UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

 

For the Quarterly Period Ended June 30, 2018March 31, 2019

 

¨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 - 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) 694-9800

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer¨Accelerated filer¨Non-accelerated filer¨xSmaller reporting company x
  (Do not check if a 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 August 3, 2018May 7, 2019, there were 3,700,9753,166,225 shares of the registrant’s Class A Common Stock outstanding.

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

Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common Stock, $1.00 par valuePFINNASDAQ

 

 

 

 

 

P&F INDUSTRIES, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018MARCH 31, 2019

 

TABLE OF CONTENTS

 

  PAGE
   
PART I — FINANCIAL INFORMATION3
   
Item 1.Financial Statements3
   
 Consolidated Balance Sheets as of June 30, 2018March 31, 2019 (unaudited) and December 31, 201720183
   
 Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 (unaudited)5
   
 Consolidated Statement of Shareholders’ Equity for the six monthsthree-month periods ended June 30, 2018 (unaudited)March 31, 2019 and 2018(unaudited)6
   
 Consolidated Statements of Cash Flows for the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 (unaudited)7
   
 Notes to Consolidated Financial Statements (unaudited)9
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2319
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk3727
   
Item 4.Controls and Procedures3727
   
PART II — OTHER INFORMATION3828
   
Item 1.Legal Proceedings3828
   
Item 1A.Risk Factors3828
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3828
   
Item 3.Defaults Upon Senior Securities3828
   
Item 4.Mine Safety Disclosures3828
   
Item 5.Other Information3828
   
Item 6.Exhibits3828
   
Signature 3929
   
Exhibit Index4030

 

 2 

 

 

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

Item 1.Financial Statements

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 June 30, 2018  December 31, 2017  March 31, 2019  December 31, 2018 
 (unaudited) (See Note 1)  (unaudited) (See Note 1) 
ASSETS                
CURRENT ASSETS                
                
Cash $1,488,000  $1,241,000  $898,000  $999,000 
Accounts receivable — net  10,188,000   10,047,000   8,996,000   9,574,000 
Inventories  20,970,000   19,657,000   20,607,000   20,496,000 
Prepaid expenses and other current assets  1,489,000   1,224,000   1,367,000   1,137,000 
TOTAL CURRENT ASSETS  34,135,000   32,169,000   31,868,000   32,206,000 
                
PROPERTY AND EQUIPMENT                
Land  1,281,000   1,281,000   1,281,000   1,281,000 
Buildings and improvements  6,150,000   6,138,000   6,262,000   6,262,000 
Machinery and equipment  21,694,000   20,579,000   23,059,000   22,612,000 
  29,125,000   27,998,000   30,602,000   30,155,000 
Less accumulated depreciation and amortization  19,673,000   19,091,000   20,748,000   20,380,000 
NET PROPERTY AND EQUIPMENT  9,452,000   8,907,000   9,854,000   9,775,000 
                
GOODWILL  4,443,000   4,447,000   4,440,000   4,436,000 
                
OTHER INTANGIBLE ASSETS — net  8,163,000   8,533,000   7,640,000   7,800,000 
                
DEFERRED INCOME TAXES — net  775,000   872,000   651,000   628,000 
                
OTHER ASSETS — net  78,000   110,000   1,212,000   741,000 
                
TOTAL ASSETS $57,046,000  $55,038,000  $55,665,000  $55,586,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 3 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 June 30, 2018  December 31, 2017  March 31, 2019  December 31, 2018 
 (unaudited) (See Note 1)  (unaudited) (See Note 1) 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
                
CURRENT LIABILITIES                
                
Short-term borrowings $2,239,000  $1,928,000  $6,354,000  $2,096,000 
Accounts payable  4,304,000   2,443,000   2,709,000   2,755,000 
Accrued compensation and benefits  1,339,000   1,944,000   1,056,000   2,336,000 
Accrued other liabilities  1,178,000   1,576,000   1,123,000   1,243,000 
Current maturities of long-term debt  490,000      80,000   453,000 
Other current liabilities  907,000      1,296,000   1,000,000 
TOTAL CURRENT LIABILITIES  10,457,000   7,891,000   12,618,000   9,883,000 
                
Long–term debt, less current maturities     94,000   353,000    
Other liabilities  179,000   1,040,000   459,000   168,000 
                
TOTAL LIABILITIES  10,636,000   9,025,000   13,430,000   10,051,000 
                
        
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 – 4,394,000 at June 30, 2018 and 4,203,000 at December 31, 2017  4,394,000   4,203,000 
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,410,000 at March 31, 2019 and December 31, 2018  4,410,000   4,410,000 
Class B - $1 par; authorized - 2,000,000 shares; no shares issued            
Additional paid-in capital  13,748,000   13,064,000   13,946,000   13,904,000 
Retained earnings  34,466,000   34,455,000   34,404,000   34,588,000 
Treasury stock, at cost – 683,000 shares at June 30, 2018 and 631,000 shares at December 31, 2017  (5,609,000)  (5,179,000)
Treasury stock, at cost –1,234,000 shares at March 31, 2019 and 816,000 shares at December 31, 2018  (9,897,000)  (6,695,000)
Accumulated other comprehensive loss  (589,000)  (530,000)  (628,000)  (672,000)
                
TOTAL SHAREHOLDERS’ EQUITY  46,410,000   46,013,000   42,235,000   45,535,000 
                
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $57,046,000  $55,038,000  $55,665,000  $55,586,000 

See accompanying notes to consolidated financial statements (unaudited).

 

 4 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited)

 

 Three months Six months  Three months 
 ended June 30,  ended June 30,  ended March 31, 
 2018  2017  2018  2017  2019  2018 
              
Net revenue $16,188,000  $15,359,000  $31,930,000  $28,575,000  $14,322,000  $15,742,000 
Cost of sales  10,311,000   9,937,000   20,619,000   18,180,000   9,041,000   10,314,000 
Gross profit  5,877,000   5,422,000   11,311,000   10,395,000   5,281,000   5,428,000 
Selling, general and administrative expenses  5,361,000   5,366,000   10,641,000   10,413,000   5,269,000   5,274,000 
Operating income (loss)  516,000   56,000   670,000   (18,000)
Other expense (income), net  28,000   (24,000)  57,000   (24,000)
Operating income  12,000   154,000 
Other expenses     29,000 
Interest expense  55,000   64,000   92,000   74,000   63,000   37,000 
Income (loss)  433,000   16,000   521,000   (68,000)
Income tax expense (benefit)  128,000      151,000   (24,000)
Net income (loss) $305,000  $16,000  $370,000  $(44,000)
(Loss) income before income taxes  (51,000)  88,000 
Income tax (benefit) expense  (25,000)  23,000 
Net (loss) income $(26,000) $65,000 
                        
Basic and diluted earnings (loss) per share $0.08  $  $0.10  $(0.01)
Basic and diluted (loss) earnings per share $(0.01) $0.02 
                        
Weighted average common shares outstanding:                        
                        
Basic  3,592,000   3,611,000   3,588,000   3,605,000   3,381,000   3,583,000 
Diluted  3,682,000   3,720,000   3,714,000   3,605,000   3,381,000   3,745,000 
                        
Net income (loss) $305,000  $16,000  $370,000  $(44,000)
Other comprehensive (loss) income -foreign currency translation adjustment  (155,000)  91,000   (59,000)  117,000 
Net (loss) income $(26,000) $65,000 
Other comprehensive income - foreign currency translation adjustment  44,000   96,000 
Total comprehensive income $150,000  $107,000  $311,000  $73,000  $18,000  $161,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 5 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)

 

     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, 2018 $46,013,000   4,203,000  $4,203,000  $13,064,000  $34,455,000   (631,000) $(5,179,000) $(530,000)
                                 
Net income  370,000            370,000          
                                 
Exercise of stock options  737,000   184,000   184,000   553,000             
                                 
Restricted common stock compensation  18,000   7,000   7,000   11,000             
                                 
Purchase of Class A common stock  (430,000)              (52,000)  (430,000)   
                                 
Stock-based compensation  120,000         120,000             
                                 
Dividends  (359,000)           (359,000)         
                                 
Foreign currency translation adjustment  (59,000)                    (59,000)
                                 
Balance, June 30, 2018 $46,410,000   4,394,000  $4,394,000  $13,748,000  $34,466,000   (683,000) $(5,609,000) $(589,000)

Three Months Ended March 31, 2019:

     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, 2019 $45,535,000   4,410,000  $4,410,000  $13,904,000  $34,588,000   (816,000) $(6,695,000) $(672,000)
                                 
Net loss  (26,000)           (26,000)         
                                 
Restricted common stock compensation  13,000         13,000             
                                 
Purchase of Class A common stock  (3,202,000)              (418,000)  (3,202,000)   
                                 
Stock-based compensation  29,000         29,000             
                                 
Dividends  (158,000)           (158,000)         
                                 
Foreign currency translation adjustment  44,000                     44,000 
                                 
Balance, March 31, 2019 $42,235,000   4,410,000  $4,410,000  $13,946,000  $34,404,000   (1,234,000) $(9,897,000) $(628,000)

Three Months Ended March 31, 2018

     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, 2018 $46,013,000   4,203,000  $4,203,000  $13,064,000  $34,455,000   (631,000) $(5,179,000) $(530,000)
                                 
Net income  65,000            65,000          
                                 
Exercise of stock options  105,000   26,000   26,000   79,000             
                                 
Restricted common stock compensation  7,000         7,000             
                                 
Purchase of Class A common stock  (82,000)              (10,000)  (82,000)   
                                 
Stock-based compensation  60,000         60,000             
                                 
Dividends  (180,000)           (180,000)         
                                 
Foreign currency translation adjustment  96,000                     96,000 
                                 
Balance, March 31, 2018 $46,084,000   4,229,000  $4,229,000  $13,210,000  $34,340,000   (641,000) $(5,261,000) $(434,000)

 

See accompanying notes to consolidated financial statements (unaudited).

 

 6 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

 Six months  Three months 
 ended June 30,  ended March 31, 
 2018  2017  2019  2018 
Cash Flows from Operating Activities:                
Net income (loss) $370,000  $(44,000)
Net (loss) income $(26,000) $65,000 
                
Adjustments to reconcile net income (loss) to net cash provided by operating activities:        
Adjustments to reconcile net (loss) income to net cash used in operating activities:        
                
Non-cash charges:                
Depreciation and amortization  660,000   650,000   389,000   335,000 
Amortization of other intangible assets  359,000   439,000   172,000   179,000 
Amortization of debt issue costs  50,000   25,000   15,000   23,000 
Provision for (recovery of) losses on accounts receivable - net  95,000   (5,000)
Amortization of consideration payable to customer  67,000    
Recovery of losses on accounts receivable - net  (69,000)  (1,000)
Stock-based compensation  120,000      29,000   60,000 
Gain on sale of fixed assets  (6,000)  (1,000)
Loss on sale of fixed assets  6,000   1,000 
Restricted stock-based compensation  18,000   22,000   13,000   7,000 
Deferred income taxes  99,000   (24,000)  (25,000)  21,000 
Fair value increase in contingent consideration  57,000         29,000 
        
Changes in operating assets and liabilities:                
Accounts receivable  (250,000)  (1,059,000)  654,000   (603,000)
Inventories  (1,332,000)  1,399,000   (88,000)  961,000 
Prepaid expenses and other current assets  (267,000)  199,000   (207,000)  (200,000)
Other assets     32,000   81,000    
Accounts payable  1,866,000   384,000   (48,000)  287,000 
Accrued compensation and benefits  (603,000)  (618,000)  (1,282,000)  (985,000)
Accrued other liabilities  (397,000)  (822,000)
Accrued other liabilities and other current liabilities  (133,000)  (328,000)
Other liabilities  (10,000)  (9,000)  (38,000)  (5,000)
Total adjustments  459,000   612,000   (464,000)  (219,000)
Net cash provided by operating activities  829,000   568,000 
Net cash used in operating activities  (490,000)  (154,000)

 

See accompanying notes to consolidated financial statements (unaudited).

 

 7 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

 Six months  Three months 
 ended June 30,  ended March 31, 
 2018  2017  2019  2018 
Cash Flows from Investing Activities:                
Capital expenditures $(1,224,000) $(358,000) $(485,000) $(570,000)
Purchase of net assets of Jiffy Air Tool, Inc.     (6,845,000)
Proceeds from disposal of assets  25,000   1,000   11,000   10,000 
Net cash used in investing activities  (1,199,000)  (7,202,000)  (474,000)  (560,000)
                
Cash Flows from Financing Activities:                
Dividend payments  (359,000)  (360,000)  (158,000)  (180,000)
Proceeds from exercise of stock options  737,000   62,000      105,000 
Purchase of Class A common stock  (430,000)     (3,202,000)  (82,000)
Net proceeds from short-term borrowings  311,000   4,537,000   4,258,000   1,313,000 
Proceeds from long-term debt  400,000    
Repayments of long-term debt  (7,000)  (10,000)
Payment of debt issue costs  (15,000)  (50,000)
Bank finance costs  (20,000)   
Repayments of loan term debt  (20,000)   
Net cash provided by financing activities  637,000   4,179,000   858,000   1,156,000 
                
Effect of exchange rate changes on cash  (20,000)  25,000   5,000   21,000 
Net increase (decrease) in cash  247,000   (2,430,000)
Net (decrease) increase in cash  (101,000)  463,000 
Cash at beginning of period  1,241,000   3,699,000   999,000   1,241,000 
Cash at end of period $1,488,000  $1,269,000  $898,000  $1,704,000 
                
Supplemental disclosures of cash flow information:                
                
Cash paid for:                
Interest $44,000  $36,000  $37,000  $16,000 
Income taxes $21,000  $335,000  $  $2,000 
Cash paid for amounts included in the measurement of operating lease liabilities $4,000  $ 
                
Supplemental disclosures of non-cash investing and financing activities:        
Contingent consideration on acquisition $  $692,000 
Noncash information:        
Right of Use (“ROU”) assets recognized for new operating lease liabilities $80,000  $ 
Operating lease liability related to ROU asset recognized upon adoption of ASC 842 $577,000  $ 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 8 

 

 

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 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 adjustments necessary to present fairly the information set forth therein. 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, 20172018 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, 20172018 (“20172018 Form 10-K”). The interim financial statements contained herein should be read in conjunction with the 20172018 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 (loss) income - foreign currency translation 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.

 

Customer concentration

 

At June 30, 2018March 31, 2019 and December 31, 2017,2018, accounts receivable from The Home Depot was 35.5%25.5% and 31.0%32.6%, respectively, of our total accounts receivable. Additionally, revenue from The Home Depot during the three and six-monththree-month periods ended June 30,March 31, 2019 and 2018 was 24.8%were 17.6% and 24.2%23.5%, for the same three and six month periods in 2017 The Home Depot revenuerespectively, of our total revenue. There were no other customers that accounted for 29.0% and 29.8%, respectively.

9

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)more than 10% of our consolidated revenue during the three-month periods ended March 31, 2019 or 2018. 

 

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)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.

 

The Company

 

P&F is a Delaware corporation incorporated on April 19, 1963. The Company conducts its 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”), Jiffy Air Tool, Inc. (“Jiffy”) are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, the Company purchased substantially all of the operating assets, less certain payables of Jiffy Air Tool, Inc., (“Jiffy”) through a wholly-owned subsidiary of Florida Pneumatic. See Note 2 to our consolidated financial statements for further discussion. Lastly, the business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.

 

Florida Pneumatic imports, manufactures imports, and sells pneumatic hand tools, most of which are of itsthe Company’s own design, primarily to the retail, industrial, automotive and aerospace markets. It also markets, through its Berkley Tool division (“Berkley”), a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines.

9

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 designs, manufactures and distributes industrial pneumatic tools, industrial gears, hydrostatic test plugs and a wide variety of parts under the brands ATP, ATSCO, OZAT, Numatx, Thaxton and Quality Gear.  Industries served include power generation, petrochemical, construction, railroad, mining, ship building and fabricated metals. Hy-Tech also manufactures components, assemblies, finished product and systems for various Original Equipment Manufacturers (“OEM”) under their own brand names.

 

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 20172018 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 adjustments 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.

 

10

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)Significant Accounting Policies

 

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)

 Significant Accounting Policies – Revenue Recognition

OurThe Company’s significant accounting policies are described in "Note 1: Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2017. Our significant accounting policy relating to revenue recognition reflects the impact of the adoption of ASC 606, defined below, effective January 1, 2018.

The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606,Revenue from Contracts with Customers ("ASC 606"). The Company sells its goods on terms which transfer title and risk of loss at a specified location, which may be our warehouse, destination designated by our customer, port of loading or port of discharge, depending on the final destination of the goods. Other than standard product warranty provisions, our sales arrangements provide for no other post-shipment obligations. The Company offers rebates and other sales incentives, promotional allowances or discounts for certain customers, typically related to customer purchase volume, and are classified as a reduction of revenue and recorded at the time of sale, using the most likely amount approach. The Company periodically evaluates whether an allowance for sales returns is necessary. Historically, we have experienced minimal sales returns. If the Company believes there are material potential sales returns, it would provide the necessary provision against sales.

The Company's performance obligations underlying its core revenue sources remain substantially unchanged. Its revenue is generated through the sale of finished products, and is generally recognized at the point in time when merchandise is transferred to the customer with a fixed payment due generally within 30 to 90 days, and in an amount that considers the impacts of estimated allowances. Further, the Company has made a policy election to account for shipping and handling activities that occur after the customer has obtained control of the products as fulfillment costs rather than as an additional promised service. This election is consistent with the Company’s prior policy, and therefore the adoption of ASC 606 relating to shipping and handling activities did not have any impact on its financial results. Additionally, as the result of the adoption of ASC 606, the Company will account for certain expenses that in prior periods were accounted for as a selling expense, which will now be treated as an adjustment to gross revenue. Accordingly, during the three and six-month period ended June 30, 2018 the Company reduced its net revenue, gross margin and selling expenses by approximately $243,000 and $457,000, respectively. Additionally, the Company at June 30, 2018 has included in its allowance for doubtful accounts approximately $89,000 that would have been accounted for in its current liabilities prior to the adoption of ASC 606. There are no remaining performance obligations as of June 30, 2018.

11

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)

The Company analyzes its revenue as follows:

Revenue generated at Florida Pneumatic.

  Three months ended June 30, 
  2018  2017 
  Revenue  Percent of 
revenue
  Revenue  Percent of
revenue
 
Retail $4,215,000   33.8% $5,411,000   44.6%
Automotive  3,774,000   30.3   3,390,000   27.9 
Industrial/catalog  1,422,000   11.4   1,250,000   10.3 
Aerospace  2,885,000   23.1   1,862,000   15.4 
Other  174,000   1.4   219,000   1.8 
Total $12,470,000   100.0% $12,132,000   100.0%

  Six months ended June 30, 
  2018  2017 
  Revenue  Percent of 
revenue
  Revenue  Percent of
revenue
 
Retail $8,305,000   33.6% $10,764,000   47.5%
Automotive  7,710,000   31.2   7,003,000   30.9 
Industrial/catalog  2,898,000   11.7   2,439,000   10.8 
Aerospace  5,443,000   22.0   2,008,000   8.9 
Other  378,000   1.5   427,000   1.9 
Total $24,734,000   100.0% $22,641,000   100.0%

Revenue generated at Hy-Tech.

  Three months ended June 30, 
  2018  2017 
  Revenue  Percent of
revenue
  Revenue  Percent of
revenue
 
ATP brands $3,384,000   91.0% $2,888,000   89.5%
Other brands  334,000   9.0   339,000   10.5 
Total $3,718,000   100.0% $3,227,000   100.0%

  Six months ended June 30, 
  2018  2017 
  Revenue  Percent of
revenue
  Revenue  Percent of
revenue
 
ATP brands $6,460,000   89.8% $5,294,000   89.2%
Other brands  736,000   10.2   640,000   10.8 
Total $7,196,000   100.0% $5,934,000   100.0%

12

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 January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04,Intangibles – Goodwill and Other (Topic 350): SimplifyingASU 2016-02 in February 2016, which was amended in some respects by subsequent ASUs (collectively 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 annual“leases standard” or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company concluded that ASU 2017-04 is preferable to the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company adopted ASU 2017-04 in 2017, in conjunction with its annual impairment test of goodwill for all reporting units. The adoption of ASU 2017-04 did not have a material impact on the Company’s financial results.

In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments“ASC 842”). The amendments in ASU 2016-15 are intendedCompany’s significant accounting policy relating to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows, with the intent of reducing diversity in practice for the eight types of cash flows identified. ASU 2016-15 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017. The adoption of ASU 2016-15 as of January 1, 2018 had no material effect on the Company’s financial position, results of operations or cash flows.

The Company adopted ASC 606 on the first day of fiscal 2018. Its 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 Company has elected to use the modified retrospective approach. As the Company does not have any sales contracts that were not completed as of January 1, 2018, there is no adjustment required to its retained earnings. The adoption of ASC 606 will not have an effect on the Company’s cash flows. Other than discussed earlier in this Note 1, the adoption of ASC 606 did not have a material effect on the Company’s consolidated financial statements.842, which was effective January 1, 2019, is discussed below.

 

 TheLease Accounting

On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) ASC 842“Leases” using the initial date of adoption method, whereby the adoption does not believe thatimpact any other recently issued accounting standard would have a material effect on its consolidated financial statements. 

Not Yet Adopted

In February 2016, the FASB issued ASU 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 companiesperiods prior to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.2019. 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 ASUCompany recorded an operating Right of Use (“ROU”) asset of $553,000, and an operating lease liability of $577,000 as of January 1, 2019. The difference between the initial operating ROU asset and operating lease liability of $24,000 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. Practical expedients are available for election.accrued rent previously recorded under ASC 840. The Company intendselected to useadopt the modified retrospective approach.package of practical expedients and, accordingly, did not reassess any previously expired or existing arrangements and related classifications under ASC 840.

If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company iscurrently inuses its best judgement when determining the processincremental borrowing rate, which is the rate of completing its assessment of all leases and is assessing the impact the adoption of this standard will have on its consolidated financial statements and related disclosures. Thus farinterest that the Company doeswould 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 believeidentified any material finance leases as of March 31, 2019.

For the adoption of this standard will have a material effect on its consolidated financial statements. However,three months ended March 31, 2019, the Company will continue its evaluationhad $80,000 in Operating lease expense.

As of March 31, 2019, the standard update through the dateCompany had a net ROU asset of adoption.$552,000 in Other Assets, a current operating lease liability of $271,000 in Other current liabilities, and a long-term operating lease liability of $296,000 in Other liabilities.

 

 1310 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)

In February 2018, the FASB issued No. ASU 2018-02,Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). Under ASU 2018-02, an entity may elect to reclassify the income tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period. The Company is evaluating what impact, if any, adoption of ASU 2018-02 may have on its consolidated financial statements.

Other Accounting Pronouncement(continued)

 

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reducesfollowing is a maturity analysis of the U.S. federal corporate income tax rate from 35%annual undiscounted cash flows reconciled to 21%, requires companies to pay a one-time transition tax on earningsthe carrying value of certain foreign subsidiaries previously deferred from tax, generally eliminates U.S federal income taxes on dividends from foreign subsidiaries and creates a new provision designed to tax global intangible low-taxed income (“GILTI”). Also on December 22, 2017, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides for a measurement periodoperating lease liabilities as of up to one year from the enactment for companies to complete their accounting for the Act. March 31, 2019:

  As of March 31, 2019 
2019 (excluding the three months ended March 31, 2019) $239,000 
2020  142,000 
2021  114,000 
2022  76,000 
2023  44,000 
Total operating lease payments  615,000 
Less imputed interest  (48,000)
Total operating lease liabilities $567,000 

Weighted-average remaining lease term3.1 years
Weighted-average discount rate5.3%

The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act.analyzes its revenue as follows:

 

At June 30, 2018Florida Pneumatic markets its air tool products to four primary sectors within the Company has not completed its accountingpneumatic tool market; Retail, Automotive, Aerospace and Industrial.

  Three months ended March 31, 
  2019  2018  Decrease 
  Revenue  Percent of
revenue
  Revenue  Percent of
revenue
  $  % 
Automotive $3,866,000   37.0% $3,938,000   32.1% $(72,000)  (1.8)%
Retail  2,709,000   26.0   4,090,000   33.4   (1,381,000)  (33.8)
Aerospace  2,360,000   22.6   2,670,000   21.8   (310,000)  (11.6)
Industrial  1,325,000   12.7   1,364,000   11.1   (39,000)  (2.9)
Other  180,000   1.7   202,000   1.6   (22,000)  (10.9)
Total $10,440,000   100.0% $12,264,000   100.0% $(1,824,000)  (14.9)%

Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, ATSCO and OZAT, which are categorized as “ATP” for reporting purposes, and also include products such as heavy-duty air tools. Our “Engineered Solutions” is in included in the tax effects ofOEM category in the Act, but has made reasonable estimates of the effects on the re-measurement of its deferred tax assetstable below. Currently NUMATX, Thaxton and liabilitiesother peripheral product lines are reported as well as its transition tax liability. During the six month period ended June 30, 2018, the Company made no adjustments to the provisional amounts recorded at December 31, 2017. Additionally, the Company has not yet collected and analyzed all necessary tax and earnings data of its foreign operations and therefore, the Company has also not yet completed its accounting for the income tax effects of the transition tax. The Company will continue to make and refine its calculations as additional analysis is completed.“Other” below.

  Three months ended March 31, 
  2019  2018  Increase (decrease) 
  Revenue  Percent of
revenue
  Revenue  Percent of
revenue
  $  % 
ATP $1,986,000   51.2% $2,357,000   67.8% $(371,000)  (15.7)%
OEM  1,476,000   38.0   666,000   19.1   810,000   121.6 
Other  420,000   10.8   455,000   13.1   (35,000)  (7.7)
Total $3,882,000   100.0% $3,478,000   100.0% $404,000   11.6%

New Accounting Pronouncements

 

Other than the aforementioned, theThe Company does not believe that any other recently issued but not yetand effective accounting standard if adopted, willwould have a material effect on its consolidated financial statements.statements.

 

NOTE 2 – 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, 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.  As of June 30, 2018, the Company has estimated the fair value of this contingent consideration to be $907,000.

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 Jiffy Seller. Pursuant to the Purchase and Sale Agreement, the purchase price for the real property was $1,050,000.

 1411 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 2 – ACQUISITIONS – (Continued)

The initial total consideration ($5,950,000 plus $1,050,000) paid to Jiffy Seller was from funds available under the Revolver, as defined in Note 9, less certain amounts escrowed pursuant to 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 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 

 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:

Customer relationships15 years
Trademarks and trade namesIndefinite
Non-compete agreements4 years

The following unaudited pro-forma combined financial information gives effect to the Jiffy Acquisition as if the Jiffy Acquisition was consummated January 1, 2017. 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, 2017 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.

  Six months ended 
  June 30, 2017 
Revenue $30,053,000 
Net Income $62,000 
Earnings per share – Basic $0.02 
Earnings per share – Diluted $0.02 

15

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 3 –(LOSS) EARNINGS (LOSS) PER SHARE

 

Basic (loss) earnings (loss) per common share is based only on the average number of shares of Common Stock outstanding for the periods.

Diluted (loss) earnings (loss) per common share reflects the effect of shares of Common Stock issuable upon the exercise of options, unless the effect on earnings is antidilutive.

Diluted (loss) earnings (loss) 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.

 

The following table sets forth the elements of basic and diluted (loss) earnings (loss) per common share:

 

  Three months ended  Six months ended 
  June 30,  June 30, 
  2018  2017  2018  2017 
Numerator for basic and diluted earnings (loss) per common share:                
Net income (loss) $305,000  $16,000  $370,000  $(44,000)
                 
Denominator:                
Denominator for basic earnings (loss) per share - weighted average common shares outstanding  3,592,000   3,611,000   3,588,000   3,605,000 
Dilutive securities(1)  90,000   109,000   126,000    
Denominator for diluted earnings (loss) per share -  weighted average common shares outstanding  3,682,000   3,720,000   3,714,000   3,605,000 
  Three months ended 
  March 31, 
  2019  2018 
Numerator for basic and diluted (loss) earnings per common share:        
         
Net (loss) income $(26,000) $65,000 
         
Denominator:        
For basic (loss) earnings per share - weighted average common shares outstanding  3,381,000   3,583,000 
Dilutive securities(1)     162,000 
For diluted (loss) earnings per share -  weighted average common shares outstanding  3,381,000   3,745,000 

 

(1)Dilutive securities consist of “in the money” stock options.

 

At June 30, 2017,March 31, 2019 and 2018, there were outstanding stock options whose exercise prices were higher than the average market values of the underlying Common Stock for the period.

Options for the three months ended March 31, 2019 are anti-dilutive and are excluded from the computation of diluted (loss) earnings per share. The weighted average of anti-dilutive stock options outstanding was as follows:

 

  Three months ended  Six months ended 
  June 30,  June 30, 
  2018  2017  2018  2017 
Weighted average antidilutive stock options outstanding     49,000   25,000   60,000 

16

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

  Three months ended 
  March 31, 
  2019  2018 
Weighted average antidilutive stock options outstanding  8,000   49,000 

 

NOTE 43 – STOCK-BASED COMPENSATION

 

There were noDuring the three-month period ended March 31, 2019, the Company granted 8,000 options granted or issued duringto non-executives. The exercise price of these options is $8.55 per option, and will expire in February 2029. Further, one third of these options vest on the anniversary date of the grant for the next three and six-month periods ended June 30, 2018.years.

The Company estimated the fair value of these options using the following assumptions:

Risk-free interest rate  2.73%
Expected term (in years)  10 years 
Volatility  62.08%
Dividend yield  2.34%
Weighted average fair value of options granted $4.60 

12

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 3 – STOCK-BASED COMPENSATION – (Continued)

 

The following is a summary of the changes in outstanding options during the six-monththree-month period ended June 30, 2018:March 31, 2019:

 

 Option Shares  Weighted
Average
Exercise
Price
  Weighted Average
Remaining
Contractual Life
(Years)
  Aggregate
Intrinsic
Value
  Option Shares  Weighted
Average
Exercise
Price
  Weighted Average
Remaining
Contractual Life
(Years)
  Aggregate
Intrinsic
Value
 
Outstanding , January 1, 2018  418,233  $5.17   3.8  $1,343,442 
Outstanding, January 1, 2019  218,075  $6.22   5.6  $335,310 
Granted                8,000   8.55         
Exercised  (184,480) $3.99                       
Forfeited                            
Expired                            
Outstanding, June 30, 2018  233,753  $6.10   5.9  $617,693 
Vested, June 30, 2018  144,753  $5.49   3.8  $470,843 
Outstanding, March 31, 2019  226,075  $6.30   5.5  $424,878 
Vested, March 31, 2019  158,742  $5.90   4.2  $360,798 

 

 Option Shares  Weighted
Average Grant-
Date Fair Value
  Option Shares  Weighted
Average Grant-
Date Fair Value
 
Non-vested options, January 1, 2018  89,000  $4.41 
Non-vested options, January 1, 2019  59,333  $4.41 
Granted        8,000   4.60 
Vested            
Forfeited            
Non-vested options, June 30, 2018  89,000  $4.41 
Non-vested options, March 31, 2019  67,333  $4.44 

 

The number of shares of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”) as of June 30, 2018March 31, 2019 was 79,437. At June 30, 2018,71,437. Further, at March 31, 2019, there were 184,253191,575 options outstanding issued under the 2012 Plan and 49,50034,500 options outstanding issued under the 2002 Stock Incentive Plan.

 

Restricted Stock

 

The Company, in May 2018, granted 1,250 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 6,250 restricted shares. The Company determined that the fair value of these shares was $8.43 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. The Company will ratably amortize the total non-cash compensation expense of approximately $53,000 in itsto selling, general and administrative expenses through May 2019.

The Company, in May 2017, 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 $6.17 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. The Company ratably amortized the total non-cash compensation expense of approximately $30,000 in its selling, general and administrative expenses.

17

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 4 – STOCK-BASED COMPENSATION – (Continued)

 

Treasury Stock

 

On August 9,February 14, 2019, the Company entered into an agreement to repurchase 389,909 shares of its common stock from certain funds and accounts advised or sub-advised by Fidelity Management & Research Company or one of its affiliates in a privately negotiated transaction at approximately $7.62 per share for a total purchase price of $2,971,000. On February 15, 2019, the Company completed this transaction. On February 14, 2019, the Company entered into Amendment No. 6 to the Second Amended and Restated Loan and Security Agreement with Capital One, which permitted the Company to complete the above transaction.

On September 12, 2018, subsequent to the expiration of a repurchase plan (the “2017 Repurchase Program”) that was adopted by the Board of Directors in 2017, the Company’s Board of Directors authorized the Company to repurchase up to 100,000 additional shares of its common stockCommon Stock (the “2018 Repurchase Program”) from time to time over a period of up tothe next twelve months (the “Repurchase Program”).through a 10b5-1 trading plan, and potentially through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. On August 24, 2017,September 14, 2018, the Company announced that, pursuant to the 2018 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, that commenced on September 17, 2018, are subject to the SEC’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. Since the inception of the 2018 Repurchase Program through June 30 2018,March 31, 2019, the Company repurchased approximately 81,00061,905 shares of its common stockCommon Stock at an aggregate cost of approximately $638,000.$503,000. During the three-month period January 1, 2018 through June 30, 2018,ended March 31, 2019, the Company repurchased 34,00028,507 shares of its common stockCommon Stock at an aggregate cost of $280,000.approximately $231,000.

 

13

Additionally, in June 2018, the Company purchased 18,140 shares of its common stock in a privately negotiated transaction outside of the Repurchase Program pursuant to an additional authorization of the Company’s Board of Directors at a total cost of $150,000. The purchase price per share was equal to five percent below the average of the closing price of its common stock for the three days prior to the transaction.

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 54 – 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'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.

 

As of June 30, 2018March 31, 2019, and December 31, 2017,2018, the carrying amounts reflected in the accompanying consolidated balance sheets for current assets and current liabilities approximated fair value due to the short-term nature of these accounts.

 

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).

18

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 65 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Accounts receivable - net consists of:

 

 June 30, 2018  December 31, 2017  March 31, 2019  December 31, 2018 
Accounts receivable $10,435,000  $10,199,000  $9,200,000  $9,847,000 
Allowance for doubtful accounts, sales discounts and chargebacks  (247,000)  (152,000)  (204,000)  (273,000)
 $10,188,000  $10,047,000  $8,996,000  $9,574,000 

 

NOTE 76 – INVENTORIES

 

Inventories consist of:

 

 June 30, 2018  December 31, 2017  March 31, 2019  December 31, 2018 
Raw material $1,964,000  $1,871,000  $2,230,000  $1,963,000 
Work in process  2,225,000   1,556,000   1,736,000   1,924,000 
Finished goods  16,781,000   16,230,000   16,641,000   16,609,000 
 $20,970,000  $19,657,000  $20,607,000  $20,496,000 

14

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 87 – GOODWILL AND OTHER INTANGIBLE ASSETS  

 

Changes in the carrying amount of goodwill are as follows:

 

Balance, January 1, 2018 $4,447,000 
Currency translation adjustment  (4,000)
Balance, June 30, 2018 $4,443,000 
Balance, January 1, 2019 $4,436,000 
Currency translation adjustment  4,000 
Balance, March 31, 2019 $4,440,000 

 

Other intangible assets were as follows:

 

 June 30, 2018  December 31, 2017  March 31, 2019  December 31, 2018 
 Cost  Accumulated
amortization
  Net book
value
  Cost  Accumulated
amortization
  Net book
value
  Cost  Accumulated
amortization
  Net book
value
  Cost  Accumulated
amortization
  Net book
value
 
Other intangible assets:                                                
Customer relationships (1) $6,831,000  $1,853,000  $4,978,000  $6,836,000  $1,570,000  $5,266,000  $6,827,000  $2,280,000  $4,547,000  $6,821,000  $2,135,000  $4,686,000 
Trademarks and trade names (1)  2,321,000      2,321,000   2,329,000      2,329,000   2,316,000      2,316,000   2,308,000      2,308,000 
Trademarks and trade names (2)  200,000   25,000   175,000   200,000   19,000   181,000   200,000   35,000   165,000   200,000   32,000   168,000 
Engineering drawings  330,000   188,000   142,000   330,000   175,000   155,000   330,000   209,000   121,000   330,000   202,000   128,000 
Non-compete agreements (1)  236,000   225,000   11,000   239,000   210,000   29,000   235,000   226,000   9,000   233,000   223,000   10,000 
Patents  1,405,000   869,000   536,000   1,405,000   832,000   573,000   1,405,000   923,000   482,000   1,405,000   905,000   500,000 
Totals $11,323,000  $3,160,000  $8,163,000  $11,339,000  $2,806,000  $8,533,000  $11,313,000  $3,673,000  $7,640,000  $11,297,000  $3,497,000  $7,800,000 

 

(1)A portion of these intangibles are maintained in a foreign currency, and are therefore subject to foreign exchange rate fluctuations.

 

(2)These were previously considered an indefinite-lived intangible asset of Hy-Tech.  However, as the result of a prior impairment, the Company began amortizing these intangible assets over a 15 year useful life.

Amortization expense of intangible assets subject to amortization was as follows:

 

Three months ended June 30,  Six months ended June 30, 
2018  2017  2018  2017 
$180,000  $233,000  $359,000  $439,000 
Three months ended March 31, 
2019  2018 
$172,000  $179,000 

 

19

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS – (Continued)

The weighted average amortization period for intangible assets was as follows:

 

 June 30, 2018  December 31, 2017  March 31, 2019  December 31, 2018 
Customer relationships  9.7   10.1   9.0   9.3 
Trademarks and trade names  13.0   13.5   12.3   12.5 
Engineering drawings  7.9   8.1   7.6   7.7 
Non-compete agreements  2.8   1.8   2.0   2.3 
Patents  8.4   8.8   7.7   7.9 

 

Amortization expense for each of the next five years and thereafter is estimated to be as follows:

 

2019 $687,000 
2020  663,000  $675,000 
2021  638,000   639,000 
2022  635,000   635,000 
2023  635,000   635,000 
2024  635,000 
Thereafter  2,584,000   2,105,000 
 $5,842,000  $5,324,000 

 

 2015 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 98 – DEBT

 

In October 2010, the Company entered into a Loan and Security Agreement (“Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One” or the “Bank”). The Credit Agreement, as amended from time to time, among other things, provides the ability to borrow funds under a Revolver arrangement. Revolver borrowings are secured by the Company’s accounts receivable, inventory, equipment and mortgages on real property. Additionally, there is a $1,600,000 line available for capital expenditures (“Capex line”). The Credit Agreement includes a $100,000 Term Loan, as defined in the Credit Agreement. This Term Loan remains in place to enable the Company and Capital One to facilitate future term loan borrowings more efficiently and in a less costly manner. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries. The Credit Agreement expireshad an expiration date of February 11, 2019.

On February 8, 2019, the Company entered into Amendment No. 5 to the Second Amended and Restated Loan and Security Agreement with Capital One (“Amendment No.5”). Amendment No. 5, among other things, extended the termination date of the Credit Agreement to February 8, 2024, set the Capex line to $2,000,000, increased the Eligible Inventory (as defined in February 2019, unless extended by the parties.Credit Agreement) to $10,000,000 from $8,000,000, and reduced certain fees and charges.

 

At the Company’s option, Revolver borrowings bear interest at either LIBOR (“London InterBankinterbank Offered Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus an Applicable Margin, as defined in the Credit Agreement. We areThe Company is subject to limitations on the number of LIBOR borrowings.

ContemporaneouslySHORT–TERM BORROWINGS

At March 31, 2019, short-term or Revolver borrowing was $6,354,000, compared to $2,096,000, at December 31, 2018. Applicable Margin Rates at March 31, 2019 and December 31, 2018 for LIBOR and Base Rates were 1.50% and 0.50%. Additionally, at March 31, 2019 and December 31, 2018, there was approximately $8,857,000 and $12,024,000, respectively, available to the Company under its Revolver arrangement.

The average balance of short-term borrowings during the three-month periods ended March 31, 2019 and 2018, were $4,076,000 and $1,847,000, respectively.

TERM LOAN BORROWINGS

There is a $100,000 Term Loan that is secured by mortgages on the real property, accounts receivable, inventory and equipment. The Term Loan borrowings can be at either LIBOR, or at the Base Rate, or a combination of the two plus the Applicable Margins. At March 31, 2019 and December 31, 2018, the total borrowing of this Term Loan was at LIBOR. The Applicable Margin for LIBOR at March 31, 2019 and December 31, 2018 was 1.5%.

In April 2018, the Company borrowed $400,000 against the Capex line. This borrowing is to be repaid in equal principal installments of approximately $6,700, payable monthly, with the acquisition of the Jiffy business discussedbalance due at its Maturity Date as defined in Note 2 to the consolidated financial statements, the Company entered into a Second Amended and Restated Loan and Security Agreement, (the “2017 Agreement”), with Capital One. The 2017 Agreement, among other things, amended the Credit Agreement by: (1) increasingAgreement. Of the maximum amount it can borrow underinitial borrowing, $300,000 was at LIBOR plus Applicable Margin, with the Revolver Commitment (as defined)balance of $100,000 at the Base Rate, or prime rate plus Applicable Margin. The Applicable Margin added to $16,000,000, subject to certain borrowing base criteria,all Base Rate and (2) modifying certain borrowing base criteria as well as financialLIBOR borrowings were 1.50% and other covenants. 0.50%, respectively.

16

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 8 – DEBT – (Continued)

The Company incurred $84,000 of debt issue costs in connection with this 2017 Agreement.Company’s Term loan borrowings are:

  March 31, 2019  December 31, 2018 
Term Loan $100,000  $100,000 
Capex borrowing  333,000   354,000 
Debt issue costs     (1,000)
   433,000   453,000 
Less current maturities  80,000   453,000 
  $353,000  $ 

 

The Company provides Capital One monthly financial statements, borrowing base certificates and certificates of compliance with various financial covenants. Should an event of default occur, the interest rate would increase by two percent per annum during the period of default, in addition to other remedies provided to Capital One.

 

We believe that should a need arise whereby the current credit facility is insufficient; we can borrow additional amounts against our real property or other assets.SHORT–TERM BORROWINGS

NOTE 9– DIVIDEND PAYMENTS

 

Short-term borrowings can beOn March 8, 2019, the Company’s Board of Directors, in accordance with their dividend policy, declared a quarterly cash dividend of $0.05 per common share, which was paid on March 22, 2019, to shareholders of record at either LIBORthe close of business on March 18, 2019. The total amount of this dividend payment was approximately $158,000.

NOTE 10– SUBSEQUENT EVENTS

Florida Pneumatic entered into a purchase and sale agreement (the “PSA”) effective April 19, 2019 (the “Effective Date”) pursuant to which Florida Pneumatic agreed to sell (the “Sale”) certain real property located at 851 Jupiter Park Lane, Jupiter, Florida, as described in the PSA, including the building in which Florida Pneumatic conducts its primary operations (the “Property”), to Jupiter Warehouse Holdings LLC., a Florida limited liability company (the “Purchaser”), for a cash purchase price of $9,500,000.

The Sale, contingent upon completion of due diligence and other conditions set forth in the PSA, is expected to close by July 3, 2019; however, there is no guarantee that the Sale will close in the timeframe the Company expects, or at all.

Further, pursuant to the Base Rate, or a combinationterms of the two, plusPSA, the Applicable Margins. At June 30, 2018parties have agreed to enter into a lease (the “Lease”). Pursuant to the terms of the Lease, upon the closing of the Sale, Florida Pneumatic would become the tenant with respect to approximately 42,000 square foot portion of the Property. The Lease would be for a term of five years, with either party able to terminate after four years. The initial monthly Base Rent (as defined in the Lease) would be $32,345 with annual escalations of three percent, and December 31, 2017,Florida Pneumatic would also be responsible for certain other payments of Additional Rent (as defined in the Company’s short-term borrowings were $2,239,000Lease) as set forth in the Lease, including certain taxes, assessments and $1,928,000, respectively. The Applicable LIBOR Margin at June 30, 2018operating expenses. In connection with the Sale, Florida Pneumatic is obligated to construct a demising wall, obtain certain permits and December 31, 2017 was 1.50%, andcause the Applicable Base Rate Margin was 0.50% at both dates.Property to be separately metered for electricity.

 

 2117 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 910– SUBSEQUENT EVENTSDEBT – (Continued)Continued

 

TERM LOAN BORROWINGSAdditionally, effective as of April 19, 2019, the Company entered into Consent and Amendment No. 7 to the Second Amended and Restated Loan and Security Agreement (“Amendment No. 7”) with Capital One.

 

The Term Loan borrowings can be at either LIBOR or at the Base Rate, or a combination of the two, plus the Applicable Margins. LIBOR borrowings at June 30, 2018 and December 31, 2017 were 1.50%. The Applicable Margin for borrowings at the Base Rate for the same timeframes was 0.50%. At June 30 2018, the Company had a $100,000 Term Loan, which is included in Current maturities of long-term debt on the consolidated balance sheet. At December 31, 2017, this obligation was included in Long-term debt, less current maturities on the consolidated balance sheet. At both June 30, 2018 and December 31, 2017 this Term Loan was at LIBOR plus the Applicable Margin.

In April 2018, the Company borrowed $400,000 against the Capex line. This borrowing is to be repaid in equal installments of approximately $6,700, payable monthly, with the balance due in February 2019, unlessAmendment No. 7, among other things, modified the Credit Agreement is renewed or extendedby revising and adding certain defined terms and revising certain covenants, in each case as set forth in Amendment No. 7. Among other things, Amendment No. 7 provides for a consent of Capital One to the Sale, provided that, among other things, the proceeds are used in the manner set forth in Amendment No. 7. Furthermore, Amendment No. 7 suspends the requirement for the Company to be in compliance with the covenant relating to a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) for the period from the Measurement Period (as defined in Amendment No. 7) ending April 30, 2019 through the Measurement Period ending March 31, 2020 (the “Fixed Charge Coverage Ratio Suspension Period”). Amendment No. 7 also establishes an Additional Availability Reserve (as defined in Amendment No. 7) of $5.0 million to be in place until the later of (i) the end of the Fixed Charge Coverage Ratio Suspension Period and (ii) the date of delivery by the parties. $300,000Company of this borrowing is at LIBOR plus Applicable Margin,the requisite compliance certificate demonstrating compliance with the balance of $100,000 at the Base Rate, or prime rate plus Applicable Margin. While the Company intends to renew or extend the Credit Agreement currently in place, this obligation at June 30, 2018, is included in Current maturities of long-term debt on its consolidated balance sheet.

At June 30, 2018 and December 31, 2017, the Company, in accordance with ASU 2015-03, reduced its long-term debt by $4,000 and $6,000, respectively.

  June 30, 2018  December 31, 2017 
Term Loan $100,000  $100,000 
Capex borrowing  394,000    
Debt issue costs  (4,000)  (6,000)
   490,000   94,000 
Less current maturities  490,000    
  $  $94,000 

NOTE 10 – DIVIDEND PAYMENTS

On May 8, 2018, the Company’s Board of Directors, in accordance with its dividend policy, declared a quarterly cash dividend of $0.05 per common share, which was paid on May 25, 2018, to shareholders of record at the close of business on May 21, 2018. The total amount of this dividend payment was approximately $179,000. During the six-month period ended June 30, 2018, the Company paid approximately $359,000 in dividend payments.Fixed Charge Coverage Ratio covenant.

 

 2218 

 

 

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, 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,” 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 20182019 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:

 

·Exposure to fluctuations in energy prices;
 ·Debt and debt service requirements;
 ·Borrowing and compliance with covenants under our credit facility;
 ·Disruption in the global capital and credit markets;
 ·The strength of the retail economy in the United States and abroad;
 ·Risks associated with sourcing from overseas, including tariffs;
·Importation delays;
 ·Customer concentration;
 ·Adverse changes in currency exchange rates;
 ·Impairment of long-lived assets and goodwill;
 ·Unforeseen inventory adjustments or changes in purchasing patterns;
 ·Market acceptance of products;
 ·Competition;
·Technology;
 ·Price reductions;
 ·Interest rates;
 ·Litigation and insurance;
 ·Retention of key personnel;
 ·Acquisition of businesses;
 ·Regulatory environment;
 ·The threat of terrorism and related political instability and economic uncertainty; and
 ·Information technology system failures and attacks,

 

and those other risks and uncertainties described in its Annual Report on Form 10-K for the year ended December 31, 20172018 (“20172018 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.

 

 2319 

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 

OUR BUSINESS

 

P&F 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. We conduct our 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”) and Jiffy Air Tool, Inc. (“Jiffy”), are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, we purchased substantially all of the operating assets, and assumed certain liabilities of Jiffy Air Tool, Inc., (“Jiffy”) through a wholly-owned subsidiary of Florida Pneumatic. See Note 2 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.

 

Florida Pneumatic imports, manufactures imports and sells pneumatic hand tools, most of which are of itsour own design, primarily to the retail, industrial, automotive and aerospace markets. It also markets, through its Berkley Tool division (“Berkley”), a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines.

 

Hy-Tech designs, manufactures and distributes industrial pneumatic tools, industrial gears, hydrostatic test plugs and a wide variety of parts under the brands ATP, ATSCO, OZAT, Numatx, Thaxton and Quality Gear. Industries served include power generation, petrochemical, construction, railroad, mining, ship building and fabricated metals. Hy-Tech also manufactures components, assemblies, finished product and systems for various Original Equipment Manufacturers under their own brand names.

 

KEY INDICATORS

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 can have an impact on the consolidated results. In addition, we monitor the number of operating rotary drilling rigs in the United States, as a means of gauging oil production, which is a key factor in our sales into the oil and gas exploration and extraction sector.

 

As the result of several new tariffs imposed in the recently imposed tariffs,second half of 2018, specifically those imposed on products imported from China, we now must consider tariffs as a key economic indicator. The Office of the US Trade Representative releasedmeasure, as a list of China-manufactured products that are subject to tariffs of 25%, effective July 6, 2018. Asignificant portion of products imported by Florida Pneumatic for itsour Retail customers is noware subject to this tariff.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.

 

24

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

KEY INDICATORS- (Continued)

Operating Measures

 

Key operating measures we use to manage our operations 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

 

Key financial measures we use to evaluate the results of our business 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; days 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 detailed sections below for each operating segment.detail below.

20

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 20172018 Form 10-K.10-K, and in the Notes to these 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, 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.

 

25

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

OVERVIEW

 

Key factors or events impacting our secondfirst quarter 20182019 results of operations were:

 

·AerospaceIncreased OEM revenue increased by 54.9%;at Hy-Tech;

 

 ·Hy-TechDeclines in both Retail and Aerospace revenue increased by 15.2%;

Hy-Tech gross margins improving 4.8 percentage points;at Florida Pneumatic; and

 

 ·The decision in 2017 not to renewimpact of the implementation of a supply agreement with Sears.complete entity-wide information system at Hy-Tech adversely affecting absorption.

 

RESULTS OF OPERATIONS

 

Unless otherwise discussed below or elsewhere inEffective July 6, 2018, the Management’s Discussion and Analysis, we believeOffice of the United States Trade Representative (“USTR”) announced that our relationships with our key customers and suppliers remain satisfactory.

We determined that, basedan additional 25% tariff be imposed on certain Chinese-made products. This additional tariff raised the cost on a small number of factors including Sears’ continuing financial difficulties, the sale of the Craftsman brand by Sears to Stanley Black & Decker and our level of working capital exposure in relation to our return onproducts that investment pertaining to Sears, it was in our best interest not to renew a supply agreement between us and Sears, effective September 30, 2017.

In December of 2017, Florida Pneumatic and The Home Depot agreed to launch an improved line of pneumatic tools to replace the current offering. We expect to begin shipment of this new product line sometime in the third quarter of 2018. Gross margin for the new product line will be approximately 2% less than the current product line. In order to promote the roll out of the new products, Florida Pneumatic has agreed to contribute $1,000,000we sell, primarily to The Home Depot (“THD”). We were able to support its marketing and promotionpass through most of the costs associated with the additional tariffs. Further, the USTR announced that effective September 24, 2018, a new product line. We believegroup of Chinese–made products was subject to an additional 10% tariff. The USTR stated that commencing January 1, 2019, an additional tariff of 15% would be imposed on this willsecond group of products increasing the additional tariff to 25%.  It was later announced that this proposed additional 15% increase would be contributed some time duringdelayed until March 1, 2019. However, in February 2019, President Trumpdelayed imposing the remainder of 2018. This contribution will be ratably amortized over a four year period and will be tested for impairment during said period.additional 15% tariffs on Chinese goods.

 

We adopted ASC 606Based on negotiations with our overseas suppliers and THD relating to the tariffs imposed on September 24, 2018, we were able to avoid substantially all of the impact of such tariffs effective January 1, 2018. The most significant2019. There is no guarantee that we will be able to avoid some or all of the impact of this adoptionassociated with potential additional 15% tariffs discussed above. Should we be unable to avoid such additional costs, our results of operations was that beginning January 1, 2018 we now classifygross margin on these products will be severely impacted. This could cause us to terminate or alter certain expenses as deductions against gross revenue, that prior to the adoption, were accounted for as a selling expense. The adoption of ASC 606 reduced our revenue, gross profit and selling expenses approximately $243,000 and $457,000, respectively, for the three and six-month periods ended June 30, 2018.customer relationships.

 

WeLastly, we believe that over time, several newer technologies and features will have a 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. We are currently evaluating the developmentcontinue to perform a cost-benefit analysis of developing or incorporating more advanced technologies in our tool platforms.

 

We are currently evaluating the impact of the recently imposed additional 25% tariff on products arriving in the United States after July 6, 2018, particularly those tariffs imposed on certain Chinese-made products that we sell to our Retail customers. Further, based on information released by the Office of the US Trade Representative, a second group of items have been announced. This second group of Chinese–made products are subject to an additional 10%, or greater, tariff; however no specific date has been announced upon which tariffs will be imposed. We have been able to increase our selling price for most of the additional tariffs imposed on the initial group of products. Until such time the Office of the US Trade Representative finalizes both the amount of the additional tariff to be imposed on the second group of Chinese-made products and the effective date of said tariff, we are unable to address this second group of products with our Retail customers on how to resolve the absorption of the additional costs incurred resulting from these new tariffs. Should Florida Pneumatic be unable to pass through the additional cost created by the new tariffs, our gross margin on the products subject to the new tariffs will be severely impacted.

26

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

RESULTS OF OPERATIONS- (Continued)

Other than the aforementioned, or matters that may be discussed further in this Management’s Discussion and Analysis,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.

 

The tables below provide an analysis ofUnless otherwise discussed elsewhere in the Management’s Discussion and Analysis, we believe that our net revenue for the threerelationships with our key customers and six-month periods ended June 30, 2018 and 2017.suppliers remain satisfactory.

 

  Three months ended June 30, 
        Increase 
  2018  2017  $  % 
Florida Pneumatic $12,470,000  $12,132,000  $338,000   2.8%
Hy-Tech  3,718,000   3,227,000   491,000   15.2 
                 
Consolidated $16,188,000  $15,359,000  $829,000   5.4%

  Six months ended June 30, 
        Increase 
  2018  2017  $  % 
             
Florida Pneumatic $24,734,000  $22,641,000  $2,093,000   9.2%
Hy-Tech  7,196,000   5,934,000   1,262,000   21.3 
                 
Consolidated $31,930,000  $28,575,000  $3,355,000   11.7%

Florida Pneumatic

Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Retail, Automotive, Aerospace and Industrial/catalog. 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 June 30, 
  2018  2017  Increase (decrease) 
  Revenue  Percent of 
revenue
  Revenue  Percent of
revenue
  $  % 
Retail customers $4,215,000   33.8% $5,411,000   44.6% $(1,196,000)  (22.1)%
Automotive  3,774,000   30.3   3,390,000   27.9   384,000   11.3 
Industrial/catalog  1,422,000   11.4   1,250,000   10.3   172,000   13.8 
Aerospace  2,885,000   23.1   1,862,000   15.4   1,023,000   54.9 
Other  174,000   1.4   219,000   1.8   (45,000)  (20.5)
Total $12,470,000   100.0% $12,132,000   100.0% $338,000   2.8%

 27

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

RESULTS OF OPERATIONS- (Continued)

Florida Pneumatic

  Six months ended June 30, 
  2018  2017  Increase (decrease) 
     Percent of     Percent of       
  Revenue  revenue  Revenue  revenue  $  % 
Retail customers $8,305,000   33.6% $10,764,000   47.5% $(2,459,000)  (22.8)%
Automotive  7,710,000   31.2   7,003,000   30.9   707,000   10.1 
Industrial/catalog  2,898,000   11.7   2,439,000   10.8   459,000   18.8 
Aerospace  5,443,000   22.0   2,008,000   8.9   3,435,000   171.1 
Other  378,000   1.5   427,000   1.9   (49,000)  (11.5)
Total $24,734,000   100.0% $22,641,000   100.0% $2,093,000   9.2%

Florida Pneumatic’s second quarter 2018 revenue increased 2.8% over the same period in 2017. An analysis of this change highlights the following: (a) Our decision in 2017 not to renew a supply agreement with Sears, is the primary cause for the decline in Retail revenue this quarter, compared to the same period a year ago. Additionally, there was a slight decline in The Home Depot revenue. (b) The increase in Automotive revenue this quarter, compared to the same three-month period in 2017 was due primarily to an increase in consumer product demand for our AIRCAT tools sold through a major on-line distributor, and to a lesser degree, an increase in revenue from our UAT division headquartered in the United Kingdom. (c) The Jiffy acquisition in April 2017 enabled us to approach the aerospace sector with a much stronger brand and breadth of products. As the Jiffy management team continues to improve and increase manufacturing output, revenue this quarter was nearly 55% greater than the same period one year ago. Lastly, the growth inIndustrial/catalog revenue this quarter, compared to the same period in 2017 is due primarily to the overall strengthening for this market sector.

Florida Pneumatic’s six-month comparisons reflect similar results to those of the second quarter. Specifically, our Retail revenue for the six-month period ended June 30, 2018 declined 22.8%, compared to the same period in 2017 due primarily to the absence of Sears revenue, along with slight revenue decline from The Home Depot. For the first six months of 2018 our Automotive revenue increased over the same period in 2017 by 10.1%, due primarily to increased consumer demandfor our AIRCAT tools, which are sold through a major on-line distributor. As the acquisition of Jiffy occurred on April 5, 2017, our Aerospace revenue for the six-month period ended June 30, 2017 only included Jiffy revenue from the date of acquisition through June 30, 2017, whereas the first six months of 2018 includes Jiffy for the entire period.

Hy-Tech

Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, ATSCO, OZAT and NUMATX, which are categorized as “ATP” for reporting purposes and include heavy duty air tools and air motors, industrial grinders, impact sockets, hydro-pneumatic riveters and OEM business. Hy-Tech’s other product lines, Thaxton and Quality Gear, are reported with its general machining business as “Other” below.

  Three months ended June 30, 
  2018  2017  Increase (decrease) 
  Revenue  Percent of
revenue
  Revenue  Percent of
revenue
  $  % 
ATP $3,384,000   91.0% $2,888,000   89.5% $496,000   17.1%
Other  334,000   9.0   339,000   10.5   (5,000)  (1.5)
Total $3,718,000   100.0% $3,227,000   100.0% $491,000   15.2%

28

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

RESULTS OF OPERATIONS- (Continued)

Hy-Tech

  Six months ended June 30, 
  2018  2017  Increase 
     Percent of     Percent of       
  Revenue  revenue  Revenue  revenue  $  % 
ATP $6,460,000   89.8% $5,294,000   89.2% $1,166,000   22.0%
Other  736,000   10.2   640,000   10.8   96,000   15.0 
Total $7,196,000   100.0% $5,934,000   100.0% $1,262,000   21.3%

An increase in shipments this quarter compared to the same period in 2017 to a large customer acquired in the ATSCO acquisition is the primary driver to increase in our ATP revenue. Although shipments of our “engineered solutions” program, which pursues alternate markets where we can exploit our engineering and manufacturing expertise, and develop different applications for our tools, motors and accessories, was relatively flat this quarter, compared to the second quarter of 2017, orders this quarter continue to increase, compared to prior year . As a result, our open orders for the engineered solutions products at June 30, 2018 have increased to $914,000, compared to $591,000 at June 30, 2017. The engineered solutions marketing strategy continues to provide an opportunity to generate new sources of revenue.

The primary factor contributing to the improvement in Hy-Tech’s revenue for the six-month period ended June 30, 2018, compared to the same period in 2017, was increased shipments to the ATSCO customer. This increase accounted for 75% of the improvement. Additional factors affecting Hy-Tech’s growth were an increase in our engineered solutions program and to a lesser extent revenue from our NUMATX technology acquisition. Increases in shipments of our Thaxton line was the driver to the improved Other revenue.

Gross profit / margin

  Three months ended June 30, Increase
  2018    2017    Amount  % 
Florida Pneumatic $4,544,000     $4,418,000     $126,000   2.9 %
As percent of respective revenue     36.4%     36.4%  % pts    
Hy-Tech $1,333,000     $1,004,000     $329,000   32.8 
As percent of respective revenue     35.9%     31.1%  4.8% pts    
Total $5,877,000     $5,422,000     $455,000   8.4 %
As percent of respective revenue     36.3%     35.3%  1.0% pts    

  Six months ended June 30, Increase (decrease) 
  2018    2017     Amount  % 
Florida Pneumatic $8,726,000     $8,537,000     $189,000   2.2 %
As percent of respective revenue     35.3%     37.7%  (2.4)%pts    
Hy-Tech $2,585,000     $1,858,000     $727,000   39.1 
As percent of respective revenue     35.9%     31.3%  4.6%pts    
Total $11,311,000     $10,395,000     $916,000   8.8%
As percent of respective revenue     35.4%     36.4%  (1.0)%pts    

2921 

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 

RESULTS OF OPERATIONS- (Continued)

 

Although Florida Pneumatic’s second quarter 2018 gross margin is the same as what we reportedThe tables below provide an analysis of our net revenue from for the comparable period in 2017, it is importantthree-month periods ended March 31, 2019 and 2018.

  Three months ended March 31, 
        (Decrease) increase 
  2019  2018  $  % 
Florida Pneumatic $10,440,000  $12,264,000  $(1,824,000)  (14.9)%
Hy-Tech  3,882,000   3,478,000   404,000   11.6 
Consolidated $14,322,000  $15,742,000  $(1,420,000)  (9.0)%

Florida Pneumatic

Florida Pneumatic markets its air tool products to note that as discussed earlier in this Management’s Discussionfour primary sectors within the pneumatic tool market; Retail, Automotive, Aerospace and Analysis, we adopted ASC 606. This adoption reduced net revenue by $243,000, thus resulting in a similar reduction in gross profit and a reductionIndustrial.

  Three months ended March 31, 
  2019  2018  Decrease 
  Revenue  Percent of
revenue
  Revenue  Percent of
revenue
  $  % 
Automotive $3,866,000   37.0% $3,938,000   32.1% $(72,000)  (1.8)%
Retail  2,709,000   26.0   4,090,000   33.4   (1,381,000)  (33.8)
Aerospace  2,360,000   22.6   2,670,000   21.8   (310,000)  (11.6)
Industrial  1,325,000   12.7   1,364,000   11.1   (39,000)  (2.9)
Other  180,000   1.7   202,000   1.6   (22,000)  (10.9)
Total $10,440,000   100.0% $12,264,000   100.0% $(1,824,000)  (14.9)%

The most significant component to the decline in Florida Pneumatic’s quarterly gross margin of 1.3 percentage points. Promotional discounts, specifically related to our AIRCAT product line, caused a reduction in Florida Pneumatic’s gross margin this quarter; however, improved absorption during thefirst quarter offset the aforementioned promotional discounts. Lastly, our Jiffy product line increased its second quarter of 2018 gross margin,2019 revenue, compared to the same period last year, due primarily to improved overhead absorption.

When comparing the second quarter of 2018 to the same period in the prior year Hy-Tech was ablelower sales to improve its overall gross margin by 4.8 percentage points,The Home Depot. We believe this reduction in revenue was due primarily to The Home Depot being in an overstocked position at the following: (a) greater absorptionend of its manufacturing overhead costs, driven by greater through-put at its facility; (b) product mix,2018. We believe that once The Home Depot’s inventory normalizes, orders and (c) price increases on certain product lines. With improving product mixshipments will rebound to levels similar to prior periods, however no assurance can be made this will occur. Additionally, shipments to Stanley Black and Decker, which acquired theCraftsman® brand in its inventory, Hy-Tech has also been able to reduce its obsolete and slow moving inventory charges this2018, declined nearly $200,000, when comparing the first quarter comparedof 2019 to the same period a year ago. We believe it is likely that shipments to Stanley Black and Decker will end sometime in 2019. The decline in our Aerospace revenue this quarter, compared to the first quarter of 2018 was due to shipments to a customer in the first quarter of 2018 not repeating in 2019. Lastly, Automotive revenue is down slightly, due to our decision to greatly curtail lower margin promotional sales.

22

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 

Florida Pneumatic’s gross marginRESULTS OF OPERATIONS- (Continued)

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” for reporting purposes and include products such as heavy-duty air tools. Our “Engineered Solutions” are included in the six-month period ended June 30, 2018, was impacted` by several factors,OEM category in the most significant oftable below. Currently NUMATX, Thaxton and other peripheral product lines are reported as “Other” below.

  Three months ended March 31, 
  2019  2018  Increase (decrease) 
  Revenue  Percent of
revenue
  Revenue  Percent of
revenue
  $  % 
ATP $1,986,000   51.2% $2,357,000   67.8% $(371,000)  (15.7)%
OEM  1,476,000   38.0   666,000   19.1   810,000   121.6 
Other  420,000   10.8   455,000   13.1   (35,000)  (7.7)
Total $3,882,000   100.0% $3,478,000   100.0% $404,000   11.6%

Hy-Tech’s Engineered Solutions products offering, which was the adoption of ASC 606 that negatively affectedis designed to market its gross profit by $457,000,engineering and effectively lowering yearmanufacturing expertise, and develop different applications for their tools, motors and accessories continues to date gross margin by 1.2 percentage points. Other factors impacting its six-month gross margin were promotional discounts and lower overhead absorptionexpand. Revenue from this offering during the first six monthsquarter of 2018,2019 increased $962,000, when compared to the same three-month period in 2017. Additionally,2018, with other components within this group, down slightly. We believe the development of the Engineered Solutions offering will continue to provide Hy-Tech an opportunity to generate additional sources of revenue in the future. The decline in ATP revenue was driven primarily to a decline of $534,000 in lower margin ATSCO revenue, partially offset by improved OZAT and ATP tools sales.

Hy-Tech intends to continue to focus on expanding its Engineered Solutions, and other, newer expanding technologies and offerings. As such, it is possible that revenue from certain product lines and sectors, such as oil and gas, may decline.

23

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

RESULTS OF OPERATIONS- (Continued)

Gross profit / margin

  Three Months Ended March 31,  

Increase/(Decrease)

 
  2019  2018  Amount  % 
Florida Pneumatic $4,007,000  $4,177,000  $(170,000)  (4.1)%
As percent of respective revenue  38.4%  34.1%  4.3% pts    
Hy-Tech $1,274,000  $1,251,000  $23,000   1.8 
As percent of respective revenue  32.8%  36.0%  (3.2)% pts    
Total Tools $5,281,000  $5,428,000  $(147,000)  (2.7)%
As percent of respective revenue  36.9%  34.5%  2.4% pts    

Several factors impacted Florida Pneumatic’s gross margin during the three-month period ended March 31, 2018, foreign currency, specifically2019. The most significant of which was the weaknessresult of our decision to curtail AIRCAT promotional programs in 2019 that were offered during the U.S. dollarfirst quarter of 2018. This decision helped improve AIRCAT margins by more than 9 percentage points. Partially offsetting the above was a decline in THD gross margin of approximately 3.3 percentage points. The lower THD gross margin was due primarily to the Taiwan dollar adversely affected Florida Pneumatic’s gross margin. previously agreed upon two percent price reduction and to a lesser degree product mix.

The aforementioned were partially offset by stronger3.2 percentage point decline in Hy-Tech’s gross margin forstated in the Jiffy product lines.

Hy-Tech’s improved gross margin reported fortable above, was due primarily to two factors: (i) unusually high costs incurred during the six-monththree-month period ended June 30, 2018, compared to the same periodMarch 31, 2019, in 2017, continues to be driven by greaterareas such as repairs and maintenance and sample costs; and (ii) under absorption of its manufacturing overhead costs, better product mix, and price increases. Further, when comparingoverhead. A complete enterprise-wide, information technologies system conversion which occurred during the two six–month periods, thus far in 2018, Hy-Tech has been ablefirst quarter of 2019 caused the facility to reduce its obsolete and slow moving inventory charges.halt production for approximately three days.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses, (“SG&A”) include salaries and related costs, commissions, travel, administrative facilities, 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.

 

During the secondfirst quarter of 2018,2019, our SG&A was $5,361,000,$5,269,000, compared to $5,366,000$5,274,000 for the same three-month period in 2017. As the result2018. Expense items of the adoption of the new revenue recognition standard ASC 606, discussed above, we now classify certain expenses totaling $243,000 incurred during the three-month period ended June 30 2018 as reductions against gross revenue that, prior to the adoption, were accounted for as SG&A. Significant components to the net changenote include: (i) an increase invariable expenses, which include costs such as: commissions, advertising and promotional costs, travel and entertainment, and freight out, had a net decrease of $45,000; (ii) compensation expenses of $259,000,expense which is comprised of base salaries and wages, accrued performance-based bonus incentives, associated payroll taxes and employee benefits; (ii) an increase in advertisingbenefits, increased $66,000; (iii) professional fees increased $19,000, and promotion expenses of $70,000; and (iii) increases in(iv) our stock-based compensation of $60,000, offset by reductions in professional fees of $131,000, which related to the Jiffy Acquisition.

30

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continueddeclined $31,000.

 

RESULTS OF OPERATIONS- (Continued)Other Expense

 

Selling, general and administrativeWhile there were no Other expenses (Continued)

Our SG&A forduring the six-month period ended June 30, 2018 was $10,641,000, compared to $10,413,000 forfirst quarter of 2019, the same period in 2017. The most significant item contributing to the net increase was additional operating expenses$29,000 incurred at Jiffy during the first quarter of 2018 of $581,000, whereas there were no Jiffy SG&A expenses during the first quarter of 2017. Additionally, as the result of the adoption of the new revenue recognition standards, we now are requiredrepresented an adjustment to classify as adjustments to net revenue certain expenses, which aggregated approximately $457,000 during the six-month period ended June 30, 2018 that prior to the adoption were accounted for as SG&A. Other significant components include: (i) an increase in non-Jiffy compensation expenses of $192,000, which is comprised of base salaries and wages, accrued performance-based bonus incentives, associated payroll taxes and employee benefits; (ii) reductions in variable expenses of $345,000 due primarily to lower Retail revenue; (iii) reductions in professional fees of $357,000, which related to the Jiffy Acquisition; and (iv) increases in our stock-based compensation of $120,000.

Other expense (income)

Other expense (income) of $28,000 and $57,000, respectively, for the three and six-month periods ended June 30, 2018, represents the adjustment of the fair value of the contingent consideration obligation to the Jiffy Seller as discussed in Note 2 to our consolidated financial statements. Other income of $24,000 for the three and six-month periods ended June 30, 2017 is due to the receiptseller of the balanceJiffy business. This obligation of escrowed funds related$1,000,000 is the maximum amount we are obligated to the salepay and is included in November 2016 of the real property located in Tampa, Florida.our Other current liabilities.

 

 3124 

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

 

RESULTS OF OPERATIONS- (Continued)

 

Interest

 

  Three months ended
June 30,
  Increase (decrease) 
  2018  2017  Amount  % 
Interest expense attributable to:                
Short-term borrowings $24,000  $48,000  $(24,000)  (50.0)%
Term loans, including Capex Term Loans  4,000   1,000   3,000   300.0 
Amortization expense of debt issue costs  27,000   15,000   12,000   80.0 
                 
Total $55,000  $64,000  $(9,000)  (14.1)%

 Six months ended
June 30,
  Increase (decrease)  Three months ended
March 31,
  

Increase

(decrease)

 
 2018  2017  Amount  %  2019  2018  Amount 
Interest expense attributable to:                            
Short-term borrowings $37,000  $49,000  $(12,000)  (24.5)% $43,000  $13,000  $30,000 
Term loans, including Capex Term Loans  5,000   1,000   4,000   400.0 
Term loans, including Capital Expenditure Term Loans  5,000   1,000   4,000 
Amortization expense of debt issue costs  50,000   24,000   26,000   108.3   15,000   23,000   (8,000)
                            
Total $92,000  $74,000  $18,000   24.3% $63,000  $37,000  $26,000 

 

The increase in short-term loan borrowings interest expense for the three-month period ended June 30, 2018 is lower than the same period inwas driven primarily by greater borrowings against our Revolver, compared to the prior year, due to the fact that on April 5, 2017 we completed the purchase of Jiffy, which was funded through our Revolver or short term borrowings. At June 30, 2017, our short term borrowing payable to the Bank was $4,537,000, whereas at June 30, 2018 the short term borrowing balance is $2,239,000. Applicable margins added to our borrowings have decreased twenty-five basis points on both LIBOR and Base rate borrowings, however prime rates have increased. The increase in amortization of debt issue costs is due to the expenses incurred with the amendment to our Loan and Security Agreement (“Credit Agreement”) in April 2017 that related to the Jiffy acquisition.

Similar to the discussion above our interest expense for the six-month period ended June 30, 2018 was driven by the Jiffy acquisition and decreases in applicable margin, offset by raising prime interest rates.

year. Our average balance of short-term borrowings during the three and six-month periodsthree-month period ended June 30, 2018March 31, 2019 was $2,571,000 and $2,211,000, respectively,$4,076,000, compared to $6,011,000 and $3,073,000, respectively,$1,847,000 during the same three and six-month periodsthree-month period in 2017.

32

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

RESULTS OF OPERATIONS- (Continued)2018.

 

Income taxes

 

At the end of each interim reporting period, we estimate ourthe Company estimates its effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis, and may change in subsequent interim periods. Accordingly, our effective tax rate for the three and six-month periodsthree-month period ended June 30, 2018March 31, 2019 was 29.6% and 29.0%49.0%, respectively, compared to 0% and 35.3%, respectively,the effective tax rate of 26.1% for the same three and six-month periods in 2017.three-month period ended March 31, 2018. The Company’s effective tax rates for both periods were affected primarily by state taxes, non-deductible expenses and foreign tax rate differentials.

 

In addition to those items mentioned above that affected ourthe Company’s effective tax rates was the Tax Cuts and Jobs Act (the “Act”) which was enacted on December 22, 2017. The Act reducesreduced the U.S. federal corporate income tax rate from 35% to 21%,. However, it eliminated the tax deductibility of certain performance-based compensation, which increased our effective tax rate, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries previously deferred from tax, generally eliminateseliminated U.S federal income taxes on dividends from foreign subsidiaries and createscreated a new provision designed to tax global intangible low-taxed income (“GILTI”). Also on December 22, 2017, the Staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides for a measurement period of up to one year from the enactment for companies to complete their accounting for the Act. We are applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act.

As of June 30 2018, we have not completed our accounting for the tax effects of the Act, but have made reasonable estimates of the effects on the re-measurement of our deferred tax assets and liabilities as well as its transition tax liability. During the three and six-month periods ended June 30, 2018, we made no adjustments to the provisional amounts recorded at December 31, 2017. Additionally, we have not yet collected and analyzed all necessary tax and earnings data of our foreign operations and therefore have not yet completed our accounting for the income tax effects of the transition tax. We will continue to make and refine the calculations as additional analysis is completed.

The Act also subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. Under GAAP, we are permitted to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet made our accounting policy election. As of June 30, 2018, because we are still evaluating the GILTI provisions, we have included tax expense related to GILTI for the current year in our estimated annual effective tax rate and have not provided additional GILTI on deferred items.income.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

 

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 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:

 

 June 30, 2018  December 31, 2017  March 31, 2019  December 31, 2018 
Working Capital $23,678,000  $24,278,000  $19,250,000  $22,323,000 
Current Ratio  3.26 to 1   4.08 to 1   2.53 to 1   3.26 to 1 
Shareholders’ Equity $46,410,000  $46,013,000  $42,235,000  $45,535,000 

 

Credit facility

 

In October 2010, we entered into a Loan and Security Agreement (“Our Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One” or the “Bank”). The Credit Agreement, as amended from time to time, among other things, provides the ability to borrow funds under the Revolver arrangement. Revolver borrowings are secured by the Company’s accounts receivable, inventory, equipment and mortgages on real property. Additionally, thereFacility is a $1,600,000 line available for capital expenditures (“Capex line”). The Credit Agreement includes a $100,000 Term Loan, as defined in the Credit Agreement. This Term Loan remains in place to enable the Company and Capital One to facilitate future term loan borrowings more efficiently and less costly. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries. The Credit Agreement expires in February 2019.We believe that we will enter into a new credit agreement with Capital One or another financial institution prior to such expiration date.

At our option, Revolver borrowings bear interest at either LIBOR (“London InterBank Offered Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus an Applicable Margin, as defined in the Credit Agreement. We are subject to limitations on the number of LIBOR borrowings.

Contemporaneously with the acquisition of the Jiffy business discussed in detail in Note 28 to theour consolidated financial statements, we entered into a Second Amended and Restated Loan and Security Agreement, (the “2017 Agreement”), with Capital One. The 2017 Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount it can borrow under the Revolver Commitment (as defined) to $16,000,000, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteria as well as financial and other covenants. We incurred $84,000 of debt issue costs in connection with the 2017 Agreement.

The Credit Agreement also provides for certain Term Loan borrowings, which can be at either LIBOR or at the Base Rate, or a combination of the two, plus the Applicable Margins. Applicable Margins on LIBOR borrowings at June 30, 2018, and December 31, 2017 were 1.50%. The Applicable Margin added to the Base Rate for the same timeframes was 0.50%. At June 30 2018, we had a $100,000 Term Loan borrowing which is included in Current maturities of long-term debt on the consolidated balance sheet. At both June 30, 2018 and December 31, 2017 this Term Loan was at LIBOR.

In April 2018, we borrowed $400,000 against the Capex line. This borrowing is to be repaid in equal installments of approximately $6,700 payable monthly, with the balance due in February 2019, unless the Credit Agreement is extended by the parties. $300,000 of this borrowing is at LIBOR plus Applicable Margin, with the balance of $100,000 at the Base Rate, or prime rate plus Applicable Margin. While we intend to renew the Credit Agreement currently in place, this obligation at June 30, 2018, is included in Current maturities of long-term debt on our consolidated balance sheet.

34

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

statements.

LIQUIDITY AND CAPITAL RESOURCES -Continued

 We provide Capital One with monthly financial statements, borrowing base certificates and certificates of compliance with various financial covenants. Should an event of default occur, the interest rate on all borrowings would increase by two percent per annum during the period of default, in addition to other remedies provided to Capital One.

We believe that should a need arise for us to borrow funds in excess of the Revolver and Term loans currently in effect, our Bank would provide for additional borrowings, based on the value of our real property or other assets. 

Cash flows

 

During the six-monththree-month period ended June 30, 2018,March 31, 2019, our net cash increaseddecreased to $1,488,000$898,000 from $1,241,000$999,000 at December 31, 2017.2018.   Our total bank debt at June 30, 2018March 31, 2019 was $2,733,000$6,787,000 and $2,028,000$2,555,000 at December 31, 2017.2018. The total debt to total book capitalization (total debt divided by total debt plus equity); at June 30, 2018March 31, 2019 was 5.6%13.8% and at December 31, 20172018 was 4.2%5.3%. The most significant factor contributing to the increase in our bank debt was the decision in February 2019 to repurchase 389,909 shares of our Common Stock. See Note 3 to our consolidated financial statements for further details.

 

During the six-monththree-month period ended June 30, 2018,March 31, 2019, we receivedused $485,000 for capital expenditures, compared to $570,000 during the same period in the prior year.  Capital expenditures for the balance of 2019 are expected to be approximately $737,000 from the exercise$1,500,000, some of stock options.which may be financed through our credit facilities with Capital One, or financed through independent third-party financial institutions. The remaining 2019 capital expenditures will likely be for machinery and equipment, tooling and computer hardware and software.

 

In February and May 2018,March 2019, our Board of Directors declared a quarterly cash dividendsdividend of $0.05 per share of our common stock, which werewas paid in March 2018, and May 2018, respectively.2019. The total dividends paid through June 30, 2018 were $359,000. We intendof such dividend payment was approximately $158,000. The Company continues to maintain the dividend policy; however, the declaration of dividends under this policy going forward is dependent upon our financial condition, results of operations, capital requirements and other factors deemed relevant by our Board of Directors.  

 

On August 9, 2017, our Board of Directors authorized us to repurchase up to 100,000 shares of our common stock over a period of up to twelve months (the “Repurchase Program”). On August 24, 2017, we announced that, pursuant to the Repurchase Program, we had adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. Since inception of the Repurchase Program, through June 30 2018, we repurchased approximately 81,000 shares of our common stock, the cost of which was approximately $638,000.  During the three and six-month periods ended June 30, 2018, we repurchased 24,000 and 34,000 shares, respectively, under the Repurchase Program at a cost of approximately $199,000 and $280,000, respectively.

Additionally, in June 2018, unrelated to the Repurchase Program, we purchased 18,140 shares of our common stock at a total cost of $150,000 in a privately negotiated transaction. The purchase price per share was equal to five percent below the average of the closing price of its common stock for the three days prior to the transaction.

During the six-month period ended June 30, 2018, we used $1,224,000 for capital expenditures, compared to $358,000 during the same period in the prior year.  Capital expenditures for the balance of 2018 are expected to be approximately $650,000, some of which may be financed through our credit facilities with Capital One, or financed through independent third party financial institutions. The remaining 2018 capital expenditures will likely be for machinery and equipment, tooling and computer hardware and software.

35

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

LIQUIDITY AND CAPITAL RESOURCES -Continued

Customer concentration

 

At June 30, 2018March 31, 2019 and December 31, 2017,2018, accounts receivable from The Home Depot was 35.5%25.5% and 31.0%32.6%, respectively, of our total accounts receivable. Additionally, revenue from The Home Depot during the three and six-monththree-month periods ended June 30,March 31, 2019 and 2018 was 24.8%were 17.6% and 24.2%23.5%, for the same three and six month periods in 2017 The Home Depot revenuerespectively, of our total revenue. There were no other customers that accounted for 29.0% and 29.8%, respectively.

As previously mentioned we elected not to renew an agreement with Sears, which expired September 30, 2017. We believemore than 10% of our consolidated revenue during the loss of The Home Depot would negatively impact our financial condition, but would not affect our ability to remain a going concern.three-month periods ended March 31, 2019 or 2018. 

 

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 2016-02,Leases, on our consolidated financial condition, results of operations and cash flows. 

In addition, in February 2018, the FASB issued No. ASU 2018-02,Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). Under ASU 2018-02, an entity may elect to reclassify the income tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period. We are currently evaluating what impact, if any, adoption of ASU 2018-02 may have on our 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.

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Item 3.Quantitative And Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4.Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company's management, with the participation of the Company's Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated, as of June 30, 2018,March 31, 2019, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "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'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'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's disclosure controls and procedures as of June 30, 2018,March 31, 2019, the Company’s management, including its CEO and CFO, concluded that the Company'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.

 

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PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings

 

There have been no material changes to the legal proceedings disclosure described in our 20172018 Form 10-K.

 

Item 1A.Risk Factors

 

There were no material changes to the risk factors previously disclosed in our 20172018 Form 10-K.

 

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

 

           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 (1)  or Program (1) 
             
April 1, 2018 – April 30, 2018  7,450  $8.01   7,450   35,316 
May 1, 2018 – May 31, 2018  8,790  $8.38   8,790   26,526 
June 1, 2018 – June 30, 2018     (2)  25,694  $8.37   7,554   18,972 
           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 (1)  or Program (1) 
             
January 1, 2019 - January 31, 2019  13,179  $7.92   13,179   53,423 
February 1, 2019 – February 28, 2019 (2)  403,332  $7.64   13,423   40,000 
March 1, 2019 – March 31, 2019  1,905  $8.35   1,905   38,095 

 

(1)On August 24, 2017,September 14, 2018, the Company publicly announced that it hadits Board of Directors authorized a new stock repurchase program and the Company adopted a new written trading plan thereunder for the purpose of repurchasing up to 100,000 shares of its common stock.Common Stock. This trading plan expires on August 23, 2018, and was adopted pursuant to an authorization of a stock repurchase program by the Company’s Board which was publicly announced on August 10, 2017.September 16, 2019.
(2)Includes 18,140389,909 shares purchased by the Company of itsat $7.62 per common stock at $8.26 per share in a privately negotiated transaction that was not part of the adopted written trading plan.

 

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, Jr.
 Joseph A. Molino, Jr.
 Chief Financial Officer
Dated: AugustMay 10, 20182019(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:

 

Exhibit
Number
 Description of Exhibit
   
10.1 Amendment No. 25 to Second Amended and Restated Loan and Security Agreement, dated as of June 21, 2018,February 8, 2019, by and among the Company,Registrant, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc.,  ATSCO Holdings Corp, Jiffy Air Tool, Inc. (formerly known as Bonanza, ATSCO Holdings Corp.), Bonanza Properties Corp., Continental Tool Group, Inc., Countrywide Hardware, Inc., Embassy Industries, Inc., Exhaust Technologies Inc., Green Manufacturing, Inc., Pacific Stair Products, Inc., WILP Holdings, Inc., Woodmark International, L.P, and Capital One, National Association, as lender and agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated June 27, 2018)February 8, 2019).
10.2Third Amended and Restated Capex Loan Note, dated February 8, 2019, by the Registrant, Florida Pneumatic Manufacturing Corporation and Hy-Tech Machine, Inc. in favor of Capital One, National Association, as lender. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated February 8, 2019).
10.3Purchase Amendment, dated as of February 14, 2019, by and among the Registrant and Fidelity Puritan Trust: Fidelity Low-Priced Stock Fund, Fidelity Low Priced Stock Commingled Pool, and Fidelity Puritan Trust: Fidelity Low-Priced Stock K6 Fund (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February 14, 2019).
10.4Amendment No. 6 to Second Amended and Restated Loan and Security Agreement, dated as of February 14, 2019 by and among the Registrant, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc., Jiffy Air Tool, Inc., ATSCO Holdings Corp., Bonanza Properties Corp., Continental Tool Group, Inc., Countrywide Hardware, Inc., Embassy Industries, Inc., Exhaust Technologies Inc., and Capital One, National Association, as lender and agent (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated February 14, 2019).
10.5Agreement, dated February 14, 2019, between Richard A. Horowitz and the Board of Directors of the Registrant (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated February 14, 2019).
10.6Amendment No. 1 to Executive Employment Agreement, dated as of March 5, 2019, between the Registrant and Joseph A. Molino, Jr. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March  5, 2019).
   
31.1 Certification of Richard A. Horowitz, Principal Executive Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Richard A. Horowitz, Principal Executive Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 .
   
32.2 Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101 *  Interactive Data

 

* Attached as Exhibit 101 are the following, each formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive Income,Income; (iii) Consolidated Statement of Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

 

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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