | - | - | ||||||||||||
Aug., 1, 2017 – Aug., 31, 2017 | 1,505 | $ | 6.32 | 1,505 | 98,495 | |||||||||||
Sept. 1, 2017 – Sept 30, 2017 | 10,860 | $ | 7.26 | 10,860 | 87,635 |
Item 3. Defaults Upon Senior Securities |
None.
Item 4. Mine Safety Disclosures |
None.
Item 5. Other Information |
None.
Item 6. Exhibits |
See “Exhibit Index” immediately following the signature page.
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SIGNATURE
Pursuant to the requirements 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.
| | |
| | P&F INDUSTRIES, INC. |
| | (Registrant) |
| | |
| | /s/ JOSEPH A. MOLINO, |
| | Joseph A. Molino, Jr. |
| | Chief Financial Officer |
Dated: November | | (Principal Financial and Chief Accounting Officer) |
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EXHIBIT INDEX
The following exhibits are either included in this report or incorporated herein by reference as indicated below:
A copy of any of the foregoing exhibits to this Quarterly Report on Form 10-Q may be obtained, upon payment of the Registrant’s reasonable expenses in furnishing such exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road, Suite 100, Melville New York 11747, Attention: Corporate Secretary.
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